Selected Consolidated Financial Data

The table below sets forth selected consolidated financial data for the Company
for each of the years in the five-year period ended December 31, 1998. Such data
have been derived from the consolidated financial statements of the Company.
Consolidated audited financial statements for each of the years in the
three-year period ended December 31, 1998, including the Notes thereto
(collectively, the "Consolidated Financial Statements"), are included elsewhere
in this annual report.

The following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and the related Notes thereto included
elsewhere in this annual report.
<TABLE>
<CAPTION>

Year ended December 31,
(in millions except per share and ratio data)         1994(1)             1995(1)           1996           1997           1998(1)
Consolidated Statement of Income Data:
<S>                                               <C>                 <C>             <C>            <C>              <C>
Net sales                                         $  2,602.2          $  3,520.7      $  4,078.3     $  3,969.8       $  4,210.6
Other revenues                                          42.7                33.7            44.1           49.4             37.2
Net revenues                                         2,644.9             3,554.4         4,122.4        4,019.2          4,247.8
Cost of sales (2)                                   (1,528.7)           (2,096.0)       (2,414.7)      (2,457.4)        (2,623.0)
      Gross profit (2)                               1,116.2             1,458.4         1,707.7        1,561.8          1,624.8
Operating expenses:
      Selling, general & administrative               (339.9)             (413.2)         (421.1)        (454.3)          (488.1)
      Research and development (3)                    (338.3)             (440.3)         (532.3)        (610.9)          (689.8)
      Restructuring costs                              (37.0)              (13.0)             --             --               --
      Other income and expenses (3)                     32.0                59.1            45.1           23.2             76.5
      Total operating expenses                        (683.2)             (807.4)         (908.3)      (1,042.0)        (1,101.4)
Operating income                                       433.0               651.0           799.4          519.8            523.4
Net interest income (expense)                          (21.0)              (16.8)          (11.2)          (2.6)             8.7
Gain on disposal of investment                            --                  --             7.3             --               --
Income before income taxes and
      minority interests                               412.0               634.2           795.5          517.2            532.1
Income tax expense                                     (49.5)             (108.3)         (171.6)        (113.0)          (120.4)
Income before minority interests                       362.5               525.9           623.9          404.2            411.7
Minority interests (4)                                    --                 0.6             1.6            2.4             (0.6)
Net income                                        $    362.5          $    526.5      $    625.5     $    406.6       $    411.1
Earnings per share (basic) (5)                    $     3.04          $     4.03      $     4.50     $     2.92       $     2.92
Earnings per share (diluted) (5)                  $     3.03          $     4.01      $     4.49     $     2.91       $     2.89
Number of shares used in calculating
      earnings per share (basic)                       119.4               130.6           138.7          139.1            140.9
Number of shares used in calculating
      earnings per share (diluted)                     119.7               131.3           139.2          139.9            144.0
Ratio of earnings to fixed charges (6)                  10.9                13.2            18.6           13.4             12.7
Consolidated Balance Sheet Data
      (end of period):
Cash, cash equivalents and
      marketable securities                       $    461.5          $    758.4      $    556.4     $    702.2       $  1,100.7
Working capital (7)                                    291.1               417.4           611.8          443.5            695.4
Total assets                                         3,224.7             4,486.0         5,005.5        5,445.7          6,434.0
Short-term debt (including current portion
      of long-term debt)                               322.5               492.8           428.2          424.6            191.2
Long-term debt (excluding current portion) (1)         277.2               200.7           194.9          356.4            755.8
Shareholders' equity (1)                             1,680.0             2,661.7         3,260.0        3,307.4          4,083.3
Consolidated Operating Data:
Capital expenditures (8)                          $    779.7          $  1,001.9      $  1,125.2     $  1,035.4       $    947.3
Net cash provided by operating activities              728.1               825.1           980.7          983.8          1,012.5
Depreciation and amortization (8)                      288.0               392.4           535.9          608.1            704.0


<FN>
(1)   On June 10, 1998, the Company completed an equity offering of 3,000,000
      shares of capital stock at $72.1875 per share (the "Share Offering"). The
      net proceeds to the Company in connection with the Share Offering were
      $208.8 million. On June 10, 1998, the Company also completed a debt
      offering of $431.7 million aggregate initial principal amount of
      zero-coupon convertible Liquid Yield Option TM Notes due 2008 (the
      "LYONs"), with yield to maturity of 1.75% per annum (the "LYONs
      Offering"). The net proceeds to the Company in connection with the LYONs
      Offering was $421.8 million. In October 1995, the Company completed a
      second public offering, with net proceeds to the Company of approximately
      $371.6 million. In December 1994, the Company completed the Initial Public
      Offering, with net proceeds to the Company of approximately $198.7
      million.
(2)   Cost of sales is net of certain funds received through government
      subsidies for industrialization costs (which include certain costs
      incurred to bring prototype products to the production stage) included
      therein. See Note 18 to the Consolidated Financial Statements. For a
      discussion of certain significant charges reflected in cost of sales in
      1996, 1997 and 1998, see "Management's Discussion and Analysis of
      Financial Condition and Results of Operations -- Results of Operations."
(3)   Other income and expenses include, among other things, funds received
      through government subsidies for research and development expenses, and
      the cost of new plant start-ups, as well as foreign currency gains and
      losses, and the costs of certain activities relating to intellectual
      property. The Company's reported research and development expenses do not
      include design center, process engineering, pre-production or
      industrialization costs.
(4)   In 1994, the Company created a joint venture with a subsidiary of the
      Shenzhen Electronics Group ("SEG"). The Company owns a 60% interest in the
      joint venture, with a subsidiary of SEG owning the remaining 40%. Minority
      interests also include other minor investments made by the Company.
(5)   Earnings per share have been restated to reflect the adoption in 1997 of
      Statement of Financial Accounting Standards No. 128 "Earnings Per Share."
      See Note 2.14 and Note 12 to the Consolidated Financial Statements.
(6)   For purposes of calculating the ratio of earnings to fixed charges,
      earnings consist of income before income taxes and minority interests,
      plus fixed charges. Fixed charges consist of interest expenses.
(7)   Working capital is calculated as current assets (excluding cash, cash
      equivalents and marketable securities) less current liabilities (excluding
      bank overdrafts, short-term debt and current portion of long-term debt).
(8)   Capital expenditures are net of certain funds received through government
      subsidies, the effect of which is to decrease depreciation.
</FN>
</TABLE>


                                     - 27 -

<PAGE>


Management's Discussion and Analysis of Financial Condition and Results of
Operations

The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere in this annual report.
The following discussion contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended. The Company's actual
results may differ significantly from those projected in the forward-looking
statements. Factors that might cause future actual results to differ materially
from the Company's recent results or those projected in the forward-looking
statements include, but are not limited to, those discussed in "Cautionary
Statement Regarding Forward-Looking Statements," under the caption "Risk
Factors" in the Company's Prospectuses dated June 5, 1998. The Company assumes
no obligation to update the forward-looking statements or such factors.

Overview

The semiconductor industry experienced a severe slowdown in 1998, after a
similar decrease in 1996 and a marginal recovery in 1997. During this period the
Company experienced increased competition and pricing pressure in its core
product markets. According to trade association data, worldwide sales of
semiconductor products (the total available market or "TAM") decreased 8.4% in
1998 over 1997, ending the year below the 1995 level. According to trade
association data, the estimated market for products produced by the Company (the
serviceable available market or "SAM") (which prior to 1995 consisted of the TAM
without DRAMs, microprocessors and opto-electronic products and commencing in
1995 and for all subsequent periods presented includes microprocessors as a
result of the Company's production of x86 products) decreased approximately 5.2%
in 1998 over 1997.

        While the semiconductor market in 1998 registered a significant
decrease, the Company's net revenues for 1998 increased 5.7% compared to net
revenues for 1997, benefiting from increased volumes in virtually all product
families and an improved product mix, including sales of new products.

        Despite difficult market conditions in recent years, from 1994 to 1998
the Company's net revenues increased from $2,644.9 million to $4,247.8 million,
representing a compound annual growth rate of 12.6%. Such revenue gains were
achieved despite the Company's absence from the market for DRAMs (a commodity
memory product) and, until the second half of 1994, from the market for personal
computer microprocessors (such as the x86 family of products). According to
trade association data, the TAM increased from $101.9 billion in 1994 to $125.6
billion in 1998, representing a compound annual growth rate of 5.4%, while the
SAM increased from $75.2 billion in 1994 to $107.0 billion in 1998, representing
a compound annual growth rate of 9.2%. During the same period, the Company's
share of the TAM increased from 2.6% to 3.4%, while the Company's share of the
SAM increased from 3.5% to 4.0%. The Company's revenue growth from 1994 through
1998 was particularly significant for differentiated ICs (which the Company
defines as being its dedicated products, semicustom devices and
microcontrollers).

        As a result of this performance, the Company not only gained market
share against both the TAM and SAM, but, according to leading market analysts,
became the ninth largest semiconductor company in the world during 1998 moving
up from tenth position in 1997. The Company's absence from the DRAM market
partially contributed to the Company's outperformance of the semiconductor
industry during the period presented. However, the Company believes that recent
difficult market conditions have led certain of its competitors to redirect
their marketing focus and manufacturing capacity toward products that compete
with the Company's products. The Company believes increased competition in its
core product markets is generating greater pricing pressure, increased
competition for market share in the SAM, and a generally more challenging market
environment for the Company.

        The Company continues to focus on differentiated ICs and analog ICs.
Differentiated ICs accounted for approximately 62% of the Company's net revenues
in 1998, compared to approximately 57% in 1997. Such products foster close
relationships with customers, resulting in early knowledge of their evolving
requirements and opportunities to access their markets for other products, and
are less vulnerable to competitive pressures than standard commodity products.
Analog ICs (including mixed signal ICs), the majority of which are also
differentiated ICs, accounted for approximately 51% of the Company's net
revenues in 1998, compared to approximately 49% in 1997, while discrete devices
accounted for approximately 13% of the Company's net revenues in 1998 and
approximately 14% in 1997. In recent years, these families of products, in
particular analog ICs, have experienced less volatility in sales growth rates
and average selling prices than the overall semi-conductor industry. However,
the difficult competitive environment in the semiconductor market in more recent
years has led to price pressures also in these families.

        With the aim of reinforcing the Company's presence in certain strategic
business segments, the Company has recently completed the acquisition of
Peripherals Technology Solutions (in the area of data storage) and Vision Group
(in the imaging market).

        The Company's gross profit margin decreased from 42.2% in 1994 to 38.3%
in 1998. Benefiting from a favorable environment in 1994, 1995 and 1996, the
Company had a stable gross profit margin of above 40%. In 1997 and 1998, in an
unfavorable industry environment, which generated lower margins due to the
negative impact of pricing pressures, gross profit margin declined to slightly
above 38%. This decline in gross profit margin coupled with a higher level of
research and development expenditure, resulted in a lower operating income as a
percentage of net revenues which, however, remained above a solid level of 12%.

        There can be no assurance that the Company will experience revenue
growth at or above the growth rate for the TAM or the SAM, or that increased
competition in the Company's core product markets will not lead to further price
erosion, lower revenue growth rates and lower margins for the Company.



                                     - 28 -

<PAGE>



Results of Operations

The tables below set forth information on the Company's net revenues by product
group and by geographic region:
<TABLE>
<CAPTION>

Year ended December 31,
(in millions except percentages)                        1994         1995          1996          1997         1998

Net Revenues by Product Group:
<S>                                                <C>          <C>           <C>           <C>          <C>
     Dedicated Products (1) (2)                    $   997.1    $ 1,344.4     $ 1,788.7     $ 1,696.3    $ 1,865.6
     Discrete and Standard ICs                         636.3        838.0         784.1         846.8        828.7
     Memory Products (2)                               560.7        653.3         736.8         708.6        659.6
     Programmable Products (1)                         372.0        550.6         689.5         642.1        783.4
     New Ventures Group and Others (3)                  78.8        168.1         123.3         125.4        110.5
          Total                                    $ 2,644.9    $ 3,554.4     $ 4,122.4     $ 4,019.2    $ 4,247.8

Net Revenues by Geographic Region: (4)
     Europe                                        $ 1,187.5    $ 1,593.8     $ 1,788.5     $ 1,753.3     $1,768.9
     North America (5)                                 643.9        812.5         903.0         899.1        937.3
     Asia/Pacific                                      617.6        916.7       1,125.7       1,065.8      1,247.9
     Japan                                             134.7        155.4         228.2         214.5        180.7
     Region Five (4)                                    61.2         76.0          77.0          86.5        113.0
          Total                                    $ 2,644.9    $ 3,554.4     $ 4,122.4     $ 4,019.2    $ 4,247.8

As a percentage of net revenues

Net Revenues by Product Group

Dedicated Products (1) (2)                              37.7%        37.8%         43.4%         42.2%        43.9%
Discrete and Standard ICs                               24.1         23.6          19.0          21.1         19.5
Memory Products (2)                                     21.2         18.4          17.9          17.6         15.5
Programmable Products (1)                               14.0         15.5          16.7          16.0         18.4
New Ventures Group and Others (3)                        3.0          4.7           3.0           3.1          2.7
Total                                                  100.0%       100.0%        100.0%        100.0%       100.0%

Net Revenues by Geographic Region: (4)
Europe                                                  44.9%        44.8%         43.4%         43.6%        41.6%
North America (5)                                       24.3         22.9          21.9          22.4         22.1
Asia/Pacific                                            23.4         25.8          27.3          26.5         29.4
Japan                                                    5.1          4.4           5.5           5.3          4.3
Region Five (4)                                          2.3          2.1           1.9           2.2          2.6
Total                                                  100.0%       100.0%        100.0%        100.0%       100.0%
<FN>

(1)  In January 1997, analog array products were moved from the Programmable
     Products Group to the Dedicated Products Group and image processing
     products from the Dedicated Products Group to the Programmable Products
     Group. Revenues for the Dedicated Products Group and the Programmable
     Products Group have been restated in this "Management's Discussion and
     Analysis of Financial Condition and Results of Operations" for prior
     periods to reflect this change.
(2)  1996 revenues for the Dedicated Products Group include $5.6 million of
     revenues from certain foundry activities which were moved from the Memory
     Products Group in January 1996. Revenues for the Dedicated Products Group
     and the Memory Products Group have been restated for prior periods to
     reflect this change.
(3)  Includes revenues from sales of subsystems and other products and from the
     New Ventures Group, which was created in May 1994 to act as a focal point
     for the Company's new business opportunities.
(4)  Revenues are classified by location of customer invoiced. For example,
     products ordered by U.S.-based companies to be invoiced to Asia/Pacific
     affiliates are classified as Asia/Pacific revenues. Net revenues by
     geographic region have been reclassified to reflect the creation of Region
     Five in January 1998 which includes emerging markets such as South America,
     Africa, Eastern Europe, the Middle East and India. Prior years have been
     restated to reflect this reclassification.
(5)  Substantially all of the revenues derived from North America are derived
     from the United States.
</FN>
</TABLE>

                                     - 29 -
<PAGE>

        The following table sets forth certain financial data from the Company's
consolidated statements of income since 1994, expressed in each case as a
percentage of net revenues:
<TABLE>
<CAPTION>

Year ended December 31,                                 1994         1995          1996          1997         1998

<S>                                                       <C>          <C>           <C>           <C>          <C>
Net sales                                                 98.4%        99.1%         98.9%         98.8%        99.1%
Other revenues                                             1.6          0.9           1.1           1.2          0.9
Net revenues                                             100.0        100.0         100.0         100.0        100.0
Cost of sales                                            (57.8)       (59.0)        (58.6)        (61.1)       (61.7)
     Gross profit                                         42.2         41.0          41.4          38.9         38.3
Operating expenses:
     Selling, general and administrative                 (12.9)       (11.6)        (10.2)        (11.3)       (11.5)
     Research and development                            (12.8)       (12.4)        (12.9)        (15.2)       (16.2)
     Restructuring costs                                  (1.4)        (0.4)           --            --           --
     Other income and expenses                             1.3          1.7           1.1           0.5          1.7
          Total operating expenses                       (25.8)       (22.7)        (22.0)        (26.0)       (26.0)
Operating income                                          16.4         18.3          19.4          12.9         12.3
Net interest income (expense)                             (0.8)        (0.5)         (0.3)         --            0.2
Gain on disposal of investment                            --           --             0.2          --           --
Income before income taxes & minority interests           15.6         17.8          19.3          12.9         12.5
Income tax expense                                        (1.9)        (3.0)         (4.2)         (2.9)        (2.8)
Income before minority interests                          13.7         14.8          15.1          10.0          9.7
Minority interests                                        --           --             0.1           0.1         --
Net income                                                13.7%        14.8%         15.2%         10.1%         9.7%
</TABLE>

1998 vs. 1997

The Company distinguished itself during 1998 by the solid performance achieved
during an unprecedented downturn in the semi-conductor industry. In 1998, the
Company increased net revenues, gross profit and net income compared to 1997. In
addition, the Company increased significantly its investments in research and
development activities during the year, continuing the trend established during
the last five years. The improved financial results reflect the Company's
business strategy, including the high level of differentiated products within
its product portfolio, its focus on high growth markets and its geographic
balance.

        Net revenues: Net sales increased 6.1%, from $3,969.8 million in 1997 to
$4,210.6 million in 1998. The increase in net sales was primarily the result of
higher volume and an improved product mix, including sales of new products,
partly offset by declining average selling prices. The exchange rate impact on
net sales in 1998 due to a stronger U.S. dollar was estimated to be marginally
unfavorable. Other revenues decreased from $49.4 million in 1997 to $37.2
million in 1998 due primarily to a reduction in licensing revenues. Net revenues
increased 5.7%, from $4,019.2 million in 1997 to $4,247.8 million in 1998.

        The Dedicated Products Group's net revenues increased 10.0% primarily as
a result of volume increases in wireless telecommunications, automotive and
printer products (partly offset by lower volumes in data storage products) and a
more favorable product mix in data storage, automotive and printer products. The
Discrete and Standard ICs Group's net revenues decreased 2.1%, as volume
increases in basically all major product families and a more favorable product
mix in transistors and standard commodities were more than offset by price
declines in transistors, discrete devices, standard commodities and standard
logic products. Net revenues of the Memory Products Group declined by 6.9% as
the volume increases in EEPROMs, flash memories and smartcard ICs were more than
offset by significant price declines in basically all product families (such as
EPROMs, EEPROMs, smartcard ICs and flash memories). The Programmable Products
Group's net revenues increased 22.0% as a result of significantly higher volumes
in digital image processing and graphics products.

                                     - 30 -
<PAGE>

Gross profit: The Company's gross profit increased 4.0%, from $1,561.8 million
in 1997 to $1,624.8 million in 1998 primarily as a result of higher net
revenues. As a percentage of net revenues, gross profit decreased from 38.9% in
1997 to 38.3% in 1998, being primarily impacted by the reduction in average
selling prices and a higher depreciation charge.

        Cost of sales increased from $2,457.4 million in 1997 to $2,623.0
million in 1998, primarily due to a significant increase in production volume
and the increased depreciation associated with new capital investments.

        The exchange rate impact on gross profit in 1998 compared to 1997 was
estimated to be marginally favorable, as the negative impact of the appreciation
of the U.S. dollar on net revenues was more than offset by the positive impact
on cost of sales. See "-- Impact of Changes in Exchange Rates." Cost of sales in
1998 and 1997 was net of $3.1 million and $6.2 million, respectively, of funds
received through government subsidies to offset industrialization costs (which
include certain costs incurred to bring prototype products to the production
stage) included in cost of sales.

Selling, general and administrative expenses: Selling, general and
administrative expenses increased 7.4%, from $454.3 million in 1997 to $488.1
million in 1998, reflecting higher expenditure for information technology,
marketing and administrative functions. As a percentage of net revenues,
selling, general and administrative expenses increased slightly from 11.3% in
1997 to 11.5% in 1998.

        Research and development expenses: Research and development expenses
increased 12.9%, from $610.9 million in 1997 to $689.8 million in 1998. The
Company continued to invest heavily in research and development and plans to
continue increasing its research and development staff. The Company continues to
allocate significant financial resources to expand its market leadership in key
applications, reflecting its commitment to service and continuous innovation.
The Company's reported research and development expenses do not include design
center, process engineering, pre-production or industrialization costs. As a
percentage of net revenues, research and development expenses increased from
15.2% in 1997 to 16.2% in 1998.

Other income and expenses: Other income and expenses increased from income of
$23.2 million in 1997 to income of $76.5 million in 1998. Other income and
expenses include primarily funds received from government agencies in connection
with the Company's research and development programs, the cost of new plant
start-ups, as well as foreign currency gains and losses, the costs of certain
activities relating to intellectual property and miscellaneous revenues and
expenses. The increase in other income and expenses resulted primarily from
lower start-up costs of new production facilities and from an increase in funds
received from government agencies in connection with the Company's research and
development programs.

Operating income: The Company's operating income increased slightly, from $519.8
million in 1997 to $523.4 million in 1998. The exchange rate impact on operating
income was estimated to be favorable, since the negative impact on net revenues
was more than compensated by the favorable impact on cost of sales and operating
expenses.

Net interest income (expense): Net interest income increased from an expense of
$2.6 million in 1997 to an income of $8.7 million in 1998 primarily as a result
of the increase in cash and cash equivalents following the Share Offering and
the LYONs Offering completed on June 10, 1998.

Income tax expense: Provision for income tax was $120.4 million in 1998 compared
to $113.0 million in 1997, primarily as a result of the increase in income
before income taxes and minority interests and a higher effective tax rate. The
accrued effective tax rate increased from 21.8% in 1997 to 22.6% in 1998. The
still favorable 1998 rate was mainly due to the application of benefits in
certain countries. As such benefits may not be available after 1998, the Company
expects an increase in the effective tax rate in the coming years.

1997 vs. 1996

The difficult market environment during 1997 resulted in a decrease in the
Company's net revenues, gross profit, operating income and net income in 1997
compared to 1996. While unit volumes increased substantially in the 1997 period,
average selling prices in 1997 declined compared to 1996.

Net revenues: Net sales decreased 2.7%, from $4,078.3 million in 1996 to
$3,969.8 million in 1997. This decrease originated from difficult market
conditions for certain product families for which supply exceeded demand and
produced strong negative pressures on the Company's selling prices, while in
other product families demand itself declined because of high inventories
accumulated by the Company's customers in previous periods. In general, as is
normal in a situation of excess capacity, memory and commodity products
experienced price declines. In particular, hard disk drives were affected by
decreasing prices due to increased competition both at the system and
semiconductor levels and set-top boxes experienced a slowdown in sales due to
inventory corrections and lower demand. The Company's unit volumes increased
substantially in 1997 compared to 1996, with commodity products (which are
typically more price sensitive than other products in the Company's product
portfolio) constituting a higher proportion of the overall product mix. The
impact of these market conditions was particularly apparent in the Asia Pacific
region and Japan. In addition, since a significant part of the Company's net
revenues was billed in European and Japanese currencies, the strong appreciation
of the U.S. dollar during 1997 resulted in a negative impact on total net
revenues when translated from local currencies into U.S. dollars. Other revenues
increased from $44.1 million in 1996 to $49.4 million in 1997 due primarily to
an increase in licensing revenues. Net revenues decreased 2.5%, from $4,122.4
million in 1996 to $4,019.2 million in 1997.

                                     - 32 -
<PAGE>

        The Dedicated Products Group's net revenues fell 5.2% primarily as a
result of price pressure and a less favorable product mix in certain major
products including telecommunication, video and automotive products. Price and
volume declines in computer (hard disk drives) products also contributed to the
revenues decline. In January 1997, analog array products were moved from the
Programmable Products Group to the Dedicated Products Group and image processing
products from the Dedicated Products Group to the Programmable Products Group.
Revenues for the Dedicated Products Group and the Programmable Products Group
have been restated in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for prior periods to reflect this change.
The Discrete and Standard ICs Group's net revenues increased by 8.0%, as
significant volume increases were partly offset by price declines in
substantially all major products including standard commodities and discrete and
power devices. Net revenues of the Memory Products Group declined by 3.8%, as
the sales increases in smartcard ICs (used primarily in European telephone and
bank cards) were more than offset by price declines in the major memory product
families (such as EPROMs, flash memories and EEPROMs) and volume declines in
EPROMs. The Programmable Products Group's net revenues decreased 6.9% as an
improved product mix in digital semicustom devices and higher volumes in
microcontroller products were more than offset by declines in sales of image
processing products and price declines in certain major products.

Gross profit: The Company's gross profit decreased 8.5%, from $1,707.7 million
in 1996 to $1,561.8 million in 1997. As a percentage of net revenues, gross
profit decreased from 41.4% in 1996 to 38.9% in 1997, primarily as a result of
the reduction in average selling prices and a less favorable product mix.

        Cost of sales increased slightly from $2,414.7 million in 1996 to
$2,457.4 million in 1997, primarily due to an increase in production volume
related to higher sales volume and higher depreciation charges linked to the
higher level of capital investment.

        The exchange rate impact on gross profit in 1997 compared to 1996 was
marginal, as the negative impact of the appreciation of the U.S. dollar on net
revenues was only slightly higher than the positive impact on cost of sales. See
"--Impact of Changes in Exchange Rates." Cost of sales in 1997 and 1996 was net
of $6.2 million and $4.6 million, respectively, of funds received through
government subsidies to offset industrialization costs (which include certain
costs incurred to bring prototype products to the production stage) included in
cost of sales.

Selling, general and administrative expenses: Selling, general and
administrative expenses increased 7.9%, from $421.1 million in 1996 to $454.3
million in 1997, reflecting higher expenditure in the marketing organization and
for information technology. As a percentage of net revenues, selling, general
and administrative expenses increased from 10.2% in 1996 to 11.3% in 1997, due
primarily to the increase in selling, general and administrative expenses and
the decrease in net revenues.

Research and development expenses: Research and development expenses increased
14.8%, from $532.3 million in 1996 to $610.9 million in 1997. The Company
continued to invest heavily in research and development and plans to continue
increasing its research and development staff. The Company is allocating
significant financial resources to expand its market leadership in key
applications, reflecting the commitment to service and continuous innovation. As
a percentage of net revenues, research and development expenses increased from
12.9% in 1996 to 15.2% in 1997. The Company's reported research and development
expenses do not include design center, process engineering, pre-production or
industrialization costs.

Other income and expenses: Other income and expenses decreased from income of
$45.1 million in 1996 to income of $23.2 million in 1997. Other income and
expenses include primarily funds received from government agencies in connection
with the Company's research and development programs, the cost of new plant
start-ups, as well as foreign currency gains and losses, the costs of certain
activities relating to intellectual property and miscellaneous revenues and
expenses. The decrease in other income and expenses resulted primarily from
higher start-up costs of new production facilities and from a decrease in funds
received from government agencies in connection with the Company's research and
development programs.

Operating income: The Company's operating income decreased 35.0%, from $799.4
million in 1996 to $519.8 million in 1997, primarily as a result of the decrease
in net revenues and the increase in research and development expenses, which
more than offset the favorable exchange rate impact.

Net interest income (expense): Net interest expense decreased from $11.2 million
in 1996 to $2.6 million in 1997 reflecting primarily improved cash flow during
1997 and a slight reduction in interest rates.

Income tax expense: Provision for income tax was $113.0 million in 1997 compared
to $171.6 million in 1996, primarily as a result of the substantial decrease in
income before income taxes and minority interests. The accrued effective tax
rate increased slightly from 21.6% in 1996 to 21.8% in 1997. The still favorable
1997 rate was mainly due to the application of favorable tax regimes in certain
countries.


                                     - 32 -

<PAGE>



Quarterly Results of Operations

The following table sets forth certain financial information for the years 1997
and 1998. Such information is derived from unaudited consolidated financial
statements, prepared on a basis consistent with the audited consolidated
financial statements, that include, in the opinion of management, only normal
recurring adjustments necessary for a fair presentation of the information set
forth therein. Operating results for any quarter are not necessarily indicative
of results for any future period. In addition, in view of the significant growth
experienced by the Company in recent years, the increasingly competitive nature
of the markets in which the Company operates, the changes in product mix and the
currency effects of changes in the composition of sales and production among
different geographic regions, the Company believes that period-to-period
comparisons of its operating results should not be relied upon as an indication
of future performance.
<TABLE>
<CAPTION>

Quarter ended (unaudited)
(in millions, except percentages and per share data)

                                         Mar 29,   June 28,  Sept 27    Dec 31,    Apr 4,     Jul 4,     Oct 3,     Dec 31,
                                          1997       1997      1997      1997       1998       1998       1998        1998
Consolidated Statement of Income Data
<S>                                     <C>       <C>       <C>        <C>        <C>        <C>        <C>        <C>
Net revenues                            $ 944.9   $ 969.7   $1,000.1   $1,104.4   $1,005.4   $1,070.3   $1,039.4   $1,132.7
Cost of sales                            (583.8)   (595.9)    (608.2)    (669.5)    (620.4)    (660.3)    (643.7)    (698.6)
Gross profit                              361.1     373.8      391.9      434.9      385.0      410.0      395.7      434.1
Operating expenses:
Selling, general & administrative        (103.0)   (113.3)    (111.2)    (126.7)    (119.9)    (126.2)    (120.1)    (121.9)
Research and development                 (142.2)   (151.5)    (151.5)    (165.7)    (166.4)    (176.2)    (168.0)    (179.2)
Other income and expenses                  (2.4)      6.9       (5.5)      24.3       16.2       17.2       21.4       21.8
Total operating expenses                 (247.6)   (257.9)    (268.2)    (268.1)    (270.1)    (285.2)    (266.7)    (279.3)
Operating income                          113.5     115.9      123.7      166.8      114.9      124.8      129.0      154.8
Net interest income (expense)              (0.7)     (0.7)      (0.5)      (0.8)      (1.1)       --         5.2        4.6
Income before income taxes &
      minority interests                  112.8     115.2      123.2      166.0      113.8      124.8      134.2      159.4
Income tax expense                        (23.5)    (23.4)     (26.5)     (39.7)     (23.6)     (26.7)     (32.5)     (37.6)
Income before minority interests           89.3      91.8       96.7      126.3       90.2       98.1      101.7      121.8
Minority interests                          1.2       0.3        0.9        --         --        (0.6)      (0.1)       --
Net income                              $  90.5   $  92.1   $   97.6   $  126.3   $   90.2   $   97.5   $  101.6   $  121.8
Earnings per share (basic)              $   0.65  $   0.66  $    0.70  $    0.91  $    0.65  $    0.70  $    0.71  $    0.86
Earnings per share (diluted)            $   0.65  $   0.66  $    0.70  $    0.90  $    0.65  $    0.69  $    0.70  $    0.84
Number of shares used in calculating
      earnings per share (basic)          139.0     139.1      139.1      139.1      139.1      139.9      142.2      142.2
Number of shares used in calculating
      earnings per share (diluted)        139.8     139.8      140.0      139.8      139.8      141.9      147.3      147.4

As a Percentage of Net Revenues
Net revenues                              100.0%    100.0%     100.0%     100.0%     100.0%     100.0%     100.0%     100.0%
Cost of sales                             (61.8)    (61.5)     (60.8)     (60.6)     (61.7)     (61.7)     (61.9)     (61.7)
Gross profit                               38.2      38.5       39.2       39.4       38.3       38.3       38.1       38.3
Operating expenses:
Selling, general & administrative         (10.9)    (11.7)     (11.1)     (11.5)     (11.9)     (11.8)     (11.6)     (10.8)
Research and development                  (15.0)    (15.6)     (15.1)     (15.0)     (16.6)     (16.5)     (16.2)     (15.8)
Other income and expenses                  (0.3)      0.8       (0.6)       2.2        1.6        1.7        2.1        2.0
Total operating expenses                  (26.2)    (26.5)     (26.8)     (24.3)     (26.9)     (26.6)     (25.7)     (24.6)
Operating income                           12.0      12.0       12.4       15.1       11.4       11.7       12.4       13.7
Net interest income (expense)              (0.1)     (0.1)      (0.1)      (0.1)      (0.1)       --         0.5        0.4
Income before income taxes &
      minority interests                   11.9      11.9       12.3       15.0       11.3       11.7       12.9       14.1
Income tax expense                         (2.4)     (2.4)      (2.6)      (3.6)      (2.3)      (2.5)      (3.1)      (3.3)
Income before minority interests            9.5       9.5        9.7       11.4        9.0        9.2        9.8       10.8
Minority interests                          0.1       --         0.1        --         --        (0.1)       --         --
Net income                                  9.6%      9.5%       9.8%      11.4%       9.0%       9.1%       9.8%      10.8%
</TABLE>

                                     - 33 -

<PAGE>



        In 1998, approximately 42% of the Company's net revenues originated in
Europe, compared to approximately 44% in 1997. The Company's third quarter
revenues in Europe have averaged slightly less than average revenues during
other quarters due to production slowdowns by its European customers in July and
August. However, during the third quarter of 1997, the negative impact of third
quarter seasonality in Europe was offset by increased sales in other regions.
Quarterly results have also been and may be expected to continue to be
substantially affected by the cyclical nature of the semiconductor and
electronic systems industries, the timing and success of new product
introductions and the levels of provisions and other unusual charges incurred.

        The Company's quarterly and annual operating results are also affected
by a wide variety of other factors that could materially and adversely affect
revenues and profitability or lead to significant variability of operating
results, including, among others, capital requirements and the availability of
funding, competition, new product development and technological change and
manufacturing. In addition, a number of other factors could lead to fluctuations
in operating results, including order cancellations or reduced bookings by key
customers or distributors, intellectual property developments, international
events, currency fluctuations, problems in obtaining adequate raw materials on a
timely basis, and the loss of key personnel. As only a portion of the Company's
expenses varies with its revenues, there can be no assurance that the Company
will be able to reduce costs promptly or adequately in relation to revenue
declines to compensate for the effect of any such factors. As a result,
unfavorable changes in the above or other factors have in the past and may in
the future adversely affect the Company's operating results.

        First quarter 1998 net revenues declined 9.0% compared to the fourth
quarter of 1997 due to difficult market conditions, lower demand for certain
product families and an adverse currency effect, and were 6.4% above first
quarter 1997 net revenues. Second quarter 1998 net revenues increased 6.5%
compared to the first quarter, and were 10.4% above second quarter 1997 net
revenues. Third quarter 1998 revenues showed a 2.9% sequential decline over the
second quarter of 1998 due to seasonal factors that generally reduce sales
during the summer months and were 3.9% above 1997 third quarter net revenues.
Fourth quarter 1998 net revenues recorded a 9.0% sequential improvement over the
third quarter of 1998 and a 2.6% increase over the fourth quarter of 1997. The
Company experienced strong sequential sales gains across all product groups in
the fourth quarter of 1998. The Dedicated Products Group recorded an increase in
net revenues of nearly 12%, reflecting the strength in sales of ICs for hard
disk drives, digital cellular phones and automotive applications. The Memory
Products Group also experienced double-digit growth, with net revenues
increasing 11%, attributable to a strong rebound in flash memories. The
Programmable Products Group had a solid quarter with an increase of 5.8% in net
revenues. The Discrete and Standards ICs Products Group also experienced
improvements with net revenues increasing just under 2%.

        Gross profit as a percentage of net revenues in the fourth quarter of
1998 remained virtually unchanged compared to the previous quarters in 1998. The
fourth quarter 1998 gross profit margin declined slightly compared to the fourth
quarter of 1997, which, net of licensing revenues, would have been 38.7%.

        Looking ahead the Company is entering 1999 in a strong competitive
position with a product portfolio that is both balanced and focused. The market
for standard products remains very competitive and visibility is still quite
limited. The differentiated products, however, have been enhanced by significant
research and development spending and should benefit from the recent
acquisitions of Peripherals Technology Solutions and Vision Group. Additionally,
the Company has already made investments in buildings and facilities that will
enable it to have the capacity to respond to a market recovery. Within this
context, the Company expects to have the capacity to continue to outperform the
served market in 1999.

Impact of Inflation

The Company believes that inflation has not had a material effect on the results
of its operations during the periods presented.

Impact of Changes in Exchange Rates

The Company's results of operations and financial condition can be significantly
affected by changes in exchange rates between the U.S. dollar and other
currencies, particularly the euro (with respect to prior periods, the Italian
lira, the French franc, the German mark), the Japanese yen and other Asian
currencies.

        Revenues for certain products (primarily dedicated products sold in
Europe and Japan) that are quoted in currencies other than the U.S. dollar are
directly affected by fluctuations in the value of the U.S. dollar. Revenues for
all other products, which are quoted in U.S. dollars and translated into local
currencies for invoicing and payment, tend not to be affected significantly by
fluctuations in exchange rates except to the extent that there is a lag between
changes in currency rates and adjustments in the local currency equivalent price
paid for such products.

        Certain significant costs incurred by the Company, such as manufacturing
labor costs and depreciation charges, selling, general and administrative
expenses, and research and development expenses, are incurred in the currencies
of jurisdictions where the Company's operations are located. Fluctuations in the
value of these currencies, particularly the euro, compared to the U.S. dollar
can affect the Company's costs and therefore its profitability.

        The appreciation in the U.S. dollar in 1998 compared to 1997 against the
principal European and Asian currencies that have a material impact on the
Company resulted in a favorable impact on results of operations for the period
because the negative impact on net revenues was more than offset by the positive
impact on cost of sales and operating expenses, resulting in a net favorable
impact on operating income. Net revenues in 1997 were materially adversely
affected by the depreciation of European currencies and the Japanese yen against
the U.S. dollar due to the significance of the Company's sales in these
currencies and the impact of translating such

                                     - 34 -
<PAGE>


local currency revenues into U.S. dollars. However, the net impact on operating
income was favorable as the negative impact on net revenues was more than offset
by the positive impact on cost of sales and operating expenses. In 1996, the
U.S. dollar on average appreciated slightly against the principal European
(except Italian) and Asian currencies which have a material impact on the
Company. The exchange rate impact on results of operations in 1996 was not
significant.

        The Company's principal strategies to reduce the risks associated with
exchange rate fluctuations have been (i) to increase the proportion of sales to
customers denominated in U.S. dollars, (ii) to purchase raw materials and
services in transactions denominated in U.S. dollars (thereby reducing the
exchange rate risk for costs relative to revenues, which are principally
denominated or determined by reference to the U.S. dollar), and (iii) to manage
certain other costs, such as financial costs, to maintain an appropriate balance
between U.S. dollars and other currencies based upon the currency environment at
the time. From time to time, the Company purchases or sells currencies forward
to cover currency risk in obligations or receivables. The Company has not
experienced significant gains or losses as a result of exchange coverage
activities. Its management strategies to reduce exchange rate risks have served
to mitigate, but not eliminate, the positive or negative impact of exchange rate
fluctuations. Furthermore, the introduction of the euro as of January 1, 1999,
has served to reduce the number of currencies whose exchange rate fluctuations
versus the U.S. dollar may impact the Company's results, thus making the
Company's exposure to exchange rate fluctuations more concentrated.

        Assets and liabilities of subsidiaries are, for consolidation purposes,
translated into U.S. dollars at the period-end exchange rate. See Note 2.4 to
the Consolidated Financial Statements. Income and expenses are translated at the
average exchange rate for the period. Adjustments resulting from the translation
are recorded directly in shareholders' equity, and are shown as "accumulated
other comprehensive income (loss)" in the consolidated statements of changes in
shareholders' equity. The balance sheet impact of such translation adjustments
has been, and may be expected to be, significant from period to period.

        At December 31, 1998, the Company's outstanding indebtedness was
denominated principally in U.S. dollars, Italian lire, and French francs. See
Note 14 to the Consolidated Financial Statements.

Liquidity and Capital Resources

        The Company's net cash generated from operations totaled $1,012.5
million in 1998 compared to $983.8 million in 1997 and $980.7 million in 1996.
Significant amounts of net cash generated from operations in 1996, 1997 and 1998
coupled with capital increases undertaken by the Company in June 1998, which
resulted in net proceeds to the Company of $208.8 million and in October 1995,
which resulted in net proceeds to the Company of $371.6 million, enabled the
Company to finance capital expenditures and strengthen its balance sheet over
the last five years. The Company had a positive net financial position (cash,
cash equivalents and marketable securities net of total debt) of $153.7 million
at December 31, 1998 compared to a negative net financial position of $78.8
million at December 31, 1997. At December 31, 1998 cash and cash equivalents was
$1,100.7 million, compared to $702.2 million at December 31, 1997 and $551.9
million at December 31, 1996. At December 31, 1998, the aggregate amount of the
Company's long-term credit facilities was approximately $801 million, all of
which was outstanding, and additionally the aggregate amount of the Company's
short-term facilities was approximately $971 million, under which approximately
$146 million of indebtedness was outstanding. At December 31, 1998, the Company
had approximately $45 million of long-term indebtedness that will become due
within one year and expects to fund such debt repayments from available cash.

        In 1998, the Company's capital expenditure payments totaled $947.3
million, compared to $1,035.4 million in 1997 and $1,125.2 million in 1996.
Capital expenditures for 1998 were devoted principally (i) to the expansion of
the 8-inch front-end wafer fabrication plant in Crolles, France, (ii) to equip
and upgrade both the new 8-inch and existing 6-inch front-end facilities at the
Catania, Italy plant, (iii) to the extension and conversion of an existing
facility in Agrate, Italy, (iv) to the expansion of the 6-inch facility in
Carrollton, Texas, (v) to the ramp-up of production at the Phoenix, Arizona
8-inch front-end facility, (vi) to the expansion of the back-end facilities in
Muar, Malaysia and (vii) to the expansion of the back-end facilities in Morocco,
Malta and Shenzhen, China. Capital expenditures for 1997 were devoted
principally (i) to equip and upgrade both the new 8-inch and existing 6-inch
front-end facilities at the Catania, Italy plant, (ii) to the expansion of the
8-inch front-end wafer fabrication plant in Crolles, France, (iii) to the
extension and conversion of an existing facility in Agrate, Italy, (iv) to the
upgrading of the front-end facility and the construction of a new 8-inch wafer
fabrication plant in Rousset, France, (v) to the ramp-up of production at the
Phoenix, Arizona 8-inch front-end manufacturing facility, (vi) to the expansion
of the back-end facility in Muar, Malaysia, (vii) to the expansion of the 6-
inch facility in Carrollton, Texas, (viii) to the expansion of the back-end
facilities in Singapore, Shenzhen (China), Malta and Morocco and (ix) to the
upgrade of the wafer fabrication facility in Rancho Bernardo.

        The Company currently expects that capital spending for 1999 will
continue to be at levels at least as high as in 1997 and 1998, and possibly
higher. The most significant of the Company's 1999 capital expenditure projects
are expected to be the conversion from 6-inch to 8- inch and expansion at one of
its front-end wafer fabrication plants in Agrate, Italy, the increase of
capacity of the 8-inch facilities in Catania, Italy, the completion of
construction of its new 8-inch front-end wafer fabrication facility in Rousset,
France, the conversion of its facilities in Crolles, France to 0.25 micron and
0.18 micron processes, the increase of capacity of the 8-inch facilities in
Phoenix, Arizona and the expansion of the back-end facilities in Muar and
Morocco. The Company has also identified an additional 8-inch wafer fabrication
facility to be built in Italy that is planned to be operational by the year
2001. The Company has decided to build a new 300 millimeter, 12-inch wafer

                                     - 35 -
<PAGE>


research fabrication and pilot line at Crolles (France) using 0.18 micron and
below process technology. The pilot line will be operated in partnership with
Leti and CNET, which are already working with the Company in Crolles. The
Company has also announced plans for a new center for advanced research and
development and industrialization in the field of nonvolatile memories in Agrate
(Italy) to target 0.13 micron CMOS technology generation by 2003. The Company
will continue to monitor its level of capital spending, however, taking into
consideration factors such as trends in the semiconductor market, capacity
utilization and announced additions.

        In 1998, the Company's receivables from government agencies totaled
$261.2 million compared to $154.9 million in 1997 and $217.3 million in 1996.
The increase in 1998 was due primarily to the recognition of certain government
contracts for which cash will be received in future periods. See Note 7 to the
Consolidated Financial Statements. In 1998, the Company's advances from
government agencies totaled $14.1 million compared to $10.1 million in 1997 and
$10.7 million in 1996. See Note 15 to the Consolidated Financial Statements. The
timing of receipt of funds under government contracts has been delayed from time
to time in the past, and while generally the Company has received the amounts
recorded in such receivables, there have been instances in which such funds
ultimately have not been paid.

        The Company expects to have significant capital requirements in the
coming years and intends to continue to devote a substantial portion of its net
revenues to research and development. The Company plans to fund its capital
requirements from cash from operations, available funds, available support from
third parties (including state support, principally from the French and Italian
governments) and may make recourse to borrowings under available credit lines
and, to the extent necessary or attractive based on market conditions prevailing
at the time, the sale of debt or additional equity securities. There can be no
assurance that additional financing will be available as necessary to fund the
Company's working capital requirements, research and development,
industrialization costs or expansion plans, or that any such financing, if
available, will be on terms acceptable to the Company.

        The Company believes that its available funds, available support from
third parties, and additional borrowings will be sufficient to meet its
anticipated needs for liquidity through at least 1999.

Year 2000

STMicroelectronics has had a top priority program (the "Year 2000 Project")
underway since the second quarter of 1997 for dealing with the year 2000 issue,
and is currently evaluating its information technology infrastructure for year
2000 compliance and working with key customers and suppliers to ensure that
their systems are year 2000 compliant. As part of the Year 2000 Project, a
Company-wide task force has been assembled to identify, test, and correct or
replace the Company's systems to ensure that they do not malfunction as a result
of the year 2000. This task force reports directly to a corporate vice-president
who produces a monthly report which is circulated to senior management and to
the President and Chief Executive Officer. The main objectives of the Year 2000
Project are to minimize the negative impact of Year 2000-related date problems
on the Company's operations and financial results as well as to instill in
business partners and other stakeholders confidence in the Company's products
and systems.

        Year 2000 risks relate to the issues associated with the limitations of
the programming code in many existing computer systems, whereby computer systems
may not properly recognize date sensitive information at or after the turn of
the year to 2000. Computer systems include, but are not limited to, computer
systems embedded in production equipment, products containing computer systems,
business data processing systems, production management and planning systems and
personal computers. Systems that do not properly recognize such information on
or after January 1, 2000 could generate erroneous data or fail. Associated
problems include the use of certain codes such as "99" for certain functions.
The Company has established its Year 2000 compliance definition to mean that the
functions, calculations, and other computing processes of each of the products
and systems (collectively, "Processes") perform in a consistent manner
regardless of the date and time the Processes are actually performed, whether
before, on, or after January 1, 2000 and regardless of whether the dates are
affected by leap years, and further that each product will function without
interruptions caused by the date and time on which the Processes are actually
performed, whether before, on or after January 1, 2000 ("Year 2000 Compliance").

The Five-Phase Year 2000 Project

The Company's Year 2000 Project has five overlapping phases: (i) preparation
(identification of the issues, creation of general awareness and the assignment
of responsibility), (ii) sizing (completion of an inventory, determination of
the costs and resources needed and assessment of risks), (iii) planning
(allocation of work, preparation of budgets, and planning for contingencies),
(iv) remediation and testing (ensuring that all products, items and systems are
Year 2000 ready and testing that remediation is adequate), and (v) tuning
(end-to-end testing and implementation of contingency plans).

        The Company's Year 2000 Project focuses on addressing seven major areas
of concern: (1) the Company's products, (2) manufacturing equipment, software
and tools including embedded controllers, (3) facilities equipment with embedded
controllers and software, (4) business application equipment and software, (5)
suppliers, including materials, logistics, financial services and utilities
suppliers, (6) design equipment and software, and (7) electronic data
interchange (EDI) links with customers and distributors.

Readiness

As of December 31, 1998, all of the Company's groups had fully completed Phase 1
and substantially completed Phase 2. Phases 3 and 4 are well under way and Phase
5 is planned to be substantially completed during the second quarter of 1999.
Inventories have been completed in all areas of the Company, status is known for
approximately 98% of the items involved, and approximately 42% of items have a
status of tested and certified compliant. For

                                              - 36 -

<PAGE>



the 58% not yet tested and certified compliant, approximately 60% of the
preparatory work has been completed. Globally, the Company is near 75%
completion relative to the total work load, and is on schedule relative to the
Year 2000 Project plan. The Company has determined the magnitude of the
remaining tasks (completion of Phases 3, 4, and 5), and has fixed schedules and
assigned resources accordingly. As at the end of 1998, compliant systems for all
business functions with a one year time horizon, i.e. order processing and
certain planning functions had been put in place. The Company anticipates being
fully compliant in all essential manufacturing and business systems by the end
of June 1999. The Company believes that the remaining tasks will be limited, and
contingency plans will be developed for matters not resolved that may have a
material adverse impact on the Company. The Company intends to define any such
contingency plans by the end of June 1999 with a view towards implementing them
prior to the end of 1999. In view of the possibility of less than 100%
compliance, the Company anticipates that the year 2000 task force will remain
active at least until the end of the first quarter of 2000.

Products: All of the Company's products have been determined to be Year 2000
Compliant (as such compliance is defined above). For the majority of the
Company's products, compliance is due to the fact that these products do not
contain any date or date functions, and do not accept any time or date inputs.
The exception is the "Timekeeper" product series, which is a battery- backed RAM
product that records time and date information. All "Timekeeper" products are
Year 2000 Compliant. However, the system software used in "Timekeeper" products,
which is not written by the Company but by its customers, must take into account
that certain of these products store only the last two digits of the year, and
such software code needs to be checked by the customer. However, when the
Company's products are used in systems with software loaded by users or others,
the software programs could have potential year 2000 problems. The Company has
advised customers to check such systems, and has also begun a communication
campaign to educate customers about potential year 2000 issues and the Company's
products in particular. New product developments, if date-sensitive, will be
designed with four digit years. Certain products are by their nature likely to
be used in third-party products which process dates. It is possible for these
third-party products to have non-compliant software. The Company is in the
process of contacting all known customers of these products to invite them to
review their designs.

        The results of the Company's evaluation of its portfolio of existing
products which has not identified any past or current semi-conductor products
which mis-process dates is being made available to the public through the
Company's web site at www.st.com. Also, the Company, to date, has not been
notified by third parties of any problems.

Manufacturing equipment with embedded controllers and software: Some of the
tools and equipment (hardware and software) used to develop and manufacture the
Company's products are date-sensitive. The Company has compiled an inventory of
all manufacturing and facilities equipment, and has identified all non-Year 2000
Compliant items. As part of its Year 2000 Project, the Company has implemented a
plan of remediation, in cooperation with its principal suppliers. At the end of
December 1998, 36% of front-end equipment and 76% of back-end equipment had been
tested or certified compliant. The Company's target is to have 100% tested
compliance by the end of June 1999, but there remains the possibility of some
delays due to the late delivery of solutions by certain suppliers. Testing is
being coordinated with equipment manufacturers and Sematech (a forum for
cooperation set up by the major semiconductor manufacturers) to minimize
production disruption.

Facilities equipment with embedded controllers and software: Embedded systems
used to control lifts, lighting, heating, air-conditioning, fire protection,
safety systems and entry control (among others) have been identified in each
site (with help from the corporate manufacturing organization) and are being
tested with the help of suppliers. Several sites use the same facility
management system, which the Company expects will speed progress. At the end of
1998, 62% of facilities equipment was tested or certified compliant.

Computing and telecommunications infrastructure: The Company has received
assurances from its telecom network service provider, that its private corporate
wide-area network infrastructure is already Year 2000 Compliant for data and
network administration services and will be compliant for voice in the first
half of 1999. All Company equipment used to connect to that network is being
made compliant. The Company has made available compliant firmware for all
standard components of the local-area networks (routers, hubs, etc.) and
upgrades and testing will be completed by June 1999. The links between Company
sites and the service provider network are provided by national carriers from
whom we have received no statement of compliance, so the Company has asked the
service provider to test each of these links for compliance. The Company is also
working with its information technology providers to obtain Year 2000 Compliant
versions of all operating systems and basic software for computing data
processing platforms and these should be implemented throughout the Company in
the second quarter of 1999. As part of its normal operations, the Company is
continuously upgrading its business software systems including its financial
accounting, sales order management and human resources systems, and as part of
those upgrades is securing year 2000 compliance. For applications which are not
otherwise being upgraded, specific year 2000 compliance is being worked on
internally. The Company expects to complete most such upgrades between the end
of 1998 and mid-1999.

Suppliers: The Company has contacted its significant corporate suppliers of
equipment and materials, and is in the process of contacting its significant
local suppliers. As at December 31, 1998, 26 out of 73 corporate materials
suppliers and 50 out of 77 corporate equipment suppliers have indicated that
they are currently Year 2000 Compliant. Substantially all other significant
suppliers are on schedule to achieve Year 2000 Compliance in due time before
January 1, 2000. The Company has identified a small number of critical suppliers
which require further investigation. The Company intends to continue to work
closely with all of its suppliers with a

                                     - 37 -
<PAGE>


view of ensuring full Year 2000 Compliance, or, in the event compliance cannot
be achieved and such failure would result in a business interruption for the
Company, to allow it to develop and implement the necessary contingency plans.

        The Company has contacted its distributors and key customers to ensure
that each such business partner is dealing with the year 2000 issue, and in
order to identify and test interfaces for orders, delivery and payment. The
Company's existing logistical applications have been made compliant. Each site
has contacted its local/national utilities suppliers (electricity, gas, water
supply, sewage and telephone network) to ensure they are aware of the year 2000
problem and to establish their year 2000 readiness. The suppliers of major
concern are utilities suppliers, primarily electricity suppliers.

Design equipment and software: Remediation and testing have been completed.

EDI: EDI transactions are inherently date sensitive. All EDI partners worldwide
have been contacted to invite them to change to compliant standard message
formats (ANSI 4010 or EDIFACT 92.1) or to implement windowing and all have
confirmed that they will do so. Any partner who is not ready in time will be
dropped from EDI and will revert temporarily to manual processing.

Costs

The Company has estimated the total capital costs related to its year 2000
activities to be in the range of approximately $50 million, of which the
majority remains to be spent. The Company expects to finance all of the year
2000 costs from available cash resources. These costs do not include costs for
potential litigation, write-offs of equipment, external support, and
miscellaneous expenses. Substantially all of the year 2000 remediation work is
carried out by the Company's current employees. Furthermore, the Company
estimates that in total more than 400 man years will be spent on dealing with
the internal year 2000 issues, mainly during 1998 and the first half of 1999.
While the Company has not hired additional workers to deal with the year 2000
issues, it has had to postpone other work because of the time spent on year 2000
matters. In addition to the above-mentioned costs, the need to shut down tools
and equipment for remediation and testing is expected to cause the Company to
suffer some loss of manufacturing capacity. The Company believes, however, that
due to its current levels of utilization of capacity, the maximum impact on
potential billings resulting from any such manufacturing loss will be less than
4%, which amount is less than normal planning and forecasting error.

        The Company does not believe that the incremental costs of addressing
year 2000 issues will have a material adverse effect on its consolidated results
of operations, liquidity or capital resources. The Company regularly reviews and
updates data for costs incurred and forecasted. Business groups within the
Company do not specifically account for internal costs (salaries, travel, etc.)
in becoming Year 2000 Compliant. As the Company continues to assess the last
phases of the Year 2000 Project, estimated costs may change. While the cost of
the project and the expected date for completion are based on the best
information available to management, such estimates have been made based on a
number of variable factors and hypotheses about future events, including the
continuing availability of certain resources, modifications of third-party
systems and other factors. No assurance can be given that such estimates or
costs will not differ significantly from those described above. The factors
which could adversely affect management's estimations include the availability
and cost of qualified personnel, the availability and/or cost of compliant
upgrades from suppliers, the ability to find and correct all programming codes
implicated by the year 2000 and similar uncertainties.

Major Risks of Year 2000 Issues

        While the Company believes that its Year 2000 Project will enable it to
identify and remedy major issues relating to the year 2000, there can be no
assurance that the Company's operations and financial results will not be
adversely materially affected by the known and unknown threats posed by the year
2000 issues. Due to its nature and the presence of computer technology in
virtually all levels of the commercial chain, year 2000 failures can occur at
several stages, either internally or externally. It is therefore practically
impossible for the Company to ensure that its operations will be immune to any
such failure, wherever it may occur along the line. Were any of the measures
taken by the Company to fail to provide the expected safeguards, or were any of
the critical suppliers of the Company to encounter major difficulties due to a
year 2000 related problem, such occurrences could have a material adverse effect
on the Company's results of operations.

        The Company has identified potential failures in the supply of raw
materials and in the logistical transportation chain which can cause material
interruptions to the Company's normal operations. Suppliers of major concern are
the utilities companies, primarily electricity suppliers, who to date have been
unwilling to provide assurances that they will be year 2000 ready. Tests
conducted to date in century rollover simulations involving such suppliers have
resulted in failures. While the Company has started dialogues with such
suppliers at the highest levels, a failure in the supply of electricity could
shut down one or more of the Company's manufacturing sites. Shifting production
in the short time involved is not feasible and such interruptions would cause
loss of production as well as significant unrecoverable loss of valuable
work-in-process. Failures in the transportation chain, due to such developments
as air transportation delays, could have an adverse impact on the Company's
purchase and sales flow. Given that the Company purchases raw materials such as
silicon wafers, lead frames, mold compound, ceramic packages and chemicals and
gases from a number of suppliers on a just-in-time basis, any significant
disruption in international/national commercial flows could materially impact
the Company's operations.

Contingency Plan

        The Company's Year 2000 Project includes a review and prioritization of
the possible problems and a series of possible responses to each of the major
risks. Of such risks and contingency plans, the following are the most important
ones: (1) in the case of a supplier

                                     - 38 -
<PAGE>


with serious year 2000 compliance problems, the Company's contingency plan
requires it to identify alternative sources of supply. Alternative sources have
already been qualified for all corporate materials; (2) in the case of delivery
delays, the Company's contingency plan requires it to review stock levels of
critical supplies to avoid interruptions in production; (3) in the case of
applications which cannot be rolled out to all sites before January 1, 2000, the
Company's contingency plan requires it to change business processes to shorten
the time horizon or supplement the computer application with human intervention;
(4) in the case of loss of key personnel during the Year 2000 Project, the
Company's contingency plan requires it to promote teamwork and cross-training to
ensure that adequate backup personnel are available; (5) in the case of
incorrect results due to date errors, before or after January 1, 2000, the
Company's contingency plans require it to train users to be alert for unexpected
results and to develop a support team to deal quickly and effectively with such
developments; and (6) in the event previously undetected date processing errors
halts production on January 1, 2000, the Company's contingency plan requires key
maintenance personnel to be on standby in all of the Company's sites as well as
at the critical suppliers. The Company also intends to schedule a light
processing load over the New Year in the year 2000.

        As the Company continues to review and complete the last phases of the
Year 2000 Project it expects to establish additional contingency measures as
appropriate. There can be no guarantee, however, that the Company will be able
to successfully prevent major disruptions by means of such contingency measures.

        This disclosure is a Year 2000 Readiness Disclosure within the meaning
of the US Year 2000 Information and Readiness Disclosure Act of 1998 to the
extent that the disclosure relates to Year 2000 processing of the Company or
products or services offered by the Company.

        It should be noted that certain statements herein which are not
historical facts, including, without limitation those regarding 1) the projected
extent and timing of Year 2000 Compliance for the Company's products, systems,
and facilities as well as those of third parties; 2) the estimated costs of Year
2000 Compliance activities, including actions currently contemplated and
actions, including contingency plans, decided upon in the future; 3) the
estimated impact on the Company's business, results and financial condition of
failures by it or third parties to adequately address year 2000 issues; and 4)
certain statements preceded by "believes", "expects", "aims", "intends",
"estimates", "anticipates", or similar expressions, are forward looking
statements. Because such statements involve risks and uncertainties, actual
events may differ materially from those currently expected by the Company.
Factors that could cause such differences include, but are not limited to 1)
additional information the Company may discover concerning the status of Year
2000 Compliance of the products, systems and facilities or those of third
parties as part of the Company's Year 2000 Project; 2) failures of others,
including public utilities, financial institutions, communications companies,
transportation providers, customers, computer manufacturers and software
providers, as well as other providers of resources on which the Company relies,
to identify, disclose and address year 2000 issues accurately and on a timely
basis; 3) the inability of year 2000 consultants, experts and advisers to
adequately identify and address year 2000 issues as planned; 4) changes in
technologies or methodologies used in identifying and addressing year 2000
issues in products, systems and facilities; 5) the effectiveness and costs of
contingency plans the Company may develop as it learns more about the status of
its own and others' Year 2000 Compliance and readiness; and 6) factors that
could affect the Company's business, results and financial condition generally,
including the risk factors specified in the Company's Prospectus dated June 5,
1998.

                                     - 39 -
<PAGE>


Compensation

        The aggregate cash compensation payable for 1998 to the members of the
Supervisory Board by the Company was approximately $240,000. The amount of cash
compensation for 1998 paid to the executive officers of the Company and members
of the Management Board as a group by the Company and its subsidiaries was
approximately $7.5 million.

        In 1989, the Company established a Corporate Executive Incentive Program
(the "EIP") that entitles selected executives and members of the Management
Board to a yearly bonus based upon the individual performance of such
executives. The maximum bonus awarded under the EIP is based upon a percentage
of the executive's or member's salary and is adjusted to reflect the overall
performance of the Company. The participants in the EIP must satisfy certain
personal objectives that are focused on customer service, profit, cash flow and
market share.

        The executive officers and the Management Board were also covered in
1998 under certain group life and medical insurance programs provided by the
Company. The aggregate additional amount set aside by the Company in 1998 to
provide pension, retirement or similar benefits for executive officers and the
Management Board of the Company as a group is estimated to have been
approximately $3.3 million. The Stock Option Plans are described in Note 11 to
the Consolidated Financial Statements.

Euro Conversion

        On January 1, 1999, eleven of the fifteen member countries of the
European Union established fixed conversion rates between their existing
national currencies and the euro. The participating countries have agreed to
adopt the euro as their common legal currency on that date. Until January 1,
2002, either the euro or a participating country's present currency (a "national
currency") will be accepted as legal currency. On January 1, 2002,
euro-denominated bills and coins will be issued and national currencies will be
withdrawn from circulation. The Company does not expect that introduction and
use of the euro will materially affect its foreign exchange activities, or its
use of derivatives and other financial instruments, or will result in any
material increase in costs to the Company. The Company will continue to assess
the impact of the introduction of the euro currency over the transition period
as well as the period subsequent to the transition, as applicable.



                                     - 40 -

<PAGE>



Consolidated Statement of Income


<TABLE>
<CAPTION>

Year ended December 31,
(in thousands of US dollars except per share amounts)       1996          1997         1998

<S>                                                      <C>            <C>          <C>
Net sales                                                4,078,246      3,969,773    4,210,618
Other revenues                                              44,114         49,372       37,134
Net revenues                                             4,122,360      4,019,145    4,247,752
         Cost of sales                                  (2,414,706)    (2,457,386)  (2,622,943)
Gross profit                                             1,707,654      1,561,759    1,624,809
         Selling, general and administrative              (421,012)      (454,311)    (488,072)
         Research and development                         (532,294)      (610,847)    (689,785)
         Other income and expenses                          45,074         23,218       76,458
Operating income                                           799,422        519,819      523,410
         Net interest income (expense)                     (11,169)        (2,646)       8,691
         Gain on disposal of investment                      7,263              0            0
Income before income taxes & minority interests            795,516        517,173      532,101
         Income tax expense                               (171,638)      (113,017)    (120,351)
Income before minority interests                           623,878        404,156      411,750
Minority interests                                           1,666          2,398         (629)
Net income                                                 625,544        406,554      411,121
Earnings per share (Basic)                                    4.50           2.92         2.92
Earnings per share (Diluted)                                  4.49           2.91         2.89
</TABLE>


The accompanying notes are an integral part of these financial statements



                                     - 41 -

<PAGE>



Consolidated Balance Sheet


<TABLE>
<CAPTION>

As at December 31,
(in thousands of US dollars)                                                1997         1998

<S>                                                                      <C>        <C>
Assets
Current assets
         Cash and cash equivalents                                       702,157    1,100,752
         Trade accounts and notes receivable                             644,017      779,489
         Inventories                                                     593,520      644,279
         Other receivables and assets                                    413,914      509,129
Total current assets                                                   2,353,608    3,033,649
Intangible assets, net                                                    26,423       33,571
Property, plant and equipment, net                                     3,046,813    3,333,005
Investments and other non-current assets                                  18,895       33,804
                                                                       3,092,131    3,400,380
Total assets                                                           5,445,739    6,434,029

Liabilities and shareholders' equity
Current liabilities
         Bank overdrafts                                                 365,944      146,040
         Short-term debt and current portion of long-term debt            58,614       45,245
         Trade accounts and notes payable                                592,315      564,457
         Other payables and accrued liabilities                          320,427      327,681
         Accrued and deferred income tax                                 295,207      345,253
Total current liabilities                                              1,632,507    1,428,676
         Long- term debt                                                 356,407      755,864
         Reserves for pension and termination indemnities                 94,938      111,803
         Other non-current liabilities                                    38,636       32,364
                                                                         489,981      900,031
Total liabilities                                                      2,122,488    2,328,707
Minority interests                                                        15,805       22,012
         Capital stock                                                 1,073,990    1,096,743
         Capital surplus                                                 930,945    1,135,526
         Accumulated result                                            1,616,292    2,027,413
         Accumulated other comprehensive income (loss)                  (313,781)    (176,372)
Shareholders' equity                                                   3,307,446    4,083,310
Total liabilities and shareholders' equity                             5,445,739    6,434,029
</TABLE>


Other commitments and contingencies: Note 24
The accompanying notes are an integral part of these financial statements



                                     - 42 -

<PAGE>



Consolidated Statement of Cash Flows


<TABLE>
<CAPTION>

As at December 31,
(in thousands of US dollars)                                                  1996           1997         1998

Cash flows from operating activities:
<S>                                                                         <C>           <C>          <C>
         Net income                                                         625,544       406,554      411,121
         Add (deduct) non-cash items:
                  Depreciation and amortization                             535,908       608,123      704,004
                  Gain on disposal of investment                             (7,263)            0            0
                  Other non-cash items                                        7,298        19,015       13,016
                  Minority interest in net income of subsidiaries            (1,666)       (2,398)         629
                  Deferred income tax                                        58,515        (3,157)      34,333
         Changes in assets and liabilities:
                  Trade receivables                                         (71,774)      (74,721)    (115,879)
                  Inventories                                               (80,517)     (149,642)     (18,807)
                  Trade payables                                            (38,019)       73,790       45,982
                  Other assets and liabilities, net                         (47,359)      106,227      (61,852)
Net cash from operating activities                                          980,667       983,791    1,012,547
Cash flows from investing activities:
         Payment for purchases of tangible assets                        (1,125,205)   (1,035,434)    (947,253)
         Proceeds from sale of investment                                     8,420             0            0
         Other investing activities                                          (5,493)      (11,576)     (18,997)
Net cash used in investing activities                                    (1,122,278)   (1,047,010)    (966,250)
Cash flows from financing activities:
         Proceeds from issuance of long-term debt                            84,623       250,759      424,955
         Repayment of long-term debt                                        (54,085)      (80,238)     (72,396)
         Increase (decrease) in short-term facilities                      (106,239)       68,869     (233,261)
         Capital increase                                                    16,671         9,669      233,334
Net cash from (used in) financing activities                                (59,030)      249,059      352,632
         Effect of changes in exchange rates                                 (1,509)      (35,579)        (334)
Net cash increase (decrease)                                               (202,150)      150,261      398,595
Cash and cash equivalents at beginning of the year                          754,046       551,896      702,157
Cash and cash equivalents at end of the year                                551,896       702,157    1,100,752

</TABLE>

The accompanying notes are an integral part of these financial statements



                                     - 43 -

<PAGE>



Consolidated Statement of Changes in Shareholders' Equity


<TABLE>
<CAPTION>

                                                                                        Accumulated
                                                                                              Other
                                             Capital        Capital     Accumulated    Comprehensive     Shareholders'
(in thousands of US dollars)                   Stock        Surplus          Result     Income (loss)         Equity

<S>                                       <C>              <C>             <C>               <C>          <C>
Balance as of December 31, 1995            1,066,528        922,065         584,039           89,083       2,661,715
Capital increase                               6,405          8,847                                           15,252
Deferred compensation                                          (582)            155                             (427)
Comprehensive income
Net Income                                                                  625,544                          625,544
Other comprehensive income, net of tax                                                       (42,064)        (42,064)
Comprehensive income                                                                                         583,480
Balance as of December 31, 1996            1,072,933        930,330       1,209,738           47,019       3,260,020
Capital increase                               1,057            615                                            1,672
Comprehensive income
Net Income                                                                  406,554                          406,554
Other comprehensive income, net of tax                                                      (360,800)       (360,800)
Comprehensive income                                                                                          45,754
Balance as of December 31, 1997            1,073,990        930,945       1,616,292         (313,781)      3,307,446
Capital increase                              22,753        204,581                                          227,334
Comprehensive income
Net Income                                                                  411,121                          411,121
Other comprehensive income, net of tax                                                       137,409         137,409
Comprehensive income                                                                                         548,530
Balance as of December 31, 1998            1,096,743      1,135,526       2,027,413         (176,372)      4,083,310

</TABLE>

The accompanying notes are an integral part of these financial statements


                                     - 44 -
<PAGE>


Notes to Consolidated Financial Statements
(Currency--Thousands of U.S. dollars)

One -- The Company

STMicroelectronics N.V. (formerly known as SGS-THOMSON Microelectronics N.V.)
(the "Company") was formed in 1987 by the combination of the semiconductor
business of SGS Microelettronica (then owned by Societa Finanziaria Telefonica
(S.T.E.T.), an Italian corporation) and the non-military business of Thomson
Semiconducteurs (then owned by Thomson-CSF, a French corporation) whereby each
company contributed their respective semiconductor businesses in exchange for a
50% interest in the Company.

The Company is registered in The Netherlands with its statutory domicile in
Amsterdam.

As of December 31, 1998, the Company was 56.05% (December 31, 1997: 68.90%)
owned by STMicroelectronics II B.V., and 43.95% by the public (December 31,
1997: 31.10%)

At December 31, 1997 and at December 31, 1998, STMicroelectronics II B.V. was
100% owned by STMicroelectronics Holding N.V.

At December 31, 1997, and at December 31, 1998 STMicroelectronics Holding N.V.
was owned as follows:

        o 50% by FT1CI, a French holding company, whose shareholders are
CEA-Industrie (51%) and France Telecom (49%)

        o 50% by M.E.I.--Microelettronica Italiana s.r.l. ("M.E.I."), an Italian
holding company, whose Shareholders are Comitato per l'intervento nella SIR ed
in settori ad alta tecnologia ("Comitato SIR") (49.9%) and Istituto per la
Ricostruzione Industriale S.p.a. ("I.R.I.") (50.1%).

Two -- Summary of accounting policies

2.1  Principles of consolidation

The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America (US GAAP).

The Company's consolidated financial statements include the assets, liabilities
and results of operations of its majority-owned subsidiaries. The ownership of
the other interest holders is reflected as minority interests. All intercompany
accounts and transactions have been eliminated in consolidation.

The initial combination of the SGS Microelettronica and Thomson Semiconducteurs
civilian semiconductor businesses was accounted for as the creation of a joint
venture. Accordingly, the assets and liabilities of the combined entities were
recorded in the books of the joint venture at their carrying amounts at the date
of combination.

2.2  Use of estimates

The preparation of the Company's financial statements in accordance with US GAAP
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes to the financial
statements.

Actual results could differ from those estimates and may affect amounts reported
in future periods. Management believes that the estimates are reasonable.

2.3  Income recognition

Sales: Revenues on sales of semiconductor products are recognized upon shipment
of the products. A portion of the Company's sales are made to distributors who
participate in certain programs common in the semiconductor industry whereby the
distributors are allowed to return merchandise under certain circumstances and
may receive future price reductions. Provision is made at the time of sale for
estimated product returns and price protection which may occur under programs
the Company has with these customers.

Subsidies: Government subsidies are recognized as the related costs are
incurred, commencing when the subsidies' contract is signed with the relevant
government department or agency. Government subsidies for research and
development are included in "other income and expenses." Government subsidies
for industrialization costs (certain costs incurred to bring prototype products
to the production stage) are offset against related expenses in "cost of sales."
Government subsidies for capital expenditures are deducted from the cost of the
related fixed assets.

2.4  Foreign currency

The United States dollar is the reporting currency for the Company because the
dollar is the currency of reference in terms of market pricing in the world-wide
semiconductor industry. Furthermore, there is no currency in which the majority
of transactions are denominated, and revenues from external sales in US dollars
exceed revenues in any other currency.

The functional currency used by each subsidiary throughout the group is
generally the local currency. For consolidation purposes, assets and liabilities
of these subsidiaries are translated at current rates of exchange at the balance
sheet date. Income and expense items are translated at the average exchange rate
for the period. The effects of translating the financial position and results of
operations of local functional currency are included in "other comprehensive
income."

Assets, liabilities, revenue, expenses, gains or losses arising from foreign
currency transactions are recorded in the functional currency of the recording
entity at the exchange rate in effect at the date of the transaction. At each
balance sheet date, recorded balances denominated in a currency other than the
recording entity's functional currency are translated at the exchange rate
prevailing at that date. The related exchange gains and losses are recorded in
the income statement.

The Company covers certain portions of its foreign currency exposure primarily
through the use of forward contracts and option contracts. Generally, gains and
losses associated with currency rate changes on forward contracts are recorded
currently in "other income and expenses," while the interest element is
recognized over the life of each contract and is included in operations. The
Company utilizes foreign exchange forward contracts and foreign currency options
to protect the Company from the effect of currency fluctuations on its probable
anticipated transactions.

                                     - 45 -
<PAGE>



2.5 Intangible assets

Intangible assets include the cost of technologies and licenses purchased from
third parties, amortized over a period ranging from five to eighteen years, and
goodwill acquired in business combinations amortized over its estimated useful
life, generally five to fifteen years.

        The carrying value of long-lived assets, including intangibles, is
evaluated whenever changes in circumstances indicate the carrying amount of such
assets may not be recoverable. In performing such review for recoverability, the
Company compares the expected future cash flow to the carrying value of
long-lived assets and identifiable intangibles. If the anticipated undiscounted
future cash flows are less than the carrying amount of such assets, the Company
recognizes an impairment loss for the difference between the carrying amount of
the assets and their estimated fair value.

2.6 Property, plant and equipment

Property, plant and equipment are stated at cost, net of government subsidies.
Major renewals and improvements are capitalized; minor replacements, maintenance
and repairs are charged to current operations. Depreciation is computed using
the straight-line method over the following estimated useful lives:

Buildings                                                     33 years
Leasehold improvements                                        10 years
Machinery and equipment                                        6 years
Computer and R&D equipment                                   3-6 years
Other                                                        2-5 years

Assets subject to leasing agreements and classified as capital leases are
included in property, plant and equipment and depreciated over the shorter of
the estimated useful life or the lease term.

2.7 Investments

The equity accounting method is used when the Company has both a 20% to 50%
equity interest and the ability to exercise significant influence over the
investee. Marketable debt and equity securities and other equity investments are
classified as "available for sale" securities and stated at fair value.

2.8 Inventories

Inventories are stated at the lower of cost or market. Cost is computed on a
currently adjusted standard basis which approximates actual cost on a current
average basis.

2.9 Research and development

Research and development costs are charged to expense as incurred. Research and
development costs include costs incurred by the Company as well as the Company's
share of costs incurred by two French research and development interest groups.
For some of its research and development programs, the Company receives grants
from Governmental agencies; these grants are recognized in the income statement
in "other income and expenses".

2.10 Start-up costs

Start-up costs incurred to expand the Company's manufacturing facilities are
included in "other income and expenses" in the accompanying consolidated
statement of income.

2.11 Pension and termination indemnities

The Company sponsors various retirement plans for its employees; such plans
include both defined benefit and defined contribution plans. Upon retirement,
the Company's employees receive such benefits as are provided by pension plan
arrangements; these plans conform with local regulations and practices of the
countries in which the Company operates.

2.12 Income taxes

The provision for current taxes represents the income taxes expected to be
payable for the current year. Deferred tax assets and liabilities are recorded
for all temporary differences arising between the tax and book basis of assets
and liabilities and for the benefits of tax credits and loss carryforwards.
Those deferred tax assets and liabilities are measured using the enacted tax
rates at which they are expected to be realized or paid. A valuation allowance
is provided where necessary to reduce deferred tax assets to the amount expected
to be "more likely than not" realized in the future. Tax rate changes are
reflected in income in the period such changes are enacted.

2.13 Advertising costs

Advertising costs are expensed as incurred. Advertising expenses for 1996, 1997
and 1998 were $12,686, $14,523 and $16,012 respectively.

2.14 Earnings per share

Basic earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share are computed by dividing net income (less interest expense, net of tax
effects, related to convertible debt) by the weighted average number of common
shares and common share equivalents outstanding during the period. The weighted
average shares used to compute diluted earnings per share include the
incremental shares of Common Stock relating to outstanding options and
convertible debt to the extent such incremental shares are dilutive.

2.15 Comprehensive income

In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income", (FAS 130). FAS 130 established standards
for reporting comprehensive income and its components and accumulated balances.
Comprehensive income is defined as the change in equity of a business during a
period from transactions and circumstances related to non-owner sources, and
includes all changes in equity except those resulting from investment by owners
and distributions to owners. In the Company's case, "other comprehensive income"
consists of foreign currency translation adjustments.

                                     - 46 -
<PAGE>


2.16 Reclassifications

Certain prior year amounts have been reclassified to conform with the current
year presentation.

2.17 Recently issued accounting standards

In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" effective for financial statements beginning after December 15,
1998. This statement provides guidance on accounting for the costs of computer
software developed or obtained for internal use. The Company will adopt the
standards required by this statement in 1999.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", (FAS 133) effective for fiscal years beginning after
June 15, 1999. This statement establishes accounting and reporting standards for
derivative instruments and requires recognition of all derivatives as assets or
liabilities in the balance sheet, and the measurement of those instruments at
fair value. The Company will adopt the standards required by this statement in
the first quarter of fiscal year 2000.

Management has not fully evaluated the impact, if any, that these new standards
may have on future financial statement disclosure.

Three -- Consolidated entities

The consolidated financial statements include the accounts of STMicroelectronics
N.V. and the following entities as of December 31, 1998:
<TABLE>
<CAPTION>

                                                                                                         Percentage
                                                                                          Common          Ownership
                                                                                           Stock         (Direct or
Legal Seat                            Name                                           (Thousands)          Indirect)

<S>                     <C>           <C>                                        <C>                      <C>
United Kingdom          London        STMicroelectronics LTD                           1,000 GBP                100
                        London        Thomson Components LTD                           1,150 GBP                100
                        Bristol       STMicroelectronics E.E.I.G.                          0 GBP                100
Sweden                  Stockholm     STMicroelectronics A.B.                         16,000 SEK                100
Germany                 Munich        STMicroelectronics GmbH                         12,901 DEM                100
Switzerland             Geneva        STMicroelectronics S.A.                            500 CHF                100
Malta                   Malta         STMicroelectronics LTD                          21,590 MTP                100
Spain                   Madrid        STMicroelectronics S.A.                         55,000 ESP                100
France                  Paris         STMicroelectronics S.A.                      3,463,319 FRF                100
                        Paris         STMicroelectronics S.A.S.                          250 FRF                100
Italy                   Milano        STMicroelectronics S.R.L.                  852,000,000 ITL                100
                        Catania       CORIMME                                      3,000,000 ITL                100
Singapore               Singapore     STMicroelectronics PTE LTD                     179,997 SGD                100
                        Singapore     STMicroelectronics ASIA PACIFIC PTE LTD         13,982 SGD                100
Malaysia                Muar          STMicroelectronics SDN BHD                     196,805 MYR                100
                        Muar          STMicroelectronics (Malaysia) SDN BHD            0.002 MYR                100
Japan                   Tokyo         STMicroelectronics KK                           68,000 JPY                100
Hong Kong               Hong Kong     STMicroelectronics LTD                             780 HKD                100
Australia               Sydney        STMicroelectronics PTY LTD                         185 AUD                100
United States           Dallas        STMicroelectronics Inc.                         22,000 USD                100
                        Rancho
                            Bernardo  STMicroelectronics (RB), Inc.                        1 USD                100
                        Dallas        STMicroelectronics Leasing Co Inc.                   1 USD                100
                        La Jolla      Metaflow Technologies Inc.                          87 USD                 85
Brazil                  Sao Paulo     STMicroelectronics Ltda                               0 R$                100
Morocco                 Casablanca    STMicroelectronics S.A.                         66,000 MAD                100
                        Casablanca    Electronic Holding S.A.                          3,110 MAD                100
China                   Shenzhen      Shenzhen STS Microelectronics Co LTD            65,000 USD                 60
                        Shenzhen      STMicroelectronics (Shenzhen) Co LTD               250 USD                100
India                   New Delhi     STMicroelectronics PTE LTD                      62,000 INR                100
Finland                 Helsinki      STMicroelectronics OY                            2,000 FIM                100
</TABLE>

                                     - 47 -
<PAGE>



Four -- Cash and cash equivalents

Cash and cash equivalents consist of the following:

December 31,                              1997                 1998
Cash                                   653,898            1,078,098
Marketable securities
   (with maturity under 3 months)       48,259               22,654
Total                                  702,157            1,100,752

Marketable securities (all of which mature within three months) consist mainly
of short term cash investments. There was no significant difference between the
book value of traded marketable securities and their fair market value as of
December 31, 1997 and 1998.

Five -- Trade accounts and notes receivable

Trade accounts and notes receivable consist of the following:

December 31,                                    1997                 1998
Trade accounts and notes receivable          659,245              789,983
Less valuation allowance                     (15,228)             (10,494)
Total                                        644,017              779,489

During 1996, 1997 and 1998 no customer individually represented over ten percent
of consolidated net revenues.

Six -- Inventories

Inventories consist of the following:

December 31,                                    1997                 1998
Raw materials                                114,712              107,546
Work-in-process                              341,537              392,666
Finished products                            137,271              144,067
Total                                        593,520              644,279

Seven -- Other receivables and assets

December 31,                                    1997                 1998
Receivables from government
   agencies*                                 154,916              261,194
Taxes and other government
   receivables                                60,474               64,573
Down payment to suppliers                        814                6,274
Loans to employees                             3,197                3,580
Prepaid expenses                              14,062               18,222
Sundry debtors                                55,475               23,989
Deferred tax                                  96,139               92,795
Other                                         28,837               38,502
Total                                        413,914              509,129

*Related to research and development contracts, industrialization contracts and
capital expenditures.

Eight -- Intangible assets

Intangible assets consist of the following:

December 31,                                    1997                 1998
Technologies and licenses, gross              72,189               86,368
Less accumulated amortization                (45,766)             (52,797)
Total                                         26,423               33,571

Nine -- Property, plant and equipment

Property, plant and equipment consist of the following:

December 31, 1997          Gross          Depreciation                  Net
Land and buildings       490,707              (102,409)             388,298
Machinery and
   equipment           4,391,066            (2,138,115)           2,252,951
Other tangible
   fixed assets          307,844              (209,088)              98,756
Construction in
   progress              306,808                    --              306,808
Total                  5,496,425            (2,449,612)           3,046,813

December 31, 1998          Gross          Depreciation                  Net
Land and buildings       506,140              (118,415)             387,725
Machinery and
   equipment           5,357,281            (2,866,957)           2,490,324
Other tangible
   fixed assets          360,123              (253,956)             106,167
Construction in
   progress              348,789                    --              348,789
Total                  6,572,333            (3,239,328)           3,333,005


                                     - 48 -

<PAGE>



Included in the above categories are assets recorded under capitalized leases
with original costs totaling $7,805 in 1997 and $8,355 in 1998.

Ten -- Investments and other non-current assets

Investments and other non-current assets consist of the following:

December 31,                                    1997                 1998
Investments carried at fair value             10,334               11,403
Long-term deposits and receivables             8,561               13,053
Discount on LYONs                                  0                9,348
Total                                         18,895               33,804

Long-term deposits and receivables consist primarily of indemnities receivable
from third parties on the sale of businesses, which bear interest or are
discounted to reflect their present value.

Eleven -- Shareholders' equity

Public offerings of shares: In December 1994, the Company increased its capital
stock through an initial public offering of 9,606,240 new shares of capital
stock, which resulted in an increase in capital stock and capital surplus of
$75,049 and $123,772, respectively. In connection with a secondary offering of
capital stock in October 1995, the Company issued 8,960,000 new shares of
capital stock, which resulted in an increase in capital stock and capital
surplus of $79,356 and $292,075, respectively. In connection with a secondary
offering of capital stock in June 1998, the Company issued 3,000,000 new shares
of capital stock, which resulted in an increase in capital stock and capital
surplus of $20,378 and $188,320, respectively.

Outstanding shares: The authorized share capital of the Company is NLG
2,750,000,000, consisting of 200,000,000 shares, each with a nominal value of
NLG 13.75. As of December 31, 1996, 1997 and 1998, the number of shares of
capital stock outstanding at a par value of NLG 13.75 were 138,985,580 shares,
139,132,397 shares and 142,478,106 shares, respectively.

Stock option plans: In 1989, the Shareholders voted to adopt the 1989 Stock
Option Plan (the "1989 Plan") and approved the issuance of 1,634,400 options to
136 employees to purchase capital stock. Under the 1989 Plan, the options vested
over four years and are exercisable for ten years at an exercise price of NLG
17.50.

        In 1995, the Shareholders voted to adopt the 1995 Stock Option Plan (the
"1995 Plan") whereby options for up to 5,500,000 shares may be granted in
installments over a five year period. Under the 1995 Plan, the options may be
granted to purchase shares of capital stock at a price not lower than the market
price of the shares on the date of grant, and generally vest over four years and
are exercisable over a period of eight years. In March 1996, the Company granted
1,200,000 options to employees at an exercise price of $36.25 per share. In
September 1997, the Company granted 645,500 options to employees at an exercise
price of $85.375 per share. In July 1998, the Company granted 650,000 options to
employees at an exercise price of $72.1875 per share.

        In 1996, the Shareholders voted to adopt the Supervisory Board Option
Plan whereby members of the Supervisory Board may receive, during the three year
period 1996-1998, 3,000 options for 1996 and 1,500 options for both 1997 and
1998, to purchase shares of capital stock at the closing market price of the
shares on the date of the grant. In the same three-year period, professionals of
the Supervisory Board may receive 1,500 options for 1996 and 750 options for
both 1997 and 1998. Under the Plan, the options vest over one year and are
exercisable for a period expiring eight years from the date of grant. In October
1996, options to purchase 33,000 shares were granted at an exercise price of
$54.00 per share. In September 1997, options to purchase 15,000 shares were
granted at an exercise price of $85.375 per share. In July 1998, options to
purchase 15,000 shares were granted at an exercise price of $72.1875 per share.

        A summary of stock option transactions for the plans follows:


                                      Number of             Price Per Share
                                         Shares          Range          Average
December 31, 1995                       810,200      17.5-25 NLG        0.0 NLG
Options granted
   1995 Plan                          1,200,000           $36.25         $36.25
   Supervisory Board Plan                33,000           $54.00         $54.00
Options cancelled                       (16,500)          $36.25         $36.25
Options exercised                      (531,790)     17.5-25 NLG       20.1 NLG

December 31, 1996                     1,494,910      17.5-25 NLG       20.1 NLG
                                                   $36.25-$54.00         $36.73
Options granted
   1995 Plan                            645,500           $85.38         $85.38
   Supervisory Board Plan                15,000           $85.38         $85.38
Options cancelled                       (18,000)  $36.25-$85.375         $44.98
Options exercised                      (137,380)    $8.67-$36.25         $10.36

December 31, 1997                     2,000,030      17.5-25 NLG       20.8 NLG
                                                  $36.25-$85.375         $53.19
Options granted
   1995 Plan                            650,000           $72.19         $72.19
   Supervisory Board Plan                15,000           $72.19         $72.19
Options cancelled                        (9,565)  $36.25-$85.375         $47.98
Options exercised                       (57,410)    $8.67-$54.00         $12.82

December 31, 1998                     2,598,055      17.5-25 NLG       23.5 NLG
                                                  $36.25-$85.375         $58.83

Employee offering plan: In December 1995, the Company offered to certain of its
employees world-wide the right to acquire up to 1,000 shares of capital stock
per employee, at a price of $33.725 per share, representing a discount of five
percent from the market price. A total of 243,710 shares were sold to
participating employees world-wide as a result of the offering. Participating
employees who purchased shares in the offering and who held such

                                     - 49 -

<PAGE>

shares for at least one year were entitled to purchase, for a price of 13.75
NLG, one share for each ten shares purchased in the offering.

        In June 1998, the Company offered to certain of its employees world-wide
the right to acquire up to 400 shares of capital stock per employee, at a price
of $63.525 (377.15 French francs, 110,800 Italian lira) per share, representing
a discount of twelve percent from the market price. A total of 288,299 shares
were issued to participating employees world-wide as a result of the offering.

Fair value of stock-based compensation: The Company applies the
intrinsic-value-based method prescribed by Accounting Principles Board Opinion
No. 25 "Accounting for Stock Issued to Employees" (APB 25), and related
Interpretations, in accounting for stock-based awards to employees. Under APB
25, the Company generally recognizes no compensation expense with respect to
such awards.

        Pro forma information regarding net income and earnings per share is
required by Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" (FAS 123) as if the Company had accounted for its
stock-based awards to employees under the fair value method prescribed by FAS
123. The fair value of the Company's stock based awards to employees was
estimated using a Black-Scholes option pricing model. The fair value was
estimated assuming no expected dividends and the following weighted-average
assumptions:

                                       1996             1997            1998
Expected life (years)                     5               5               5
Expected stock price
   volatility                            55%            40%             38%
Risk-free interest rate                   5%             6%              5%

For pro forma purposes, the estimated fair value of the Company's stock-based
awards to employees is amortized over the options' vesting period. The Company's
pro forma information is as follows:

Year ended December 31,                 1996          1997            1998
Net income
   As reported                       625,544       406,554         411,121
   Pro forma                         621,449       399,509         393,949
Earnings per share
   As reported                          4.50          2.92            2.92
   Pro forma                            4.48          2.87            2.80

These pro forma amounts include amortized fair values attributable to options
granted after December 31, 1995 only, and are therefore not representative of
future pro forma amounts.

Retained earnings: At December 31, 1998, the amount of retained earnings
available to pay dividends under Dutch law was approximately $2,987,000 (1997:
2,233,000). Retained earnings for purposes of this calculation are based upon
generally accepted accounting principles in The Netherlands. The Company's
subsidiaries are subject to the laws of the countries in which they are
domiciled. These laws may restrict the ability of the subsidiaries to transfer
funds to the Company. Such restrictions are not considered to be significant as
of December 31, 1998.

Twelve -- Earnings per share

For the years ended December 31, 1996, 1997 and 1998 earnings per share (EPS)
was calculated as follows:

Year ended December 31,        1996          1997          1998
Basic EPS
Net income                  625,544       406,554       411,121
Weighted average
   shares outstanding   138,695,540   139,092,900   140,852,008
EPS                            4.50          2.92          2.92
Diluted EPS
Net income                  625,544       406,554       411,121
LYONs interest,
   net of tax                     0             0         4,566
Net income adjusted         625,544       406,554       415,687
Weighted average
   shares outstanding   138,695,540   139,092,900   140,852,008
Dilutive effect of
   stock options            505,586       757,696       632,563
Dilutive effect
   of LYONs                       0             0     2,570,959
Number of shares used
   in calculating EPS   139,201,126   139,850,596   144,055,530
EPS                            4.49          2.91          2.89

                                     - 50 -

<PAGE>


Thirteen -- Retirement plans

The Company and its subsidiaries have a number of defined benefit pension plans
covering employees in various countries. The plans provide for pension benefits,
the amounts of which are calculated based on factors such as years of service
and employee compensation levels. Eligibility is generally determined in
accordance with local statutory requirements. The Company also has a defined
benefit termination plan in Italy whereby an indemnity is paid to personnel upon
termination of employment.

December 31,                                    1997                 1998
Change in benefit obligation:
Benefit obligation at beginning of year      167,515              169,455
Service cost                                  17,501               17,045
Interest cost                                  8,155                7,551
Benefits paid                                 (8,594)              (8,293)
Actuarial losses                                 190                4,034
Foreign currency
   translation adjustments                   (14,561)               7,258
Other                                           (751)              (1,935)
Benefit obligation at end of year            169,455              195,115

Change in plan assets:
Plan assets at fair value at beginning
   of year                                    66,908               77,455
Actual return on plan assets                   8,017                8,228
Employer contributions                         5,575                5,223
Benefits paid                                 (8,594)              (8,293)
Foreign currency translation adjustments      (1,868)               1,062
Other                                          7,417                 (437)
Plan assets at fair value at end of year      77,455               83,238

Funded status                                (92,000)            (111,877)
Unrecognized prior service cost                7,381                7,848
Unrecognized transition obligation            (3,649)              (3,281)
Unrecognized net actuarial gain                2,517                  820
Accrued benefit cost                         (85,751)            (106,490)

Net amount recognized in the balance
sheet consists of the following:
Prepaid benefit cost                           9,187                5,313
Accrued benefit liability                    (94,938)            (111,803)
Net amount recognized                        (85,751)            (106,490)

Each year, the liability for the Italian indemnity plan is adjusted to reflect
current year compensation as well as a revaluation of prior years' accruals
based on an index. The plan is unfunded, and all participants are fully vested.

The components of the net periodic benefit cost includes the following:

December 31,                    1996               1997                 1998
Service cost                  19,922             17,501               17,045
Interest cost                  6,879              8,155                7,551
Expected return on
   plan assets                (4,147)            (4,478)              (6,147)
Amortization of
   unrecognized
   transition obligation      (1,612)              (282)                (366)
Recognized gains
   and losses                     17                 56                   56
Recognition of prior
   service cost                  490                553                  762
Net periodic benefit cost     21,549             21,505               18,901

The weighted average assumptions used in the determination of the net pension
cost for the pension plans were as follows:

Assumptions                     1996               1997                 1998
Discount rate                   5.56%              5.98%                5.97%
Salary increase rate            4.21%              4.21%                4.18%
Expected rate of return
   on funds                     8.33%              8.53%                8.43%

Fourteen -- Long-term debt

Long-term debt consists of the following:

December 31,                                          1997                 1998
Unsecured                                          369,915              801,109
Secured (mainly mortgages on
   land, buildings and liens on equipment)          45,106                    0
Total                                              415,021              801,109

Repayment schedule
December 31,                                                               1998
1999                                                                     45,245
2000                                                                    109,936
2001                                                                    102,460
2002                                                                     77,741
2003                                                                      9,200
Thereafter                                                              456,527
Total                                                                   801,109


                                     - 51 -

<PAGE>



Interest rates
December 31,                                              1997            1998
Non interest bearing                                     4,092           3,308
From 1 to 3%                                            63,719         485,290
From 3 to 6%                                           275,163         287,339
From 6 to 10%                                           68,721          21,521
From 10 to 17%                                           3,326           3,651
Total                                                  415,021         801,109

Currencies
December 31,                                              1997            1998
U.S. dollar                                             20,000         455,885
Italian lira                                           242,754         231,752
French franc                                            94,403          98,628
Other                                                   57,864          14,844
Total                                                  415,021         801,109

Long-term debt includes:

                                                          1997            1998
STMicroelectronics SA (France)
- 4.97% Bank Loan due 2002                              33,361          35,712
- 4.95% Bank Loan due 2002                              33,361          35,712
- 4.36% Other Bank Loans                                27,681          27,204
STMicroelectronics LTD (Malta)
- 6.19% Bank Loan due 1998                              20,033               0
- 3.00% Other Bank Loans                                25,075           1,322
STMicroelectronics s.r.l. (Italy)
- 5.68% Bank Loan due 2002                              56,844          60,492
- 2.15% Government Loan
   due 2000                                             53,219          40,276
- 5.50% Other Bank Loans                               132,691         130,984
STMicroelectronics N.V.
- 1.75% Liquid Yield Option Notes (LYONs)                    0         435,885
STMicroelectronics (other countries)
- 6.99% Other Bank Loans                                32,756          33,522
Total long-term debt                                   415,021         801,109
Total long-term debt, current portion                   58,614          45,245
Total long-term debt, less current portion             356,407         755,864

In June 1998, the Company issued $513,852 face value of zero-coupon subordinated
convertible notes, due 2008, for net proceeds of $421,837. The notes are
convertible at any time by the holders at the rate of 8.952 shares of the
Company's common stock for each one thousand dollar face value of the notes. The
notes may be redeemed by the holders on June 10, 2003 or by the Company on or
after that date at the book value, payable in cash. The notes are subordinated
to all the other existing and future indebtedness of the Company.

Fifteen -- Other payables and accrued liabilities

December 31,                                         1997                 1998
Taxes other than income taxes                      38,910               29,825
Salaries and wages                                 85,809               78,493
Social charges                                     52,893               74,064
Advances received on fundings                      10,124               14,050
Commercial rebates                                 31,585               37,577
Royalties payable                                  20,769               12,778
Other                                              80,337               80,894
Total                                             320,427              327,681


Sixteen -- Other revenues

Other revenues consist of the following:

December 31,                               1996           1997           1998
Royalties and
   indemnities received                     582            956              0
Licensing revenues                       16,693         27,598          1,765
Miscellaneous sales                      18,675         17,250         27,833
Other                                    8,164           3,568          7,536
Total                                    44,114         49,372         37,134


Seventeen -- Personnel

Labor costs consist of the following:

December 31,                               1996           1997           1998
Salaries and wages                      745,329        753,275        825,961
Social security contribution            210,611        214,023        219,942
Other                                    53,838         57,929         60,871
Total                                 1,009,778      1,025,227      1,106,774


Labor costs are allocated to cost of sales, selling, general and administrative
expenses and research and development costs. At December 31, 1998 the Company
employed 29,182 persons (1997: 28,728).


                                     - 52 -

<PAGE>



Eighteen -- Other income and expenses

Other income and expenses consist of the following:

December 31,                            1996           1997           1998
Research and development funding*     63,792         55,269         63,531
Patents income (expense), net         (2,639)          (660)        (2,396)
Exchange gain (loss), net             11,822         15,158         19,019
Start-up costs                       (38,987)       (47,867)       (12,609)
Other                                 11,086          1,318          8,913
Total                                 45,074         23,218         76,458

*Does not include certain other funding received for industrialization costs
(which include certain costs incurred to bring prototype products to the
production stage). Such funding and costs are netted in cost of sales in the
income statement ($4,613 for 1996, $6,192 for 1997 and $3,081 for 1998).


Nineteen -- Net interest income (expense)

Net interest income (expense) consist of the following:

December 31,                             1996           1997           1998
Income                                 34,139         39,009         54,294
Expenses                              (45,308)       (41,655)       (45,603)
Total                                 (11,169)        (2,646)         8,691

Cash paid for interest was $40,064 for 1996, $43,305 for 1997 and $48,569 for
1998.


Twenty -- Income tax

Income before income tax expense is comprised of the following components:

December 31, 1996 1997 1998
Income from domestic operations        31,284         (8,437)       (18,730)
Income from foreign operations        765,898        528,008        550,202
Income before income tax expense      797,182        519,571        531,472


STMicroelectronics N.V. and its subsidiaries are individually liable for income
tax. Tax losses can only offset profits generated by the taxable entity
incurring such loss.


December 31,                              1996           1997           1998
Domestic--current                       (4,857)        (8,377)        (3,886)
Foreign--current                      (108,266)      (107,797)       (82,132)
Current taxes                         (113,123)      (116,174)       (86,018)
Deferred taxes                         (58,515)         3,157        (34,333)
Income tax expense                    (171,638)      (113,017)      (120,351)

The principal items accounting for the differences in income taxes computed at
The Netherlands statutory rate (35%) and the effective income tax rate comprise
the following:

Income tax expense computed
   at statutory rate                  (279,013)      (181,850)      (186,015)
Benefit (deductions) for financial
   reporting for which no current tax
   benefit is available                 14,894         (1,217)         7,644
Variation in valuation allowance        23,935           (294)           397
Other tax and credits                    7,855           (627)         2,995
Effect of tax rate differences          60,691         70,971         54,628
Income tax expense                    (171,638)      (113,017)      (120,351)

Permanent differences reflect mainly the effects of the capital allowances
programs existing in certain Southeast Asian and Mediterranean countries, of the
special post-pioneer regimes existing in Asia Pacific regions and of
non-deductible items.

Deferred tax assets and liabilities consist of the following:

                                                         1997           1998
Tax loss carryforwards and capital allowances          71,967         41,375
Other assets                                          142,362        142,212
Total assets, gross                                   214,329        183,587
Valuation allowance                                    (4,450)        (4,053)
Deferred tax assets, net                              209,879        179,534
Fixed assets depreciation                             213,399        240,116
Other liabilities                                      50,857         34,472
Deferred tax liabilities                              264,256        274,588


As a result of offsetting deferred tax assets against deferred tax liabilities
in each tax jurisdiction, the Company recorded a net deferred tax asset of
$96,139 in 1997 and $92,795 in 1998, and a net deferred tax liability of
$150,516 in 1997 and $187,849 in 1998. The Company increased its valuation
allowance by $294 and decreased it by $397 in 1997 and 1998, respectively.

                                     - 53 -

<PAGE>



As of December 31, 1998, the Company and its subsidiaries had net operating loss
carryforwards and capital allowances expiring in the following years:

Year
1999                                                                 23,927
2000                                                                 11,297
2001                                                                 11,984
2002                                                                  7,424
2003 and thereafter                                                 146,982
Total                                                               201,614

The Company paid $109,277 cash for income taxes in 1996, $37,207 cash for income
taxes in 1997 and $75,886 cash for income taxes in 1998.

Twenty-One -- Credit facilities

As of December 31, 1998, the aggregate amount of the Company's long-term credit
facilities was $801,109 (note 14) under which $801,109 of indebtedness was
outstanding, and additionally the aggregate amount of the Company's short-term
facilities was approximately $971,000 under which $146,000 indebtedness was
outstanding.

Twenty-Two -- Lease commitments

The Company leases land, building, plant and equipment under non-cancellable
lease agreements. As of December 31, 1998 the future minimum lease payments to
which the Company was committed under operating leases were as follows:

Year
1999                                                                 14,971
2000                                                                 11,484
2001                                                                  9,414
2002                                                                  7,893
2003                                                                  7,269
Thereafter                                                           23,985
Total                                                                75,016

Twenty-Three -- Financial instruments and risk management

Financial instruments and derivatives are used exclusively for purposes other
than trading.

Forward exchange contracts and currency options: The Company enters into forward
contracts and foreign currency options to protect against potentially adverse
changes in foreign currency exchange rates and to cover a portion of both its
probable anticipated, but not firmly committed, transactions and transactions
with firm foreign currency commitments. These transactions include international
sales by various subsidiaries in foreign currencies, foreign currency
denominated purchases, intercompany sales and other intercompany transactions.
Such contracts outstanding as of December 31, 1998 have remaining terms of one
to 25 months, maturing mainly during first quarter 1999, and amount to $342,470
forward sale of US$, $20,142 forward purchase of US$, $200,424 forward sale of
other foreign currencies, and $71,833 forward purchase of other foreign
currencies. There were no foreign currency options outstanding as of December
31, 1997 or 1998. The principal currencies covered are the German mark, the
British pound, the Japanese yen, the French franc, the Swiss franc and the
Italian lira.

        The risk of loss associated with purchased options is limited to premium
amounts paid for the option contracts. The risk of loss associated with forward
contracts is equal to the exchange rate differential from the time the contract
is entered into until the time it is settled.

        Realized and unrealized gains and losses on forward contracts are
included in "other income and expenses". The discount or premium on forward
contracts have been amortized over the life of the forward contract and included
in net interest expenses.

Concentration of credit risk: Financial instruments that potentially subject the
Company to concentrations of credit risk consist primarily of cash and cash
equivalents, financial instruments with off-balance sheet risks (primarily
forward contracts), and trade receivables. The Company places its cash and cash
equivalents with high credit quality financial institutions. The Company
controls the credit risks associated with financial instruments through credit
approvals, investment limits and centralized monitoring procedures but does not
normally require collateral or other security from the parties to the financial
instruments with off-balance sheet risk. In the event of a failure to honor one
of the forward contracts by one of the banks with which the Company has
contracted, management believes any loss would be limited to the exchange rate
differential from the time the contract was made.

        Concentrations of credit risk with respect to trade receivables are
limited because the Company conducts its operations with customers located
throughout the world. Management believes that receivables are well diversified,
thereby reducing potential credit risk to the Company.

        The Company does not anticipate non-performance by counterparties which
could have a significant impact on its financial position or results of
operations.

                                     - 54 -

<PAGE>

                 Interest rate and foreign currency agreements:

December 31,                                            1997           1998
Forward exchange contracts:
--sales                                               213,468        542,894
--purchases                                           (91,751)       (91,975)

Fair value of financial instruments: The estimates of fair value were obtained
using prevailing financial market information resulting from various valuation
techniques as of December 31, 1998. The estimated fair values may not be
representative of actual values of the financial instruments that could have
been realized as of year end or that will be realized in the future. The
methodologies used to estimate fair value are as follow:

Cash and cash equivalents, accounts and notes receivable, bank overdrafts,
short-term borrowings, accounts and notes payables: The carrying amounts
reflected in the consolidated financial statements are reasonable estimates of
fair value because of the relatively short period of time between the
origination of the instruments and their expected realization.

Long-term debt and current portion of long-term debt:
The fair values of these financial instruments were determined based on quoted
market prices, and by estimating future cash flows on a borrowing-by-borrowing
basis and discounting these future cash flows using the Company's incremental
borrowing rates for similar types of borrowing arrangements.

Forward exchange contracts: The fair value of these instruments is the estimated
amount that the Company would receive or pay to settle the related agreements as
of December 31, 1997 and 1998 based upon quoted market prices for the same or
similar instruments and the creditworthiness of the counterparties.
<TABLE>
<CAPTION>

                                                               1997                       1998
                                             Carrying     Estimated     Carrying     Estimated
                                             Amount       Fair Value    Amount       Fair Value
<S>                                          <C>          <C>           <C>         <C>
Balance sheet
--  Marketable securities (included in
    cash equivalents)                          48,259       48,259        22,654       22,654
--  Bank loans (including current
    portion)                                  415,021      405,445       365,224      355,514
--  Liquid Yield Option Notes (LYONs)            --           --         435,885      447,051
Off-balance sheet
--  Forward exchange contracts                (13,833)    (121,717)       (7,900)    (455,098)
</TABLE>


Twenty-Four -- Other commitments and contingencies
The Company is involved in various lawsuits, claims, investigations and
proceedings incidental to the normal conduct of its operations. These matters
mainly include the risks associated with external patents utilization, various
investigations, claims from customers and tax disputes. Management believes that
these contingencies will not have a material effect on the business, financial
condition or results of operations of the Company. However, the Company believes
that provisions carried as at December 31, 1998 are adequate.


Twenty-Five -- Related party transactions

Transactions with significant shareholders and their affiliates were as follows:

December 31,                               1996           1997           1998
Sales                                   232,057        148,172          5,608
Research and development expenses       (13,262)       (12,794)       (16,215)
Other purchases and expenses            (48,155)       (29,757)       (12,406)
Accounts receivable                      31,580         17,244          1,872
Accounts payable                         10,519          9,745         10,509

As at December 31, 1996 and 1997, the transactions with the shareholders
included transactions with Thomson SA and Thomson CSF, who were shareholders
during those years.


Twenty-Six -- Segment information

In June 1997, the United States Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise and Related Information" (FAS 131), which the Company adopted
effective December 31, 1998. FAS 131 requires that enterprises report certain
information about operating segments. It also requires that enterprises report
certain information about their products and services, the geographic areas in
which they operate, and their major customers.

        The Company concluded that it has two principal businesses and operates
in two segments: the Semiconductor segment and the Subsystems segment.

        In the Semiconductor segment, the Company designs, develops,
manufactures and markets a broad range of products, including discrete, memories
and standard commodity components, ASICSs (full custom devices and semicustom
devices) and ASSPs for analog, digital, and mixed-signal applications.

        In the Subsystems segment, the Company designs, develops, manufactures
and markets subsystems and modules for the Telecom, Automotive and Industrial
markets including mobile phone accessories, battery chargers, ISDN power
supplies and in-vehicle equipment for electronic toll payment. The Subsystems
segment does not meet the requirements for a reportable segment as defined in
FAS 131.

        The accounting policies of the segments are the same as those described
in the summary of significant accounting policies.

                                     - 55 -

<PAGE>



        The following is a summary of operations by entities located within the
indicated geographic areas for 1996, 1997 and 1998. Long-lived assets consist of
net property and equipment and other intangible assets.

Net revenues

December 31,                               1996           1997           1998
France                                  486,551        455,663        474,580
Italy                                   196,816        189,222        171,143
Germany                                 505,759        427,211        444,362
Other European countries                631,592        728,128        737,112
USA                                     934,224        935,010        978,662
Singapore                               809,930      1,031,020      1,261,165
Other countries                         557,488        252,891        180,728
Total                                 4,122,360      4,019,145      4,247,752


Long-lived assets

December 31,                               1996           1997           1998
France                                  895,979        980,250      1,169,273
Italy                                   777,698        837,307        899,689
Germany                                     921            869          1,134
Other European countries                  7,384          7,402         19,922
USA                                     497,348        605,666        587,734
Singapore                               245,731        227,888        216,817
Other countries                         432,221        413,854        472,007
Total                                 2,857,282      3,073,236      3,366,576


Twenty-Seven -- Subsequent events (unaudited)

In April 1999, the Supervisory Board approved the submission of several
resolutions to shareholder approval. The resolutions include payment of a cash
dividend of $0.16 per share on June 15, 1999 to shareholders of record on June
1, 1999, a two for one stock split, which would become effective on June 16,
1999 immediately after the payment of the cash dividend, and the authorisation
for the Company to issue up to 180 million Preference Shares to its main
Shareholder STMicroelectronics Holding II B.V. After the stock split and the
authorisation to create Preference Shares, the authorised share capital of the
Company would be 400 million ordinary shares and 180 million Preference Shares.
The Preference Shares which are intended to protect the Company from a hostile
takeover would be issued in accordance with the terms of an option contract to
be agreed between the Company and STMicroelectronics Holding II B.V., at 25% of
their par value, and would entitle STMicroelectronics II B.V. to full voting
rights. The issuance of Preference Shares is contingent upon STMicroelectronics
Holding II B.V. retaining at least 33% of the issued share capital of the
Company.

                                     - 56 -
<PAGE>


Report of Independent Accountants

To the Supervisory Board and Shareholders of
STMicroelectronics NV

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of cash flows and of changes in shareholders'
equity present fairly, in all material respects, the financial position of
STMicroelectronics NV and its subsidiaries at December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards in the United States of America which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.

/s/ PricewaterhouseCoopers NV.
PricewaterhouseCoopers NV
Amsterdam, January 25, 1999



                                     - 58 -