Form 10-Q

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES x NO ¨

The number of shares of the Registrant’s Common Stock outstanding on October 31, 2003 was 42,107,996.

See accompanying notes to unaudited condensed consolidated financial statements.

ActivCard Corp. was incorporated in the State of Delaware in August 2002 for the purpose of changing the domicile of the publicly listed company in the ActivCard group of companies, previously ActivCard S.A., from the Republic of France to the United States. On February 3, 2003 ActivCard Corp. completed a registered public exchange offer acquiring approximately 94.8% of the outstanding securities of ActivCard S.A. On June 9, 2003 the Company commenced a follow-on registered exchange offer to acquire the minority interest in ActivCard S.A. not owned by ActivCard Corp. In the follow-on exchange offer, the Company exchanged 0.95 shares of its common stock for each ActivCard S.A. common share and American depositary share (“ADS”) duly tendered. The follow-on exchange offer closed on July 17, 2003 with 1,808,075 shares of ActivCard Corp. common stock issued in exchange for 1,157,689 common shares and 745,603 ADS’s of ActivCard S.A. tendered. Following completion of the follow-on exchange offer, ActivCard Corp. holds approximately 99.4% of the outstanding securities of ActivCard S.A. The common shares and ADS’s of ActivCard S.A. not exchanged have been recorded as a minority interest on the consolidated balance sheet. These consolidated financial statements present the financial position and results of operations and cash flows for ActivCard S.A. for those periods preceding the change in domicile. Unless otherwise indicated, references to “ActivCard” and the “Company” refer to the consolidated group of ActivCard companies.

The Company develops and markets digital identity solutions that enable customers to securely issue, use and maintain digital identities. The Company’s solutions provide customers with the ability to authenticate a user to a network, a system or an application through a variety of personal devices as well as the ability to manage credentials remotely post-issuance. The Company markets its solutions to governments, enterprises and financial institutions directly and indirectly through system integrators, value-added resellers, original equipment manufacturers and distributors.

The accompanying consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America has been condensed or omitted pursuant to such rules and regulations. In the opinion of management, these condensed consolidated financial statements include all normal recurring adjustments necessary for the fair presentation of the Company’s consolidated financial position at September 30, 2003, consolidated results of operations for the three and nine months ended September 30, 2003 and 2002, respectively, and consolidated statements of cash flows for the nine months ended September 30, 2003 and 2002. The consolidated results of operations for the three and nine months ended September 30, 2003 are not necessarily indicative of the consolidated operating results for the Company’s full fiscal year ending December 31, 2003 or any future periods.

These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in ActivCard Corp.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.

Reclassifications – Certain reclassifications have been made to the 2002 financial statement presentation to conform to the 2003 presentation. These reclassifications had no effect on reported net loss or shareholders’ equity.

Revenues are derived primarily from the sale of software licenses, hardware and service agreements. The Company applies the provisions of Statement of Position 97-2 and related guidance. Revenues from software license agreements are generally recognized upon shipment, provided that evidence of an arrangement exists, the fee is fixed or determinable, no significant obligations remain and collection of the corresponding receivable is probable. In software arrangements that include hardware products, rights to multiple software products, maintenance and/or other services, the Company allocates the total arrangement fee among each deliverable, based on vendor-specific objective evidence of fair value of each element if vendor-specific objective evidence of each element exists. The Company determines vendor specific evidence of fair value of an element based on the price charged when the same element is sold separately. For an element not yet sold separately, vendor specific evidence of fair value of an element is established by management having the relevant authority as long as it is probable that the price, once established, will not change before separate introduction of the element in the marketplace. When arrangements contain multiple elements and vendor specific objective evidence of fair value exists for all undelivered elements, the Company recognizes revenue for the delivered elements based on the residual value method. For arrangements containing multiple elements wherein vendor specific objective evidence of fair value does not exist for all undelivered elements, revenue for the delivered and undelivered elements is deferred until vendor specific objective evidence of fair value exists or all elements have been delivered. The Company does not include acceptance clauses for its shrink-wrapped software products such as ActivCard Gold or Trinity client software. Acceptance clauses usually give the customer the right to accept or reject the software after the Company has delivered the product. However, the Company has provided certain customers with acceptance clauses for customized or significantly modified software products developed under product development agreements, and on occasion, for hardware products and client/server software products as well. In instances where an acceptance clause exists, the Company does not recognize revenue until the product is formally accepted by the customer in writing or the defined acceptance period has expired.

Revenue from the sale of hardware is recognized upon shipment of the product, provided that no significant obligation remains and collection of the receivable is considered probable.

Post-contract customer support is recognized on a straight-line basis over the term of the contract.

Service revenues include revenues from training, installation, or consulting. The Company enters into agreements with customers that require significant production, modification or customization of software in addition to the provision of services. Where the services are essential to the functionality of the software element of the arrangement, separate accounting for the services is not permitted and contract accounting is applied to both the software and service elements. In these cases, revenue is recognized as the work is performed pursuant to the related contracts and the achievement of related milestones in accordance with the percentage of completion method based on input measures.

Service revenues are recognized separately from the software element when the services are performed if vendor specific objective evidence of fair value exists to allocate the revenue to the various elements in a multi-element arrangement, the services are not essential to the functionality of any other element of the arrangement and the total price of the contract would vary with the inclusion or exclusion of the services.

The Company normally sells its products to customers with payment terms that are less than 60 days.

In certain specific and limited circumstances, the Company provides product return and price protection rights to certain distributors and resellers. The Company generally recognizes revenue from product sales upon shipment to resellers, distributors and other indirect channels, net of estimated returns or estimated future price changes. The Company’s policy is to not ship product to a reseller or distributor unless the reseller or distributor has a history of selling the Company’s products and the end user is known or has been qualified by the Company. The Company has established a reasonable basis through historical experience for estimating future returns and price changes. Actual returns have not been material to date. Price protection rights typically expire after 30 days and have not been material to date.

Amounts billed in excess of revenue recognized are recorded as deferred revenue in the accompanying consolidated balance sheets. Unbilled work-in-process is recorded as a receivable in the accompanying consolidated balance sheets.

The Company accounts for its employee stock option plans in accordance with the provisions of APB Opinion No. 25, which provides that no compensation costs be recorded if the exercise price of the options granted is equal to the fair market value of the Company’s stock as at the date of grant. Accordingly, the Company allocates to deferred stock compensation, the fair value of restricted stock when granted to employees of acquired companies if they remain as employees of the Company subsequent to the acquisition date. The Company amortizes the deferred stock compensation to expense using the straight-line method over the vesting period, which is three years.

Pro forma information regarding net loss and loss per share has been determined as if the Company had accounted for its employee stock options and warrants under the fair value method of SFAS 123. The fair value for these options and warrants was estimated at the date of grant using the Black-Scholes pricing model.

For purposes of pro forma disclosures, the estimated fair value of the options and restricted stock granted is amortized to expense over the options’ vesting period. The Company’s pro forma information follows:

In June 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146, “Accounting for Costs Associated With Exit or Disposal Activities”, which addresses financial accounting and reporting for costs associated with exit or disposal activities. The provisions of SFAS No. 146 require that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred rather than when an entity commits to an exit plan as previously required. SFAS 146 also requires that such a liability be measured at its fair value and subsequent changes to the liability be measured using the credit-adjusted risk-free rate used when the liability was initially recorded. The Company adopted the provisions of SFAS 146 for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS 146 did not have a material impact on the Company’s results of operations or financial position.

In November 2002, the EITF reached a consensus on Issue No. 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables.” The EITF concluded that revenue arrangements with multiple elements should be divided into separate units of accounting if the deliverables in the arrangement have value to the customer on a standalone basis, if there is objective and reliable evidence of the fair value of the undelivered elements, and as long as there are no rights of return or additional performance guarantees by the Company. The provisions of EITF Issue No. 00-21 are applicable to agreements entered into in fiscal periods commencing after June 15, 2003. The adoption of EITF Issue No. 00-21 did not have a material impact on the Company’s results of operations or financial position.

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45). FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. The Company adopted the disclosure requirements of FIN 45 in the fourth quarter of fiscal 2002 (see Note 12 concerning the reserve for warranty costs). The recognition and measurement provisions apply to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on the Company’s results of operations or financial position.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” The statement amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We adopted the disclosure provisions of SFAS No. 148 at December 31, 2002. The Company has not yet determined the impact, if any, that the transition provisions of SFAS No. 148 may have on its financial position or results of operations.

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities,” which clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” relating to consolidation of certain entities. FIN 46 will require identification of the Company’s participation in variable interest entities (“VIE”), which are defined as entities with a level of invested equity that is not sufficient to fund future activities to permit them to operate on a stand alone basis, or whose equity holders lack certain characteristics of a controlling financial interest. For entities identified as VIE, FIN 46 sets forth a model to evaluate potential consolidation based on an assessment of which party to the VIE, if any, bears a majority of the exposure to its expected losses, or stands to gain from a majority of its expected returns. FIN 46 also sets forth certain disclosure requirements regarding interests in VIE that are deemed significant, even if consolidation is not required. FIN 46 applies to all financial statements issued after January 31, 2003. The adoption of FIN 46 did not have a material impact on the Company’s results of operations or financial position.

In January 2002, the Company established a wholly owned subsidiary in South Africa and acquired certain assets from two privately held companies based in South Africa. The underlying assets purchased and liabilities assumed comprised a business and as such, the Company used the purchase method of accounting to allocate the purchase price to the assets acquired. The results of operations of the acquired business have been included in the Company’s condensed consolidated statements of operations from the acquisition date.

In connection with the purchase price allocation for ActivCard South Africa, $68 was charged to earnings in the nine months ended September 30, 2002 for acquired in process research and development. The value assigned to acquired in-process research and development was based on estimated future cash flows over five years and was discounted at a rate of 30%.

In June 2003, management identified indicators of impairment of the Company’s other acquired intangible assets. These indicators were caused by changes to the Company’s strategic plans that affected the use of acquired technologies and expected revenues from certain acquired contracts. Asset impairment tests were performed comparing the expected aggregate undiscounted cash flows to the carrying amounts of the acquired intangible assets. Based on the results of these tests, the Company determined that its other acquired intangible assets were impaired. The fair value of these acquired intangible assets was then determined using the discounted cash flow method. As a result, the Company recorded an impairment write-down of $758 during the nine months ended September 30, 2003. The other intangible assets determined to be impaired consisted of developed and core technology, contracts, and trade names and trademarks.

In February 2003, ActivCard Corp. acquired approximately 94.8% of the outstanding securities of ActivCard S.A. in a registered exchange offer undertaken to change the domicile of the publicly listed company in the ActivCard Group from the Republic of France to the United States. On June 9, 2003 the Company commenced a follow-on registered exchange offer to acquire the minority interest in ActivCard S.A. not owned by ActivCard Corp. The follow-on exchange offer closed on July 17, 2003 with ActivCard Corp. issuing 1,808,075 shares of its common stock to acquire approximately an additional 4.6% of the outstanding securities of ActivCard S.A.

The purchase price of the ActivCard S.A. minority interest acquired in the follow-on exchange offer is as follows:

The fair values of the assets acquired and liabilities assumed at the date of purchase, July 17, 2003, were as follows:

In connection with the purchase price allocation of the ActivCard S.A. minority interest acquired, $306 was charged to earnings in the three and nine months ended September 30, 2003 for acquired in process research and development. The value assigned to acquired in process research and development was based on estimated future cash flows over periods ranging from three to seven years and was discounted at 28%.

On July 30, 2003, the Company acquired a 38% interest in ASPACE Solutions Limited (“Aspace”), a developer of secure multi-channel data management systems based in London, England. The Company purchased 38,140 common shares of Aspace from existing shareholders for £954 (£25 per share) or $1,552. In connection with the acquisition of common shares, the Company also provided Aspace with a two-year, senior convertible loan (“loan”) in the amount of £2,500 or $4,067, which bears interest at a rate of 6% per annum. If all or part of the loan is outstanding on the two-year anniversary date, the Company has the right to convert the existing loan balance any time thereafter, into common shares of Aspace at a price of £25 per share. Aspace currently has 100,000 shares outstanding.

Aspace has been incurring losses to date and ActivCard management anticipates continuing losses from Aspace over the next twelve months. ActivCard management believes that the other shareholders in Aspace cannot bear their share of losses to fund ongoing operations and anticipates that future Aspace losses will ultimately be borne by the Company. In this context, the authoritative accounting guidance requires that the Company record 100% of the net losses incurred by Aspace despite holding only 38% of the voting control. For the three and nine months ended September 30, 2003, the Company recorded $855 of losses incurred by Aspace from July 30, 2003 to September 30, 2003. Although the Company has no contractual obligation to do so, the Company may provide financing to Aspace in the future.

In June 2003, the Company terminated certain non-core activities that resulted in charges to earnings for asset write-downs of $3,705. The actions taken included: discontinuance of the Company’s biometric hardware product line in favor of reselling similar products manufactured by third parties; termination of a service offering whereby the Company would have hosted PKI digital certificate issuance; and consolidation of overlapping product offerings resulting in the replacement of certain third-party software code. As a result of these decisions, certain assets relating to these non-core activities were impaired. The assets written down were biometric hardware inventories, PKI digital certificate inventories, prepaid software royalties, prepaid software maintenance and software licenses. The charges for the asset write-downs are included in cost of revenues in the condensed consolidated statements of operations for the nine months ended September 30, 2003.

In 2002, the Company commenced restructuring its business to enhance operational efficiency and reduce expenses. This restructuring and business realignment plan included a worldwide reduction in workforce across all functions of 90 employees, a reduction in excess facilities and other direct costs. Of the terminated employees, 36 were employed in sales and marketing, 42 were employed in research and development, 7 were employed in general and administrative, 3 were employed in manufacturing and logistics and 2 were employed in corporate functions. The charge for excess facilities was comprised primarily of future minimum lease payments payable over a nine-year period ending February 2011, net of estimated sublease income of $734. Sublease income was estimated assuming current market lease rates and after estimated vacancy periods. Charges for the reduction in workforce consisted mainly of severance, outplacement and other termination costs.

In March 2003, the Company took further measures to restructure its business and reduce its operating costs by implementing a reduction in workforce that resulted in the termination of 14 employees. The reduction in workforce was completed in May 2003 with the termination of two additional employees. Of the terminated employees, 9 were employed in sales and marketing, 6 were employed in research and development and 1 was employed in manufacturing and logistics. Charges for the reduction in workforce consist of severance, outplacement and other termination costs.

Components of restructuring and business realignment accruals, which are presented on the condensed consolidated balance sheet and in the condensed consolidated statements of operations for the year ended December 31, 2002 and the three and nine months ended September 30, 2003 were as follows:

Remaining cash expenditures to complete the facility exit activities will be made over the eight-year period ending February 2011. The Company expects to make remaining cash payments to complete the workforce reduction by December 31, 2003.

On February 15, 2002, the Company executed its plan to dispose of the hosting operations of Authentic8. As a result of this decision, the results of operations of the hosting activities, an impairment of goodwill and other acquired intangible assets and a write-down of fixed assets have been included in income (loss) from discontinued operations in the consolidated statement of operations for the three and nine months ended September 30, 2002. The Company determined the fair value of the reporting unit by discounting estimated future cash flows to assess whether there was impairment in the carrying value of the goodwill and other intangibles. The assets and liabilities related to the hosting operations have been classified as assets and liabilities held for sale on the consolidated balance sheet at December 31, 2002.

On February 12, 2003, the Company entered into an agreement with VeriSign for the disposition of the assets and certain liabilities of the hosting operations of Authentic8. The results of operations of the hosting activities to March 14, 2003, the effective date of the agreement with VeriSign, have been included in the loss from discontinued operations in the consolidated statement of operations for the nine months ended September 30, 2003. In the three and nine months ended September 30, 2003, results of discontinued operations were positively impacted by $158 associated with a reduction in accruals related to the disposition of the hosting operations to VeriSign.

Income (loss) from discontinued operations related to the disposal of the hosting operations of the former Authentic8 was comprised of the following:

The following is a reconciliation of the numerator and denominator used to determine basic and diluted loss per share:

No amounts have been presented for diluted earnings per share for the periods where the effect of including the weighted average number of common shares available under share options, reserved rights and warrants after applying the treasury stock method is anti-dilutive. Weighted average common share equivalents excluded in the three months ended September 30, 2003 and 2002 and the nine months ended September 30, 2003 and 2002 were 1,047,400; 675,996; 1,275,081; and 914,124, respectively.

The contractual maturities of available-for-sale debt securities as of September 30, 2003 were as follows:

During the three months ended September 30, 2003 and 2002 and the nine months ended September 30, 2003 and 2002, the Company had purchases of approximately $31, $1,284, $2,902 and $1,533, respectively, from SCM Microsystems, Inc. (“SCM”), a manufacturer of smart card readers. As of September 30, 2003 and December 31, 2002, amounts owing to SCM were $7 and $634, respectively. Although SCM is not a single-source supplier to the Company of specific products, the companies shared the services of Steven Humphreys. Mr. Humphreys was the Chairman and Chief Executive Officer of ActivCard as of September 30, 2003 and the non-executive Chairman of SCM’s Board of Directors. Mr. Humphreys was not compensated for revenue transactions between the two companies.

The Company has one operating segment: Digital Identity Solutions. Accordingly, the Company is disclosing segmented information by geographic area only. Transfers between geographic areas are eliminated in the consolidated financial statements. The following is a summary of operations by geographic region for the three and nine months ended September 30, 2003 and 2002 and as of September 30, 2003 and December 31, 2002:

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements included in this Quarterly Report on Form 10-Q, other than statements that are purely historical, are forward-looking statements. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions also identify forward-looking statements. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q include, without limitation, statements regarding operating results, product development, marketing initiatives, business plans and anticipated trends. The forward-looking statements in this Quarterly Report on Form 10-Q are subject to additional risks and uncertainties further discussed under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risks Factors” and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2002 filed with the Securities and Exchange Commission on March 31, 2003. We assume no obligation to update any forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q.

The following discussion of our financial condition and results of operations should be read in conjunction with our Condensed Consolidated Financial Statements and related notes included in “Item 1. Financial Statements” in this Quarterly Report on Form 10-Q.

ActivCard Corp. was incorporated in the State of Delaware in August 2002 for the purpose of changing the domicile of the publicly listed company in the ActivCard group of companies, previously ActivCard S.A., from the Republic of France to the United States. On February 3, 2003 we completed a registered public exchange offer acquiring approximately 94.8% of the outstanding securities of ActivCard S.A. On July 17, 2003 we completed a follow-on registered exchange offer to acquire the minority interest in ActivCard S.A. not owned by ActivCard Corp. In the follow-on exchange offer, we exchanged 1,808,075 shares of ActivCard Corp. common stock for 1,157,689 ActivCard S.A. common shares and 745,603 ActivCard S.A. American depositary shares (“ADS”). Following completion of the follow-on exchange offer, ActivCard Corp. holds approximately 99.4% of the outstanding securities of ActivCard S.A. We accounted for the common shares and ADS’s of ActivCard S.A. acquired in the follow-on exchange offer using the purchase method of accounting. The common shares and ADS’s of ActivCard S.A. not exchanged are recorded as a minority interest on the consolidated balance sheet. Unless otherwise indicated, references to “ActivCard”, “we”, “us” and “our” refer to the consolidated group of ActivCard companies.

We develop, market and support digital identity solutions that enable our customers to issue, use and maintain digital identities in a secure, manageable and reliable manner. We market our solutions to the government, financial institutions, network service providers and enterprise customers directly through our own sales organization and indirectly through system integrators, resellers and original equipment manufacturers.

We focus our development efforts on smart card related products, primarily in the form of software applications embedded on the smart card and client/server software to support multi-function capabilities including card issuance, provisioning and management of digital identities. In the three months ended September 30, 2003 and 2002, and the nine months ended September 30, 2003 and 2002, 39%, 54%, 43% and 52%, respectively, of revenues were derived from smart card related software, primarily from ActivCard Gold, ActivPack authentication server and license fees from product development agreements for the ActivCard Identity Management System and ActivCard Java Card Applets, respectively.

The discussion and analysis of our consolidated financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The preparation of our condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expense during the reporting period. Note 2 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2002 describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, sales warranties and allowance for doubtful accounts, long-lived assets, goodwill and intangible assets, income taxes, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, the actual results could differ from those estimates.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

Significant management judgments and estimates must be made and used in connection with the revenue recognized in any reporting period.

For all sales, we use a binding contract, purchase order or other form of documented agreement to evidence an arrangement with a customer. We do not include acceptance clauses for our shrink-wrapped software products such as ActivCard Gold. Acceptance clauses usually give the customer the right to accept or reject the software after we have shipped the product. However, we have provided certain customers with acceptance clauses for customized or significantly modified software products developed under product development agreements and, on occasion, for hardware products and client/server software products as well. In instances where an acceptance clause exists, we do not recognize revenues until the product is formally accepted by the customer in writing or the defined acceptance period has expired.

Revenues are derived primarily from the sale of software licenses, hardware and service agreements. We apply the provisions of Statement of Position 97-2 and related guidance. Revenues from software license agreements are generally recognized upon shipment, provided that evidence of an arrangement exists, the fee is fixed or determinable, no significant obligations remain and collection of the corresponding receivable is probable. In software arrangements that include hardware products, rights to multiple software products, maintenance and/or other services, we allocate the total arrangement fee among each deliverable, based on vendor-specific objective evidence of fair value of each element if vendor-specific objective evidence of each element exists. We determine vendor specific evidence of fair value of an element based on the price charged when the same element is sold separately. For an element not yet sold separately, vendor specific evidence of fair value of an element is established by management having the relevant authority as long as it is probable that the price, once established, will not change before separate introduction of the element in the marketplace. When arrangements contain multiple elements and vendor-specific objective evidence of fair value exists for all undelivered elements, we recognize revenue for the delivered elements based on the residual value method. For arrangements containing multiple elements wherein vendor specific objective evidence of fair value does not exist for all undelivered elements, revenue for the delivered and undelivered elements is deferred until vendor specific objective evidence of fair value exists or all elements have been delivered.

Revenue from the sale of hardware products, such as ActivCard tokens and ActivReader, is recognized upon shipment of the product, provided that no significant obligation remains and collection of the receivable is considered probable.

Post-contract customer support is recognized on a straight-line basis over the term of the contract.

Service revenues include revenues from training, installation or consulting. From time to time, we enter into agreements with customers that require significant production, modification or customization of software in addition to the provision of services. Where the services are essential to the functionality of the software element of the arrangement, separate accounting for the services is not permitted and contract accounting is applied to both the software and service elements. In these cases, revenue is recognized as the work is performed pursuant to the related contracts and the achievement of related milestones in accordance with the percentage of completion method based on input measures.

Service revenues are recognized separately from the software element when the services are performed if vendor-specific objective evidence of fair value exists to allocate the revenue to the various elements in a multi-element arrangement, the services are not essential to the functionality of any other element of the arrangement and the total price of the contract would vary with the inclusion or exclusion of the services.

We normally sell our products to customers with payment terms that are less than 60 days.

In certain specific and limited circumstances, we provide product return and price protection rights to certain distributors, resellers and end users. We generally recognize revenue from product sales upon shipment to resellers, distributors and other indirect channels, net of estimated returns or estimated future price changes. Our policy is to not ship product to a reseller or distributor unless the reseller or distributor has a history of selling our products and the end user is known or has been qualified by us. We have established a reasonable basis through historical experience for estimating future returns and price changes. Actual returns have not been material to date. Price protection rights typically expire after 30 days and have not been material to date.

Amounts billed in excess of revenue recognized are recorded as deferred revenue. Unbilled work-in-process is recorded as a receivable.

Expenses associated with potential warranty claims are accrued at the time of sale, based on warranty terms and prior experience. We provide for the costs of warranty in excess of warranty coverage provided to us by the product assembly contractors. Our standard warranty period is ninety days for software products and one year for hardware products.

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to pay outstanding amounts. The provision is based on factors that include account aging, historical bad debt experience, customer creditworthiness and other known factors.

Inventories are stated at the lower of cost or market, cost being determined on a first-in, first-out method. Write-downs for slow-moving and obsolete inventories are provided based on historical experience and current product demand.

On June 9, 2003 we commenced a follow-on registered exchange offer to acquire the minority interest in ActivCard S.A. not owned by ActivCard Corp. The follow-on exchange offer closed on July 17, 2003 with ActivCard Corp. issuing 1,808,075 shares of its common stock to acquire approximately an additional 4.6% of the outstanding securities of ActivCard S.A. We allocated the purchase price to the assets acquired and liabilities assumed at July 17, 2003 based on their fair values. In order to determine fair values, we had to make assumptions regarding estimated future cash flows and make estimates based on other factors. An allocation was made to acquired in process research and development, which was charged to operations, as the research and development did not have alternative future uses as of July 17, 2003. The allocation of purchase price among long-lived assets, which are depreciated, in-process research and development, which is expensed at the time of acquisition and goodwill, which is not amortized but evaluated periodically for impairment, has a significant impact on both current and future operating results.

In assessing the recoverability of our goodwill, long-lived and other intangible assets, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges against these assets in the reporting period in which the impairment is determined. For identifiable long-lived assets, this evaluation includes an analysis of estimated expected future undiscounted net cash flows to be generated by the assets over their estimated useful lives. If the estimated future undiscounted net cash flows are insufficient to recover the carrying value of the assets over their estimated useful lives, we record an impairment charge in the amount by which the carrying value of the assets exceeds their fair value. Fair value for identifiable long-lived assets is generally determined based on discounted cash flows.

On February 15, 2002, as a result of changes in strategic plans, we executed a plan to dispose of the hosting operations of Authentic8 International. As a result of the changed circumstances, the estimates and assumptions for future cash flows from the hosting operation declined indicating that impairment in the value of the related assets existed. Accordingly, we recorded a charge to earnings in the amount of $15.6 million in 2002, which included an impairment of the carrying value of goodwill and other intangibles of $15.0 million.

Under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we recorded an impairment write-down of $758 thousand in the second quarter of 2003 and $5.1 million in the fourth quarter of 2002 to adjust the carrying value of acquired intangible assets to their estimated fair value as of June 30, 2003 and December 31, 2002, respectively. The acquired intangible assets determined to be impaired consisted of developed and core technology, agreements, contracts, and trade names and trademarks.

In the second quarter of 2003, we terminated certain non-core activities including our biometric hardware product line, a service offering whereby we would have hosted PKI digital certificate issuance, and overlapping product offerings. As a result of these actions taken, the estimates and assumptions regarding future cash flows from the assets relating to these non-core activities declined indicating impairment in value of the related assets. Accordingly, we recorded a charge to earnings of $3.7 million, which included impairment in value of software licenses included in property and equipment of $1.7 million. The other assets written down were biometric hardware inventories, PKI digital certificate inventories, prepaid software royalties, and prepaid software maintenance.

In the future, any additional impairment charge could be significant and could have a material adverse effect on our consolidated financial position and results of operations. At September 30, 2003, we had $17.3 million of goodwill and other intangible assets, which accounted for 6% of our total assets.

We recorded charges of $1.3 million and $7.8 million in the nine months ended September 30, 2003 and 2002, respectively. These charges related to restructuring and business realignment plans. The plan executed in the first six months of 2003 was a reduction in workforce consisting primarily of severance, outplacement and other costs. The plan announced in the first quarter of 2002 consisted primarily of a reduction in work force and facility vacancy costs. Accounting pronouncements in effect for restructuring activities initiated after December 31, 2002 required us to record a liability and charge when the liability was incurred rather than when we formally committed to the restructuring plan as previously required. These new provisions required us to measure the liability at fair value. Accounting pronouncements for restructuring costs in effect during 2002 required us to record provisions and charges when we had a formal and committed plan. In the first quarter of 2002, we were required to make significant estimates related to the subletting of facilities in Fremont, California and Melbourne, Australia. Estimates related to sublease income are based on assumptions regarding expected vacancy periods required to locate and contract with suitable sublessees and current sublease market rates. In December 2002, we revised our estimate of expected sublease income and recorded an additional charge to earnings of $620 thousand. If the assumptions for these estimates change in the future due to changes in the market, the ultimate restructuring expenses for these facilities could vary by material amounts. Our policies, as supported by current authoritative guidance, require us to continually evaluate the adequacy of the remaining liabilities under our restructuring initiatives. As management continues to evaluate the business, there may be additional charges for new restructuring activities, as well as changes in estimates to amounts previously recorded.

The following table sets forth the selected items from our condensed consolidated statements of operations expressed as a percentage of total revenues for the periods presented:

The decrease in hardware revenues of 15% in the three months ended September 30, 2003 compared to the same period a year ago reflected decreased demand for smart card readers from U.S. government agencies. The increase in hardware revenues of 26% in the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002 is a result of increased demand for our token-based products from European financial institutions and for smart card readers from U.S. government agencies and North American corporate enterprises.

The decrease in software and maintenance revenues of 31% and 6% in the third quarter and first nine months of 2003 compared to the same periods a year ago was the result of decreased unit sales of our ActivCard Gold client software products for maturing smart card based digital identification deployments by the U.S. Department of Defense agencies.

Revenues by geographic region, expressed as a percentage of total revenues, are as follows:

Revenues by customer segment, expressed as a percentage of total revenues, are as follows:

The decrease in revenues in North America of 15% and 3% and the Government segment of 18% and 2% in the three and nine months ended September 30, 2003, respectively, compared to the same periods in 2002, were the result of decreased unit sales of our ActivCard Gold client software products and related smart card readers for maturing smart card based digital identification deployments by the U.S. Department of Defense agencies. The increase in revenues in Europe of 18% and the Financial segment of 14% in the three months ended September 30, 2003 compared to the three months ended September 30, 2002 was the result of increased demand for our token-based products from European financial institutions. The increase in revenues from the Corporate segment of 4% and 6% in the three and nine months ended September 30, 2003, respectively, relative to the comparable periods in the prior year, were the result of increased sales of smart card client software and related smart card readers to enterprises for internal deployments.

Revenues in North America consisted primarily of ActivCard Gold and Trinity client software and related smart card readers and ActivCard Identity Management System sales sold indirectly through various system integrators into U.S. government agencies. European revenues were primarily related to ActivCard Token and ActivPack authentication server sales into European financial institutions for commercial and internal applications.

Gross margin totaled $5.9 million and $8.1 million in the three months ended September 30, 2003 and 2002, respectively and $14.6 million and $20.4 million in the nine months ended September 30, 2003 and 2002, respectively.

Total gross margin decreased 2% in the third quarter of 2003 compared to the third quarter of 2002 primarily as a result of decreased unit sales of our ActivCard Gold client software products for maturing smart card based digital identification deployments by the U.S. Department of Defense agencies.

The decrease in total gross margin of 23% in the first nine months of 2003 compared to the first nine months of 2002 is attributable to management’s decision in June 2003 to terminate certain non-core activities that resulted in charges to cost of sales for asset write-downs of $3.7 million. The actions taken included: discontinuance of our biometric hardware product line in favor of reselling similar products manufactured by third parties; termination of a service offering whereby we would have hosted PKI digital certificate issuance; and consolidation of overlapping product offerings resulting in the replacement of certain third-party software code. As a result of these decisions, certain assets relating to these non-core activities were impaired. The assets written down were biometric hardware inventories, PKI digital certificate inventories, prepaid software royalties, prepaid software maintenance and software licenses. The charges for the asset write-downs are included in cost of revenues in the condensed consolidated statements of operations for the nine months ended September 30, 2003.

Research and development expenses decreased 4% in the third quarter of 2003 compared to the third quarter of 2002 and 9% in the first nine months of 2003 compared to the first nine months of 2002 pursuant to our restructuring and business realignment activities executed during 2002 that included the reductions in headcount and relocation of certain development activities to lower cost locations.

In connection with the purchase price allocation of the ActivCard S.A. minority interest acquired as part of the follow-on exchange offer completed in July 2003, the following amounts were assigned to research and development assets (in thousands):

Acquired research and development assets were valued based on discounted estimated future cash flows on a project-by-project basis over periods ranging three to seven years. The discount rates used ranged from 14% to 18% for developed and core technology and 28% for in process research and development. The research and development assets recorded in the purchase of the ActivCard S.A. minority interest were smart card related software applications and client/server software to support multi-function capabilities including card issuance, provisioning and management of digital identities.

In connection with the purchase of certain assets from two privately held companies based in South Africa in January 2002, the portion of the purchase price that was attributed to research and development assets was as follows (in thousands):

The values attributed to acquired in-process research and development assets were based on discounted estimated future cash flows on a project-by-project basis over periods ranging over four years for developed technologies and five years for core technologies and in process research and development. The discount rates used ranged from 20% to 25% for developed and core technology and 30% for in process research and development. The research and development assets purchased from the two privately held South African companies related to biometric authentication systems and related software development kits.

In the three months ended September 30, 2003, selling and marketing expenses increased 6% compared to the same period a year ago as a result of increased costs associated with pre-sales and support efforts for large corporate and government deployments. Selling and marketing expenses in the first nine months of 2003 were at the same level as the first nine months of 2002, as headcount reductions implemented as part of our restructuring and business realignment plan in 2002 and reduced marketing activities in 2003 offset additional investments in pre-sales and support efforts for large corporate and government deployments in 2003.

General and administrative expenses increased 36% and 48% in the three and nine months ended September 30, 2003, respectively, compared to the three and nine months ended September 30, 2002 as a result of increased professional fees. These professional fees were incurred to defend our intellectual property, pursue potential business acquisitions and implement new regulatory reporting and compliance regulations.

The amortization of acquired intangible assets decreased 77% in the third quarter of 2003 compared to the third quarter of 2002 and 74% in the first nine months of 2003 compared to the first nine months of 2002 primarily as a result of impairment write-downs of $758 thousand and $5.1 million in the second quarter of 2003 and the fourth quarter of 2002, respectively, to adjust the carrying value of acquired intangible assets to their estimated fair value as the respective reporting dates. The amortization of acquired intangible assets consisted of the amortization of developed and core technology, agreements, contracts, trade names and trademarks associated with the acquisitions of Ankari, Safe Data and the ActivCard S.A. minority interest.

In June 2003, management identified indicators of impairment of the remaining acquired intangible assets. These indicators included changes to our strategic plans that affected the use of acquired developed and core technologies and expected revenues from certain acquired contracts. Asset impairment tests were performed comparing the expected aggregate undiscounted cash flows to the carrying amounts of the acquired intangible assets. Based on the results of these tests, we determined that our acquired intangible assets were impaired. The fair value of these acquired intangible assets was then determined using the discounted cash flow method. As a result, we recorded an impairment write-down of $758 thousand during the nine months ended September 30, 2003. The other intangible assets determined to be impaired consisted of developed and core technology, contracts and trade names and trademarks.

Other charges for the respective comparative periods consisted of the following:

Amortization of deferred stock compensation relates to amortization of shares issued to certain employees of an acquired company who remained as employees of ActivCard, as well as amortization of deferred stock compensation related to options and warrants granted at exercise prices that were less than the fair value of our share price on the date of grant. The amount of deferred stock compensation, $1.7 million as of September 30, 2003, will be amortized over the remaining vesting period on a straight-line basis through October 2005.

In 2002, we commenced consolidation of certain operations in order to enhance operational efficiency and reduce expenses and recorded restructuring and business realignment costs of $8.6 million, of which $7.8 million was recorded in the nine months ended September 30, 2002. Restructuring and business realignment expenses consist of severance and other costs associated with the reduction of employee headcount of $2.6 million and facility exit costs of $6.0 million, consisting primarily of approximately nine years of minimum lease payments due under certain excess facilities lease agreements, net of estimated sublease revenue. The severance costs were for 90 employees, of which 36 were employed in sales and marketing, 42 were employed in research and development, 7 were employed in general and administrative activities, 3 were employed in manufacturing and logistics and 2 were employed in corporate functions.

In March 2003, we took further measures to restructure our business and reduce our operating costs by implementing a reduction in workforce that resulted in the termination of 16 employees. Of the terminated employees, 9 were employed in sales and marketing, 6 were employed in research and development and 1 was employed in manufacturing and logistics. Charges for the reduction in workforce were $1.3 million in the nine months ended September 30, 2003 and consisted of severance, outplacement and other termination costs.

Remaining cash expenditures of $4.6 million to complete the facility exit activities will be made over the eight-year period ending February 2011. We expect to make remaining cash payments of $203 thousand to complete the work force reduction by December 31, 2003.

In the nine months ended September 30, 2003, we incurred charges of $1.1 million related to the change in domicile of the publicly listed company in the ActivCard group from the Republic of France to the United States, which was completed in February 2003. The charges consisted primarily of share cancellation expenses and professional fees associated with the regulatory filings prepared in connection with the exchange offer and filed with the SEC and the Belgian Banking and Finance Commission. Total charges incurred to complete the change in domicile were $2.0 million.

Interest income in the third quarter and first nine months of 2003 was lower than the comparable periods of the prior year due primarily to the effects of lower interest rates in effect during those periods.

For all periods presented, foreign exchange gains and losses were attributable primarily to the volatility of the U.S. dollar against the local functional currencies and resulted from revaluation of the assets and liabilities denominated in currencies other than the functional currency. The average exchange rate of the Euro relative to the U.S. dollar was 1.13 and 0.98 for the three months ended September 30, 2003 and 2002, respectively, and 1.11 and 0.93 for the nine months ended September 30, 2003 and 2002, respectively.

Income tax expense in the three and nine months ended September 30, 2003 and 2002 consisted of minimum annual income and franchise taxes in certain jurisdictions.

In first quarter of 2003, we completed the change in domicile of the publicly listed company in the ActivCard group, formerly ActivCard S.A. from the Republic of France to the United States. In July 2003, we completed a follow-on exchange offer in which we acquired approximately an additional 4.6% of the outstanding securities of ActivCard S.A. The minority interest in ActivCard S.A. is approximately 0.6% representing outstanding common shares and American Depositary Shares of ActivCard S.A. that were not exchanged as of September 30, 2003.

On July 30, 2003, we acquired a 38% interest in ASPACE Solutions Limited (“Aspace”), a developer of secure multi-channel data management systems based in London, England. We purchased 38,140 common shares of Aspace from existing shareholders for £954 (£25 per share) or $1,552. In connection with the acquisition of common shares, we also provided Aspace with a two-year, senior convertible loan (“loan”) in the amount of £2,500 or $4,067, which bears interest at a rate of 6% per annum. If all or part of the loan is outstanding on the two-year anniversary date, we have the right to convert the existing loan balance any time thereafter, into common shares of Aspace at a price of £25 per share. Aspace currently has 100,000 shares outstanding.

Aspace has been incurring losses to date and we anticipate continuing losses from Aspace over the next twelve months. We believe that the other shareholders in Aspace cannot bear their share of losses to fund ongoing operations and anticipate that future Aspace losses will ultimately be borne by ActivCard. In this context, the authoritative accounting guidance requires that we record 100% of the net losses incurred by Aspace despite holding only 38% of the voting control. For the three and nine months ended September 30, 2003, we recorded $855 of losses incurred by Aspace from July 30, 2003 to September 30, 2003. Although we have no contractual obligation to do so, we may provide financing to Aspace in the future.

On February 15, 2002, we executed a plan to dispose of the hosting operations of Authentic8. The assets and liabilities related to the hosting operations were classified as assets and liabilities held for sale on the consolidated balance sheet at December 31, 2002 and the charge to earnings classified as a loss from discontinued operations on the consolidated statement of operations for the three and nine months ended September 30, 2002.

On February 12, 2003, the Company entered into an agreement with VeriSign for the disposition of the assets and certain liabilities of the hosting operations of Authentic8. The results of operations of the hosting activities to March 14, 2003, the effective date of the agreement with VeriSign, have been included in the income (loss) from discontinued operations in the condensed consolidated statement of operations for the nine months ended September 30, 2003. In the three and nine months ended September 30, 2003, results of discontinued operations were positively impacted by $158 thousand associated with a reduction in accruals related to the disposition of the hosting operations to VeriSign.

The income (loss) from discontinued operations related to the disposal of the hosting operations of the former Authentic8 was comprised of the following:

As of September 30, 2003, we had cash and equivalents and short-term investments of $235.5 million, a decrease of $12.9 million from $248.4 million at December 31, 2002. In the first nine months of 2003, we consumed $9.1 million of cash from continuing operations primarily due to a loss from continuing operations in the period of $20.3 million reduced by collections of outstanding accounts receivable of $3.9 million, non-cash write-downs of long-lived and acquired intangible assets of $2.4 million and equity in the net loss of Aspace of $0.9 million. We consumed $9.9 million of cash from continuing operations in the first nine months of 2002 primarily from a net loss from continuing operations of $19.7 million offset by an increase in restructuring and business realignment accruals of $4.6 million.

Accounts receivable, net of allowances, decreased to $5.6 million as of September 30, 2003 from $9.2 million as of December 31, 2002. Days sales outstanding, which is a measure of the average collection period of trade accounts receivable, decreased to 56 days at September 30, 2003 from 69 days as of December 31, 2002. The decline in days sales outstanding was the result of improved linearity of monthly shipments in the third quarter of 2003 compared to the fourth quarter of 2002 resulting in proportionately lower shipments in the last month of the quarter. The credit terms extended to our customers are less than 60 days, which has not changed during the periods presented.

Investing activities during the nine months ended September 30, 2003 consisted primarily of investments in short-term securities and Aspace and capital expenditures. Purchases of short-term investments, net of proceeds from sales and maturities of short-term investments, totaled $66.6 million in the first nine months of 2003 primarily due to investments excess cash and equivalents in U.S. government and government agency securities. In July 2003, we agreed to make an investment in and loans to Aspace totaling $6.0 million. Aspace has been incurring losses to date and we anticipate continuing losses from Aspace over the next twelve months. We believe that the other shareholders in Aspace cannot bear their share of losses to fund ongoing operations and anticipate that future Aspace losses will ultimately be borne by ActivCard. Although we have no contractual obligation to do so, we may provide financing to Aspace in the future.

In the first nine months of 2002, we also acquired certain assets and assumed certain liabilities of two privately held companies based in South Africa totaling $1.2 million including acquisition costs and recovered $1.8 million from closing balance sheet adjustments from the purchase of Safe Data and Authentic8. Capital expenditures of $1.0 million and $1.2 million in the nine months ended September 30, 2003 and 2002, respectively, consisted of leasehold improvements, furniture and fixtures and computers.

Financing activities of $3.5 million and $5.1 million for the nine months ended September 30, 2003 and 2002, respectively, consisted primarily of proceeds from the issuance of common shares resulting from the exercise of stock options.

At September 30, 2003, we had $4.0 million of long term restructuring accruals compared to $4.4 million at December 31, 2002. Long-term restructuring accruals represent remaining cash expenditures to complete the facility exit activities and will be paid over the eight-year period ending February 2011. At September 30, 2003 and December 31, 2002, we had $991 thousand and $525 thousand, respectively, of other long-term liabilities consisting primarily of deferred rent.

Our future capital requirements, the timing and amount of expenditures, and the adequacy of funds available to us will depend on our success in developing and selling new and existing products. Based on our current plans, we believe that existing cash balances will be adequate to satisfy our capital requirements for at least the next twelve months.

We intend to pursue business acquisition opportunities that provide business, products, technologies or even sales channels that are complementary to our business.

In June 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146, “Accounting for Costs Associated With Exit or Disposal Activities”, which addresses financial accounting and reporting for costs associated with exit or disposal activities. The provisions of SFAS No. 146 require that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred rather than when an entity commits to an exit plan as previously required. SFAS 146 also requires that such a liability be measured at its fair value and subsequent changes to the liability be measured using the credit-adjusted risk-free rate used when the liability was initially recorded. We adopted the provisions of SFAS 146 for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS 146 did not have a material impact on our results of operations or financial position.

In November 2002, the EITF reached a consensus on Issue No. 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables”. The EITF concluded that revenue arrangements with multiple elements should be divided into separate units of accounting if the deliverables in the arrangement have value to the customer on a standalone basis, if there is objective and reliable evidence of the fair value of the undelivered elements, and as long as there are no rights of return or additional performance guarantees by the Company. The provisions of EITF Issue No. 00-21 are applicable to agreements entered into in fiscal periods commencing after June 15, 2003. The adoption of EITF Issue No. 00-21 did not have a material impact on the Company’s results of operations or financial position.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” The statement amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We adopted the disclosure provisions of SFAS No. 148 at December 31, 2002. We have not yet determined the impact, if any, that the transition provisions of SFAS No. 148 may have on our financial position or results of operations.

We have a history of losses and we may experience losses in the foreseeable future.

We have not achieved profitability on an operating basis and we may continue to incur operating losses in the foreseeable future. In the three months ended September 30, 2003 and 2002 and the nine months ended September 30, 2003 and 2002, we incurred losses from continuing operations of $5.8 million, $2.7 million, $20.3 million and $19.7 million, respectively. As of September 30, 2003, our accumulated deficit was $130.0 million, which represents our net losses since we began our operations. Even with our sizable cash balances, we may not become profitable or be able to significantly increase our revenue.

We will need to achieve significant incremental revenue growth to achieve profitability. Even if we do achieve profitability, we may be unable to sustain profitability on a quarterly or annual basis in the future. It is possible that our revenues will grow more slowly than we anticipate or that operating expenses will exceed our expectations.

Our industry is characterized by rapid technological change and we must continually improve our products to remain competitive.

The market for network security products is characterized by rapid technological advances, changes in customer requirements, evolving industry standards and frequent new product introductions and enhancements. If we do not continually modify and adapt our products and improve the performance features and reliability of our products in response to advances and changes in technology and standards, our business could be adversely affected and our products and technology could become obsolete or less marketable. Moreover, if new Internet, networking or telecommunications technologies or standards become widely adopted, or if other technological changes occur, we may need to adapt our products. Our future operating results will depend upon our ability, on a timely basis, to enhance our current products and to develop and introduce new products that address the increasingly sophisticated needs of the marketplace and that keep pace with technological developments, new competitive product offerings and emerging industry standards. The process of developing our products and services is extremely complex and requires significant ongoing development efforts.

Results vary significantly from quarter-to-quarter and it is difficult to forecast future results.

Our operating results are difficult to forecast and may continue to fluctuate significantly from period to period. As a result, period-to-period comparisons of our operating results are not necessarily meaningful. Factors that influence our operating results include:

Our expense levels are based, in part, on our expectations of future revenues and if such expectations are not met, our operating results will be adversely affected. Further, net income (loss) may be disproportionately affected by a reduction in revenues because of the relatively small amount of our expenses that vary with our revenues.

We experience seasonal fluctuations in sales and, as a result, our revenues may fluctuate significantly from period to period.

As a significant portion of our operating expenses are fixed, a small variation in the timing of recognition of revenue can cause significant variations in operating results from quarter to quarter. As with many companies that have a substantial presence in Europe, the third quarter has typically been a challenging quarter due to the traditional slowdown of economic activity throughout Europe in the summer months. If, as anticipated, our revenues reflect an increasing proportion of software licenses in the future, we may experience another form of seasonality typical of other software companies. Software customers have a tendency to delay purchases until the fourth quarter as driven by an annual budgetary phenomenon. This typically causes first quarter revenues to be lower than the previous fourth quarter revenues. In recent years, we have experienced a proportional increase in revenues from the U.S. federal government whose budgetary year ends September 30. Other companies that derive a significant proportion of their revenues from the U.S. federal government often experience lower fourth quarter revenues than third quarter revenues due to the annual budgetary process. Although we have not experienced such seasonality in the past, we may in the future if our U.S. federal government revenues continue to increase.

In addition, a significant percentage of our quarterly revenues occur during the last weeks of the quarter. This has reduced the visibility of our quarterly operating results and increased the risk that revenues expected in a quarter will not be realized until future quarters.

Our operating margins may decline in future periods as we make significant expenditures necessary to remain competitive.

Depending on market conditions, market opportunities, actual revenues achieved and the competitive landscape, we may increase our investment in research and development and, to a lesser extent, sales and marketing organizations. In addition, we may make additional investments in our general and administrative infrastructure. As a result, operating margins may decrease from historical levels. The amount and timing of these additional expenditures are likely to result in

fluctuations in operating margins. Any material reduction in gross or operating margins could materially adversely affect our operating results. In addition, we could receive limited returns on the investments we have made in resources to develop and market new products if we are not successful introducing new products or if these new products are not accepted in the marketplace.

We derive revenue from only a limited number of products and we do not have a diversified product base.

Substantially all of our revenues are derived from the sale of our digital identity systems and products. We anticipate that substantially all of the growth in our revenue, if any, will also be derived from these sources. If for any reason our sale of these products is impeded, and we have not diversified our product offerings, our business and results from operations could be harmed.

Our customer base is highly concentrated and the loss of any one of these customers could adversely affect our business.

Historically, we have experienced a concentration of revenues through certain of our channel partners to customers. In the three and nine months ended September 30, 2003 and 2002, there was a high concentration of revenues through a number of system integrators to the U.S. Department of Defense. Many of our contracts with our significant channel partners are short-term. If any of these channel partners did not renew their contract upon expiration, or if there was a substantial reduction in sales to any of our significant customers, it could adversely affect our business and operating results.

In the three months ended September 30, 2003, two customers combined accounted for 44% of revenues and in the nine months ended September 30, 2003, three customers combined accounted for 56% of revenues. In the three months ended September 30, 2002, three customers combined accounted for 59% of revenues and in the nine months ended September 30, 2002, one customer accounted for 24% of revenues. Our customers consist primarily of system integrators, resellers, distributors and OEMs. We ship product to the U.S. Department of Defense exclusively through system integrators. In the nine months ended September 30, 2003 and the year ended December 31, 2002, we shipped product to many departments within the U.S. Department of Defense through system integrators such as Northrop Grumman. Our subcontract agreement with Northrop Grumman expires in August 2004. We cannot be certain the subcontract agreement with Northrop Grumman will be renewed or extended.

In the aggregate, the U.S. Department of Defense, as an end-user, accounted for approximately 45% of our consolidated revenues in the nine months ended September 30, 2003 and 47% of our consolidated revenues in the nine months ended September 30, 2002. There were two end-users, representing departments within the U.S. Department of Defense, that each accounted for 10% of consolidated revenues during the nine months ended September 30, 2003 and 2002. We expect to continue to depend upon a small number of large customers for a substantial portion of our revenue.

We have a long and often complicated sales cycle for individual orders, which can result in significant revenue fluctuations from quarter to quarter.

The sales cycle for our products, which is the period of time between the identification of a potential customer and completion of the sale, is typically long and subject to a number of significant risks over which we have little control. As our operating expenses are based on anticipated revenue levels, a small fluctuation in the timing of sales can cause our operating results to vary significantly from period to period. If revenue falls significantly below anticipated levels, our business would be seriously harmed.

A typical sales cycle is often nine to twelve months in the case of an enterprise customer, and more than twelve months in the case of a network service provider customer or government entity.

Purchasing decisions for our products and systems may be subject to delay due to many factors that are not within our control, such as:

Furthermore, the implementation process is subject to delays resulting from network administrative concerns associated with incorporating new technologies into existing networks, deployment of a new network system or preservation of existing network infrastructure and data migration to the new system. Full deployment of our technology and products for such networks, servers or other host systems is usually scheduled to occur over a two-to-three-year period and the licensing of digital identity systems and products, including client and server software, smart cards, readers, tokens and the recognition of maintenance revenues would also occur over this period.

The market for our products is still developing and if the industry adopts standards or a platform different from our platform, then our competitive position would be negatively affected.

The market for digital identity products is still emerging and is also experiencing consolidation. The evolution of the market is in a constant state of flux that may result in the development of different network computing platforms and industry standards that are not compatible with our current products or technologies.

We believe that smart cards are an emerging platform for providing digital identity for network applications and services. Our business model is premised on the smart card becoming a common access platform for network computing in the future. Further, we have focused on developing our products for particular operating systems related to smart card deployment and use. Should platforms other than the smart card emerge as a preferred platform or should operating systems other than the specific systems we have focused on emerge as preferred operating systems, our current product offerings could be at a disadvantage to competitors who have been focusing on alternative platforms and operating systems. If this were to occur, our future growth and operating results could suffer.

In addition, the digital identity market lacks industry-wide standards. While we are actively engaged in discussions with industry peers to define what standards should be, it is possible that any standards eventually adopted could prove disadvantageous to or incompatible with our business model and product lines.

The nature of our bidding process and competitive pressures may, in the future, force us to sell products at a loss.

We engage in competitive bidding practices for some of our contracts that in the future could result in our costs exceeding our revenues for some contracts. We generate a portion of our revenue from contracts and purchase orders awarded through competitive bidding processes. Our bids will not always be accepted or, if accepted, awarded contracts may not generate enough revenue to be profitable. The competitive bidding process is typically lengthy and often results in the expenditure of financial, engineering and other resources early in the process and also in connection with bids that are not accepted. Additionally, inherent in the competitive bidding process is the risk that our costs may exceed projected costs upon which a submitted bid or contract price is based.

Our international operations subject us to risks associated with operating in foreign markets, including fluctuations in currency exchange rates that could adversely affect our results from operations and financial condition. International sales are a substantial portion of our business. A severe economic decline in one of our major foreign markets could make it difficult for customers from those countries to pay us on a timely basis. Any such failure to pay, or deferral of payment, could adversely affect our results of operations and financial condition. In the nine months ended September 30, 2003 and 2002, markets outside of North America accounted for 39% and 36% of consolidated revenues, respectively.

We face a number of risks inherent in doing business in international markets, including among others:

While we prepare our financial statements in U.S. dollars, we have historically incurred a substantial portion of our expenses in Euros and prior to the Euro, French francs. We expect that a significant portion of our expenses will continue to be incurred in Euros and, to a lesser extent, in other non-U.S. foreign currencies. Fluctuations in the value of the Euro and other currencies relative to the U.S. dollar have caused and will continue to cause dollar-translated amounts to vary from one period to another. Due to the constantly changing currency exposures and the substantial volatility of currency exchange rates, we cannot predict the effect of exchange rate fluctuations upon future operating results.

Our cost reduction initiatives may adversely affect the morale and performance of our personnel and our ability to hire new personnel.

In connection with our effort to streamline operations, reduce costs and bring our staffing and structure in line with industry standards, we restructured our organization in 2002 and the first quarter of 2003, with substantial reductions in our workforce. There have been and may continue to be substantial costs associated with the workforce reductions, including severance and other employee–related costs, and our restructuring plan may yield unanticipated consequences, such as attrition beyond our planned reduction in workforce. As a result of these reductions, our ability to respond to unexpected challenges may be impaired and we may be unable to take advantage of new opportunities. In addition, many of the employees who were terminated possessed specific knowledge or expertise that may prove to have been important to our operations. In that case, their absence may create significant difficulties. This personnel reduction may also subject us to the risk of litigation, which may adversely impact our ability to conduct our operations and may cause us to incur significant expense.

If the members of our management team are unable to work together effectively, our ability to manage and expand our business will suffer.

The members of our management team have not previously worked together, and we cannot be sure that they will be able to work together effectively as we expand our operations. Our management team has changed significantly over the past several months. George Garrick and Glenn Cross joined us in October 2003 as our Chief Executive Officer and Senior Vice President of Global Sales and Customer Services, respectively. Frank Bishop has agreed to join us in December 2003 as our Senior Vice President of Product Strategy, Management and Marketing. We intend to hire other executive officers as needed in the near future. If these employees cannot work together effectively, our ability to manage and expand our business will suffer.

Our ability to remain competitive depends in part on attracting, hiring and retaining qualified technical personnel.

Our future success depends in part on the availability of qualified technical personnel, including personnel trained in software and hardware applications within specialized fields. As a result, we may not be able to successfully attract or retain skilled technical employees, which may impede our ability to develop, install, implement and otherwise service our software and hardware systems and to efficiently conduct our operations.

The information technology and network security industries are characterized by a high level of employee mobility and the market for technical personnel remains extremely competitive in certain regions. This competition means there are fewer highly qualified employees available to hire, the costs of hiring and retaining such personnel are high and they may not remain with our company once hired. Furthermore, there is continuing pressure to provide technical employees with stock options and other equity interests in our company, which may dilute our earnings (loss) per share.

Additions of new personnel and departures of existing personnel, particularly in key positions, can be disruptive, might lead to additional departures of existing personnel and could have a material adverse effect on our business, operating results and financial condition. The addition and assimilation of new personnel may be made more difficult by the fact that our research and development personnel are located in France, the United States, Canada and India, and our sales and marketing activities are located on three continents, thus requiring the coordination of organizations separated by geography and time zones, and the interaction of personnel with disparate business backgrounds, languages and cultures.

It is difficult to integrate acquired companies, products and technologies into our operations and our inability to do so could greatly lessen the value of any such acquisitions.

In January 2002, we established a wholly owned subsidiary in South Africa and acquired certain assets from two privately held companies based in South Africa. In 2001, we acquired Safe Data System S.A. in Montpellier, France, Authentic8 International Inc. in Melbourne, Australia and American Biometric Co. Ltd. (Ankari) in Ottawa, Canada. We may make additional strategic acquisitions of companies, products or technologies in the future in order to implement our business strategy. If we are unable to successfully integrate acquired businesses, products or technologies with our existing operations, we may not receive the intended benefits of such acquisitions. For example, in the first quarter of 2002, we decided to dispose of certain of the operations of Authentic8. As a result of this decision, we recorded a $16.8 million charge to earnings in year ended December 31, 2002 associated with the impairment of goodwill and other intangibles, write-down of property and equipment and loss from discontinued operations. Additionally, following the consummation of an acquisition, disputes may arise regarding indemnity, earn-out and other provisions in the acquisition agreement. For the foregoing reasons, acquisitions may subject us to unanticipated liabilities or risks, disrupt our operations and divert management’s attention from day-to-day operations.

To date, we have primarily used cash to finance our business acquisitions. We may incur debt or issue equity securities to finance future acquisitions. The issuance of equity securities for any acquisition could be substantially dilutive to our shareholders. In addition, our profitability may suffer due to acquisition-related expenses and the amortization of acquired intangible assets.

We rely on strategic relationships with other companies to develop and market our products. If we are unable to enter into any such relationships, or if we lose an existing relationship, our business could be harmed.

Our success depends on establishing and maintaining strategic relationships with other companies to develop, market and distribute our technology and products and, in some cases, to incorporate our technology into their products. Part of our business strategy has been to enter into strategic alliances and other cooperative arrangements with other companies in the industry. We are currently involved in cooperative efforts to incorporate our products into products of others, to jointly engage in research and development efforts and to jointly engage in marketing efforts and reseller arrangements. None of these relationships is exclusive, and some of our strategic partners also have cooperative relationships with certain of our competitors.

If we are unable to enter into cooperative arrangements in the future or if we lose any of our current strategic or cooperative relationships, our business could be harmed. We do not control the time and resources devoted to such activities by parties with whom we have relationships. In addition, we may not have the resources available to satisfy our commitments, which may adversely affect these relationships. These relationships may not continue, may not be commercially successful, or may require the expenditure of significant financial, personnel and administrative resources from time to time. Further, certain of our products and services compete with the products and services of our strategic partners. For example, Schlumberger distributes software for logical security applications using smart cards in addition to the smart card products that they license from our company. This competition may adversely affect our relationships with our strategic partners, which could adversely affect our business.

The nature of our operations makes us particularly susceptible to power outages, computer viruses, acts of terrorism and natural disasters.

Our operations are vulnerable to damage or interruption from computer viruses, human error, natural disasters, telecommunication failures, power outages, intentional acts of vandalism or terrorism and similar events. In particular, our U.S. headquarters are located in the San Francisco Bay area, which is known for seismic activity. We have not established a formal disaster recovery plan, and our back-up operations and business interruption insurance may not be adequate to compensate us for losses that occur. A significant business interruption would result in losses or damages incurred and would harm our business.

We have recorded significant write-downs in recent periods for impairment of assets and may have similar write-downs in future periods.

We recorded an impairment write-down of $758 thousand in the second quarter of 2003 and $5.1 million in the fourth quarter of 2002 to adjust the carrying value of acquired intangible assets to their estimated fair value. The impaired assets consisted of developed and core technology, agreements, contracts, and trade names and trademarks. Additionally, we terminated certain non-core activities in the second quarter of 2003, including our biometric hardware product line, hosting of PKI digital certificate issuance and overlapping product offerings. As a result of these decisions, we recorded a charge to earnings of $3.7 million in that quarter, which included impairment in value of software licenses included in property and equipment of $1.7 million.

We may terminate additional non-core activities in future periods or determine that our investment in Aspace Solutions Limited, other intangible assets or goodwill have been impaired. Any additional impairment charges that result could be significant and could have a material adverse effect on our consolidated financial position and results of operations. At September 30, 2003, we had $17.3 million of goodwill and other intangible assets, which accounted for 6% of our total assets.

Legislative actions, higher insurance cost and potential new accounting pronouncements are likely to impact our future financial position and results of operations.

There have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and there may potentially be new accounting pronouncements or additional regulatory rulings which will have an impact on our future financial position and results of operations. The Sarbanes-Oxley Act of 2002 and other rule changes as well as proposed legislative initiatives following the

Enron bankruptcy are likely to increase general and administrative costs, particularly for a relatively small company such as ours. In addition, insurers are likely to increase premiums as a result of high claims rates over the past year, which we expect will increase our premiums for our various insurance policies. Further, proposed initiatives are expected to result in changes in certain accounting rules, including legislative and other proposals to account for employee stock options as a compensation expense. These and other potential changes could materially increase the expenses we report under generally accepted accounting principles and adversely affect our operating results.

We believe that we are exposed to minimal market risks. We do not hold or issue derivatives, derivative commodity instruments or other financial instruments for trading purposes.

We are exposed to currency exchange fluctuations as we sell our products internationally. We attempt to manage the sensitivity of our international sales by denominating as many transactions as possible in U.S. dollars.

In the three and nine months ended September 30, 2003 and 2002, approximately 75% of our revenues were invoiced in U.S. dollars. Although we purchase many of our components in U.S. dollars, approximately half of our cost of revenues and operating expenses are denominated in other currencies.

In the three months ended September 30, 2003 the net foreign exchange gain was $23 thousand and in the nine months ended September 30, 2003 the net foreign exchange loss was $147 thousand. The volatility of the U.S. dollar against the local functional currencies in the first nine months of 2003 was the primary cause of these net foreign exchange gains and losses that resulted from revaluation of the assets and liabilities denominated in currencies other than the functional currency. In the three and nine months ended September 30, 2002, the net foreign exchange loss was $107 thousand and $186 thousand, respectively.

We utilize a foreign exchange hedging program to mitigate transaction gains and losses resulting from exchange rate fluctuations on assets and liabilities held by ActivCard companies that were denominated in currencies other than the functional currency of the legal entity holding the related asset or liability. To achieve this objective, we regularly enter into various short-term foreign currency forward contracts that we account for as fair value hedging instruments to offset these foreign exchange transaction gains and losses.

We are exposed to interest rate risk as a result of our significant cash and equivalent holdings. The interest rate risk that we may be able to obtain on investment securities will depend on market conditions at that time and may differ from the rates we have secured in the past.

On September 30, 2003, we held $80.1 million of cash and equivalents and $155.4 million in short-term investments. Our cash and equivalents consist primarily of money-market funds and our short-term investments are primarily comprised of government and government agency securities. We currently have the ability and intention to hold our fixed investments until maturity, and therefore, we would not expect our operating results or cash flows to be affected to any significant degree by a sudden change in market interest rates. Due to the low current market yields and the relatively short-term nature of our investments, a hypothetical 10% change in interest rates along the entire interest rate yield curve would not materially affect the fair value of our financial instruments that are exposed to changes in interest rates.

The Company’s Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15(d)-15(e)), as of the end of the period covered by this report. Based on that evaluation, these officers have concluded that the Company’s disclosure controls and procedures were adequate and designed to ensure that material information relating to the Company and the Company’s consolidated subsidiaries would be made known to them by others within those entities.

In March 2002, we filed a lawsuit in the United States District Court, District of Delaware, against Vasco Data Systems International alleging infringement of U.S. patent no. 5,937,068 entitled “System and Method for User Authentication Employing Dynamic Encryption Variables”, which was issued by the U.S. Patent and Trademark Office on August 10, 1999. The complaint also alleges false designation of origin in violation of the Lanham Act and common law trade dress infringement. In May 2002, Vasco filed a response to our complaint and filed counterclaims, including claims of non-infringement and patent invalidity. The parties are still in the discovery process and a trial date has been set for June 21, 2004.

In May 2003, we filed a lawsuit in the United States District Court, District of Delaware, against certain former shareholders of Authentic8 International, Inc. alleging fraud and the breach of certain representations and warranties set forth in the agreement pursuant to which we acquired Authentic8. In September 2003, we filed an amended compliant asserting violation of the Securities Exchange Act of 1934, fraudulent concealment and misrepresentation. This action is in its early stages and, as of the date of this report, the defendants have not yet filed a responsive pleading to our amended compliant.

On July 30, 2003, the registrant furnished the SEC with a Current Report on Form 8-K to report the issuance of a press release announcing the registrant’s results of operations for the quarter ended June 30, 2003.

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fremont, State of California on this 13th day of November 2003.

ACTIVCARD CORP.

By:		/s/ Blair W. Geddes
		Blair W. Geddes Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

Delaware		450485038
(State or other jurisdiction of incorporation of organization)		(I.R.S. Employer Identification Number)

PART I: FINANCIAL INFORMATION

Item 1	Financial Statements	3
	Condensed Consolidated Statements of Operations	3
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3	Quantitative and Qualitative Disclosures about Market Risk	35
Item 4	Controls and Procedures	36

PART II: OTHER INFORMATION

Item 1	Legal Proceedings	37
Item 2	Changes in Securities and Use of Proceeds	37
Item 3	Defaults Upon Senior Securities	37
Item 4	Submission of Matters to a Vote of Security Holders	37
Item 5	Other Information	37
Item 6	Exhibits and Reports on Form 8-K	37

SIGNATURES		37

EXHIBIT INDEX

	For the three months ended September 30,						For the nine months ended September 30,
	2003			2002			2003			2002
Revenue
Hardware	$	3,814		$	4,505		$	13,829		$	10,995
Software and maintenance		5,136			7,478			17,710			18,760

		8,950			11,983			31,539			29,755

Cost of revenue
Hardware		1,885			2,583			9,394			6,197
Software and maintenance		1,128			1,267			7,568			3,167

		3,013			3,850			16,962			9,364

Gross margin		5,937			8,133			14,577			20,391

Operating expenses
Research and development		4,580			4,777			13,417			14,683
Selling and marketing		5,050			4,761			15,116			15,131
General and administrative		1,598			1,179			4,632			3,135
Amortization of acquired intangible assets		113			498			416			1,589
Write-down of acquired intangible assets		—			—			758			—
Other charges		536			978			3,423			9,366

		11,877			12,193			37,762			43,904

Loss from operations		(5,940	)		(4,060	)		(23,185	)		(23,513	)
Interest expense		—			(1	)		—			(10	)
Interest income		870			1,435			3,241			4,055
Foreign exchange gain (loss)		23			(107	)		(147	)		(186	)

Loss from continuing operations before income taxes, minority interest, and equity in net loss of Aspace Solutions Limited		(5,047	)		(2,733	)		(20,091	)		(19,654	)

Income taxes		(1	)		—			(84	)		(69	)
Minority interest		100			—			699			—
Equity in net loss of Aspace Solutions Limited		(855	)		—			(855	)		—

Loss from continuing operations		(5,803	)		(2,733	)		(20,331	)		(19,723	)
Income (loss) from discontinued operations		158			(214	)		(70	)		(16,541	)

Net loss	$	(5,645	)	$	(2,947	)	$	(20,401	)	$	(36,264	)

Basic and diluted loss per common share:
From continuing operations	$	(0.14	)	$	(0.07	)	$	(0.50	)	$	(0.48	)
From discontinued operations		—			—			—			(0.40	)

	$	(0.14	)	$	(0.07	)	$	(0.50	)	$	(0.88	)

Shares used in the calculation of loss per common share:
Basic and diluted		41,685,532			41,439,211			40,789,253			41,080,003

Other charges were comprised of:
Amortization of deferred stock compensation:
Cost of revenue	$	9		$	9		$	27		$	25
Research and development		112			199			384			573
Sales and marketing		80			123			266			387
General and administrative		27			21			80			68

		228			352			757			1,053
Acquired in process research and development		306			—			306			68
Restructuring and business realignment expenses		1			133			1,293			7,752
Re-incorporation expenses		1			493			1,067			493

Total other charges	$	536		$	978		$	3,423		$	9,366

	September 30, 2003			December 31, 2002
ASSETS
Current assets
Cash and equivalents	$	80,101		$	158,880
Short-term investments		155,381			89,502
Accounts receivable (net of allowance for doubtful accounts of $500 and $525 at September 30, 2003 and December 31, 2002, respectively)		5,596			9,192
Other receivables		1,630			1,579
Inventories		2,702			3,488
Assets held for sale		—			262
Other current assets		1,303			1,959

Total current assets		246,713			264,862
Restricted investments		627			432
Property and equipment		4,483			7,313
Investment in Aspace Solutions Limited		5,178			—
Goodwill		15,322			10,600
Other intangible assets		1,958			2,311
Other long-term assets		794			874

	$	275,075		$	286,392

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued liabilities	$	10,602		$	10,493
Current portion of restructuring and business realignment accruals		768			867
Deferred revenue		2,899			3,997
Liabilities held for sale		—			250
Current portion of long-term debt		—			15
Current portion of obligations under capital lease		2			7

Total current liabilities		14,271			15,629

Long-term portion of restructuring and business realignment accruals		3,995			4,429
Other long-term liabilities		991			525

Total long-term liabilities		4,986			4,954

Minority interest		1,559			—

Commitments and contingencies
Shareholders’ equity
Preferred shares, $0.001 par value, none issued		—			—
Common shares, $0.001 par value, 42,034 shares issued and outstanding at September 30, 2003; €1.00 nominal value, 41,690 shares issued and outstanding at December 31, 2002		42			45,117
Additional paid-in capital		398,949			354,400
Accumulated other comprehensive loss		(13,036	)		(14,817	)
Deferred stock compensation		(1,676	)		(3,122	)
Accumulated deficit		(130,020	)		(115,769	)

Total shareholders’ equity		254,259			265,809

	$	275,075		$	286,392

	For the nine months ended September 30,
	2003			2002
Operating activities
Loss from continuing operations	$	(20,331	)	$	(19,723	)
Adjustments to reconcile loss from continuing operations to net cash used in continuing operations:
Depreciation and amortization		2,368			2,605
Write-down of property and equipment		1,684			—
Amortization of acquired intangible assets		416			1,635
Write-down of acquired intangible assets		758			—
In process research and development		306			68
Amortization of deferred stock compensation		757			1,053
Non-cash restructuring and business realignment expenses		520			1,054
Minority interest		(699	)		—
Equity in net loss of Aspace Solutions Limited		855			—
Other non-cash items, net		795			232
Increase (decrease) in cash, net of the effects of business combinations, from:
Accounts receivable		3,859			(685	)
Other receivables		42			(395	)
Inventories		1,182			461
Other current assets		772			(447	)
Accounts payable and accrued liabilities		(813	)		(1,399	)
Restructuring and business realignment accruals		(540	)		4,637
Deferred revenue		(1,038	)		1,019

Net cash used in continuing operations		(9,107	)		(9,885	)
Net cash used in discontinued operations		(106	)		(1,291	)

Net cash used in operating activities		(9,213	)		(11,176	)

Investing activities
Business acquisitions, net of cash acquired		—			606
Loans to related parties		—			(67	)
Investment in Aspace Solutions Limited		(6,033	)		—
Acquisition of ActivCard S.A. minority interest		(395	)		—
Purchases of property and equipment		(966	)		(1,162	)
Purchases of short term investments		(209,233	)		(173,159	)
Proceeds from sales and maturities of short term investments		142,598			78,405
Other long-term assets		12			13

Net cash used in investing activities		(74,017	)		(95,364	)

Financing activities
Proceeds from exercise of stock options and warrants		3,506			5,172
Increase in long-term liabilities		—			43
Repayment of long-term debt		(17	)		(160	)

Net cash provided by financing activities		3,489			5,055

Effect of exchange rate changes on cash and equivalents		962			1,989

Net decrease in cash and equivalents		(78,779	)		(99,496	)
Cash and equivalents, beginning of period		158,880			248,444

Cash and equivalents, end of period	$	80,101		$	148,948

Supplemental disclosure of non-cash financing activity:
Issuance of common stock in connection with acquisition of ActivCard S.A. minority interest	$	16,637			—

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Current assets	$	11,539
Property and equipment, net		208
Other long term assets		605
Intangible assets and in process research and development		1,178
Goodwill		4,722

Total assets acquired		18,252
Current liabilities		(667	)
Long term liabilities		(553	)

Net assets acquired	$	17,032

	2002 Restructuring						2003 Restructuring
	Facility Exit Costs			Workforce Reduction			Workforce Reduction			Total
Accrual balance at January 1, 2002	$	—		$	—		$	—		$	—
Provisions for restructuring and business realignment costs		5,423			2,706			—			8,129
Adjustments to accruals for changes in estimates		569			(112	)		—			457
Payments		(701	)		(1,658	)		—			(2,359	)
Asset write-offs		(214	)		(717	)		—			(931	)

Accrual balance at December 31, 2002		5,077			219			—			5,296
Provisions for restructuring and business realignment costs		—			—			913			913
Adjustments to accruals for changes in estimates		—			34			—			34
Payments		(175	)		(217	)		(229	)		(621	)
Non-cash charges		—			—			(520	)		(520	)

Accrual balance at March 31, 2003		4,902			36			164			5,102
Provisions for restructuring and business realignment costs		—			—			338			338
Adjustments to accruals for changes in estimates		—			7			—			7
Payments		(178	)		—			(170	)		(348	)

Accrual balance at June 30, 2003		4,724			43			332			5,099
Adjustments to accruals for changes in estimates		—			1			—			1
Payments		(164	)		(44	)		(129	)		(337	)

Accrual balance at September 30, 2003		4,560			—			203			4,763
Less current portion		565			—			203			768

Long term portion	$	3,995		$	—		$	—		$	3,995

Estimated remaining cash expenditures	$	4,560		$	—		$	203		$	4,763

	September 30, 2003
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. government and agency securities	$	154,757	$	677	$	53	$	155,381

	September 30, 2003
	Amortized Cost		Estimated Fair Value
Within one year	$	31,055	$	31,193
Between one year and three years		123,702		124,188

	$	154,757	$	155,381

	September 30, 2003		December 31, 2002
Components	$	566	$	911
Finished goods		2,136		2,577

	$	2,702	$	3,488

	Warranty Allowance
Sales warranty allowance balance at December 31, 2002	$	43
Warranty costs incurred		(66	)
Additions related to current period sales		182
Adjustments to accruals related to prior period sales		(16	)

Sales warranty allowance balance at September 30, 2003	$	143

	Europe			North America			Asia Pacific			Total
Three months ended September 30, 2003
Net revenues	$	3,897		$	4,857		$	196		$	8,950
Net loss		(2,268	)		(2,943	)		(434	)		(5,645	)
Three months ended September 30, 2002
Net revenues	$	3,080		$	8,213		$	690		$	11,983
Net loss		(2,748	)		50			(249	)		(2,947	)
Nine months ended September 30, 2003
Net revenues	$	10,622		$	19,415		$	1,502		$	31,539
Net loss		(8,183	)		(10,940	)		(1,278	)		(20,401	)
Nine months ended September 30, 2002
Net revenues	$	9,615		$	19,023		$	1,117		$	29,755
Net loss		(9,420	)		(8,396	)		(18,448	)		(36,264	)

	Europe			North America			Asia Pacific			Total
September 30, 2003
Goodwill	$	1,795		$	13,420		$	107		$	15,322
Long lived assets		7,770			5,003			267			13,040
Total assets		17,489			255,146			2,440			275,075
December 31, 2002
Goodwill	$	1,795		$	8,698		$	107		$	10,600
Long lived assets		2,921			7,883			126			10,930
Total assets		23,311			260,908			2,173			286,392

	For the three months ended September 30,				For the nine months ended September 30,
	2003		2002		2003		2002
Percentage of revenue
Revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenue	33.7		32.1		53.8		31.5

Gross profit	66.3		67.9		46.2		68.5

Operating expenses
Research and development	51.2		39.9		42.5		49.3
Sales and marketing	56.4		39.7		47.9		50.9
General and administrative	17.9		9.8		14.7		10.5
Amortization of acquired intangible assets	1.3		4.2		1.3		5.3
Write-down of acquired intangible assets	—		—		2.4		—
Other charges	5.9		8.2		10.9		31.5

Total operating expenses	132.7		101.8		119.7		147.5

Loss from operations	(66.4	)	(33.9	)	(73.5	)	(79.0	)
Non-operating income (expense)
Interest expense	—		—		—		—
Interest income	9.7		12.0		10.3		13.6
Foreign exchange gain (loss)	0.3		(0.9	)	(0.5	)	(0.7	)

Loss from continuing operations before income taxes and minority interest	(56.4	)	(22.8	)	(63.7	)	(66.1	)
Income tax expense	—		—		(0.3	)	(0.2	)
Minority interest	1.1		—		2.2		—
Equity in net loss of Aspace Solutions Limited	(9.6	)	—		(2.7	)	—
Income (loss) from discontinued operations	1.8		(1.8	)	(0.2	)	(55.6	)

Net loss	(63.1	)%	(24.6	)%	(64.7	)%	(121.9	)%

	For the three months ended September 30,						For the nine months ended September 30,
	2003		2002		% Change		2003		2002		% Change
	(in thousands)						(in thousands)
Hardware revenues	$	3,814	$	4,505	-15	%	$	13,829	$	10,995	+26	%
Software and maintenance revenues		5,136		7,478	-31	%		17,710		18,760	-6	%

	$	8,950	$	11,983	-25	%	$	31,539	$	29,755	+6	%

Developed and core technology	$	742
Acquired in process research and development		306

Acquired research and development assets	$	1,048

	For the three months ended September 30,				For the nine months ended September 30,
	2003		2002		2003		2002
	(in thousands)				(in thousands)
Amortization of deferred stock compensation	$	228	$	352	$	757	$	1,053
Acquired in process research and development		306		—		306		68
Restructuring and business realignment expenses		1		133		1,293		7,752
Re-incorporation expenses		1		493		1,067		493

Total other charges	$	536	$	978	$	3,423	$	9,366

Exhibit Number		Description

31.1		Certification Filed Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

31.2		Certification Filed Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

32.1		Certification Filed Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

32.2		Certification Filed Pursuant to Section 906 of Sarbanes-Oxley Act of 2002