Annual Report Extending the boundaries of Digital Security

Transcription

1 Annual Report 2010 Extending the boundaries of Digital Security

2 Our vision Gemalto Annual Report 2010 Our vision In an increasingly connected society, Gemalto is the leader in making digital interactions secure and easy Performance highlights ( * ) Revenue 1,906m +19% (2009: 1,602m) Profit from operations ( ** ) 216m +19% (2009: 181m) Profit margin from operations ( ** ) 11.3% (2009: 11.3%) Net cash 255m -33% (2009: 381m) Cash generated by operating activities 174m -13% (2009: 200m) Cash returned to shareholders (share buy-back plus dividend) 60m -8% (2009: 65m) IFRS net profit 167m +42% (2009: 118m) Adjusted basic earnings per share ( ** ) % (2009: 1.91) Return on Capital Employed (ROCE) ( ** ) 16.0% +70 basis points (2009: 15.3%) Further information Links to further information are illustrated with the following markers: For more information visit For more information see pages XX-XX ( * ) The Company business in point of sales terminals was disposed of on December 31, As per IFRS, the contribution of this activity to the Company IFRS income statement is reclassified for both 2009 and 2010 reporting periods, and its net contribution is presented as a single amount on the line item Profit (loss) from discontinued operations (net of income tax). As a result, financial information for the 2009 reporting period differs from previously reported figures. ( ** ) Adjusted financial information. For more information see pages

3 01 02 Our business profile 04 Our segments 06 Our global presence 08 Chairman s statement 09 Chief Executive s review 12 Our strategy 14 The digital security market 20 Mobile communication 24 Machine-to-Machine 26 Secure transactions 30 Security 35 Others Our vision Segmental review Gemalto delivered a strong performance in 2010, posting a new revenue record of more than one billion euros in the second semester. Secure Transactions and Security reached their profit margin objective one year ahead of schedule. Their significant profit expansion strengthens and diversifies our sources of profit as anticipated in our plan. We continued to invest in the development of our software and services offers in Mobile Communication, doubling revenue and delivering on several flagship customer projects. The good performance of the Machine-to-Machine business also contributed to our profit in the Telecom space. On this solid basis, and in particular leveraging the acquisitions we ve made, we intend to continue to grow our revenue and profit in 2011, and are bolstered in our ability to deliver on the 300 million profit from operations target in Olivier Piou Chief Executive Officer The Board report comprises the following sections: Our vision, Segmental review, Group financial and operating review, and Governance. Gemalto N.V. is a public company incorporated in the Netherlands. It is headquartered in Amsterdam and has subsidiaries around the world. Unless otherwise specified, we refer to them as Gemalto. 38 Financial review 42 Principal risks 44 Our approach to sustainability 48 Governance at a glance 50 Corporate governance 56 Internal risk management and control systems 59 Board compliance statement 60 The Board and the management 64 Report of the Non-executive Board members 66 Remuneration 76 Consolidated financial statements and notes 129 Company financial statements and notes 144 Auditor s report 145 Appropriation of profit 146 Post-closing events 147 Adjusted measures 150 Investor information 152 Glossary of digital security terms Group financial and operating review Governance Financial statements Other information

4 02 Our vision Gemalto Annual Report 2010 Our business profile Gemalto s expertise spans the entire process for creating digital security solutions. We develop operating systems and software, and produce and personalize secure devices of which we have already delivered over 12 billion worldwide. We continue to innovate with new forms and architectures, and to expand our software and services portfolio for clients who want to provide secure, convenient applications to their end-users. Innovation Solutions, software and services Digital scientists 1,400 Gemalto s internationally renowned team of security and cryptography experts leads the way in the invention, design and development of new products, solutions and applications certified to the highest standards. 4,200 Patents and patent applications in our patent portfolio, representing about 1,300 patent families. 103 New inventions first filed in Value-added services 252m value of services sold 2010 Personalization facilities 30 Software and services: Gemalto s know-how and field experience mean we are uniquely placed to offer a range of software and services that support our clients in the delivery of digital security solutions to end-users. We also offer our clients a wide range of training, consulting, integration and managed services. Secure remote management: to ensure that end-users always enjoy up-to-date information and services, our secure server software can connect with our devices when they are in the field and connected to digital networks. For cellphones this is done via Over-the-Air (OTA) platforms. ID badges, banking cards and USB tokens can be updated when they are connected to a computer, often via a smart card reader. Personalized devices: Gemalto is the trusted partner for the individual personalization of millions of secure personal devices daily, effected under various security certification schemes. These include SIMs, banking cards, epassports, eid cards and so on. Particularly in the financial services sector, the outsourcing of personalization is gaining momentum as the worldwide deployment of cards increases and issuers look to outsource this activity. R&D centers 13 Production sites 18 A complete range of SIMs, MIMs and UICC cards. Smart cards and banking cards. Electronic passports, identity documents, health cards, etc. USB dongles and other devices. Licensing of intellectual property With the aim of promoting digital security and convenience, we have developed a number of licensing programs based on our patent portfolio, including our latest innovations. Partner network Technology partners: develop products (hardware and/or software) for the same ecosystem as Gemalto s. The combination of our offers increases the value delivered to the end-user. Technology partners and Gemalto commit to making their products interoperable and engage in co-marketing activities. Original Equipment Manufacturers: embed and resell Gemalto technologies in their own products with their own branding. Channel partners: resell and market Gemalto products and services as distributors, value-added resellers or system integrators. They belong to the Gemalto Certified Partner community.

5 Our business profile 03 Our vision Markets Consumers Telecommunications Machine-to-Machine Financial services and retail Transport Pay TV 1 billion+ EMV cards in circulation (source: EMVco). 670 million 3G subscribers worldwide 2010 (source: Informa WCIS). 20 million Online banking customers use our solutions (source: Gemalto). Machines PASSPORT Government programs Online authentication ebanking and ecommerce 30 million M2M modules shipped 2010, 30% year-on-year growth (source: Gartner). 106 million+ M2M modules to be shipped 2015 (estimated number; source: Gartner). For more information visit

6 04 Our vision Gemalto Annual Report 2010 Our segments Gemalto is at the heart of our evolving digital society. The freedom to communicate, travel, shop, bank, entertain and work anytime, anywhere, and in ways that are convenient, enjoyable and secure has become an integral part of what people want and expect. Gemalto meets these growing demands from billions of people worldwide by offering our services to the following segments: Segments Solutions Markets Mobile communication A unique portfolio of solutions for Mobile Network Operators (MNOs) to help serve their subscribers. For more information see pages Telecommunications: the world s leading supplier of SIM and UICC cards to the mobile industry, as well as client-server software and services. We deliver a vast range of solutions including roaming, mobile payment and data management to billions of customers via hundreds of operators. Machine-to-Machine (M2M) Powering the internet of things with fully certified, high-quality M2M modules and terminals. For more information see pages Highly durable Machine Identity Modules (MIMs) as well as support for integration, software and services. M2M: the world s leading supplier of modules that connect machines to improve operations, productivity and efficiency. MIM: the leading supplier of MIMs, we provide three families of secure, durable and long-lasting modules. We also provide integration support for a broad range of industries worldwide, such as utilities and automotive. Secure transactions Innovative and secure payment solutions for financial institutions and retailers. For more information see pages Rapid, convenient, contactless electronic ticketing (eticketing) solutions for public transport. Pay TV subscriber authentication and rights management solutions. Financial services and retail: the leading player in this sector, we deliver a wide range of chip and contactless payment solutions and services to banks and other issuers with hundreds of millions of end-users. We also offer a range of mobile financial solutions. Transport: we provide eticketing solutions to mass transit authorities. Pay TV: we offer a range of Pay TV solutions to secure access service providers. Security Highly secure, durable identity products, solutions and services for governments. For more information see pages Identity and Access Management (IAM) solutions including online authentication for many large public and private organizations, plus security solutions, including multi-factor authentication and transaction verification, for ebanking and ecommerce. Licensing of our intellectual property rights. Government programs: the world s leading supplier of epassports, we also provide secure electronic documents for eid, ehealth, edriving license and other egovernment initiatives, as well as services such as enrollment and issuance. Online authentication: we provide strong authentication solutions such as ID badges and their management for enterprises, governments, banks and other organizations, enabling them to better control access to their digital and physical resources. ebanking & ecommerce: our solutions let people bank and shop online and conduct transactions conveniently, with their privacy respected and secure from fraud. Others Phone cards for public telephony operators. For more information see pages 35 Point-of-Sale (POS) terminals and services for retailers. We sell a vast range of pre-paid cards and solutions for public telephony. At the end of 2010, our POS terminals business was sold to VeriFone (see page 35).

7 Our segments 05 Everyone knows what a SIM is but do you know what a MIM is? Our vision If a SIM (Subscriber Identity Module) identifies a person using a mobile phone, a MIM (Machine Identification Module) identifies a machine when it s calling another machine. MIMs are used in the Machine-to-Machine (M2M) market, of which Gemalto is now the world leader. Want to know more? See a more detailed explanation on page 25. Revenue ( * ) Profit from operations ( * ) Highlights 981m (2009: 888m) 118m 53% 57% (2009: 151m) Growth driven by software and services revenue doubling to 152 million. Promising developments in new form factor products. Profit margin profile of traditional SIM card unchanged. Profit variation essentially resulting from operating expenses investment in fast growing software and services areas, consolidation effects of acquired businesses and exceptional items. 81m 7m 4% 3% Integration of Cinterion now essentially complete. Solid 15% revenue growth (pro forma) driven by the increasing use of cellular connectivity by multiple industrial sectors. Profit from operations doubled (pro forma), directly benefiting from the increased volume of sales, and customer confidence. 462m (2009: 411m) 41m 25% 20% (2009: 12m) Growth driven by worldwide migration to EMV and dual-interface contactless products. The drag on growth, caused both by the UK triennial trough and the shift to standard mailing, faded in the second half as anticipated. Significant improvement of gross margin as a result of better product mix and high personalization service activity. Operating expenses increase in line with revenue after accounting for the impact of acquisitions. The strong growth in the second half had excellent fall through to profit. 318m (2009: 236m) 39m 17% 19% (2009: 4m) 16% growth in Government Programs. 50% growth in IAM due to strong activity in ebanking. Patent licensing revenue above Company plan at 33 million, productivity gains and scale effect lead to 450 basis points gross margin improvement. Operating expenses down 620 basis points to 28% of revenue. The operational leverage combining strong growth, gross margin performance and operating expenses control lifts profit margin from operations margin 12.4% in 2010, and to 6.8% when excluding the patent contribution. 19m (2009: 24m) 2m 1% 1% (2009: 4m) ( * ) Our segments financial information and highlights are based on adjusted financial information for ongoing operations. For more information see pages

8 06 Our vision Gemalto Annual Report 2010 Our global presence Gemalto s global presence is key to the way we serve our clients, with our sites and facilities strategically spread across every continent. Beyond this, it s our worldwide network of partners and our employees of some 90 nationalities who make the difference. So wherever our clients are based, we re not far away and we speak their language. Key figures Nationalities of our customers 190+ North and South America Headcount 21% Nationalities of our employees 90 Countries worldwide with a site in operation 45 Employees worldwide 10,000+ Revenue 26% Argentina Brazil Canada Columbia Mexico USA Buenos Aires Curitiba Rio de Janeiro São Paulo Burlington Montreal Bogota Cuernavaca Iztapalapa Mexico City Arlington Austin Bellevue Montgomeryville New York North Wales Key Research & Development centers 13 Production sites 18 Personalization facilities 30 Sales and Marketing offices 87

9 07 Our global presence Our vision Europe, CIS, Middle East and Africa Asia Pacific Headcount Headcount 49% 30% Revenue Revenue 53% 21% Europe Belgium Brussels Czech Republic Prague Denmark Ballerup Copenhagen Finland Vantaa France Boulogne-Billancourt Gemenos/ La Ciotat Meudon Pont-Audemer Sophia-Antipolis Tours Germany Berlin Bocholt Filderstadt Ismaning Cologne Leipzig Munich Overath Hungary Budapest Italy Agrate Brianza Milan Rome Israel Netanya Tel Aviv Netherlands Amsterdam Norway Oslo Poland Tczew Warsaw Slovenia Sencur Spain Barcelona Madrid Sweden Gothenburg Sollentuna Stockholm Turkey Istanbul UK Fareham Ferndown Havant London St Helens Warrington Australia Sydney Melbourne Bangladesh Dhaka China Beijing Changsha Guangzhou Hong Kong Qingdao Shanghai Taipei, Taiwan Tianjin Zuhai India Bangalore Gurgaon Mumbai New Delhi Noida Indonesia Jakarta Japan Tokyo Korea Seoul Malaysia Kuala Lumpur New Zealand Auckland Philippines Manila Singapore Singapore Thailand Bangkok Vietnam Hanoi CIS, Middle East and Africa Egypt Cairo Kazakhstan Almaty Oman Muscat Pakistan Lahore Russia Moscow Saudi Arabia Riyad Senegal Dakar South Africa Cape Town Johannesburg UAE Dubai For more information visit

10 08 Our vision Gemalto Annual Report 2010 Chairman s statement Commendable progress towards ambitious goals Stock price at December 31, % (2009: 30.50) Cash dividend paid in 2010 per share 0.25 Our business has the culture, leadership and market positions to thrive as the global economy gets moving again. Astute planning around a clear strategy is delivering well for our shareholders. A global identity Gemalto delivered superior results in 2010, in line with our plans for both organic and non-organic growth. Given the economic backdrop, this was a commendable performance. Despite later signs of recovery, both Western Europe and North America were struggling last year. However, with Gemalto s global footprint, we were able to offset this sluggishness with strong results in Africa, Asia and South America. Acting with authority Gemalto can deliver in this way partly because its management team has the ability and ambition to exploit emerging opportunities in new regions, markets and technologies. During 2010 the Board backed management in the acquisition of five companies. Thanks to some carefully considered and timely deals, we ve broadened the base for serving our customers, by targeting companies which add specific technologies, routes to market or new growth areas such as M2M. These new capabilities are critical building blocks for the future. Secure for the long term Another key factor in strengthening the company is sound corporate governance. As a Board, we devote time ensuring that we re well informed about the latest legislation and best practice in this area. This translates into clear action plans for our Board responsibilities. In 2010 we published our first stand-alone sustainability report. This is important to a company like Gemalto, which helps its customers build and protect mission-critical infrastructure. In this environment, we are proud to have a long-term, long-lasting vision. A positive performance That we are making progress is clearly supported by our 2010 figures. Growing revenues, rising EBITDA, improving margins and strong cash generation all point to a business that s successful and well managed though this positive performance hasn t yet been reflected in our share price. Nevertheless, our results allowed us to pay a dividend in 2010 the first in our history. This demonstrates that Gemalto has the scale, the market positions and the confidence to generate reliable cash flows. Ambitious goals In the light of these outcomes, I am optimistic about the future. Our widening portfolio means we re in the right position to make the most of the growth that s re-emerging. Better still, we sit at the heart of some exciting sectors where demand for our solutions can only increase. Shareholders rightly expect the company to perform consistently and to hit the demanding milestones we have set for ourselves. I m confident that they will see the inherent value of this business as we work towards those ambitious goals. Alex Mandl Chairman

11 Chief executive s review 09 Chief Executive s review Our vision On track towards our bold objective When we announced our Development Plan in November 2009 we set ourselves a very bold objective: 300m in profits in 2013, up more than 50% from an already record And we were convinced it was achievable, thanks to the sound platform for growth we ve been laying since Gemalto s creation in The market developments and our performance in 2010 show that we got our strategy right, and that we re capable of hitting our targets. We have significantly expanded our revenue, in particular in software and services, and once again grown our profit from operations. In addition, we have further increased our customers satisfaction and loyalty, and kept our employees motivated and happy. Gemalto is a leading player in markets brimming with opportunities: mobile financial services, contactless payment, trusted service management, mobile money, strong authentication for cloud computing applications, egovernment enrollment and issuance services, machine-to-machine technology, the internet-of-things and so on. In each area we ve delivered significant progress, through a combination of in-house innovations, organic investments and judicious acquisitions. An appetite for innovation Significantly, we did well in very contrasting economies and regions. After a long pause, many of our developed markets progressively showed a revitalized appetite for innovation. For the quickly developing nations, which now account for about half of our business, this enthusiasm had never gone away. Not only have they continued to grow in volume of products delivered over the past couple of years, they re also eagerly willing to adopt our latest technologies and they haven t got any embedded infrastructure to hold them back. That s why, for example, mobile money was pioneered with such success in Africa. Our global reach, our long-standing commitment to diversity with over 90 nationalities working in Gemalto and our strong, long-term presence in many of these markets clearly benefit us. A developing digital security market 2010 saw significant developments in our digital security eco-system. For example, this year the mobile internet went really mass market, and we quickly detected the rapid acceleration in demand for mobile commerce. We know from experience that when markets go mobile, they get big, fast. Add our expertise in Near-Field Communication (NFC) solutions for proximity interactions and many opportunities come to life. Another of the biggest shifts has been the escalating importance of cloud computing. We ll soon be seeing plenty of private clouds for large corporations as well as specific offerings for smaller businesses and individuals. These will require new security and identity management solutions to make sure these high-value data are accessible online only to the right users all of which is creating a significant potential market for us. After the first full year of our Development Plan, two things are increasingly clear: we have put together an excellent suite of products, software and services for many rapidly expanding markets, and we re capable of achieving the ambitious targets we ve set for ourselves.

12 10 Our vision Gemalto Annual Report 2010 Added value is the key As we described in the Development Plan, our strategy is about extending our role and the boundaries of digital security, and that s what we re doing. Our software and services increasingly touch people s daily lives in convenient and positive ways, and we are constantly adding value to the diversifying range of secure devices through which they re delivered to end-users: smart cards, passports, SIMs, modules, USB keys, microsds and so on. Our mobile communication business is a good example. The advanced fourth generation Long Term Evolution (LTE) system of mobile telephony uses UICC ( * ). It s like having a full PC on a single chip, dedicated to security, privacy and convenience, with all the potential that offers. Yet the real value is in our software and services management that enables it to run a host of applications, only one of which is called voice. Our Digital Life Management suite is likewise helping operators strengthen their customer relationships, while offering end-users more freedom and convenience. And we re leading the way in the move to introduce new sources of revenue from mobile devices with our unique, interactive solutions for mobile marketing. New opportunities in payment In the financial services sector, the migration of old technology magnetic stripe bank cards to those with the more secure and intelligent EMV chip is moving ahead worldwide, and this continues to create considerable business opportunities. In Asia, the People s Bank of China issued specific instructions in 2010 with the aim of migrating the country to microprocessorbased payment cards compatible with EMV over the medium term. At the same time, in the massive US market, Americans who go abroad are getting increasingly tired of having their old technology cards declined at retailers and ATM s in more and more countries. This is partly why the United Nations Credit Union moved to EMV chip cards in 2010; and with the US Federal Reserve now accountable by law for fraud management in payments systems, the argument for EMV and convenient contactless payment cards is increasingly being heard there. Meanwhile, we re also seeing an accelerating drive globally to have financial services derive more benefit from the online and mobile channels. Rapidly increasing use of smartphones, combined with the banks desire to offer customers convenience and security while improving their own efficiency, mean our electronic and mobile banking activity is reaching new record levels. Modernizing state services In the public sector, our epassport business also continued to prosper in Protecting air travel and securing borders the principal drivers of early adoption are only the start. Increasingly Governments deploying epassport programs are becoming convinced that issuing digital credentials (eid) is more feasible and popular than they thought. They ve realized that they can safely entrust this technically complex operation to an experienced company like Gemalto and thereby enjoy the benefits of reduced cost and strong voter support with low execution risks. As a result, they ve begun to call on us for new projects such as helping facilitate enrollment in their election processes, and to reduce inefficiency and fraud in the delivery of healthcare and social benefits. For their citizens, it s satisfying to see that their state services are becoming more modern and convenient. People in early-adopter countries frequently say they re proud their governments now exist in the same 24/7 digital world that they ve become used to in their daily lives. A culture of innovation We couldn t perform well in these rapidly evolving markets without a strong culture of innovation. It s a cornerstone of our enterprise: last year our investment in R&D was again more than twice that of our physical equipment capex. And it s borne fruit. Amongst many developments, 2010 saw us announcing E-Go, a technology which is poised to radically simplify digital interactions. With E-Go, you ll be able to authorize a transaction simply by touching a digital device. If you ve got banking cards in your pocket and you decide to buy something, you ll simply touch a payment terminal and E-Go will make it ask which account you want to debit. If you re wearing your company ID pass and touch a computer mouse, you ll be able to automatically log on with your own preferences and environment. And when you walk away, you ll be automatically disconnected. ( * ) UICC: Universal Integrated Circuit Card

13 Chief executive s review 11 If you ve got a SIM card, you ll touch a phone and immediately make it yours, with your own number and all your data. And all this will be done anonymously, without leaving unnecessary remnants while still being genuine. It will be a couple of years before it goes mainstream but it ll be nothing short of a revolution when it happens. Smart M&A So we place a high value on innovation. Yet knowing well that we won t invent everything ourselves, we constantly look around for smart ideas and great technologies that can complement our own. And where we ve been able to do a friendly, mutually beneficial deal, we ve been propelling our growth by making acquisitions. At the start of the year we took a controlling stake in Netsize, with its under-utilized mobile commerce and mobile marketing platform. This makes Gemalto a key player in mobile application sales, and rounds out the services we provide to operators to bolster their subscriber revenues. Soon after, we acquired Valimo, the world leader in mobile PKI authentication, aiming at growing usage of legally-binding mobile digital signature. In April we acquired Todos, making us the only truly global ebanking vendor with such a comprehensive range of authentication solutions for internet banking and ecommerce. During the summer, Cinterion, the leading provider of Machine-to-Machine (M2M) communications, suddenly became available. Since we d already got a well considered plan in place, ratified with our Board and explained in our Development Plan, we were able to seize the opportunity. Finally, we acquired Trivnet, one of the top technology providers in mobile money and mobile financial services. We started this campaign of acquisitions ahead of the field, so we concluded them on far more favourable terms than if we d waited. Our Board was challenging and supportive in assessing our targets and our integration processes, and I thank them for their encouragement. In each case the deal has reinforced our position in a high-growth market where we re already a recognized player. And now, in order to get the best from these technologies and business additions, we re focused on integrating these new talents into our existing teams. Satisfying our clients In fact, when I look back on 2010, it s what our people have achieved that excites me most. They ve shown their capacity for customer service, quality and innovation, winning contracts and awards in so many different markets and regions. They ve demonstrated their ability to accelerate the pace of growth and profit, yet they never forgot about caring for and satisfying our customers. Every year we commission an independent survey of clients, representing around half our global revenues. For the third year in a row we ve increased their satisfaction levels, and maintained our ranking among the very best companies in the world in this respect. And since one key to customer satisfaction is happy, talented and motivated people, I was also pleased to see that our employee survey results were again very positive in A host of opportunities The companies that do best coming out of a downturn are usually those that have been willing and able to invest through it. Gemalto is one of those companies. We ve worked hard at enriching our portfolio and serving our customers in the tough times they ve been through. We will dedicate 2011 to leveraging our new acquisitions, and further developing our portfolio of products, software and services. We strongly believe, as ever, that these efforts will bear fruit through to 2013 and beyond. Our ambitions are bold and our results in 2010 demonstrate our potential. Olivier Piou Chief Executive Officer Our vision We couldn t perform well in these rapidly evolving markets without a strong culture of innovation. It s a cornerstone of our enterprise.

14 12 Our vision Gemalto Annual Report 2010 Our strategy: extending the boundaries In November 2009 we announced our Development Plan. At its core is our objective to increase our profit from operations to 300 million in 2013 through a strategy of profitable growth. In 2010 we made a promising start in this direction. Objective Through revenue growth and margin expansion, our objective is to expand our profit from operations ( * ) by more than 50% to 300 million in 2013 We will achieve this objective through: Growth in all business segments, with a double-digit revenue increase in security Growth will be generated by: developments in wireless offers, with new devices and remote services; steady worldwide expansion of payment cards; and global spread of new government projects and authentication solutions. Double-digit revenue increase in software and services across all business segments Further margin improvements driven by Secure Transactions and Security Tight management of capital employed, with further ambition to increase our return on capital employed (ROCE) Our strategic priorities: Actively replicate successful models across geographies Capture more value with remote services Speed up commercialization of innovations Leverage our unique position to serve customers with converging needs Leverage our efficient base and expand through bolt-on acquisitions We plan to generate strong levels of operating cash flows, and to: Re-invest our cash to fuel organic growth and fund bolt-on acquisitions Enhance return to shareholders, via a combination of share buy-back and dividend distribution

15 Our strategy 13 Did you know that by 2015 the market will expand to: 3.8 billion mobile users 2.6 billion internet users 15 billion connected machines Our vision Progress Profit from operations ( * ) m Target: 300 ( * ) Profit from operations is a non-gaap measure defined as the IFRS operating result adjusted for all equity-based compensation charges and associated costs, amortization and depreciation of intangibles resulting from acquisitions, and restructuring and acquisition-related expenses For more information see pages : another year of expansion The Company targets for 2011 another increase in revenue and profit from its ongoing operations. In Mobile Communication the Company is looking at substantial commercial deployments of mobile contactless services and LTE fourth generation networks. Software & Services and acquired companies will increase their contribution to profit and the Company will maintain its organic investments toward strategic growth areas. In Machine-to-Machine, the Company anticipates strong activity in the automotive and metering sectors. With the expected development of the internet of things, the company intends to increase its investments in research and development in this M2M segment. In Secure Transactions, the Company should continue to benefit from the widespread migration to EMV and higher-end contactless products. In Security, the Company aims at delivering another year of revenue growth in 2011, on the back of continued deployment of secure electronic document programs and substantial growth in ebanking. Starting January 1st, 2011 the contribution from the patent licensing activity, currently reported in the Security segment, will be reported in a new Patents segment. The Company does not anticipate significant patent licensing revenue in 2011 due to the public patent litigation initiated by Gemalto in the US. The Company reiterates its expectation to have Secure Transactions delivering a high single-digit profit margin from operations in 2011, and upgrades its view on the Security segment which is now expected to deliver a high single-digit profit margin from operations even without a patent licensing contribution in Slide 14 of Gemalto Investment Conference 2009 presentation sets out the key assumptions and potential growth accelerators underpinning our plan. For more information visit

16 14 Our vision Gemalto Annual Report 2010 The digital security market Evolving end-user expectations, new business opportunities, technological advances and changing threats are driving significant growth in the variety, scope and value of digital security services. Growth potential in mobile 3G Current subscribers Growth potential US 3G subscribers 136.6m Penetration 48% Growth y/y 31% UK 3G subscribers 29.5m Penetration 38% Growth y/y 34% Russia 3G subscribers 9.6m Penetration 5% Growth y/y 81% China 3G subscribers 14.5m Penetration 2% Growth y/y 941% Brazil 3G subscribers 13.3m Penetration 8% Growth y/y 148% Indonesia 3G subscribers 19.2m Penetration 12% Growth y/y 57% Source: Morgan Stanley Digital dynamics Virtually every human activity can now be expressed as digital data whether it s the simplest conversation or the most complex financial transaction. We can communicate, monitor, view, access and enable a vast range of information in the digital realm. Convergence creates convenience At the same time, technologies are converging. Until recently, devices had fixed roles a cellphone to make a call, a computer to manipulate data. Those distinctions have blurred. Now, we expect the digital world to revolve around us as individuals, regardless of the device we re using. We re starting to make payments and access our with our cellphones, and using our bank cards as a travel pass. Telecommunications Smartphone adoption has created new markets for wireless services, on top of continued organic growth in areas such as voice and messaging. These ongoing revenue opportunities are supported by a more pervasive digital lifestyle and businesses that now integrate mobile communications into their products and marketing. High-speed mobile data and multi-function smartphones, for example, are creating demand for more advanced SIM cards allowing users secure access to a host of new applications in sensitive areas such as banking and retail. For mobile users, value no longer resides purely in their handset. They expect to be able to access upgrades, applications and content Over-the-Air (OTA), regardless of the device. They also want to protect their digital lives, safeguarding their contacts, their identities and their contents. The SIM card is the only universal and secured application platform working with 100% of handsets. Machine-to-Machine (M2M) In a growing world of smart applications and things, M2M is the key enabling technology for the Internet of Things. M2M is used to optimize business processes by connecting machines to one another. It s used in an astonishing array of vertical markets and industries such as remote maintenance and control; metering; payment systems; routers and gateways; security systems; healthcare; automotive and etoll; tracking and tracing; environmental monitoring and more.

17 The digital security market 15 Companies around the world are discovering the power of M2M technology to save money, increase revenue or generate new sources of income by leveraging new channels to their customers. Further growth comes from governments that are forced to save money, increase income and meet carbon emission targets. Legislation favoring the implementation of M2M in ecall, smart metering for smart grids, stolen vehicle tracking and intelligent traffic systems is increasing. Furthermore, the aging population wishing to live an independent and healthy lifestyle is driving growth in mobile healthcare applications. With increasing penetration of M2M into all aspects of business and life, security of the network and data privacy will be increasing in relevance for M2M adopters. Financial services and retail There are already around one billion EMV ( * ) cards in circulation. Some of the fastestdeveloping economies in the world (such as Brazil, South Africa and Turkey) already have EMV in place. But potentially huge markets such as China, India and much of the Americas remain largely untapped. There are signs that US issuers with a base of more than 700 million credit cards and 460 million debit cards are being won over by the anti-fraud and user benefits of chip payment cards. In February 2009, American Express became the fourth member of the EMV consortium, massively expanding its reach. And even in the more mature European market, the Single Euro Payments Area (SEPA) initiative could also drive higher uptake. Aside from enhanced security, convenience is a key driver for EMV. Contactless cards and faster, more reliable authentication are delivering in-store efficiencies that create real competitive advantage for retailers. Government programs Governments need systems that offer efficient interactions with their citizens, who in turn demand security and convenience from their authorities. That s why nations around the world are investing in digital identity. Regulatory pressures for instance, the visa waiver scheme to gain entry to the US, which now mandates biometric passports are also driving growth in this market, such that more than 100 countries already have an epassport program in place. Electronic ID schemes go one stage further, since they require every citizen to carry an eid card. Many governments are already deploying them for access to health and social security services, Mobile voice has already been surpassed by mobile data traffic worldwide, driven by the rapid adoption of smartphones. By 2012, their shipments are predicted to exceed those of both Desktop and Notebook PCs combined. Global Unit Shipments (MM) Desktop PC s Notebook PC s Smartphones E 2011E 2012E 2013E Source: Morgan Stanley E: estimate SIM shipments worldwide billion+ (source: Eurosmart) Microcontroller payment cards to be shipped billion ( * ) (*estimate; source: Gemalto) Microcontroller cards sold for all Government eid projects million ( * ) (*estimate; source: Gemalto) Our vision ( * ) EMV: EuroPay, MasterCard, Visa: the industry standard for international debit/credit cards

18 16 Our vision Gemalto Annual Report 2010 Top internet markets percentage of penetration USA 76% Brazil Russia China India 18% 29% 39% 42% IDC has forecast the identity and access management market to reach over $5 billion by Gemalto is positioning itself to capitalize on market and convergence opportunities. It has expanded beyond its traditional smart card roots to create end-to-end solutions for digital security. (IDC, Gemalto: Secure authentication for Securing the Cloud, June 2010) and as drivers licenses. In a growing number of cases, they are also combining functions to derive even more efficiency and convenience for users. The potential here is immense. For example, India, with a population of 1.2 billion, has initiated a scheme to provide multipurpose national identity cards (MNIC) to every citizen by Beyond such card schemes, there is a widespread move towards egovernment. Ministers from the EU and EFTA recently approved a declaration recognizing that this increases efficiency and effectiveness...to constantly improve public services and set priorities in this area to be achieved by Online authentication Cloud computing services data and applications that are accessed via the internet or virtual private networks are going mainstream. IDC expects spending on IT cloud services to reach $42 billion in By then, it will represent 25% of IT spending growth and nearly a third of growth the following year. ( * ) Shipments of secure egovernment documents year-on-year growth 20%+ (source: Eurosmart) Value of US mobile payment transactions 2009 $5.2 billion ( * ) ( * ) Estimate; source: But freedom of access places a huge additional burden on security. It s essential to verify the identity of authorized users without hampering the convenience and efficiency of cloud computing. At the same time, complex software tends to have more security vulnerabilities, not fewer. This is increasing demand for strong (two- or even three-factor) authentication. For example, a user might need a password as well as a physical component like a fingerprint; or an ultra-secure one-time password generated by a smart card and reader. The need to meet compliance regulations is by far the greatest market driver. According to IDC this accounted for approximately 85% of all online authentication sales in Other factors contributing to market growth in this area are: Continued issuance and enforcement of regulatory requirements worldwide; Steadily increasing need for secure, scalable identity-driven cloud models for both private and public cloud deployments; Increased demand for strong authentication for both enterprise and consumer interactions. ( * ) Source: IDC

19 The digital security market 17 Today some 21 countries worldwide issue eid cards to their citizens, and over 60 countries issue epassports. Securing the cloud Our vision ebanking and ecommerce Secure online banking comes with the potential for increased revenue and new business opportunities. Switching focus from low-value transactions, such as cash withdrawals and check deposits, to high-value sales, such as loans and ecommerce, as well as financial and business advice, is the future in this domain. The business case for ebanking rests on four pillars: Cost control: when customers do more online, they can cut the cost of a transaction by up to 80%. Increased utilization: spending increases when people prefer a particular provider s services and cards the top of wallet effect. Similarly, people will do more online with a provider they trust. Competition: banks are facing increased competition from online payment providers such as PayPal, and from mobile operators offering payment services. Non-traditional businesses, such as supermarkets, are also promoting a growing range of banking services. By improving their ebanking offer, banks can differentiate themselves and increase loyalty. Security: increased security makes each customer more valuable and more profitable by enabling greater uptake of online services. It lets branches and call centers focus on high-value relationship banking and high-touch services. It also enables new services such as electronic invoicing, for example, by utility companies. Cloud computing simply means internet-based computing. Your data and applications aren t stored on your PC, but on servers located elsewhere (in the cloud ) which provide resources, software and so on, on demand. Users benefit from greater convenience and lower cost. They can consume computing resources as a service and only pay for what they use; access data, applications and services from any location; and employ greater computing power than they might otherwise be able to afford. The global market for enterprise cloud-based services will grow from US $12.1 billion ( 9.4 billion) in 2010 to US $35.6 billion ( 27.5 billion) by 2015 ( * ). Yet while many enterprises are embracing cloud computing, others are resisting, held back by security concerns. In the old days, security meant putting a firewall around the physical network in your office and giving people a password to access it. But it s in the nature of cloud services that you can access them from anywhere, so there s been a shift from border security to identitybased security. And the simplest way of strengthening this is to deploy a two-factor Single Sign On (SSO) solution. This requires both a password and a physical token, such as a smart card or encrypted USB key, before the user can be logged in. Even if the password is discovered, access is denied if the unique hardware token is not present. Two-factor authentication greatly enhances network security and allows enterprises to ensure that employees can securely access company information and networks, both locally and remotely. This text is based on a full-length article in the Autumn 2010 edition of The Review, Gemalto s corporate magazine: ( * ) Source: Analysis Mason

20 Added security for ebanking in Mexico Financial institutions increasingly want to add ebanking services to their portfolio. They also want them to be trusted by their customers and scalable to future developments. During 2010 one Mexican bank achieved this by selecting Gemalto s Ezio strong authentication server and One-Time Password tokens, which combine to create a more secure environment for ebanking. The extra security provides enhanced protection for users while they re accessing their accounts and performing transactions online. The solution can also be expanded to other authentication devices, including EMV payment cards, connected readers and mobile phones. For more information see page 34 For more information visit

21 The segmental review is based on adjusted financial information for ongoing operations. Ongoing operations exclude the contribution from discontinued operations and from assets classified as held for sale to the income statement. The adjusted financial information are non-gaap measures, where the key metric to evaluate the business and to take operating decisions is the profit from operations (PFO). PFO is defined as the IFRS operating result adjusted for all equity-based compensation charges and associated costs, amortization and depreciation of intangibles resulting from acquisitions, and restructuring and acquisition-related expenses. For more information see pages Mobile communication 24 Machine-to-Machine 26 Secure transactions 30 Security 35 Others Segmental review

22 20 Segmental review Gemalto Annual Report 2010 Mobile communication Mobile communication is set to enter a new phase with faster access to data and massive growth in mobile applications. In 2010, Gemalto demonstrated again that it is at the forefront of these changes and is delivering significant returns from its ongoing investment in innovative technology. Our performance ( * ) Revenue 981m (2009: 888m) Up 5% year-on-year at constant exchange rates Gross profit 376m (2009: 383m) Gross margin 38.3% (down 490 basis points) Acquisitions Profit from operations 118m (2009: 151m) Profit margin from operations 12.0% (down 500 basis points) Netsize In January 2010, Gemalto increased its stake in Netsize S.A. to 85.65%. Netsize offers mobile payment solutions based on operator billing for 100 mobile operators in 28 countries, reaching over 1 billion billable subscribers, and provides mobile messaging with SMS and MMS delivery to over 200 countries. Netsize was founded in For further information see page 95. Trivnet In August 2010, Gemalto acquired Trivnet, one of the leading players in Mobile Financial Services. Trivnet helps Mobile Network Operators and banks to increase their customer base, enhance loyalty and drive revenue by enabling mobile payments, mobile commerce, mobile wallet, banking the unbanked and mobile money transfer. Trivnet was founded in Growth was driven by success in software and services, whose revenue doubled to 152 million. Promising developments in new form factor products offset the slightly lower revenue from traditional SIM card business. Margin profile of traditional SIM card business remained unchanged Year-on-year profit variation is essentially resulting from operating. expenses investment in fast growing software and services areas, consolidation effects of acquired businesses and exceptional items. ( * ) Adjusted financial information for ongoing operations. For more information see pages

23 Mobile communication 21 Segmental review Our products, software and services Our positioning More than 450 Mobile Network Operators (MNOs) worldwide benefit from our products, software and services. These include: Digital Life Management We help MNOs who want to expand their services onto the internet, and end-users who want to put their data onto any platform, whether their handset or PC. Our LinqUs Life Mobilizer lets them protect, organize, manage and share their data securely, and so enables the experience that both users and operators have been seeking. Mobile Marketing Solutions We help operators, content providers, advertising agencies and brands to deliver personalized, rich and relevant content and campaigns via mobile handsets, with unrivaled efficiency. Mobile Financial Services We provide mobile solutions for banking, payment and money transfer, so that banks and MNOs can offer innovative, high-value services at lower cost and with maximum security. LinqUs Mobile Banking also provides such services to millions of unbanked subscribers in emerging economies. Roaming Services LinqUs Roaming Director puts users onto the preferred network when abroad. This highly efficient traffic redirection steering system helps operators maximize revenues and deliver the optimum performance for subscribers. Our solutions help drive up profitable roaming traffic and give end-users a superior experience. Some 1.8 billion ( ** ) subscribers benefit from at least one of our solutions. People increasingly access and manage many essential services via their mobile device. Since this involves their personal data, they need to trust the systems they use. Ensuring that sensitive information is secure is at the core of Gemalto s expertise. With a leading share in advanced markets, we are therefore firmly positioned to address fast-growing premium opportunities such as mobile broadband, mobile contactless transactions, remote management and Machine-to-Machine. We are also continuing to help narrow the gap between premium technology and worldwide accessibility, giving billions of users access to the advantages of a range of mobile services. With our broad expertise across a range of markets we are in a unique position to serve customers with converging needs, such as those who want to use their phone as a payment device. In order to offer the best user experience, our end-to-end technology stands both at the heart of the MNOs systems and in the hands of consumers, providing an unbreakable link and high interactivity between them. We have strengthened our hand in the Mobile communication sector by making strategic acquisitions. We are engaged in active partnerships with handset manufacturers to establish seamless solutions. We have a strong involvement in organizations and bodies defining standards, setting trends and shaping the industry. Trusted Service Manager (TSM) Thanks to Near-Field Communication (NFC) technology, the mobile handset has become a mobile wallet for a wide range of applications. Allynis TSM helps mass transit operators, banks, businesses and MNOs deploy services seamlessly and securely. Long-Term Evolution (LTE) Gemalto sits at the forefront of the roll-out of 4G the long-term evolution of mobile broadband services, bringing all our expertise in digital identity and security to a vast range of new applications. ( ** ) Source: Gemalto

24 22 Segmental review Gemalto Annual Report 2010 Keeping the world in contact Mobile communication is a key domain for Gemalto, which has been providing products, solutions and software to the industry for more than 30 years. In 2010, we saw significant advances in all areas of this segment, including major contract wins, awards for our technology and plaudits for our innovations; and our performance reaffirmed our global leadership in this massive and growing market. Digital Life Management Users now expect their digital content and services to be with them everywhere particularly on their mobile handset. And our technology ensures that they can protect, manage, organize and share their personal data on any platform, whether it s in their mobile, on their computer or in the cloud. Uptake of these offerings has been remarkable. In 2010, the number of contacts being managed by our Digital Life Management Services surpassed the 3 billion mark. Our solutions work on more than 1,000 different devices which ensures that end users retain choice about every aspect of their digital lives wherever their data is and whenever they decide to change phones. Not only are we constantly working to link the internet with the mobile, we are also striving to narrow the gap between premium technology and worldwide accessibility as, for example, our solutions giving potentially billions of mobile users access to Facebook and Windows Live. Mobile Marketing Both operators and major brands are keen to exploit mobile devices as a marketing channel they re the one thing that people never leave home without. In many markets, there are more handsets than people, and smartphones are rapidly increasing in market share. As a result, we re seeing great interest in our LinqUs mobile marketing solutions that deliver personalized, targeted and relevant content and campaigns via the phone. Our solutions offer wide reach and built-in interactivity improving measurement of return on investment, profiling and targeting. Gemalto has a competitive advantage in this arena: we are the only company able to deploy interactive SMS messages that can pop-up on an idle phone screen. This makes them a valuable, extra directmarketing channel to any CRM or ad server. In 2010 we showed how we can blend the range of Gemalto solutions to maximize the impact of mobile marketing. When Belgian telco Mobistar wanted to get more subscribers to use its ContactSave service, we recommended our LinqUs traffic boosting solution to increase the discovery and usage rate. Then we targeted two million subscribers with a promotional interactive SMS campaign, which resulted in a five-fold increase of traffic generated. In February 2010, Mobistar confirmed that use of ContactSave had multiplied by ten over a four-month period. Mobile Financial Services The popularity of our Mobile Financial Services (MFS) offering continued to rise in Our expertise in strong authentication means our solutions meet the highest security standards. And because they work on all devices, MNOs and banks can offer these highly secure services without compromising on customer reach. This is particularly relevant in emerging economies, where most handsets are basic models. It makes Gemalto solutions a powerful driver of digital democracy. By opening up financial services to anyone with a handset, we re helping give them significant life choices especially if they re one of the five billion people worldwide without a bank account. We strengthened our MFS offering in In order to augment our solutions for enterprises, access management and identification, we announced in February that we had acquired Valimo, a world leader in mobile authentication. Valimo enables mobile phone users to securely sign digital documents simply by entering a password or PIN code. Naturally, that commitment to strengthening our solutions is translating into new business. For example, in 2010 we announced that MTN Middle-East and North Africa had selected our LinqUs security solution to launch MFS in five countries, a potential new market of 30 million people. And in March, we agreed a deal with Texas Instruments to integrate our MFS capabilities into its mobile security platform (OMAP), helping manufacturers and operators roll out secure financial transaction capabilities more easily. Roaming Services Gemalto continues to provide Roaming Services to help operators optimize costs and increase revenues. This is more important than ever as people are increasingly using mobile internet services when abroad. Consequently, data roaming is rising sharply, and assigning users to preferred networks can make a real difference in cost for operators. Gemalto s Roaming Director service delivers 90% successful traffic redirection other technologies typically achieve just 60% ensuring MNOs can connect subscribers to preferred partners seamlessly. It also means they can place a call or go online the moment they step off the plane. That s one of the reasons why, in February 2010, the Netherlands largest operator, KPN, started using our LinqUs Roaming Director to offer enhanced services to its eight million subscribers, as well as offering it new capabilities to fine-tune traffic redirection. Trusted Service Manager (TSM) Near-Field Communication (NFC) technology has turned the handset into a versatile electronic wallet, capable of accessing an array of applications such as payments and ticketing systems. As a result, MNOs, banks and other providers are seeing new opportunities to bring together their services in one convenient device. To merge these functions securely and ensure only legitimate users access the right services, Gemalto provides a Trusted Service Manager (TSM) solution. Our deal in May 2010 to provide Orange with Allynis TSM services for the Nice, mobile contactless city project illustrates how it works. This is the first commercial launch of contactless mobile services in Europe and

25 Mobile communication 23 allows citizens and visitors to Nice to use an NFC mobile handset to pay at restaurants, supermarkets and local stores, as well as ride city busses and trams all with total digital security. In June 2010, we announced that KDDI s 31 million subscribers in Japan would be able to take part in their own NFC roll-out thanks to our TSM solution. Elsewhere, we agreed a deal in July with Kasikornbank, Thailand s second largest bank, and Advanced Info Services (AIS), its largest telecommunications operator, to introduce their own NFC services using TSM. Long-Term Evolution (LTE) We are also a driving force in rolling out the next generation of mobile networks, known as Long-Term Evolution (LTE) or 4G, helping MNOs deploy new value-added services using ultra-high-speed data access and IP connectivity. With our solutions, MNOs not only seamlessly overcome obstacles in their migration to these high-bandwidth data services, they can also transform their relationships with subscribers. Gemalto is supplying Over-the-Air (OTA) services and Universal Integrated Circuit Card (UICC multi-function SIM) solutions to a range of major LTE projects. In January 2010 we began deploying them for Verizon Wireless, the leading US 4G and 3G operator with 93 million customers. They help Verizon deliver a secure and reliable multimedia data connection, provide global roaming capabilities, and remotely add new UICC applications and services on its 4G LTE wireless broadband network. Only two months later, MetroPCS, the fifth largest facilities-based carrier in the US, selected Gemalto to provide these solutions for its mobile broadband launch covering 6.6 million subscribers. This meant that by the end of 2010, it was able to offer LTE coverage in five major metropolitan cities, including Los Angeles and Dallas. In October, Gemalto was shortlisted in three categories at the LTE North America Awards, reaffirming our position as a global leader in the drive to accelerate adoption of this critical new technology. Segmental review Mobile financial services in the Middle East Thirty million MTN subscribers in Africa and the Middle East now use a wide variety of mobile financial services thanks to Gemalto s SIM-based security solution. MTN s MobileMoney service includes money transfer, mobile purchase, payment and balance checking, as well as the immediate purchase of airtime. The user-friendly interface makes it easy and convenient for subscribers to enjoy these services, which feature simple menus in English plus a number of local languages. Gemalto s SIM-based technology, with end-to-end encryption, guarantees the highest level of security for these transactions and gives subscribers the freedom to use the services from any type of handset by simply swapping the SIM card. Mobile financial services are considered to be one of the world s fastest-growing and dynamic wireless markets, set to be worth USD 65 billion by 2014 ( * ). 30 million MTN subscribers now use a wide variety of mobile financial services. $65 billion The estimated value of the mobile financial services market by ( * ) Juniper Research, January 2010 For more information visit

26 24 Segmental review Gemalto Annual Report 2010 Machine-to-Machine (M2M) The combination of Gemalto and Cinterion strengthens our position as leader in M2M modules, MIMs and device management. M2M technology connects devices across a wide range of industries to reduce cost through improved processes, and to generate revenues by enabling new business models. Our performance ( * ) Revenue 81m Up 15% year-on-year at constant exchange rates ( ** ) Gross profit 27m Gross margin 32.6% Profit from operations 7m Profit margin from operations 8.7% Acquisition Cinterion In June 2010, Gemalto acquired Cinterion Wireless Modules GmbH (CWM). Cinterion is the leading provider of industrial Machine-to-Machine wireless communication modules, with approximately 26% ( * ) market share. The business was started in 1995 and has major centers in Munich and Berlin, Germany. For further information see page 95. ( * ) Source: Gartner The integration of Cinterion is now essentially complete. The solid 15% revenue growth was driven by the increasing use of cellular connectivity by multiple industrial sectors such as the automotive and metering industries. Profit from operations doubles, directly benefiting from the increased volume of sales. ( * ) Adjusted financial information for ongoing operations. ( ** ) Pro-forma, by comparing the activities reported in the Machine-to-Machine segment starting August 1, 2010, consolidation date of the acquired Cinterion business, with the corresponding activities for the same period of For more information on adjusted measures see pages

27 Machine-to-Machine 25 Segmental review Our products, software and services Our positioning Wireless modules Gemalto, notably through Cinterion, its affiliate company, is the leading supplier of M2M devices and solutions based on HSPA, UMTS, EDGE, GPRS and GSM technologies. Our portfolio of fully certified, high-quality products offers communication for a wide range of applications, including automotive, metering, remote maintenance, mhealth, e-toll systems, POS systems, industrial PDAs, routers and gateways, tracking and tracing, as well as security systems. This provides users with unlimited mobility due to worldwide coverage and seamless roaming across networks. The respective data standards offer reliable connections with high data rates enabling data-centric applications. The modules can be readily customized to suit unique needs or combined with other innovative features such as Java, GPS and SIM Access Profile. MIMs (Machine Identification Modules) Through Gemalto s leadership in the SIM industry, we have developed a comprehensive set of MIM cards. This ranges from plug-in format and 3FF (Third Form Factor) to the latest ETSI standardized MFF-M2M form factor. MIMs need to meet the high demands of industrial applications, including extremes of vibration, temperature and humidity, as well as a longer lifespan than consumer mobile applications. Our offer includes three product families to cover these needs, including FullM2M in semiconductor packaging, as well as other unique features like extended Life for long-term applications. These products have been massively deployed throughout the world. Services Gemalto provides leading-edge support for integration worldwide, from design to delivery and in-life management. By combining vertical-specific know-how with consulting, we reduce time-to-market for our customers. And with our unique security expertise, global leadership in Over-The-Air and long-standing experience in software verticals such as device management, mobile financial services and roaming, we are able to facilitate the deployment of value-added M2M services. Cinterion is the world s undisputed market leader in cellular M2M modules with a market share of 26% ( * ). We provide vertical-specific consulting and integration support to help customers reduce time-to-market and avoid costly loops. We offer a broad product portfolio scalable to customer needs. Our products are designed for long-term availability. Our products meet the highest standards of quality and reliability required for industrial applications and the automotive industry. We provide unique integrated hardware expertise from MIM to M2M modules, delivering end-to-end solutions for M2M applications. We facilitate and simplify the deployment of M2M value-added-services. We add security to M2M applications. Our high innovation potential is demonstrated by our latest awards, most recently in the form of the GSMA Award and Oracle s Duke s Choice Java Innovation Award. M2M and MIM what s behind the acronyms? M2M (Machine-to-Machine) technology enables communication between machines for applications such as smart meters, mobile health solutions and many more. An M2M module effectively has the functionality of a cellphone although it has none of the normal appearance (i.e. it has no display, keypad, battery, etc). It cannot authenticate itself or connect to the mobile network without a MIM. A MIM (Machine Identification Module) is the equivalent of a SIM (Subscriber Identity Module) with specific features such that it can be used in machines and enable authentication. Machine Identification Module (MIM) is a Gemalto registered Trademark. ( * ) Source: Gartner Inc.

28 26 Segmental review Gemalto Annual Report 2010 Secure transactions In 2010, Gemalto continued to win new contracts that bolstered its leadership position in serving global financial institutions. Our performance ( * ) Revenue 462m (2009: 411m) Up 7% year-on-year at constant exchange rates Gross profit 140m (2009: 99m) Gross margin 30.3% (up 620 basis points) Profit from operations 41m (2009: 12m) Profit margin from operations 8.9% (up 600 basis points) Growth was driven by global migration to EMV and dual-interface contactless products. The drag on growth, caused both by the UK triennial trough and the shift to standard mailing, faded in the second half as anticipated. Gross margin improved significantly, as a result of a better product mix and high personalization service activity. Operating expenses increase was in line with revenue growth, after accounting for the impact of acquisitions. Fall through of the second half strong growth was excellent, and consequently profit margin from operations for the full year improved sharply. ( * ) Adjusted financial information for ongoing operations. For more information see pages

29 Secure transactions 27 Segmental review Our products, software and services Our positioning Gemalto offers a full range of solutions for secure transactions in financial services, transport and other emerging markets. These include: Payment and loyalty cards Our Clarista, Optelio and Desineo brands, segmented by unique customer needs, represent our complete EMV card payment solutions. They support all profiles such as JCB, MasterCard and Visa in both Static Data Authentication (SDA) and the more advanced Dynamic (DDA) systems. Clarista and Optelio also relate to our loyalty solutions. Contactless solutions Our contactless card and sticker solutions offer faster, more convenient ways to make payments, driving up retail activity and reducing the number of cash-based transactions. We apply innovative designs and form factors to payment solutions, as well as eco-friendly biodegradable cards opening up co-branding and marketing opportunities. Secure services and solutions Our Allynis range of secure services includes personalization, packaging and card distribution, plus a full set of e-services such as PIN by SMS and PIN self-definition. Our Dexxis Instant Issuance solution allows banks and retailers to issue cards immediately in the store or in-branch. Gemalto is the world leader in chip payment cards, and the preferred partner of global banks. A progressive worldwide demand for migration to EMV cards and contactless payments is driving our core business. We are leveraging our local knowledge, world leadership and scale to develop attractive markets ready for EMV, such as Brazil, Mexico, Canada, Russia, Poland and Indonesia. In the US, we are also recognized for the expertise and support we bring to major banks, and in 2010 we won the first EMV migration program there. We are combining the technology used in Secure Transactions with those from other segments, to create converged solutions such as online and mobile banking. During ten years experience in contactless technology we have delivered more than 100 million contactless cards to customers. Hence we are well positioned in the fast-growing market of dual interface (DI) contact/contactless cards, with one in two issued by Gemalto in Our contactless cards are used by many major transit authorities, including those in London, Paris, São Paulo, Rio de Janeiro and Santiago, in order to maximize throughput and replace cash. Our retail customers benefit from our extensive experience in delivering smart card based solutions for loyalty, vouchers and private payment applications. Trusted Service Manager (TSM) Our TSM solution supports a variety of convergent payment offerings, including mobile contactless payment programs. Transport Mass transit operators need to maximize commuter throughput as well as reduce fraud and create opportunities for marketing and co-branding. Our solutions address all these issues in one clear proposition. Pay TV We supply subscriber authentication and rights management cards to large secure-access TV service providers.

30 28 Segmental review Gemalto Annual Report million Customers of PKO Bank Polski will receive their new contactless EMV Visa cards by the end of million EMV contactless cards were delivered by Gemalto worldwide in Contactless debit cards for Poland In November 2010, Poland s largest financial institution, PKO Bank Polski S.A, selected Gemalto to migrate its entire portfolio of individual Visa debit cards to EMV contactless. The bank plans to issue around 6.5 million Visa paywave cards to its customers by the end of This massive deployment is part of PKO BP s strategy to offer innovative products to its customers and to boost the development of cashless transactions in Poland. In addition to the security of EMV, the card provides a new and simple way to make low-value purchases up to 50 Polish Zloty ( 12.5, USD17). Users benefit from the speed and convenience of contactless in thousands of acceptance points, at department stores, fast-food restaurants, cinemas, bookstores and pharmacies. For more information visit Consumers appreciate the security and convenience of credit and debit cards. EMV ( * ) chip cards offer the highest level of trust and security, protecting both cardholders and issuers. Gemalto s experience in technology and encryption means we are strongly positioned to respond to increasing demands from financial institutions worldwide for their deployment. Contactless technology increasingly enables issuers to combine different services, such as payment and transport, on a single card. Banking cards Although consumers appreciate the convenience of credit and debit cards, secure access to their credentials remains a major priority ( ** ). New technical and security ( * ) Source: EMVCo ( ** ) Source: TNS Sofres standards, as well as consumer demand for more choice and convenience, are driving suppliers to look for innovative payment solutions. At the same time, financial and retail card issuers want better security and innovative platforms to create new revenue streams. Gemalto s years of experience in card technology and expertise in encryption mean we are strongly positioned to address these issues. Migrating abroad Adoption of EMV standards for smart payment cards is growing, and with American Express joining the EMV consortium in 2009, it is stronger than ever. The familiar PIN authentication process makes EMV cards easy to use for customers and keeps transaction times low for retailers a crucial factor. Thus by the end of 2010 there were more than 1 billion ( * ) of them in use worldwide, and market growth potential remains high. Javelin Strategy & Research estimates that $16.6 billion in card fraud in the US alone could be immediately affected by EMV implementation. Alongside our existing EMV contracts, 2010 saw us supporting our clients in their EMV migration programs in Poland, Spain, Brazil and Canada amongst others. Our global presence makes us a logical partner for banks looking to manage their migration from magnetic stripe (mag-stripe) cards to EMV. In May 2010, Gemalto won the first such program in the

31 Secure transactions 29 In February 2010, BNP Paribas in France granted us a two-year contract for the supply and personalization of EMV DDA payment cards. Expert services Applying our expertise in handling secure data, we personalize cards for each user and then manage their distribution and administration. With the widest range of value-added services in the market and 30 personalization centers around the world, close to our customers and certified by Visa and MasterCard, Gemalto is reputed for the flexibility, reliability, speed and security of its issuance services. We are also innovating in issuance solutions for emerging markets. In November we announced the deployment of our Dexxis Instant Issuance offering in Indonesia, where consumers 90% without bank accounts require micro-banking services. Dexxis offers them instant, on-the-spot issuance of EMV cards. The package also includes servers, software, printers and training to deploy the solution over a secure network. Transactions business. In June, Gemalto achieved MasterCard certification for our consulting services, demonstrating our unique ability to support our customers during their EMV migration programs. By incorporating EMV services into a SIM card, we have already been able to provide five French banks with a contactless payment system called Payez Mobile, built into users cellphones. In May, Gemalto and Orange announced their partnership in the deployment of our Trusted Service Manager (TSM) for NFC solutions in the Nice (France) contactless city commercial project. Transport Our Celigo smart cards are already being used to access mass transit systems in 30 cities that have more than one million inhabitants each. Passengers appreciate the convenience of our contactless cards while operators value the additional revenue protection. Unauthorized travel is reduced and with our cryptographic expertise, fraud is all but eliminated. Segmental review Our customization services also allow banks and retailers to issue unique designs to enhance their market position. In May, Raiffeisen was the first issuer in Austria to deploy Gemalto s picture-on-card solution, which prints one of the customers favorite photos onto the card. For more advanced projects, our Optelio range of payment cards includes on-board applications which open up a number of possibilities for both issuers and customers. During 2010, we saw increasing interest from financial institutions and mass transit operators to leverage the success of contactless technology by combining payment and transport ticketing on a single card. US with the United Nations Federal Credit Union (UNFCU). Its motivation for deploying EMV was driven by the need for US cardholders to be able to make payments when travelling abroad. In most mature EMV markets, mag-stripe cards (those typically used in the US) are no longer accepted in machines such as those used for transport ticketing systems and road tolls. In July 2010, Hometrust in Canada also selected Gemalto to support its EMV migration program. Dynamic security Gemalto s latest generation of Dynamic Data Authentication (DDA) cards increases their security yet further. Visa and MasterCard have mandated DDA for all their EMV cards in Europe by January Similar mandates are expected in the rest of the world soon. Contactless payments Gemalto has been supplying contactless technology for over a decade, delivering more than 100 million contactless cards to customers. Users make a payment by simply holding their card near a reader, even if it s still in their wallet or purse. That means we can offer new form factors, such as keyfobs, as payment tokens. It also makes it easier for banks and retailers to create co-branded payment cards. Gemalto had several successes during 2010 with dual interface (DI) contact/contactless cards. For example, in January Setefi (Intesa Sanpaolo Group) in Italy deployed our EMV cards with MasterCard PayPass contactless payment. And in December, PKO Bank Polski in Poland adopted our solutions to migrate straight from magnetic stripe cards all the way to EMV contactless for its entire portfolio of debit cards. Our ability to navigate the converging worlds of banking, mobile communications, transport and retailing is also opening up new opportunities for our Secure

32 30 Segmental review Gemalto Annual Report 2010 Security The Security segment is characterized by growth and diversification. We are producing an increasing range of software, services and solutions for an ever-expanding number of markets, from governments and their agencies to organizations and enterprises. Our performance ( * ) Revenue 318m (2009: 236m) Up 31% year-on-year at constant exchange rates Gross profit 129m (2009: 85m) Gross margin 40.6% (up 450 basis points) Acquisitions Todos In April 2010, Gemalto acquired Todos AB, a leading provider of strong authentication solutions for internet banking. Todos has delivered some 20 million products to over 100 financial institutions in 30 countries. With their EMV card and a reader, consumers use their PIN code to securely sign internet banking transactions. An additional layer of security can be provided by displaying transaction details on the reader, so that users sign what they see. Todos was founded in Valimo In February 2010, Gemalto acquired Valimo Wireless OY, the world leader in mobile authentication. Valimo s solutions enable mobile users to securely authenticate themselves, digitally sign documents and confirm legally binding transactions. This facilitates secure online banking, mobile payments, governmental services, electronic and mobile commerce, and identity and access rights management for enterprises. Valimo was founded in Profit from operations 39m (2009: 4m) Profit margin from operations 12.4% (up 1,060 basis points) Government Programs revenue was up 16%, on the back of certain large-scale epassport and eid programs starting their deployment Identity & Access Management revenue was up 50%, thanks to strong sales of ebanking solutions. Productivity gains and scale effect, together with the higher patent contribution, led to 450 basis points gross margin improvement. Operating expenses were down 620 basis points to 28% of revenue. The operational leverage combination of strong growth, gross margin performance and operating expenses control lifted profit margin from operations to 12.4% in 2010, and to 6.8% when excluding the patent contribution. ( * ) Adjusted financial information for ongoing operations. For more information see pages

33 Security 31 Segmental review Our products, software and services Our positioning Government programs We provide identity management solutions and services comprising secure documents, enrollment, issuance and national registry solutions for governments, national printers and integrators. Sealys: physical, visual and electronic security for travel documents, national eid, ehealth cards, drivers licenses and registration certificates. Coesys: end-to-end solutions for enrollment, issuance, border control and egovernment. Allynis: secure operated services, outsourced personalization and delivery, plus strong engineering and financial capabilities. Identity and Access Management Online Authentication (OA): We provide strong authentication for enterprises, governments, banks and other organizations, enabling them to control access to their physical and logical assets. Protiva: a full suite of products, software and services to protect information and provide encryption for sensitive data. This includes multi-function smart cards, contact and contactless readers, USB memory with built-in security, One-Time Password devices and Public Key Infrastructure for access control in fixed and mobile environments. Protiva enables customers to implement secure access to and storage of data, secure remote access, digital signature, pre-boot authentication, identity verification and biometric authentication. Our end-to-end services take customer projects from definition to infrastructure integration, fulfillment and ID provisioning. ebanking and ecommerce: We enable banks and retailers to offer customers in each end-user segment tailored solutions that deliver maximum confidence in their online transactions without compromising convenience. Ezio online banking solutions: digital signature and secure access to home banking, retail and corporate bank networks, ecommerce sites and cloud computing services. Cards, USB tokens, connected and unconnected readers, central servers, plus fulfillment, integration and hosted authentication services. Governments are increasingly using electronic ID solutions to enhance national security and increase administrative efficiency. Gemalto is the world leader in this domain in terms of the number of epassport and eid systems implemented, with over 50 active projects. We have unrivalled experience in managing programs involving a wide variety of interactions between citizen and state, and in compliance with regulations for electronic documentation and software. Our global footprint and efficient operations enable us to address market opportunities with a strong local dimension. Gemalto is trusted by governments and financial institutions to protect access to their sensitive data. Our clients include many Fortune 500 companies such as Boeing, Chevron, HP, Schlumberger, Shell, Microsoft and the US Dept. of Defense. We deliver strong access control and help clients meet industry standards and governmental security directives. We provide advanced solutions in fixed and mobile environments, minimizing total cost of ownership and maximizing convenience without compromising security. Our solutions provide the highest level of protection against fraud while being simple for IT departments to administer and very easy to use, ensuring maximum compliance with security protocols. Gemalto is a global leader in ebanking deployments based on EMV-CAP (Chip Authentication Programs). We have delivered some 50 million Ezio units, half of which are advanced unconnected and connectable ebanking card readers. Our worldwide footprint enables us to serve customers locally from design to integration and fulfillment services. With the broadest portfolio on offer, we are chosen by banks facing an increasing diversity of needs, from light, unconnected to major connected solutions over fixed and mobile networks. Licensing of intellectual property rights We have a unique portfolio of proprietary technology and patents, and we license use of our rights to other players.

34 32 Segmental review Gemalto Annual Report 2010 Government programs National security and border integrity continued to dominate headlines around the world during Many countries are investing heavily in additional security measures to protect against hostile intent from within and outside their borders and to enforce policies on travel and access. Meanwhile global interest in, and deployment of, electronic identity solutions for citizens is at an all-time high as governments look for ways to become more efficient and at the same time to enhance the services they offer. Electronic passports Gemalto saw steady revenues from epassports and related services in The best testament to the strength of our business in this sector is the number of our satisfied customers. In May, for example, the Norwegian Police renewed its multi-year contract to personalize and issue Sealys epassports. Gemalto manages the entire delivery process from our secure service center in Oslo, from the production of travel documents through to personalization and issuance services. The new solution features extended access control (EAC) (a high-security mechanism for second generation passports) and includes an innovative data page hinge to prevent fraudulent use. Elsewhere, in June, we announced that we had been selected by the Turkish Ministry of Foreign Affairs for its epassport program. Our Coesys issuance solution, including the certificate authority and associated integration services, is being used to personalize new electronic passports for Turkey s 72.5 million citizens. In September, the Moroccan Mint commissioned Gemalto to deliver a complete solution for the Kingdom s new biometric passport program. Our solution includes the highly secure Sealys etravel operating system; integrated contactless microprocessors containing the holder s digital data; plus our Coesys Issuance solution, training and maintenance services. We are also supplying the Ministry of the Interior with our Coesys Enrolment solution to ease data capture. In November, the Danish State Police also renewed its contract for our Sealys epassport production and issuance service, a five-year deal with an option for a further five. We are also providing our Allynis Issuance services for epassport personalization at our Danish service center. The document has a secure laser-engraved polycarbonate data-page with innovative features including a contactless microprocessor running our highly secure OS. To cater for increased global demand for premium products manufactured in a highly-secure environment, in 2010 we opened a new production line for core epassport technology in Poland. Our additional capabilities in Tczew mean that we can continue to guarantee our customers high quality and excellent service levels. Electronic IDs and drivers licenses We reached several milestones for our electronic IDs and drivers licenses (eid and edl) business in For example, in India we surpassed the ten million mark for deliveries of electronic drivers licenses and electronic registration certificates for vehicles. The program is expected to become the largest of its kind in the world. We continued to break new ground for eid in For example, the Republic of Benin is benefiting from our Coesys enrollment solution to manage the secure biometric registration of an estimated six million voters for its 2011 presidential elections, by using more than 3,200 Coesys mobile enrollment stations. Gemalto is also supplying the software for national data consolidation, training services, technical assistance and fulfillment. This success reinforces our presence in Africa where we have already deployed several government programs, notably in Algeria, the Ivory Coast, Gabon, Morocco, Tunisia and South Africa. Health cards Governments around the world prioritized efficiency in 2010, and Gemalto solutions are helping them manage health administration, a key area of public spending. Electronic Healthcare Records (EHR) are unquestionably the next stage in restructuring the relationship between patients, healthcare practitioners and public-sector authorities. They can help reduce benefit fraud, provide healthcare to the right patients and ensure only authorized people can access their data. In February 2010, Bulgaria began deploying a national EHR program to optimize, simplify and secure health treatment and information for its military personnel and their families using Gemalto technology and middleware. The personal electronic health record enables healthcare professionals to access a patient s medical data instantly and make more accurate decisions, especially in emergency situations. Innovation and awards A core part of the Gemalto proposition to governments is innovation, helping them to streamline their services and achieve cost-controls. In June, we launched Sealys CoreMark, a semi-transparent opening fused into a 100% polycarbonate card body that is impossible to delaminate. Its distinctive watermark effect is produced by laser engraving deep into the card s core layers. This new security feature can be applied to documents such as ID cards, health cards, drivers licenses, vehicle registration, voting and resident permit cards. Not all of our innovation is technological. In May, we announced a partnership with The World Bank to support social and economic advancement in developing countries. This collaboration is part of the World Bank s etransform Initiative and will see Gemalto s international experience in secure electronic identity and mobile financial services applied to help governments gain wider access to best-in-class technology, expertise and practices.

35 Security 33 egovernment 2.0 The expression egovernment, which has been current for some years, refers to the use of information and communication technology in government services. Segmental review 10 million Electronic drivers licenses delivered to date in India. 100 million+ Electronic documents ( * ) issued to date by Gemalto. More recently, egovernment 2.0 (or egov 2.0), was coined to describe programs offering even more effective delivery of these services. The most common goals of egov 2.0 programs are increased efficiency, lowered costs and reduction in bureaucracy. They also include modernization of the social contract and strengthening of social cohesion. For Gemalto, egov 2.0 means a resolutely citizen-centric approach to the delivery of public services, making them more intimate and personalized. We enable this through programs using our secure electronic identification technologies. By offering an increasing range of flexible, responsive and convenient solutions, the public face of government is progressively growing closer to the citizens it is serving. ( * ) Includes epassports, edrivers licenses, eid, eresident, ehealth and eregistration (vehicles) cards. For more information visit It s always pleasing when our innovative products achieve industry recognition and awards underpin our business case with government clients, too. In November, our Personal Identity Verification credential was named Best Smart Card Solution at the US Government Security News Homeland Security Awards in Washington DC. Our secure Coesys Enrollment Solution for US ID projects was also a finalist in the Biometric Solutions category. Online authentication (OA) In 2010, Gemalto continued to supply solutions to manage access for employees to both physical infrastructure and IT systems in markets such as higher education, government, healthcare, banks and corporations. Our expertise in issuance and personalization ensures that each employee or member is properly accredited; and that authorizations, from the most senior decision-makers to the freshest recruits, can be managed centrally for maximum efficiency. Partnerships with leading IT suppliers ensure our solutions are easy for corporate IT departments to deploy and easy for their employees to use. For example, our Protiva.NET Bio solution, available for Windows 7, is delivering increased levels of corporate security by applying multi-factor authentication with biometrics on the smart card. Microsoft itself manages physical and logical access control worldwide using our smart cards with.net technology. OA for governments Gemalto s extensive government contracts for electronic authentication demonstrate our ability to deliver the highest levels of security for all our potential customers. Their systems hold highly personal information about millions of people. Their employees are often engaged on work of great sensitivity. And reliability is paramount both to protect data and ensure key staff can access secure information and networks wherever they are in the world. So our enterprise and banking customers can be reassured that our solutions have been tested in the most secure environments. In January 2010 we announced that Australia s Queensland Police Service had selected

36 34 Segmental review Gemalto Annual Report 2010 Gemalto to provide new electronic ID cards for its staff. This is the first police force to adopt an innovative solution that strengthens access security and enhances operational management. OA in financial services The most valuable assets for financial services firms today aren t held in vaults or safes they re in databases, and in their employees ability to perform secure transactions without delay. Banks can secure vital data and premises with world-class encryption systems using Gemalto smart cards, while ensuring the right employees have access to both physical infrastructure and IT systems. The Financial Services sector is a fast-moving market, and in 2010 we continued to innovate with products tailor-made for its most testing environments. In December, for instance, we launched a specific strong authentication solution for traders: Protiva One4all. With it, each trader only needs one secure credential to perform logon, logout and desktop locking for multiple PCs. This stand-alone software is designed to work with any PKI smart card and middleware. It can be easily installed on workstations with no impact on a bank s existing IT systems, and has been implemented in the trading rooms of major banks worldwide. Securing education Higher education is a showcase for our authentication solutions. On any campus, thousands of staff, students and support workers need secure access to buildings, networks, banking, transportation, and even for voting in student elections. Our multi-function cards act as a single credential allowing them to access a uniquely tailored set of services. The user-friendliness of our solutions is a key asset for fast adoption and deployment. In 2010, more than 7 million students around the world used our eid solutions. Cloud computing As companies strive to meet the demands of their mobile workforces, cloud computing ( * ) has become the focus of IT departments looking to deliver data services from a centralized location. One of the significant challenges in this service delivery model is the need for strong security controls and an audit trail of all access events. Gemalto s Protiva suite of strong authentication products and services provides a flexible solution to meet the needs of any size of organization. This includes both on-premise authentication, a blend of on-premise and hosted, and a fully hosted authentication service including fulfillment, life-cycle management, authentication services and support. These services are also applicable to the emerging needs within online gaming communities where users need to secure access to their accounts and control their digital assets. For example, Amazon Web Services (AWS) offers Gemalto s OTP token to add strong authentication for their users to access their online data resources. Gemalto provides the fulfillment services and manages the webstore where tokens can be bought by AWS users. ebanking and ecommerce The drive to move financial services online continued in Rapidly increasing use of smartphones and the need for banks to offer customers both convenience and security as well as improve their own efficiency at a time when they remain under financial pressure meant electronic banking activity reached record levels. Gemalto is the only truly global ebanking authentication provider with a strong local presence worldwide. Our solutions allow people to seamlessly prove their identity and conveniently conduct transactions online, with their privacy respected and secure from fraud. We also recognize that online security is increasingly about people and behavior, not just technology. That s why banks continued to rely on us in 2010 to deliver the most appropriate strong authentication solution to each individual. Pushing boundaries Banks are looking to Gemalto for even stronger, more trustworthy options for multi-factor authentication. That s why we offer a full range of solutions that add context, establish consent and manage risk. It s also why we offer a range of services from consultancy and back-end authentication servers, to producing, personalizing and distributing security devices. This has translated into a number of contract wins. In January 2010, for example, we announced that the Advanced Bank of Asia (ABA) in Cambodia would deploy our Ezio card readers for its new internet banking services. It means ABA customers can securely access and perform online banking transactions using their Ezio Reader and EMV card. This combination of something you have (the card) and something you know (the one-time PIN) Gemalto s Ezio Suite brings together a unique authentication server, plug-in modules and a range of authentication devices, ensuring our customers get exactly the solution they need. provides a much higher level of security compared with simple username and password schemes. Alongside our existing innovations we have sought to complement our ebanking offer through acquisitions. At the end of 2009 we acquired the banking business unit of Xiring, and its rapid integration saw us strengthening our position as a global leader in ebanking, ecommerce and access security. Then in April 2010 we acquired Todos AB, a provider of strong authentication for internet banking that has delivered more than 20 million devices to over 100 financial institutions worldwide. Its product suite allows consumers to use their PIN to securely sign internet banking transactions. Todos was quickly integrated with our existing activities and is a perfect fit with our ebanking business. Strong authentication Gemalto s Ezio Suite brings together a unique authentication server, plug-in modules and a range of authentication devices, ensuring our customers get exactly the solution they need. The result is a completely flexible, future-proof system. In November 2010 we augmented Ezio with the industry s first credit card combining One-Time Password (OTP) security with standard payment. End-users are happy to have a security token embedded in a familiar form-factor, guaranteeing high acceptance and allowing banks to lower fullfilment costs while increasing security, particularly online. This kind of innovation helps us win new business. For example, in October, Consultoría International Banco (CI Banco) in Mexico announced the roll-out of our Ezio strong authentication server and OTP tokens, enabling it to deploy multiple authentication devices, including EMV payment cards, connected readers and mobile phones. Leading banks such as Barclays, ABN AMRO, Nordea and many of their peers around the globe continued to trust us last year to deliver more than 50 million ebanking security devices to the doorsteps of their clients. ( * ) See page 17

37 Others 35 Others Segmental review Our performance ( * ) Our products, software and services Revenue 19m (2009: 24m) Down 22% year-on-year at constant Gross profit 4m (2009: 6m) Profit from operations 2m (2009: 4m) exchange rates Gross margin 22.3% (down 230 basis points) Profit margin from operations 10.9% (down 450 basis points) Sales of memory cards for fixed line public telephony applications continued to decline, as usage is substituted by mobile telephony. Our POS terminal business was transferred to VeriFone. Public Telephony Gemalto provides multi-function prepaid cards for public telephony. These enable operators to offer services to users when making payments at kiosks and going online. Gemalto is the world s leading supplier of prepaid phone cards with over 150 million units shipped in Our phone card solutions offer strong security for both operators and their customers. Our open Key Management System for authenticating card-based activities delivers a combination of security and flexibility. With our global footprint and diverse customer base, we support public telephony operators in a wide range of initiatives designed to promote their business. By sharing our market and technical expertise, we help operators develop fresh approaches to the highly mature fixed-line market. This enables public telephony to remain distinctive and relevant in a world increasingly dominated by mobile communication. Our tamper-proof UniSAM (Security Application Module) system can be installed in payphones or terminals to authenticate prepaid user cards. This offers security against fraud and allows storage of issuers private information. Since it is built on open standards, it works with almost any legacy system. POS terminals Effective December 31, 2010, Gemalto finalized the transfer of its POS solutions business to VeriFone. The latter has assumed the fulfillment of existing customer relationships and product requirements for Gemalto POS customers. ( * ) Adjusted financial information for ongoing operations. For more information see pages

38 Safe, convenient payment in America Payment card holders naturally expect to be able to use their cards anywhere in the world. And with most countries moving to EMV-based (Chip and PIN) payment for greater security, travelers with magnetic stripe cards are increasingly having trouble using them abroad. During 2010, Gemalto was chosen by banks in Canada and the US to help them migrate to EMV cards, including those with dual interface Dynamic Data Authentication (DDA) for contact and contactless use. This means their cardholders will have a secure, hassle-free means of payment that is globally accepted. For more information see pages For more information visit

39 38 Financial review 42 Principal risks 44 Our approach to sustainability Group financial and operating review

40 38 Group financial and operating review Gemalto Annual Report 2010 Financial review Gemalto delivered a strong performance in 2010 with Secure Transactions and Security reaching their profit margin objective one year ahead of schedule. Income statement Extract of the adjusted income statement: m Revenue 1, , % Gross profit % % (0.5 ppt) Operating expenses (1) % % (0.5 ppt) EBITDA (2) % % (0.1 ppt) Profit from operations % % +0.0 ppt Net profit % % +1.3 ppt Earnings per share ( per share) (3) basic % diluted % (1) In the adjusted income statement, operating expenses are defined as the sum of Research and Engineering, Sales and Marketing and General and Administrative expenses, and Other income (expense) net. (2) EBITDA is defined as PFO plus depreciation and amortization expenses, excluding the above amortization and depreciation of intangibles resulting from acquisitions. (3) The full year 2010 adjusted basic earnings per share are determined on the basis of the weighted average number of Gemalto shares outstanding during the twelve-month period ended December 31, 2010, i.e. 83,030,525 shares, which takes into account the effect of the share buy-back program. The full year 2010 adjusted diluted earnings per share were determined using 84,399,768 shares corresponding to the IFRS treasury stock method, i.e. on the basis of the same weighted average number of Gemalto shares outstanding for the twelve-month period ended December 31, 2010 and considering that all outstanding in the money stock options were exercised (5,976,566 options) and the proceeds received from the options exercised ( 142,268,568) were used to buy-back shares at the average share price of the full year 2010 (4,607,323 shares at 30.88). The financial review is based on adjusted financial information: non-gaap measures where the key metric to evaluate the business and to take operating decisions is the profit from operations (PFO). PFO is defined as the IFRS operating result adjusted for all equity-based compensation charges and associated costs, amortization and depreciation of intangibles resulting from acquisitions, and restructuring and acquisition-related expenses. For a better understanding of Gemalto s year-on-year business evolution, financial information and comments in the Segment information paragraph address the ongoing operations i.e. exclude the contribution from discontinued operations and from assets classified as held for sale to the income statement. Figures in the financial review are at historical exchange rates, except where otherwise noted. Fluctuations in currencies exchange rates against the Euro have a translation impact on the Euro value of Group revenues: comparisons at constant exchange rates aim at eliminating the effect of currencies translation movements on the analysis of the Group results by translating prior year revenues at the same average exchange rate as applied in the current year. Revenue for the full year 2010 was up by 19% at historical rates to 1,906 million, fuelled by double-digit growth in all 4 main segments, and by a strong second semester which, for the first time, saw Company revenue clearly surpassing the one billion euro revenue mark for a semester. Revenue from software and services grew by 54% to 252 million, contributing significantly to the Company s overall growth, and representing 13% of 2010 revenue. Business conditions in the fourth quarter were generally comparable to those observed during the rest of the year. The seasonality of revenue throughout 2010 was, as expected, more pronounced than in 2009, leading to much stronger seasonality in profit generation. Gross profit for the Company was up 102 million or 17% at 689 million. This represents a gross margin of 36.2%, lower by 50 basis points on the previous year. Profitability expanded in the Secure Transactions and Security segments offset by lower gross margin in Mobile Communication. The increase in operating expenses was much less than revenue growth, and was essentially attributable to the consolidation of acquired businesses and to some specific organic operating expense investments made in software and services and strategic growth areas. As a consequence, operating expenses were down 60 basis points when expressed as a percentage of revenue. The operational leverage combining strong revenue growth and controlled operating expenses generated a 19% increase in profit from operations to 216 million. The profit margin from operations of the Company was kept at its record level of 11.3% of revenue. Financial income for 2010 came in as a 0.8 million profit, versus a 2.2 million charge the year before; and share of profit of associates was essentially stable at 1.7 million. Hence, the profit before tax was up year-on-year by 21% to 218 million. Income tax amounted this year to a credit of 0.6 million, reflecting the effect of the recognition of some previously unrecognized deferred tax assets. In 2009, income tax expense amounted to 21.6 million. For more information on adjusted measures see pages

41 Financial review 39 The divestiture of the Point-of-sale (POS) activity, previously reported in the segment Others, became effective on December 31, As per IFRS, the contribution of this activity to the income statement is reclassified, and its net contribution is presented as a single amount on the line item Profit (loss) from discontinued operation (net of income tax) for both the 2010 and 2009 accounts. In 2010, this net contribution from discontinued operation was a loss of 2.4 million, essentially reflecting the net loss recorded on the disposal of the associated assets and liabilities. In 2009, the net contribution of the POS operations was a profit of 2.6 million. For the full year 2010 Gemalto generated an adjusted net profit of 216 million, higher by 55.5 million than the adjusted net profit for full year Basic adjusted earnings per share rose to 2.56 for 2010, and diluted adjusted earnings per share settled at 2.52, representing an earnings growth of 34% compared to Discontinued operation and Assets held for sale Within the framework of a strategic partnership between VeriFone and Gemalto announced in October 2010, the two companies entered into exclusive discussion for the transfer of Gemalto s electronic point of sale (POS) terminals business to VeriFone. The disposal of the POS business became effective on December 31, 2010, and therefore this activity, formerly reported within the segment Others, is now classified as a discontinued operation. As per IFRS, its net contribution is presented as a single amount on the line item Profit (loss) from discontinued operation (net of income tax), together with the 3 million net loss on the disposal of the related assets and corresponding liabilities. Without this reclassification, the POS activity would have contributed 51 million in revenue and 1 million in profit from operations in 2010, respectively 52 million and 3 million in The assets of one of the Company joint ventures (the JV) active in China in Secure Transactions and Security have been classified as held for sale due to the shareholding restructuring in process with the partner. In 2010 this JV revenue was 44 million and its profit from operations was 8 million, in 2009 its revenue was 42 million and its profit from operations was 10 million. The 22% increase in profit from operations to 207 million in 2010 leads to 11.1% profit margin from operations, both new records for the Company. The vast majority of this 37 million positive variation comes from the higher performance of the underlying business. This was complemented by the net effect of one-off items and acquired businesses. In Security the strong fall through from the double-digit growth was augmented by a greater contribution from the patent licensing activity. In Secure Transactions, the high operational leverage was driven by worldwide migration to EMV standards and strong demand for dual interface cards, and was partially offset by the triennial renewal trough in the UK. In the Telecom sector, the Mobile Communication segment reported lower profit due to limited large scale deployment of innovative projects and operating expense investments in software and service growth areas, while in the Machine-to-Machine segment customers reacted positively to the fast integration of Cinterion. The contribution to profit from operations from acquired businesses was slightly positive for the year. Constant perimeter analysis Businesses acquired in 2010 contributed 158 million to revenue. Taking as a reference the group s perimeter as at December 31, 2010, the ongoing operations year-on-year revenue growth (4) at constant perimeter was +7% at historical rates. Segment information For a better understanding of Gemalto s year-on-year business evolution, in this section Segment information comments and comparison address the ongoing operations as defined on pages Mobile communication m, ongoing operations Revenue % Gross profit % % ( 4.9 ppt) Operating expenses % % ppt Profit from operations % % ( 5.0 ppt) Group financial and operating review Ongoing operations analysis For a better understanding of the current and future year-on-year evolution of the business, the Company also provides the adjusted income statement for the ongoing operations ; i.e. excluding discontinued operation and assets held for sale. See pages for the reconciliation between the ongoing operations figures and the adjusted and IFRS income statements. Mobile Communication posted revenue of 981 million, higher by 5% at constant exchange rates from the previous year. Growth was driven by success in software and services whose revenue doubled year on year to 152 million as investment towards new offerings was sustained both through bolt-on acquisitions and organic developments. Extract of the adjusted income statement for ongoing operations: m, ongoing operations Revenue 1, , % Gross profit % % (0.5 ppt) Operating expenses % % (0.7 ppt) EBITDA % % +0.1 ppt Profit from operations % % +0.2 ppt Net profit % % +1.8 ppt Earnings per share ( per share) basic % diluted % On the product side, promising developments in new form factors (5) products used in new wireless usage such as mobile TV and mobile contactless services partly offset the slightly lower revenue from a traditional SIM card business whose product mix improvement was slowed by a less favorable regional sales breakdown and by the year s limited return to large-scale commercial deployment of innovative projects. Gross profit remained relatively stable at 376 million. Operating expenses grew by 25 million to 258 million with the consolidation of acquired technology companies and continued organic investment in strategic fast-growing areas such as Trusted Service Management (TSM), Mobile Money and Digital Life Management services. (4) i.e. as if all businesses acquired in 2009 and 2010 were consolidated as at January 1st 2009, and discontinued operations and asset held for sale were deconsolidated as at January 1st 2009, and based on pre-acquisition available revenue figures and best estimates. (5) Among the new form factors, revenue from Machine Identification Module products (MIM) is reported starting August 2010 in the segment Machine-to-Machine (M2M).

42 40 Group financial and operating review Gemalto Annual Report 2010 Hence, profit from operations was lower by 33 million year on year, at 118 million, representing a profit margin of 12.0%. The margin profile of the traditional SIM card business remained unchanged and the segment s year-on-year profit variation was essentially attributable to the pro-active investments in operating expenses to grow the software and service offerings, to the consolidation effects of the acquired businesses and to a series of non-recurring items. Machine-to-Machine The Machine-to-Machine (M2M) segment formed at the beginning of August 2010 essentially corresponds to the acquired Cinterion activity. It also includes Gemalto s existing M2M activity previously reported in the Mobile Communication segment. As a result, the Machine-to-Machine segment encompasses wireless modules from Cinterion, Gemalto s Machine Identification Modules (MIM) products and emerging M2M management platforms and services. As a result of the improvement in product mix, of the better absorption of fixed costs in high growth areas and of higher personalization activity, gross margin increased by 620 basis points on the previous year, to 30.3%. On the back of the revenue growth and gross margin improvement, gross profit settled at 140 million for the year, 41% above that of Operating expenses were kept tightly controlled and grew in line with revenue despite the consolidation of acquired technology companies and the continued investment in geographical growth areas. There was hence excellent fall-through to profit from operations from the strong second half surge in demand, and profit margin from operations thus progressed sharply, by 600 basis points, to 8.9% for the full year. Security m, ongoing operations 2010 Revenue % Gross profit % Operating expenses % Profit from operations % M2M posted revenue of 81 million over the 5-month consolidation period, higher by 15% at constant exchange rates on the previous year on a pro-forma basis (6). The integration of Cinterion and Gemalto M2M activities progressed well over the second half and the development of integrated offers began by year-end. During this period, revenue expansion was driven by the growing adoption of cellular connectivity solutions in a variety of industries such as automotive and metering. Gross profit grew accordingly, even if the strong rebound in the M2M applications came with slightly lower gross margins. Nevertheless, profit from operations doubled on a pro-forma basis, to 7 million, or 8.7% of revenue, benefiting from the strong operating leverage. Secure transactions m, ongoing operations Revenue % Gross profit % % ppt Operating expenses % % ppt Profit from operations % % ppt Secure Transactions revenue grew by 7% over the previous year at constant exchange rates, to 462 million. This growth was once again driven by global worldwide migration to EMV, and was boosted by the rapid adoption by certain countries of upgrades to dual-interface contactless payment cards. As expected, the twin negative effects of the triennial payment card renewal trough in the United Kingdom and of the shift from registered mail to standard mail for personalized card deliveries faded out in the second half of the year, leading to very strong 16% revenue growth in the second semester at constant exchange rates. m, ongoing operations Revenue % Gross profit % % ppt Operating expenses % % (6.2 ppt) Profit from operations % % ppt Security posted another very dynamic year, with excellent revenue growth, up 31% year-on-year at constant exchange rates, to 318 million. Identity & Access Management (IAM) led the way at +50% on the back of strong sales of our Ezio solution for ebanking deployments and on the integration of acquired ebanking activities. Government Programs also continued to grow fast, by 16%, as certain large-scale epassport and eid programs entered their deployment phases. Patent licensing revenue was also extremely strong this year, with revenue exceeding the Company s plan at 33 million, 19 million above that of 2009, as some on-going licensing negotiations came to an early conclusion. Additionally, a high profile patent litigation was initiated by Gemalto in the US. Gross margin improved by 450 basis points to 40.6% in 2010, and by 200 basis points when excluding the effect of the higher patent contribution, due to continued productivity gains in Government Programs and a greater share of IAM activity. The resulting gross margin improvement combined with the segment s double-digit revenue expansion to create a sharp increase in gross profit that settled at 129 million for the year, up 51% year on year. In this segment as well, operating expenses reflected the consolidation effect of acquired businesses and investment in promising areas, such as egovernment solutions. Still, operating expenses remained tightly controlled, growing by only 11% to 90 million and bringing operating expenses when expressed as a percentage of revenue down significantly, by 620 basis points. For the year, the operational leverage of a strong top line growth and gross margin improvement on limited operating expenses expansion led to a 1060 basis points expansion in the segment s profit margin from operations, to 12.4%. When excluding the patent licensing activity, this increase was 760 basis points, to 6.8%. (6) Pro-forma, by comparing the activities reported in the Machine-to-Machine segment starting August 1, 2010, consolidation date of the acquired Cinterion business, with the corresponding activities for the same period of 2009.

43 Financial review 41 Others m, ongoing operations Revenue (20%) Gross profit % % (2.3 ppt) Operating expenses % % +2.2 ppt Profit from operations % % (4.5 ppt) Following the disposal of the point of sale (POS) terminals activities at the end of December 2010, POS has been classified as a discontinued operation in compliance with IFRS, and its net contribution is thus presented in the income statement as a single line item Profit (loss) from discontinued operation (net of income tax) below the profit from operations. On a pro-forma basis the POS activity would have contributed in to the Segment Others 51 million in revenue and 1 million in profit from operations in 2010 ( 52 million and 3 million respectively in 2009). The Public Telephony activity continues to decline as it is now almost fully substituted globally by mobile telephony. Balance sheet and cash position variation schedule m Cash and cash equivalents, beginning of period Cash generated by operating activities, before cash outflows related to restructuring actions Including cash provided (used) by working capital decrease (increase) 9 (38) Cash used in restructuring actions (24) (9) Cash generated by operating activities Capital expenditure and acquisitions of intangibles (53) (73) Free cash flow Interest received, net 2 2 Cash used by acquisitions (74) (198) Other cash provided (used) by investing activities 4 9 Currency translation adjustments 8 9 Cash generated (used) by operating and investing activities 87 (77) Cash used by the share buy-back program (65) (39) Dividend paid to Gemalto shareholders 0 (21) Other cash provided (used) by financing activities 14 8 Cash and cash equivalents, end of period (7) Current and non-current borrowings including finance lease and bank overdrafts, end of period (23) (20) Net cash, end of period In the full year 2010, operating activities generated a cash flow of 183 million before the 9 million cash outflow related to restructuring and acquisition related expenses. This figure was unfavourably impacted by a 38 million increase in working capital requirement essentially generated by the strong revenue growth of the second semester. Capital expenditure and acquisition of intangibles amounted to 73 million, or 3.8% of revenue, of which 44 million were incurred for Plant, Property and Equipment purchases net of proceeds from sales (respectively 53 million and 40 million in 2009). Acquisition of subsidiaries and businesses, net of cash acquired, used 198 million in cash, of which 154 million were incurred for the acquisition of Cinterion. Other investing activities generated 9 million and Currency translation adjustments amounted to 9 million leading to a total of 77 million used in operating and investing activities. Gemalto s share buy-back program used 39 million in cash for the purchase of 1,281,254 shares in As at December 31, 2010, the Company owned 4,884,596 shares, i.e. 5.55% of its own shares in treasury. The average acquisition price of the shares repurchased on the market and held in treasury as of December 31, 2010 was The total number of Gemalto shares issued is unchanged, at 88,015,844 shares. Net of the 4,884,596 shares held in treasury, 83,131,248 shares were outstanding on December 31, On May 31, 2010, Gemalto paid a cash dividend of 0.25 per share in respect of the fiscal year This distribution, the first ever in Gemalto s history, used 21 million in cash. Other investing activities generated 8 million in cash, including 16 million of proceeds received by the Company from the exercise of stock options by employees. Combined with impact from the share buy-back program this resulted in 51 million used in financing activities. As a result of these elements Gemalto s net cash position (7) as at December 31, 2010 was 255 million. It was 381 million as at December 31, The Company also took advantage of favourable conditions to renegotiate and replace its existing syndicated credit facility that was about to expire by arranging a set of bilateral facilities for a total amount of 210 million as at December 31, 2010, and 300 million as at March 10, Outlook In 2011, Gemalto targets another year of expansion in revenue and profit from its ongoing operations, progressing in its development plan. The Company expects a substantially lower contribution from patent licensing activities in 2011, due to the public patent litigation it initiated in the USA; stable or expanding profits in Mobile Communication, with a pronounced seasonality due to the large deployments of Near-Field Communication (NFC) mobile contactless services and LTE fourth generation networks announced for the latter part of the year; and reiterates its expectation to have Secure Transactions delivering a high single-digit profit margin from operations in It upgrades its view on the Security segment, which is now expected to deliver high single-digit profit margin from operations in 2011 even without patent licensing contribution. Gemalto confirms its target of 300 million in profit from operations in Group financial and operating review (7) As at December 31, 2010, net cash amounting 19 million were in the JV and reported in the item Asset held for sale.

44 42 Group financial and operating review Gemalto Annual Report 2010 Principal risks In common with most organizations worldwide, Gemalto is affected by a number of risk factors, not all of which are within our control. Some factors, such as macroeconomic factors, are likely to affect the performance of businesses generally, while others are particular to our operations. This section sets out the risks that Gemalto s management believes are the principal risks to the Company, most being specific to our business. Accordingly, it is not intended to be an exhaustive list of all the risks that may affect our business, but aims at reporting on the main identified risks that stem from our activity and the actions developed in order to mitigate them. Risk area Strategic risks Lower growth, decrease in activities and/or increase in competition (Change in business environment, emerging market competition, etc.) Wrong acquisitions and/or joint ventures (Technological bricks, geographical coverage etc.) Technology shift (Change in business model) Operational risks Business interruption, including crisis mismanagement (Inability to serve our customers in a timely way and protect our stakeholders) Sourcing failures including unavailability of chips (Sophisticated technical requirements etc.) Decoding of encryption programs (Encryption is key to security) Defective products and/or service failures (Manufacturing, personalization services and development of software etc.) Most important potential impacts on Gemalto Financial Financial and operational, loss of key people Financial and reputational Financial, commercial and reputational Financial, commercial and reputational Financial and reputational Commercial, financial and reputational Mitigating actions Critical size, global presence. Competitive and market intelligence program Development Plan. Diversified portfolio of activities. Capacity of innovation to bring new products and applications to the market. In 2010, Gemalto filed 103 new patent applications (103 in 2009). Bolt-on acquisitions. Cross-segments selling. Strict pricing discipline. Focus on creating value to clients. In 2010, overall client satisfaction remained strong at 712 points (2009: 715, 2008: 631) Development Plan. Experience of successful combinations (twelve acquisitions since the Combination). Dedicated M&A team and processes. Strategy and M&A Committee with Board Members. Diversified technology portfolio approach (including through M&A). Participation in industrial bodies and standardization organizations. Many awards for technological innovations (see Strong Research & Development and standardization teams. Competitive and market intelligence program. Risk mapping with regular updates (both at site and group levels). Crisis management framework and worldwide training program. Business continuity responses build-up. Diversified industrial footprint. Multiple sourcing. Safety stocks management. Protection clauses in contracts. Strong security and cryptography expertise. Market Intelligence team. Eight sites with ISO certification (6 in 2009). Standardized manufacturing processes. Quality Management system and world-class enterprise organization. 27 sites with ISO 9001 certification (27 in 2009). Product and Professional liability insurance. Customer satisfaction survey. In 2010, overall client satisfaction remained strong at 712 (2009: 715, 2008: 631).

45 Principal risks 43 Risk area Most important potential impacts on Gemalto Mitigating actions Operational risks Bidding and execution failures of major contracts (Amount, duration, technology, commitments) Exposure to country risk (Political, regulatory and trade exposure impacting our staff, footprint and receivables) Infringement to intellectual property rights (IPR) (R&D is an important part of our activity) Commercial, financial and reputational Financial Financial and reputational Project-based organization for government program bids. Key account managers. Security certifications and organization. Crisis management. Involvement of treasury, tax and legal departments at the early stages of international operations. Travel intelligence and medical repatriation cover. Dedicated IPR team. Protection clauses in contracts. Internal inventors policy. Group financial and operating review Sensitive data mismanagement (Leakage and/or loss of customers data) Financial and reputational Internal audits. Security and IT policies and related trainings. Worldwide Security organization. Security certifications (including ISO 27001, EMV, etc.). Financial risks Foreign exchange risk (Manufacturing footprint, portfolio of receivables, future cash flows, competition) Financial Centralized currency risk management. Natural hedging (i.e. matching costs and revenue currencies). Hedging transactions (foreign exchange forward contracts and options recorded as cash flow hedges). Financial counterparty risk (Long-term contracts, terms of payment, cash deposit) Financial Risk limits set for counterparties. Usage of plain vanilla hedging instruments and low risk money market investment. Working with financial institutions of investment grade (deposits, hedging transactions). Financial reporting risks (Revenue recognition process, inventory valuation, taxation and other complex accounting issues) Financial and reputational Financial policies and procedures. Internal Audit department. Dedicated team on internal control over financial reporting. Single financial reporting tool company wide. Single Enterprise Resource Planning (ERP) under deployment.

46 44 Group financial and operating review Gemalto Annual Report 2010 Our approach to sustainability We ve been working towards business excellence for many years and in so doing we ve formalized our approach to sustainability, integrating it into our management systems and structures to help improve our performance as a responsible company. Introducing our first Sustainability report In November 2010 Gemalto published its first stand-alone Sustainability Report. This can be viewed online or downloaded as a pdf from Our 2010 edition will be published in summer Our values The way we approach and manage sustainability is closely aligned to our values. Over the years, our three core commitments to customers, employees and innovation have created a robust ethical framework which underpins all our sustainability activities. Managing Sustainability As a company that has always pursued business performance excellence, Gemalto has a strong background in many aspects of sustainability. We ve continually challenged our own practices through external evaluations and certifications. We ve benchmarked our performance against best-in-class companies and have always worked to meet expectations of corporate citizenship from our key stakeholders. A few years ago, we decided to combine our numerous corporate responsibility initiatives within a coordinated framework. At this point, our Board intensified its involvement in Gemalto s sustainability performance and reporting, and we took a more systematic approach to managing sustainability within the company. (For information on our Governance structure see page 50.) Our first priority was to set up a combined, formal sustainability management system. In 2009, we created a multidisciplinary Sustainable Development Steering Committee, supervised by three Executive Vice-Presidents: Human Resources, Marketing and General Counsel. This committee meets at least once a year to review our sustainability improvement strategy. We also set up two sub-commissions, Ecology and Social & Ethics, which meet every two months to review our sustainability projects. In particular, the sub-commissions focus on: Measurement of climate impact and carbon footprint; Development of more eco-friendly and safer products; Responsible purchasing practices; Measurement of performance against sustainability indicators. In September 2009, we signed up to the United Nations Global Compact (UNGC), benchmarking our policies and results with world-class standards, and verifying the alignment of our current practices with the Compact s ten principles on human rights, labor rights, anti-corruption and the environment. Also, we recently upgraded our Corporate Policy on Health, Safety and Environment (HSE) to a Sustainable Development Policy, which reflects the scope of our commitments in this area. Our first Communication of Progress (COP) to the UN was sent in September Materiality In our approach to sustainability, we aim to tackle the issues that matter most to Gemalto and our stakeholders. Based on our experience and knowledge, and taking into account requests from our customers and other stakeholders, as well as evolving HSE regulations, we have historically addressed critical issues such as: The environmental risks and impacts of our assembly and supply chain activities; Our capacity to design and create eco-friendly products; The impact of our products and industrial processes on the health of our employees and end-users. In 2009, we introduced new programs in the areas of People Care and Responsible Purchasing. We also began to define and implement a Corporate Social Responsibility (CSR) dashboard to help us monitor our CSR performance and progress.

47 Our approach to sustainability 45 It is essential to us that sustainability is at the core of our Company. We expect our employees to understand, embody and uphold our commitments and beliefs. Our global Enterprise Risk Assessment encompassed several sustainability issues and helped us map and mitigate key risks. Our next step is to conduct a dedicated sustainability risk analysis for the Company as a whole. This will enable us to better identify and prioritize the issues we engage with in the future. Stakeholder dialogue We communicate regularly with our key stakeholders, and invite their views on our performance. Whether they are customers, suppliers, employees, investors or local communities, our stakeholders opinions are of great importance to us. This view certainly underpins our approach to our investors. The confidence and loyalty of private and institutional shareholders are essential to our successful long-term development. Our investor relations policy is therefore aimed at informing shareholders in a timely and detailed way about developments that are relevant to Gemalto. In addition to the shareholders Annual General Meetings (AGM), we have implemented a wide variety of communication tools to keep investors informed on a regular basis, and to encourage their feedback. At the publication of interim and annual financial statements, we hold conference calls and investor meetings. In addition, we regularly hold road shows and participate in conferences for institutional investors. All these contacts help us to get a clear picture of investors and analysts opinions (see page 150). Our annual Tell Me survey, meanwhile, enables us to assess levels of customer satisfaction. It also allows us to answer queries from customers who want to maintain certain corporate responsibility standards throughout their own supply chains. the supply chain, product quality and our mutual relationship. In 2009, we also asked our suppliers for direct feedback on our procurement practices. We also regularly engage with people from the areas where we operate. These communications are conducted at a local level and can address issues such as noise pollution and people transport. For greatest efficiency, they are managed on a site-by-site basis. Internally, our annual employee survey, PeopleQuest, helps us to track employee satisfaction across our global operations. Employee engagement It is essential to us that sustainability is at the core of our Company. We expect our employees to understand, embody and uphold our commitments and beliefs. In 2009 we revisited our Code of Ethics, upgrading some of the rules that govern the conduct of our operations worldwide and strengthening the high ethical standards to which we aspire as a business. By the end of the year, 98.7% of targeted employees (more than 2,500) had read and signed this Code, confirming a strong level of engagement at all levels. We also communicate regularly with our employees about sustainability at Gemalto. We deliver information via established internal communications channels, and every year we disseminate our HSE and Sustainable Development Strategic Agenda. Last year, our commitment to support the UNGC, and our new sustainability projects and management structure, were communicated to all of our 10,000 + employees. We also introduced staff training on specific key issues such as fraud and launched a bi-monthly newsletter on internal control and risk management matters. Group financial and operating review Another key opportunity for customer dialogue on sustainability comes at the point of tender. During this process, as we answer questions put to us by customers, we are able to describe in detail our main management systems and practices. When requested, we also complete customer-specific questionnaires demonstrating how we can meet expectations for sustainable products and services. Since 2008, we ve been holding an annual Gemalto Sustainable Development Day with events held in all our sites worldwide which serve to update and engage our staff with our sustainability actions. And as of June 2010, we now have a dedicated CSR intranet. This site provides articles and information on sustainability topics, and serves as a key communication platform for our employees. Full details of Gemalto s policies and performance with regard to Sustainability can be found in its Sustainability Report on For our biggest suppliers, we hold Quarterly Business Review meetings where we discuss commercial and technical issues relating to

48 An easier route to democracy in Benin When a country s citizens live in remote areas, it s difficult to involve them in democratic life. Preparing for its 2011 presidential elections, the Republic of Benin selected Gemalto s Coesys mobile enrollment solution to manage the secure biometric registration of its six million voters. Packed inside a robust field case is all the software needed to capture citizens demographic data, fingerprints and digital photographs, anywhere in the country. This means voters can enroll rapidly without having to travel long distances. Gemalto delivered over 3,200 stations, plus the software for national data consolidation, training services, technical assistance and fulfillment. For more information see page 32 For more information visit

49 48 Governance at a glance 50 Corporate governance 56 Internal risk management and control systems 59 Board compliance statement 60 The Board and the management 64 Report of the Non-executive Board members 66 Remuneration Governance

50 48 Governance Gemalto Annual Report 2010 Governance at a glance Corporate governance For more information see pages 50 to 55 Core principles The Board is responsible for Gemalto s corporate governance structure and for compliance with the Dutch corporate governance code, as applicable during the 2010 financial year. The Company complies with the principles and best practice provisions of the Dutch corporate governance code with the exception of the best practice provisions listed on page 50. Board compliance statement The Board compliance statement for purposes of compliance with the Dutch corporate governance code and in accordance with the implemented European Union Transparency Directive, can be found on page 59. Board structure The Company has a one-tier Board comprising: Executive Board member, the CEO. Non-executive Chairman. Eight further Non-executive Board members. The Board held eight meetings during 2010, four in person and four by conference call. The Board has ultimate responsibility for the management, general affairs, direction and performance of the business as a whole. The CEO conducts the day-to-day management of the Company. The CEO is supported by the senior management team that consists of ten Executive Vice- Presidents, including the Chief Financial Officer. Board committees The Board committees are: Audit committee held six meetings during Compensation committee held five meetings during Nomination and Governance committee held four meetings during Strategy and M&A committee held six meetings during Board composition The members of the Board can be found on pages 60 to 61. Board member changes are set out on page 52 and 53. Report of the Non-executive Board members The report of the Non-executive Board members describes the activities of the Board and the different Board committees during The report can be found on pages 64 and 65. Internal risk management and control systems For more information see pages 56 to 58 Core principles The principal aim of Gemalto s internal risk management structure and control systems is to manage business risks, with a view to enhancing the value of shareholders investments and safeguarding assets and cash flows. Management has put in place, and regularly reviews and updates, a number of key policies, processes and independent controls to provide assurance to the Board as to the integrity of Gemalto s reporting and effectiveness of its systems of internal control and risk management. Risk assessment Risk assessment is part of management responsibilities at all levels. At Group level, a risk mapping was performed in 2007 and a new one was launched in The results and progresses on the action plans are regularly presented to the Audit committee and to the Board. For a detailed description, see page 58. Internal control Gemalto s management regards internal control as a responsibility that is shared by all managers and that is met by implementing a set of processes and procedures within Gemalto intended to provide reasonable assurance that risks are mitigated, financial reporting is reliable, applicable laws and regulations are complied with, and that the objectives of the Board can be attained (see pages 58 and 59).

51 Governance at a glance 49 Remuneration For more information see pages 66 to Remuneration Report of the Board The 2010 Remuneration Report of the Board, as drawn up by the Compensation committee, contains an account of the manner in which the Remuneration Policy for the CEO was implemented in 2010, and is scheduled to be implemented in 2011 (see pages 66 to 73). Remuneration Policy for the CEO The Remuneration Policy for the CEO was adopted by the Annual General Meeting (AGM) on May 11, 2005 and was most recently amended by the AGM of May 14, The Remuneration Policy is published on Gemalto s web site. The Remuneration Policy also serves as a guidance to establish the senior management remuneration. The objectives of the Remuneration Policy and the remuneration policy for the management are to attract, retain and reward talented staff and management, by offering compensation that is competitive in the industry, motivates management to surpass the Company s business objectives and aligns the interests of management with the interests of the shareholders. Remuneration of the CEO, including his function as Executive Board member The General Meeting, upon the proposal of the Board, determines the Remuneration Policy for the CEO, including for his function as Executive Board member. The remuneration of the CEO shall, with due observance of the Remuneration Policy, be determined by the Board. For details on the compensation of the CEO for the financial year 2010, see page 69. Remuneration of the Non-executive Board members The remuneration of the Non-executive Board members, including the remuneration of the Chairman of the Board and the members of the Board committees, is determined by the General Meeting. The remuneration is reviewed annually by the Compensation committee. For details on the remuneration structure for the Non-executive Board members, see page 72. Long-term incentive plans Global Equity Incentive Plan Gemalto has established a Global Equity Incentive Plan enabling the Board to grant options, restricted shares units and/or share appreciation rights to eligible employees (see page 73). Long-term incentive plans Global Employee Share Purchase Plan Gemalto has established a Global Employee Share Purchase Plan enabling the Board to offer the opportunity to eligible employees to purchase shares in the Company at a discount to the prevailing market price (see page 73). Governance

52 50 Governance Gemalto Annual Report 2010 Corporate governance This section provides a broad outline of Gemalto s corporate governance structure, its implementation during 2010, and its compliance with the Dutch corporate governance code. General Gemalto N.V. ( Gemalto N.V. or the Company ) is the parent company of the Gemalto group ( Gemalto or the Group ). The Company was incorporated in the Netherlands as a private company with limited liability on December 10, The Company was formerly named Axalto Holding N.V. and changed its name on June 2, 2006 in connection with the combination with Gemplus International S.A. ( Gemplus ), hereinafter the Combination. The Company s shares have been listed on Eurolist by Euronext Paris S.A. (formerly named Premier Marché) (Euronext NL ) since The corporate seat of the Company is Amsterdam, the Netherlands, and its registered office address is Barbara Strozzilaan 382, 1083 HN, Amsterdam, the Netherlands. The Company is registered with the trade register in Amsterdam, the Netherlands under No The Company is required to comply with, inter alia, Dutch law, Dutch corporate governance rules, Dutch AFM rules, French AMF rules and Euronext Paris Stock Exchange rules and related regulations, insofar as applicable to the Company. Compliance with the Dutch corporate governance code The Board is responsible for Gemalto s corporate governance structure and for compliance with the Dutch corporate governance code, as applicable during the 2010 financial year. The Company complies with the principles and best practice provisions of the Dutch corporate governance code with the exception of the below listed best practice provisions. These deviations are explained in the relevant sections of the Annual Report. Provision II.1.7: a whistle-blower procedure has been established compliant with the French legal requirements and as a consequence with a restricted scope. Please refer to Internal risk management and control systems, page 56. Provision II.2.7: amendment of the vesting date of options granted to Mr. O. Piou as CEO. Please refer to Deviations from the Dutch corporate governance code in terms of remuneration, page 72. Provision II.2.8: maximum remuneration in the event of dismissal of Mr. O. Piou as CEO. Please refer to Deviations from the Dutch corporate governance code in terms of remuneration, page 72. Provision II.2.10: (ultimum remedium). Please refer to Deviations from the Dutch corporate governance code in terms of remuneration, page 72. Provision II.2.13 (e): content of the Remuneration Report; i.e. non-disclosure of the companies of the Comparison Group. Please refer to Deviations from the Dutch corporate governance code in terms of remuneration, page 72. Provision III.8.1: appointment of the former Executive Chairman as Non-executive Chairman of the Board. Please refer to Composition of the Board (term of) appointment, page 51. Board of Directors One-tier Board The Company has a one-tier Board, comprising one Executive Board member, the CEO, and a majority of Non-executive Board members. The Board has ultimate responsibility for the management, general affairs, direction and performance of the business as a whole. The tasks and functions of the Board, as described in the Articles of Association and the Board charter, include the duties recommended in the Dutch corporate governance code. The CEO conducts the day-to-day management. The CEO does not require the approval or consent of the Board for any decisions in respect of day-to-day management. The duties and powers of the Board include those matters specified in the Articles of Association. The Board may delegate powers regarding matters that fall outside the area of the day-to-day management to the CEO and consequently these matters do not require a resolution of the Board. For information on the Board meetings held and the activities performed by the Board during 2010, please refer to Board meetings and activities during 2010, page 64. The Articles of Association and the Board charter are published on Gemalto s web site. The Dutch corporate governance code can be found on

53 Corporate governance 51 Operational and financial objectives and strategy During 2010, the Board discussed the parameters to be used for measuring performance and adopted the operational and financial objectives of Gemalto for The Board discussed at several meetings Gemalto s strategic plans and their implementation, reviewed the development of business activities and various investment opportunities. For more information on the Company s strategy, please refer to Our strategy, pages 12 to 13. The Board sets the framework and key objectives of the budget, which includes the operational and financial objectives of Gemalto. Budgets are constructed bottom-up, assessed by the Board and adjusted top-down where necessary to meet Gemalto s objectives. The budget for 2010 was approved by the Board at the December 2009 Board meeting. The budget for 2011 was approved by the Board at the December 2010 Board meeting. Corporate Social Responsibility The Board is responsible for the corporate social responsibility issues that are relevant to Gemalto. For more information, please refer to Our approach to sustainability, pages 44 to 45. Internal risk management and control systems Gemalto maintains operational and financial risk management systems and procedures and has monitoring and reporting systems and procedures. Among those procedures, Gemalto has a code of ethics, which provides guidelines for the conduct of all employees with respect to internal controls, financial disclosures, accountability, business practices and legal principles. Gemalto has a whistle-blower procedure for the receipt, retention and treatment of complaints received by Gemalto regarding suspected financial irregularities. Departing from the Dutch corporate governance code, to be in line with EU and French rules regarding data protection, suspected irregularities of a general or operational nature are not covered by the whistle-blower code, but shall be reported internally to the relevant manager. Gemalto has a policy on the ownership of, and transactions in Gemalto securities, which was updated in The code of ethics, the whistle-blower code and the policy on the ownership of and transactions in Gemalto securities are published on Gemalto s web site. For more details on the internal risk management and control systems, please refer to Internal risk management and control systems, pages 56 to 58. The statement of the Board in accordance with best practice provision II.1.5 of the Dutch corporate governance code can be found in Board compliance statement, page 59. Composition of the Board (term of) appointment At the 2007 AGM, the maximum number of Board members was set at eleven to allow the Board to determine from time to time its optimal size. The Board currently consists of ten Board members: nine Non-executive Board members and one Executive Board member, the CEO. Executive and Non-executive Board members are appointed by the General Meeting of Shareholders ( General Meeting ), whether or not on the binding or non-binding proposal of the Board. If the Board has not made a proposal for appointment, the General Meeting can appoint a candidate by absolute majority of the votes cast in a meeting at which at least one-third of the issued share capital is represented. If the Board has made a non-binding proposal for appointment, the General Meeting can appoint a candidate by absolute majority of the votes cast without a quorum required. If the Board has made a binding proposal, the General Meeting may override the binding nature of such proposal by an absolute majority representing at least one-third of the issued share capital. If the majority has been met, but the quorum not, a second meeting is held at which no quorum is required. So far the Board has not made use of the option to make a binding nomination. Board members are appointed for a maximum term of four years and may be reappointed for subsequent four year periods. However, Non-executive Board members may only be reappointed twice. The Non-executive Board members appoint the Executive Board member as the CEO and can at any time revoke such appointment. If the appointment as CEO of the Executive Board member is revoked, his powers and duties shall be carried out by an Acting CEO, temporarily appointed by the Non-executive Board members, whether or not from among their midst. The Board appoints one of its Non-executive Board members as Chairman of the Board. Absent proposal of the Board, the General Meeting may suspend or dismiss Board members only by an absolute majority of votes cast representing at least one-fourth of the Company s issued share capital. If the quorum is not met, a second meeting can be held at which no quorum is required. If the Board has made a proposal to suspend or dismiss a Board member, a quorum is not required. If Dutch law so permits, the Executive Board member may also be suspended by the Board. Governance

54 52 Governance Gemalto Annual Report 2010 The profile setting out the desired expertise and background of the Non-executive Board members was updated by the Board in October 2009 and is published on Gemalto s web site. With respect to diversity among Non-executive Board members, the objective pursued is to have a variation of age, gender, expertise, social background and nationality. The present composition of the Board differs from the intended situation, as the majority of Board members were appointed prior to the introduction of this objective. In as much as possible, the Company strives for a balance to achieve the above-mentioned variation. The Company believes that at least one of the Non-executive Board members can be regarded as a financial expert within the meaning of best practice III.3.2 of the Dutch corporate governance code. Although the appointment of a former Executive Board member as Chairman of a one-tier Board is not in line with the Dutch corporate governance code, after Mr. A. Mandl s reappointment by the 2007 AGM as Non-executive Board member as of December 2, 2007 for a first term ending at the end of the 2011 AGM, the Board appointed Mr. A. Mandl as Non-executive Chairman of the Board, as of December 2, The Board is pleased to be able to capitalize further on the knowledge and experience of Mr. A. Mandl within the Group, which is of particular added value for Gemalto and its stakeholders. At the 2010 AGM, Mr. D. Bonderman resigned from his position as Non-executive Board member. In view hereof there was one vacancy to be filled on the Board. The 2010 AGM, upon proposal by the Board, appointed Mr. Ph. Alfroid as Non-executive Board member for a first term ending at the end of the AGM to be held in At the 2011 AGM, the present term of Messrs. A. Mandl and M Soublin will end. The Board will propose to the 2011 AGM the reappointment of Mr. A. Mandl as Non-executive Board member for a second term and the reappointment of Mr. M. Soublin as Non-executive Board member for a third term, both terms ending at the end of the 2015 AGM. In 2010 the Board adopted a new reappointment schedule, published on Gemalto s web site, in order to avoid, as far as possible, a situation in which many Board members retire at the same time. For information on the members of the Board, please refer to The Board, pages 60 and 61. Board committees The Board has formed an Audit committee, a Compensation committee, a Nomination and Governance committee and a Strategy and M&A committee from among the Nonexecutive Board members. The committees have as their main role to provide a focused analysis and preparation of the subjects within their respective areas of expertise and to report and make recommendations to the Board, subject to the overall responsibility of the Board. The committees do not have executive powers. The duties of each committee are described in their respective charters. Board mandates with third parties With respect to the number and type of supervisory Board memberships that the Board members may hold, Executive and Non-executive Board members shall comply with the recommendations of the Dutch corporate governance code, as set out in best practice provisions II.1.8 and III.3.4 respectively. Conflicts of interest The Articles of Association state the conditions under which potential conflicts of interest exist and Gemalto has formalized rules to avoid conflicts of interests between Gemalto and Board members. For more information on these rules, please refer to article 17 of the Articles of Association. The Company complied with best practice provisions II.3.2 through II.3.4 and III.6.1 to III.6.3 of the Dutch corporate governance code in relation to conflicts of interest. For an overview of the related party transactions during 2010, please refer to note 32 of the consolidated financial statements. Loans or guarantees Gemalto does not grant personal loans, guarantees, or the like to Board members, and no such loans and guarantees, waivers of loans or guarantees were granted to the Board members in 2010, nor are outstanding as of December 31, For information on the committee meetings held and the activities performed by the committees during 2010, please refer to the respective committee reports in Report of the Non-executive Board members, pages 64 and 65.

55 Corporate governance 53 Indemnification of Board members To the extent permitted by Dutch law, Board members shall be indemnified by the Company against expenses, such as the reasonable costs of defending claims, as formalized in article 19 of the Articles of Association. Under certain circumstances, such as a claim, issue or matter as to which a Board member has been held liable for gross negligence or willful misconduct in the performance of his duty to the Company, there will be no entitlement to this reimbursement. Gemalto has a liability insurance (Directors & Officers D&O) for Board members and corporate officers. (Vice-) Chairman of the Board and Company Secretary The Chairman ensures the proper functioning of the Board and the Board committees and acts as the main contact for shareholders regarding the functioning of the Board. The Chairman presides over Board meetings and General Meetings and is responsible for a proper conduct of business at meetings. In case of the Chairman s absence or inability to act, the committee chairmen will designate among themselves a vice-chairman, who will temporarily assume the position. Senior management team The CEO is supported by the senior management team that consists of ten Executive Vice-Presidents, including the Chief Financial Officer. For information on the members of the senior management team, please refer to Members of the senior management, pages 62 and 63. Shares owned and rights to acquire shares Board members, including the CEO, hold shares in the Company for the purpose of long-term investment and they are required to comply with the policy on the ownership of, and transactions in Gemalto securities, as posted on Gemalto s web site. Gemalto shares Certain Board members are shareholders of the Company. On December 31, 2010, they jointly held 371,300 shares, of which Mr. O. Piou owned 367,000 shares. Mr. G. Fink owned 2,800 shares resulting from the exchange of Gemplus shares following the voluntary public exchange offer for the shares of Gemplus (the Offer ) and Mr. M. Soublin owned 1,500 shares purchased in Restricted Share Units On December 31, 2010, Mr. O. Piou held a maximum of 250,000 RSU. Gemalto share options On December 31, 2010, Mr. O. Piou held 800,000 Gemalto share options, and Mr. A. Mandl (through a company controlled by him) held 200,000 Gemalto share options. Gemplus share options On December 31, 2010, the following Board members held Gemplus share options: Mr. A. Mandl held 4,520,800 (through a company controlled by him) and Mr. J. Fritz held 11,302. Those Gemplus share options can be exercized for Gemplus shares that can be exchanged for Gemalto shares at a ratio of 25/2, resulting in 361,664 Gemalto shares for Mr. A. Mandl and 904 Gemalto shares for Mr. J. Fritz. Shares or other Financial Instruments in listed companies other than Gemalto N.V. Board members are required to comply with regulations concerning the ownership of, and transactions in, securities in listed companies other than Gemalto N.V. This policy is published on Gemalto s web site. Governance The Board is assisted by a Company Secretary, also General Counsel and Central Officer of the Group. Mr. J-P. Charlet was appointed as Company Secretary by the Board in July FCPE units On December 31, 2010, Mr. O. Piou owned 4, units in a FCPE (Fonds Commun de Placement d Entreprise), which units were purchased by his contribution to the Global Employee Share Purchase Plans in 2004, 2005, 2008 and 2010.

56 54 Governance Gemalto Annual Report 2010 Shareholders and General Meetings Share capital and shares of the Company The Company s authorized share capital amounts to 150,000,000 and is divided into 150,000,000 ordinary shares, with a nominal value of 1 per share. As of December 31, 2010, the Company s issued and paid-up share capital amounted to 88,015,844, consisting of 88,015,844 ordinary shares, of which 4,884,596 shares were held in treasury; as a consequence of which 83,131,248 shares were in circulation. During 2010, there were no changes in the amount of the issued share capital of the Company. Based upon the authorization of the Board to repurchase shares in the Company s share capital, which authorization was granted by the 2009 AGM and renewed by the 2010 AGM, shares were purchased during 2010 with the objective to animate the secondary market, to grant shares to employees and to fund external growth. As of December 31, 2010, 4,884,596 shares were held in treasury, acquired at an average price of with a market value as of December 31, 2010 of 155,549, There are no voting rights attached to shares when held by the Company in treasury. The Company has only issued ordinary shares, all of the same category, and all in registered form. No certificates representing shares have been issued. Shares are listed on Eurolist by Euronext Paris S.A. Company shares can be held in two ways: in an account in a bank, a financial institution, an account holder or an intermediary, these shares then being included in the Company s shareholders register in the name of Euroclear France S.A. ( Euroclear ); or listed in the shareholder s own name in the Company s shareholders register. AGM held in 2010 The AGM was held on May 19, No shareholders exercised their right to place items on the agenda for the AGM. In accordance with the Articles of Association, a registration date for the exercise of voting rights was determined for the 2010 AGM. At the AGM the following items were dealt with, all as separate agenda items: the 2009 annual report, the corporate governance chapter in the 2009 annual report, the adoption of the 2009 financial statements, the Company s dividend policy and a proposal for a dividend in cash of 0.25 per share for the 2009 financial year, discharge of the CEO and of the Non-executive Board members for the fulfillment of their respective duties during the financial year 2009, appointment of a Non-executive Board member, renewal of the authorization of the Board to repurchase shares in the Company s share capital and the reappointment of the external auditor for the year The minutes of the meeting are published on Gemalto s web site. All shares carry equal rights of voting at the General Meeting. Votes may be cast directly, or voting proxies or voting instructions may be issued to an independent third party prior to the General Meeting. Unless otherwise required by Dutch law or the Articles of Association, resolutions are adopted by an absolute majority of votes cast in a General Meeting where at least one-tenth of the issued share capital is represented. A General Meeting shall be held in the Netherlands: in Amsterdam, The Hague, Haarlemmermeer (Schiphol-Airport), Utrecht or Rotterdam. Authorizations to the Board The Board has the following authorizations, as granted by the AGM: To issue shares or grant rights to acquire shares in the Company, as well as to limit or exclude pre-emptive rights accruing to shareholders, as from March 18, 2009 for a period of five years up to and including March 17, The authorization relates to all shares that can be issued as allowed by the authorized share capital as expressed in the Articles of Association as they may provide from time to time (as of December 31, 2010, 61,984,156 shares remaining out of the 150,000,000 shares); To acquire shares in the share capital of the Company up to the maximum of 10% of the issued share capital of the Company, within the limits of the Articles of Association and within a certain price range, up to and including November 18, On December 31, 2010, the Company s issued and paid up share capital consisted of 88,015,844 shares, of which 4,884,596 shares were held in treasury, based on which on that date the authorization related to 83,131,248 shares; To cancel a number of shares not exceeding 9,101,584 shares, which cancellation may be executed in one or more tranches and the number of shares that may be cancelled (whether or not in one tranche) shall be determined by the Board.

57 Corporate governance 55 Distribution of profits The dividend policy of the Company was dealt with and explained as a separate item on the agenda for the first time at the 2005 AGM. The Company s dividend policy is that the amount of dividends to be paid by the Company to its shareholders shall be determined by taking into consideration the Company s capital requirements, return on capital, current and future rates of return and market practices, notably in its business sector, as regards the distribution of dividends. In 2010, the Company paid a dividend in cash of 0.25 per share for the 2009 financial year. With due observance of the dividend policy, the Company will propose to the 2011 AGM to distribute a dividend in cash of 0.28 per share in respect of the 2010 financial year. Prior to the General Meeting s authority to resolve upon the appropriation of the (remaining) result, the Board has the authority to reserve all or part of the profits made in a financial year. For more information on the distribution of profits or reserves, please refer to articles 32 to 35 of the Articles of Association. Shareholders disclosures During 2010, the Company was notified by the Dutch market authorities ( AFM ) that it had received disclosures of a substantial holding in the share capital of the Company, which disclosures are published on the web site of the AFM ( As at December 31, 2010, the following disclosures were published on the web site of the AFM, as included in the table here below. Specific provisions of the Articles of Association Amendment of the Articles of Association, liquidation or (de-)merger The General Meeting, upon the proposal of the Board, has the authority to amend the Articles of Association, to dissolve the Company, to legally merge, or to legally demerge, by resolutions adopted by a majority of at least two-thirds of the votes cast at such General Meeting at which at least one-third of the issued share capital is represented. Absent such quorum, a second meeting can be held at which no quorum is required. Appointment of the external auditor The Audit committee and Board review the functioning of the external auditor annually. Upon proposal of the Board, the 2010 AGM appointed PricewaterhouseCoopers Accountants N.V. as the Company s external auditor for the financial year The Board will propose to the 2011 AGM to reappoint PricewaterhouseCoopers Accountants N.V. as the Company s external auditor for the financial year Quorum requirement Unless otherwise provided by law or the Company s Articles of Association of the Company, the General Meeting can only adopt resolutions with an absolute majority in a meeting at which at least 10% of the issued share capital is represented. Absent such quorum, a second meeting can be held at which no quorum is required. Governance Notification date Dec 30, 2010 May 28, 2009 Sept 18, 2008 Notifier FMR LLC (held indirectly through Fidelity Management & Research Company, Pyramis Global Advisors Trust Company, Pyramis Global Advisors LLC) Caisse des Dépôts et Consignations (held indirectly through Fonds Stratégique d Investissment (FSI) and CDC EVM) Gemalto N.V. (4,884,596 shares (5.55%) were held in treasury by the Company as of Dec 31, 2010) Disclosure (% of capital) 10.72% (9,439,128 shares) 8.43% (7,418,500 shares) 5.17% (4,549,965 shares)

58 56 Governance Gemalto Annual Report 2010 Internal risk management and control systems Risk management and internal control principles Risk management and internal controls are critical to the stability of the Company. The aim of our internal risk management is to expand our ability to achieve our objectives by: Effectively constraining threats to acceptable levels, Making informed decisions, Enhancing our capacity to exploit opportunities, while trying to protect the interests of our stakeholders and our shareholders investments. The Company operates in a dynamic environment and there may be circumstances in which risks occur that had not yet been identified or in which the impact of identified risks is greater than expected. Management has put in place a number of key policies, processes and independent controls to provide assurance to the Board, as to the integrity of Gemalto s reporting and effectiveness of its systems of internal risk management and control, but they may not always prevent or detect all misstatements, inaccuracies, errors, fraud or non-compliance with law and regulations, neither can they provide certainty as to the achievement of the Company s objectives. The Board is responsible for reviewing the Company s system of internal risk management and controls and for assessing their effectiveness. The Audit committee regularly reviews with management and internal audit the Company s system of internal risk management and controls focusing on financial reporting matters, on main operational risks and on the results of improvement actions. The Board subsequently considers the outcome of the Audit committee s review. The Company s risk profile is reported in Principal risks, pages 42 and 43. Risk management organization The diagram below gives a synthetic view of the Gemalto risk management organization, as explained hereafter. Risk management organization Oversight structure Board and its committees (Audit, Compensation, Nomination and Governance, Strategy and M&A) Senior management, Anti-fraud commission Assurance bodies Business units Support functions Operations & Innovation Internal audit & internal control Risk management & insurance RISK ASSESSMENT Controlling CRISIS & BUSINESS CONTINUITY MANAGEMENT External auditors Certification bodies BUDGET, PLANNING & REPORTING Foundations Strategy and objectives Governance (procedures and policies) Culture and values

59 Internal risk management and control systems 57 Foundations: Risk management at Gemalto is built on solid foundations, as described in Our Strategy, pages 12 and 13, Our approach to sustainability, pages 44 to 45 and Corporate governance, pages 50 to 55. Gemalto has developed three levers to manage its operational and financial risks in a transversal manner throughout the organization: Risk assessment: Identifying and assessing our major operational and financial risks enables Gemalto to focus on those that matter and align its action plans and resources accordingly. Risk assessment is carried out at all management levels, for example, covering bid to contract reviews, sites (e.g. ISO 27001), new asset acquisitions, etc. Specifically at Group level, a risk mapping is performed and action plans identified and followed. Crisis and business continuity management: Having a flexible and tested crisis management organization and business continuity responses helps to reduce the impact of events inherent to Gemalto s operations and the type of industries in which Gemalto is engaged. Through the standardization of production tools and processes, multi-sourcing strategies, IT availability and redundancy infrastructure, Gemalto has developed systems that help to respond to unforeseen circumstances with minimal disruptions to our customers and our business. Budget, planning and reporting: Various complementary reporting systems enable Gemalto to obtain the right information when required, facilitating the decisionmaking. Gemalto has also detailed budget and planning processes. For more information, please refer to Internal Control over Financial Information, below and on page 58. Oversight structure The oversight structure ensures that the organization is geared towards effective risk management. Business units and Operations & Innovation Operations and business managers identify and manage risks in their respective sites or scope of responsibilities in line with Group strategy, policies and standards. Support functions Support functions (Finance, Purchasing, Security, IT, Quality, Health Safety and Environment, HR, and Legal) analyze risks, define prevention and protection standards, as well as policies and procedures. They monitor implementation of the respective risk policies in their own field of expertise. Assurance bodies The assurance bodies provide assurance on the design and effectiveness of the risk management processes and compliance with the relevant standards, policies and norms. The Group Risk Manager, reporting to the General Counsel and Company Secretary and to the CFO, is in charge of driving the enterprise risk assessment (in close cooperation with the Internal Audit Director) and promoting transversal risk management projects. The Group Risk Manager is also responsible for managing the insurance programs. Strategy of risk transfer to insurers The Group policy on insurance cover focuses on optimizing and securing the policies contracted by Gemalto. The aim is to protect the Company against exceptionally large or numerous claims, at a cost that does not impair the Group s competitiveness. The Group does not own or operate any insurance captive. Gemalto has set up global insurance programs with only quality and financially sound insurers and which combine master policies and local insurance policies in countries requiring it. The negotiation and coordination of these programs is carried out centrally with assistance from leading insurance brokers having an integrated international network. Such an organization facilitates a broad and consistent cover of all Gemalto activities and locations worldwide, cost optimization, global reporting and control, while ensuring compliance with local regulatory requirements. Insurance coverage strategies are periodically reviewed, taking into account changes in Gemalto s risk profile (acquisitions, claims and loss events, activities, etc.) and insurance market trends. Gemalto maintains insurance programs with policies encompassing property damage, business interruption, public, product and professional liability and Directors and Officers exposures. In 2010, the Group continued improvement actions through subscriptions to multiyear contracts in a hardening insurance market. Internal control environment Principles Gemalto s management regards internal control as a responsibility that is shared by all managers and that is met by implementing a set of processes and procedures intended to provide reasonable assurance that the Board s objectives will be attained under the corporate governance rules and respecting local laws and regulations. It has also defined internal control principles and procedures applicable to its main transaction cycles and to its central functions. Internal control is based on granting extended responsibilities and powers to the managers of subsidiaries, to management bodies and to their functional teams (Legal, HR, Purchasing, etc.). The Company s internal control system cannot provide absolute assurance. However, while keeping a reasonable balance between cost and assurance, it aims to ensure that realization of objectives is monitored, financial reporting is reliable and applicable laws and regulations are complied with. Anti-fraud commission The 2007 anti-fraud assessment project included an inventory of the Company tools and processes covering fraud prevention and detection. As from 2008, a senior management level operational structure called the Anti-fraud commission was put in place. Its first objective was to coordinate the various programs already in place inside the Company. Subsequent objectives encompass the continuous fraud risk assessment, anti-fraud policy and procedures, and response actions in case of fraud. This structure comprises the Group General Counsel, the EVP Human Resources, the Chief Information Officer, the Quality, HSE ( * ), Security and WCE ( ** ) Director and the Internal Audit Director. Its charter was approved by management on August 18, The commission meets formally on a quarterly basis and on an ad hoc basis in between when required. It has developed an anti-fraud action plan which, among other things, included the issuance of the Gemalto anti-fraud policy in 2009 and the implementation in 2010 of a frame agreement with two forensic specialized firms. Internal Audit In order to assess and test the internal risk management and control systems, the Company has a dedicated internal audit team that operates in conformity with a charter approved by the Audit committee (updated in 2010) and in line with international professional standards (Institute of Internal Auditors). The team is composed of eight auditors (as in the previous two years). It has direct and unlimited access to Group operations, documents and employees. The Internal Audit Director reports directly to the CFO and has an open independent line of communication with the Audit committee Chairman, as well as regular private sessions with the Audit committee. Governance ( * ) HSE: Health, Safety & Environment. ( ** ) WCE: World-Class Enterprise.

60 58 Governance Gemalto Annual Report 2010 Internal Audit conducts its missions according to an audit plan approved once a year by the Audit committee based on a risk assessment. Upon request of the Group s management or the Audit committee, Internal Audit also performs several ad hoc audits on certain aspects of the business. Work is coordinated with the external auditors. The implementation of recommended and accepted corrective actions is systematically followed up. The Internal Audit Director prepares a monthly report which includes a summary of the activity of his department and the key internal control issues and their status, and submits it to the Chairman of the Audit committee and the CFO. On November 2, 2010, Gemalto received the professional certification of its internal audit activities from the Institut Français de l Audit et du Contrôle Internes (IFACI) France representative of the Institute of Internal Auditors (IIA). Internal control over financial information (ICFR) The production and control of financial information is organized so as to be consistent with Gemalto s operational organization. To ensure the quality and completeness of the financial data produced and reported, Gemalto has set up a process for the production and review of the operating results by management, identified the main risks which have significant impact on the financial statements elements, and implemented preventive and corrective controls so as to mitigate those risks. As part of ICFR, the following elements are worth highlighting: Gemalto Development Plan This plan was prepared in 2009 encompassing the whole Group and in line with the Group objectives and strategy. Budget and forecast updating process and business reviews The budget process covers all operational entities and corporate departments, including treasury. The process begins in October and the result is an annual budget for the Group presented to the Board in December for the following year. Whenever changes in activity justify it, currentquarter and current-year forecasts are reviewed, and consolidated into an updated forecast for the Group on the basis of actions undertaken to meet Group objectives. They form a key part of the system to co-ordinate and monitor the Group activity. Monthly operating and financial results review and reporting processes Monthly and quarterly operating results are reviewed in detail in the first days of the following month between Gemalto s Corporate Controller and the President and/or Controller of each business segment and geographic area, on a date fixed in advance in the monthly or quarterly reporting calendar. The Chief Accounting Officer and the Internal Audit Director attend, and from time to time the CFO. Once validated by each area and segment Controller, operating results are consolidated by the corporate accounting department, reviewed by the Corporate Controller, the Chief Accounting Officer and the Finance Director (in charge of treasury and tax), then presented and discussed with the CFO. They are then presented jointly by the Corporate Controller and the CFO to the CEO. The Corporate Treasurer prepares a monthly report which includes a review of the financial result of the period, of the efficiency of the balance sheet and cash flow hedges, of the client receivables position and of the Group s cash and debt positions. On the basis of the operating results review and of the treasury report, the monthly operating dashboard and accompanying CEO and CFO letter are prepared by the Corporate Controller and CFO, and reviewed by the CEO before they are sent to the Board and circulated to the first line of management. The dashboard and accompanying letter cover the activity of the month by business segment, the updated operating income statement forecast for the current quarter, as well as a review of the cash and debt positions and of the working capital. A review of the activity is presented by the CEO and the CFO at each meeting of the Board. Quarterly pre-close reviews with each business segment and geographic area are organized by the Chief Accounting Officer in the last days of the quarter. They allow prompt identification and communication of any transaction or event which could potentially result in significant impacts on the results or the financial condition of the Group. Internal Control over Financial Reporting In 2007, a corporate project was launched with the objective of improving internal control over and above the quality of financial reporting. A self-assessment campaign is now performed each year through a financial risks based scoping exercise following the COSO2 model. The self-evaluations of the controls are tested for some critical processes and entities by internal auditors, as well as by the Company s external auditors. This campaign is also aimed at defining remediation plans based on identified deficiencies and to follow up the progress of those plans year-on-year. An annual report on financial internal control and on internal audit activity is prepared by the Internal Audit Director, reviewed and agreed by the CFO, approved by the CEO and presented to the Audit committee. Actions taken in 2010 Enterprise risk assessment: In 2010, action plans launched on risk and identified in the 2008 ERA continued and their status were regularly presented to the Audit committee and to the Board. In 2010 a new risk mapping exercise was launched on the risks that could impact the objectives and/or reputation of the Group. Policies and procedures: Gemalto maintains operational and financial policies and procedures, which are published on Gemalto s intranet and regularly updated when required. For example, during 2010, the following main policies and procedures were updated or first-time issued: the agent management policy, the R&D financial policy and the hedging policy. Crisis management: In 2009, Gemalto defined a Crisis Management Framework which encompasses basic escalation and communication rules, guidelines for anticipation and action, and clarified roles and responsibilities. Training sessions (including simulation exercises) started in 2009 and are currently 87% completed with, for example, 61 crisis management leaders trained worldwide. This proactive approach to crisis management enabled us to respond to unforeseen events, minimizing the impact for our customers and our business during the year. Business continuity: The capability of Gemalto to provide business continuity response has been strengthened by the enhancement of the standardization of the production tools and processes, with improved centralization of pertinent data and of relevant architecture for the seamless distribution of those data to back-up sites. Additional manufacturing capacities have been implemented to cater for unplanned circumstances. Training: In addition to trainings on internal control, ethics, anti-fraud, authority limits, contract management and competition rules, regularly given throughout the organization, in 2010 a special focus was put on newcomers (whether newly hired employees or newly acquired entities), on delegation of power and agents management.

61 Board compliance statement 59 Board compliance statement The objectives set for the internal risk management process are to identify the significant financial, operational, social, regulatory, legal and environmental risks that the Company may face, to perform a mapping of these risks and to initiate actions to mitigate, reduce, transfer, hedge, keep and manage, or suppress them. The Company s risk profile is reported in Principal risks, pages 42 and 43, with a description of principal risks, their most important impact on the Company and the main mitigation actions, and the internal risk management and control systems are described on pages 56 to 58. The Company operates in a dynamic environment and there may be circumstances in which risks occur that had not yet been identified or in which the impact of identified risks is greater than expected. The Company s internal controls are designed to manage these risks within limits acceptable to the Company, but may not always prevent or detect all misstatements, inaccuracies, errors, fraud or non-compliance with law and regulations, neither can they provide certainty as to the achievement of the Company s objectives. The Board is responsible for reviewing the Company s organization of internal risk management and controls and for assessing their effectiveness. The Audit committee reviewed with management and internal audit the Company s process of internal risk management and controls focusing on matters relating to financial reporting and on the main operational risks that have been identified, and on the result of actions that had been previously presented and performed by management. The Board subsequently considered the results of the Audit committee s review. For purpose of compliance with the Dutch corporate governance code, to the best of its knowledge, the Board believes that, as regards the risks relating to financial reporting: Gemalto s internal risk management and control organization provide a reasonable assurance that its financial reporting does not contain any error of material importance; Gemalto s internal risk management and control process in relation to financial reporting have worked properly in the year In conjunction with the European Union Transparency Directive, as incorporated in chapter 5.3 of the Dutch Financial Markets Supervision Act (Wet op het financieel toezicht), the Board hereby declares that, to the best of its knowledge: the annual financial statements for the year ended December 31, 2010 give a true and fair view of the assets, liabilities, financial position and profit or loss of Gemalto and its consolidated companies; the annual management report gives a true and fair view of the position as per the balance sheet date and the state of affairs during 2010 of Gemalto and its affiliated companies of which the data has been included in the financial statements; and the annual management report describes the principal risks that Gemalto faces. The Board Mr. Alex Mandl Non-executive Chairman of the Board Mr. Olivier Piou Executive Board member and Chief Executive Officer Mr. Buford Alexander Non-executive Board member Mr. Philippe Alfroid Non-executive Board member Mr. Kent Atkinson Non-executive Board member Mr. Geoffrey Fink Non-executive Board member Mr. Johannes Fritz Non-executive Board member Mr. John Ormerod Non-executive Board member Mr. Arthur van der Poel Non-executive Board member Mr. Michel Soublin Non-executive Board member Amsterdam, March 8, 2011 Governance

62 60 Governance Gemalto Annual Report 2010 The Board The Board is composed of the following members: ( * ) Alex Mandl (1943) American Non-executive, non-independent Board member, Chairman of the Board. Appointed: December 2, 2007 for four years until the AGM of 2011 (first term). Executive Chairman from June 2, 2006 until December 2, Chairman of the Nomination and Governance committee. Lead director, chairman of the audit committee and member of the governance committee of Dell Inc, non-executive chairman, chairman of the nomination and governance committee and member of the audit committee of Horizon Lines. Prior to June 2, 2006, Alex Mandl served as President and CEO of Gemplus from September 2002 to June From April 2001 through August 2002, he was a principal in ASM Investments focusing on technology investments. Previously, he served as chairman and CEO of Teligent, a company he started in 1996, offering the business markets an alternative to the local Bell Companies for telecommunication and internet services. From 1991 to 1996, Alex Mandl was with AT&T where he served as President and Chief Operating Officer with responsibility for long distance, wireless, local communications and internet services. Prior to his President/COO position he was AT&T s CFO. Between 1987 and 1991, he was chairman and CEO of Sea-Land Services, Inc., the world s leading provider of ocean transport services. In 1980, he joined Seaboard Coastline Industries, a diversified transportation company, as Senior Vice President and CFO. He began his career in 1969, when he joined Boise Cascade Corp., as a merger and acquisition analyst, and he held various financial positions during the next eleven years. Until September 2010, Alex Mandl was board member and chairman of the leadership and compensation committee of Hewitt Associates and board member and member of the audit committee and of the finance committee of Visteon Corporation. Alex Mandl holds an MBA from the University of California at Berkeley and a BA in economics from Willamette University in Salem, Oregon. 2. Olivier Piou (1958) French Executive Board member and Chief Executive Officer, non-independent. Appointed: February 17, 2004, reappointed at the AGM of 2008 for four years until the AGM of 2012 (second term). Member of the board of directors of Alcatel-Lucent and of Institut National de Recherche en Informatique et en Automatique (INRIA) the French national institute for research in computer science and control. Olivier Piou has been CEO of Gemalto since its creation in He was previously CEO of Axalto, from 2004 to In 2004 he successfully introduced Axalto, at that time a division of Schlumberger Limited, to the stock market through an IPO, and in 2006 conducted the merger of Gemplus and Axalto which formed Gemalto. He graduated in Engineering from the Ecole Centrale de Lyon, in 1980, joined Schlumberger in 1981, and held numerous positions across technology, marketing and operations in France and in the US until From 1998 onwards he was in charge of the smart cards business. From 2004 to 2006 he was a member of the board of directors of Axalto, and from 2003 to 2006 was President of Eurosmart, the international non-profit association based in Brussels, which represents the chip card industry. Olivier Piou is a knight of the Legion of Honor in France. 3. Buford Alexander (1949) American Non-executive, independent Board member. Appointed: May 20, 2009 for four years until the AGM of 2013 (first term). Member of the Strategy and M&A committee. Member of the board of Viking River Cruises, Ltd. Member of non-profit boards including the Holland America Friendship Foundation (chairman), the American Chamber of Commerce in the Netherlands (president emeritus), and the Fulbright Commission in the Netherlands. Until 2008, Buford Alexander was a senior director of McKinsey & Company, where he pursued a consulting career for more than 30 years. He was a leader of McKinsey s European banking practice and later of McKinsey s European high-tech practice, and founded McKinsey s European Corporate Finance practice (restructuring, M&A, turnarounds and post-merger management). He has spent much of the last years designing and leading the transformation of global European multinationals. Amsterdam has served as his European base since Buford Alexander holds a Bachelor s degree in mathematics and economics from Rice University in Houston, Texas, as well as a MBA degree from the Harvard Business School. In May 2001, Queen Beatrix granted him the Royal Distinction of Officer in the Order of Oranje-Nassau. 4. Philippe Alfroid (1945) French Non-executive, independent Board member. Appointed: May 19, 2010 for four years until the AGM of 2014 (first term). Member of the Audit committee Chairman of the supervisory board of Faiveley Transport. Board member of Essilor International and Eurogerm. Until mid-2009, Philippe Alfroid was Chief Operating Officer of Essilor International, the world leader in ophthalmic optics. He joined the company when it was created in 1972 and has held several operational and senior management positions, including that of group CFO. In the 90s, he was chairman and CEO of Sperian a leader in personal protective equipment. Philippe Alfroid is an engineering graduate from ENSEHRMA Grenoble and holds a Master of Science from the Massachusetts Institute of Technology. 5. Kent Atkinson (1945) British Non-executive, independent Board member. Appointed: May 11, 2005, reappointed at the AGM of 2009 for four years until the AGM of 2013 (second term). Member of the Audit committee and of the Strategy and M&A committee. Senior independent director and chairman of the audit committee of Coca-Cola HBC SA. Non-executive director and chairman of the group audit and compliance committee of Standard Life plc, and a member of its risk & capital committee and its investment committee. Senior independent director, chairman of the audit committee and a member of the risk committee of UK Asset Resolution Limited (which includes Northern Rock (Asset Management) plc and Bradford & Bingley plc). Kent Atkinson originally joined the Bank of London and South America (later acquired by Lloyds Bank) and held a number of senior managerial positions in Latin America and the Middle East before returning to the UK. He was Regional Executive Director for Lloyds TSB s South East Region until he joined the main board as Group Finance Director, a position he held for eight years until his retirement as an executive. He remained on the Lloyds TSB board for a further year as a non-executive director. Until April 2005 Kent Atkinson was the senior independent director, chairman of the audit committee and a member of the remuneration and nominations committees of Cookson Group plc, and until November 2007 he was the senior independent director, chairman of the audit committee and a member of the remuneration and nominations committees of Telent plc (previously Marconi Corporation plc). He was also chairman of Link Plus Corporation Inc until April He was non-executive director of Millicom International Cellular SA and a member of its audit and compensation committees until May Geoffrey Fink (1969) French Non-executive, independent Board member. Appointed: June 2, 2006, reappointed at the AGM of 2008 for four years until the AGM of 2012 (second term). Member of the Compensation committee and of the Strategy and M&A committee. Geoffrey Fink is based in Dubai where he is a Managing Partner and Head of Investments for Delta Partners Group, a leading emerging markets-focused TMT advisory firm. From December 2000 through September 2010 he was a London-based Partner of TPG Capital, LLP. From May 1998 to December 2000, he was a Vice-President and subsequently Senior Vice-President with Security Capital Group. Between August 1999 and December 2000, Geoffrey Fink was also Chief Operating Officer, ( * ) Situation as of the date of this Annual Report.

63 The Board and the management head of the Management committee, and board member of Access Space. In 1993 and from 1995 to 1998, he was a Consultant and then Engagement Manager with McKinsey & Company in London. Prior to joining McKinsey, he worked in the M&A departments of both Goldman Sachs in London and PaineWebber in New York. Geoffrey Fink was previously a director of Gemplus until June 2, 2006 and has served on the board of Eutelsat S.A., Eden Springs Ltd., and various private companies. Geoffrey Fink is a member of the New York Bar. He received a Bachelor of Arts degree summa cum laude from Yale University, a Juris Doctoris degree magna cum laude from Harvard University and a Master s degree focused on international business from the Fletcher School of Law and Diplomacy. 7. Johannes Fritz (1954) German Non-executive, non-independent Board member. Appointed: June 2, 2006, reappointed at the AGM of 2009 for three years until the AGM of 2012 (second term). Chairman of the Strategy and M&A committee and member of the Audit committee. Head of the Quandt Family office since June Johannes Fritz studied at Mannheim University (MBA) and New York University (post-graduate). He then spent two years with Bertelsmann (assistant to CEO) and subsequently five years at KPMG covering financial institutions and industrial companies (CPA). In 1989 he joined the Quandt Family office. From 1990 to June 2000 he was responsible for all financial questions and running the day-to-day-business (managing director). Johannes Fritz was previously a director of Gemplus until June 2, John Ormerod (1949) British Non-executive, independent Board member. Appointed: June 2, 2006, reappointed at the AGM of 2009 for four years until the AGM of 2013 (second term). Chairman of the Audit committee and member of the Compensation committee. Chairman of Tribal Group PLC, a UK-listed company. Senior independent, non-executive director and chairman of the audit committee of Misys plc and director and chairman of the audit committee of Computacenter plc, UK listed companies. Non-executive director and chairman of the audit committee of ITV plc, a UK-listed company. Trustee of the Design Museum. John Ormerod is a UK chartered accountant and since 2004 has been a director of a number of private and public companies. He retired as a partner in the UK firm of Deloitte & Touche LLP in 2004 where he was Practice Senior Partner London. After graduating from Oxford University, Mr. Ormerod joined the London office of Arthur Andersen where he remained until he joined Deloitte in He led the development of the firm s European capability in Telecoms, Media and Technology ( TMT ) as industry leader and member of the Global TMT Industry team executive. He was elected Andersen s UK managing partner for John Ormerod was previously a director of Gemplus until June 2, Arthur van der Poel (1948) Dutch Non-executive, independent Board member. Appointed: May 1, 2004, reappointed at the AGM of 2008 for four years until the AGM of 2012 (second term). Chairman of the Compensation committee and member of the Nomination and Governance committee. Chairman of the supervisory board of semiconductor equipment maker ASML and member of the supervisory boards of engineering company DHV and soccer club PSV Eindhoven. Arthur van der Poel is a graduate of the Eindhoven Technical University. Upon graduation, he worked for the research and development group of Dutch PTT and then went on to work for the International Telecommunication Union in Indonesia. In 1984, he began working at Philips Semiconductors where he held different marketing and management positions and became chairman and CEO in March In May 1998, he was appointed member of the management board of Royal Philips Electronics. He remained a member of Philips group management committee until he retired from Philips on April 1, Michel Soublin (1945) French Non-executive, independent Board member. Appointed: February 17, 2004, reappointed at the AGM of 2007 for four years until the AGM of 2011 (second term). Member of the Nomination and Governance committee and of the Strategy and M&A committee. Director, Ligue Nationale contre le Cancer Michel Soublin joined Schlumberger in 1973 and has held several positions in the financial sector and management in Paris, New York and Moscow, including from 1983 to 1990, CEO of Schlumberger s e-transactions subsidiary (Smart cards, POS terminals, service station equipment and parking divisions), financial director of Oilfield Services from 1996 to 1998, Schlumberger Group Treasurer from 2001 to February 2005 and financial advisor from 2005 to Michel Soublin retired from Schlumberger in July Michel Soublin is a graduate of the Institute of Political Studies (IEP) and of the Faculty of Law and Economics in Paris. Governance

64 62 Governance Gemalto Annual Report 2010 Members of the senior management The senior management is composed of the following senior managers: ( * ) Paul Beverly (1962) American Executive Vice-President, Corporate Marketing & President North America Paul Beverly began his career as a Marketing Manager within the Schlumberger group. Over the course of his 19 years within Schlumberger, he held various management positions in operations, marketing and sales in North America and in France. From 1999 to 2003, he was Vice-President in Test & Transactions for Schlumberger in North America, while also serving as Chairman of the Smart Card Alliance. He was President of the Americas from April 2003 until June Paul Beverly holds Business and Economics degrees from Auburn University and the Management Program at Harvard University. Philippe Cabanettes (1955) French Executive Vice-President, Human Resources Philippe Cabanettes worked with Schlumberger for 23 years and has held different positions of worldwide responsibility for human resources in the petroleum, industrial and services sectors in France, Italy and the US. From 1997 to 2001, he was Director of Personnel of the Resources Management Services division of Schlumberger. In May 2001, he became the Director of Personnel of Schlumberger s Volume Products business. In May 2004, he became Vice President Human Resources for Axalto. He has been the Executive Vice President Human Resources of Gemalto since July Since 2002, Philippe Cabanettes has served as President of PartnerJob.com, a non-profit, cross-industry organization facilitating Dual Career management. Philippe Cabanettes is a graduate from Institut d Etudes Politiques in Paris (Sciences-Po) and holds a Master in Economics from Université de Paris X. Philippe Cambriel (1958) French Executive Vice-President, Secure Transactions Business Unit Philippe Cambriel began his career at Aerospatiale in From 1989 to 1996, he held various sales and marketing positions at Compaq in France and in Germany. From 1996 to 1998, he was General Manager for IPC in France before managing the PC and Intel server unit of Bull. In 1998 he was appointed Chief Officer, sales and marketing at Bull CP8. From 2001 to 2003, he was Vice-President of Schlumberger s e-transaction Cards business. In April 2003, he was appointed President of Schlumberger s Smart Cards business for Europe, the Middle East and Africa. Philippe Cambriel is a graduate from the Ecole Nationale Supérieure de l Aéronautique et de l Espace (Sup Aéro) and has an MBA from INSEAD. Jean-Pierre Charlet (1953) French Executive Vice-President, General Counsel and Company Secretary Jean-Pierre Charlet was admitted to the Bar in Paris where he began his career in law firms in From 1981 to 1996, he held positions within the Legal Departments of Société Métallurgique Le Nickel-SLN, Schlumberger group, Pinault Printemps Redoute group and Carnaud-Metalbox. He subsequently served as General Counsel of Synthélabo, Deputy General Counsel of Sanofi-Synthélabo and General Counsel of Rexel. He joined Gemalto in June Jean-Pierre Charlet holds a Master in Law from Université de Paris X and a Master of Comparative Law from Georgetown University in Washington D.C. ( * ) Situation as of the date of this Annual Report.

65 The Board and the management 63 Claude Dahan (1947) French Executive Vice-President, Operations Claude Dahan began his career with the Office National d Etudes et de Recherches Aérospatiales (ONERA) in 1977, and served as Vice-President of a research center until Between 1982 and 2001, he held various management positions in Schlumberger s many different businesses, including research and engineering, marketing and production in both France and the USA. From 2001 to 2002, he was the Vice-President in charge of marketing and product development for Schlumberger. In January 2003, he became Vice-President of Schlumberger s Smart Cards business. Claude Dahan is a graduate from the Ecole des Mines de Paris, has a PhD in physics and fluid mechanics, and holds an advanced management degree from INSEAD. Martin McCourt (1962) Irish Executive Vice-President, Strategy, Mergers and Acquisitions Martin McCourt previously served as President of Gemalto s South Asia operations. Prior to this position, he was also President of Gemplus Asia. In this capacity, he was responsible for the whole of Asia. He has 20 years of experience in the Telecom sector, working in Europe, the US and China. He has held leadership roles in R&D, Sales and Marketing, Operations, Strategy and M&A and was Vice President of Corning Cable System s worldwide Project Services business. Martin McCourt has a Master of Business Administration from INSEAD, a Ph.D in Integrated Optics from the Institut National Polytechnique in Grenoble and a Bachelor of Electronic Engineering from University College Dublin. Christophe Pagezy (1958) French Executive Vice-President, Corporate Projects Having joined Schlumberger in 1983 as a project engineer, Christophe Pagezy held various operational, technical and business positions in France and Italy within that company until Between 2001 and 2002, he was business development manager for Schlumberger s Volume Products and Global Market Segments business. In June 2002, he became Vice-President of Schlumberger s Terminals division and in May 2004 Vice-President Business Development in charge of Mergers and Acquisitions and of the POS Terminal division of Axalto. Christophe Pagezy is a graduate from the Ecole Supérieure d Electricité (Supelec) and from the Massachusetts Institute of Technology (MIT). Jacques Sénéca (1959) French Executive Vice-President, Security Business Unit Previously, Jacques Sénéca was in charge of Gemalto s European operations. Prior to these appointments, he served as head of the ID & Security Business Unit, as well as head of Business Development Unit. He joined Gemplus in 1989 as Project Manager. He has held several management positions such as Products Department Manager, General Manager for Sales and Manufacturing Operations in Germany, General Manager for the Telecom Business Division, Executive Vice President for Gemplus Marketing & Technology and General Manager of Gemplus GemVentures Services Unit. He was also a member of the Gemplus Executive Committee. Prior to joining Gemplus, he worked with STMicroelectronics where he held various positions in the fields of manufacturing, marketing and business development. Jacques Sénéca holds a Degree in Engineering from Ecole Nationale Supérieure d Arts et Métiers (ENSAM Paris, France) and a Business Administration degree from the IAE of Aix-en-Provence in France. Jacques Tierny (1954) French and Swiss Chief Financial Officer Jacques Tierny began his career as a trader. He then spent 23 years in different finance positions at Michelin in France and abroad, where he became the Group Deputy CFO. In 2003 he joined the retail group Casino as Group CFO, later becoming Casino s Executive Deputy General Manager. Since January 2007, Jacques Tierny was heading the Valuation and Strategic Finance practice at KPMG Corporate Finance in Paris. He joined Gemalto in September Jacques Tierny graduated in 1977 from the HEC School of Management in Paris and later from the International Management Program from New York University and the Mestrado from Gétulio Vargas in São Paulo. Philippe Vallée (1964) French Executive Vice-President, Telecommunications Business Unit Philippe Vallée was previously Chief Technology Officer of Gemplus, heading the Product and Marketing Center. Prior to this appointment, he had served as Vice-President Marketing and then President of the Telecom Business Unit of Gemplus. He was previously based in Singapore as Executive Vice-President of Gemplus Technologies Asia. He has more than 21 years of experience in the Telecom industry and held various positions within Gemplus in the fields of marketing, product management and sales. Prior to joining Gemplus, he began his career with Matra Communication (now Lagardère Group) in France as a product manager on the first generation of GSM mobile phones. Philippe Vallée is a graduate from the Institut National Polytechnique de Grenoble (Engineering degree in Telecom and Microelectronics) and from the ESSEC Business School. Governance

66 64 Governance Gemalto Annual Report 2010 Report of the Non-executive Board members Board meetings and activities during 2010 Meetings The Board held eight meetings: four in person and four by conference call. Each of the Board members attended the majority of the meetings. The Board addressed in different meetings the following main subjects: The corporate strategy and main risks of the business, the result of the assessment of the design and effectiveness of the internal risk management and control systems, as well as any significant changes in such matters. Financial performance of the Group. Parameters to be used for measuring performance. Annual budget plan for Development of business activities and various investment opportunities. Share buy-back and dividend policy. Convocation of the AGM. Reports of the Board committees following each of their meetings. Performance of the Board, of the committees and of its individual members, including the CEO. Succession planning and management development. Remuneration of the CEO and the senior management. Grants to eligible employees under the Global Equity Incentive Plan, and opportunity for eligible employees to purchase discounted shares under the Global Equity Share Purchase Plan. Corporate governance requirements and developments. The CEO was not present and did not take part in the discussion or decision-making by the Board at the part of meetings in which his remuneration and performance was discussed. The Board members met regularly in the absence of the CEO and of the senior management. Performance evaluation The Board evaluated its own performance, the performance of the committees and of its individual members, including the CEO. The Board followed-up on the 2009 evaluation and noted the implementation of several suggestions. Other items discussed included the composition and competencies of the Board, the setup and content of meetings and meeting materials. Also the relationship with the senior management was discussed. Suggestions for improvement either have been fully implemented, or will be implemented as it becomes feasible to do so. Training The Board made a visit to one of its factories for training on Gemalto s products and held meetings with managers to further familiarize themselves with the business and the senior management team. Board composition For information on the composition of the Board, please refer to Composition of the Board (term of) appointment, pages 51 and 53. For information on the individual Board members, please refer to The Board, pages 60 and 61. Independence The Board currently consists of ten Board members: nine Non-executive Board members and one Executive Board member, the CEO. The Board considers that seven Non-executive Board members are independent, within the meaning of best practice provision III.2.2; thus the Company complies with best practice provision III.8.4. The following Non-executive Board members are considered non-independent: Mr. J. Fritz, Head of the Quandt Family office. Mr. A. Mandl, former Executive Chairman of Gemalto. Report of the Audit committee The committee advises the Board with respect to the oversight of the quality and integrity of Gemalto s financial statements; risk management and internal control arrangements; compliance with legal and regulatory requirements; the performance, qualifications and independence of the external auditor; and the performance of the internal audit function. The committee consists of four Non-executive Board members, listed in The Board, pages 62 and 63. One committee member is considered non-independent. The Board believes that at least one committee member is a financial expert within the meaning of best practice III.3.2 of the Dutch corporate governance code. During 2010, the committee held six meetings. The Chairman, CEO, CFO, Chief Accounting Officer, the Internal Audit Director and the external auditors were invited to attend the committee meetings. The committee also met on at least one occasion privately with the CFO, the Internal Audit Director, the external auditors and the General Counsel (without other members of management being present). During 2010, the committee reviewed the 2009 annual financial statements and the related audit report from the external auditors. The committee also reviewed the condensed interim financial statements as of June 30, 2010 and the related report by the external auditors, as well as the announcements of the 2010 quarterly revenue figures. In connection with these reviews, the committee reviewed the Company s accounting policies and compliance with accounting standards. During the year, the committee received and considered reports on the Company s risk management system and key internal financial control policies and procedures. With regard to the internal audit, the committee reviewed the revised internal audit charter, the internal audit plan for 2011 and its coverage in relation to the scope of external audit. It also reviewed the effectiveness and independence of the internal audit process. The committee received reports on the work of the internal audit department and considered their significant findings and recommendations. With regard to the external audit, the committee reviewed the independent auditor s audit plan for the financial year ended December 31, The committee assessed the performance and independence of the auditors and considered steps taken to ensure their independence,

67 Report of the Non-executive Board members 65 including receiving a report on the auditors internal procedures for maintaining independence, including policies for rotation of responsibilities of key personnel; approving key non-audit assignments; and reviewing the fees paid for non-audit services. For an overview of the aggregate fees billed by the external auditors for professional services rendered for the fiscal year 2010, please refer to note 10 of the company financial statements. The committee considered these and other factors in concluding its recommendation to the Board for the reappointment of the external auditors. The committee carried out the review and assessment of the effectiveness of internal controls. This included a review of the tax and treasury risks, and the information and communication technology risks. The committee also reviewed the effectiveness of the whistle-blowing arrangements, received reports on whistle-blowing, significant claims and disputes, including those resulting in litigation, and related party transactions. During the year, the committee reviewed the effectiveness of its performance with input from all Board members. Changes are then implemented to make improvements. During the year, as a result of this process, the committee arranged for a technical accounting update presentation and discussion led by the technical staff of the auditors, focusing on recent and planned developments in accounting and reporting which are most likely to affect the Company. Report of the Compensation committee The committee advises the Board with a proposal for a Remuneration Policy for the CEO, which is reviewed annually, and with a proposal for the remuneration of the Non-executive Board members, which is reviewed from time to time, to be adopted by the General Meeting. The committee proposes the remuneration of the CEO within the limits of the Remuneration Policy. Furthermore, the committee oversees the general remuneration policy of Gemalto and discusses the grant of Awards, i.e. options, restricted share units and/or share appreciation rights, and the opportunity for eligible employees of Gemalto to purchase shares in the Company at a discount to the prevailing market price. The committee consists of three Non-executive Board members, listed in The Board, pages 60 and 61. All committee members are considered independent. During 2010, the committee held five meetings. In these meetings, the committee reviewed the 2009 achievements and associated bonus payments for the CEO and senior management, as well as the 2010 salary increases, objectives and bonus levels. The remuneration for the CEO was determined within the limits of the Remuneration Policy for the CEO. The committee prepared the 2010 Remuneration Report, which report can be found in 2010 Remuneration report of the Board, pages 66 to 73. The committee made recommendations to the Board on the grant of restricted share units to eligible employees, as well as on the performance conditions relating to such share incentive. Details of the grant of restricted share units to the CEO are disclosed in Compensation of the CEO for the financial year 2010, page 69. The committee also recommended to the Board that eligible employees be offered the opportunity to purchase shares in the Company at a discount of 15% to the prevailing market price within the Global Employee Share Purchase Plan (`GESPP ), as described in more detail on page 73. As part of their duties, the committee requested external advice from Mercer, an independent internationally recognized firm of compensation specialists, which firm did not provide advice services to management, but only to the Board via the committee. Report of the Nomination and Governance committee The committee advises the Board with respect to overseeing new candidates for service on the Board, as well as new members of the senior management of Gemalto. The committee reviews the corporate governance principles applicable to Gemalto and advises the Board on any changes to these principles as it deems appropriate. The committee consists of three Non-executive Board members, listed in The Board, pages 60 and 61. One committee member is considered non-independent. During 2010, the committee held four meetings. The committee advised the Board in 2010 on the appointment of Mr. Ph. Alfroid as Non-executive Board member. The committee advised the Board on a new reappointment schedule following the appointment of a new Board member. The committee discussed further steps that the Company could take to improve its corporate governance, reviewed the Governance section of the Annual Report and the agenda for the AGM. The committee also reviewed the Sustainability report that was prepared for the first time in The committee proposed changes to the insider trading policy. The committee prepared and coordinated with the Chairman of the Board the annual self-assessment of the Board and of the committees, which took place in the second half year of Report of the Strategy and M&A committee The Strategy and M&A committee advises the Board with respect to Gemalto s strategy and the major features of its merger, acquisition and divestiture activities. The committee consists of five Non-executive Board members, listed in The Board, pages 60 and 61. One committee member is considered non-independent. During 2010, the committee held six meetings. The committee reviewed all material investment and divestiture proposals. It advised and submitted recommendations to the Board on Gemalto s M&A and divestiture activities, and Gemalto s strategic plans and their implementation. Financial statements 2010 The financial statements of the Company for 2010, as presented by the Board, have been audited by PricewaterhouseCoopers Accountants N.V., the Company s external auditors. Please refer to the Auditor s report, page 144. All individual Board members have signed the financial statements. The Board proposes that the financial statements for the year 2010 be adopted by the AGM of May 18, 2011 and that the other resolutions proposed to the shareholders be approved. Finally, we would like to express our thanks to the CEO, the senior management and all employees of the Group for their continued dedication and contribution during the past twelve months, making 2010 a successful year for Gemalto. The Non-executive Board members Amsterdam, March 8, 2011 Governance

68 66 Governance Gemalto Annual Report 2010 Remuneration This section consists of the following: 2010 Remuneration Report of the Board. Remuneration of the Non-executive Board members. Long-term incentive plans Remuneration Report of the Board The 2010 Remuneration Report of the Board, as drawn up by the Compensation committee, contains an account of the manner in which the Remuneration Policy for the CEO was implemented in 2010, and is planned to be implemented in Remuneration of the CEO, including his function as Executive Board member The General Meeting, upon the proposal of the Board, determines the Remuneration Policy for the CEO, including for his function as Executive Board member. The remuneration of the CEO shall, with due observance of the Remuneration Policy, be determined by the Board. Remuneration Policy for the CEO The Remuneration Policy for the CEO was adopted by the AGM on May 11, 2005 and was most recently amended by the AGM of May 14, The Remuneration Policy is published on Gemalto s web site. The Remuneration Policy also serves as a guidance to establish the senior management remuneration (not addressed in this report). The compensation package of the CEO consists of four elements: (i) base salary, (ii) variable incentive, (iii) long-term or deferred incentive and (iv) a fixed fee as Executive Board member of Gemalto N.V. The compensation of the CEO is calibrated by comparison to a group of other relevant companies, particularly continental European high-tech and industrial companies (the Comparison Group ) and surveys are performed by Towers Watson, an independent internationally recognized firm of compensation specialists. Positioning of the Remuneration Policy The table opposite (page 69) summarizes the positioning of the Remuneration Policy by comparison with the Comparison Group and applies to the compensation package of the CEO. Compensation package of the CEO The table on pages 68 and 69 sets out: Key elements of the compensation package of the CEO. Compensation of the CEO for the financial year The objectives of the Remuneration Policy and the remuneration policy for the management are to attract, retain and reward talented staff and management, by offering compensation that is competitive in the industry, motivates management to surpass the Company s business objectives and aligns the interests of management with the interests of the shareholders. The Company considers that it has a balanced set of clearly defined objectives and performance targets that do not encourage the CEO to take risks that are not in line with the adopted strategy and which are within the Company s risk appetite.

69 Remuneration 67 Positioning of the Remuneration Policy Types of compensation Overall compensation Policy relating to compensation Assuming that challenging but achievable targets set by the Board have been met, the overall compensation is set to be about the 60th percentile by comparison with the remuneration practices of the Comparison Group. In case of exceptional performance, the total compensation is set to be in the upper quartile. Total Reference Compensation ( TRC ), i.e. base salary and a fixed fee as Executive Board member of Gemalto N.V. The TRC is targeted around 50th percentile by comparison with the Comparison Group. Governance Variable incentive The total variable compensation at 100% (on-target) achievement of all objectives is designed to be clearly above 50th percentile, with an average over the years of about 60th percentile by comparison with the Comparison Group. Long-term or deferred incentive The long-term or deferred incentive part of the total compensation package for the CEO is designed to be clearly above 50th percentile by comparison with the Comparison Group, which may be the upper quartile in case of exceptional performance.

70 68 Governance Gemalto Annual Report 2010 Compensation package of the CEO Key elements of the compensation package of the CEO Short-term Total Reference Compensation ( TRC ) The TRC is fixed and reviewed every year, but not necessarily adjusted every year. Variable incentive The variable compensation of the CEO, based on the achievement of personal and financial objectives, ranges from 0 to 180% of the TRC. A variable incentive of 120% of the TRC is payable on achievement of 100% of on-target performance by reference to a predefined set of personal and financial objectives. In case of exceptional performance in excess of the 100% (on-target) achievement of objectives, the variable compensation can be increased so that the total variable compensation can reach up to 180% of the TRC. The personal and financial objectives for variable compensation typically relate to short-term (annual) performance targets and are key drivers for value creation and growth in shareholders value. Part of the variable compensation is related to Gemalto s financial results, e.g. revenue, cash flow and operating income, and is determined by the Board on the recommendation of the Compensation committee on an annual basis. The remainder depends on success in achieving a limited number of specific strategic, tactical or individual objectives, also determined annually by the Board on the recommendation of the Compensation committee. Long-term or deferred incentive Global Equity Incentive Plan ( GEIP ) Under the GEIP and the French Sub-Plan, the CEO may receive options, restricted share units and/or share appreciation rights (jointly referred to as Awards ). For further information, please see page 72. The Board is authorized to grant to the CEO annually any combination of Awards, including any awards, as defined in the GEIP, similar in substance and/or nature, with a maximum value equivalent to the value Global Employee Share Purchase Plan ( GESPP ) Under the GESPP, the Company may offer eligible employees, including the CEO, the opportunity to purchase shares in the Company at a discount to the prevailing market price. The discount of the purchase price of the shares is 15% based on the lesser of the value of the shares on the first and last day of the offering period. The CEO may participate in the GESPP (as well as in any future similar plans), through a Fonds Commun de Placement d Entreprise. Other benefits Pension The CEO does not benefit from any special pension plan provided by Gemalto, other than the mandatory legal pension system in France. There are no agreed arrangements for early retirement of the CEO. Employee benefits The CEO enjoys any and all benefits that may be applicable to French employees.

71 Remuneration 69 Compensation of the CEO for the financial year 2010 The TRC of the CEO was adjusted effective February 1, 2010 to 670,000 (including a fixed fee as Executive Board member of Gemalto N.V. of 35,000). Below a minimum performance threshold, the variable compensation for financial performance is zero. The compensation is 120% at target level and at a maximum of 180% at stretch level. This compensation is calculated using two linear interpolation scales from threshold to target and from target to stretch. In exceptional cases, the Board may add a discretionary amount. 1,148,820 (143% of on target Variable Incentive, 172% of TRC). For 2010, the CEO s financial targets accounted for 2/3 of the variable compensation and were: Revenue: 4/15 of the variable compensation. Profit from Operations: 4/15 of the variable compensation. Free cash flow: 2/15 of the variable compensation. The personal targets, accounting for 1/3 of the CEO s variable compensation, depended on his specific responsibilities and were defined as measurable actions linked with the success and development of Gemalto. In accordance with best practice provision II.2.13 (b) of the Dutch corporate governance code, the Compensation committee, and subsequently the Board, analyzed the possible outcomes of the variable compensation components and how they may affect the compensation of the CEO. of 250,000 options valued by reference to any of the generally recognized valuation methods applied in a manner as approved by the Board. Grant of 32,500 RSU, if conditions allow for 100% vesting. The number of RSU granted may be either zero or may vary, with a linear sliding scale between 100% and 200% vesting, from 32,500 RSU to 65,000 RSU. This corresponds to a cost that varies from 877,104 to 1,754,207 for Gemalto depending on the multiplier effect of the RSU conditions. The cost will be expensed over 36 months. Vesting occurs in March 2013, if both a performance condition and a service condition are met. The performance condition being the Company achieving a target level of Profit from Operations for Governance ( FCPE ), in which case the FCPE subscribes to Gemalto shares and the CEO receives in exchange units of the FCPE. The CEO participated to the 2010 GESPP, subscribing for 20,000 (plus Company matching) for which he received FCPE units. 58,013 Costs for 2010 for the CEO s mandatory French legal pension scheme. The CEO enjoyed any and all benefits that were also applicable to French employees.

72 70 Governance Gemalto Annual Report 2010 Global Equity Incentive Plan ( GEIP ): Awards and Conditions Awards Options When granting options, the Board applies performance and vesting conditions, as set out below. The exercise price of options is equal to the average of the Gemalto share closing price on the Euronext Paris Stock Exchange during the five trading days preceding the grant date. The options do not benefit from any discount. Restricted share units ( RSU ) A RSU is a right to acquire shares in exchange for the RSU. There is no purchase price to be paid to acquire a RSU. When granting a RSU, the Board applies performance and vesting conditions, as set out below. At any time after the granting of a RSU, the Board may accelerate the vesting of such RSU. Under no circumstances, except in case of death, shall the delivery of shares related to a RSU occur prior to the second anniversary of the date of grant. Except in case of death, the sale of shares acquired pursuant to the exchange of the RSU may not occur prior to the expiration of a two-year period from the date delivery of the shares. Share appreciation rights ( SAR ) A SAR is a right to receive the difference between the fair market value of a share on the exercise date and the exercise price of the right being exercised. So far, the Company has not granted SAR to the CEO. Conditions Performance factors Awards may be granted or vest on the basis of the achievement of specified financial or personal performance conditions, as included in the Remuneration Policy. In 2010, Awards made during the year were subject to the Company achieving a target level of Profit from Operations for The Board expects to consider applying similar performance conditions for future grants. Vesting in certain circumstances In addition to any performance conditions, Awards have generally been subject to vesting over a specified future period of time. However, any option rights granted to the CEO will vest automatically upon any decision to terminate the appointment of the CEO and will remain exercisable for the full term of the option, notwithstanding any early termination provided in the GEIP and the relevant Sub-Plan, and all other eventual equity-based schemes will continue to vest even after the date of termination. These termination arrangements do not apply where the employment of the CEO with Gemalto International SAS or the Company is terminated for willful misconduct ( faute lourde within the meaning established by the French Supreme Court case law). Under specific circumstances, the Board has the discretionary power to grant unconditional options (e.g. in case of new hire).

73 Remuneration 71 The table below summarizes information on Awards granted to the CEO in previous years, in accordance with best practice provision II.2.13 (d) of the Dutch corporate governance code. Options Date of grant Number Value at grant date June ,000 1,269,781 Unconditional (past performance related) Sept ,000 1,049,761 Unconditional (past performance related) (Un)conditional Date of vesting Value at vesting date June 2010 (4 years after date of grant) Sept 2012 (4 years after date of grant) End of lock-up Exercise price ( ) 1,408,000 Not applicable Not applicable Not applicable RSU Date of grant Number Value at grant date Sept 2007 The number may vary from 0 to 80,000 with a maximum multiplier of 3 (Un)conditional Date of vesting Value at vesting date 1,727,828 Conditional Dependent on whether thresholds are reached before Dec 31, 2009 or before Dec 31, 2010 End of lock-up Value at end of lock-up 66% vested in ,424, Not applicable 84% vested in 2009 (in total 150%) 2,026, Not applicable As per Dec 31, 2010, the remainder of the RSU were not vested and hence were forfeited Oct ,000 1,689,377 Conditional Oct 2012 Not applicable Oct 2014 (if vested) March 2010 The number may vary from 877,104 Conditional March 2013 Not applicable March 2015 (if vested) 0 to 32,500 with a maximum multiplier of 2 Not applicable Not applicable Governance

74 72 Governance Gemalto Annual Report 2010 Contracts of employment Mr. O. Piou was appointed as CEO in 2004 for a term of four years until the AGM of He was reappointed on May 14, 2008 as Board member with the title of CEO for a term of four years until the AGM of Mr. O. Piou has an employment contract (originally dated 1981), not limited in time, governed by French law with Gemalto International SAS, a Gemalto subsidiary. He has a six-month notice period. If Gemalto terminates Mr. O. Piou s employment contract, he is entitled to a severance payment equal to one year of reference salary. The reference salary used to calculate this payment will be the annual gross salary paid under Mr. O. Piou s employment contract during the twelve months preceding its termination, including bonuses and other discretionary cash incentives, if any, as well as the Board member fees he is entitled to. The severance payment will be in addition to the indemnities and benefits that would be provided by French laws and regulations and the collective bargaining agreement for the Engineers and Management level Employees in the Metallurgical Industry (Convention collective nationale de la Métallurgie Ingénieurs et Cadres). In the event of termination of his employment contract, Mr. O. Piou has a recognized seniority since 1981 and is entitled to a six-month notice period indemnity, as well as the dismissal and paid vacation indemnities. The severance payment will not be due if the employment contract of Mr. O. Piou is terminated for willful misconduct ( faute lourde within the meaning established by the French Supreme Court case law) or upon voluntary resignation of Mr. O. Piou. Details regarding the compensation of the CEO are also disclosed in note 9 to the company financial statements. Changes to the compensation of the CEO for the 2011 financial year The CEO s TRC will be adjusted in For 2011, the CEO s financial targets will account for 2/3 of the variable compensation and are: Revenue: 4/15 of the variable compensation. Profit from operations: 4/15 of the variable compensation. Free cash flow: 2/15 of the variable compensation. The personal targets for 2011 will account for 1/3 of his variable compensation and will depend on his specific responsibilities and are defined as measurable actions linked with the success and development of Gemalto. Loans or guarantees Gemalto does not grant personal loans, guarantees or the like to the CEO, and none were granted to the CEO in 2010, nor are outstanding as of December 31, Deviations from the Dutch corporate governance code in terms of remuneration Provision II.2.7: amendment of the vesting date of options granted to Mr. O. Piou as CEO. The CEO s Remuneration Policy provides that, unless his employment with Gemalto International SAS or Gemalto N.V. is terminated for willful misconduct, any option rights vest automatically upon decision to terminate the appointment of the CEO and remain exercisable for the full term of the option, notwithstanding any early termination provided in the GEIP and the relevant Sub-Plan. All other equity-based schemes will continue to vest even after the date of termination. Although it is not the Company s policy to amend conditions regarding options granted to Executive Board members during the option term, the amendment of the vesting date of the options granted to the CEO is included in the Remuneration Policy adopted by the shareholders, as proposed by the Board, as a result of the execution of the Combination agreement signed between Gemalto N.V. (at that time named Axalto Holding N.V.) and Gemplus International S.A. on December 6, Provision II.2.8: maximum remuneration in the event of dismissal of Mr. O. Piou as CEO. The severance payment for the CEO is not in line with the Dutch corporate governance code, which recommends that the maximum remuneration of one year s salary is based on the fixed remuneration component. However, the severance payment of the CEO reflects his accrued seniority with Gemalto and is included in the Remuneration Policy adopted by the shareholders, as proposed by the Board, as a result of the execution of the Combination agreement signed between Gemalto N.V. (at that time named Axalto Holding N.V.) and Gemplus International S.A. on December 6, Provisions II.2.10 (ultimum remedium). Although recommended by the Dutch corporate governance code, the existing employment contract of the CEO does not specifically include the possibility to adjust the value of conditionally awarded variable compensation if it would produce an unfair result due to extraordinary circumstances. In these cases, the Company will make such adjustments as is feasible under applicable law. Provision II.2.13 (e): content of the Remuneration Report, i.e. non-disclosure of the companies of the Comparison Group. Although recommended by the Dutch corporate governance code, the Company does not disclose the names of the companies in the Comparison Group. The Company compares the compensation of the CEO to those of a group of other relevant companies, particularly continental European high-tech and industrial companies and surveys are performed by Towers Watson, an independent internationally recognized firm of compensation specialists. Remuneration of the Non-executive Board members The remuneration of the Non-executive Board members, including the remuneration of the Chairman of the Board and the members of the Board committees is determined by the General Meeting. The remuneration is reviewed from time to time by the Compensation committee. The remuneration structure for the Non-executive Board members (per calendar year) is as follows: 200,000 for the Non-executive Chairman of the Board. 65,000 for each other Non-executive Board member. An additional fee of 24,000 for the chairman of the Audit committee and an additional fee of 16,000 for each member of the Audit committee. An additional fee of 12,000 for the chairman of the other Board committees, and an additional fee of 8,000 for the other members of those Board committees. The remuneration of a Non-executive Board member is not dependent on the results of Gemalto. The Company does not grant shares or rights to acquire shares by way of remuneration to Non-executive Board members. Details regarding the remuneration of the individual Board members are disclosed in note 9 to the company financial statements.

75 Remuneration 73 Long-term incentive plans Global Equity Incentive Plan In 2004, the General Meeting adopted a Global Equity Incentive Plan ( GEIP ) enabling the Board to grant options, RSU and/or share appreciation rights ( Awards ) to eligible employees. A total number of 14 million shares have been made available for grant and issue under the GEIP. As of December 31, 2010 the remaining number of shares available amounts to 5,498,464. During 2010, the Board granted 380,318 RSU to eligible employees, including the CEO. For more information on the grant of RSU to the CEO, please refer to Compensation of the CEO for the financial year 2010, page 69. The 2007 AGM approved a stock option plan, further to the undertakings by the Company in the Combination agreement, to exchange options to acquire Gemplus or Gemalto S.A. (formerly named Gemplus S.A.) shares for options to acquire Company shares. A total number of 7 million shares are available for grant and issue under this stock option plan. So far, the Company has not made any grants under this stock option plan. In the event the Company and/or its affiliates are absorbed by merger and liquidated, or undergo a change of control, and provided no other resolutions are adopted by the Board on such events, and subject to the terms of such resolutions, each outstanding Award not otherwise fully vested shall automatically vest so that each outstanding Award shall, immediately prior the effective date of the event, become exercisable with regards to all or part of the underlying shares and each RSU will be immediately refunded or compensated through the granting of shares, except to the extent such Award is maintained in effect by the Company, or assumed by a successor corporation or otherwise substituted by a plan giving substantially equivalent rights to the employee upon surrender of the Awards. Global Employee Share Purchase Plan In 2004, the General Meeting adopted a Global Employee Share Purchase Plan ( GESPP ) enabling the Board to offer the opportunity to eligible employees to purchase shares in the Company at a discount to the prevailing market price. A total number of 3.2 million shares have been made available for issue or transfer under the GESPP. As of December 31, 2010 the remaining number of shares available amounts to 2,481,261. In 2010, the Board offered eligible employees the opportunity to participate in the plan and 39,602 shares were purchased by employees. In order to benefit from preferential tax treatment, employees of Gemalto s French subsidiaries are able to participate in the GESPP through a Fonds Commun de Placement d Entreprise ( FCPE ), in which case the FCPE subscribes to Gemalto shares and employees receive in exchange units of the FCPE. Participation in the FCPE does not give rise to direct ownership of shares or the right to acquire shares in the Company. The FCPE has an independent Board of directors and owns 166,395 shares of Gemalto as of December 31, The FCPE exercises the voting rights on these shares, without instructions from the employees who participate in the FCPE. For more information on the participation in the GESPP during 2010, please refer to note 25 to the consolidated financial statements. Governance For more information on the grant of RSU during 2010, please refer to note 25 to the consolidated financial statements.

76 Digital freedom for Thai consumers Mobile subscribers in Thailand benefited from two innovative roll-outs in In one case, deployment of Gemalto s 3G USIM cards with our Over-the-Air (OTA) platform is enabling the operator to offer its customers an increasing range of cutting-edge services like video telephony and high-speed internet access. In the other, a pioneering project supported by Gemalto s Trusted Service Manager (TSM) service is bringing together a bank and an operator to launch a mobile NFC program. This is enabling users to transform their handsets into contactless payment devices, opening up fast and fuss-free payment for food, entertainment and shopping. For more information see page 23 For more information visit

77 76 Consolidated financial statements and notes 129 Company financial statements and notes Financial statements

78 76 Financial statements Gemalto Annual Report 2010 Consolidated financial statements and notes 76 Consolidated financial statements 77 Consolidated statement of financial position 78 Consolidated income statement 79 Consolidated statement of comprehensive income 80 Consolidated statement of changes in equity 82 Consolidated cash flow statement 83 Notes to the consolidated financial statements 83 Note 1 General information 83 Note 2 Summary of significant accounting policies 92 Note 3 Financial risk management 95 Note 4 Business combinations 98 Note 5 Additional information on specific line items of the income statement 99 Note 6 Segment information 102 Note 7 Financial assets/liabilities by category 103 Note 8 Property, plant and equipment 104 Note 9 Goodwill and intangible assets 106 Note 10 Investments in associates and available-for-sale financial assets 106 Note 11 Assets held for sale and discontinued operations 108 Note 12 Other non-current assets 108 Note 13 Inventories 108 Note 14 Trade and other receivables 109 Note 15 Cash and cash equivalents 109 Note 16 Borrowings 110 Note 17 Employee benefit obligations 113 Note 18 Non-current provisions and other liabilities 114 Note 19 Trade and other payables 114 Note 20 Derivative financial instruments 115 Note 21 Current provisions and other liabilities 116 Note 22 Revenue 116 Note 23 Costs of sales and operating expenses by nature 116 Note 24 Employee compensation and benefit expense 117 Note 25 Share-based compensation plans 120 Note 26 Other income (expense), net 120 Note 27 Financial income (expense), net 121 Note 28 Net foreign exchange gains (losses) 121 Note 29 Taxes 122 Note 30 Earnings per share 123 Note 31 Cash generated from operations 124 Note 32 Related party transactions 124 Note 33 Commitments and contingencies 125 Note 34 Dividends 125 Note 35 Post-closing events 126 Note 36 Consolidated entities

79 Consolidated statement of financial position 77 Consolidated statement of financial position Year ended December 31, In thousands of Euro Notes Assets Non-current assets Property, plant and equipment, net 8 220, ,211 Goodwill, net 9 596, ,993 Intangible assets, net 9 81, ,561 Investments in associates 10 9,970 10,934 Deferred income tax assets 29 24,192 51,318 Available-for-sale financial assets, net 10 1,270 1,667 Other non-current assets (1) 12 22,791 33,335 Derivative financial instruments 20 1,765 7,451 Total non-current assets 958,122 1,273,470 Current assets Inventories, net , ,254 Trade and other receivables, net (1) , ,099 Derivative financial instruments 20 15,401 7,937 Cash and cash equivalents , ,110 Total current assets 1,001, ,400 Assets held for sale 11 1,711 57,183 Total assets 1,961,631 2,287,053 Equity Share capital 88,016 88,016 Share premium 1,215,868 1,209,437 Treasury shares (129,640) (132,046) Fair value and other reserves 55,101 79,962 Cumulative translation adjustments (22,879) 5,879 Retained earnings 201, ,302 Capital and reserves attributable to the owners of the Company 1,407,692 1,595,550 Non-controlling interests 11,795 14,757 Total equity 1,419,487 1,610,307 Liabilities Non-current liabilities Borrowings 16 14,946 14,772 Deferred income tax liabilities 29 22,293 19,213 Employee benefit obligations 17 32,706 43,587 Provisions and other liabilities 18 74,010 71,712 Derivative financial instruments Total non-current liabilities 144, ,048 Financial statements Current liabilities Trade and other payables , ,094 Current income tax liabilities 6,370 15,754 Borrowings 16 8,244 5,423 Derivative financial instruments 20 3,434 8,929 Provisions and other liabilities 21 26,014 13,710 Total current liabilities 397, ,910 Liabilities associated with assets held for sale 11 19,788 Total liabilities 542, ,746 Total equity and liabilities 1,961,631 2,287,053 (1) Compared to the published consolidated financial statements for the year ended December 31, 2009, Trade and other receivables of 4,300 have been reclassified to Other non-current assets.

80 78 Financial statements Gemalto Annual Report 2010 Consolidated income statement Year ended December 31, In thousands of Euro (except earnings per share) Notes (represented*) Continuing operations Revenue 22 1,601,893 1,905,568 Cost of sales (1,015,920) (1,218,720) Gross profit 585, ,848 Operating expenses Research and engineering (92,309) (104,612) Sales and marketing (231,475) (267,545) General and administrative (99,480) (127,621) Other income (expense), net 26 4,013 8,406 Restructuring and acquisition-related expenses 5 (9,316) (9,268) Amortization and depreciation of intangible assets resulting from acquisitions 5 (23,699) (22,792) Operating result 133, ,416 Financial income (expense), net 27 (2,246) 796 Share of profit of associates 10 1,380 1,717 Gain on sale of investment in associate 78 Profit before income tax 132, ,929 Income tax (expense) credit 29 (17,425) 3,871 Profit from continuing operations 115, ,800 Discontinued operation Profit (loss) from discontinued operation (net of income tax) 11 2,630 (2,422) Profit for the period 118, ,378 Attributable to: Owners of the Company 114, ,920 Non-controlling interests 3,328 3,458 Earnings per share Basic earnings per share Diluted earnings per share Earnings per share continuing operations Basic earnings per share Diluted earnings per share Weighted average number of shares outstanding (in thousands) 30 82,520 83,031 Weighted average number of shares outstanding assuming dilution (in thousands) 30 83,789 84,400 ( * ) Compared to the published consolidated financial statements for the year ended December 31, 2009, the income statement has been represented to take into account the operation discontinued in 2010.

81 Consolidated statement of comprehensive income 79 Consolidated statement of comprehensive income Year ended December 31, In thousands of Euro Notes Profit for the period 118, ,378 Gains (losses) recognized directly in equity: Currency translation adjustments currency translation 17,071 30,426 transfer to profit and loss account (Financial income) on liquidated entities (197) Gains on Treasury shares (liquidity program) 1, Fair value gains (losses) on: financial assets available-for-sale transfer to profit and loss account (Financial expense) on disposal of available-for-sale financial assets 764 variation of actuarial gains and losses in benefit obligations 17 (5,391) (3,654) cash flow hedges 10,054 1,071 currency translation adjustments on fair value gains (losses) (416) (938) Other comprehensive income for the period 22,397 28,860 Income tax relating to components of other comprehensive income ( * ) 1,252 Total comprehensive income for the period, net of tax 140, ,490 Attributable to: Owners of the Company 137, ,561 Non-controlling interests 3,292 4,929 ( * ) Tax has been recognized on changes in actuarial gains and losses in benefit obligations. Financial statements

82 80 Financial statements Gemalto Annual Report 2010 Consolidated statement of changes in equity Number of shares (1) In thousands of Euro Issued Outstanding Balance as of January 1, ,015,844 82,296,192 Profit for the period Other comprehensive income (loss) Total comprehensive income Share-based compensation expense Employee share option scheme 2,684,452 Purchase of Treasury shares, net (2,204,431) Acquisition of non-controlling interest Excess of purchase price on SAIT non-controlling interest acquisition Correction of the excess of purchase price on subsequent acquisition of Gemplus shares (2) Excess of purchase price on subsequent acquisition of Serverside Group Limited Revaluation further to the acquisition of Trusted Logic S.A. Dividend paid to non-controlling interests Balance as of December 31, ,015,844 82,776,213 Profit for the period Other comprehensive income (loss) Total comprehensive income Share-based compensation expense Employee share option scheme 836,289 Purchase of Treasury shares, net (1,281,254) Treasury shares used for the acquisition of Todos AB 800,000 Excess of purchase price on subsequent acquisition of Netsize S.A. Minimum dividend payable to SAIT non-controlling interests Dividend paid/payable to group shareholders (3) Dividend paid to non-controlling interests Balance as of December 31, ,015,844 83,131,248 (1) As at December 31, 2009 and 2010, the difference between the number of shares issued and the number of shares outstanding corresponds to the 5,239,631 and 4,884,596 shares held in treasury, respectively. (2) As at December 31, 2009, the Company recognized some deferred tax assets that did not meet the recognition criteria at the date of the Combination with Gemplus. As a result, in accordance with the provisions of IFRS 3 and IAS 12, the Company reduced the carrying value of the goodwill and increased the value of the share premium by 3.0 million and 3.8 million, respectively. (3) See note 34.

83 Consolidated statement of changes in equity 81 Share capital Share premium Attributable to owners of the Company Treasury shares Fair value and other reserves Cumulative translation adjustments Retained earnings Noncontrolling interests Total equity 88,016 1,214,429 (114,933) 56,835 (39,986) 84,118 14,142 1,302, ,796 3, ,124 5,326 17,107 (36) 22,397 5,326 17, ,796 3, ,521 12,327 12,327 50,257 (19,387) 30,870 (64,964) (64,964) (823) (823) (1,937) (1,937) 3,843 3,843 (467) (467) 2,312 2,312 (4,815) (4,815) 88,016 1,215,868 (129,640) 55,101 (22,879) 201,226 11,795 1,419, ,920 3, ,378 (117) 28,758 1,471 30,112 (117) 28, ,920 4, ,490 19,447 19,447 14, ,604 (39,279) (39,279) 21,933 4,867 26,800 (6,431) (34) (6,465) (1,064) (1,064) (20,844) (20,844) (869) (869) 88,016 1,209,437 (132,046) 79,962 5, ,302 14,757 1,610,307 Financial statements

84 82 Financial statements Gemalto Annual Report 2010 Consolidated cash flow statement Year ended December 31, In thousands of Euro Notes Cash flows provided by (used in) operating activities Cash generated from operations , ,944 Income tax paid (22,776) (19,260) Net cash provided by operating activities 200, ,684 Cash flows provided by (used in) investing activities Acquisition of subsidiaries, net of cash acquired (37,545) (195,325) Acquisition of businesses (30,866) (856) Purchase of Non-controlling interests in subsidiaries (2,760) Purchase of property, plant & equipment 8 (40,158) (44,214) Proceeds from sale of property, plant & equipment Acquisition and capitalization of intangible assets 9 (14,708) (29,438) Proceeds from sale of non-current assets Proceeds from sale of a subsidiary 333 Proceeds from sale of investments in associate 2,058 Proceeds from sale of an available-for-sale financial asset 430 Purchase of investments in associate (2,550) (2,000) Proceeds from sale of a discontinued operation 7,374 Interest paid (1,916) (1,513) Interest received 4,084 3,332 Dividends received from investments in associates 10 1,125 1,502 Net cash used in investing activities (121,397) (259,676) Cash flows provided by (used in) financing activities Proceeds from exercise of stocks options 31,827 15,604 Purchase of Treasury shares (net) (64,941) (38,713) Repayments of borrowings (7,022) (5,322) Dividends paid to Company shareholders 34 (20,844) Dividends paid to Non-controlling interests (4,815) (869) Net cash used in financing activities (44,951) (50,144) Net increase (decrease) in cash and bank overdrafts 33,908 (136,136) Cash and bank overdrafts, beginning of period , ,174 Currency translation effect on cash and bank overdrafts 8,232 9,263 Cash and bank overdrafts, end of period , ,301

85 Notes to the consolidated financial statements 83 Notes to the consolidated financial statements All amounts are stated in thousands of Euro, except per share amounts which are stated in Euro and unless otherwise stated. Note 1. General information Gemalto, the world leader in digital security, is at the heart of our evolving digital society. The freedom to communicate, travel, shop, bank, entertain, and work anytime, anywhere has become an integral part of what people want and expect, in ways that are convenient, enjoyable and secure. Gemalto delivers on the growing demands of billions of people worldwide for mobile connectivity, identity and data protection, credit card safety, health and transportation services, e-government and national security. We do this by supplying to governments, wireless operators, banks and enterprises a wide range of secure personal devices, such as subscriber identification modules (SIM) in mobile phones, smart banking cards, electronic passports, and USB tokens for online identity protection. To complete the solutions, we also provide software, systems and services to help our customers achieve their goals. The Group has facilities and sells around the world. The Company is a limited liability company incorporated and domiciled in the Netherlands. The address of its registered office is Barbara Strozzilaan 382, 1083 HN Amsterdam, the Netherlands. The Company was first listed on Eurolist by Euronext Paris on May 18, The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, except as noted below. 2.2 Changes in accounting policies and disclosures Standards, amendments to existing standards and interpretations mandatory for financial statements as at December 31, 2010 a. Standards which have an impact on the Group s financial statements as at December 31, 2010 IFRS 3 Business Combinations (Revised) The Group has applied the revised standard since January 1, IFRS 3 (Revised) has introduced significant changes in the accounting for business combinations occurring after that date. Changes affect the valuation of Non-controlling interest, the accounting for transaction costs, the initial recognition and subsequent measurement of a contingent consideration and business combinations achieved in stages. These consolidated financial statements for the year ended December 31, 2010 have been authorized for issue by the Board of the Company on March 8, 2011 and are subject to adoption at the Annual General Meeting of Shareholders on May 18, Note 2. Summary of significant accounting policies 2.1 Basis of preparation The consolidated financial statements of Gemalto for the year ended December 31, 2010 have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (available at the following internet address: eu/internal_market/accounting/ias/index_en.htm). IAS 27 Consolidated and Separate Financial Statements (Amended) The amended standard requires that a change in the ownership interest of a subsidiary (without loss of control) is accounted for as an equity transaction. Therefore, such transactions will no longer give rise to goodwill, nor gains or losses. Furthermore, the amended standard changes the accounting for losses incurred by the subsidiary as well as the loss of control of a subsidiary. IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (Amended) Prepayments of a Minimum Funding Requirement. This amendment has been early adopted by the Group. Financial statements The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets and financial assets and liabilities (including derivative financial instruments) at fair value through profit and loss.

86 84 Financial statements Gemalto Annual Report 2010 b. The following standards, amendments to existing standards and interpretations did not have any impact on the Group s financial statements as at December 31, 2010 IFRS 1 First-time Adoption of International Financial Reporting Standards (Amended) Additional Exemptions for First-time Adopters IFRS 2 Share-based Payment (Amended) Group Cash-settled Share-based Payment Transactions 2008 Improvements to IFRS (for those effective for periods beginning after January 1, 2009 and on or before January 1, 2010) 2009 Improvements to IFRS (for those effective for periods beginning on or before January 1, 2010) IAS 39 Financial Instruments: Recognition and Measurement (Amended) Eligible Hedged Items IFRIC 15 Agreements for the Construction of Real Estate IFRIC 17 Distribution of Non-cash Assets to Owners IFRIC 18 Transfer of assets from Customers Standards, amendments to existing standards and interpretations issued but not mandatory for financial statements as at December 31, 2010 (and not early adopted by the Group) IFRS 1 First-time Adoption of International Financial Reporting Standards (Amended) Limited Exemption from Comparative IFRS 7 Disclosures for First-time Adopters IAS 32 Financial Instruments: Presentation (Amended) Classification of Rights Issues IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments IFRS 9 Financial Instruments: Classification and Measurement IAS 24 Related Party Disclosures (Revised) 2010 Improvements to IFRS The standards, amendments to existing standards and interpretations above are not anticipated to have a material impact on the Group s future financial position or performance Presentation of the income statement The Group reports under the line Restructuring and acquisition-related expenses (as detailed in note 5) (i) restructuring expenses which are the costs incurred in connection with a restructuring as defined in accordance with the provision of IAS 37 (e.g. sale or termination of a business, closure of a plant, ), and consequent costs; (ii) reorganization expenses defined as the costs incurred in connection with headcount reductions, consolidation of manufacturing and offices sites, as well as the rationalization and harmonization of the product and service portfolio, and the integration of IT systems, consequent to a business combination; and (iii) transaction costs (such as fees paid as part of the acquisition process) which were previously capitalized as part of the cost of an acquisition, according to the International Financial Reporting Standards. The Group also discloses under the line named Amortization and depreciation of intangibles resulting from acquisitions the amortization and depreciation expense related to the intangibles recognized as part of the allocation of the excess purchase consideration over the share of net assets acquired. 2.3 Method of accounting of subsidiaries and associates (a) Subsidiaries Subsidiaries are all entities over which Gemalto has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether Gemalto controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to Gemalto. The acquisition method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets transferred in consideration, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any Non-controlling interest. The excess of the cost of acquisition over the fair value of the Group s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement (see note 2.7). For further acquisitions of Non-controlling interest, the excess of the cost of acquisition over the carrying value of the Group s additional share of the identifiable net assets acquired is recorded against the share premium in the equity. Adjustments to the fair value of the assets acquired and liabilities and contingent liabilities assumed can occur during a period of twelve months following the date of acquisition. Inter-company transactions, balances and unrealized gains on transactions between Group companies are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

87 Notes to the consolidated financial statements 85 (b) Associates Associates are all entities over which Gemalto has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associate are accounted for by the equity method of accounting and are initially recognized at cost. Gemalto s investment in associate includes goodwill (net of any accumulated impairment loss) identified on acquisition. Gemalto s share of its associates post-acquisition profits or losses is recognized in the income statement, and its share of other post-acquisition movements in reserves is recognized in the Group s reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When Gemalto s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, Gemalto does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealized gains on transactions between Gemalto and its associates are eliminated to the extent of Gemalto s interest in the associates. Unrealized losses are similarly eliminated unless the transaction provides evidence of an impairment of the asset transferred. Dilution gains and losses in associates are recognized in the income statement. 2.4 Segment reporting An operating segment is a component of the entity that engages in business activities from which it may earn revenues and incur expenses and for which the operating results are regularly reviewed to take decisions about resources to be allocated to the segment and assess its performance (see note 6). 2.5 Foreign currency translation (a) Functional and reporting currency Items included in the financial statements of each of Gemalto s entities are measured using the currency of the primary economic environment in which the entity operates ( the functional currency ). The consolidated financial statements are presented in Euro, which is the Company s reporting currency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency of the entity where they are recorded using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement, except when deferred in equity as qualifying cash flow hedges or when related to an intra-group advance as part of a hedge on net investment in a foreign entity. Translation differences on non-monetary items, such as equities classified as available-for-sale financial assets, are included in the fair value reserve in equity. (c) Group companies The results and financial position of all the Group entities that have a functional currency different from the reporting currency are translated into the reporting currency as follows: (i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; (ii) income and expenses for each income statement are translated at average exchange rates on a monthly basis; and (iii) all resulting exchange differences are recognized as a separate component of equity. On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders equity. When a foreign operation is partially disposed of, sold, or liquidated, such exchange differences are recognized in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Financial statements

88 86 Financial statements Gemalto Annual Report Property, plant and equipment Property, plant and equipment is stated at historical cost, less depreciation and, if any, impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to Gemalto and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their costs less their residual values over their estimated useful lives, as follows: Building Leasehold improvement Machinery and equipment years 5-12 years 3-10 years Leasehold improvements are amortized on a straight-line basis over their estimated useful lives, which cannot exceed the lease term. The asset residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset carrying amount is written down immediately to its recoverable amount if the asset carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with the carrying amount and are reflected in the operating result. Leases of property, plant and equipment where Gemalto has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized at the lease commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate of interest on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in other borrowings (and classified as current or non-current items depending on the timing of expected cash outflows). The property, plant and equipment acquired under finance lease is depreciated over the shorter of the useful life of the asset and the lease term. 2.7 Goodwill and intangible assets (a) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group s share of the net identifiable assets of the acquired subsidiary/associate at the date of acquisition. Goodwill on acquisition of subsidiaries is presented separately in the balance sheet. Goodwill on acquisitions of associates is included in Investments in associate. Separately recognized goodwill is tested annually for impairment or more frequently when there is an indication that it may be impaired, and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. (b) Brand names Brand names acquired in a business combination are recognized at fair value at the acquisition date and may have an indefinite useful life. (c) Other intangible assets Other intangible assets have a definite useful life and are carried at cost less accumulated amortization. Amortization is calculated using the straight-line method to allocate the cost of other intangible assets over their estimated useful lives as follows: Software Patents and technologies Capitalized development costs Other 3-5 years 1-13 years 2-7 years 1-15 years

89 Notes to the consolidated financial statements Impairment of non-financial assets Assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment or more frequently when there is an indication that they may be impaired. Assets that are subject to amortization 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 carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units or CGU s). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. 2.9 Investments and financial assets Gemalto classifies its investments in the following categories: financial assets at fair value through profit or loss, loans and receivables, and available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and re-evaluates this designation at every reporting date. (a) Financial assets at fair value through profit and loss Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are classified as held for trading unless they are designated as hedges. Assets in this category are classified as current assets. (b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when Gemalto provides money, goods or services directly to a debtor with no intention of trading the receivable. They are included in current assets in trade and other receivables in the balance sheet,except for maturities greater than 12 months after the balance sheet date, which are classified as other non-current assets in the balance sheet. Loans and receivables are initially recognized at fair value and subsequently recorded at amortized cost using the effective interest method, less provision for impairment. (c) Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets, as management does not intend to dispose of the investment within 12 months of the balance sheet date. Investments representing less than 20% of the equity of the investee are classified as available-for-sale financial assets. Available-for-sale financial assets are carried at fair value but if fair value cannot be reliably measured, these items are accounted for using the cost method. Unrealized gains and losses arising from changes in the fair value of available-forsale financial assets are recognized in equity. In the case of equity securities classified as available-forsale financial assets, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss is removed from equity and recognized in the income statement. Impairment losses recognized in the income statement on equity instruments are not reversed through the income statement Inventories Inventories are stated at the lower of cost and net realizable value. Cost is determined using the first in / first out method. The cost of finished goods and work in progress comprises design costs, raw materials, direct labor, other direct costs and related production overheads (based on normal operating capacity). It excludes borrowing costs. Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Gemalto also provides inventory allowances for excess and obsolete inventories Trade receivables Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that Gemalto will not be able to collect all amounts due according to the original terms of the receivables and appraisal of market conditions. The amount of the provision is recognized in the income statement within sales and marketing expenses. Financial statements

90 88 Financial statements Gemalto Annual Report Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks and other short-term highly liquid investments. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Where any Gemalto company purchases the Company s equity share capital (Treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company s equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company s equity holders Borrowings Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost. Any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the income statement over the period of the borrowing using the effective interest method. Borrowings are classified as current liabilities unless Gemalto has a right to defer settlement of the liability for at least 12 months after the balance sheet date Taxes on income The tax expense for the period comprises current and deferred tax. Tax is recognized in the income statement, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is calculated on the basis of the temporary differences between the carrying amount of an asset or liability in the balance sheet and its tax base. The deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax liabilities are provided in full on taxable temporary differences. Deferred tax assets on deductible temporary differences are recognized to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences can be utilized. Deferred income tax is measured using tax rates (and laws) that have been enacted or substantially enacted at the balance sheet date and are expected to apply when the related asset is realized or the liability is settled. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the Group controls the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future Research tax credits and government grants Research tax credits are provided by various governments to give incentives for companies to perform technical and scientific research. These research tax credits are presented as a reduction of research and development expenses in the income statement when companies that have qualifying expenses can receive such grants in the form of a tax credit irrespective of taxes ever paid or ever to be paid. These tax credits are included in Trade and other receivables and Other non-current assets in the balance sheet depending on the timing of expected cash inflows. The Company records the benefit of this credit only when all qualifying research has been performed and the Company has obtained sufficient evidence from the relevant government authority that the credit will be granted. In addition, grants may be available to companies that perform technical and scientific research. Such grants are typically subject to performance conditions over an extended period of time. The Company recognizes in the income statement these grants when the performance conditions are met and any risk of repayment is assessed as remote Research and development costs Research and development costs mainly comprise software development. Gemalto capitalizes eligible software development costs upon achievement of commercial and technological feasibility, reliability of measurement costs and subject to net realizable value considerations. Based on Gemalto s development process, technological feasibility is generally established upon completion of a working model. Research and development costs prior to a determination of technological feasibility are expensed as incurred. Amortization of capitalized software development costs begins when the products are available for general release over their estimated useful life on a straight-line basis. Unamortized capitalized software development costs determined to be in excess of the net realizable value of the product are expensed immediately.

91 Notes to the consolidated financial statements Employee benefits (a) Pension and similar obligations The Company operates various pension schemes under both defined benefit and defined contribution plans (see note 17). The liability recognized in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustment for past-service costs. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating the terms of the related pension liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are reported in the statement of comprehensive income. Past-service costs are recognized immediately in the income statement unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortized on a straight-line basis over the vesting period. For defined contribution plans, the Company pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Company has no further payment obligations once the contributions have been paid. The contributions are recognized as employee benefit expense when they are due. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in the future payments is recognized. (b) Termination benefits Termination benefits are payable when employment is terminated before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. Gemalto recognizes termination benefits when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal, or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after balance sheet date are discounted to present value. (c) Profit-sharing and bonus plans Gemalto recognizes liabilities and expenses for bonuses and profit sharing. The Group recognizes a provision where contractually obliged or where there is a past practice that has created a constructive obligation Share-based payment (a) Share-based compensation Gemalto operates equity-settled share-based compensation plans (see note 25). The fair value of the employee services received in exchange for the grant of the options is recognized as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the equity instruments granted, excluding the impact of any non-market vesting conditions. Non-market vesting conditions are included in assumptions about the number of equity instruments that are expected to become exercisable. At each balance sheet date, the entity revises its estimates of the number of equity instruments that are expected to become exercisable. It recognizes the impact of the revision of original estimates, if any, in the income statement, and a corresponding adjustment to equity. (b) Share-based transaction The fair value of the amount payable in respect of share appreciation rights, which are settled in cash, is recognized as an expense with a corresponding increase in liabilities, over the vesting period. The liability is remeasured at each reporting date and at settlement date. Any changes in fair value of the liability are recognized as other financial expenses in the consolidated income statement Provisions Provisions for environmental restoration, restructuring and reorganization costs, legal claims and warranty are recognized when the Group has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are not recognized for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole Revenue recognition Revenue comprises the fair value for the sale of goods and services, net of value-added tax, rebates and discounts and after eliminating sales within Gemalto. Revenue is recognized as follows: Financial statements

92 90 Financial statements Gemalto Annual Report 2010 (a) Product and service revenue Gemalto s products and services are generally sold based upon contracts or purchase orders with the customer that include fixed and determinable prices and that do not include right of return, other similar provisions or other significant post-delivery obligations but for customary warranty terms. Revenue is recognized for products upon delivery when title and risk pass, the price is fixed and determinable and collectibility is reasonably assured. Revenue for services is recognized over the period when services are rendered and collectibility is reasonably assured. Revenue for royalties is recognized when income is earned and collectibility is reasonably assured. Certain revenues are recognized using the percentage of completion method as services are provided (according to criteria applied on a consistent basis). These services include the development of specific software platforms. Under the percentage of completion method, the extent of progress towards completion is measured based on actual costs incurred to total estimated costs. Losses on contracts are recognized during the period in which the loss first becomes probable and can be reasonably estimated. (b) Multiple-element arrangements Revenue from contracts with multiple elements, such as those including services, is recognized as each element is earned based on the relative fair value of each element and when there are no undelivered elements that are essential to the functionality of the delivered elements. (c) Collectibility As part of the revenue recognition process, Gemalto determines whether trade receivables and notes receivable are reasonably assured of collection based on various factors, and whether there has been deterioration in the credit quality of customers that could result in the inability to sell those receivables. (d) Deferred and unbilled revenue Deferred revenue includes amounts that have been billed per contractual terms but have not been recognized as income Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease Use of judgments and estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities (including the classification of assets and liabilities as held for sale see note 11), disclosure of contingent liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses (including the classification as restructuring and acquisition-related expenses see note 5) during the reporting period. On an ongoing basis, Gemalto evaluates its estimates, including those related to doubtful accounts, valuation of inventories and investments, warranty obligations, recoverability of goodwill, intangible assets and property, plant and equipment, income tax provision and recoverability of deferred taxes, contingencies and litigations, and actuarial assumptions for employee benefit plans. Gemalto bases its estimates on historical experience and on various other assumptions that, in management s opinion, are reasonable under the circumstances. These results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions Derivative financial instruments and hedging activities Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. These instruments, which are expected to mature within 36 months after the balance sheet date, are presented under Derivative financial instruments in current or non-current assets or liabilities depending on their maturity. 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. Some of the derivative financial instruments used to hedge the Company s foreign exchange exposure qualify as cash flow hedges since they reduce the variability in cash flows attributable to the Company s forecasted transactions. The Company documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. For derivatives qualified as cash flow hedges, the Company also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The fair values of the derivative instruments used for hedging purposes are disclosed in note 20. Movements on the hedging reserve are shown in the consolidated statement of comprehensive income.

93 Notes to the consolidated financial statements 91 The effective portion of changes in fair value of derivatives that are designated and qualify as cash flow hedges is recognized in the consolidated statement of comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in the income statement within the foreign exchange gains and losses. Amounts accumulated in equity are recycled in the income statement in the periods when the hedged items will affect profit or loss. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognized when the forecast transaction is ultimately recognized in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement as foreign exchange gain or loss in the financial income. For fair value hedges of existing assets and liabilities, the change in fair value of the derivative is recognized in the income statement under the same heading as the change in fair value of the hedged item for the portion attributable to the hedged risk. between the two currencies. Fair value is then obtained by discounting, for the remaining life of each contract, its expected gain or loss calculated by difference between the contract rate and the market forward rate, applied to the notional amount of the contract. At maturity, the fair value is calculated by difference between the contract rate and the prevailing accounting rate, applied to the notional amount of the contract. An option contract value at inception is the initial premium paid or received. Over the life of the contract, fair value is determined using standard option pricing models (such as Cox Ross & Rubinstein option pricing model), based on market parameters obtained from the Company s banks or official financial information providers, and using the following variables: (i) spot foreign exchange rate, (ii) volatility and (iii) risk-free interest rate, applied to the terms of the contract (notional amount, strike rate and expiration date). At maturity, the fair value is either zero if the option is not exercised or, when exercised, calculated by difference between the strike rate and the prevailing accounting rate, applied to the notional amount of the contract. For hedges that do not qualify for hedge accounting, any gains or losses arising from changes in fair value of the hedging instruments are recorded immediately as foreign exchange gains and losses for the period Estimation of derivative financial instrument fair value The fair value of financial instruments traded in active markets such as investment funds is based on quoted market prices at the balance sheet date. A market is regarded as active if quoted prices are readily and regularly available from a foreign exchange dealer, broker, industry group, pricing service, or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm s-length basis. These instruments are included in Level 1. The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined by using valuation techniques requiring financial inputs observable on the markets. The fair value of derivative financial instruments is calculated at inception and over the life of the derivative. These instruments are classified in Level 2. The fair value of forward and exchange contracts at inception is zero. Over the life of the contract, the fair value is derived from the following parameters communicated by the Company s banks or official financial information providers: (i) spot foreign exchange rate and (ii) interest rate differential For the available-for-sale assets, they are either quoted on official market prices and classified in Level 1, otherwise their fair value is based on a valuation model using assumptions neither supported by prices from observable current transactions nor on available market data. They are consequently disclosed in the Level 3 of the fair value hierarchy. At year-end, this amount remains non-material at Group level. The following table presents the Group s assets and liabilities that were measured at fair value as at December 31, 2009: Level 1 Level 2 Level 3 Total Balance Assets Derivatives used for hedging 17,166 17,166 Short-term bank deposits and investment funds 318, ,812 Available-for-sale financial assets 265 1,005 1,270 Total Assets 319,077 17,166 1, ,248 Liabilities Derivatives used for hedging 3,650 3,650 Total Liabilities 3,650 3,650 Financial statements

94 92 Financial statements Gemalto Annual Report 2010 The following table presents the Group s assets and liabilities that were measured at fair value as at December 31, 2010: Level 1 Level 2 Level 3 Total Balance Assets Derivatives used for hedging 15,388 15,388 Short-term bank deposits and investment funds 157, ,765 Available-for-sale financial assets 1,667 1,667 Total Assets 157,765 15,388 1, ,820 Liabilities Derivatives used for hedging 9,693 9,693 Total Liabilities 9,693 9,693 Note 3. Financial risk management The Company is exposed to a variety of financial risks, including foreign exchange risk, interest rate risk, liquidity risk, financial counterparty risk and credit risk. Gemalto overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company s financial performance. Gemalto has developed risk management guidelines that set forth its tolerance for risk and its overall risk management policies. The Company formally documents all relationships between the hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking various hedge transactions. Foreign exchange forward contracts and options that hedge a portion of subsidiaries known or forecast commercial transactions, not denominated in their functional currencies, are qualified as cash flow hedges under IAS 39 until the time when the underlying transactions materialize in the income statement. Other foreign exchange forward contracts that hedge the foreign exchange risk incurred in the settlement of balance sheet items not denominated in the relevant subsidiary s functional currency, are not qualified in hedge accounting (see note 20). The following table shows the sensitivity of the Group s results to reasonably possible changes in the US Dollar exchange rate against the Euro, all other variables being held constant, split between: effect on profit and loss due to changes in the fair value of financial assets and liabilities (including those denominated in US Dollar-linked currencies); and effect on equity due to changes in the fair value of cash flow hedges held at the balance sheet date. The impacts of other currencies to similar fluctuations on the profit and loss do not exceed 0.4 million for any given currency. 3.1 Foreign exchange risk Significant portions of Gemalto revenue, cost of sales and expenses are generated in currencies other than the Euro, mainly the US Dollar, Sterling Pound, Japanese Yen, Brazilian Real, Chinese Renminbi, Singapore Dollar and Polish Zloty. Revenue and gross profit are therefore exposed to exchange rate fluctuations. The Company attempts in a first stage to match the currencies of its revenue and expenses in order to naturally hedge its exposure to foreign currency fluctuations, and then enters into derivative financial instruments to hedge part of its residual exposure. The decision to hedge or not a given currency depends on the level of forecast net exposure for that currency and on a cost-and-risk analysis using several market parameters such as volatility, hedge costs, forecasts, etc Year ended December 31, Change in $/ exchange rate 2.50% -2.50% 2.50% -2.50% Effect on Profit before tax Income/(expense) Underlying ( * ) (1,049) 1,102 (1,233) 1,297 Hedges ( ** ) 844 (892) 1,385 (1,456) Net (205) (159) Effect on Equity Gain/(loss) Hedges ( *** ) 2,757 (2,415) 6,816 (7,166) ( * ) Effect of revaluation of financial assets and liabilities, excluding hedges. ( ** ) Effect on mark-to-market valuation of fair value hedges. ( *** ) Effect on intrinsic value of cash flow hedges. The impacts of translation of foreign currency financial statements from their functional currency to the Company s reporting currency are not included in the above computation.

95 Notes to the consolidated financial statements Interest rate risk Financial assets are invested in bank deposits and money market funds with maturities no longer than three months, classified as cash and cash equivalents. Financial liabilities are mainly floating rate finance leases. Financial income (expense) can therefore be sensitive to interest rate fluctuations. The Company however considers that this risk may not have a significant impact on its financial situation in the short term, and does not use derivative financial instruments to hedge interest rate risk. The following table shows the sensitivity of the Group s results to reasonably possible changes in the interest rates, all other variables being held constant. There is no effect on the Group s equity. Effect on Profit before tax Variation in interest rate (in basis points) Income/(expense) Borrowings (50) (81) (54) Short-term deposits and investment funds (50) (1,440) (1,065) 50 1,440 1, Liquidity risk By maintaining sufficient cash and cash equivalent positions as well as an adequate amount of committed credit facilities, including 210 million bilateral credit facilities referred to in note 16, the Company considers that it is not exposed, in the short term, to significant liquidity risk. The Company cannot however guarantee that under any circumstances the level of liquidity will be enough to cover all of the Company s future cash requirements. The table below analyzes the Group s financial liabilities and derivative financial liabilities into relevant maturity ranges based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. With the exception of finance lease liabilities, the balances due within 12 months equal their carrying balances as the impact of discounting is not significant. In addition to the below liabilities, Gemalto N.V. has issued various guarantees which amounted to million as of December 31, 2009 and 20.7 million as of December 31, 2010 (see note 33). Not later than 1 year 2009 Later than 1 year and not later than 5 years Later than 5 years Total Finance lease liabilities 3,676 8,139 11,815 Other borrowings 4,723 7,486 ( * ) 12,209 Derivative financial instruments 3, ( ** ) 3,650 Trade & other payables 353, , ,744 15, ,585 Not later than 1 year 2010 Later than 1 year and not later than 5 years Later than 5 years Total Finance lease liabilities 2,451 5,918 8,369 Other borrowings 3,086 9,423 12,509 Derivative financial instruments 8, ( ** ) 9,693 Trade & other payables 463, , ,560 16, ,665 Financial statements ( * ) Compared to the published consolidated financial statements for the year ended December 31, 2009, the amount is reported for its undiscounted value. ( ** ) The amounts reported for derivative financial instruments are discounted but the difference with the contractual undiscounted cash flows is not material.

96 94 Financial statements Gemalto Annual Report Financial counterparty risk Derivative financial instruments and all short-term deposits and investment funds are exclusively held with major counterparties of strong credit rating. Short-term deposits and investment funds are invested in fixed-term deposits with banks and money market mutual funds with a maturity of less than 3 months and the objective that no counterparty represents more than 15% of the total at any time. Money market mutual funds consist of openended investment companies (French SICAV) authorized by the French AMF. Funds are selected based on the quality of the management company, the low level of risk with a diversified portfolio of short-term fixed income securities and money market instruments (bonds, treasury bills and notes, commercial paper, certificates of deposit, etc ) and a daily liquidity. A portion of our short term deposits and investment funds can be invested in commercial paper with a strong credit rating. The Company also maintains credit lines with various banks. It includes uncommitted short-term facilities, short term bonds and guarantee lines, and also a series of committed bank bilateral credit facilities totaling 210 million arranged with international banks of strong credit rating referred to in note 16. The maturities of these facilities are comprised between December 9, 2013 and December 17, As at December 31, 2010, no financial institution accounted for more than 24% of the notional amount of derivative financial instruments, 9% of the cash and cash equivalents, and 30% of the credit lines (27% including bonds and guarantee lines). In addition, the Company has temporary exposure to non-investment grade financial institutions on payments made by customers in certain countries, until the Company transfers such amounts to investment grade institutions. This exposure is not significant. Maximum risk with any single counterparty is as follows: Year ended December 31, Borrowings Syndicated bank loan ( * ) Committed credit line (undrawn) 26,736 Bilateral credit facilities Committed credit line (undrawn) 75,000 Overdrafts and other short-term loans Uncommitted credit lines (partially drawn) 16,762 16,766 Bonds and guarantee facilities Uncommitted credit lines (partially drawn) 40,200 40,200 Cumulated borrowing risk with a single counterparty 74,436 97,700 in % of total borrowing risk for Gemalto 23% 27% Cash and cash equivalents Short-term bank deposits and cash at bank and in hand 43,261 22,883 Money market mutual funds 31,545 19,591 Cumulated cash and cash equivalents risk with a single counterparty 43,261 22,883 in % of total cash & cash equivalents risk for Gemalto 11% 9% Derivative financial instruments Notional amount 90, ,093 in % of total derivative financial instruments risk for Gemalto 27% 24% Mark-to-market 4,530 2,509 Total risk for any single counterparty 119, ,506 in % of total counterparty risk for Gemalto 16% 16% ( * ) USD 250 million syndicated bank loan facility was cancelled on October, 21, 2010.

97 Notes to the consolidated financial statements Credit risk The Company s broad geographic and customer distribution limits the concentration of credit risk. No single customer accounted for more than 10% of the Company s sales in 2009 and An allowance for uncollectible accounts receivable is maintained based on expected collectibility. The expected collectibility of accounts receivable is assessed periodically or when events lead to believe that collectibility is uncertain. Additionally, the Company performs ongoing credit evaluations of customers financial condition. As of December 31, 2010, trade receivables of 97,474 were past due but not impaired (2009: 80,496). These relate to a number of independent customers for whom there is no recent history of default and whose credit standing is regularly assessed. The ageing analysis of these trade receivables is as follows: Note 4. Business combinations In 2010, the Group completed a number of acquisitions. The most significant acquisitions relate to Cinterion Wireless Modules Group (Cinterion) and Netsize Group (Netsize) as detailed below. These acquisitions have been accounted for under the acquisition method as prescribed by IFRS 3 Business Combinations (Revised) and IAS 27 Consolidated and Separate Financial Statements (Amended). They have been included in the Company s consolidated financial statements since the date of their acquisition. Cinterion On July 28, 2010, Gemalto acquired Cinterion, the leading provider of industrial Machine-to-Machine (M2M) wireless communication modules. Cinterion, which uses a fabless business model, employs 335 staff with major centers in Munich and Berlin, Germany. The business was started by Siemens in 1995 and spun out to a financial sponsor consortium in Overdue by: Year ended December 31, Carrying amount Carrying amount Bad debt reserve Overdue but not impaired Up to 1 month 43,042 55,858 (54) 55,804 2 to 3 months 18,729 26,343 (737) 25,606 4 to 6 months 8,232 10,435 (885) 9,550 Later than 6 months 19,439 13,414 (6,900) 6,514 89, ,050 97,474 Provision for impairment of receivables (8,496) (8,576) Trade receivables overdue but not impaired 80,946 97,474 Year ended December 31, As at January 1, (8,898) (8,496) Provision for impairment of receivables (3,042) (3,204) Receivables written off over the year as uncollectible 1,158 3,756 Unused amounts reversed 2,546 1,406 Reclassification (56) 30 Currency translation adjustment (204) (534) Acquisition of subsidiary (1,708) Reclassification to assets held for sale 174 As at December 31, (8,496) (8,576) Yearly loss (as a percentage of annual revenue) (0.00%) (0.00%) Building on the investments made in the last twenty years by mobile network operators worldwide that provide wireless data coverage in almost every part of the world, wireless M2M applications are increasingly revolutionizing businesses by enabling simple and cost-effective connectivity for a variety of applications. These include, among others, remote monitoring of utility meters or patients at home, tracking of high-value items or stolen vehicles and optimized real-time management of fleets, smart energy grids for more efficient energy consumption and air pollution detection systems for urban reduction programs in CO 2 emissions. Combining Cinterion s M2M module technology with Gemalto s expertise in deploying software and services for mobile network operators will provide M2M solutions with proven security and demonstrated remote Over-the-Air management of devices for industrial companies, for administrations and for mobile network operators which are increasingly seeking to offer M2M communication services. Netsize On January 4, 2010, Gemalto, which already held a 24.12% interest in Netsize, subscribed to a capital contribution increasing its stake to 85.65%. Netsize offers mobile payment solutions based on operator billing (through premium SMS, MMS and WAP for example) for 100 mobile operators in 28 countries, reaching over 1 billion billable subscribers worldwide, and provides mobile messaging, with SMS and MMS delivery to over 200 countries. Gemalto and Netsize minority shareholders have the option to force the purchase/sale of the remaining 14.35% non-controlling interests in Netsize respectively. Financial statements

98 96 Financial statements Gemalto Annual Report 2010 As a result, Gemalto has already considered 100% of control and interest in Netsize against a 4.9 million liability. The acquisition of 61.53% gave rise to a 18.1 million goodwill and the acquisition of the remaining 14.35% is shown as a 6.4 million decrease in share premium. Other acquisitions In 2010, the Group completed various other acquisitions which were less material either individually or in aggregate. The total purchase consideration transferred and the total goodwill arising from these acquisitions amounted to 77 million and 68 million, respectively. From the date of acquisition, Cinterion has contributed 80 million and 2 million to the Group s revenue and net profit, respectively. Netsize has contributed 61 million and (4) million to the Group s revenue and net profit, respectively. The other acquisitions have contributed 17 million and (3) million to the Group s revenue and net profit, respectively. If the acquisitions had occurred on January 1, 2010, management estimates that revenue from Cinterion would have been 176 million and net profit 0 million. The management also estimates the other acquisitions would have contributed 21 million and 4 million respectively. Intangible assets identified as part of the purchase price allocation In most instances, Gemalto management, assisted by independent qualified experts, provisionally identified and allocated the combination value to the assets acquired and liabilities and contingent liabilities assumed, including those not previously recognized by the acquiree. The tax effect on the fair value of the intangible assets recognized amounted to 8.4 million. The following table summarizes the estimated fair values of the intangible assets acquired and their remaining useful life at the date of the acquisitions: In millions of Euro Fair value Cinterion Netsize Other acquisitions Remaining useful life From 1 year Fair value Remaining useful life Fair value Remaining useful life From 2 years to 9 years Existing technologies 21.1 to 5 years years 7.5 Capitalized development costs years (1) From 7 years Customer relationships years 3.2 to 9 years Backlogs months From 2 years Brand names 7.5 Indefinite 0.6 Indefinite 0.4 to 4 years (1) Amortization of capitalized development costs will start when the underlying technologies are launched (expected in 2011).

99 Notes to the consolidated financial statements 97 Identifiable assets and liabilities at the date of acquisition The effects of these acquisitions on the Group s assets and liabilities as of the respective acquisition dates are described below: In thousands of Euro Cinterion Netsize Other acquisitions Assets Property, plant and equipment, net 3, Intangible assets, net 57,165 7,183 11,085 Deferred income tax assets ,564 Other non-current assets Inventories, net 4, Trade and other receivables, net 26,527 42,489 5,200 Cash and cash equivalents 8,592 14,201 4,102 Total assets 101,294 65,126 23,708 Liabilities Borrowings (non-current) 188 2,047 Deferred income tax liabilities 6, ,564 Employee benefit obligations 3, Provisions and other liabilities (non-current) 15 8, Trade and other payables 40,772 59,868 8,267 Current income tax liabilities Borrowings (current) 5, Derivative financial instruments (current) 4,732 Provisions and other liabilities (current) 2,214 1, Total liabilities 57,790 75,755 14,423 Fair value of identifiable net assets 43,504 (10,629) 9,285 Purchase consideration 163,000 9,000 77,020 (1) Non-controlling interests, based on their proportionate interest in the recognized amounts of the asset and liabilities of the acquiree (1,525) Goodwill 119,496 18,104 67,735 (1) Of which 26.8 million has been settled in 800,000 Gemalto shares valued at the acquisition date. Goodwill, which amounted to million represented the complementary technological expertise, the skills and know-how of the workforce acquired and the synergies expected to be achieved through the integration of our acquisitions. Financial statements

100 98 Financial statements Gemalto Annual Report 2010 Analysis of cash flows on acquisitions Cinterion Netsize Other acquisitions Purchase consideration settled in cash 163,000 9,000 50,220 Net cash acquired (8,592) (14,201) (4,102) Net cash flow on acquisitions 154,408 (5,201) 46,118 Note 5. Additional information on specific line items of the income statement The Group reported Restructuring and acquisition-related expenses (see note 2.2.3) for 9,268 as at December 31, 2010 ( 9,316 in 2009). This amount consisted of employee benefits, severance and associated costs for 3,893 ( 3,303 in 2009), of property, plant and equipment, intangible asset and inventory write-offs and impairments for 321 ( 162 in 2009) and of other costs for 5,054 ( 5,851 in 2009). Transaction costs for 3,972 (these costs were capitalized in 2009) are included in this amount in In 2009, the Company recognized some deferred tax assets that did not meet the recognition criteria at the date of the combination with Gemplus. As a result, in accordance with the provisions of IFRS 3 and IAS 12, the Company reduced the carrying value of the goodwill and increased the value of the share premium by 3.0 million and 3.8 million respectively. These adjustments have been recognized as an expense under the line item Amortization and depreciation of intangible assets resulting from acquisitions in the 2009 consolidated income statement (and included in the 23,699 expense). Amortization and depreciation of intangibles resulting from acquisitions amounted to 22,792 for the year ended December 31, 2010 ( 23,699 for the year ended December 31, 2009).

101 Notes to the consolidated financial statements 99 Note 6. Segment information In accordance with IFRS 8 Operating Segments, the information by operating segment is derived from the business organization and activities of Gemalto. Gemalto operates four core activities Mobile Communication, Machine-to-Machine, Secure Transactions, and Security and sells microprocessor cards (including embedded software), software solutions and services (including device management platforms, services to personalize each device individually), and intellectual property rights licenses. The Company also sells, mostly in the security segment, other microprocessor-based products such as electronic passports and secured USB keys. Mobile Communication customers are mobile operators. Machine-to-Machine supplies wireless communication modules; these include among others, remote monitoring of utility meters or patients at home, tracking of high-value items or stolen vehicles and optimized real-time management of fleets, smart energy grids for more efficient energy consumption and air pollution detection systems for urban reduction programs in CO 2 emissions. Secure Transactions supply financial cards to financial institutions, transportation cards to large urban mass transit operators, and Pay TV subscriber authentication and right management cards to large secure access service providers. Security offers include secure electronic documents, such as e-passports or e-identity cards, and issuance related services for governmental agencies; they also include products and solutions based on microprocessor technology for strong user authentication, typically used in a corporate environment or to securely access services over the internet such as e-banking. Revenue, gross and operating profit derived from the licensing of the Group s patent portfolio is included into the Security segment s income statement. Gemalto also operates a Public Telephony activity, which sells memory cards. For reporting purposes, this activity is presented under the heading Others. To supplement the financial statements presented on an IFRS basis, and to better assess its past and future performance, the Group also prepares an additional income statement where the key metric used to understand, evaluate the business and take operating decisions over the period 2010 to 2013 is the Profit from operations. Profit from operations is a non-gaap measure defined as IFRS operating result adjusted for (i) all equity-based compensation charges and associated costs (reported in the column Adjustments within the tables below); (ii) amortization and depreciation of intangibles resulting from acquisitions; and (iii) restructuring and acquisition-related expenses. This supplemental non-gaap measure is used internally to understand, manage and evaluate business and take operating decisions. It is among the primary factors management uses in planning for and forecasting future periods. Compensation of executives is based in part on the performance of the business based on this non-gaap measure. For a better understanding of the year-on-year performance of the business, the adjusted income statement for Ongoing operations, as reported within the tables below, not only excludes the contribution from discontinued operation, but also the contribution from assets held for sale reported in the column Reconciling items (see note 11). The information reported for each operating segment is the same as reported and reviewed internally on a monthly basis in order to assess performance and allocate resources to the operating segments. Gemalto s operating segments have been determined based on these internal reports. Financial income and expenses are not included in the result for each operating segment that is reviewed internally. Nor is asset or liability information on a segmented basis reviewed in order to assess performance and allocate resources. The information by operating segment reported in the tables below applies the same accounting policies as those used and described in these consolidated financial statements. Financial statements

102 100 Financial statements Gemalto Annual Report 2010 In thousands of Euro Ongoing operations Secure Transactions Security Others Adjusted financial information for ongoing operations Reconciling items (1) Adjusted financial information Year ended December 31, 2009 Mobile Communication Adjustments (2) IFRS financial information Revenue 888, , ,978 24,484 1,559,950 42,065 1,602,015 (122) 1,601,893 Cost of sales (504,618) (312,303) (150,741) (18,467) (986,129) (28,082) (1,014,211) (1,709) (1,015,920) Gross profit 383,452 99,115 85,237 6, ,821 13, ,804 (1,831) 585,973 Operating expenses Research and engineering (53,568) (15,894) (21,593) (59) (91,114) (178) (91,292) (1,017) (92,309) Sales and marketing (122,810) (50,430) (48,325) (2,086) (223,651) (3,193) (226,844) (4,631) (231,475) General and administrative (59,312) (21,354) (11,291) (242) (92,199) (793) (92,992) (6,488) (99,480) Other income (expense), net 2, , ,013 4,013 Profit from operations 150,699 11,834 4,146 3, ,437 10, ,689 Restructuring & acquisition-related expenses (9,316) Amortization and depreciation of intangibles resulting from acquisitions (23,699) Operating result (EBIT) 133,707 Financial income (expense), net (2,246) Share of profit of associates 1,380 Gain on sale of investment in associate 78 Profit before income tax 132,919 Income tax (expense) credit (17,425) Profit from continuing operations 115,494 Profit (loss) from discontinued operation (net of income tax) 2,630 Profit for the period 118,124 (1) Reconciling items comprise the contribution from the assets held for sale (see note 11). (2) Compared to the published consolidated financial statements as of December 31, 2009, the 12.7 million equity-based compensation charge has been excluded from the Profit from operations and reported in the column Adjustments within the table above. This 12.7 million was included in the adjusted operating result reported in the published consolidated financial statements as of December 31, (3) The amounts reported in the column Adjustments correspond to the 20,187 equity-based compensation charges and associated costs.

103 Notes to the consolidated financial statements 101 Ongoing operations Mobile Communication Machine-to- Machine Secure Transactions Security Others Adjusted financial information for ongoing operations Reconciling items (1) Adjusted financial information Year ended December 31, 2010 Adjustments (3) IFRS financial information 980,871 81, , ,077 19,493 1,861,842 43,726 1,905,568 1,905,568 (604,986) (54,798) (321,879) (189,012) (15,144) (1,185,819) (30,389) (1,216,208) (2,512) (1,218,720) 375,885 26, , ,065 4, ,023 13, ,360 (2,512) 686,848 (58,188) (2,941) (17,252) (25,088) (77) (103,546) (255) (103,801) (811) (104,612) (134,433) (7,995) (57,307) (54,574) (1,913) (256,222) (4,146) (260,368) (7,177) (267,545) (67,755) (8,562) (24,971) (15,486) (293) (117,067) (867) (117,934) (9,687) (127,621) 2, , , ,406 8, ,694 7,100 41,163 39,392 2, ,465 8, ,663 (9,268) (22,792) 163, , ,929 3, ,800 Financial statements (2,422) 167,378

104 102 Financial statements Gemalto Annual Report 2010 Geographical information The table below shows revenue and non-current assets (excluding goodwill) attributed to geographic areas, on the basis of the location of the customers and the location of the assets respectively: Year ended December 31, Revenue North and South America 392, ,773 Europe, Middle East and Africa 890,409 1,008,744 Asia Pacific 318, ,051 Total 1,601,893 1,905,568 Year ended December 31, Non-current assets excluding goodwill (net) North and South America 51,506 58,643 Europe, Middle East and Africa excluding France 95, ,487 France 148, ,519 Asia Pacific 66,628 64,828 Total 361, ,477 Note 7. Financial assets/liabilities by category In accordance with IFRS 7 provisions, financial assets and liabilities would be allocated as follows: December 31, 2009 Loans and receivables Assets at fair value through profit and loss Derivatives used for hedging Availablefor-sale Assets Available-for-sale financial assets, net 1,270 1,270 Other non-current assets 22,791 22,791 Trade and other receivables, net 432, ,072 Derivative financial instruments 17,166 17,166 Cash and cash equivalents 84, , ,704 Total 539, ,812 17,166 1, ,003 Total Derivatives used for hedging Financial liabilities Liabilities Borrowings 23,190 23,190 Derivative financial instruments 3,650 3,650 Total 3,650 23,190 26,840 Total December 31, 2010 Loans and receivables Assets at fair value through profit and loss Derivatives used for hedging Availablefor-sale Assets Available-for-sale financial assets, net 1,667 1,667 Other non-current assets 33,335 33,335 Trade and other receivables, net 537, ,099 Derivative financial instruments 15,388 15,388 Cash and cash equivalents 98, , ,110 Total 668, ,765 15,388 1, ,599 Total Derivatives used for hedging Financial liabilities Liabilities Borrowings 20,195 20,195 Derivative financial instruments 9,693 9,693 Total 9,693 20,195 29,888 Total

105 Notes to the consolidated financial statements 103 Note 8. Property, plant and equipment Property, plant and equipment (net) consist of the following: Land Building & improvement Machinery & equipment Total property, plant and equipment Gross book value as of January 1, , , , ,798 Acquisition of subsidiary and business 492 3,680 4,172 Additions 3 6,914 33,241 40,158 Reclassification to assets held for sale (1) (67) (4,923) (4,990) Other reclassifications (83) (782) 553 (312) Disposals (1,316) (30,378) (31,694) Currency translation adjustment 19 1,569 7,038 8,626 Gross book value as of December 31, , , , ,758 Accumulated depreciation as of January 1, 2009 (110,095) (391,346) (501,441) Depreciation charge (39) (13,049) (28,696) (41,784) Reclassification to assets held for sale (1) 4,533 4,533 Other reclassifications (353) Disposals 1,241 29,118 30,359 Currency translation adjustment 5 (530) (3,997) (4,522) Accumulated depreciation as of December 31, 2009 (387) (117,547) (394,819) (512,753) Net book value as of December 31, ,627 91, , ,005 Land Building & improvement Machinery & equipment Total property, plant and equipment Gross book value as of January 1, , , , ,758 Acquisition of subsidiary and business 196 4,665 4,861 Additions 4,326 39,888 44,214 Discontinued operation (77) (5,636) (5,713) Reclassification to assets held for sale (2) (400) (4,249) (14,940) (19,589) Other reclassifications 1,112 (1,581) (469) Disposals (3,256) (27,698) (30,954) Currency translation adjustment 153 4,943 20,177 25,273 Gross book value as of December 31, , , , ,381 Accumulated depreciation as of January 1, 2010 (387) (117,547) (394,819) (512,753) Depreciation charge (35) (14,102) (33,850) (47,987) Impairment charge (204) (204) Discontinued operation 7 3,814 3,821 Reclassification to assets held for sale (2) 232 1,238 9,513 10,983 Other reclassifications 268 (115) 153 Disposals 2,986 26,679 29,665 Currency translation adjustment (43) (2,478) (14,327) (16,848) Accumulated depreciation as of December 31, 2010 (233) (129,628) (403,309) (533,170) Financial statements Net book value as of December 31, ,534 81, , ,211 (1) Reclassification to asset held for sale relates to the buildings located in Saint-Cyr en Val, France. (2) Reclassification to asset held for sale relates to the disposal group held for sale (see note 11).

106 104 Financial statements Gemalto Annual Report 2010 For the year ended December 31, 2009, depreciation expense of 35,190 was recorded in cost of sales, 1,190 in research and engineering expenses, 657 in sales and marketing expenses, 4,698 in general and administrative expenses and 49 in other income and expenses. For the year ended December 31, 2010, depreciation expense of 38,071 was recorded in cost of sales, 2,108 in research and engineering expenses, 1,001 in sales and marketing expenses, 5,898 in general and administrative expenses and 49 in other income and expenses and 860 in discontinued operation. Capitalized leases included in Property, plant and equipment above, are as follows: Year ended December 31, Gross book value 54,161 54,129 Accumulated depreciation (28,831) (30,738) Net book value 25,330 23,391 Note 9. Goodwill and intangible assets Goodwill and intangible assets (net) consist of the following: Goodwill Patents and technology Capitalized development costs Other intangibles Gross book value as of January 1, , ,860 69, , ,023 Acquisition of subsidiary and business 46,830 23,024 6,011 8,665 84,530 Additions 322 8,739 7,659 16,720 Write-offs (2,971) (931) (474) (75) (4,451) Reclassifications within intangibles 1,420 (1,420) Other reclassifications Currency translation adjustment (67) 100 (8) (39) (14) Gross book value as of December 31, , ,795 84, ,539 1,084,647 Total Accumulated amortization as of January 1, 2009 (12,786) (231,373) (56,581) (77,786) (378,526) Amortization charge (10,935) (3,644) (14,590) (29,169) Write-offs ,293 Other reclassifications (303) (102) (405) Currency translation adjustment (1) Accumulated amortization as of December 31, 2009 (12,632) (241,265) (60,224) (92,397) (406,518) Net book value as of December 31, ,602 29,530 23,855 28, ,129

107 Notes to the consolidated financial statements 105 Goodwill Patents and technology Capitalized development costs Other intangibles Gross book value as of January 1, , ,795 84, ,539 1,084,647 Acquisition of subsidiary and business (1) 207,438 33,899 8,668 31, ,805 Additions 1,277 24,793 6,385 32,455 Write-offs (10) (2,605) (3,032) (5,647) Discontinued operation (3,879) (942) (239) (5,060) Reclassification to assets held for sale (5,800) (5,800) Other reclassifications 202 (20) Currency translation adjustment 5, ,959 Gross book value as of December 31, , , , ,581 1,390,019 Total Accumulated amortization as of January 1, 2010 (12,632) (241,265) (60,224) (92,397) (406,518) Amortization charge (13,675) (5,108) (17,006) (35,789) Write-offs 10 1,298 3,030 4,338 Discontinued operation ,145 Other reclassifications (202) 25 (204) (381) Currency translation adjustment (623) (366) (7) (264) (1,260) Accumulated amortization as of December 31, 2010 (13,255) (255,498) (63,074) (106,638) (438,465) Net book value as of December 31, ,993 51,662 50,956 49, ,554 (1) Of which 2,103 relates to the change in the acquisition balance sheet of Xiring and Trusted Logic. For the year ended December 31, 2009, amortization expense of 11,126 was charged to cost of sales, 804 was recorded in research and engineering expenses, 44 was recorded in selling and marketing expenses, 315 was recorded in general and administrative expenses, 16,880 was recorded in the line named Amortization and depreciation of intangible assets resulting from acquisitions. For the year ended December 31, 2010, amortization expense of 11,636 was charged to cost of sales, 575 was recorded in research and engineering expenses, 141 was recorded in selling and marketing expenses, 645 was recorded in general and administrative expenses, 22,792 was recorded in the line named Amortization and depreciation of intangible assets resulting from acquisitions. Other intangibles mainly consist of licensing rights to use and distribute licensed technology for 6,815, acquired customer relationships for 20,601, acquired brand names for 10,795 and miscellaneous software for 9,940. Goodwill write-off As at December 31, 2009, the Company recognized some deferred tax assets that did not meet the recognition criteria at the date of the Combination with Gemplus. As a result, in accordance with the provisions of IFRS 3 and IAS 12, the Company reduced the carrying value of the goodwill and increased the value of the share premium by 3.0 million and 3.8 million respectively. These adjustments have been recognized as an expense under the line item Amortization and depreciation of intangible assets resulting from acquisition in the consolidated income statement (see note 5). Goodwill impairment test The Company has organized its operations and reporting structure into five operating segments and cash generating units: Mobile Communication, Machine-to-Machine, Secure Transactions, Security and Others. Long-range planning, operating performance measurement and resource allocation are carried out by management on the basis of this structure. Goodwill has been allocated to these cash generating units on the basis of their expected contribution to the operating profits of the Group, pursuant to management business plan. Mobile Communication, Machine-to-Machine, Secure Transactions and Security are the cash generating units that include, in their carrying value, a goodwill that is a significant proportion of the total goodwill reported by Gemalto, for 387 million, 119 million, 137 million and 153 million respectively. The recoverable amount of the cash generating units is determined based on projected cash flows after tax derived from management plans as of the date the review was carried out. Cash flows beyond management plans horizon are extrapolated using a growth rate, which does not exceed the average growth rate for the industry in which Gemalto operates. The discount rate used in this calculation is the after-tax weighted average cost of capital used by the Financial statements

108 106 Financial statements Gemalto Annual Report 2010 Company, estimated at 12% in The outcome of the computation yields recoverable amounts above the carrying values of the cash generating units. No impairment charge was recognized in 2009 nor No impairment charge would be recognized in 2010 if discounted projected cash flows were 10% lower. Note 10. Investments in associates and available-for-sale financial assets Investments in associates consist of the following: Year ended December 31, Investments as of beginning of period 10,469 9,970 Acquisition of associates (1) 4,550 Dividends paid by associates (1,125) (1,502) Share of profit 1,380 1,717 Disposals (2) (2,208) Other movements (3) (3,224) Currency translation adjustment Investments as of end of period 9,970 10,934 (1) Gemalto acquired 49% and 19.87% of the voting shares of Raidax S.A and OpenTrust S.A for 550 and 4,000 respectively. Net assets acquired amounted respectively to 33 and 1,450. As a consequence, goodwill of 517 and 2,550 have been recognized. (2) Gemalto sold its investment in Atchik Realtime S.A in October (3) The amount of (3,224) includes the value of 32.04% of Trusted Logic shares for (3,054). Further to the acquisition of an additional 67.96% interest in September 2009, the entity is now fully consolidated. The Company s investments in associates include goodwill (net of any impairment loss) identified on acquisition. As of December 31, 2010, the net book value of goodwill in associates amounted to 3,067 and related to investments in Raidax S.A. and OpenTrust S.A. Gemalto s associates aggregated key data were as follows (in total): Associates total Year Assets Liabilities Revenue Profit/(loss) 2009 (1) 66,258 63, ,048 (1,353) 2010 (1) 28,330 9,407 34,658 1,187 Available-for-sale financial assets consist of the following: Year ended December 31, Available-for-sale financial assets as of beginning of period 1,203 1,270 Net gains transferred to equity (1) Disposals (411) Available-for-sale financial assets as of end of period 1,270 1,667 (1) It mainly relates to the revaluation of Keynectis S.A investment from 1,005 to 1,667. Note 11. Assets held for sale and discontinued operation Assets held for sale One of our joint ventures, whose shareholding should evolve in 2011 along negotiations, is presented as a disposal group held for sale. As at December 31, 2010, the disposal group comprised assets for 55 million and liabilities for 20 million. Year ended December 31, Assets classified as held for sale as of beginning of period (1) 1,711 1,711 Additions ,058 Disposals (457) Currency translation adjustment 414 Assets classified as held for sale as of end of period 1,711 57,183 Year ended December 31, Liabilities associated with assets held for sale as of beginning of period Additions 19,636 Currency translation adjustment 152 Liabilities associated with assets held for sale as of end of period 19,788 (1) As at January 1, 2010, the assets held for sale related to building located in Orleans (France). (1) Previous year financial information is disclosed when current year financial information is not available.

109 Notes to the consolidated financial statements 107 Effect of the reclassification to assets and liabilities associated with assets held for sale on the consolidated statement of financial position: The net gain/(loss) from discontinued operation comprises the following: Year ended December 31, 2010 Goodwill (5,800) Property, plant and equipment, net (8,608) Deferred income tax assets (43) Other non-current assets (48) Inventories, net (7,836) Trade and other receivables, net (13,320) Cash and cash equivalents (19,403) Assets classified as held for sale 55,058 Deferred income tax liabilities (2,157) Trade and other payables (16,388) Current income tax liabilities (299) Provisions and other liabilities (792) Liabilities associated with assets held for sale 19,636 The currency translation adjustment reserve, related to the disposal group, amounted to 3,182 (deferred gain) as at December 31, Discontinued operation On December 31, 2010, Gemalto and VeriFone Systems Inc. completed the transfer of the Group s POS solutions business. The POS activity was not a discontinued operation or classified as held for sale as at December 31, Therefore, the 2009 comparative consolidated income statement has been restated to present the POS activity as a discontinued operation separately from continuing operations. Year ended December 31, In thousands of Euro (except earnings per share) Revenue of discontinued operation 52,354 50,776 Cost of sales (38,310) (36,199) Gross profit of discontinued operation 14,044 14,577 Operating expenses (11,414) (13,912) Operating result of discontinued operation 2, Financial income (expense), net Profit before income tax of discontinued operation 2, Income tax expense Profit from discontinued operation 2, Loss on sale of discontinued operation (2,969) Income tax on loss on sale of discontinued operation (118) Profit (loss) from discontinued operation (net of income tax) 2,630 (2,422) Attributable to: Equity holders of the company 2,630 (2,422) Non-controlling interests Weighted average number of shares outstanding (in thousands) 30 82,520 83,031 Weighted average number of shares outstanding assuming dilution (in thousands) 30 83,789 84,400 Earnings per share discontinued operation Basic earnings per share 0.03 (0.03) Diluted earnings per share 0.03 (0.03) Financial statements

110 108 Financial statements Gemalto Annual Report 2010 Effect of disposal on the consolidated statement of financial position: Note 13. Inventories Inventories consist of the following: Year ended December 31, 2010 Goodwill (3,879) Property, plant & equipment, net (1,932) Inventories, net (4,271) Trade & other Receivables, net (14,414) Employee benefit obligations (595) Non-current provisions & other liabilities (2,167) Trade & other payables (7,822) Current provisions & other liabilities (130) Net assets and liabilities transferred (13,782) Total consideration (in cash) 10,813 Loss on sale of discontinued operation (2,969) Year ended December 31, Gross book value Raw materials and spares 48,830 41,877 Work in progress (1) 80,199 86,875 Finished goods 37,928 40,503 Total 166, ,255 Obsolescence reserve Raw materials and spares (6,533) (4,645) Work in progress (4,606) (4,981) Finished goods (5,197) (4,375) Total (16,336) (14,001) Net book value 150, ,254 As a result of the difference between the consideration received and the net assets and liabilities transferred, a 2,969 loss on sale of discontinued operation was recognized in the line Profit (loss) from discontinued operation (net of income tax) as at December 31, Note 12. Other non-current assets Other non-current assets consist of the following: Year ended December 31, Loan receivable from former Gemplus Board chairman (net of provision) (1) 8,488 9,097 Research tax credits (2) 10,940 Long term deposits (3) 2,636 3,583 Tax receivable (4) 7,131 7,013 Other 4,536 2,702 Total 22,791 33,335 (1) In 2000, a former chairman of Gemplus Board was granted a loan of 71,900 to finance the exercise of stock options. In December 2001, this former chairman ceased his active involvement with Gemplus. In the second quarter of 2002, Gemplus learned that the former chairman had financial difficulties that would affect his ability to repay the loan. Accordingly, Gemplus recorded a provision originally as of June 30, 2002 amounting to 69,620 as of December 31, 2006 taking into account a severance payable, which is conditional on reimbursement of the loan (see note 18). In proceedings brought by Gemplus in April 2004, an arbitral tribunal issued a final award in favor of Gemplus and its indirect subsidiary against this former chairman in the amount of 71,900, plus accrued interest and attorneys fees and costs. Gemplus has not forgiven the loan nor released the arbitration award. (2) The option granted by the French regulation Loi de Finance rectificative 2008 enabling French companies to get an accelerated refund of their research tax credit, is no longer effective. As a result, research tax credit are classified as non-current assets. (3) The 3,583 carrying value of long term deposits is assessed to be equivalent to their fair value. (4) Compared to the published consolidated financial statements for the year ended December 31, 2009, Trade and other receivables of 4,300 have been reclassified to Other non-current assets. (1) Work in progress as at December 31, 2009 included 3,838 which has been reclassified to other receivables in Note 14. Trade and other receivables Trade and other receivables consist of the following: Year ended December 31, Trade receivables 317, ,367 Provision for impairment of receivables (8,496) (8,576) Trade receivables, net 309, ,791 Prepaid expenses 16,642 13,521 VAT recoverable and tax receivable (1) 41,031 51,761 Advances to suppliers and related 8,177 8,756 Unbilled customers 32,232 42,198 Other (2) 24,720 31,072 Total (3) 432, ,099 (1) Compared to the published consolidated financial statements for the year ended December 31, 2009, Trade and other receivables of 4,300 have been reclassified to Other non-current assets. (2) 3,838 has been reclassified from inventories to other receivables as at January 1, (3) Change in Trade and other receivables includes a 74,216 related to the newly acquired companies (contribution at acquisition date).

111 Notes to the consolidated financial statements 109 Note 15. Cash and cash equivalents Cash and cash equivalents consist of the following: Note 16. Borrowings Borrowings consist of the following: Year ended December 31, Cash at bank and in hand 84,892 98,345 Short term bank deposits and investment funds 318, ,765 Total 403, ,110 The average effective interest rate on short term deposits was 1.43% in 2010 (1.42% in 2009). These deposits are invested in the form of overnight and fixed term deposits, in money market funds or in commercial paper, with maturities of less than three months at the balance sheet date. The amount of cash and bank overdrafts shown in the cash flow statement is net of bank overdrafts as reconciled below: Year ended December 31, Cash and cash equivalents 403, ,110 Bank overdrafts (1,530) (212) Cash included in assets classified as held for sale 19,403 Total 402, ,301 Year ended December 31, Non-current portion Other financial liability ( * ) 7,038 8,997 Finance lease liabilities 7,908 5,775 Total Non-current portion 14,946 14,772 Current portion Short term loans 3,193 2,875 Bank overdrafts 1, Finance lease liabilities 3,521 2,336 Total Current portion 8,244 5,423 Total 23,190 20,195 ( * ) Debts mainly related to the anticipated acquisition of an additional 49.9% interest in Serverside. In 2010, the Group refinanced its back-up credit facilities by arranging a series of bilateral committed revolving credit lines, arranged with first rank banks. The total amount is 210 million and the maturities are comprised between December 9, 2013 and December 17, The nominal interest rates as at December 31, 2009 and 2010 were as follows: Amount EUR XAF SGD PLN GBP AED INR CNY Other financial liability Floating rate 7, % n/a Short-term loans and bank overdrafts Floating rate 4,723 n/s 10.00% n/s Finance lease liabilities Floating rate 11, % Finance lease liabilities Fixed rate % 14.38% 9.00% Amount EUR XAF USD PLN GBP AED INR CNY Other financial liability Floating rate 10, % 0.78% n/a n/a Short-term loans and bank overdrafts Floating rate 1,787 n/s n/s Finance lease liabilities Floating rate 7, % Finance lease liabilities Fixed rate 307 n/s 9.00% Financial statements n/a: not applicable. No specific interest rate as it relates to the liabilities for additional compensation/guaranteed dividend payable to non-controlling interests. n/s: not significant.

112 110 Financial statements Gemalto Annual Report 2010 These funding sources do not require Gemalto to comply with any financial ratio. The syndicated bank loan facility of USD 250 million was cancelled on October 21, Neither the syndicated loan nor the bilateral credit lines were drawn respectively at December 31, 2009 and December 31, To the exception of minor finance leases totaling 0.3 million as at December 31, 2010, the total amount of borrowings is based on floating interest rates. The carrying amounts of Gemalto s borrowings are denominated in the following currencies: Year ended December 31, Euro (EUR) 12,479 10,255 Central African Franc (XAF) 16 British Pound (GBP) 5,973 6,419 Arab Emirates Dirham (AED) India Rupee (INR) 1,190 Chinese Yuan (CNY) 3,192 2,562 US Dollar (USD) 937 Total 23,190 20,195 Finance lease liabilities are split by maturity as follows: Finance lease liabilities minimum lease payments Year ended December 31, Not later than 1 year 3,676 2,450 Later than 1 year and not later than 5 years 8,139 5,918 Total 11,815 8,368 Future finance charges on finance leases (386) (257) Present value of finance lease liabilities 11,429 8,111 The present value of finance lease liabilities is as follows: Note 17. Employee benefit obligations The Company operates its principal defined benefit plans in France and in the United Kingdom. The net liabilities as at December 31, 2009 and 2010 were as follows: Year ended December 31, France 22,462 27,555 UK 6,774 7,181 Other countries (1) 3,470 8,851 Total 32,706 43,587 (1) Change in Net liabilities for Other countries includes a 3,353 related to the newly acquired companies (contribution at acquisition date). In France, the Company contributes to the mandatory national pension system and other compulsory plans. Pursuant to applicable French law and industry labor agreements, a lump-sum payment is made to employees upon retirement ( Indemnités de fin de carrière or IFC). The amount depends on the length of service on the date the employee reaches retirement age. Long service awards are granted after respectively 20, 30, 35 and 40 years of employment ( Jubilees ). During the year ended December 31, 2010, conditions were improved on both plans following a change in the industry labor agreements and an agreement with the workers union. Past service costs due to the change in the retirement plan are amortized on a straight-line basis over the average expected remaining service of the employees as from August 1, Actuarial movements and past service costs for Jubilees are recognized immediately in the income statement. The defined benefit plan that the Company operated in the United Kingdom was closed on March 31, Employees ceased to accrue benefits under the old defined benefit scheme from that date and joined a defined contribution scheme effective from April 1, Other less significant defined benefit plans are applied in other countries such as Germany, Finland, Italy, Mexico, Poland and South Africa. Actuarial evaluations have been performed as at December 31, 2009 and The amounts recognized in the income statement in respect of defined benefit plans are as follows: Year ended December 31, Not later than 1 year 3,521 2,336 Later than 1 year and not later than 5 years 7,908 5,775 Later than 5 years Total 11,429 8,111 Year ended December 31, Current year service cost 1,719 2,837 Past service cost (12) 581 Interest cost 3,022 3,520 Expected return on plan assets (909) (777) Total 3,820 6,161

113 Notes to the consolidated financial statements 111 The following table sets forth the funded status of defined benefit plans by country: Year ended December 31, 2009 France UK Other countries Total Projected benefit obligations 22,293 32,086 6,649 61,028 Plan assets at fair value 25,312 3,179 28,491 Projected benefit obligations in excess of plan assets 22,293 6,774 3,470 32,537 Past service costs Net liability 22,462 6,774 3,470 32,706 Year ended December 31, 2010 France UK Other countries Total Projected benefit obligations 29,995 36,370 18,213 84,578 Plan assets at fair value 29,189 9,362 38,551 Projected benefit obligations in excess of plan assets 29,995 7,181 8,851 46,027 Past service costs (2,440) (2,440) Net liability 27,555 7,181 8,851 43,587 The amounts recognized in the income statement in respect of defined benefit plans by country are as follows: Year ended December 31, France 2,594 4,059 UK Other countries 567 1,383 Total 3,820 6,161 Changes in the projected benefit obligations over the year are as follows: Changes in the fair value of the plan assets are as follows: Year ended December 31, Beginning of period 21,810 28,491 Actual return on plan assets 4,079 2,976 Acquisition of subsidiary and business 4,842 Employer contribution 1,898 2,083 Benefits paid (810) (1,340) Currency translation adjustment 1,514 1,499 End of period 28,491 38,551 Year ended December 31, Beginning of period 47,275 61,028 Service cost 1,719 3,280 Interest cost 3,022 3,520 Acquisition of subsidiary and business 230 8,196 Past service cost 12 3,158 Reclassifications 595 Actuarial (gain) and loss 8,561 5,852 Benefits paid (1,538) (2,348) Discontinued operation (595) Gain on curtailment (139) Currency translation adjustment 1,747 2,031 End of period 61,028 84,578 The actual return on plan assets amounted to 2,976 in 2010 and 4,079 in The assets of the pension schemes have significantly performed, with a significant increase in the UK asset value. This increase in asset value has been offset by an increase in the pension scheme liability as a result of a lower discount rate and a slightly higher inflation rate. The plan assets in the UK are composed of the following: Year ended December 31, Equity securities 12,074 17,518 Government bonds 9,076 11,464 Other investments 7,341 9,569 Total plan asset fair value 28,491 38,551 In France, the regulations do not provide for any obligation to fund the liability arising from IFC which are lump-sum payments made to employees upon their retirement. Financial statements

114 112 Financial statements Gemalto Annual Report 2010 In the United Kingdom, Germany and Finland, plan assets are comprised of equity securities, corporate bonds and other investments. In 2008, in accordance with the Pensions Act 2004 which requires that the employer and pension scheme trustees in the United Kingdom agree and submit a funding plan to the Pension Regulator within 15 months of the valuation date for all schemes showing an asset deficit, Gemalto N.V. and the trustees of the Gemplus Limited Staff Pension scheme reached an agreement on the ongoing funding of the scheme, which consisted of a plan to fund the deficit over 8 years on a going concern basis and a parental guarantee put in place by Gemalto N.V. in the event that Gemalto UK Ltd were unable to fulfill its funding obligations. Changes in other comprehensive income are as follows: Year ended December 31, Beginning of period 4,396 (995) Recognized during the period (5,391) (3,654) End of period (995) (4,649) The main actuarial assumptions used were as follows: Year ended December 31, France Discount rate 5.15% 4.75% Future salary increase 3.50% 3.50% Inflation rate 2.00% 2.00% UK Discount rate 5.80% 5.45% Inflation rate 3.40% 3.50% Expected rate of return on plan assets 6.22% 6.86% Increase/(Decrease) in the liability 0.5 percentage point increase 0.5 percentage point decrease Discount rate (5,175) 5,948 Inflation rate 2,715 (2,364) Demographic assumptions Mortality assumptions for the most important countries are based on the following post-retirement tables: (i) INSEE TV/ TD for France and (ii) PA92 MC and the medium cohort improvement factors for the United Kingdom. Assumptions regarding future mortality are based on published statistics and mortality tables. The current longevities underlying the values of the liabilities in the defined benefit plans are as follows: Year ended December 31, 2009 France United Kingdom Longevity at age 65 for current pensioners (years) Males Females Longevity at age 65 for current members aged 45 (years) Males Females Year ended December 31, 2010 France United Kingdom Longevity at age 65 for current pensioners (years) Males Females Longevity at age 65 for current members aged 45 (years) Males Females Discount rate source The Group uses the i-boxx index for the French and the United Kingdom plans as a basis when determining the discount rate to be applied for the liability calculation. Both indexes refer to Euro denominated and Sterling corporate bonds with AA rating maturing over 10 years. The assumptions in respect of discount rate and inflation rate have a significant effect on the liability valuation. Changes to these assumptions in the light of prevailing market conditions may have a significant impact on future valuations. Sensitivity analysis The following table shows the sensitivity of the UK and French liabilities for the year ended December 31, 2010 to reasonable changes in main assumptions used, all other variables being held constant: Historical data Year ended December 31, Projected benefit obligations 61,028 47,275 58,142 Plan assets at fair value (28,491) (21,810) (32,376) Deficit/(surplus) in the plan 32,537 25,465 25,766 Experience adjustments arising on plan liabilities (30) Experience adjustments arising on plan assets (141)

115 Notes to the consolidated financial statements 113 Note 18. Non-current provisions and other liabilities Year ended December 31, Non-current provisions 34,776 37,116 Other liabilities 39,234 34,596 Total 74,010 71,712 Year ended December 31, Management compensation (1) 8,489 9,098 Government grants 10,382 8,473 Long term payables (2) 20,363 17,025 Total other non-current liabilities 39,234 34,596 (1) Management compensation relates to former Gemplus Board chairman s termination package conditioned to the refund of a loan granted to him by Gemplus in 2000 (see note 12). (2) The 17,025 carrying value of long-term payables is assessed to be equivalent to their fair value. Variation analysis of the non-current provisions is as follows: Warranty non-current Restr. & Reorg. Reserves Litigation Tax claims Prov. for other risks As of January 1, ,582 4, ,271 5,950 28,432 Additional provisions 1,540 1,959 6,189 2,357 12,045 Acquisition of a subsidiary Unused amount reversed (57) (274) (200) (2,543) (959) (4,033) Used during the year (524) (808) (22) (46) (2,517) (3,917) Reclassifications (138) , ,208 Cumulative translation adjustment (31) 1,011 As of December 31, ,404 4,319 2,562 17,661 4,830 34,776 Total Warranty non-current Restr. & Reorg. Reserves Litigation Tax claims Prov. for other risks As of January 1, ,404 4,319 2,562 17,661 4,830 34,776 Additional provisions 1, , ,686 Acquisition of a subsidiary 1,406 6, ,493 Unused amount reversed (475) (2,177) (882) (6,646) (961) (11,141) Used during the year (129) (832) (1,376) (255) (1,356) (3,948) Discontinued operation (28) (160) (188) Reclassifications ,259 Cumulative translation adjustment , ,179 As of December 31, ,256 2,028 2,413 22,268 4,151 37,116 Total Financial statements

116 114 Financial statements Gemalto Annual Report 2010 Note 19. Trade and other payables Trade and other payables for the years ended December 31, 2009 and 2010 consist of the following: Year ended December 31, Trade payables 141, ,106 Employee related payables 114, ,076 Accrued expenses 39,321 54,371 Accrued VAT 15,097 22,177 Deferred revenue 39,147 45,201 Other 4,095 5,163 Total trade and other payables (1) 353, ,094 Note 20. Derivative financial instruments As set out in note 3 Financial risk management, Gemalto enters into foreign exchange contracts as cash flow hedges and fair value hedges in order to manage its foreign currency exposure incurred in the normal course of business. As at December 31, 2010, the Company held forward and option contracts which were designated as qualifying cash flow hedges of forecast sales and purchases denominated in US Dollar, Sterling Pound, Japanese Yen, Singapore Dollar and Polish Zloty. It also held forward and option contracts designated as fair value hedges of assets and liabilities denominated in the same currencies and in South African Rand. (1) Change in Trade and other payables includes a 108,907 related to the newly acquired companies (contribution at acquisition date). The fair value of the Company s financial instruments is recorded either in current or non-current assets and liabilities as Derivative Financial Instruments and details as follows (Mark-to-market valuations): Year ended December 31, USD GBP JPY SGD PLN Other USD GBP JPY SGD PLN ZAR Cash flow hedges Forward contracts 7, ,831 9,879 (539) (1,684) Option contracts 918 (904) Fair value hedges Forward contracts 760 (18) (249) (107) (87) (679) (913) (192) 33 (43) (40) (465) Option contracts 2, (653) (535) 10,650 1, ,744 (679) 8,966 (731) (3,090) (465) At the balance sheet date, the above cash flow hedging contracts represented for Gemalto unrecognized pre-tax profits of 16.5 million and losses of (4.9) million which were recorded in equity. Under constant market conditions, these profits and losses would be reclassified as debits or credits to sales or cost of sales over the next 36 months. The effective portion of Gemalto s cash flow hedges generated a 2.3 million net loss in 2010 ( 5 million net gain in 2009), recorded in the income statement as a debit of 5.5 million to sales and a credit of 3.2 million to cost of sales. Foreign exchange transactions, fair value and disqualified hedges, and the ineffective portion of Gemalto s cash flow and fair value hedges generated a 1.1 million loss in 2010 ( 1.4 million loss in 2009), which was included in financial income.

117 Notes to the consolidated financial statements 115 Note 21. Current provisions and other liabilities Current provisions and other liabilities consist of the following: Year ended December 31, Warranty current 3,200 4,527 Provisions for loss on contract 1, Restructuring and reorganization 3,790 2,141 Other 17,776 6,508 Total current provisions and other liabilities 26,014 13,710 Warranty current Provisions for loss on contract Restr. & Reorg. Reserves (1) Other Total As of January 1, ,881 1,444 18,631 9,522 32,478 Additional provisions 2, ,198 12,762 17,745 Acquisition of a subsidiary 30 2,333 2,363 Unused amount reversed (719) (1,005) (2) (6,559) (8,285) Used during the year (854) (195) (16,969) (522) (18,540) Other reclassifications (242) 331 (64) (31) (6) Cumulative translation adjustment (16) 8 (4) As of December 31, ,200 1,248 3,790 17,776 (2) 26,014 Warranty current Provisions for loss on contract Restr. & Reorg. Reserves (1) Other Total As of January 1, ,200 1,248 3,790 17,776 26,014 Additional provisions 1, ,315 1,094 4,158 Acquisition of a subsidiary 2, , ,770 Unused amount reversed (858) (1,108) (852) (2,762) (5,580) Used during the year (1,265) (416) (3,363) (9,211) (14,255) Discontinued operation (127) (127) Reclassifications to liabilities held for sale (792) (792) Other reclassifications (107) (120) (492) (719) Cumulative translation adjustment As of December 31, , ,141 6,508 (2) 13,710 (1) Usage mainly consists of severance payments made in connection with restructuring and reorganization plans. (2) A 11.2 million special provision was recorded as at December 31, 2009 to cover the consequences for Gemalto of the situation related to some German payment cards identified at the beginning of the year 2010 when card holders became unable to conduct transactions. This provision has been released for 9.3 million in Financial statements

118 116 Financial statements Gemalto Annual Report 2010 Note 22. Revenue Revenue by category is analyzed as follows: Year ended December 31, (represented) Sales of goods 1,416,723 1, 624,472 Revenue from services 163, ,557 Others ( * ) 21,333 27,539 Total 1,601,893 1, 905,568 ( * ) Others includes the revenue derived from Gemalto patent licensing activities, as well as gains and losses on certain cash flow hedge instruments. Note 23. Costs of sales and operating expenses by nature The costs of sales and operating expenses by nature are as follows: Year ended December 31, (represented) Depreciation, amortization, impairment charges and write-offs 49,009 61,595 Amortization and impairment charges related to the accounting treatment of the combinations 23,699 22,792 Employee compensation and benefit expense (see note 24) 509, ,659 Change in inventories (finished goods and work in progress) (12,517) (12,860) Raw materials used and consumables 556, ,625 Freight and transportation costs 47,855 53,622 Travel costs 36,632 41,794 Building and office leases 71,004 72,518 Royalties, legal and professional fees 93, ,495 Subcontracting and temporary workforce 82,244 82,713 Other 10,898 (10,801) Total expenses 1,468,186 1,742,152 Note 24. Employee compensation and benefit expense Year ended December 31, (represented) Wages and salaries (including severance costs incurred in 2009 and 2010 and recorded in restructuring and acquisition-related expenses) 435, ,422 Pension Defined benefit plans (1) 1,670 3,418 Pension Defined contribution plan 18,868 21,847 Share-based compensation 12,327 18,645 Other 40,623 49,327 Employee compensation and benefit expense 509, ,659 (1) Includes mainly the annual charge related to the French IFC which are lump-sum payments made to the French employees upon their retirement.

119 Notes to the consolidated financial statements 117 Note 25. Share-based compensation plans All exercise prices are expressed in Euro. Gemalto has established a Global Equity Incentive Plan ( GEIP ) for its employees. Gemalto share option and restricted share unit plans (excluding Gemplus share option plans) The GEIP authorizes the company to grant eligible employees over the duration of the plan ending March 18, 2014 the right to acquire 14 million ordinary shares of Gemalto N.V. Gemalto share options: The following table summarizes the main characteristics of the share option plans granted by the Board of Gemalto N.V. since Share options granted Exercise price (Euro) Grant date Valuation assumptions used (stochastic models) No dividend 3,196,000 May Expected volatility of 25% Risk-free interest rate of 3% Expected option life of 4.13 years No dividend 5,000 Dec Expected volatility of 25% Risk-free interest rate of 3% Expected option life of 3 years No dividend 15,000 Jun Expected volatility of 27% Risk-free interest rate of 3% Expected option life of 4.5 years No dividend 685,000 Sep Expected volatility of 28% Risk-free interest rate of 2.8% Expected option life of 4.12 years No dividend 1,600,000 Jun Expected volatility of 36% Risk-free interest rate of 3.8% Expected option life of 3.7 years No dividend 872,000 Sep Expected volatility of 28.5% Risk-free interest rate between 4.01% and 4.15% Expected option life between 1.5 and 4.5 years No dividend 1,399,000 Sep Expected volatility between 30% and 39% Risk-free interest rate between 4.02% and 4.17% Expected option life between 1.5 and 4.5 years Financial statements For all the share option plans listed in the table above (except for the June 2006 plan), the vesting schedule differs, depending on the country of employment of the optionee, and varies from a 25% vesting per year over 4 years to a cliff vesting at the end of the 4-year period. For the June 2006 plan, the vesting schedule varied from a full vesting after 18 months to a cliff vesting at the end of the 4-year period. For the share options granted in 2004, 2005 and 2006, volatility was determined by calculating the historical volatility of the Company s share price returns over the last 360 market days prior to the grant date, when enough historical data were available. For the share options and the restricted share units granted in 2007, and for the share options granted in 2008, the historical volatility of the Company s share price returns over the last 360 market days prior to the grant date was adjusted to take into account a negative volatility curve.

120 118 Financial statements Gemalto Annual Report 2010 The following table summarizes information with respect to Gemalto share options outstanding as at December 31, 2009 and 2010 (excluding Gemplus share options): Grant date Exercise price (Euro) Number of options outstanding as of December 31, 2009 Number of options outstanding as of December 31, May ,048, , Jun ,000 15, Sep , , Jun ,222,750 1,092, Sep , , Sep ,371,750 1,323,250 5,019,097 4,488,146 Gemalto restricted share units (RSU): The following table summarizes the main characteristics of the restricted share unit plans granted by the Board of Gemalto N.V.: RSU granted Grant date Vesting schedule and conditions RSU vested Valuation assumptions used 560,000 Sep 07 End of the vesting period: Dec 10 Vesting conditions are both service-based and performance-based 611,500 Oct 09 End of the vesting period: Oct 12 Vesting conditions are both service-based and performance-based 380,318 Mar 10 8,000 RSU were forfeited in 2010 End of the vesting period: Mar 13 Vesting conditions are both service-based and performance-based 4,250 RSU were forfeited in ,000 nil nil Share price of Euro No dividend Risk-free interest rate of 4.17% Implicit volatility of 28.5% Fair value discounted by 4% for each year of restriction on share trading Stochastic model used Share price of Euro Dividend of 0.20 Euro per share 1-year risk-free rate of 0.69% 2-year risk-free rate of 1.27% 3-year risk-free rate of 1.67% Fair value discounted by 7.5% for each year of restriction on share trading Share price of Euro Dividend of 0.25 Euro per share 1-year risk-free rate of 0.56% 2-year risk-free rate of 0.92% 3-year risk-free rate of 1.37% 4-year risk-free rate of 1.82% 5-year risk-free rate of 2.27% Fair value discounted by 4.49% for each year of restriction on share trading Gemplus S.A. and Gemplus International S.A. share option plans Pursuant to the undertaking under article 3.3(a) of the Combination agreement between Gemalto N.V. and Gemplus International S.A. signed on December 6, 2005, Gemalto guarantees to the Gemplus share option holders the right to exchange their future Gemplus shares for Gemalto shares, on the basis of the exchange ratio of the public exchange offer (i.e. 25 Gemplus shares for 2 Gemalto shares). The following table summarizes information with respect to Gemplus share options outstanding as of December 31, 2009 and The initial numbers and exercise prices of the options for Gemplus International S.A. and Gemplus S.A. shares granted to Gemplus share option holders have been adjusted for the 0.26 Euro distribution of available reserves to the Gemplus shareholders on June 2, 2006, and converted at the ratio of the public exchange offer (i.e. 25 Gemplus shares for 2 Gemalto shares). Upon exercise of Gemplus S.A. or Gemplus International S.A. share options, the optionee is offered the exchange of shares of these companies with Gemalto shares.

121 Notes to the consolidated financial statements 119 Grant date Exercise price (Euro) Number of options outstanding as of December 31, 2009 Number of options outstanding as of December 31, Apr , Apr Apr , Apr Jul , Jul , Dec , Jun Jun ,205 6, Sep ,715 4, Dec Jan ,260 2, Jan , Jul ,042 9, Aug , , Dec , , Apr , Jul ,099 1, Aug ,374 54, Aug ,416 90, Oct , , Oct ,633 43, Apr , Apr ,083 18, Jun , Apr ,166 36, May ,455 37, May ,688 70, Aug ,526 3, Aug ,166 36, Apr ,042 2,042 1,855,878 1,099,759 The fair value of each grant has been calculated as of June 2, It has been estimated on the date of grant using a stochastic option-pricing model. The following average parameters were used: no dividend, volatility of 32% and risk-free interest rate from 3.71% to 3.97%. Options typically vest in equal amounts over a period of three to four years. Movements in the number of share options outstanding (Gemalto and Gemplus) and their related weighted average exercise price are as follows: Average exercise price Outstanding (Euro) options Year ended December 31, Average exercise price Outstanding (Euro) options Beginning of the period ,232, ,874,975 Granted Forfeited (502,968) (494,438) Exercised ( * ) (1,854,712) (792,632) End of the period ,874, ,587,905 ( * ) In 2009, 1,854,712 shares were exercised, of which 215 were not delivered but cash settled as a monetary compensating balance. In 2010, 792,632 shares were exercised of which 99 were not delivered but settled in cash. As of December 31, 2010, the average remaining life of the 5,587,905 outstanding options was 5.2 years. It was 5.7 years as of December 31, 2009 for the 6,874,975 options. Share options outstanding (Gemalto and Gemplus) at the end of the period have the following expiry dates and exercise prices: Expiry date Average exercise price (Euro) Year ended December 31, Outstanding options Average exercise price (Euro) Outstanding options , , , , , ,338, ,021, , , ,564, ,379, , , , , ,371, ,323,250 6,874,975 5,587,905 Financial statements In the income statement for the period ended December 31, 2010, a compensation expense of 17,894 ( 12,026 in 2009) corresponding to the amortization of the fair value of all the outstanding share options and restricted share units was recorded for 2,400 ( 1,543 in 2009) in cost of sales, 750 ( 461 in 2009) in research and engineering expenses, 6,775 ( 4,150 in 2009) in sales and marketing expenses and 7,969 ( 5,872 in 2009) in general and administrative expenses. Out of the 5,587,905 above mentioned outstanding options as of December 31, 2010, a total of 3,869,405 are vested and exercisable at a Euro average exercise price.

122 120 Financial statements Gemalto Annual Report 2010 Gemalto has established a Global Employee Share Purchase Plan ( GESPP ) for its employees. Employee Share Purchase plan 2009 In the period from October 26, 2009 to November 6, 2009, Gemalto employees were offered the opportunity to buy Gemalto shares at a price 15% below the lower of the closing prices for the Gemalto share on October 26, 2009 and November 6, ,525 Treasury shares were subscribed by the employees at Euro per share. The compensation expense corresponding to the discount granted to employees under that program of 301 was recorded as a compensation expense in the 2009 income statement: 50 were recorded in cost of sales, 73 in research and development expenses, 85 in sales and marketing expenses and 93 in general and administrative expenses. Employee Share Purchase plan 2010 In the period from October 25, 2010 to November 5, 2010, Gemalto employees were offered the opportunity to buy Gemalto shares at a price 15% below the lower of the closing prices for the Gemalto share on October 25, 2010 and November 5, ,602 Treasury shares were subscribed by the employees at Euro per share. The compensation expense corresponding to the discount granted to employees under that program of 193 was recorded as a compensation expense in the 2010 income statement: 24 were recorded in cost of sales, 64 in research and development expenses, 10 in sales and marketing expenses and 95 in general and administrative expenses. Note 26. Other income (expense), net Year ended December 31, Fixed assets write-offs and net gains/losses on sales 1, Compensation from customers and suppliers, net (1) 1,146 6,089 Other 1,677 2,204 Total 4,013 8,406 (1) Mainly composed of a compensation resulting from the final judgment in a lawsuit in Note 27. Financial income (expense), net Financial income/(expense) details are as follows: Year ended December 31, Interest expense (4,009) (4,419) Interest income 4,084 3,238 Foreign exchange transaction gains (losses) Foreign exchange gains (losses), including derivative instruments not designated as cash flow hedges 798 3,240 Ineffective part of derivative instruments Cash flow hedges (hedging) (2,173) (4,284) Loss on sale of an availablefor-sale financial asset (730) Other financial income (expense), net (946) 3,751 ( * ) Financial income (expense), net (2,246) 796 ( * ) Mainly composed of a reassessment to fair-value of a financial liability relating to the subsequent acquisition of non-controlling interests.

123 Notes to the consolidated financial statements 121 Note 28. Net foreign exchange gains (losses) The exchange differences charged/credited to the income statement are as follows (see note 20): Year ended December 31, Net sales 7,069 (5,518) Cost of sales (2,048) 3,166 Financial income (expense), net (1,375) (1,044) Net foreign exchange gains (losses) 3,646 (3,396) Foreign exchange gains or losses arising from the Company s qualified hedges under IAS 39 are recorded in sales if the underlying net exposure is positive (net selling position) and in cost of sales if the underlying net exposure is negative (net buying position). The changes in the net deferred income tax assets (liabilities) are as follows: Year ended December 31, Beginning of the period 7,556 1,899 Acquisition of subsidiary and business (11,143) (6,550) Credited to income statement 3,999 32,248 Tax credit recognized in equity 1,252 Reclassification to liabilities held for sale 2,114 Cumulative translation adjustment 1,487 1,142 End of the period 1,899 32,105 Deferred tax assets and liabilities for the years ended December 31, 2009 and 2010 detail as follows: Note 29. Taxes Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same tax authority. Net amounts are as follows: Year ended December 31, Deferred tax assets: Deferred tax asset to be recovered after more than 12 months 7,733 38,804 Deferred tax asset to be recovered within 12 months 16,459 12,514 24,192 51,318 Deferred tax liabilities: Deferred tax liabilities due after more than 12 months (20,528) (18,799) Deferred tax liabilities due within 12 months (1,765) (414) (22,293) (19,213) Deferred tax assets (liabilities), net 1,899 32,105 Year ended December 31, Assets Loss carry-forward 1,280 37,468 Excess book over tax depreciation and amortization 3,077 5,212 Employee and retirement benefits 4,298 4,877 Warranty reserves and accruals 1,575 1,716 Other temporary differences 13,962 20,671 Total Assets 24,192 69,944 Liabilities Excess tax over book depreciation and amortization (19,657) (30,459) Other temporary differences (2,636) (7,380) Total Liabilities (22,293) (37,839) Deferred tax assets (liabilities), net 1,899 32,105 The income tax credit (expense) is as follows: Year ended December 31, Current tax (21,424) (28,377) Deferred tax 3,999 32,248 (17,425) 3,871 Financial statements

124 122 Financial statements Gemalto Annual Report 2010 The reconciliation between the income tax credit (expense) on Gemalto s profit (loss) before tax and the amount that would arise using the tax rate applicable in the country of incorporation of the Company (i.e. the Netherlands), is as follows: Year ended December 31, % % Profit (loss) before income tax 132, , Tax calculated at the rate of the holding company (33,894) (25.5) (42,312) (25.5) Effect of difference in nominal tax rate between the holding and the consolidated entities 9,049 12,224 Effect of the reassessment of the recognition of deferred tax assets (923) 35,660 Effect of utilization of tax assets not recognized in prior years 26,000 12,410 Effect of unrecognized deferred tax assets arising in the year (4,917) (6,494) Other permanent differences (12,740) (7,617) Income tax credit (expense) (17,425) (13.1) 3, In 2010, the Company recorded an income tax credit of 3.9 million on a pretax profit of million, inclusive of a 32.2 million reassessment in relation to the recognition of a deferred tax asset on loss carry forwards for France. Deferred income tax assets are recognized for tax loss carry forwards and other future deductions to the extent that the realization of the related tax benefit through the future taxable profits is probable. Note 30. Earnings per share Year ended December 31, Basic Profit attributable to equity holders of the Company 114, ,920 Weighted average number of ordinary shares outstanding (thousands) 82,520 83,031 Basic earnings per share Year ended December 31, Diluted Profit attributable to equity holders of the Company 114, ,920 Weighted average number of ordinary shares outstanding (thousands) 82,520 83,031 Dilution from share options (thousands) 1,269 1,369 Weighted average number of ordinary shares for diluted earnings per share (thousands) 83,789 84,400 Diluted earnings per share The Company presents both basic and diluted earnings per share (EPS) amounts. Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated according to the Treasury Stock method by dividing net income by the average number of common shares outstanding assuming dilution. Dilution is determined assuming that all share options, which are in the money, are exercised at the beginning of the period and the proceeds used, by the Company, to purchase shares at the average market price for the period. As of December 31, 2010, Gemalto did not recognize tax assets amounting to million ( 444 million as of December 31, 2009) relating to tax losses and other future tax deductions. Of this amount, million (1) related to tax loss carry forwards amounting to 1,031.3 million (2) of which million can be used indefinitely. In 2009, those amounts were million, 1,339 million and 1,249 million respectively. Deferred income tax liabilities have been recognized for withholding taxes and other tax payables according to applicable laws on the unremitted earnings of subsidiaries when Gemalto does not intend to reinvest its earnings and when such taxes cannot be recovered. Deferred taxes are accrued on unremitted earnings of associates when Gemalto does not control the dividend distribution process. (1) Including million ( million in 2009) related to Gemplus International S.A. (Luxemburg) tax loss carry forwards. (2) Including million ( million in 2009) related to Gemplus International S.A. (Luxemburg)

125 Notes to the consolidated financial statements 123 Note 31. Cash generated from operations Year ended December 31, Notes Profit for the period including Non-controlling interests 118, ,378 Adjustment for: Tax 29 17,425 (3,871) Research tax credit (9,013) (12,305) Depreciation and impairment 8 41,784 48,191 Amortization 9 35,982 37,098 Gemalto Employee Share Purchase Plan discount Share-based payment expense 13,225 19,254 Gains and losses on sale of fixed assets and write-offs Gains and losses on sale of assets held for sale (795) Gains and losses on sale of available-for-sale financial assets 730 Gains and losses on sale of investment in affiliate (182) Gains and losses on sale of investment in associate (78) Loss on sale of a discontinued operation, net of tax 11 3,087 Cumulated translation adjustment transferred to financial income upon liquidation of consolidated entities 3,991 (197) Net movement in provisions and other liabilities (7,042) (25,994) Employee benefit obligations (556) 1,164 Interest income 27 (4,084) (6,989) Interest expense and other financial expense 27 5,509 4,419 Share of profit from associates 10 (1,380) (1,717) Changes in current assets and liabilities (excluding the effects of acquisitions and exchange differences in consolidation): Inventories 19,994 (4,390) Trade & other receivables 33,183 (46,632) Derivative financial instruments (1,684) 4,160 Trade & other payables (42,372) 8,727 Cash generated from operations 223, ,944 Financial statements

126 124 Financial statements Gemalto Annual Report 2010 Note 32. Related party transactions a) Key Management compensation The compensation of key management personnel (persons having the authority and responsibility for planning, directing and controlling the activities of the Company, directly or indirectly, including any Board member whether Executive or Non-executive of the Company) paid in 2009 and 2010 by the Company is summarized as follows: Year ended December 31, Salaries and other short term employee benefits 6,606 9,036 Share-based compensation charge 5,835 9,367 Total expenses 12,441 18,403 b) Purchases of goods and services Gemalto and its affiliates are buying computer equipment from Dell. In 2010, the Company purchased some 1,567 ( 3,893 in 2009) of equipment under existing agreements. Mr. Alex Mandl, who has been the Company s Non-Executive Chairman of the Board of Directors since December 2, 2007, is also a director of Dell Computer Corporation. Mr. Mandl had no involvement in this transaction. DataCard Corporation is a related party to certain individual members of the Quandt Family who themselves control entities which have been shareholders of the Company since June 2, In 2010, the Company purchased some 2,022 of equipment and services under existing agreements ( 2,742 in 2009). Neither the members nor the representatives of the Quandt Family entities were involved in this transaction. In 2010, total purchases from associated companies amounted to 2,418 ( 255 in 2009). c) Sales of goods and services In 2010, total sales to related parties amounted to 38 ( 0 in 2009). In 2010, total sales to associated companies amounted to 5,776 ( 7,187 in 2009). d) Year-end balances arising from sales/purchases of goods and services: Year ended December 31, Receivables from: Associates 1,430 1,464 Related parties 0 6 Total receivables 1,430 1,470 Payables to: Associates Related parties 1, Total payables 1, Note 33. Commitments and contingencies Legal proceedings The Company is subject to legal proceedings, claims and legal actions arising in the ordinary course of business. The Company s management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company s consolidated financial position, results of operations or cash flows. Schlumberger residuals Pursuant to the terms of the Master Separation Agreement signed on March 19, 2004, Schlumberger and the Company agreed to carry out the complete transfer of the Schlumberger group s Cards and POS businesses to the Company or one of its subsidiaries. These undertakings remain in effect as long as there are contracts, assets or liabilities falling within the scope of the Company s business that have not been transferred at the time of the Separation. This also applies to contracts, assets or liabilities falling within the scope of Schlumberger s business that have not been transferred at that same time. Until the date of transfer of these contracts, assets or liabilities to the Company or to Schlumberger or in the event that they could not be transferred or shall not be transferred as agreed by the parties, Schlumberger and the Company have agreed to cooperate and execute the contracts or manage the assets and liabilities in the name of and for the account of the other party, pursuant to the instructions of such party, who will receive all profits and bear all losses resulting from these contracts, assets and liabilities.

127 Notes to the consolidated financial statements 125 Therefore, the activities, assets and liabilities pertaining to Schlumberger activities falling under the provisions of the Master Separation Agreement are not disclosed in the accompanying consolidated financial statements of the Company nor is the associated payable from the Company to Schlumberger or the associated receivable by the Company from Schlumberger. However, one legal action is reported here below. Any liability arising from this action will be assumed by Schlumberger under the applicable provisions of the Master Separation Agreement. Accordingly, the Company has not made any provision in respect of this matter. In 2002, a 12.5 million claim was brought against Gemalto in front of the Brussels commercial court by a distributor for damages suffered and costs incurred resulting from the Company s alleged failure to deliver POS terminal software on time and to provide agreed specifications. The court ordered a report by a technical expert. The expert s final report issued in July 2007 established damages at 2,376. As of December 31, 2010, the balance of the assets and liabilities belonging to Schlumberger was nil. Lease commitments Minimum rental lease commitments under non-cancelable operating leases, primarily real estate and office facilities in effect as of December 31, 2010, are as follows: Microprocessor chip purchase commitments Gemalto is committed by contracts with its suppliers of chips to purchase the whole quantity of products in safety stocks within a period of time of one year from the availability date of the safety stocks. As at December 31, 2010, the commitments to purchase these safety stocks valued at the average purchase price amounted to 32,962 ( 28,439 in 2009). Gemalto N.V. guarantees Gemalto N.V. has issued a guarantee of GBP17.7 million (equivalent to 20.7 million) granted to the trustees of the Gemplus Ltd Staff Pension Scheme for the funding deficit of the pension plan. Shanghai Axalto IC Card Technologies Co., Ltd commitment Gemalto holds a 82.85% interest in Shanghai Axalto IC Card Technologies Co., Ltd, a Chinese joint venture. This joint venture is fully consolidated. Gemalto and the joint venture partners agreed that Gemalto guaranteed the profit of the joint venture would not be less than Chinese Renminbi 18 million (approximately 2 million) for 2010, 2011 and In exchange, Gemalto was granted and shall exercise control of the joint venture until December 31, This liability towards the non-controlling interest has been recognized at fair value for Chinese Renminbi 9.2 million (approximately 1 million) as at December 31, 2010, and the liability will be re-valued at the end of each reporting date. Year ended December 31, Not later than 1 year 19,333 22,170 Later than 1 year and not later than 5 years 55,375 53,596 Later than 5 years 36,976 26, , ,786 Bank guarantees As at December 31, 2010, bank guarantees, mainly performance and bid bonds, amounted to 48 million. These guarantees have been issued as part of the Group s normal operations in order to secure the Group s performance under contracts or tenders for business. These guarantees become payable based upon the non-performance of the Group. Note 34. Dividends Amounts in this note are stated in Euro. The Annual General Meeting of May 19, 2010 has approved the distribution of a 20,843,844 dividend in respect of the financial year This represents a dividend of 0.25 per share. Note 35. Post-closing events In February 2011, Gemalto finalized the signature of three additional bilateral revolving credit facilities for a total amount of 90 million, maturing in February 2016 and with no financial covenant. Those facilities complement the existing bilateral revolving credit facilities arranged in December 2010 (see note 16). With a total of 300 million credit lines, all not requiring to comply with any financial ratio, Gemalto has reinforced its financial flexibility and extended the maturity of its financial resources. Financial statements To management s knowledge, there is no significant event that occurred since December 31, 2010 which would materially impact the consolidated financial statements.

128 126 Financial statements Gemalto Annual Report 2010 Note 36. Consolidated entities The consolidated financial statements as of December 31, 2010 include the accounts of Gemalto N.V. and the following entities: Country of incorporation Company name Percentage of Group voting rights Argentina Gemalto Argentina S.A. 100% Australia Gemalto Pty Ltd 100% Australia Multos International Pty Ltd 100% Australia Netsize Australia PTY Ltd 86% Belgium Gemplus N.V. 100% Belgium Gemventures 1 N.V. 100% Brazil Cinterion Brazil Comércio de Produtos Eletrônicos e Assistência 100% Técnica Ltda. Brazil Gemalto do Brasil Cartoes e Terminais Ltda 100% British Virgin Islands Axalto Cards & Terminals Ltd 100% British Virgin Islands Axalto Technology Ltd 100% Canada Cinterion Wireless Modules Canada Inc. 100% Canada Gemalto Canada, Inc 100% Canada Solutions Fides ( * ) 49% China Axalto Smart Cards Technology Co. Ltd 100% China Cinterion Wireless Communication Technology (Shanghai) Co., Ltd 100% China Gemalto Technologies (Shanghai) Co. Ltd 100% China Gemplus (Beijing) Electronics Research and Development Co. Ltd 100% China Gemplus (Tianjin) New Technologies Co. Ltd 100% China Gemplus International Trade (Shanghai) Co. Ltd 100% China Shanghai Axalto IC Card Technologies Co. Ltd 83% China Tianjin Gemplus Smart Cards Co. Ltd 51% China Todos Qingdao Co. Ltd 100% China Zhuhai Goldpac SecurCard Co. Ltd 67% Colombia Gemalto Colombia S.A. 100% Czech Republic Gemalto S.R.O. 100% Czech Republic Gemplus S.R.O. 100% Denmark Gemalto Danmark A/S 100% Egypt Makxalto Advanced Card Technology Co. ( * ) 34% Finland Gemalto Nordic Oy 100% Finland Gemalto Oy 100% Finland Valimo Wireless Oy 100% France Axalto Participations S.A.S. 100% France Bantry Technologies S.A.S. 100% France CP8 Technologies S.A. 100% France Gemalto International S.A.S. 100% France Gemalto S.A. 100% France Gemalto Treasury Services S.A. 100% France Gkard S.A.S. ( * ) 50% France Netsize S.A. 86% France OpenTrust S.A. ( * ) 20% France Setelis S.A. ( * ) 22% France SLP S.A.S. 100% France Trusted Labs S.A.S.U. 100% France Trusted Logic S.A. 100%

129 Notes to the consolidated financial statements 127 Country of incorporation Company name Percentage of Group voting rights Germany Celo Communications GmbH 100% Germany Cinterion Wireless Modules GmbH 100% Germany CLM GmbH & Co. KG ( * ) 50% Germany CLM GmbH ( * ) 50% Germany Gemalto GmbH 100% Germany Netsize Deutschland GmbH 86% Germany O3SIS Information Technologies AG 100% Gibraltar Zenzus Holdings Ltd 100% Hong Kong Gemalto Technologies Asia Ltd 100% Hong Kong Gemplus Goldpac Group Ltd 67% Hong Kong Goldpac Datacard Solutions Co. Ltd 67% Hungary Gemalto Hungary Commercial and Services Ltd 100% Hungary Netsize KFT 83% India Cinterion Wireless Modules India Private Limited 100% India Gemalto Digital Security Ltd 100% India Gemalto Terminals India Private Ltd 100% India Gemplus India Private Ltd 100% Indonesia PT Gemalto Indonesia 100% Indonesia PT Gemalto Smart Cards 100% Ireland Celocom Ltd 100% Ireland Trusted Logic Ltd 100% Israel Trivnet Ltd 100% Italy Gemalto SPA 100% Italy Netsize Italia SRL 86% Japan Gemalto KK 100% Japan SPOM Japan Co.Ltd 100% Japan Toppan Gemalto Services Co. Ltd ( * ) 50% Japan Trivnet Japan Ltd 100% Luxemburg Gemplus International S.A. 100% Malaysia Axalto International Ltd 100% Malaysia Gemalto Sdn Bhd 100% Mexico Conrena S.A. de CV ( * ) 20% Mexico CP8 Mexico S.A. de CV 100% Mexico Gemalto Mexico S.A. de CV 100% Netherlands Antilles Cards & Terminals N.V. 100% New Zealand Serverside Graphics (NZ) Limited 50% Norway Gemalto Norge AS 100% Philippines Gemalto Philippines Inc. 100% Poland Gemalto Sp. z o.o 100% Poland Gemplus Sp. z o.o 100% Russia Gemalto LLC 100% Senegal Gemalto Senegal S.A.R.L. 100% Singapore Gemalto Holding Pte Ltd 100% Singapore Gemalto Pte Ltd 100% Singapore Gemplus Asia Pacific Pte Ltd 100% Singapore Multos International Pte Ltd 100% Financial statements

130 128 Financial statements Gemalto Annual Report 2010 Country of incorporation Company name Percentage of Group voting rights Singapore Netsize SGP PTE Ltd 86% Singapore Trusted Logic Asia (Pte) Ltd 100% Singapore V3 Teletec Pte Ltd ( * ) 21% South Africa Gemalto (Pty) Ltd 100% South Africa Gemalto Southern Africa Pty Ltd 70% South Africa Netsize South Africa Proprietary Ltd 86% South Africa Trusted Logic Africa (Pty) Ltd 100% Spain Gemalto SP S.A. 100% Spain Gemplus Card International Espana S.A. 100% Spain Netsize Espana SL 85% Sweden AB Svenska Pass ( * ) 50% Sweden Gemalto AB 100% Sweden Gemalto Sverige AB 100% Sweden Netsize Swerige AB 86% Sweden Todos AB 100% Sweden Todos ecode Security AB 100% Switzerland Gemplus Management and Trading S.A. 100% Switzerland Raidax Technology S.A. ( * ) 49% Taiwan Gemalto Taiwan Co. Ltd 100% Taiwan Todos Security Asia Co. Ltd 100% Thailand Gemalto (Thailand) Ltd 100% Thailand Trivnet (Thailand) Ltd 100% The Netherlands Gemalto B.V. 100% The Netherlands Gemplus B.V. 100% Turkey Gemalto Kart ve Terminaller Ltd Sirketi 100% United Arab Emirates Gemalto Middle East FZ LLC 100% United Kingdom Axalto Cards Ltd 100% United Kingdom Gemalto Terminals Ltd 100% United Kingdom Gemalto UK Ltd 100% United Kingdom Gemplus Ltd 100% United Kingdom Maosco Ltd 100% United Kingdom Multos Ltd 100% United Kingdom Netsize UK Ltd 86% United kingdom Posdesk Ltd 100% United Kingdom Serverside Group Limited 50% United Kingdom Step Nexus Ltd 100% United States of America Cinterion Wireless Modules NAFTA LLC (Delaware) 100% United States of America Gemalto Inc. 100% United States of America Netsize Inc. 86% United States of America Serverside Graphics, Inc. 50% United States of America Trivnet Inc. 100% ( * ) Associated companies accounted for according to the equity method For all companies listed above, the percentage of ownership interest equals the percentage of voting rights with the exception of Serverside Graphics (NZ) Limited (New Zealand), Serverside Group Limited (United Kingdom), Serverside Graphics, Inc (United States of America), Netsize Australia PTY Ltd (Australia), Netsize S.A. (France), Netsize Deutschland GmbH (Germany), Netsize Italia SRL (Italy), Netsize SGP PTE Ltd (Singapore), Netsize South Africa Proprietary Ltd (South Africa), Netsize Espana SL (Spain), Netsize Swerige AB (Sweden), Netsize UK Ltd (United Kingdom), Netsize Inc. (United States of America) and Gemalto Southern Africa Pty Ltd (South Africa) for which the ownership interest is 100%, and with the exception of Netsize KFT (Hungary) for which ownership interest is 97%.

131 Company financial statements and notes 129 Company financial statements and notes 130 Company financial statements 130 Company statement of financial position 131 Company income statement 132 Company statement of changes in shareholders equity 134 Notes to the Company financial statements 134 Note 1 Significant accounting policies 134 Note 2 Intangible assets 134 Note 3 Property, plant and equipment 135 Note 4 Investments and loans 137 Note 5 Cash and cash equivalents 137 Note 6 Equity 137 Note 7 Long term debt 137 Note 8 Employees 138 Note 9 Information relating to the board 141 Note 10 Auditors fees 141 Note 11 Guarantees granted by the Company Financial statements

132 130 Financial statements Gemalto Annual Report 2010 Company statement of financial position Year ended December 31, In thousands of Euro Before appropriation of the result for the period Notes Assets Non-current assets Goodwill 2 538, ,587 Property, plant and equipment Investments in subsidiaries and associates 4 649, ,999 Long-term loans to subsidiaries 4 20,071 13,789 Total non-current assets 1,208,365 1,516,619 Current assets Short-term loans to subsidiaries 4 217,281 87,714 Receivables due from subsidiaries 4,323 5,202 Other receivables 2,790 6,140 Cash and cash equivalents 5 3,363 7,650 Total current assets 227, ,706 Total assets 1,436,122 1,623,325 Equity Issued and paid in share capital 6 88,016 88,016 Share premium 6 1,215,868 1,209,437 Legal reserves 6 7,461 15,681 Other reserves 6 (104,879) (61,886) Retained earnings 6 86, ,382 Net income for the period 6 114, ,920 Total equity 1,407,692 1,595,550 Liabilities Non-current liabilities Long-term debt 7 5,921 6,399 Provisions on investments in subsidiaries and associates 4 12,904 4,034 Total non-current liabilities 18,825 10,433 Current liabilities Short-term borrowing from a subsidiary 3,816 Payables to subsidiaries 5,582 8,652 Other payables 3,688 4,874 Bank overdraft 335 Total current liabilities 9,605 17,342 Total liabilities 28,430 27,775 Total equity and liabilities 1,436,122 1,623,325

133 Company income statement 131 Company income statement Year ended December 31, In thousands of Euro Loss after taxes (32,769) (26,135) Income from subsidiaries 147, ,055 Net income for the period 114, ,920 Financial statements

134 132 Financial statements Gemalto Annual Report 2010 Company statement of changes in shareholders equity Number of shares (1) In thousands of Euro Issued Outstanding Shareholders equity as of January 1, ,015,844 82,296,192 Movements in fair value and other reserves: Currency translation adjustments Gain/(losses) on Treasury shares Fair value gains/(losses), net of tax: Financial assets available-for-sale Variation of actuarial gains and losses in benefit obligations Cash flow hedges Transfer from Legal reserves to Other reserves Transfer from Other reserves to Legal reserves Net income recognized directly in equity Net income for the period Total recognized income for 2009 Share-based compensation expense Employee share option scheme 2,684,452 Purchase of Treasury shares, net (2,204,431) Excess of purchase price on SAIT minority interest acquisition Correction of the excess of purchase price on subsequent acquisition of Gemplus shares Excess of purchase price on subsequent acquisition of Serverside Group Limited Revaluation further to the acquisition of Trusted Logic SA Balance as of December 31, ,015,844 82,776,213 Shareholders equity as of January 1, 2010 Movements in fair value and other reserves: Currency translation adjustments Gain/(losses) on Treasury shares Fair value gains/(losses), net of tax: Financial assets available-for-sale Variation of actuarial gains and losses in benefit obligations Cash flow hedges Currency translation adjustments on fair value gains/(losses) Transfer from Other reserves to Legal reserves Net income recognized directly in equity Net income for the period Total recognized income for 2010 Share-based compensation expense Employee share option scheme 836,289 Purchase of Treasury shares, net (1,281,254) Treasury shares used for the acquisition of Todos AB 800,000 Excess of purchase price on subsequent acquisition of Netsize S.A. Dividends paid/payable to shareholders Balance as of December 31, ,015,844 83,131,248 (1) As of December 31, 2010, the difference between the number of shares issued and the number of shares outstanding corresponds to the 4,884,596 shares held in treasury.

135 Company statement of changes in shareholders equity 133 Attributable to equity holders of the Company Share capital Share premium Legal reserves Other reserves Retained earnings Total equity 88,016 1,214,429 4,447 (102,531) 84,118 1,288,479 17,107 17,107 1,006 1, (5,391) (5,391) 9,638 9,638 (4,396) 4,396 7,410 (7,410) 3,014 19,419 22, , ,796 3,014 19, , ,229 12,327 12,327 30,870 30,870 (64,964) (64,964) (1,937) (1,937) 3,843 3,843 (467) (467) 2,312 2,312 88,016 1,215,868 7,461 (104,879) 201,226 1,407,692 28,758 28, ,572 1,572 (2,402) (2,402) 1,071 1,071 (938) (938) (23,181) 23,181 8,220 20,421 28, , ,920 8,220 20, , ,561 19,447 19,447 15,604 15,604 (39,293) (39,293) 26,814 26,814 (6,431) (6,431) (20,844) (20,844) 88,016 1,209,437 15,681 (61,886) 344,302 1,595,550 Financial statements

136 134 Financial statements Gemalto Annual Report 2010 Notes to the company financial statements The Company financial statements should be read in conjunction with the consolidated financial statements. The notes below are an integral part of the Company financial statements. All amounts are stated in thousands of Euro, except per share amounts which are stated in Euro and unless otherwise mentioned. Note 1. Significant accounting policies 1.1 Basis of preparation The Company financial statements of Gemalto N.V., with its statutory seat in Amsterdam ( the Company or Gemalto ), have been prepared in accordance with the statutory provisions of Part 9, Book 2 of the Netherlands Civil Code. In accordance with subsection 8 of section 362, Book 2 of the Netherlands Civil Code, the measurement principles and determination of assets, liabilities and results applied in these Company financial statements are the same as those applied in the consolidated financial statements (see note 2 to the consolidated financial statements). The Company s financial data are included in the consolidated financial statements. As allowed by section 402, Book 2 of the Netherlands Civil Code, the income statement is presented in a condensed form. 1.2 Investments Subsidiaries are all entities (including special purpose entities) over which the Company has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Company controls another entity. Associates are all entities over which the Company has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in subsidiaries are valued at net asset value while associates are valued using the equity method. The Company calculates the net asset value using the accounting policies as described in note 2 to the consolidated accounts. The net asset value of the subsidiaries comprises the cost, excluding goodwill for subsidiaries owned directly by the Company and including goodwill for subsidiaries indirectly owned by the Company, plus the Company s share in income and losses since acquisition, less dividends received. The Company s investment in associates includes goodwill (net of any accumulated impairment loss) identified on acquisition. The Company s share of its associates and subsidiaries post-acquisition profits or losses is recognized in the income statement, and its share of post-acquisition movements in retained earnings is recognized in retained earnings. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. Investments with negative net asset value should be first deducted from loans that form part of the net investments (if any). Provision should be formed by the Company only if the Company has the firm intention to settle and that the obligations meet the criteria for recognition as provision (e.g. constructive and legal obligations, potential cash outflow, etc). Note 2. Intangible assets Goodwill January 1, ,233 Acquisition of Todos AB 38,183 Acquisition of Trivnet Ltd 24,005 Business disvestment (discontinued operation) (3,879) Currency translation adjustment 3,045 December 31, ,587 Note 3. Property, plant and equipment Leasehold improvements and office furniture and equipment January 1, 2010 Gross book value 472 Accumulated depreciation (172) Net book value movements Additions Depreciation (56) December 31, 2010 Gross book value 472 Accumulated depreciation (228) Net book value 244

137 Notes to the company financial statements 135 Note 4. Investments and loans Year ended December 31, Investments in subsidiaries and associates 649, ,999 Provisions on investments in subsidiaries and associates (12,904) (4,034) Net investments in subsidiaries and associates 636, ,965 An overview of the movements in investments and loans is presented below: Net Investments in subsidiaries Investments in associates Long-term loans Short-term loans to subsidiaries to subsidiaries January 1, ,120 1,737 20, , , movements Acquisition of Todos AB 8,617 8,617 Acquisition of Trivnet Ltd 2,000 2,000 Contributions to Gemalto GmbH 50,000 50,000 Contributions to other subsidiaries 5,928 5,928 Excess of purchase price on subsequent acquisition of Netsize S.A. (6,431) (6,431) Business disvestment (discontinued operation) 3,879 3,879 Fair value losses (697) (697) Dividends (13,769) (270) (14,039) Net result from subsidiaries 190, ,055 Net result from associates Refund of loans (8,932) (129,567) (138,499) Currency translation adjustment 22, ,650 25,379 December 31, ,366 1,599 13,789 87,714 1,000,468 Total Financial statements

138 136 Financial statements Gemalto Annual Report 2010 Loans to subsidiaries Subsidiaries Year Ended December 31, 2010 Long-term Short-term Loans Loans Gemalto LLC 900 Gemalto Treasury Services S.A. 87,714 Gemalto Namitech Pty Ltd 12,096 PT Gemalto Smart Cards Indonesia 793 Total 13,789 87,714 On April 2, 2004, the Company financed its Indian subsidiary, Gemalto Digital Security Ltd, with two interest-bearing loans denominated in US Dollars. The first loan, with a maximum facility of USD3 million, had a three-year maturity and was drawn for USD2.5 million as of December 31, 2009 ( 1.8 million as at December 31, 2009). The USD2.5 million outstanding principal amount was repaid in October 2010 and the corresponding outstanding interests were paid in August and December The second loan, with a maximum draw capacity of USD8 million, had a three and a half-year maturity and was drawn for USD7.3 million as of December 31, 2009 ( 5.1 million as at December 31, 2009). The USD7.3 million outstanding principal amount was repaid in November 2010 and the corresponding outstanding interests were paid in August and December On June 26, 2008, the Company financed a new Russian subsidiary, Gemalto LLC, with an interest-bearing loan denominated in Euro. The loan, with a maximum facility of 3.4 million, has a five-year maturity till June The balance as at December 31, 2010 amounted to 0.9 million ( 3.4 million as at December 31, 2009). On July 28, 2009, the Company financed its Indonesian subsidiary with an interest-bearing loan denominated in US Dollars (USD). The loan, with a maximum facility of USD1.1 million, has a five-year maturity till July 28, The balance as at December 31, 2010 amounted to USD1.1 million equivalent to 0.8 million (As at December 31, million). Effective November 1, 2008, the Company started to operate a new Treasury Center based in Meudon in a new entity, Gemalto Treasury Services S.A. ( GTS ) replacing the Swiss entity, Gemplus International Swiss Branch ( Swiss Branch ). The new entity has taken over the role of the former cash pool entity. The Company agreed to borrow from or lend to GTS. The agreement is valid for a time period of one year, automatically renewable for further periods of one year, if not cancelled. As at December 31, 2010, the amount borrowed from the Company amounted to 87.7 million (as at December 31, 2009, million were borrowed by the Company). On December 14, 2010, the Company concluded a loan agreement with its Curaçao subsidiary, Cards & Terminals N.V., at interest-bearing conditions. The loan, with a maximum facility of USD1.8 million has a threeyear maturity. As at December 31, 2010, no drawdown was taken. In 2008, the Company granted short term advances to Gemplus International S.A. (GISA) which were refunded in GISA shares for 12.2 million. In December 2009, GISA reduced its share capital by 79.5 million resulting in a loan payable to the Company for the same amount. This amount was repaid in January On March 18, 2009, the Company financed its South African subsidiary with a non-interest-bearing loan denominated in South African Rand (ZAR). The loan, with a maximum facility of ZAR110 million, has a five-year maturity till March 18, The balance as at December 31, 2010 amounted to ZAR106.2 million, equivalent to 12.1 million (ZAR97.2 million equivalent to 9.1 million as at 31 December 2009).

139 Notes to the company financial statements 137 Note 5. Cash and cash equivalents Cash and cash equivalents consist of the following: Year ended December 31, Cash at bank and in hand 264 4,491 Short-term bank deposits and investment funds 3,099 3,159 Total 3,363 7,650 The average effective interest rate on short term deposits was 0.31% in 2010 (0.31% in 2009). Note 6. Equity Share capital The authorized share capital of the Company amounted to 150 million as at December 31, 2010 and consisted of 150 million ordinary shares with a nominal value of 1. Issued and fully paid-in share capital amounted to 88,016 as at December 31, 2010 and 2009, and consisted of 88,015,844 ordinary shares with a nominal value of 1. Other reserves As at December 31, 2010, Other reserves mainly consisted of Treasury shares for (132,046), ( (129,640) as at December 31, 2009), stock option reserve amounting to 91,856 ( 66,992 as at December 31, 2009), net gains (losses) on Treasury shares in connection with the liquidity program for 1,448 ( 868 as at December 31, 2009), the reserve for actuarial gains and losses in benefit obligations for (3,397) ( (995) as at December 31, 2009) and related cumulative translation adjustments for (938), and a loss on Treasury shares canceled for the share capital reduction in 2008 for (18,923). The cumulative translation adjustment amounting to (22,879) and the accumulated fair value adjustment on financial assets available-for-sale amounting to (302) as at December 31, 2009 have been transferred to Legal reserves as they became positive. Retained earnings (including net income for the period) Retained earnings amounted to 344,302 as at December 31, 2010 ( 201,226 as at December 31, 2009). Note 7. Long term debt Share premium As at December 31, 2010, the share premium amounted to 1,209,437 ( 1,215,868 as at December 31, 2009). In 2010, share premium decreased by 6,431 due to the excess purchase price on subsequent acquisition of Netsize S.A. (see note 4 to the consolidated financial statements). Legal reserves Movements in legal reserves, which cannot be distributed freely, are presented below: Income recognized directly in equity Undistributable results of Group companies Total January 1, , , movements 31,401 31,401 Transfers (23,181) (23,181) December 31, , ,681 Year ended December 31, Other financial liability 5,921 6,399 Total 5,921 6,399 This debt relates to the anticipated acquisition of an additional 49.9% interest in Serverside (SSGL). Note 8. Employees The average number of staff employed by the Company during 2010 was 10.5 (2009: 9). None of these employees was employed abroad (2009: nil). Financial statements Pursuant to section 373, Book 2 of the Netherlands Civil Code, the part of retained earnings in relation to non-distributable results of Group companies and associates (including pension reserves) and cash flow hedges (if their balances are positive) are legal reserves. As at December 31, 2010, Income recognized directly in equity mainly consisted of cumulative translation adjustments for 5,880, cash flow hedges for 8,481 and fair value adjustments on financial assets available-for-sale for 1,270. The transfer is mainly due to the transfer from Other reserves of the reserves for fair value adjustment on financial assets available-for-sale and the cumulative translation adjustment (as they became positive in 2010).

140 138 Financial statements Gemalto Annual Report 2010 Note 9. Information relating to the Board Amounts in this note are stated in Euro. Remuneration of the Board The Board currently consists of ten Board members: nine Non-executive Board members and one Executive Board member, the CEO. At the 2010 Annual General Meeting (AGM), Mr. D. Bonderman resigned from his position as Non-executive Board member. At the 2010 AGM, Mr. Ph. Alfroid was appointed as Non-executive Board member for a first term ending at the end of the AGM to be held in At the 2011 AGM, the present term of Messrs. A. Mandl and M. Soublin will end. The Board will propose to the 2011 AGM the reappointment of Mr. A. Mandl as Non-executive Board member for a second term and the reappointment of Mr. M. Soublin as Non-executive Board member for a third term, both terms ending at the end of the 2015 AGM. Gemalto Board Board member fee per annum Board committee fee per annum Remuneration from January 1 until December 31, 2009 Fiscal year 2009 Alex Mandl Non-executive Chairman 200,000 12, ,000 Olivier Piou Chief Executive Officer 35,000 35,000 Kent Atkinson Non-executive Board member 65,000 24,000 89,000 David Bonderman Non-executive Board member 65,000 8,000 73,000 Geoffrey Fink Non-executive Board member 65,000 16,000 81,000 Johannes Fritz Non-executive Board member 65,000 28,000 93,000 John Ormerod Non-executive Board member 65,000 32,000 97,000 Michel Soublin Non-executive Board member 65,000 24,000 89,000 Buford Alexander Non-executive Board member 40,247 4,953 45,200 Arthur van der Poel Non-executive Board member 65,000 20,000 85,000 Total 730, , ,200 Gemalto Board Board member fee per annum Board Committee fee per annum Remuneration from January 1 until December 31, 2010 Fiscal year 2010 Alex Mandl Non-executive Chairman 200,000 12, ,000 Olivier Piou Chief Executive Officer 35,000 35,000 Kent Atkinson Non-executive Board member 65,000 24,000 89,000 David Bonderman Non-executive Board member 65,000 8,000 73,000 Geoffrey Fink Non-executive Board member 65,000 16,000 81,000 Johannes Fritz Non-executive Board member 65,000 28,000 93,000 John Ormerod Non-executive Board member 65,000 32,000 97,000 Michel Soublin Non-executive Board member 65,000 16,000 81,000 Buford Alexander Non-executive Board member 65,000 8,000 73,000 Philippe Alfroid Non-executive Board member 40,425 8,066 48,491 Arthur van der Poel Non-executive Board member 65,000 20,000 85,000 Total 795, , ,491

141 Notes to the company financial statements 139 The remuneration of the Non-executive Board members, including the remuneration of the Chairman of the Board and the members of the Board committees, is determined by the General Meeting. The remuneration is reviewed from time to time by the Compensation committee. The remuneration structure for the Non-executive Board members (per calendar year) is as follows: 200,000 per calendar year for the Non-executive Chairman of the Board; 65,000 per calendar year for each other Non-executive Board member; an additional fee of 24,000 per calendar year for the chairman of the Audit committee and an additional fee of 16,000 per calendar year for each member of the Audit committee; an additional fee of 12,000 per calendar year for the chairman of the other Board committees and an additional fee of 8,000 per calendar year for the other members of those Board committees. In addition to the remuneration mentioned above, the Board members received income in kind amounting to 6,423 in The remuneration paid by the Company or by companies of the Group to the CEO, Mr. O. Piou, for the 2010 financial year is as follows: Total Reference Compensation Bonus (percentage of on target Variable Incentive) Total gross compensation paid for 2010 O. Piou ( * ) 668, % 1,817,646 ( * ) Including Board member fees. Mr. O. Piou was appointed as CEO in 2004 for a term of four years ending at the end of the AGM of May 14, He was reappointed as Board member with the title of CEO for a term of four years until the AGM of Mr. O. Piou has an employment contract (originally dated 1981), not limited in time, governed by French law with Gemalto International S.A.S., a Gemalto subsidiary and he enjoys any and all benefits that may be applicable to French employees. He has a six-month notice period. Share options granted to Board members Share options have been attributed under the Global Equity Incentive Plan as described in note 25 to the consolidated financial statements. Date of attribution Number Exercise price ( ) Fair value of share options granted ( ) Date of exercise Alex Mandl June , ,052, months after the attribution Olivier Piou May , ,230,662 4 years after the attribution Sept , ,099,745 4 years after the attribution June , ,269,781 4 years after the attribution Sept , ,049,761 4 years after the attribution Financial statements

142 140 Financial statements Gemalto Annual Report 2010 On September 27, 2007, the Board granted restricted share units to Mr. O. Piou with a performance criteria based on the stock market value of the Gemalto shares. The number of restricted share units may vary from 0 up to 80,000 with a maximum multiplier of three in case of exceptional performance. On September 25, 2008, the Board recognized that, according to the vesting conditions, 66% of the granted restricted share units had vested on September 9, On November 13, 2009, the Board recognized that, according to the vesting conditions, an additional 84% of the granted share units had vested on November 6, In October 2009, the Board of Gemalto N.V. granted to Mr. O. Piou 65,000 restricted share units. The vesting period ends on October 2, Vesting conditions are both service-based and performance-based. If vesting conditions are met, restricted share units will be exchanged against Gemalto shares and the ratio of exchange will depend on the achievement of adjusted EBIT margin targets. The Gemalto shares resulting from the exchange, if any, will not be transferred to Mr. O. Piou before the end of a 2-year period starting on the date of the exchange, and he is not allowed to trade those shares during the 2-year period starting on the date of the transfer. On March 2, 2010, the Board recognized that the performance-based vesting condition had been met. In March 2010, the Board granted restricted share units to Mr. O. Piou with a performance criteria based on the stock market value of the Gemalto shares. The number of restricted share units may vary from 0 up to 32,500 with a maximum multiplier of two in case of exceptional performance. The vesting period ends on March, Vesting conditions are both service-based and performance-based. If vesting conditions are met, restricted share units will be exchanged against Gemalto shares and the ratio of exchange will depend on the achievement of Profit from Operation. The Gemalto shares resulting from the exchange, if any, will not be transferred to Mr. O. Piou before the end of a 2-year period starting on the date of the exchange, and he is not allowed to trade those shares during the 2-year period starting on the date of the transfer. The gross compensation paid for 2010 (disclosed in section Remuneration of the Board of this note) excludes share-based compensation charge. Share-based compensation charge related to Mr. O. Piou s share options and restricted shares amounted to 2,123,334 in 2010 ( 1,682,273 in 2009). No charge was recorded during the period in relation with Mr. A. Mandl s share options (no charge in 2009 neither). There is no forfeited share option in Gemalto shares held by Board Members Gemalto shares Certain Board members are shareholders of the Company. On December 31, 2010, they jointly held 371,300 shares, of which Mr. O. Piou owned 367,000 shares. Mr. G. Fink owned 2,800 shares resulting from the exchange of Gemplus shares following the voluntary public exchange offer for the shares of Gemplus (the Offer ) and Mr. M. Soublin owned 1,500 shares purchased in FCPE units On December 31, 2010, Mr. O. Piou owned 4, units in a FCPE (Fonds Commun de Placement d Entreprise), which units were purchased by his contribution to the Global Employee Share Purchase Plans in 2004, 2005, 2008 and Restricted Share Units On December 31, 2010, Mr. O. Piou held a maximum of 250,000 RSU. Gemalto share options On December 31, 2010, Mr. O. Piou held 800,000 Gemalto share options, and Mr. A. Mandl (through a company controlled by him) held 200,000 Gemalto share options. Gemplus share options On December 31, 2010, the following Board members held Gemplus share options: Mr. A. Mandl held 4,520,800 (through a company controlled by him) and Mr. J. Fritz held 11,302. At a ratio of 25/2, those Gemplus share options can be exercised for Gemplus shares that can be exchanged for Gemalto shares at the same 25/2 ratio, resulting in 361,664 Gemalto shares for Mr. A. Mandl and 904 Gemalto shares for Mr. J. Fritz.

143 Notes to the company financial statements 141 Note 10. Auditors fees The aggregate fees billed by the external auditors, Pricewaterhouse Coopers, for professional services rendered for the fiscal years 2009 and 2010 were are follows: 2009 Fee PWC Accountants N.V. Fee other PWC offices Total fee PWC Audit of the financial statements 100 2,194 2,294 Other audit procedures Fees relating to tax advice Other non-audit fees Total 142 2,692 2, Fee PWC Accountants N.V. Fee other PWC offices Total fee PWC Audit of the financial statements 100 2,516 2,616 Other audit procedures Fees relating to tax advice Total 100 3,143 3,243 The Board Mr. Alex Mandl Non-executive Chairman of the Board Mr. Olivier Piou Executive Board member and Chief Executive Officer Mr. Buford Alexander Non-executive Board member Mr. Kent Atkinson Non-executive Board member Mr. Philippe Alfroid Non-executive Board member Mr. Geoffrey Fink Non-executive Board member Mr. Johannes Fritz Non-executive Board member Note 11. Guarantees granted by the Company Gemalto N.V. guarantees Gemalto N.V. has issued a guarantee of GBP 17.7 million (equivalent to 20.7 million) granted to the trustees of the Gemplus Ltd Staff Pension Scheme for the funding deficit of the pension plan. Lease commitments Minimum rental lease commitments under non-cancelable operating leases, primarily real estate and office facilities in effect as of December 31, 2010, are as follows: 2010 Not later than 1 year 263 Later than 1 year and not later than 5 years 391 Later than 5 years Total 644 Mr. John Ormerod Non-executive Board member Mr. Arthur van der Poel Non-executive Board member Mr. Michel Soublin Non-executive Board member Amsterdam, March 8, 2011 (A signed version of The Annual Report is available at the Company s office) Financial statements

144 Contactless mobile payment in France The convergence of mobile communication and banking is enabling businesses to offer convenient new services to their customers. Near-Field Communication (NFC) marks a genuine revolution in payment, and 2010 saw the first commercial launch of its kind in Europe. The project in Nice, France, saw Gemalto joining forces with mobile operators, banks, transport operators and retailers. It allows people to use their NFC-enabled mobile phones to make payments at restaurants, supermarkets and shops, as well as the city s transport networks. They can also access information at museums and the university campus. For more information see page 22 For more information visit

145 144 Auditor s report 145 Appropriation of profit 146 Post-closing events 147 Adjusted measures 150 Investor information 152 Glossary of digital security terms Other information

146 144 Other information Gemalto Annual Report 2010 Auditor s report Independent auditor s report on statutory financial statements To: the General Meeting of Shareholders of Gemalto N.V. Report on the financial statements We have audited the accompanying financial statements 2010 as set out on pages 76 to 141 of Gemalto N.V., Amsterdam, which comprise the consolidated and company statement of financial position as at 31 December 2010, the consolidated and company income statement, the statements of comprehensive income, changes in equity and cash flows for the year then ended and the notes, comprising a summary of significant accounting policies and other explanatory information. Board of directors responsibility The board of directors is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Dutch Civil Code, and for the preparation of the directors report in accordance with Part 9 of Book 2 of the Dutch Civil Code. Furthermore, the board of directors is responsible for such internal control as it determines is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Dutch law, including the Dutch Standards on Auditing. This requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the company s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the board of directors, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion with respect to consolidated financial statements In our opinion, the consolidated financial statements give a true and fair view of the financial position of Gemalto N.V. as at 31 December 2010, and of its result and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Dutch Civil Code. Opinion with respect to company financial statements In our opinion, the company financial statements give a true and fair view of the financial position of Gemalto N.V. as at 31 December 2010, and of its result for the year then ended in accordance with Part 9 of Book 2 of the Dutch Civil Code. Report on other legal and regulatory requirements Pursuant to the legal requirement under Section 2: 393 sub 5 at e and f of the Dutch Civil Code, we have no deficiencies to report as a result of our examination whether the directors report as included in this annual report which comprises of sections Our Vision, Segmental Review, Group Financial and Operating Review and Governance, to the extent we can assess, has been prepared in accordance with Part 9 of Book 2 of this Code, and whether the information as required under Section 2: 392 sub 1 at b-h has been annexed. Further we report that the directors report, to the extent we can assess, is consistent with the financial statements as required by Section 2: 391 sub 4 of the Dutch Civil Code. The Hague, 8 March 2011 PricewaterhouseCoopers Accountants N.V. Original signed by Fernand Izeboud RA

147 Appropriation of profit 145 Appropriation of profit Profit appropriation according to the Articles of Association Stipulations relating to the distribution of profits and dividends by the Company to its shareholders are provided in articles 32 to 35 of the Articles of Association. Distribution of profits shall be made following adoption of the annual accounts which show that the distribution is permitted. The Company may only make distributions to shareholders and other persons entitled to distributable profits to the extent that its equity exceeds the total amount of its issued capital and the reserves which must be maintained by law. The Board shall with due observance of the policy of the Company on additions to reserves and on distributions of profits determine what portion of the profit shall be retained by way of reserve, having regard to the legal provisions relating to obligatory reserves. The portion of the profit that shall not be reserved shall be at the disposal of the General Meeting of Shareholders. Subject to section 105, subsection 4, Book 2, Civil Code and with due observance of the policy of the Company on additions to reserves and on distributions of profits, the Board may at its own discretion resolve to distribute one or more interim dividends before the annual accounts for any financial year have been adopted at a General Meeting of Shareholders. Appropriation of result The Board has determined with due observance of the Company s policy on additions to reserves and on distributions of profits to propose to the 2011 General Meeting of Shareholders to distribute a dividend in cash of 0.28 per share in respect of the 2010 financial year and to allocate the remaining result for the period to the reserves. Upon the proposal of the Board, the General Meeting of Shareholders shall be entitled to resolve to make distributions charged to the share premium reserve or charged to the other reserves shown in the annual accounts not prescribed by the law. The Board may determine the terms and conditions of distributions to shareholders and may grant to shareholders the option to choose between distribution in whole or in part in the form of shares in the share capital of the Company (bonus shares, stock dividend), subject to having obtained the authorization of the General Meeting of Shareholders to issue shares. If, however, such designation is not in force, any distributions in the form of shares in the share capital of the Company require a resolution of the General Meeting of Shareholders upon the proposal of the Board. Other information

148 146 Other information Gemalto Annual Report 2010 Post-closing events In February 2011, Gemalto finalized the signature of three additional bilateral revolving credit facilities for a total amount of 90 million, maturing in February 2016 and with no financial covenant. Those facilities complement the existing bilateral revolving credit facilities arranged in December 2010 (see note 16). With a total of 300 million credit lines, all not requiring to comply with any financial ratio, Gemalto has reinforced its financial flexibility and extended the maturity of its financial resources. To management s knowledge, there is no significant event that occurred since December 31, 2010 which would materially impact the consolidated financial statements.

149 Adjusted measures 147 Adjusted measures Adjusted income statement and profit from operations non-gaap measure The consolidated financial statements are prepared in accordance with the International Financial Reporting Standards. To better assess its past and future performance, the Company also prepares an adjusted income statement where the key metric used to evaluate the business and take operating decisions over the period 2010 to 2013 is the profit from operations. Profit from operations (PFO) is a non-gaap measure defined as the IFRS operating result adjusted for the amortization and depreciation of intangibles resulting from acquisitions, for equity-based compensation charges, and for restructuring and acquisition-related expenses. These items are further explained as follows: Amortization and depreciation of intangibles resulting from acquisitions are defined as the amortization and depreciation expenses related to the intangibles recognized as part of the allocation of the excess purchase consideration over the share of net assets acquired. Equity-based compensation charges are defined as (i) the discount granted to employees acquiring Gemalto shares under Gemalto Employee Stock Purchase plans; and (ii) the amortization of the fair value of stock options and restricted share units granted by the Board of Directors to employees, and the related costs. Restructuring and acquisitions-related expenses are defined as (i) restructuring expenses which are the costs incurred in connection with a restructuring as defined in accordance with the provision of IAS 37 (e.g. sale or termination of a business, closure of a plant, ), and consequent costs; (ii) reorganization expenses defined as the costs incurred in connection with headcount reductions, consolidation of manufacturing and offices sites, as well as the rationalization and harmonization of the product and service portfolio, and the integration of IT systems, consequent to a business combination; and (iii) transaction costs (such as fees paid as part of the acquisition process) which were previously capitalized as part of the cost of an acquisition under previous IFRS versions. These non-gaap financial measures are not meant to be considered in isolation or as a substitute for comparable IFRS measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with IFRS. In the adjusted income statement, Operating Expenses are defined as the sum of Research and Engineering, Sales and Marketing and General and Administrative expenses, and Other income (expense) net. EBITDA is defined as PFO plus depreciation and amortization expenses, excluding the above amortization and depreciation of intangibles resulting from acquisitions. Return on capital employed (ROCE) is defined as after-tax PFO divided by capital employed. Adjusted income statement for ongoing operations For a better understanding of the current and future year-on-year evolution of the business, the Company also provides an adjusted income statement for the ongoing operations. Ongoing operations The adjusted income statement for Ongoing operations not only excludes, as per the IFRS income statement, the contribution from discontinued operation to the income statement, but also the contribution from assets classified as held for sale. Assets held for sale The assets of one of the Company joint ventures (the JV ) active in China in Secure Transactions and Security have been classified as held for sale due to the shareholding restructuring in process with the partner. As per IFRS, the assets and corresponding liabilities are isolated in the balance sheet and reported as held for sale. Continuing operations The IFRS Continuing operations comprises the above Ongoing operations and Assets held for sale. Discontinued operation The disposal of the Company business in point of sale ( POS ) terminals was effective on December 31, As per IFRS, the contribution of this activity to the IFRS income statement is reclassified for both 2009 and 2010 reporting periods and its net contribution is presented on the line item Profit (loss) from discontinued operation (net of income tax). For 2010, this line item also comprises the net loss on the disposal of the related assets and corresponding liabilities. Consequently, in the adjusted income statement, the contribution of POS and the impact of the transaction are not included in the profit from operations. Other information

150 148 Other information Gemalto Annual Report 2010 Adjusted information for ongoing operations by segment, assets held for sales by segment, adjusted financial information and discontinued operation In thousands of Euro Mobile Communication M2M Ongoing operations: Secure Transactions Security Others Adjusted financial information for ongoing operations Assets held for sale: Secure Transactions (JV) Security (JV) Adjusted financial information Year ended December 31, 2009 Discontinued operation: Adjusted financial information as reported previously Revenue 888, , ,978 24,484 1,559,950 29,963 12,102 1,602,015 52,354 1,654,369 Gross profit 383,452 99,115 85,237 6, ,821 9,477 4, ,804 14, ,848 Operating expenses (232,753) (87,281) (81,091) (2,259) (403,384) (3,347) (384) (407,115) (11,414) (418,529) Profit from operations 150,699 11,834 4,146 3, ,437 6,130 4, ,689 2, ,319 Others (POS) Reconciliation between adjusted financial information and IFRS financial information In thousands of Euro Adjusted financial information for ongoing operations Contribution from JV and POS Adjusted financial information Year ended December 31, 2009 Adjustments IFRS financial information Revenue 1,559,950 42,065 1,602,015 (122) 1,601,893 Cost of sales (986,129) (28,082) (1,014,211) (1,709) (1,015,920) Gross profit 573,821 13, ,804 (1,831) 585,973 Operating expenses Research and engineering (91,114) (178) (91,292) (1,017) (92,309) Sales and marketing (223,651) (3,193) (226,844) (4,631) (231,475) General and administrative (92,199) (793) (92,992) (6,488) (99,480) Other income (expense), net 3, ,013 4,013 Profit from operations (PFO) 170,437 10, ,689 Equity-based compensation charges (13,967) Restructuring & acquisition-related expenses (9,316) (9,316) Amortization and depreciation of intangibles resulting from acquisitions (23,699) (23,699) Operating result (EBIT) (46,982) 133,708 Financial income (expense), net (2,246) (2,246) (2,246) Share of profit of associates 1,380 1,380 1,380 Gain on sale of investment in associate Profit before income tax 169,649 10, ,901 (46,982) 132,919 Income tax (expense) credit (19,649) (1,998) (21,647) 4,222 (17,425) Profit from continuing operations 150,000 8, ,254 (42,760) 115,494 Profit from discontinued operation (POS) (net of income tax) 2,630 2,630 2,630 Profit for the period (Net profit) 150,000 10, ,884 (42,760) 118,124 Attributable to: Owners of the Company 149,014 8, , ,796 Non-controlling interests 986 2,342 3,328 3,328 Earnings per share ( per share) Basic Diluted

151 Adjusted measures 149 Year ended December 31, 2010 In thousands of Euro Mobile Communication Ongoing operations: M2M Secure Transactions Security Others Adjusted financial information for ongoing operations Assets held for sale: Secure Transactions (JV) Security (JV) Adjusted financial information Pro-forma Discontinued operation: Revenue 980,871 81, , ,077 19,493 1,861,842 41,298 2,428 1,905,568 50,776 Gross profit 375,885 26, , ,065 4, ,023 12, ,360 14,577 Operating expenses (258,191) (19,431) (99,030) (89,673) (2,233) (468,558) (4,955) (184) (473,697) (13,912) Profit from operations 117,694 7,100 41,163 39,392 2, ,465 7, , Others (POS) In thousands of Euro Adjusted financial information for ongoing operations Contribution from JV and POS Adjusted financial information Year ended December 31, 2010 Adjustments IFRS financial information Revenue 1,861,842 43,726 1,905,568 1,905,568 Cost of sales (1,185,819) (30,389) (1,216,208) (2,512) (1,218,720) Gross profit 676,023 13, ,360 (2,512) 686,848 Operating expenses Research and engineering (103,546) (255) (103,801) (811) (104,612) Sales and marketing (256,222) (4,146) (260,368) (7,177) (267,545) General and administrative (117,067) (867) (117,934) (9,687) (127,621) Other income (expense), net 8, ,406 8,406 Profit from operations (PFO) 207,465 8, ,663 Equity-based compensation charges (20,187) Restructuring & acquisition-related expenses (9,268) (9,268) Amortization and depreciation of intangibles resulting from acquisitions (22,792) (22,792) Operating result (EBIT) (52,247) 163,416 Financial income (expense), net Share of profit of associates 1,717 1,717 1,717 Gain on sale of investment in associate Profit before income tax 209,978 8, ,176 (52,247) 165,929 Income tax (expense) credit 2,519 (1,904) 615 3,256 3,871 Profit from continuing operations 212,497 6, ,791 (48,991) 169,800 Loss from discontinued operation (POS) (net of income tax) (2,422) (2,422) (2,422) Profit for the period (Net profit) 212,497 3, ,369 (48,991) 167,378 Attributable to: Owners of the Company 211,243 1, , ,920 Non-controlling interests 1,254 2,203 3,457 3,458 Earnings per share ( per share) Basic Diluted Other information

152 150 Other information Gemalto Annual Report 2010 Investor information Investor relation policy Maintaining positive relations with our investors is key to Gemalto s growth. The confidence and loyalty of private and institutional shareholders are essential to our successful long-term development. Gemalto s investor relations policy is aimed at informing shareholders in a timely and detailed way about developments that are relevant to Gemalto in order to provide a faithful and clear picture of investment decisions involving Gemalto. Price sensitive information is disseminated without delay through press releases and web site updates. In addition to the AGMs, Gemalto has implemented a wide variety of communication tools to keep investors informed on a regular basis. These include the annual reports, legal announcements, press releases and financial statements. At the publication of interim and annual financial statements, Gemalto holds conference calls or investor meetings. In addition, Gemalto regularly features road shows and participates in conferences for institutional investors. These contacts help Gemalto to get a clear picture of investors and analysts opinions. Relevant information for potential and current shareholders may be found on the Gemalto web site under the link Investor Relations Gemalto also observes black out periods during which no road shows and interviews with potential or current investors take place. For interim and annual publications, this covers at least fifteen days prior to the publication date. Corporate seat Gemalto N.V. is the holding company of the Group. The corporate seat of Gemalto N.V. is Amsterdam, the Netherlands, and its registered office address is Barbara Strozzilaan 382, 1083 HN Amsterdam, the Netherlands. Gemalto N.V. is registered with the trade register in Amsterdam, the Netherlands under No Share capital structure The Company s authorized share capital amounts to 150,000,000 and is divided into 150,000,000 ordinary shares, with a nominal value of 1 per share. As of December 31, 2010 the Company s issued and paid-up share capital amounted to 88,015,844, consisting of 88,015,844 ordinary shares with a nominal value of 1 per share, of which 4,884,596 shares were held in treasury. 83,131,248 shares were in circulation on December 31, Stock exchange listing 2010 stock market data Gemalto N.V. (Euronext NL ) is listed on Eurolist by Euronext Paris S.A. in the compartment A (Large Caps). Gemalto shares were eligible for the Deferred Settlement System or Service de Règlement Différé (SRD) from January 26, 2006 onwards. Among other stock indices, Gemalto is part of the SBF 120 (FR ), CAC NEXT 20 (QS ) and Dow Jones STOXX 600 Index (EU ). Mnemonic: GTO Exchange: NYSE Euronext Paris ISIN Code: NL Reuters: GTO.PA Bloomberg: GTO:FP Share price evolution Gemalto (in Euro) Rebased (100 on 1/1/2008) Gemalto SBF120 Average daily trading volume on Euronext Paris in 2010: 378,441 shares Market capitalization as of December 31, 2010: 2,802,864,552

153 Investor information 151 ADR (American Depositary Receipt) Gemalto established a sponsored Level I American Depository Receipt (ADR) Program in the US in November Each Gemalto ordinary share is represented by two ADRs. Gemalto s ADRs trade in US dollars and have full voting rights. The dividends are the same as for Gemalto s shares and are paid to investors in US dollars. Dividends are converted into US dollars by the depositary bank at the prevailing rate. Structure: Sponsored Level I ADR Mnemonic: GTOMY Exchange: OTC Ratio (ORD:DR): 1:2 DR ISIN: US36863N2080 DR CUSIP: 36863N 208 Shareholders disclosures The following shareholding threshold disclosures were applicable as at December 31, For further information, please refer to Shareholders disclosures, page 55. Notification date Notifier Disclosure (% of capital) December 30, 2010 FMR LLC (Fidelity Management & Research) (USA) 10.72% May 28, 2009 Caisse des Dépôts et Consignations (CDC) (France) 8.43% Sept 18, 2008 (1) Gemalto N.V 5.17% Geographic spread of share holdings Geographical spread of identified shareholding as of November 2010 North America 28% UK and Ireland 14% Continental Europe 55% Other 3% Dividend The Company paid the first dividend of its history in 2010, with a cash dividend of 0.25 per share in respect of the 2009 financial year. With due observance of the Company s dividend policy the Board will propose to the 2011 AGM to distribute a dividend in cash of 0.28 per share in respect of the 2010 financial year. For more information on the dividend policy, please refer to Distribution of profits, page 55. Share buy-back program As authorized by the 2010 AGM, the Company has renewed its share buy-back program up to and including November 18, During the full year 2010, the Company used 39 million to purchase Gemalto shares within this program. For further information on the share buy-back program, please refer to Authorizations to the Board, page 54. (1) 4,884,596 shares, or 5,55% of the capital, were held in treasury by Gemalto as of December 31, Financial calendar 2011 Important dates of financial calendar March 10, 2011 April 28, 2011 May 18, 2011 August 25, 2011 October 20, 2011 Publication of 2010 Fourth Quarter Revenue and Full Year Results Publication of 2011 First Quarter Revenue AGM Publication of 2011 Second Quarter Revenue and First Half Results Publication of 2011 Third Quarter Revenue 2011 AGM Gemalto N.V. will hold its 2011 AGM at the Sheraton Amsterdam Airport Hotel & Conference Center, Schiphol Boulevard 101, 1118 BG Schiphol Airport, the Netherlands on Wednesday, May 18, 2011 at 10 a.m. CET. For the AGM on May 18, 2011 a record date (being April 20, 2011) will apply: those persons, who on April 20, 2011 hold shares in the Company and are registered as such in a register designated thereto by the Board for the AGM, will be entitled to participate and vote at that meeting. Investor Relations contact: Gemalto shareholders service Tel: Fax: [email protected] Investor Center: Contact us at: Contact details for ADR holders: Deutsche Bank Shareholder Services American Stock Transfer & Trust Company Peck Slip Station P.O. Box 2050 New York, NY [email protected] Toll-free number: Direct Dial: Gemalto s registrar Netherlands Management Company B.V. Visiting address: Parnassustoren, Locatellikade 1, 1076 AZ Amsterdam, the Netherlands P.O. Box 75215, 1070 AE Amsterdam, the Netherlands Tel: / fax [email protected] Other information

154 152 Other information Gemalto Annual Report 2010 Glossary of digital security terms 3FF (3rd Form Factor): a very small SIM card, also known as a micro-sim, for use in small mobile devices. 3G (Third Generation): the broadband telecommunications systems that combine high-speed voice, data and multimedia. 3GPP (3G Partnership Project): a group that aims to produce specifications for a 3G system based on GSM networks. 4G: the 4th generation of wireless standards offering a comprehensive, secure all-ip based mobile broadband solution to smartphones, laptop computer wireless modems and other mobile devices. CAC (Common Access Card): a US Department of Defense smart card issued as standard physical and network identification for military and other personnel. CDMA (Code Division Multiple Access): a wireless communications technology that uses the spread spectrum communication to provide increased bandwidth. Contactless: a card that communicates by means of a radio frequency signal, eliminating the need for physical contact with a reader. DDA (Dynamic Data Authentication): an authentication technology that allows banks to approve transactions at the terminal in a highly secure way. DI (Dual Interface): a device that is both contact and contactless. Digital signature: an electronic signature created with a public-key algorithm that can be used by the recipient to authenticate the identity of the sender. Dongle: any small piece of hardware that plugs into a computer. EAC (Extended Access Control): a mechanism enhancing the security of epassports whereby only authorized inspection systems can read biometric data. EDGE: a pre-3g digital mobile phone technology allowing improved data transmission rates. EMV: the industry standard for international debit/ credit cards established by Europay, MasterCard and Visa. epassport: an electronic passport with high security printing, an inlay including an antenna and a microprocessor, and other security features. epurse: a small portable device that contains electronic money and is generally used for low-value transactions. eticketing: electronic systems for issuing, checking and paying for tickets, mainly for public transport. ETSI: the European Telecommunications Standards Institute. FIPS 201 (Federal Information Processing Standard): a US federal government standard that specifies personal identity verification requirements for employees and contractors. FOMA (Freedom of Mobile Multimedia Access): the brand name for the world s first W-CDMA 3G services offered by NTT DoCoMo, the Japanese operator. GSM (Global System for Mobile communications): a European standard for digital cellphones that has now been widely adopted throughout the world. GSMA (GSM Association): the global association for mobile phone operators. HSPD-12 (Homeland Security Presidential Directive-12): orders all US federal agencies to issue secure and reliable forms of identification to employees and contractors, with a recommendation in favor of smart card technology. ICAO (International Civil Aviation Organization): a UN agency that defines standards and practices for air navigation, prevention of unlawful interference, and facilitation of border-crossing procedures for international civil aviation. IP (Internet Protocol): a protocol for communicating data across a network; hence an IP address is a unique computer address using the IP standard. Java: a network oriented programming language invented by Sun Microsystems and specifically designed so that programs can be safely downloaded to remote devices. LTE (Long Term Evolution): the standard in advanced mobile network technology, often referred to as 4G (see above).

155 Glossary of digital security terms 153 M2M (Machine-to-Machine): technology enabling communication between machines for applications such as smart meters, mobile health solutions, etc. MFS (Mobile Financial Services): banking services such as transfer and payment available via a mobile device. Microprocessor: a smart card comprising a module embedded with a chip, a computer with its own processor, memory, operating system and application software. MIM (Machine Identification Module): the equivalent of a SIM with specific features such that it can be used in machines to enable authentication. MMS (Multimedia Messaging Service): a standard way of sending messages that include multimedia content (e.g. photographs) to and from mobile phones. MNO (Mobile Network Operator): a company that provides services for mobile phone subscribers. Module: the unit formed of a chip and a contact plate. NFC (Near-Field Communication): a wireless technology that enables communication over short distances (e.g. 4cm), typically between a mobile device and a reader. OATH (The Initiative for Open Authentication): an industry coalition comprising Gemalto, Citrix, IBM, Verisign and others, that is creating open standards for strong authentication. OMA (Open Mobile Alliance): a body that develops open standards for the mobile phone industry. OS (Operating System): software that runs on computers and other smart devices and that manages the way they function. OTA (Over-The-Air): a method of distributing new software updates to cellphones which are already in use. OTP (One-Time Password): a password that is valid for only one login session or transaction. PIN (Personal Identification Number): a secret code required to confirm a user s identity. PKI (Public Key Infrastructure): the software and/or hardware components necessary to enable the effective use of public key encryption technology. Public Key is a system that uses two different keys (public and private) for encrypting and signing data. RUIM (Removable User Identity Module): an identity module for standards other than GSM. SIM (Subscriber Identity Module): a smart card for GSM systems. SMS (Short Message Service): a GSM service that sends and receives messages to and from a mobile phone. Thin client: a computer (client) that depends primarily on a central server for processing activities. By contrast, a large client does as much processing as possible. TSM (Trusted Services Manager): A third-party enabling mobile operators, mass transit operators, banks and businesses to offer combined services seamlessly and securely. UICC (Universal Integrated Circuit Card): a high-capacity smart card used in mobile terminals for GSM and UMTS/3G networks. UMTS (Universal Mobile Telecommunications System): one of the 3G mobile telecommunications technologies which is also being developed into a 4G technology. USB (Universal Serial Bus): a standard input/output bus that supports very high transmission rates. USIM (Universal Subscriber Identity Module): ensures continuity when migrating to 3G services. VPN (Virtual Private Network): a private network often used within a company or group of companies to communicate confidentially over a public network. PDA (Personal Digital Assistant): a mobile device that functions as a personal information manager, often with the ability to connect to the internet. W-CDMA (Wideband Code Division Multiple Access): a 3G technology for wireless systems based on CDMA technology. Other information

156 154 Other information Gemalto Annual Report 2010 Notes

157 155 Other information

158 Printed on Revive Pure White Silk, a 100% recycled paper with FSC certification. The composition of the paper is 85% de-inked post-consumer waste and 15% unprinted pre-consumer waste. All pulps used are Elemental Chlorine Free (ECF) and the manufacturing mill is accredited with the ISO standard for environmental management. The use of the FSC logo identifies products which contain wood from well-managed forests certified in accordance with the rules of the Forest Stewardship Council. Design and production Addison Gemalto N.V. All rights reserved. Gemalto, Gemalto logos and product and service names are trademarks of Gemalto N.V. or its affiliates.

159 We ve talked about Gemalto s successes in this report. In reality, they re the achievements of our employees. These photos were taken at various Gemalto sites around the world during 2010

160 Introducing the people behind digital security