SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 20-F

       |_|     REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                                       or
       |X|      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   for the fiscal year ended December 31, 1996
                                       or
       |_|    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                        for the transition period from to
                        Commission File number: 1-13546

                        SGS-THOMSON Microelectronics N.V.
             (Exact name of Registrant as specified in its charter)

               N/A                                   The Netherlands
     (Translation of Registrant's           (Jurisdiction of incorporation
         name into English)                          or organization)

                      Technoparc du Pays de Gex - B.P. 112
                             165, rue Edouard Branly
                            01630 Saint Genis Pouilly
                                     France
                    (Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

         Title of each class:                  Name of each exchange
         --------------------                   on which registered
                                               ---------------------

      Common Shares, nominal value             New York Stock Exchange
       NLG 13.75 per Common Share


Securities registered or to be registered pursuant to Section 12(g) of the Act:
                                      None

Securities for which there is a reporting  obligation  pursuant to Section 15(d)
of the Act:
                                      None

         Indicate  the  number of  outstanding  shares  of each of the  issuer's
classes of capital or common stock as of the close of the period  covered by the
annual report:

         Common Shares, nominal value NLG 13.75
         per Common Share                            138,985,580

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

                             Yes |X|                   No |_|

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

                             Item 17 |_|               Item 18 |X|


<PAGE>



                                TABLE OF CONTENTS

                                     PART I

                                                                            Page
                                                                            ----

Item 1.    Description of Business..........................................  1
Item 2.    Description of Property.......................................... 39
Item 3.    Legal Proceedings................................................ 43
Item 4.    Control of Registrant............................................ 44
Item 5.    Nature of Trading Market......................................... 51
Item 6.    Exchange Controls and Other Limitations Affecting Security
             Holders*....................................................... 52
Item 7.    Taxation......................................................... 52
Item 8.    Selected Consolidated Financial Data............................. 56
Item 9.    Management's Discussion and Analysis of Financial Condition
             and Results of Operations...................................... 56
Item 10.   Directors and Officers of Registrant............................. 56
Item 11.   Compensation of Directors and Officers........................... 66
Item 12.   Options to Purchase Securities from Registrant or Subsidiaries... 66
Item 13.   Interest of Management in Certain Transactions................... 67


                                     PART II

Item 14.   Description of Securities to be Registered*...................... 68


                                    PART III

Item 15.   Defaults upon Senior Securities*................................. 68
Item 16.   Changes in Securities and Changes in Security for Registered
             Securities*.................................................... 68


                                     PART IV

Item 17.   Financial Statements*............................................ 68
Item 18.   Financial Statements............................................. 68
Item 19.   Financial Statements and Exhibits................................ 69

Signature
----------------
*  Omitted because item is not applicable.

<PAGE>




                                     PART I


                     Item 1: Description of Business In 1996


The Company

                  SGS-THOMSON is a global independent semiconductor company that
designs,  develops,  manufactures  and  markets a broad  range of  semiconductor
integrated   circuits   and   discrete   devices  used  in  a  wide  variety  of
microelectronic  applications,  including  telecommunications  systems, computer
systems,  consumer products,  automotive products and industrial  automation and
control systems.  According to preliminary industry data, SGS-THOMSON entered in
1996 the group of the top 10 worldwide  suppliers of semiconductor  devices.  On
the basis of preliminary  1996 industry  rankings,  SGS-THOMSON  was the world's
leading  supplier of analog  monolithic  ICs, mixed signal ASICs ICs,  smartcard
ICs,  special  automotive  ICs, EPROM and EEPROM memories and the world's second
leading  supplier  of  telecom  ICs.   According  to  industry  data  for  1995,
SGS-THOMSON  was the leading  supplier of MPEG  decoders ICs with  approximately
44.3% share of the MPEG decoders market.  The Company currently offers more than
3,000 main types of products  to more than 1,500  customers  including  Alcatel,
Bosch, Creative Technology, Ford, Hewlett-Packard, IBM, Motorola, Nokia, Nortel,
Philips,  Seagate  Technology,  Siemens,  Sony,  Thomson  Multimedia and Western
Digital.

                  The  Company  offers  a  diversified   product  portfolio  and
develops  products  for a wide  range  of  market  applications  to  reduce  its
dependence on any single product,  industry or application  market.  The Company
has focused on  developing  products that exploit its  technological  strengths,
including  differentiated  ICs (which the Company defines as being its dedicated
products,  semicustom devices and  microcontrollers).  Differentiated ICs 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.  Differentiated  ICs accounted for approximately 59% of the
Company's  net  revenues  in  1996  compared  to  approximately   51%  in  1995.
SGS-THOMSON  also  targets  applications  that  require  substantial  analog and
mixed-signal  content and can exploit the Company's system level  expertise.  In
1996,  analog ICs (including  mixed-signal  ICs), the majority of which are also
differentiated  ICs,  accounted  for  approximately  46%  of the  Company's  net
revenues   (unchanged  from  1995),   while  discrete   devices   accounted  for
approximately  14% of the Company's net revenues  (compared to approximately 17%
in 1995). In recent years,  analog ICs have experienced less volatility in sales
growth rates and average selling prices than the overall semiconductor industry.

                  In 1996,  the  Company  developed  a number of  important  new
products  such as the  first  superintegrated  chips for hard  disk  drives  and
set-top-boxes   (OMEGA  chip  announced  in  1997),   new  8,  16  and  32  bits
application-specific cores of its microcontrollers families, a new


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family of mixed-signal  semicustom  chips, new integrated  Audio/Video chips for
MPEG-2 decompression  functionality in multimedia and consumer applications,  an
antitaping chip that can be integrated in the Company video encoding devices,  a
new multimedia  analog front-end for computer and a  radiofrequency  single chip
for digital cellular phones.

                  In  1996,   SGS-THOMSON  reached  an  agreement  with  Samsung
Electronics   Co.  Ltd.  to  cooperate  in  the   development  and  sourcing  of
microcontrollers  and digital signal processors  designed  specifically for high
volume markets, such as set-top-boxes,  multimedia PCs and mobile communication.
The  Company  also  signed an  agreement  with World  Space for  developing  and
producing  chip  sets  for  new  generation  personal  satellite  radios  and an
agreement  with  Chromatic  Research Inc. to co-design,  manufacture  and market
single-chip  multimedia  processors  of the MPACT  series  (capable of 2D and 3D
graphics, audio, video, fax/modem, telephony and videophone functionalities) for
multimedia  PC  applications  and  entered  into a  strategic  partnership  with
Microsoft to add hardware  Digital  Video Disk support to the  Microsoft  Active
Movie platform.

                  In 1996,  SGS-THOMSON's  cumulative  shipments  of  integrated
circuits for smartcards  surpassed the one billion mark. The Company's smartcard
chip portfolio  spans the full range of commercial  applications,  including GSM
mobile phones,  pay-TV,  ID cards,  banking,  electronic  purses,  health cards,
access control,  toll payment and mass transport,  and includes  standard memory
chips as well as the most  advanced  8 bit  cryptocontrollers.  The  Company  is
currently  developing  32  bit   cryptocontrollers  as  well  as  solutions  for
contactless  applications.  In 1996, SGS-THOMSON was the first company to obtain
security  certifications  for banking and Pay-TV devices  according to the ITSEC
European Norms.

                  In November 1996, the Company  announced that the research and
development  center  jointly  operated by the  Company  and the Centre  National
d'Etudes et des  Telecommunications  ("CNET"), the research laboratory of France
Telecom, had completed the development of the 0.25 micron CMOS process, only one
year  after  the  qualification  of the 0.35  micron  process.  The 0.25  micron
process,  currently used in the prototyping of a complex  evaluation  circuit of
several million transistors, consists of six metal layers and involves more than
22 levels of masking.  Other complex  prototypes are being  developed to further
validate the process and accelerate the  introduction  of products based on this
process,  in particular a systolic  processor for the  estimation of movement in
images.

                  In 1996, the Company  established a small research  laboratory
in  Berkeley,  California,  which will  principally  cooperate  in the design of
advanced  macrocells and libraries for the Company's  analog,  digital and mixed
signal technologies.

                  Since  1995,  SGS-THOMSON  adopted  a  plan  to  increase  its
manufacturing  capacity through the addition of new 8-inch submicron fabrication
plants that will be designed to meet the growing  demand for VLSI  devices.  The
Company also  approved  the  building  and  equipping of a new 8-inch 0.5 micron
front-end  wafer   fabrication  plant  (which  will  also  be  capable  of  0.35
production) in Singapore, which was announced in 1996.

                                      - 2 -

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                  The  Company's  business  is  organized  into  five  principal
product groups:

                  The Dedicated  Products  Group  produces  application-specific
         semiconductor   products  using   advanced   bipolar,   CMOS,   BiCMOS,
         mixed-signal and power technologies. The Group's dedicated products are
         used  in  all  major   end-user   applications,   including   such  new
         applications as mobile communications  networks,  asynchronous transfer
         mode communications  systems,  global positioning  systems,  flat panel
         displays,  hard disk drives and digital video  systems.  The breadth of
         the Group's  customer and application base provides it with a source of
         stability in the cyclical semiconductor market, while its position as a
         strategic  supplier of  application-specific  products provides it with
         opportunities to supply its customers' requirements for other products,
         including discrete devices, programmable products and memories.

                  The Discrete and Standard ICs Group  produces  discrete  power
         devices,  power  transistors,  standard  linear and logic ICs and radio
         frequency ("RF") products.  The Group's discrete and standard  products
         are  manufactured  using mature  technological  processes that are less
         capital  intensive than the Company's  other  principal  products.  The
         Group has a diverse customer base and broad product portfolio.

                  The Memory  Products  Group  produces a broad  range of memory
         products,  including EPROMs, flash memories,  EEPROMs, SRAMs, and chips
         for smartcards. According to preliminary industry data, the Company was
         the leading  supplier of EPROMs in 1996,  accounting for  approximately
         30% of  worldwide  EPROM  sales,  as well as the  leading  supplier  of
         EEPROMs.  The Company has  developed a  proprietary  know-how for flash
         memory  devices and has started mass  production  for this market.  The
         Group does not produce DRAMs, a commodity memory product.

                  The  Programmable  Products  Group  produces   microcomponents
         (including   microcontrollers,   microprocessors   and  digital  signal
         processors),   digital  semicustom  devices  and  mixed  analog/digital
         semicustom devices.

                  The New Ventures  Group  identifies  and develops new business
         opportunities  to complement  the  Company's  existing  businesses  and
         exploit its  technological  know-how,  manufacturing  capabilities  and
         global marketing team. Initial activities have focused on manufacturing
         and marketing x86  microprocessors.  New activities  include design and
         manufacturing  of "system on  silicon"  solutions  based on the 486 CPU
         core and more recently media  processors based on Very Long Instruction
         Word ("VLIW") processes.

                  As part of its activities  outside the five principal products
groups,   the  Company  also  produces   subsystems  for  industrial  and  other
applications.

                  SGS-THOMSON's  products are  manufactured and designed using a
broad  range  of  manufacturing   processes  and  proprietary   design  methods.
SGS-THOMSON uses all of the

                                      - 3 -

<PAGE>



prevalent  function-oriented  process technologies,  including CMOS, bipolar and
non-volatile memory technologies. In addition, by combining basic processes, the
Company has developed advanced  systems-oriented  technologies that enable it to
produce  differentiated  and  application-specific  products,  including  BiCMOS
technologies (bipolar and CMOS) for mixed-signal applications,  BCD technologies
(bipolar,  CMOS and DMOS) for intelligent power applications and embedded memory
technologies.  This broad technology  portfolio,  a cornerstone of the Company's
strategy for many years,  enables the Company to meet the increasing  demand for
"systems-on-a-chip" solutions. To complement this depth and diversity of process
and design technology,  the Company also possesses a broad intellectual property
portfolio that it has used to enter into  cross-licensing  agreements  with many
major semiconductor manufacturers.

                  In   1996,    SGS-THOMSON   has   expanded   its   diversified
manufacturing  infrastructure  while improving the cost, quality and flexibility
of its operations. SGS-THOMSON has applied 1996 investments in its manufacturing
facilities to bring to full capacity the 8-inch front-end manufacturing facility
in  Crolles,  France,  to  continue  the  ramp  up of the new  8-inch  front-end
manufacturing  facility in Phoenix,  Arizona, to complete the building of and to
begin equipping the third 8-inch  front-end  manufacturing  facility in Catania,
Italy,  and to complete a new back-end  facility and design  center in Shenzhen,
China,  through  its joint  venture  created  in 1994 with a  subsidiary  of the
Shenzhen  Electronics  Group.  During  1996,  the  Company  has  also  completed
conversion from 4-inch to 5-inch of the two front-end wafer  fabrication  plants
in Tours,  France,  from  5-inch to 6-inch of the  front-end  wafer  fabrication
facility in Rousset, France, and has installed a new 6-inch module in the Rancho
Bernardo,  California  front-end wafer fabrication  facility.  In addition,  the
Company has started  construction of a new 8-inch  front-end  wafer  fabrication
facility in Rousset,  France,  has initiated the 6-inch to 8-inch  conversion of
one of its Agrate,  Italy front-end wafer  fabrication  plants,  and has started
planning the construction of a new 8-inch front-end wafer  fabrication  facility
in Singapore,  announced during 1996.  Finally,  the Company has also identified
one more 8-inch  front-end  wafer  fabrication  plant to be built in Italy.  The
Company  has  many  back-end  manufacturing   activities  in  large  and  modern
facilities in lower-cost areas in the Mediterranean and Asia Pacific regions and
has  focused  on  continually   improving  the   productivity   of  all  of  its
manufacturing facilities. SGS-THOMSON has also centralized the management of its
manufacturing  operations  and  implemented  computer-integrated   manufacturing
systems and  statistical  process  control  techniques.  The  Company  fosters a
corporate-wide  Total Quality  Management  ("TQM") culture that defines a common
set of objectives and performance  measurements  for employees in all geographic
regions,  at every stage of product  design,  development and production for all
product lines.

                  SGS-THOMSON is  international  in scope,  operating  front-end
and/or  back-end  manufacturing  facilities in Europe,  the United  States,  the
Mediterranean and Asia Pacific regions,  and conducting research and development
primarily in France and Italy,  and design,  marketing  and sales  activities in
each of the electronic  industry's major economic  regions:  Europe,  the United
States,  the Asia Pacific region and Japan.  In 1996,  approximately  44% of the
Company's  net  revenues  originated  in  Europe  (compared  to  46%  in  1995),
approximately 23% in the Americas  (compared to 24% in 1995),  approximately 27%
in the Asia Pacific region

                                      - 4 -

<PAGE>



(compared  to 26% in 1995)  and  approximately  6% in Japan  (compared  to 4% in
1995). In 1996 the Company's  sales in the Asia Pacific region  surpassed the $1
billion level for the first time. In 1996, approximately one-third of the 6-inch
equivalent  wafers  manufactured  by the Company  were  manufactured  outside of
Europe and more than one-half of the Company's employees were located outside of
Europe.

                  SGS-THOMSON  believes that strategic alliances are critical to
success in the semiconductor  industry, and has entered into strategic alliances
with customers, other semiconductor  manufacturers and major suppliers of design
software.  The Company has entered into several  strategic  customer  alliances,
including  alliances with Alcatel,  Seagate  Technology,  Thomson Multimedia and
Western  Digital,  among  others.  Customer  alliances  provide the Company with
valuable  systems  and  application  know-how  and  access  to  markets  for key
products,  while allowing the Company's  customers to share some of the risks of
product  development  with the Company and gain access to the Company's  process
technologies   and   manufacturing   infrastructure.    Alliances   with   other
semiconductor   manufacturers   permit  costly   research  and  development  and
manufacturing  resources to be shared to mutual  advantage for joint  technology
development.  The Company has also entered into technology development alliances
with  customers and other  manufacturers,  including  Nortel in North America to
develop  advanced 0.5 micron BiCMOS  mixed-signal  technologies  and  Mitsubishi
Electric  Corporation  ("Mitsubishi")  in Japan to  develop  a family of 16 Mbit
flash memories for mass storage applications.  The Company has also entered into
an agreement with Philips  Semiconductors  to jointly  develop  sub-micron  CMOS
logic  processes  in  Crolles,   France  through  1997.  The  Company  has  also
established  joint  development  programs with leading suppliers such as Applied
Materials,  ASM Lithography,  LAM and Air Liquide,  and with CAD Tools producers
including  Cadence,  Synopsis and Mentor. It is a participant in Sematech I 300I
for the development of 300 millimeter wafer manufacturing processes. SGS-THOMSON
is active  in joint  European  research  efforts  such as the new MEDEA  program
(which  succeeded to JESSI as of 1997),  and also cooperates with major research
institutions and universities.

History

                  The  Company  was  formed  in  June  1987 as a  result  of the
combination  of  the  non-military  business  of  Thomson  Semiconducteurs,  the
microelectronics  business of the French  state-controlled  defense  electronics
company Thomson-CSF,  and SGS  Microelettronica,  the microelectronics  business
owned by  STET-Societa  Finanziaria  Telefonica  S.p.A.  ("STET"),  the  Italian
state-controlled  telephone  company.  Since  its  formation,  the  Company  has
significantly  broadened and upgraded its range of products and technologies and
has strengthened  its  manufacturing  and  distribution  capabilities in Europe,
North America, and the Asia Pacific region, while at the same time restructuring
its operations to improve efficiency.

                  At the time of the Company's  formation,  SGS Microelettronica
was the 20th  largest  semiconductor  company in the world by  revenues  and the
non-military semiconductor business of Thomson Semiconducteurs was of comparable
size. At its inception,  the Company was among the world's leading  suppliers of
intelligent power devices and bipolar power

                                      - 5 -

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transistors  and a leading  supplier  to the  telecommunications  industry.  SGS
Microelettronica's   strengths  in  power  products,   industrial  products  and
automotive  products  and its  presence  in the  emerging  Asia  Pacific  market
complemented  Thomson  Semiconducteurs'  strengths in  mixed-signal  processing,
telecommunications  devices and consumer electronics,  its presence in the North
American market and its strong intellectual  property portfolio,  which included
patents acquired when Thomson Semiconducteurs purchased substantially all of the
assets of Mostek  Corporation in 1985. The combination of the two European-based
semiconductor   businesses   provided   opportunities   to   realize   operating
efficiencies,  consolidate  global operations and better withstand  downturns in
the cyclical  semiconductor  industry, and facilitated the financing of research
and development and capital  expenditures  necessary to compete effectively with
the world's leading semiconductor companies.

                  Following the Company's  formation,  management  implemented a
comprehensive plan to rationalize the Company's operations,  pursuant to which a
variety of measures were taken to reduce fixed costs,  improve  product  quality
and  increase  yields.  Between  1987 and 1992,  the Company  closed or sold ten
manufacturing  plants, and certain back-end and front-end  production  processes
were  shifted to lower cost  facilities  in the  Mediterranean  and Asia Pacific
regions.  Although it maintained a broad product line, the Company  rationalized
its product  offerings and process  technologies  and focused on increasing  its
production  of  differentiated   products.   Management  also  standardized  the
Company's   management   information   systems  and   consolidated   management,
administrative and sales staffs for the combined group.

                  To increase  its  presence in the  microprocessor  market,  in
April 1989 SGS-THOMSON  acquired Inmos Ltd. ("Inmos"),  a British  semiconductor
company that was founded in 1978 and purchased by Thorn EMI plc ("Thorn EMI") in
1984.  In  connection  with its sale of Inmos to the  Company,  Thorn EMI and an
affiliate  acquired a 10% interest in SGS-THOMSON  which has since been sold. In
October 1989, the Company purchased the former microwave  semiconductor business
of Microwave Semiconductor Corporation,  and in March 1993, SGS-THOMSON acquired
the low current thyristors and triacs business of Tag Semiconductors  Limited, a
subsidiary of Raytheon Company.

                  Since its formation in 1987,  the Company has  maintained  its
commitment  to research and  development  despite  significant  cost  reductions
during  the  Company's  restructuring,  particularly  in 1990 and 1991  when the
Company  experienced  losses.  Management  initially  combined  the research and
development  staffs  of the  predecessor  companies  and  focused  its  expanded
research  and  development  resources on strategic  products,  applications  and
technologies. Beginning in 1993, the Company significantly increased its capital
investments  as  part  of a  long-term  program  to  upgrade  and  increase  its
manufacturing capabilities at existing plants and to build new facilities.

                  To provide the Company with a stronger capital structure,  the
Company's  shareholders  contributed capital totalling $800 million between 1988
and 1993.  The Company used these funds in part to finance  restructuring  costs
and to reduce net debt (total debt,  including  bank  overdrafts,  less cash and
cash equivalents and marketable securities) from a high

                                      - 6 -

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of  approximately  $905 million at December 31, 1991 to 66.7 million at December
31, 1996. In December,  1994, the Company completed a registered public offering
of Common  Shares  (the  "Initial  Public  Offering")  with net  proceeds to the
Company of approximately  $198.7 million.  In the Initial Public  Offering,  the
Company  sold  9,606,240  shares and the selling  shareholders  sold  11,393,760
shares at the initial price to public of $22.25 a share.  In October  1995,  the
Company  completed a secondary  public offering of Common Shares in the U.S. and
in France (the  "Offering")  with net  proceeds to the Company of  approximately
$371.6  million.  In the  Offering,  the Company sold  8,960,000  shares and the
selling  shareholders  sold  11,740,000  shares  at a price to public of $43.5 a
share.  See Item 4: "Control of Registrant".  In February 1996, the Company also
completed  an offering of Common  Shares to certain of its  employees  worldwide
(the "1996  Employee  Offering").  Common  Shares  offered in the 1996  Employee
Offering  were  offered at a 5%  discount  to the market  price as of January 5,
1996. In addition,  eligible employees who purchased shares in the 1996 Employee
Offering  ("Participating  Employees")  and who held those shares at least until
the  first  anniversary  of the day on which  such  shares  were  issued to such
Participating  Employees,  were entitled to purchase, for each lot of ten shares
purchased in the 1996 Employee Offering,  one additional share (a "Bonus Share")
at a discounted  price.  The purchase  price of each Bonus Share was the $ or FF
equivalent of NLG 13.75,  which is the nominal value per share.  An aggregate of
253,397 new Common Shares were issued pursuant to the 1996 Employee Offering. In
1997,  the Company  intends to implement a share purchase plan which is intended
to enable employees in most SGS-THOMSON locations worldwide to purchase, subject
to various conditions, up to one million Common Shares to be newly issued.

Industry Background

                  Semiconductors are the basic building blocks used to create an
increasing  variety of electronic  products and systems.  Since the invention of
the transistor in 1948,  continuous  improvements in  semiconductor  process and
design technologies have led to smaller,  more complex and more reliable devices
at a lower cost per  function.  As  performance  has increased and size and cost
have  decreased,  semiconductors  have expanded  beyond their  original  primary
applications,  computer  systems,  to  applications  such as  telecommunications
systems,  automotive  products,  consumer  goods and  industrial  automation and
control systems.  In addition,  system users and designers have demanded systems
with more functionality,  higher levels of performance,  greater reliability and
shorter  design  cycle  times,  all in smaller  packages at lower  costs.  These
demands have  resulted in  increased  semiconductor  content as a percentage  of
system cost.  Calculated on the basis of TAM (as defined  below) as a percentage
of worldwide  revenues  from  production of  electronic  equipment  according to
published  industry  data (which for  purposes  of this  annual  report are data
published by Dataquest,  Inc.  ("Dataquest")),  semiconductor  pervasiveness has
increased  from 9.0% in 1991 to 19.0% in 1995 and  decreased to an estimated 15%
in 1996. The demand for electronic systems has also expanded geographically with
the emergence of new markets, particularly in the Asia Pacific region.

                  Semiconductor sales have increased significantly over the long
term but have  experienced  significant  cyclical  variations  in growth  rates.
According to trade association data

                                      - 7 -

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(which for all  purposes of this  annual  report are World  Semiconductor  Trade
Statistics ("WSTS")),  worldwide sales of all semiconductor  products (the total
available  market or "TAM")  increased from $17.8 billion in 1983 to an estimate
of $132 billion in 1996 (growing at a compound annual rate of approximately 17%,
according to trade association  data), while the 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 prior periods  compared  therewith  includes
microprocessors  as a  result  of the  Company's  production  of  x86  products)
increased  from  approximately  $15.0  billion in 1983 to an  estimate of $102.7
billion in 1996  (growing at a compound  annual rate of  approximately  16%). In
1996,  the TAM  decreased  by 8.6% with sales in the Asia  Pacific  Region,  the
Americas,   Europe  and  Japan   decreasing  by  6.7%,   9.2%,  2%,  and  13.8%,
respectively. In 1996, approximately 32.3% of all semiconductors were shipped to
the  Americas,  25.9% to Japan,  20.9% to Europe,  and 20.9% to the Asia Pacific
region.

                  Historically,  cyclical changes in production  capacity in the
semiconductor  industry  and demand for  electronic  systems  have  resulted  in
pronounced cyclical changes in the level of semiconductor sales and fluctuations
in prices and margins for  semiconductor  products  from time to time.  However,
certain significant changes in the industry could contribute to continued growth
over the long term  notwithstanding  cyclical  variations from period to period.
Such  changes  include  the  development  of  new  semiconductor   applications,
increased  semiconductor  content as a percentage of total system cost, emerging
strategic  partnerships,  growth in the electronic  systems industry in the Asia
Pacific region.

Business Outlook

                  From  market  data  related to 1996,  it is  evident  that the
industry has started a correction from the extraordinary growth of recent years.
The Company,  however, entered 1997 in a healthy financial condition, and with a
strong  market  position  despite  the  strong  corrections  experienced  by the
industry in 1996. Market conditions  remained  difficult in the first quarter of
1997,  with  continuing  overall price  pressures that  negatively  impacted the
Company's sales. As the quarter came to a close,  however, the Company saw signs
that the market was improving as prices of several  standard  products  began to
stabilize,  and in some cases recover from recent low levels.  In addition,  the
Company's order rates  accelerated in March.  Although  overall order visibility
remained modest,  it improved over the fourth quarter of 1996.  Certain industry
analysts  expect a growth rate for 1997 compared to a market decline in 1996. It
is evident,  however,  that decreased  visibility on customer demand has made it
somewhat more difficult to predict market conditions.

                  On  June  5,  1997,  the  Company  announced  that,  based  on
available information for the first two months of its second quarter, it expects
its net  revenue  for the second  quarter  ending  June 28, 1997 to be above the
first quarter level, but below analysts'  expectations,  and its gross margin to
be similar to that of the first  quarter  due to a  short-term  shift in product
mix.

                                      - 8 -

<PAGE>



The Company also stated that its net earnings for the second  quarter are likely
to be within a range approximating first quarter 1997 levels.

                  In  the  first  two  months  of the  quarter,  a  larger  than
anticipated  percentage of net sales was derived from commodity products such as
Standard ICs and Memories.  Worldwide demand for these products has strengthened
in the last  several  months,  but  pricing  remains  low and the  gross  margin
associated with them is significantly below that of SGS-THOMSON's differentiated
products.

                  Looking ahead, the Company  reaffirmed that it expects 1997 to
be a year of  progressive  improvement  for the  Company  and that  second  half
results  should  benefit from better  overall  market  conditions  and a greater
contribution from sales of differentiated products.

                  In 1997,  the Company  intends to continue  to  emphasize  its
expertise  in  differentiated  products  while  continuing  to  offer  commodity
products that contribute volume, profit and cash flow. The Company is confident,
however,  that the heavy emphasis on  differentiated  products in its portfolio,
its  strong  customer  base  and  strategic  alliances,  together  with its well
diversified  sales base,  both in terms of  applications  and geography,  should
allow SGS-THOMSON to again outpace the rate of growth in its served market.  The
Company also remains  confident about its long-term  growth prospects as well as
those of the  market it serves  and  consequently  intends  to move  ahead  with
capital expenditure and research and development plans,  committing a percentage
of revenue on the same order of magnitude as during 1996.

                  The above statements  contained in this "Business Outlook" are
forward looking statements that involve a number of risks and uncertainties.  In
addition to the factors  discussed  above,  among the other  factors  that could
cause actual results to differ materially are the following:  the cyclicality of
the semiconductor and electronic systems  industries;  capital  requirements and
the  availability  of  funding;   competition;   new  product   development  and
technological  change;  manufacturing  risks;  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.  Unfavorable changes
in the above or other factors discussed under "Risk Factors" listed from time to
time in the Company's SEC reports,  including in the Company's  Prospectus dated
October 18, 1995 (pages 9 through 16), could materially affect the Company.

                  Semiconductor Classifications

                  The  process  technologies,   levels  of  integration,  design
specificity,    functional   technologies   and   applications   for   different
semiconductor   products   vary   significantly.   As   differences   in   these
characteristics  have  increased,  the  semiconductor  market has become  highly
diversified  as well as  subject to  constant  and rapid  change.  Semiconductor
product markets may be classified according to each of these characteristics.

                                      - 9 -

<PAGE>



                  Semiconductors  can be manufactured  using  different  process
technologies,  each of which is particularly  suited to different  applications.
Since the mid-1970s,  the two dominant processes have been bipolar (the original
technology  used  to  produce  integrated   circuits)  and  CMOS  (complementary
metal-oxide-silicon).  Bipolar devices  typically  operate at higher speeds than
CMOS devices, but CMOS devices consume less power and permit more transistors to
be  integrated  on a single  IC.  While  bipolar  semiconductors  were once used
extensively  in large  computer  systems,  CMOS has  become  the most  prevalent
technology,  particularly  for devices  used in personal  computer  systems.  In
connection  with  the  development  of new  semiconductor  applications  and the
demands  of  system  designers  for  more  integrated  semiconductors,  advanced
technologies  have been developed  during the last decade that are  particularly
suited to more  systems-oriented  semiconductor  applications.  For mixed-signal
applications,  BiCMOS technologies have been developed to combine the high speed
and high  voltage  characteristics  of bipolar  technologies  with the low power
consumption and high  integration of CMOS  technologies.  For intelligent  power
applications,  BCD technologies  have been developed that combine bipolar,  CMOS
and DMOS technologies.  Such systems-oriented  technologies require more process
steps and mask levels,  and are more  complex  than the basic  function-oriented
technologies.  The use of  systems-oriented  technologies  requires knowledge of
system  design  and  performance  characteristics  (in  particular,  analog  and
mixed-signal systems and power systems) as well as expertise and experience with
several semiconductor process technologies.

                  Semiconductors are often classified as either discrete devices
(such as individual  diodes or  transistors)  or  integrated  circuits (in which
thousands of functions are combined on a single "chip" of silicon to form a more
complex  circuit).  Compared  to the market  for ICs,  there is  typically  less
differentiation  among  discrete  products  supplied by different  semiconductor
manufacturers.  Also,  discrete markets have generally grown at slower, but more
stable, rates than IC markets.

                  Semiconductors  may  also be  classified  as  either  standard
components or application-specific  ICs ("ASICs").  Standard components are used
by a large group of systems  designers for a broad range of applications,  while
ASICs are  designed to perform  specific  functions  in  specific  applications.
Generally,  there are  three  types of ASICs:  full-custom  devices,  semicustom
devices  and  application-specific  standard  products  ("ASSPs").  Full  custom
devices  are  typically  designed  to meet the  particular  requirements  of one
specific  customer.  Semicustom  devices are more  standardized  ICs that can be
customized  with efficient CAD tools within a short design cycle time to perform
specific  functions.  ASSPs are standardized  ASICs that are designed to perform
specific  functions  in a specific  application,  but are not  proprietary  to a
single customer.

                  The  two  basic  functional   technologies  for  semiconductor
products are analog and digital. Analog (or linear) devices monitor,  condition,
amplify or transform  analog signals,  which are signals that vary  continuously
over a wide  range of values.  Analog  circuits  are  critical  as an  interface
between  electronic systems and a variety of real world phenomena such as sound,
light, temperature,  pressure, weight or speed. Electronics systems continuously
translate analog signals into digital data, and vice versa.

                                     - 10 -

<PAGE>




                  The  analog  semiconductor  market  consists  of a  large  and
growing  group of specific  markets  that serve  numerous  and widely  differing
applications,  including  applications for automotive systems,  instrumentation,
computer peripheral  equipment,  industrial  controls,  communications  devices,
video  products  and medical  systems.  Because of the varied  applications  for
analog circuits, manufacturers typically offer a greater variety of devices to a
more diverse  group of customers.  Compared to the market for commodity  digital
devices  such as  standard  memory  and  logic  devices,  the  analog  market is
characterized  by longer product life cycles,  products that are less vulnerable
to technological obsolescence,  and lower capital requirements due to the use of
mature manufacturing technologies.  Such characteristics have resulted in growth
rates  that  have  been  less   volatile  than  growth  rates  for  the  overall
semiconductor industry.

                  Digital  devices perform binary  arithmetic  functions on data
represented  by a series of on/off states.  Historically,  the digital IC market
has been  primarily  focused  on the fast  growing  markets  for  computing  and
information technology systems. Increasing demands for high-throughput computing
and networking and the  proliferation  of more powerful  personal  computers and
workstations  in recent years have led to dramatic  increases in digital  device
density and integration.  As a result, significant advances in electronic system
integration have occurred in the design and manufacture of digital devices.

                  There are two major types of digital ICs:  memory products and
logic devices.  Memory products,  which are used in electronic  systems to store
data and program  instructions,  are  generally  classified  as either  volatile
memories (which lose their data content when power supplies are switched off) or
nonvolatile  memories  (which  retain  their data  content  without the need for
constant  power supply).  Volatile  memories are used to store data in virtually
all computer systems,  from large and mid-range  computers to personal computers
and workstations. The primary volatile memory devices are DRAMs, which accounted
for  69.8% of  semiconductor  memory  sales in 1996.  Nonvolatile  memories  are
typically  used to store  program  instructions  that  control the  operation of
microprocessors and electronic  systems.  The primary nonvolatile memory devices
are EPROMs, flash memories and EEPROMs.  Memory products are typically standard,
general  purpose ICs that can be  manufactured  in high volumes using basic CMOS
processes,  and they are  generally  differentiated  by cost  and  physical  and
performance   characteristics,   including  data  capacity,   die  size,   power
consumption and access speed.

                  Logic devices process digital data to control the operation of
electronic  systems.  The largest  segment of the logic market,  standard  logic
devices,   include   microprocessors,   microcontrollers   and  digital   signal
processors.  Microprocessors  are  the  central  processing  units  of  computer
systems.  Microcontrollers  are complete  computer  systems  contained on single
integrated   circuits   that  are   programmed   to  control  the  operation  of
electromechanical  systems by processing input data from electronic  sensors and
generating  electronic control signals.  Digital signal processors  ("DSPs") are
parallel processors used for high complexity,  high speed real-time computations
in a wide variety of applications,  including digital cellular telephone systems
and data compression systems.  Standard devices are intended to be utilized by a
large  group  of  systems   designers   for  a  broad  range  of   applications.
Consequently, standard devices

                                     - 11 -

<PAGE>



usually contain more functions than are actually  required and,  therefore,  may
not be cost-effective for certain specific applications. In addition to standard
logic devices,  a broad range of full-custom,  semicustom and ASSP logic devices
has been  developed  for a wide  variety  of  applications.  These  devices  are
typically designed to meet particular customer requirements.  Compared to memory
markets,  logic device markets are much more  differentiated  and dependent upon
intellectual property and advanced product design skills.

                  Analog/digital  (or  "mixed-signal")  ICs  combine  analog and
digital  devices on a single  chip to process  both  analog  signals and digital
data. Historically, analog and digital devices have been developed separately as
they are  fundamentally  different  and it has  been  technically  difficult  to
combine  analog and digital  devices on a single IC. System  manufacturers  have
generally  addressed  mixed-signal  requirements  using printed  circuit  boards
containing  many  separate  analog and digital  circuits  acquired from multiple
suppliers.  However,  system designers are  increasingly  demanding system level
integration  in which complete  electronic  systems  containing  both analog and
digital functions are integrated on a single IC.

                  Mixed-signal ICs are typically characterized as analog ICs due
to their similar market  characteristics,  including longer product life cycles,
diverse  applications  and  customers and more stable  growth  through  economic
cycles  as  compared  to  digital  devices.   However,   certain  parts  of  the
mixed-signal  market are becoming higher volume markets as the increasing use of
mixed-signal   devices  has  enhanced  the  options  of  system   designers  and
contributed to the development of new applications,  including multimedia, video
conferencing, automotive, mass storage and personal communications.


                                     - 12 -

<PAGE>



                  The Semiconductor Market

                  The  following  tables set forth  information  with respect to
worldwide semiconductor sales by type of semiconductor and geographic region:

<TABLE>
<CAPTION>
                                  Worldwide Semiconductor Sales(1)                  Compound Annual Growth Rates(2)
                       -------------------------------------------------------------------------------------------------
                          1983       1988       1993       1995       1996       83-88   88-93   83-93   93-95   93-96
                          ----       ----       ----       ----       ----       -----   -----   -----   -----   -----

                                     (in millions)

<S>                     <C>        <C>        <C>        <C>        <C>          <C>     <C>     <C>     <C>     <C>  
Integrated Circuits .   $ 13,335   $ 35,893   $ 66,018   $126,056   $114,941     21.9%   13.0%   17.3%   38.2%   20.3%

   Analog (linear and
mixed-signal) .......      2,875      7,228     10,673     16,646     17,044     20.2     8.1    14.0    24.6    16.9
   Digital
      Logic .........      6,712     17,750     34,079     55,953     61,879     21.5    13.9    17.6    28.2    22.0
         Memory
         DRAM .......      1,741      6,390     13,140     40,833     25,132     29.7    15.5    22.4    76.3    24.0
         Others .....      2,007      4,524      8,127     12,624     10,886     17.7    12.4    15.0    24.6    10.2
                        --------   --------   --------   --------     ------     ----    ----    ----    ----    ---- 
     Total Memory ...      3,748     10,914     21,267     53,457     36,018     23.8    14.3    19.0    58.5    19.2
                        --------   --------   --------   --------     ------     ----    ----    ----    ----    ---- 
Total digital .......     10,460     28,664     55,346    109,410     97,897     22.3    14.1    18.1    40.6    20.9
Discrete ............      3,696      6,999      8,637     14,004     12,878     13.6     4.3     8.9    27.3    14.2
Opto-electronics ....        736      2,113      2,654      4,344      4,147     23.5     4.7    13.7    27.9    16.0
                        --------   --------   --------   --------     ------     ----    ----    ----    ----    ---- 
     TAM ............   $ 17,767   $ 45,005   $ 77,309   $144,404   $131,966     20.4%   11.4%   15.8%   36.7%   19.5
                        ========   ========   ========   ========   ========     ====    ====    ====    ====    ====

Europe ..............   $  3,320   $  8,104   $ 14,599   $ 28,199     27,562     19.5%   12.5%   15.9%   39.0%   23.6%
Americas ............      7,761     13,418     24,744     46,998     46,679     11.6    13.1    12.3    37.8    19.9
Asia Pacific ........      1,150      5,374     14,168     29,540     27,550     36.1    21.4    28.5    44.4    24.8
Japan ...............      5,536     18,109     23,798     39,667     34,175     26.7     5.6    15.7    16.1    12.8
                        --------   --------   --------   --------     ------     ----    ----    ----    ----    ----
      TAM ...........   $ 17,767   $ 45,005   $ 77,309   $144,404   $131,966     20.4%   11.4%   15.8%   36.7%   19.5
                        ========   ========   ========   ========   ========     ====    ====    ====    ====    ====

<FN>
(1)  Source: WSTS.
(2)  Calculated using end points of the periods specified.
</FN>
</TABLE>


                  During the 1960s and 1970s,  the development of  semiconductor
process  technologies  was  critical  to  the  success  of  participants  in the
industry.  As  process  technologies  matured,   manufacturing  sciences  became
important;  in the 1980s, the emphasis shifted to increasing  production volumes
and yields and lowering  production  costs.  The large capital  expenditures and
other resources  required during this period to develop  advanced  manufacturing
capabilities  resulted in a  stratification  of the industry between broad range
suppliers operating multiple front-end and back-end manufacturing facilities and
specialty  niche  players  operating  small wafer fads or  subcontracting  wafer
production.

                                     - 13 -

<PAGE>



                  With  the   continuing   development   of  new   semiconductor
applications  and  increasing  demands of system  designers for more  integrated
systems-oriented products,  semiconductor manufacturers must continually improve
their  core  technology  and  manufacturing   competencies.   In  addition,  the
increasing  diversity and complexity of semiconductor  products,  the demands of
technological  change,  and the costs associated with keeping pace with industry
developments  have  contributed to the growth of cooperative  product design and
development  and  manufacturing  alliances  with  customers  as  well  as  among
semiconductor suppliers.  Alliances with customers provide the manufacturer with
valuable  systems  and  application  know-how  and  access  to  markets  for key
products, while allowing the manufacturer's customers to share some of the risks
and  benefits  of  product  development.  Customers  also  gain  access  to  the
manufacturer's process technologies and manufacturing infrastructure.  Alliances
with other  semiconductor  manufacturers  permit costly research and development
and  manufacturing  resources  to  be  shared  to  mutual  advantage  for  joint
technology development.

                  To  compete  as  a  broad  line  semiconductor   manufacturer,
management  believes  that it is  important  to have:  (i) a broad  and  diverse
customer base; (ii) a diversified product portfolio  (including analog,  digital
mixed-signal and power products) and experience in several application  markets;
(iii) a broad range of process technologies  (including basic  function-oriented
and advanced systems-oriented technologies);  (iv) an efficient, quality, global
manufacturing  infrastructure;  (v) global marketing and technical support;  and
(vi) a  worldwide  network  of  strategic  alliances  with  customers  and other
semiconductor manufacturers.

                  Strategy

                  Since the Company's formation in 1987, management's objectives
have been to become one of the world's top ten  semiconductor  suppliers  and to
achieve  operating  results better than the average of the top ten semiconductor
suppliers.  According to preliminary  industry data, in 1996 SGS-THOMSON  became
one of the top 10 worldwide suppliers of semiconductor devices. To achieve these
objectives,   the  Company  has  focused  on  using  its  core   technology  and
manufacturing  competencies to produce  innovative,  quality and  cost-effective
products. The key elements of the Company's strategy are set forth below.

                  Maintain   Broad   Customer   Base   and   Increase   Customer
Penetration. The Company works with its key customers to identify evolving needs
and new applications and to develop  innovative  products and product  features.
The  Company  also seeks to use its  access to key  customers  as a supplier  of
application-specific  products to establish  itself as a supplier across a broad
range of products.  The Company maintains a geographically diverse customer base
across a broad  range of  market  applications.  Regional  sales  and  marketing
organizations  operate in each of Europe,  the United  States,  the Asia Pacific
region and Japan. In addition,  the Company's central  strategic  marketing team
and key account management teams serve selected multinational customers.

                  Offer Diversified  Product  Portfolio in Evolving  Application
Markets.  The  Company  offers a  diversified  product  portfolio  and  develops
products for a wide range of market

                                     - 14 -

<PAGE>



applications  to reduce  its  dependence  on any  single  product,  industry  or
application  market.  As a  broad  range  supplier,  the  Company  provides  its
customers  with a single  source of supply for multiple  product  needs.  In the
telecommunications  market,  the Company is developing  advanced BiCMOS and high
frequency bipolar processes and focusing on products for the switching equipment
and new, fast-growing telecommunications markets, including the digital cellular
telephone and the asynchronous  transfer mode  communication  systems market. In
the  computer  market,  the  Company  produces  dedicated  products,   memories,
microcontrollers, semicustom devices and microprocessors for use in all types of
computer systems.  The Company is focusing  particularly on the development of a
family of flash memory  products and dedicated  products for computer  monitors,
disk drives and printers.  In addition,  the Company has started to  manufacture
and market x86 microprocessors.  In the consumer products market, the Company is
developing dedicated products for television and home entertainment  systems and
devices for new multimedia  applications,  including digital video decoders.  In
the  automotive  market,  management  is  using  its BCD  processes  to  develop
dedicated products for a wide range of automotive applications, including engine
management and safety,  and is developing  devices for new applications  such as
global positioning  systems. In the industrial market, the Company is developing
innovative  power products,  particularly for use in lighting systems and switch
mode power supplies.

                  Develop Advanced Process and Design Technologies.  The Company
intends to continue to exploit its expertise and experience with a wide range of
process and design  technologies  to develop  more  advanced  technologies.  The
Company  is  committed  to  continuing  to  increase  research  and  development
expenditures in the future.  Despite  significant cost reductions  following the
Company's  formation  in 1987 and  particularly  during  1990 and 1991  when the
Company experienced  losses,  management did not reduce research and development
spending.  The  Company is using its memory  products  as the focal point of its
process   development   efforts  due  to  their  standardized  design  features,
manufacturability  and  potential  high volumes.  Technological  advances in the
areas of  transistor  performance  and  interconnection  technologies  are being
developed through the Company's logic products and semicustom  devices. In 1996,
the Company  developed a 0.25 micron,  six-metal layers process that can be used
to create either  circuits  which operate at high speed (clock  frequency of 400
MHZ at 2.5V) or  circuits  with low power  consumption  (1.0V)  and  capable  of
densities  of up to  30,000  gates per  square  millimeter.  It is also  working
closely  with  many  of its  key  customers  on  developing  easy-to-use  design
equipment  for specific  applications.  The Company is  developing  advanced and
standardized  design  tools  for its  CMOS  processes  as well as  libraries  of
macrofunctions  and megafunctions  for many of its products,  and is focusing on
improving  its  concurrent  engineering  practices to better  coordinate  design
activities and reduce overall time-to-market.

                  Expand  and  Improve  Manufacturing  Capabilities.   In  1996,
SGS-THOMSON  expanded  its  diversified   manufacturing   infrastructures  while
improving the cost,  quality and flexibility of its operations.  SGS-THOMSON has
applied  1996  investments  in its  manufacturing  facilities  to  bring to full
capacity the 8-inch  front-end  manufacturing  facility in Crolles,  France,  to
continue  the  ramp-up of the new 8-inch  front-end  manufacturing  facility  in
Phoenix, Arizona,

                                     - 15 -

<PAGE>



to complete the building of and to begin  equipping  the third 8-inch  front-end
manufacturing  facility in Catania,  Italy, and to continue to build and equip a
new back-end  facility and design center in Shenzhen,  China,  through its joint
venture  created in 1994 with a subsidiary  of the Shenzhen  Electronics  group.
During 1996, the Company has also completed  conversion from 4-inch to 5-inch of
the two front-end wafer  fabrication  modules in Tours,  France,  from 5-inch to
6-inch of the front-end wafer fabrication  facility in Rousset,  France, and has
installed a new 6-inch module in the Rancho Bernardo, California front-end wafer
fabrication facility. In addition, the Company has started construction of a new
8-inch front-end wafer fabrication  facility in Rousset,  France,  has initiated
the 6-inch to 8-inch  conversion  of one of its Agrate,  Italy  front-end  wafer
fabrication  plants,  and has started  planning the construction of a new 8-inch
front-end  wafer  fabrication  facility in  Singapore,  announced  during  1996.
Finally,  the Company plans one more 8-inch front-end wafer fabrication plant to
be built in Italy. In 1996,  approximately 93% of the ICs wafers manufactured by
SGS-THOMSON were manufactured on 5-, 6- and 8-inch wafers. The Company fosters a
corporate-wide  Total Quality  Management  ("TQM") culture that defines a common
set of objectives and performance  measurements  for employees in all geographic
regions,  at every stage of product  design,  development and production for all
product lines.  SGS-THOMSON has established front-end and back-end manufacturing
facilities in each of Europe,  the United States and the  Mediterranean and Asia
Pacific regions.  The Company's  geographically  diverse  facilities allow it to
shift production to accommodate variable production requirements.

                  Emphasize  Differentiated  ICs. Within its diversified product
portfolio,  the Company  has focused on  developing  products  that  exploit its
technological strengths, including differentiated ICs (which the Company defines
as being its  dedicated  products,  semicustom  devices  and  microcontrollers).
Differentiated ICs 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. Differentiated ICs accounted for approximately
59% of the Company's net revenues in 1996 compared to approximately 51% in 1995.
The Company  also  targets  applications  that  require  substantial  analog and
mixed-signal  content and can  exploit the  Company's  system  level  expertise.
Analog  ICs  (including  mixed-signal  ICs),  the  majority  of  which  are also
differentiated  ICs,  accounted for  approximately 46% of the Company's 1996 net
revenues   (unchanged  from  1995),   while  discrete   devices   accounted  for
approximately 14% of the Company's 1996 net revenues  (compared to 17% in 1995).
In  recent  years,  analog  ICs  and  discrete  devices  have  experienced  less
volatility  in sales  growth rates and average  selling  prices than the overall
semiconductor industry.

                  Expand  Strategic  Alliances.  Consistent with its belief that
strategic alliances are critical to success in the semiconductor  industry,  the
Company has entered into such  alliances  with  customers,  other  semiconductor
manufacturers  and a major supplier of design software.  The Company has entered
into several  customer  strategic  alliances,  including  with  Alcatel,  Bosch,
Seagate  Technology,  Thomson  Multimedia,  and Western  Digital,  among others.
Alliances  with  customers   provide  the  Company  with  valuable  systems  and
application know-how and access to markets for key products,  while allowing the
Company's customers to share some

                                     - 16 -

<PAGE>



of the risks of product  development  with SGS-THOMSON and to gain access to the
Company's process technologies and manufacturing infrastructure.  Alliances with
other  semiconductor  manufacturers  are  generally  designed  to permit  costly
research  and  development  and  manufacturing  resources to be shared to mutual
advantage for joint technology  development.  Technology  development  alliances
have been formed  with  customers  and other  manufacturers,  including  Philips
Semiconductors  in Europe to develop  sub-micron CMOS  technologies and Northern
Telecom in North  America to develop  advanced  0.5 micron  BiCMOS  mixed-signal
technologies  and  Mitsubishi  in Japan to  develop  a family  of 16 Mbit  flash
memories for mass storage  applications.  The Company has also established joint
development  programs  with leading  suppliers  such as Applied  Materials,  ASM
Lithography,  LAM and Air  Liquide,  and  with  CAD  Tools  producers  including
Cadence,  Synopsis and Mentor.  It is a  participant  in Sematech I 300I for the
development  of 300 millimeter  wafer  manufacturing  processes.  SGS-THOMSON is
active in joint European  research  efforts such as the new MEDEA program (which
succeeded  to JESSI  as of  1997),  and  also  cooperates  with  major  research
institutions and universities.

Customers and Applications

                  SGS-THOMSON designs,  develops,  manufactures and markets over
3,000 main types of products that it sells to more than 1,500 customers. To many
of its key  customers the Company  provides a wide range of products,  including
dedicated products, discrete devices, memory products and programmable products.
The Company's position as a strategic supplier of application-specific  products
to  certain  customers  fosters  close   relationships   that  provide  it  with
opportunities  to  supply  such  customers'  requirements  for  other  products,
including discrete devices, programmable products and memory products.


                                     - 17 -

<PAGE>



                  The  following  table  sets  forth  certain  of the  Company's
significant customers in 1996 and certain applications for its products:

<TABLE>
-------------------------------------------------------------------------------------------------------------------
<S>                      <C>                       <C>                       <C>                    <C>
Telecommunications
     Customers:          Alcatel                   Gemplus                   Nortel                 Schlumberger
                         AT&T                      Goldstar                  Orga                   Siemens
                         Daewoo                    Italtel                   Philips
                         Ericsson                  Motorola                  Sagem
                         Fujitsu                   Nokia                     Samsung
                         ------------------------------------------------------------------------------------------
     Applications:       Answering machines                                  ISDN controllers
                         Central office switching systems                    Modems
                         Chips for smartcards                                PBX systems
                         Digital cellular telephones                         Telephone sets (corded and cordless)
-------------------------------------------------------------------------------------------------------------------

Computer Systems
     Customers:          ACER                      Creative Technologies     IBM                    Tatung
                         ATI Technologies          Cyrix                     Matsushita             Western Digital
                         Bull                      DEC                       Olivetti               Xerox
                         Canon                     Epson                     Quantumi
                         Compaq                    Hewlett-Packard           Seagate Technology
                         ------------------------------------------------------------------------------------------
     Applications:       Chips for smartcards                                Optical scanners
                         Disk drives                                         Photocopiers
                         Monitors                                            Printers
                         Network controllers
-------------------------------------------------------------------------------------------------------------------
Automotive
     Customers:          BMW                       Daimler-Benz              Ford                   Marelli
                         Bosch                     Delco                     Hyundai                Valeo
                         Chrysler                  Fiat                      Peugeot S.A.           Renault
                         ------------------------------------------------------------------------------------------
     Applications:       Alternator regulators                               Ignition circuits
                         Airbags                                             Injection circuits
                         Antiskid braking systems                            Instrument
                         Automotive entertainment systems                    Electric Motor Controllers
                         Body and chassis electronics                        Multiplex wiring kits
                         Central locking systems                             Transmission control systems
                         Engine management systems
-------------------------------------------------------------------------------------------------------------------

Consumer Products
     Customers:          Canal Plus                Goldstar            Nokia                 Sharp
                         Canon                     Grundig             Pace                  Sony
                         Creative Technology       Kenwood             Philips               Thomson Multimedia
                         Daewoo                    Matsushita          Pioneer
                         General Instrument        NEC                 Samsung
                         ------------------------------------------------------------------------------------------
     Applications:       Audio power amplifiers                        Graphic equalizers
                         Audio processors                              Pay television decoders
                         Cable television systems                      Satellite receiver decoding circuits
                         Compact disc players                          Set up boxes
                         Digital video encoders and decoders           TV sets and monitors
                                                                       Video cassette recorders
-------------------------------------------------------------------------------------------------------------------
Industrial and
   Other Applications
     Customers:          Astec                     Emerson             Philips               Siemens
                         Asea Brown Boveri         Mannesman           Schlumberger          Schneider
                         ------------------------------------------------------------------------------------------
     Applications:       Battery chargers                              Motor controllers
                         Industrial automation and control systems     Power supplies  
                         Intelligent power switches                    Smartcard readers
                         Lighting  systems  (lamp  ballasts)           Switch  mode power supplies
-------------------------------------------------------------------------------------------------------------------
</TABLE>

                                     - 18 -

<PAGE>




                  Two  customers  each  accounted  for slightly  above 5% of the
Company's  net  revenues in 1996 and sales to the  Company's  top ten  customers
accounted for  approximately 38% of the Company's net sales in 1996. The Company
has  several  large  customers,  certain  of whom have  entered  into  strategic
alliances  with the Company.  Many of the  Company's  key  customers  operate in
cyclical  businesses  and have in the past,  and may in the  future,  vary order
levels  significantly  from period to period. In addition,  approximately 21% of
the Company's net revenues in 1996 were made through distributors.  There can be
no assurance that such customers or distributors,  or any other customers,  will
continue to place orders with the Company in the future at the same levels as in
prior  periods.  The  loss  of  one  or  more  of  the  Company's  customers  or
distributors,  or reduced bookings by its key customers or  distributors,  could
adversely affect the Company's  operating results.  In addition,  in a declining
market the Company has in the past and may in the future be  requested to reduce
prices to limit  the level of order  cancellations.  Despite  price  reductions,
however,   in  an  industry  downturn  order   cancellations  may  be  expected,
particularly by distributors and for commodity products.

Products and Technology

                  SGS-THOMSON  designs,  develops,  manufactures  and  markets a
broad range of products used in a wide variety of microelectronic  applications,
including   telecommunications   systems,   computer  systems,  consumer  goods,
automotive products and industrial automation and control systems. The Company's
products include standard commodity components,  full custom devices, semicustom
devices  and  ASSPs  for  analog,   digital   and   mixed-signal   applications.
Historically,  the  Company  has not  produced  DRAMs or,  until  recently,  x86
microprocessors.  The SAM  represented  approximately  77.8% of the TAM in 1996,
compared to 84% of the TAM in 1983. While the TAM increased at a compound annual
growth rate of  approximately  17% from $17.8  billion in 1983 to an estimate of
$132  billion in 1996,  the SAM  increased at a compound  annual  growth rate of
approximately 16% from $15.0 billion to an estimate of $102.7 billion during the
same period.

                  The  Company's  products  are  organized  into five  principal
product groups: Dedicated Products,  Discrete and Standard ICs, Memory Products,
Programmable Products and the New Ventures Group.

                  Dedicated Products Group

                  The   Dedicated   Products   Group   designs,   develops   and
manufactures   application-specific   products  using  advanced  bipolar,  CMOS,
mixed-signal and power technologies.  The Group offers complete system solutions
to customers in several  application  markets.  As the largest of  SGS-THOMSON's
product  groups,  the Dedicated  Products Group  generated  revenues of $1,757.7
million  in 1996  (an  increase  of  29.3%  over  1995  revenues),  representing
approximately  43% of SGS-THOMSON's  1996 revenues.  Approximately  33.2% of the
Group's revenues in 1996 were generated in Europe,  while  approximately  23.3%,
37.8%,  and 5.7% were generated in the Americas,  the Asia Pacific  region,  and
Japan,  respectively.  Many of the  dedicated  products sold to the Asia Pacific
region are sold to U.S.-based original equipment

                                     - 19 -

<PAGE>



manufacturers  located in the region.  All of the Group's  products are ASSPs or
full custom devices.

                  The Dedicated  Products  Group works closely with customers to
develop  application-specific  products  using  SGS-THOMSON's  technologies  and
manufacturing capabilities.  The breadth of the Group's customer and application
base  provides  it with a source  of  stability  in the  cyclical  semiconductor
market.  In  addition,  the  Company's  position  as  a  strategic  supplier  of
application-specific  products fosters close  relationships that provide it with
opportunities  to  supply  such  customers'  requirements  for  other  products,
including discrete devices, programmable products and memory products.

                  The   Group   particularly   emphasizes   dedicated   ICs  for
telecommunications, audio, automotive, power and computer applications.

                  The  Group  is  organized  into  the  following  four  product
divisions: (i) telecommunications; (ii) computer and industrial; (iii) audio and
automotive;  and (iv) video. In addition, the Company created a business unit to
design and  manufacture  products  for the  emerging  digital  video  processing
industry.

                  Telecommunications    Products.   According   to   preliminary
published  industry  data, in 1996,  SGS-THOMSON  was the world's second largest
supplier of dedicated  telecommunications ICs. The Company's  telecommunications
products are used  primarily  in  telephone  sets,  modems and  subscriber  line
interface  cards (SLICs) for digital  central office  switching  equipment.  The
Group is targeting applications in mobile communications  networks and telephone
sets and asynchronous transfer mode ("ATM") communication systems.

                  Computer and Industrial Products.  SGS-THOMSON's  computer and
industrial  products  include  components  for  computer  peripheral  equipment,
facsimile  machines,  photocopiers,  industrial  automation systems and lighting
applications.  Its  key  products  are  power  ICs  for  motor  controllers  and
read/write amplifiers,  intelligent power ICs for spindle motor control and head
positioning in computer disk drives and battery chargers for portable electronic
systems, particularly mobile telephone sets.

                  Audio and Automotive  Products.  SGS-THOMSON's  audio products
include audio power amplifiers,  audio processors and graphic equalizer ICs. The
Company has sold more than 1.2 billion audio power amplifier ICs since 1972.

                  The   Company's   automotive   products   include   alternator
regulators,  airbag  controls,  antiskid  braking  systems,  ignition  circuits,
injection  circuits,  multiplex  wiring kits and  products  for body and chassis
electronics,  engine  management  and  instrumentation  systems.  The Company is
currently targeting the emerging application of global positioning systems.

                  Video  Products.   SGS-THOMSON   produces  ICs  for  TV  sets,
monitors,  videocassette  recorders,  satellite  receivers,  pay-tv decoders and
digital video disks. The

                                     - 20 -

<PAGE>



Company is focusing on developing  products for applications in the growing U.S.
satellite and cable television markets.  Leveraging its BCD Technology know how,
the Group is now targeting the emerging market of flat panel displays.

                  Image  Processing.  SGS-THOMSON has created a business unit to
design and  manufacture  products  for the  emerging  digital  video  processing
industry.  Emerging digital video technologies offer a number of advantages over
traditional  analog  video,  including  the ability to  compress  video data for
transmission  and  storage,   to  transmit  and  reproduce  video  data  without
perceptible image degradation and to randomly access and edit video data.

                  Despite  the  advantages  of  digital  video,  its  widespread
adoption has been  constrained by the lack of  high-performance,  cost-effective
compression  devices and by the absence of digital video compression  standards.
Video compression,  which uses complicated  mathematical algorithms operating at
high  speeds to encode the large  amounts of data that  result  from  digitizing
video signals, is both highly complex and technically challenging. Digital video
compression  technology is expected to contribute to the development of a number
of new or  enhanced  applications  in the  consumer  electronics,  computer  and
communications  markets,  including video CD players,  interactive game consoles
and video conferencing systems.

                  The Company's  image  processing  business unit delivers large
volumes of Motion Picture Experts Group ("MPEG")  decoder ICs suitable for video
CD products, personal computers,  multimedia and digital TV applications.  These
products  implement  the  MPEG 1  standard  for CD ROM,  video  CD and  personal
computer  applications and the MPEG 2 standard for digital TV applications (both
cable and  satellite  digital  TV).  This unit is also  developing  products for
emerging video phone  applications.  According to the latest published  industry
data, in 1995  SGS-THOMSON was the leading  supplier of MPEG decoder ICs with an
approximately 44.3% share of the MPEG decoders market.

                  Discrete and Standard ICs Group

                  The Discrete and Standard  ICs Group  designs,  develops,  and
manufactures  discrete  power  devices,  power  transistors,  standard logic and
linear ICs, and RF products (which were transferred to the Discrete and Standard
ICs Group in May 1994). Including revenues from RF products, the Group generated
revenues  of $784.1  million in 1996 (a  decrease  of 6.4% over 1995  revenues),
representing approximately 19% of SGS-THOMSON's net revenues.  Approximately 53%
of the Group's  1996  revenues  were  generated in Europe,  while  approximately
21.5%, 23.9%, and 1.6% were generated in the Americas,  the Asia Pacific region,
and Japan, respectively. According to preliminary published industry data, based
on  1996  revenues,  SGS-THOMSON  is  among  the top  four  suppliers  of  power
transistors  (1996 total  market of $4.9  billion)  and  thyristors  (1996 total
market of $738 million).

                  The Group's  discrete and standard  products are  manufactured
using mature  technological  processes.  Although such products are less capital
intensive  than  the  Company's  other  principal   products,   the  Company  is
continuously improving product performance and

                                     - 21 -

<PAGE>



developing new product  features.  The Group has a diverse  customer base, and a
large percentage of the Group's products are sold through distributors.

                  Discrete Power Devices.  SGS-THOMSON  manufactures and sells a
variety of discrete power devices, including rectifiers,  protection devices and
thyristors  (SCRs  and  triacs).  The  Company's  devices  are  used in  various
applications,  including in  particular  telecommunications  systems  (telephone
sets, modems and line cards), household appliances and industrial systems (motor
control and power control devices).  More  specifically,  rectifiers are used in
voltage  converters  and  voltage  regulators,  protection  devices  are used to
protect electronic  equipment from power supply spikes or surges, and thyristors
are  used to vary  current  flows  through  a  variety  of  electrical  devices,
including lamps and household appliances.

                  Power Transistors. SGS-THOMSON designs, manufactures and sells
power transistors,  which (like the Company's discrete power devices) operate at
high  current  and  voltage  levels in a variety  of  switching  and pulse  mode
systems. The Company has three power transistor divisions:  bipolar transistors,
power  MOSFETs  (metal-oxide-silicon  field  effect  transistors)  and new power
transistors such as IGBTs.

                  The Company's  bipolar power transistors are used in a variety
of  high-speed,  high-voltage  applications,  including  SMPS (switch mode power
supply) systems,  television/monitor  deflection  circuits and lighting systems.
According to preliminary published industry data, on the basis of 1996 revenues,
SGS-THOMSON is among the leading suppliers of bipolar transistors,  including RF
power  transistors (1996 total market of $2.2 billion).  The Company  introduced
power  MOSFETs  in  1991  to  extend  the  use  of  power   transistors  to  new
high-frequency,  high-voltage  applications,  including  automotive  components,
crowbar  protection  devices,  resonant  converters and power factor  correction
devices.  According to industry  data,  the Company has been ranked  number five
worldwide in the fast growing segment of the power MOSFETs.

                  The  Company  also  offers  a  family  of  VIPower   (vertical
integration  power)  products,  as well  as  omnifets  and  application-specific
devices.  VIPower  products  exhibit  the  operating  characteristics  of  power
transistors  while  incorporating  full thermal,  short circuit and  overcurrent
protection and allowing logic level input. VIPower products are used in consumer
goods (lamp  ballasts)  and  automotive  products  (ignition  circuits,  central
locking  systems and  transmission  circuits).  Omnifets are power  MOSFETs with
fully-integrated  protection devices that are used in a variety of sophisticated
automotive  and  industrial  applications.   Application-specific   devices  are
semicustom  ICs that  integrate  diodes,  rectifiers  and thyristors on the same
chip, thereby providing  cost-effective and space-saving components with a short
design time.

                  Standard Logic and Linear ICs. The Company  produces a variety
of bipolar and HCMOS  logic  devices,  including  clocks,  registers,  gates and
latches.  Such  devices are used in a wide  variety of  applications,  including
increasingly in portable  computers,  computer  networks and  telecommunications
systems.

                                     - 22 -

<PAGE>



                  The Company also offers standard linear ICs covering a variety
of  applications,   including  amplifiers,   comparators,  decoders,  detectors,
filters, modulators, multipliers and voltage regulators.

                  Radio Frequency Products.  The Company supplies components for
RF  transmission  systems  used  in  television  broadcasting  equipment,  radar
systems,  telecommunications  systems and avionic equipment. At present, most of
the  Company's  RF  products  are sold in the  United  States.  The  Company  is
targeting  new  applications  for its RF products,  including  two-way  wireless
communications   systems  (in  particular,   cellular   telephone  systems)  and
commercial   radio   communication   networks  for   business   and   government
applications.

                  Memory Products Group

                  The Memory Products Group designs, develops and manufactures a
broad  range  of  semiconductor  memory  products.  The  Memory  Products  Group
generated  revenues  of $736.8  million in 1996 (an  increase of 12.8% over 1995
revenues),  representing  approximately  18%  of  SGS-THOMSON's  1996  revenues.
Approximately 53.1% of the Group's 1996 revenues were generated in Europe, while
approximately  19.5%, 14.4%, and 13.0% were generated in the Americas,  the Asia
Pacific  region,  and Japan,  respectively.  According to preliminary  published
industry  data,  on the  basis of 1996  revenues,  SGS-THOMSON  was the  leading
producer of EPROMs (1996 total market of $1.1 billion) and the leading  supplier
of EEPROMs (1996 total market of $1.1 million).

                  There are two basic  types of memory  devices,  random  access
memories  ("RAMs") and  non-volatile.  RAMs are typically used in microprocessor
systems  to  store  data  used  in  the  operation  of  such  systems,   whereas
Non-Volatile Memory is typically used to store program instructions that control
the operation of microprocessors and electronic systems.

                  The most  common  types of RAMs are DRAMs  (dynamic  RAMs) and
SRAMs (static  RAMs).  DRAMs are volatile  memories that lose their data content
when power supplies are switched off,  whereas SRAMs are volatile  memories that
allow the storage of data in the memory  array but without the need for clock or
refresh logic circuitry.  SRAMs are roughly four times as complex as DRAMs (four
transistors per bit of memory compared to one transistor) and are  significantly
more  expensive  than DRAMs per unit of storage.  DRAMs are used in a computer's
main memory to  temporarily  store data  retrieved  from low cost  external mass
memory devices such as hard disk drives.  SRAMs are  principally  used as caches
and buffers between a computer's microprocessor and its DRAM-based main memory.

                  There are several  types of  non-volatile  memories that offer
varying  degrees of  functionality  at varying  costs.  Among such  non-volatile
memories,  read-only memories ("ROMs") are permanently  programmed when they are
manufactured  while  programmable  ROMs  (PROMs)  can be  programmed  by  system
designers or end-users after they are manufactured.  Erasable PROMs (EPROMs) may
be erased and reprogrammed several times,

                                     - 23 -

<PAGE>



but to do so EPROMs must be physically removed from electronic systems,  exposed
to  ultraviolet  light,  reprogrammed  using an external  power  supply and then
returned to the systems.  Electrically  erasable  PROMs  (EEPROMs) can be erased
byte by byte and reprogrammed  "in-system"  without the need for removal.  Using
EEPROMs, a system designer or user can program or reprogram systems at any time.

                  "Flash" memories are relatively new products that represent an
intermediate  solution for system designers  between EPROMs and EEPROMs based on
their cost and  functionality.  Flash memories are typically less expensive than
EEPROMs,  but can also be erased and rewritten.  The entire  contents of a flash
memory or large  blocks  of data (not  individual  bytes)  can be erased  with a
"flash" of  current.  Because  flash  memories  can be erased  and  reprogrammed
electrically and in-system,  they are more flexible than EPROMs and,  therefore,
may replace  EPROMs in many of their current  applications.  Flash  memories may
also be used for solid state mass  storage of data,  a  potentially  high volume
application,  and  in  other  applications,   including,  in  particular  mobile
telephone  systems.  Flash memories are smaller and use less power than the hard
disk  drives  now  commonly  used for mass data  storage,  and,  therefore,  are
considered   candidates  to  replace  disk  drives,   particularly  in  portable
computers.

                  According to preliminary  published industry data, the TAM for
memory devices in 1996 was approximately $36.0 billion, with DRAMs, SRAMs, ROMs,
EPROMs, flash and EEPROMs accounting for approximately 69.8%, 13.2%, 3.7%, 3.1%,
7.2% and 3.0% of the total, respectively.

                  The  Company's  Memory  Products  Group is organized  into the
following  divisions:  (i)  EPROMs;  (ii)  flash  memories;  (iii)  EEPROMs  and
application-specific memories; (iv) SRAMs; and (v) smartcard products.

                  EPROMs.  SGS-THOMSON produces a broad range of EPROMs, from 16
Kbit  to  16  Mbit.   According  to  preliminary   industry  data,   SGS-THOMSON
consolidated  its  world's  leading  market  position  for EPROMS in 1996,  with
revenues of $335.5 million (basically unchanged over 1995 despite a sharp market
decline) or approximately  30.4% of worldwide EPROM sales. The Company currently
produces EPROMs using 0.5 micron CMOS technologies.

                  The  EPROM  market  is  relatively  mature  and  it  has  been
declining in 1996 according to preliminary industry data. Nevertheless, in 1996,
the  Company   succeeded  in   maintaining   its  sales  level  and  in  further
consolidating  its  market  leadership  because  of  its  best  in  class  EPROM
technology.  This technology has, in fact, allowed the Group to build one of the
broadest product  portfolios  currently  offered in the market,  and at the same
time it has enabled continuous improvement of manufacturing yields and reduction
of die  size,  thus  leading  the  Company  to an  extremely  advantageous  cost
position.  Efficient manufacturing in the Singapore and Malaysia assembly plants
together with SGS-THOMSON's large sales and

                                     - 24 -

<PAGE>



distribution channels around the world have allowed the full exploitation of the
technological advantage.

                  Due to the  volatility of EPROM supply,  prices  reached a top
high at the  beginning  of 1996,  and then  progressively  declined,  because of
industry  oversupply,  to an end of year low basically in line with the price at
the beginning of 1995.

                  Flash  Memories.  The  Company  is using its EPROM and  EEPROM
know-how to develop advanced flash memory products, and currently produces flash
memories up to 4 Mbit in size. The Company  intends to develop a broad portfolio
of flash memory  devices to cover all  EPROM-like  market  needs,  including 0.5
micron dual voltage and single  voltage  devices up to 16 Mbit. The Company also
intends to develop specific  processes based on current technology to produce 64
Mbit 0.35 micron devices for the mass storage  market.  The Company is using its
flash  memories  and fast SRAMs as the focal  point of its  process  development
efforts  due  to  their  standardized  design  features,  manufacturability  and
potential high volumes.

                  In May 1993,  the Company  entered  into a strategic  alliance
with  Mitsubishi to jointly  develop a family of compatible 16 Mbit dual voltage
flash memories for mass storage applications using 0.5 micron CMOS wafer process
technology and to standardize specific manufacturing  processes. In addition, in
December 1994,  SGS-THOMSON signed an agreement with Advanced Micro Devices Inc.
("AMD"),  the supplier of  approximately  24% of flash memories sold in 1994, to
cooperate in the  definition  of standards  for future  EPROM-like  flash memory
products based on AMD's single-voltage architecture. The cooperation is intended
to help create an alternative  industry  standard to Intel's  standard for flash
memory  products and thereby  accelerate  growth in the  worldwide  flash memory
market.  SGS-THOMSON and AMD currently plan to independently  develop compatible
products around the standard.  The Company currently  produces the 4 Mbit single
voltage flash memory device which is designed to the same  specifications as the
equivalent device from AMD, with which it is pin-compatible, although built with
a proprietary 0.6 um double-metal CMOS technology.

                  EEPROMs and Application-Specific  Memories. The Company offers
1.2  micron  serial  EEPROMs up to 16 Kbit and  parallel  EEPROMs up to 64 Kbit.
Serial  EEPROMs are the most popular type of EEPROMs and are  generally  used in
computer,  automotive and consumer applications.  Parallel EEPROMs account for a
smaller  portion of the EEPROM market,  being used mainly in  telecommunications
equipment.  SGS-THOMSON  entered the parallel  EEPROM  market in late 1993.  The
Company  intends to work closely with its key customers and strategic  allies to
identify  and  develop  new  application-specific  memory  devices  using  mixed
technologies.

                  SRAMS.  The  Company  focuses  on  producing  fast  SRAMs  and
specialty low power SRAMs, but not other more  standardized  types of SRAMs. The
Company's fast SRAMS are used as cache memories in computer  systems and as main
memories in telecommunications  systems. The Company produces fast SRAMs up to 1
Mbit with access  speeds of 9 to 20  nanoseconds.  The Company's low power SRAMs
are used as main memories in portable

                                     - 25 -

<PAGE>



computers and telecommunications equipment. The Company produces low power SRAMs
up to 1 Mbit with access speeds of 35 to 70 nanoseconds.

                  Smartcard  Products.  Smartcards are credit-card  like devices
containing  integrated circuits that store data and provide an array of security
capabilities.  They are  used in a wide and  growing  variety  of  applications,
including  public pay  telephone  systems  (primarily  in France  and  Germany),
cellular  telephone  systems  (primarily  in Europe),  bank cards  (primarily in
France) and pay television systems (primarily in the United Kingdom and France).
Other potential  applications include medical record  applications,  card-access
security systems and toll-access applications. In 1996, SGS-THOMSON's cumulative
shipments of integrated circuits for smartcards surpassed the one billion mark.

                  Smartcards  incorporate a variety of products  manufactured by
the  Company,  including  microcontrollers,  EPROMs,  EEPROMs  and flash  memory
components. A key smartcard customer of the Company is Gemplus, a French company
that was formed in 1988 as a spinoff  from the Company.  The Company  retained a
32%  interest in Gemplus  until  1992.  The  Company is now  developing  32 bits
cryptocontrollers  as well as solutions for contactless  applications.  In 1996,
SGS-THOMSON was the first company to obtain security  certification  for banking
and Pay-TV applications according to the ITSEC European Norms.

                  Programmable Products Group

                  The   Programmable   Products  Group  designs,   develops  and
manufactures  microcomponents (including  microcontrollers,  microprocessors and
digital signal processors), digital semicustom devices, mixed analog and digital
semicustom  devices.  The Group generated revenues of $720.5 million in 1996 (an
increase of 34.6% over 1995),  representing  approximately  17% of SGS-THOMSON's
1996 revenues.  Approximately  45.2% of the Group's 1996 revenues were generated
in Europe,  while  approximately  27.7%,  24.5% and 2.6% were  generated  in the
Americas, the Asia Pacific region and Japan, respectively.

                  Microcomponents.   The  Company's   microcomponents   division
manufactures  and sells  microcontrollers,  microprocessors  and digital  signal
processors.

                  Microcontrollers  are complete  computer systems  contained on
single   integrated   circuits  that  are   programmed   to  specific   customer
requirements.  They contain  microprocessor cores as well as logic circuitry and
memory  capacity.  Microcontrollers  control the  operation  of  electronic  and
electromechanical  systems by processing input data from electronic  sensors and
generating  electronic  control  signals,  and  are  used in a wide  variety  of
consumer  products  (alarm  systems,  household  appliance  controls  and  video
products),  automotive  systems (engine control and dashboard  instrumentation),
computer peripheral  equipment (disk drives,  facsimile  machines,  printers and
optical   scanners),   industrial   applications   (motor   drives  and  process
controllers), and telecommunications systems (telephones, answering machines and
digital cellular phones).


                                     - 26 -

<PAGE>



                  Based  on its  experience  with a  variety  of  second-sourced
microcontrollers,  the  Company  has  developed  its  complete  "ST"  family  of
proprietary  microcontroller  products,  ranging  from the 8-bit ST6,  ST7,  ST9
microcontrollers  to the 16-bit ST10 and 32-bit ST20 devices.  The ST10 and ST20
families  are  designed  to address  the full  spectrum  of  embedded  processor
applications, from computer peripherals such as hard disk drives and printers to
high volume consumer  appliances such as digital telephone  handsets and digital
satellite receivers.  SGS-THOMSON's microcontrollers draw on the Company's large
product and  technology  portfolios to combine logic devices,  EPROMs,  EEPROMs,
flash memories and various  macrofunctions  around a range of second-sourced and
proprietary  cores.  The Company has also  developed a line of starter  kits and
code generators and compilers that permit system designers to quickly and easily
implement the Company's  microcontrollers  into their  electronic  systems.  The
Company is  targeting  emerging  applications  for  microcontrollers,  including
televisions,   monitors,   cable  television,   satellite  receivers,   cellular
telephones and global positioning systems.

                  Microprocessors  are the central  processing units of computer
systems.  The Company  second-sources a variety of microprocessors  developed by
other semiconductor manufacturers.  The Company is currently developing a 64-bit
RISC microprocessor.

                  Digital  signal  processors  ("DSPs") are parallel  processors
used for high complexity, high speed real-time computations.  DSPs are used in a
wide variety of applications,  including  answering  machines,  modems,  digital
cellular  telephone  systems,  audio  processors and data  compression  systems.
SGS-THOMSON  and its  predecessors  have been  producing  DSPs for more than ten
years. The Company is producing the D950-CORE, a fixed point DSP core based upon
the Company's 0.5 micron/3.3V  triple-level-metal  HCMOS5  technology for a wide
range of applications in the computer,  telecommunications and consumer markets.
The  Company  is  prototyping  a  0.35  micron/2.7V   five-metal  layers  HCMOS6
technology  version of the D950-CORE.  Examples of  applications  include mobile
phones,  telephone answering machines, fax machines,  modems, disk drives, video
conferencing systems and speech, sound, music and other multimedia functions.

                  Digital  Semicustom   Devices.   Semicustom  devices  are  ICs
containing standardized lines or arrays of transistors that can be configured or
interconnected  to perform  specific  functions after a short design cycle time.
SGS-THOMSON  manufactures a wide range of digital semicustom devices,  including
high-speed low-voltage 0.35 micron CMOS five-metal layer standard cells.

                  SGS-THOMSON's semicustom devices are supported by libraries of
cells, macro functions and design tools.  SGS-THOMSON supports popular CAD tools
and platforms, and has strategic alliances with Cadence Design Systems, Inc. and
Synopsys,  Inc.  to develop  semicustom  CAD tools.  SGS-THOMSON  is  developing
proprietary  libraries for semicustom devices for  telecommunications,  computer
and consumer applications.

                  Mixed-Signal   Semicustom   Devices.   SGS-THOMSON   and   its
predecessor companies have also manufactured mixed-signal BiCMOS semicustom gate
arrays, standard cells

                                     - 27 -

<PAGE>



and embedded arrays since 1985.  Mixed-signal  devices combine standard cells of
digital gates and analog devices on the same  semicustom IC. Such devices can be
used  in a wide  variety  of  analog/digital  applications,  including  computer
peripherals,  telecommunications  products and industrial  systems.  SGS-THOMSON
manufactures a wide range of mixed-signal  semicustom  devices,  including a 0.5
micron BiCMOS library of cells.

                  New Ventures Group

                  SGS-THOMSON  established the New Ventures Group in May 1994 to
bring together various major product  initiatives that would otherwise have been
coordinated  within and across individual  product groups.  The Group identifies
and develops new business  opportunities  to complement  the Company's  existing
businesses and exploit its technological  know-how,  manufacturing  capabilities
and  global   marketing  team.  The  Group's  first  activities  have  been  the
manufacture and sale of x86 microprocessors designed by Cyrix. The Group is also
evaluating other business opportunities.

                  x86  microprocessors  are  the  central  processing  units  of
IBM-compatible  personal  computer systems (which accounted for more than 84% of
worldwide  personal  computer sales in 1995).  SGS-THOMSON U.S. has manufactured
Cyrix-designed x86 chips since 1992 as a foundry for Cyrix. In 1996, SGS-THOMSON
U.S.  produced x86 chips for the original  equipment  manufacturer  market.  The
Company is also  focusing on  designing  and  manufacturing  "system on silicon"
solutions based on the 486 CPU core, and more recently media processors based on
Very Long Instruction Word ("VLIW") processors.

                  In 1996,  the Company  enhanced  its  position in the emerging
market for new  consumer  electronics  products  by forming a joint  development
arrangement  with  Microsoft for DVD products,  and by licensing the MPACT media
processor from Chromatic Research.  The Company also announced the first product
on the market to employ the Macrovision 7.0 Anti-Copy System for DVD and set-top
box applications.  Another  important product  introduction for DVD applications
was the Dolby AC-3 decoder.  In addition,  the Company  helped  define  industry
standards with the development of the Video Interface Port,  which was initiated
together  with several  competitors  and will create an  architecture  for using
video in PCs.

                  The  Company   expects  to  be  able  to  use   microprocessor
technology, its broad range of other products and technologies and its strengths
in developing and marketing  application-specific  products to produce  powerful
x86 core-based embedded applications and derivative products.

Sales, Marketing and Distribution

                  In 1996, the Company derived approximately 79% of its revenues
from sales  directly to  customers  through  its  regional  sales  organizations
(compared to  approximately  77% in 1995) and 21% of its net revenues from sales
through  distributors  (compared  to  approximately  23% in  1995).  SGS-THOMSON
operates regional sales organizations in Europe, North

                                     - 28 -

<PAGE>



America,  the Asia Pacific region and Japan. In 1996,  approximately  44% of the
Company's revenues originated in Europe (compared to approximately 46% in 1995),
while 23% originated in the Americas  (compared to  approximately  24% in 1995),
27%  originated in the Asia Pacific  region  (compared to  approximately  26% in
1995) and 6% originated in Japan (compared to approximately 4% in 1995). In 1996
the Company's sales in the Asia Pacific region  surpassed for the first time the
$1 billion  level.  In 1996, two customers each accounted for slightly more than
5% of the Company's net revenues.

                  The  European  region is  divided  into  five  main  sales and
services  districts:  Central  Europe  (Germany and  Austria),  Northern  Europe
(United  Kingdom,  Ireland  and  Scandinavia),  Western  Europe  (France and the
Benelux countries),  Southern Europe (Italy, Spain,  Portugal) and Export Group.
The sales  organization  in each  district is  segmented by  application  market
(i.e., telecommunications, computer, consumer, automotive and industrial), while
marketing is segmented by product groups.

                  In North  America,  the sales and marketing  team is organized
into six  business  units that are located  near major  centers of activity  for
either a particular  application  or  geographic  region:  automotive  (Detroit,
Michigan),  industrial and consumer (Chicago, Illinois), computer and peripheral
equipment (San Jose, California),  communications (Dallas, Texas),  distribution
(Boston,  Massachusetts),  and Latin America (Phoenix,  Arizona).  Each business
unit has a sales force that specializes in the relevant  business  sector.  Each
business unit also provides  product-related  marketing and application support.
This structure allows SGS-THOMSON to monitor emerging  applications,  to provide
local  design  support,  and to develop  new  products in  conjunction  with the
various  product  divisions  as well as to develop new markets and  applications
with its current  product  portfolio.  A central  marketing  operation in Boston
provides market communications, data processing and customer quality services to
the whole region,  while a logistics center in Phoenix supports the distribution
network in North America.

                  In the Asia Pacific  region,  sales and marketing is organized
by country  and is managed  from the  Company  regional  sales  headquarters  in
Singapore.  The Company has sales offices in Taiwan,  Korea,  China,  Hong Kong,
India,  Malaysia,  Thailand and  Australia.  The  Singapore  sales  organization
provides central  marketing,  customer  service,  technical  support,  shipping,
laboratory  and design  services for the entire region.  In addition,  there are
design centers in Taiwan, Korea, Hong Kong and India.

                  In Japan,  the large majority of the Company's  sales are made
through  distributors,  as is typical  for  foreign  suppliers  to the  Japanese
market.  Each  distributor  serves  specific  territories  or  customers  and is
responsible  for  maintaining  the  minimum  inventories  required  by  Japanese
customers.  The Company  provides  marketing and technical  support  services to
distributors through sales offices in Tokyo and Osaka. In addition,  the Company
has established a design center and application  laboratory in Tokyo. The design
center designs custom ICs for Japanese clients, while the application laboratory
allows Japanese customers to test SGS-THOMSON products in specific applications.

                                     - 29 -

<PAGE>




                  The Company's  central  marketing efforts are organized into a
central  strategic   marketing   organization  and  a  key  account   management
organization.  The strategic marketing  organization is organized by application
market.  In addition,  in July 1992 the Company  created a series of initiatives
that it  refers to as  Golden  Programs.  These  programs  focus  the  Company's
multi-divisional  and multi-area  organizations  on 13 key  application  markets
worldwide.  Each Golden  Program  includes a team of  personnel  from  corporate
strategic  marketing,  the product  groups and divisions and the regional  sales
offices.  The Golden  Program  teams work closely with the  Company's  strategic
allies  in  each  application   market.  The  current  Golden  Programs  include
television/terminals,  memory disk drives,  digital cellular  telephones,  color
television,  power supply,  line card,  multimedia  graphics,  automobile radio,
monitors,  satellite and cable television systems,  lighting,  engine management
and asynchronous transfer mode data communications.

                  In 1996, the Company  undertook the Gold Standard  program,  a
long-term commitment to excellence in standard products. The program consists in
manufacturing  and  offering  standard  products  at the same price level as the
market but with a superior level of quality,  service and lead time. The related
initiatives  included  worldwide  advertising,  promotional  task  forces in all
regions, special distribution initiatives, worldwide training of salespeople and
marketing personnel.

                  In addition  to the  central  strategic  marketing  team,  the
Company has established key account  management teams to serve key multinational
customers. The key account management teams work with the Company's regional and
divisional  managers to provide a broad range of products to its major  accounts
and to  develop  complete  systems  solutions  for  customers.  The teams  build
strategic  relationships  with the Company's major accounts that can lead to the
development  of new  products,  increased  access to evolving  technologies  and
enhanced knowledge of customer requirements.

                  Each  of  the  four  regional  sales   organizations   operate
dedicated  distribution  organizations.  To support  the  distribution  network,
SGS-THOMSON operates logistic centers in Saint Genis, France,  Phoenix,  Arizona
and   Singapore,   and  has   made   considerable   investments   in   warehouse
computerization and logistics support.

                  The Company  also uses  distributors  and  representatives  to
distribute its products around the world. Typically,  distributors handle a wide
variety of products,  including products that compete with SGS-THOMSON products,
and fill orders for many customers.  Most of the Company's sales to distributors
are made under  agreements  allowing  for price  protection  and/or the right of
return on unsold  merchandise.  The Company  recognizes  revenues  when it ships
products to distributors.  Sales representatives generally do not offer products
that compete directly with the Company's  products,  but may carry complementary
items  manufactured  by  others.  Representatives  do  not  maintain  a  product
inventory;  instead their  customers  place large quantity  orders directly with
SGS-THOMSON and are referred to distributors for smaller orders.


                                     - 30 -

<PAGE>



Research and Development

                  Management  believes that research and development is critical
to the Company's success and is committed to increasing research and development
expenditures in the future.  Despite  significant cost reductions  following the
Company's  formation in 1987, and particularly in 1990 and 1991 when the Company
experienced losses, management did not reduce research and development spending.
The table below sets forth  information  with respect to the Company's  research
and  development  spending  since 1992 (not  including  design  center,  process
engineering, pre-production or industrialization costs):


                                                 Year ended December 31,

                                       1992     1993     1994     1995    1996
                                       ----     ----     ----     ----    ----
                                            (in millions, except percentages)

Expenditures ....................     $260.9   $270.9   $338.3    440.3   532.3

  as a percentage of net revenues       16.6%    13.3%    12.8%    12.4%   12.9%



As a result of the history of the Company,  approximately  89% of the  Company's
research and development expenses in 1996 were incurred in Europe,  primarily in
France and Italy. See "-- State Support for the Semiconductor  Industry".  As of
December 31, 1996,  approximately  2,980 employees were employed in research and
development activities.

                  Central research and development units conduct research on the
basic VLSI technologies,  packaging  technologies and design tools that are used
by  all   product   groups  and  the   front-end   manufacturing   organization.
SGS-THOMSON'S  central  research and  development  activities  are  conducted in
Crolles, France; Agrate, Italy; Carrollton,  Texas; Phoenix, Arizona;  Berkeley,
California;  and Noida,  India.  The  central  research  and  development  units
participate  in several  strategic  partnerships.  The  Company's  manufacturing
facility at Crolles,  France  houses a research and  development  center that is
operated  pursuant to a partnership  agreement between the Company and CNET, the
research laboratory of France Telecom, an indirect shareholder of the Company in
1993. This center is developing submicron process technologies.  The Company has
also entered into an agreement with Philips  Semiconductors  to jointly  develop
sub-micron  CMOS logic  processes in Crolles,  France  through 1997. A technical
center in Noida, India, develops design software and CAD libraries and tools.

                  The Company has signed an agreement  providing  for a research
and development cooperation with GRESSI, the research and development Groupement
d'Interet  Economique  ("GIE") formed by the CNET, a research  laboratory wholly
owned by France  Telecom,  and the  Laboratoire  d'Electronique  de  Technologie
d'Instrumentation  ("LETI"), a research laboratory of CEA, the parent company of
one  of  the  indirect  shareholders  of  the  Company.  The  objectives  of the
cooperation  is to develop  know-how on  innovative  aspects of VLSI  technology
evolution  which can be transferred to industrial  applications,  and to address
the development of innovative

                                     - 31 -

<PAGE>



process  steps and  process  modules  to be used in future  generations  of VLSI
products.  The  cooperation  agreement is based upon a pluriannual  plan through
1998, and the Company is expected to bear half of the program's  total cost. See
Item 13:  "Management's  Interest  in Certain  Transactions".  The  Company  has
developed a wide network of cooperation with several  universities in the United
Kingdom  (Bristol and Newcastle),  Italy  (Bologna,  Catania,  Milan,  Pavia and
Turin), France (Grenoble,  Marseille,  Toulouse and Tours), in the United States
(Carnegie Mellon, Stanford,  Berkeley and UCLA) and Singapore for basic research
projects on design and process development.

                  In  addition  to  central  research  and   development,   each
operating  division  also   independently   conducts  research  and  development
activities on specific processes and products.

State Support for the Semiconductor Industry

                  Due to the importance of the semiconductor  industry,  various
government  authorities  in the world,  including  the European  Commission  and
individual  countries in Europe,  have  established  programs for the funding of
research  and  development,  innovation,  industrialization  and training in the
industry. In addition,  many countries grant various forms of tax relief, direct
grants  and  other  incentives  to  semiconductor  companies  as well  as  other
industries to encourage investment. The Company has structured its operations to
benefit from such  programs and  incentives  and expects to continue to do so in
the future.  Unlike certain of its  competitors,  however,  the Company does not
receive  significant  direct or  indirect  financing  from  defense  development
programs.

                  The main  European  programs  in which the Company is involved
include:  (i) the joint European  research  program called JESSI,  (ii) European
Union  research and  development  projects  such as ESPRIT  (European  Strategic
Programme for  Information  Technology)  and RACE  (Research and  Development in
Advanced  Communications  Technologies for Europe),  (iii) national programs for
research and development and  industrialization  in the electronics  industries,
and (iv) investment  incentive programs for the economic  development of certain
regions.  The  pan-European  programs are generally  open to eligible  companies
operating and investing in Europe and cover an extended period.  In Italy,  both
electronics  and economic  development  programs are open to eligible  companies
regardless of their ownership or country of incorporation.

                  JESSI is a European  cooperative  project in  microelectronics
among several  countries  that covered the period 1988 through 1996 and involved
more than 80 companies.  ESPRIT  started in 1983 and is being  extended  through
1998  within  the  fourth  framework  program  of  the  European  Commission  on
Information  and  Communication  Technologies  (ICT).  In Italy,  the "Programma
Nazionale per la Microelettronica" has 18 participants, and various programs for
intervention  in  the  "Mezzogiorno"  (southern  Italy)  are  open  to  eligible
companies,  including  non-European  companies,  operating  in  the  region  and
regulated by specific laws.  Italian  programs  often cover several  years,  but
funding is typically subject to annual budget appropriation.  In France, support
for microelectronics is provided to over 30 companies

                                     - 32 -

<PAGE>



manufacturing  or using  semiconductors.  The  amount of  support  under  French
programs is decided annually and subject to budget appropriation.

                  The Company  will also  participate  in the  Micro-Electronics
Development  for  European   Application   "MEDEA"   cooperative   research  and
development program which was launched in June 1996 by the Eureka Conference and
is  designed to bring  together  many of Europe's  top  researchers  in a 12,000
man-year program that will cover the period 1997-2000.

                  In addition,  management  expects to have the  opportunity  to
take part in the future in  European  "structural  funds"  that are  intended to
furnish  important  support  through 1999 to dedicated  regions in many European
countries, and provide priorities in funding for productive investment, training
and job  creation.  These funds are available to eligible  companies,  including
non-European companies, operating in the dedicated regions.

                  As a result of the history of the  Company,  its  research and
development  facilities  and activities  are mainly  concentrated  in France and
Italy,  and the  substantial  majority of the  Company's  state funding has been
derived from programs in such countries.  Umbrella agreements with the Republics
of France and Italy,  which set forth the  parameters of state support under the
national programs, ran from 1992 through 1996 and required,  among other things,
compliance  with EC regulations  and annual and  project-by-project  reviews and
approvals. The agreements were based on the maintenance of an equilibrium in the
levels of research  and  development  and related  expenditures  between the two
countries.

                  Public  authority  funding for  research and  development  are
reported in "Other Income and Expenses" in the Company's consolidated statements
of income. See Note 19 to the Consolidated  Financial  Statements.  Such funding
has totalled $80.1  million,  $89.6 million and $63.8 million in the years 1994,
1995 and 1996,  respectively.  Public funding for industrialization costs (which
include  certain costs  incurred to bring  prototype  products to the production
stage) is offset against expenses in computing cost of sales, and has the effect
of increasing  the Company's  gross  profit.  Such funding of  industrialization
costs has totalled $19.3 million,  $11.8 million and $4.6 million in 1994,  1995
and 1996,  respectively.  See Note 19 to the Consolidated  Financial Statements.
Government support for capital  expenditures funding has totalled $40.4 million,
$64.5 million and $93.3 million in the years 1994, 1995 and 1996,  respectively.
Such funding has been used to support the Company's  capital  investment;  while
receipt of these funds is not  directly  reflected in the  Company's  results of
operations,  the  resulting  lower  amounts  recorded  in  property,  plant  and
equipment reduce the level of depreciation recognized by the Company.

                  Low interest financing has been made available (principally in
Italy) under programs such as the Italian  Republic's Fund for Applied Research,
established  in 1968 for the purpose of  supporting  Italian  research  projects
meeting specified program criteria. At year-end 1994, 1995 and 1996, the Company
had  $133.2  million,  $115.4  million  and  $176.3  million,  respectively,  of
indebtedness  outstanding under state-assisted  financing programs at an average
interest cost of 2.9%, 2.64% and 4.0%, respectively.

                                     - 33 -

<PAGE>




                   Funding  for  programs  in  France  and Italy is  subject  to
compliance with EU and national regulations as well as to annual  appropriation;
if such governments were unable to provide anticipated funding on a timely basis
or if existing  government-funded  programs were curtailed or discontinued or if
the  programs  were deemed not to comply with  applicable  regulations,  such an
occurrence  could  have a material  adverse  effect on the  Company's  business,
operating  results and  financial  condition.  From time to time the Company has
experienced  delays in the  receipt  of funding  under  these  programs.  As the
availability and timing of such funding are substantially  outside the Company's
control,  there can be no assurance  that the Company  will  continue to benefit
from such  government  support,  that  funding  will not be delayed from time to
time,  that  sufficient  alternative  funding would be available if necessary or
that any such alternative funding would be provided on terms as favorable to the
Company as those previously provided.

                  Various  programs  that provide  different  forms of financial
support and incentives  (such as research and development  grants,  low interest
loans,  capital  investment  support and tax  incentives)  for  companies in the
semiconductor industry are offered in a number of countries.  In connection with
its long term expansion plans,  management  believes that opportunities for such
financial  support and  incentives  may be available to it in countries  outside
France and Italy.

Intellectual Property

                  Intellectual  property  rights which apply to various  Company
products include  patents,  copyrights,  trade secrets,  trademarks and maskwork
rights.  SGS-THOMSON owns more than 1,600 original  invention patents or pending
patent  applications,  most of which have been  registered in several  countries
around the world.  In 1996, the Company filed 493 original  patent  applications
around the world.  Management believes that its intellectual property represents
valuable property and intends to protect the Company's  investment in technology
by enforcing all of its intellectual property rights.

                  The Company has entered  into  several  patent  cross-licenses
with several major semiconductor companies,  consisting primarily of most of the
major Japanese semiconductor companies.

                  Pursuant  to a 1977  license  agreement  (the  "Intel  License
Agreement"),  SGS-THOMSON  U.S. is licensed to make, have made, use and sell (in
addition to other  rights)  products that practice all Intel patents filed prior
to 1999 for the life of such patents. The Intel License Agreement was originally
entered   into   by   Mostek   Corporation   ("Mostek")   and   Intel.   Thomson
Semiconducteurs,  one of the  constituent  companies  of  the  current  Company,
acquired Mostek assets in 1985 and SGS-THOMSON U.S. succeeded to the interest of
Mostek under the Intel License  Agreement upon the Company's  formation in 1987.
SGS-THOMSON  U.S.'s  succession  rights under the Intel License  Agreement  were
upheld in a court  judgment  rendered in July 1992 which is now final as well as
in a court judgement dated December 30, 1994 which has been confirmed in appeal.


                                     - 34 -

<PAGE>



                  In January  1994,  SGS-THOMSON  U.S. and Cyrix  entered into a
non-exclusive  production and license agreement (the "Cyrix License  Agreement")
pursuant to which SGS-THOMSON U.S. agreed to produce Cyrix-designed x86 chips to
sell to Cyrix for resale as Cyrix-branded  products. In addition,  Cyrix granted
SGS-THOMSON U.S. a license to sell (as SGS-THOMSON products) a proportion of the
chips that it makes available to Cyrix and to use Cyrix  architecture to produce
application-specific   ICs.  The  Cyrix  License  Agreement  extends  to  future
generations of x86 products.  Cyrix and SGS-THOMSON  U.S. signed an amendment to
the Cyrix  License  Agreement  in July  1995 that  allows  SGS-THOMSON  U.S.  to
manufacture and sell to third parties additional quantities of Cyrix products at
least  through  1997.  SGS-THOMSON  U.S.  may continue to  manufacture  and sell
application-specific  ICs using  Cyrix  architecture  after  termination  of the
agreement.  In April  1994,  Cyrix  entered  into  x86  production  and  license
agreements with IBM.

                  The Company's success depends in part on its ability to obtain
patents,  licenses and other intellectual  property rights covering its products
and  manufacturing  processes.  To that end,  the Company has  acquired  certain
patents and patent  licenses  and  intends to  continue  to seek  patents on its
inventions and manufacturing processes. The process of seeking patent protection
can be long and expensive, and there can be no assurance that patents will issue
from currently  pending or future  applications  or that, if patents are issued,
they will be of sufficient scope or strength to provide meaningful protection or
any commercial  advantage to the Company.  In addition,  effective copyright and
trade secret  protection  may be  unavailable  or limited in certain  countries.
Litigation,  which could  demand  financial  and  management  resources,  may be
necessary  to  enforce  patents  or other  intellectual  property  rights of the
Company.

                  Also,  there can be no assurance that  litigation  will not be
commenced  in the future  against the  Company  regarding  patents,  mask works,
copyrights, trademarks or trade secrets, or that any licenses or other rights to
necessary  intellectual  property  could be obtained on  acceptable  terms.  The
failure to obtain licenses or other intellectual property rights, as well as the
expense or outcome of litigation,  could adversely affect the Company's  results
of  operations  or  financial  condition.  The  Company  has  from  time to time
received,  and it may in the future receive,  communications  alleging  possible
infringement of certain patents and other intellectual property rights of others
and it is currently the defendant in a lawsuit  charging the Company with patent
infringement.  Regardless  of the validity or the  successful  assertion of such
claims,  the Company could incur  significant  costs with respect to the defense
thereof which could have a material  adverse effect on the Company's  results of
operations or financial condition. See Item 3: "Legal Proceedings".

Backlog

                  The Company's  sales are made  primarily  pursuant to standard
purchase  orders that are generally  booked from one to twelve months in advance
of delivery.  Quantities actually purchased by customers, as well as prices, are
subject to  variations  between  booking  and  delivery  to  reflect  changes in
customer needs or industry conditions.

                                     - 35 -

<PAGE>




                  The Company's  backlog has decreased during 1996 following the
tough  semiconductor  market  conditions.  On  January  22,  1997,  the  Company
announced that with lead times  shrinking  throughout the industry  during 1996,
the Company  entered 1997 with less order  visibility  than it has  historically
enjoyed and on June 6, 1997, the Company  announced that the third quarter order
backlog as of May 31, 1997 was  substantially  above second  quarter  levels and
reflected a significant  increase in order  visibility over the first and second
quarters of 1997.

                  SGS-THOMSON  also  sells  certain  products  to key  customers
pursuant to frame contracts.  Frame contracts are annual  fixed-price  contracts
with  customers  setting  forth  the  terms of  purchase  and  sale of  specific
products.  These contracts allow the Company to schedule  production capacity in
advance and allow  customers to manage their  inventory  levels  consistent with
just-in-time  principles  while  shortening  the cycle times required to produce
ordered  products.  Orders  under frame  contracts  are also subject to risks of
price reduction and order cancellation.

Competition

                  Markets for the  Company's  products  are highly  competitive.
While only a few  companies  compete with  SGS-THOMSON  in all of the  Company's
product lines, the Company faces significant  competition in each of its product
lines.  SGS-THOMSON competes with major international  semiconductor  companies,
some of which have substantially  greater financial and other resources than the
Company  with  which  to  pursue  engineering,   manufacturing,   marketing  and
distribution of their products.  Smaller niche semiconductor  companies are also
increasing their participation in the semiconductor market.  Competitors include
manufacturers  of standard  semiconductors,  application-specific  ICs and fully
customized  ICs,  including  both  chip  and  board-level  products,  as well as
customers who develop their own integrated circuit products.
Some of the Company's competitors are also its customers.

                  The  Company's  primary  competitors  include  Advanced  Micro
Devices,   Inc.,   Hitachi,   Intel  Corporation,   Motorola,   Inc.,   National
Semiconductor    Corporation,    Nippon   Electric   Company,    Ltd.,   Philips
Semiconductors,  Samsung,  Siemens, Texas Instruments  Incorporated and Toshiba.
The market for the Company's new x86  microprocessors is currently  dominated by
Intel Corporation.

                  The Company  competes in  different  product  lines to various
degrees on the basis of price, technical performance,  product features, product
system  compatibility,  customized design,  availability,  quality and sales and
technical  support.  The Company's  ability to compete  successfully  depends on
elements both within and outside of its control, including successful and timely
development of new products and manufacturing processes, product performance and
quality,  manufacturing  yields  and  product  availability,  customer  service,
pricing, industry trends and general economic trends.

                  The market for the  Company's  products  is  characterized  by
rapidly  changing  technology.   Therefore,  the  Company's  success  is  highly
dependent upon its ability to develop

                                     - 36 -

<PAGE>



complex  new  products  on a  cost-effective  basis,  to  introduce  them in the
marketplace  on a timely  basis,  and to have  them  selected  for  design  into
products of leading systems manufacturers. SGS-THOMSON has committed and intends
to continue to commit substantial  resources to the development of new products.
Because  new  product  development  commitments  must be made well in advance of
sales, however, new product decisions must anticipate both future demand and the
technology  that will be available to supply such demand.  Delays in  developing
new products with  anticipated  technological  advances or in commencing  volume
shipments of new products may have an adverse effect on the Company's  business.
In addition,  there can be no assurance that new products,  if introduced,  will
gain market  acceptance or will not be adversely  affected by new  technological
changes  or  new  product   announcements  by  others.   See  "--  Research  and
Development".

                  In recent  years the Company has  introduced,  among other new
products, dedicated products for several applications, including, in particular,
telecommunications,  computer  peripheral,  and automotive  applications,  power
MOSFETS  for  high-frequency  and  high-voltage  applications,  Omnifets  (power
MOSFETS  with  fully  integrated  protection  devices).  The  Company  has  also
introduced a digital signal  processing core for 0.5 micron ASICs (DSP 950), the
ST20  family  of  compatible  0.5  micron  32-bit  microprocessor  cores  and  a
multimedia accelerator (Riva 128) as well as the STi 3540 DVD MPEG2 decoder. The
Company also continually strives to improve the operating performance and design
features of many of its products.

                  According   to   preliminary   industry   data,    SGS-THOMSON
consolidated  its leading world market position for EPROMs in 1996 with revenues
of $335.5 million, basically unchanged over 1995 despite a sharp market decline.
According to  preliminary  industry  data,  the Company was the world's  leading
supplier of EEPROMs in 1996.  Flash memory  products may replace  EPROMs in many
applications  in the second half of the 1990s.  The Company  currently  supplies
flash memory  products up to 4 Mbit, and is currently  developing  families of 8
and 16 Mbit flash  memories.  The Company is also developing a new generation of
digital video decompression  chips, a 64-bit RISC microprocessor and 0.35 micron
BiCMOS mixed-signal standard cells. There can be no assurance, however, that the
Company's   flash   memories   or  other  new   products,   including   its  x86
microprocessors,  will be  successfully  developed or produced or that they will
achieve market acceptance or contribute significantly to the Company's revenues.
The market for the  Company's  new x86  microprocessors  is  dominated  by Intel
Corporation.

                  The Company's  future  success is also  dependent in part upon
its  ability to develop  and  implement  new  design and  process  technologies.
Semiconductor design and process technologies are subject to rapid technological
change,  and require large  expenditures for capital investment and research and
development.  The Company is developing  advanced and standardized  design tools
for its CMOS processes as well as libraries of macrofunctions  and megafunctions
for  many  of  its  products,  and  is  focusing  on  improving  its  concurrent
engineering  practices to better coordinate design activities and reduce overall
time-to-market.  If the Company experiences substantial delays in developing new
design or process technologies or

                                     - 37 -

<PAGE>



inefficiently  implements  production  increases or  transitions,  the Company's
results of operations could be adversely affected.

Employees

                  As of December 31, 1996,  the Company  employed  approximately
25,893 people, of whom approximately  5,358 were employed in France,  5,514 were
employed in Italy, 588 were employed in the rest of Europe,  2,555 were employed
in the United  States,  4,308 were  employed in Malta and Morocco and 7,570 were
employed  in   Singapore,   Malaysia  and  Japan.   As  of  December  31,  1996,
approximately 2,980 employees were engaged in research and development, 1,296 in
marketing  and  sales,  17,672 in  manufacturing,  1,629 in  administration  and
general services and 2,343 in divisional functions.

                  The  Company's  future  success will depend,  in part,  on its
ability to continue to attract,  retain and motivate highly qualified technical,
marketing,  engineering and management personnel.  Unions are present in France,
Italy,  Malta,  Morocco  and  Singapore.  The Company  has not  experienced  any
significant  strikes or work stoppages in recent years, other than in connection
with  national  strikes in Italy,  and  management  believes  that the Company's
employee relations are good.

Environmental Matters

                  The Company's manufacturing  operations use many chemicals and
gases and the  Company  is  subject  to a variety  of  governmental  regulations
related to the use, storage,  discharge and disposal of such chemicals and gases
and other  emissions and wastes.  Consistent  with the Company's TQM principles,
the Company has established proactive environmental policies with respect to the
handling of such chemicals and gases and emissions and waste  disposals from its
manufacturing  operations.  The Company has engaged outside consultants to audit
its  environmental  activities and has created  environmental  management teams,
information  systems,   education  and  training  programs,   and  environmental
assessment  procedures for new processes and suppliers.  By the end of 1996, ten
of the Company's plants were certified for the  Eco-Management  and Audit Scheme
("EMAS") and five sites have also obtained ISO 14001 certification.

                   Although the Company has not suffered material  environmental
claims  in the past  and  believes  that its  activities  conform  to  presently
applicable environmental  regulations,  in all material respects,  environmental
claims or the failure to comply with present or future  regulations could result
in the  assessment  of damages  or  imposition  of fines  against  the  Company,
suspension of production or a cessation of operations.




                                     - 38 -

<PAGE>

                         Item 2: Description of Property


                  SGS-THOMSON   currently   operates   17   main   manufacturing
facilities around the world. The table below sets forth certain information with
respect  to  SGS-THOMSON's  current  manufacturing   facilities,   products  and
technologies.  Front-end  manufacturing  facilities are wafer fabrication plants
and back-end facilities are assembly, packaging and final testing plants.

                                     - 39 -

<PAGE>




<TABLE>
<CAPTION>
          Location                            Products                                  Technologies
          --------                            --------                                  ------------
<S>                               <C>                                      <C>
Front-end Facilities:
Crolles, France                   Semicustom devices and dedicated                 8-inch 0.7/0.35 micron CMOS and
                                  products                                         1.0/0.35 micron BiCMOS; R&D on
                                                                                   submicron technologies in
                                                                                   conjunction with CNET and Philips
                                                                                   Semiconductors
Phoenix, Arizona                  x86 microprocessors, EPROMs and                  8-inch 0.5/0.35 micron CMOS
                                  other VLSI products

Agrate, Italy                     EPROMSs, EEPROMs, semicustom             Fab 1 - 6-inch 0.8/0.6 micron CMOS
                                  devices, microcontrollers, flash         Fab 2 - 6-inch 2.0/1.2 micron BiCMOS and
                                  memories and dedicated products                  BCD
                                                                           Fab 3 - 6-inch 0.65/0.35 micron CMOS pilot 
                                                                                   line being converted to 8-inch

Rousset, France                   Microcontrollers, EEPROMs and                    6-inch 0.8 micron CMOS
                                  smartcard products

Catania, Italy                    Power transistors, smart devices and     Fab 1 - 5-inch 3 micron bipolar power
                                  audio and automotive dedicated           Fab 2 - 5-inch 3/4 micron power MOS/BCD
                                  products                                         (being converted to 6-inch)
                                                                           Fab 3 - 6-inch 4/6/1 micron pilot line

Rennes, France                    Dedicated and power products                     5-inch 2 micron BiCMOS, BCD and
                                                                                   bipolar
Grenoble, France(1)               Dedicated products, semicustom                   4-inch 2.0/1.2 micron BiCMOS
                                  devices, smartcard products

Castelletto, Italy                Smart power BCD                                  6-inch 4.0/1.2 micron bipolar and
                                                                                   mixed BCD pilot line (converted
                                                                                   from 5-inch in 1996)

Tours, France                     Thyristors, diodes and application-      Fab 1 - 5-inch discrete (converted from 4-
                                  specific discretes                               inch in 1996)
                                                                           Fab 2 - 5-inch discrete (converted from 4-
                                                                                   inch in 1996)

Ang Mo Kio, Singapore             Dedicated products, microcontrollers     Fab 1 - 5-inch 2 micron CMOS
                                  and commodity products                   Fab 2 - 5-inch 6 micron bipolar standard
                                                                           Fab 3 - 5-inch 3 micron bipolar complex

Carrollton, Texas                 Memories, microprocessors and            Fab 1 - 4-inch 1.2 micron CMOS and
                                  semicustom devices                               BiCMOS (being converted to 6-inch)
                                                                           Fab 2 - 6-inch 0.6 micron CMOS

Rancho Bernardo, California(2)    CMOS/BiCMOS telecommunications                   4-inch 3 micron CMOS/BiCMOS
                                  ICs                                              (new 6-inch module in progress)
Back-end Facilities:
Muar, Malaysia                    Broad range
Kirkop, Malta                     Broad range
Toa Payoh, Singapore              Broad range
Ain Sebaa, Morocco                Discrete semiconductors
Bouskoura, Morocco                Subsystems
Shenzen, China                    Discrete semiconductors


<FN>
(1) The closure of the  Grenoble  front-end  facility is now  scheduled  to take place during 1997.
(2) This facility was acquired by the Company from Northern Telecom on January 1, 1994 in connection with entering into a strategic
    alliance with Northern Telecom.
</FN>
</TABLE>


                                     - 40 -

<PAGE>



                  In  1996,  approximately  61%  of  the  value  of  SGS-THOMSON
manufactured  devices were produced in Europe,  21% in the Asia Pacific  region,
and 18% in the United  States.  The major hubs for  European  manufacturing  and
product design and development are located in Agrate, Italy and Crolles, France.
In the United States, the Company's main  manufacturing  facility are located in
Carrollton,  Texas and Phoenix, Arizona. In the Asia Pacific region, the Company
operates a front-end wafer fab in Singapore and back-end facilities in Singapore
and Muar, Malaysia.

                  In   1996,    SGS-THOMSON   has   expanded   its   diversified
manufacturing  infrastructure  while improving the cost, quality and flexibility
of its operations. SGS-THOMSON has applied 1996 investments in its manufacturing
facilities to bring to full capacity the 8-inch front-end manufacturing facility
in  Crolles,  France,  to  continue  the  ramp  up of the new  8-inch  front-end
manufacturing  facility in Phoenix,  Arizona, to complete the building of and to
begin equipping the third 8-inch  front-end  manufacturing  facility in Catania,
Italy,  and to complete a new back-end  facility and design  center in Shenzhen,
China,  through  its joint  venture  created  in 1996 with a  subsidiary  of the
Shenzhen  Electronics  Group.  During  1996,  the  Company  has  also  completed
conversion from 4-inch to 5-inch of the two front-end wafer  fabrication  plants
in Tours,  France,  from  5-inch to 6-inch of the  front-end  wafer  fabrication
facility in Rousset, France, and has installed a new 6-inch module in the Rancho
Bernardo,  California  front-end wafer fabrication  facility.  In addition,  the
Company has started  construction of a new 8-inch  front-end  wafer  fabrication
facility in Rousset,  France,  has initiated the 6-inch to 8-inch  conversion of
one of its Agrate,  Italy front-end wafer  fabrication  plants,  and has started
planning the construction of a new 8-inch front-end wafer  fabrication  facility
in Singapore,  announced during 1996.  Finally,  the Company has also identified
one more 8-inch front-end wafer fabrication plant to be built in Italy. In 1996,
approximately   93%  of  the  ICs  wafers   manufactured  by  SGS-THOMSON   were
manufactured on 5-inch or larger wafers.

                  In 1994, the Company created a joint venture with a subsidiary
of the  Shenzhen  Electronics  Group  ("SEG") that built and equipped a back-end
manufacturing  facility  and  design  center in the  Futian  free-trade  zone of
Shenzhen  in  southern  China.  SGS-THOMSON  owns a 60%  interest  in the  joint
venture,  with a subsidiary of SEG owing the remaining 40%.  Construction of the
plant and  equipment  installation  has been  completed in 1996 as scheduled and
production  started  at the end of 1996.  The  Company  and SEG  plan to  invest
initially  approximately $77 million in the joint venture.  SEG is a diversified
export-oriented   electronics  company  controlled  by  the  Shenzhen  Municipal
Government that manufactures communications equipment,  computers and electronic
products  and  components  and  engages  in  import-export  trading,   financial
investment management and real estate.

                  Although  each  fabrication  plant is  dedicated  to  specific
processes,  the Company's  strategy is to have  multiple  plants for key process
families.   The  Company   subcontracts   some  back-end  assembly  and  testing
operations.


                                     - 41 -

<PAGE>



Manufacturing Risks

                  The  Company's  manufacturing  processes  are highly  complex,
require advanced and costly equipment and are continuously  being modified in an
effort  to  improve  yields  and  product   performance.   Impurities  or  other
difficulties  in the  manufacturing  process  can  lower  yields.  Although  the
Company's increased manufacturing efficiency has been an important factor in its
improved results of operations,  as is common in the semiconductor industry, the
Company  has from time to time  experienced  production  difficulties  that have
caused delivery delays and quality control  problems.  No assurance can be given
that the Company will be able to increase manufacturing efficiency in the future
to the  same  extent  as in the  past or that the  Company  will not  experience
production difficulties in the future.

                  The Company  undertook in 1996 certain  initiatives  to expand
its manufacturing  resources in order to help relieve capacity  constraints with
regard to certain advanced  products.  In particular the  manufacturing  plan in
Phoenix,  Arizona, was qualified to produce a broader and more flexible range of
products.  SGS-THOMSON has applied 1994, 1995 and 1996  investments to build and
equip two 8-inch  front-end  manufacturing  facilities  in  Crolles,  France and
Phoenix,  Arizona  currently  in  operation,  and  has  applied  1995  and  1996
investments  to build and equip an  additional  8-inch  front-end  manufacturing
facility in Catania, Italy, now qualified,  and to build a new back-end facility
and design center in Shenzhen,  China through its joint venture  created in 1994
with a subsidiary of the Shenzhen  Electronics Group. The Company also converted
4-inch and 5-inch wafer fabs to 5-inch and 6-inch production and is starting the
conversion  and  expansion  from  6-inch to  8-inch  production  of a  front-end
fabrication facility in Agrate,  Italy. In addition,  the Company has identified
two other 8-inch front-end wafer fabrication facilities, one of which will be in
Singapore,  with the other one in Italy now under  consideration.  In 1995,  the
Company approved the building and equipping of a new 8-inch 0.5 micron front-end
wafer  fabrication  plant  (which  will also be capable of 0.35 and 0.25  micron
production) in Rousset, France which is now under construction.  As is common in
the  semiconductor  industry,  the  Company  has from  time to time  experienced
difficulty in ramping up production at new  facilities or effecting  transitions
to new manufacturing processes and, consequently, has suffered delays in product
deliveries or reduced  yields.  There can be no assurance  that the Company will
not  experience  manufacturing  problems in achieving  acceptable  yields and/or
product  delivery  delays in the  future as a result  of,  among  other  things,
capacity  constraints,   construction  delays,  ramping  up  production  at  new
facilities,  upgrading or expanding existing  facilities or changing its process
technologies,  any of which  could  result  in a loss of  future  revenues.  The
Company's  operating results could also be adversely affected by the increase in
fixed costs and operating  expenses related to increases in production  capacity
if revenues do not increase commensurately.

                  SGS-THOMSON's  principal  executive office is located in Saint
Genis, France, near Geneva, Switzerland. The Company also operates nine research
and development  centers and 26 design centers.  The Company maintains  regional
sales headquarters in Saint Genis, France, Boston, Massachusetts,  Singapore and
Tokyo, Japan, and has 44 sales offices in 22

                                     - 42 -

<PAGE>



countries  throughout  Europe,  North  America and the Asia Pacific  region.  In
general,  the Company owns its  manufacturing  facilities and leases most of its
sales offices.


                            Item 3: Legal Proceedings

                  As is the  case  with  many  companies  in  the  semiconductor
industry,  the Company has from time to time  received  communications  alleging
possible  infringement  of  certain  intellectual  property  rights  of  others.
Irrespective  of the validity or the  successful  assertion of such claims,  the
Company could incur  significant costs with respect to the defense thereof which
could have a material  adverse effect on the Company's  results of operations or
financial condition.

                  The   Company  is   currently   involved   in  certain   legal
proceedings;  however, the Company does not believe that the ultimate resolution
of  pending  legal  proceedings  will  have a  material  adverse  effect  on its
financial condition.

                  In May 1995, an investigation was ordered by the prosecutor of
the court of Catania,  Italy of the research and development consortium CORIMME.
SGS-THOMSON  Microelectronics  s.r.l.  holds a  662/3%  voting  interest  in the
consortium  with the University of Catania  holding the remaining  331/3% voting
interest.  A notice (Informazione di Garanzia) of the commencement of a criminal
investigation  was  served  on the  President  of  CORIMME  and to the  Board of
Directors  and  Statutory  Auditors  of CORIMME.  Under  Italian  law,  criminal
liability  cannot be attributed to a company and therefore  notices  relating to
investigation of acts or events generally  attributable to a company are sent to
the legal  representative  of such company (i.e.  the president or the statutory
bodies). Investigations are still on going with regard to the dispute concerning
value-added-tax ("VAT") between CORIMME and the Italian tax authority,  and with
regard to alleged misuse of public funds by SGS-THOMSON  Microelectronics s.r.l.
In order to become eligible for government research and development funding, the
CORIMME  consortium  was  required  to  submit  detailed  plans  specifying  the
objectives of a program and the manner in which the funding  would be used.  The
Company's  management  believes  that the inquiry to date has focused on whether
part of the funds and other  resources  designated  for  research  were used for
production  or  otherwise in violation  of  applicable  requirements  and on the
proper use of, and  allocation  of expenses  (such as rent and  utilities)  for,
resources and the  allocation of revenues  between  CORIMME and the Company.  In
another  matter  concerning a dispute on VAT  deductions,  CORIMME was granted a
favorable  ruling by the Commissione  Tributaria di Primo Grado in Catania which
has been  confirmed by The  Commissione  Tributaria di Secundo Grado in Catania.
The  Company's   management  believes  that  CORIMME's   contractual  and  other
requirements  have  been  honored  in  all  material  respects.   The  Company's
management  further believes that the management of CORIMME programs has been in
all  material  respects  in  accordance  with  those  plans and with  applicable
financial  procedures provided by the Italian  government.  It is cooperating in
full with the authorities in the conduct of the inquiry.  Due to the preliminary
nature of the  inquiry it is  impossible  to  determine  the  ultimate  scope or
outcome of the inquiry. Although the investigation

                                     - 43 -

<PAGE>



is at a preliminary stage, management believes based on information available to
the Company to date and based on the advice of legal counsel that the outcome of
the investigation will not have a material effect on the financial  condition or
results of operations of the Company.


                          Item 4: Control of Registrant

Principal Shareholders

         In October, 1995, the Company completed a second public offering of the
Common  Shares.  In the  Offering,  the Company  sold  8,960,000  shares and the
selling  shareholders  sold  11,740,000  shares  at a price to public of $43.5 a
share.  The following table sets forth certain  information  with respect to the
ownership of the Company's Common Shares, as of May 30, 1997.


                                                 Common Shares Owned
                                                 -------------------

                                             Number of
Shareholders                               Common Shares                %
------------                               -------------                -

SGS-THOMSON Microelectronics
    Holding II B.V..................         95,863,880               68.9



         The  officers  and   directors  of  the  Company  as  a  group  own  an
insignificant number of Common Shares.



                                     - 44 -

<PAGE>



                  The  chart  below   illustrates   the   current   shareholding
structure:



THIS INFORMATION WAS REPRESENTED BY AN ORGANIZATIONAL CHART
IN THE ORIGINAL DOCUMENT.
Description of Shareholding Structure:

         SGS-THOMSON   Microelectronics  N.V.  is  owned  68.9%  by  SGS-THOMSON
Microelectronics  Holding  II B.V.  a  wholly-owned  subsidiary  of  SGS-THOMSON
Microelectronics  Holding N.V. SGS-THOMSON  Microelectronics Holding N.V. is 50%
owned by a consortium  of French  shareholders  and 50% owned by a consortium of
Italian shareholders. The French shareholder, FT2CI, is owned 49.9% and 50.1% by
Thomson-CSF and FT1CI, respectively.  Thomson-CSF is owned 58.0% by Thomson S.A.
FT1CI  is  owned  51.0%  and  49.0%  by   CEA-Industrie   and  France   Telecom,
respectively.  The Italian shareholder,  MEI, is owned 50.1% and 49.9% by I.R.I.
and Comitato SIR, respectively.


                                     - 45 -

<PAGE>



                  SGS-THOMSON  Microelectronics  Holding  II B.V.  ("SGS-THOMSON
Holding  II") is a  wholly  owned  subsidiary  of  SGS-THOMSON  Microelectronics
Holding  N.V.  ("SGS-THOMSON  Holding").  SGS-THOMSON  Holding is 50% owned by a
consortium of French  shareholders that are indirectly  controlled by the French
government  and 50%  owned by a  consortium  of  Italian  shareholders  that are
indirectly  controlled  by the  Italian  government.  The  consortium  of French
shareholders   is  comprised  of   Thomson-CSF,   a  subsidiary  of  the  French
state-controlled  electronics  company Thomson S.A., France Telecom,  the French
state-controlled telephone company,  CEA-Industrie,  a corporation controlled by
the French atomic energy  commission,  and FT1CI and FT2CI,  two French  holding
companies.  The consortium of Italian  shareholders is comprised of Istituto per
la Ricostruzione Industriale S.p.A. ("I.R.I."),  the holding company for Italian
state-owned industrial and commercial interests, Comitato per l'Intervento nella
SIR ed in settori ad Alta Technologia ("Comitato SIR") and  MEI-Microelettronica
Italiana  s.r.l.   ("MEI"),  an  Italian  holding  company.  In  December  1994,
Finmeccanica,  a subsidiary of I.R.I.,  transferred  its interest in SGS-THOMSON
Holding  to MEI.  Shares of  Thomson-CSF  are  listed on the Bourse de Paris and
Frankfurt  Stock  Exchange and American  Depositary  Receipts for its shares are
quoted on Nasdaq.  Certificats  d'investissement  of CEA-Industrie are listed on
the Bourse de Paris.

                  SGS-THOMSON  Holding II is a holding  company whose only asset
is the  common  stock  of the  Company.  It has no  Supervisory  Board,  and its
Management Board is SGS-THOMSON Holding.

                  Shareholder Agreements

                  In connection  with the formation of the Company,  Thomson-CSF
and STET, as shareholders of the Company,  entered into a shareholders agreement
on April 30, 1987. In connection  with the formation of  SGS-THOMSON  Holding in
1989,  which  coincided with the acquisition by Thorn EMI of its interest in the
Company,  the  shareholders  agreement  (as amended,  the "Holding  Shareholders
Agreement")  was  amended  to apply to the  parties'  ownership  in  SGS-THOMSON
Holding.  The rights and  obligations of Thomson-CSF  and STET under the Holding
Shareholders  Agreement were  subsequently  transferred to or assumed by, as the
case may be,  FT2CI for  Thomson-CSF,  and  Finmeccanica  and MEI for  STET.  In
connection  with the transfer by  Finmeccanica  of its  interest in  SGS-THOMSON
Holding to MEI, the rights and  obligations  of  Finmeccanica  under the Holding
Shareholders  Agreement were  subsequently  transferred to or assumed by, as the
case may be, MEI.

                  Pursuant  to the terms of the Holding  Shareholders  Agreement
and for the duration of such agreement,  FT2CI (the "French Owner"),  on the one
hand, and MEI (the "Italian Owner"),  on the other hand, have agreed to maintain
equal  interests  in the share  capital of  SGS-THOMSON  Holding  and  maintain,
together,  ownership  of the majority of  SGS-THOMSON  Holding's  issued  voting
shares.  The  admission  of a third  party to the share  capital of  SGS-THOMSON
Holding, whether through the sale of SGS-THOMSON Holding's outstanding shares or
through the issue by SGS-THOMSON  Holding of new shares,  or by any other means,
must

                                     - 46 -

<PAGE>



be  unanimously  agreed  upon.  In the event of a new  shareholder,  the parties
undertake   to  ensure  that  the   balance   between  the  French  and  Italian
shareholdings shall be maintained.

                  The  Holding  Shareholders  Agreement  contemplates  that  the
parties shall agree upon common  proposals and jointly  exercise their powers of
decision and their full  control of the  strategies  and actions of  SGS-THOMSON
Holding  and  the  Company.  Under  the  Holding  Shareholders  Agreement,   the
Supervisory   Board  of  SGS-THOMSON   Holding,   which  is  composed  of  three
representatives  of the French  Owner and three  representatives  of the Italian
Owner, must give its prior approval before SGS-THOMSON  Holding, the Company, or
any  subsidiary  of the Company may:  (i) modify its articles of  incorporation;
(ii) change its authorized share capital,  issue,  acquire or dispose of its own
shares,  change any  shareholder  rights or issue any  instruments  granting  an
interest in its capital or profits;  (iii) be  liquidated or dispose of all or a
substantial and material part of its assets or any shares it holds in any of its
subsidiaries; (iv) enter into any merger, acquisition or joint venture agreement
(and, if  substantial  and  material,  any  agreement  relating to  intellectual
property) or form a new company;  (v) approve such company's draft  consolidated
balance  sheets and  financial  statements  or any profit  distribution  by such
company;  or (vi) enter into any  agreement  with any of the direct or  indirect
French or Italian  Owners  outside the normal  course of  business.  The Holding
Shareholders  Agreement also provides that  long-term  business plans and annual
budgets  of the  Company  and  its  subsidiaries,  as  well  as any  significant
modifications  thereto, shall be approved in advance by the Supervisory Board of
SGS-THOMSON  Holding. In addition,  the Supervisory Board of SGS-THOMSON Holding
shall also decide upon  operations of  exceptional  importance  contained in the
annual budget even after financing thereof shall have been approved.

                  Such agreement also provides that similar and adequate  levels
of research,  development and technological  innovation shall be achieved by the
Company  and its  subsidiaries  in France and Italy and that  there  shall be no
substantial  discrepancy  in the  percentage  of  state  financing  compared  to
research,  development and technological  innovation expenditures by the Company
and its subsidiaries in each such country.  See "Item 1: Description of Business
State  Support  for the  Semiconductor  Industry."  Pursuant to the terms of the
Holding  Shareholders  Agreement,  SGS-THOMSON  Holding is not  permitted,  as a
matter of principle, to operate outside the field of semiconductor products. The
parties to the Holding Shareholders Agreement also undertake to refrain directly
or  indirectly  from  competing  with the  Company in the area of  semiconductor
products,  subject to certain exceptions, and to offer the Company opportunities
to commercialize or invest in any  semiconductor  product  developments by them.
Any financing or capital  provided by the parties to SGS-THOMSON  Holding or the
Company is  intended to be provided  pro rata based on the  parties'  respective
shareholdings in SGS-THOMSON Holding. In the Holding Shareholders Agreement, the
parties  state that it is of the utmost  importance  that the French and Italian
governments  grant sufficient and continuous  financial support for research and
development,  and  undertake to take  suitable  actions with a view to obtaining
such funding.

                  In the event of a disagreement that cannot be resolved between
the parties as to the conduct of the  business and actions  contemplated  by the
Holding Shareholders Agreement,

                                     - 47 -

<PAGE>



each party has the right to offer its  interest  in  SGS-THOMSON  Holding to the
other,  which then has the right to acquire,  or to have a third party  acquire,
such  interest.  If neither  party agrees to acquire or have  acquired the other
party's interest, then together the parties are obligated to try to find a third
party to acquire their collective interests, or such part thereof as is suitable
to change the  decision to terminate  the  agreement.  The Holding  Shareholders
Agreement  otherwise  terminates  in the event that one of the  parties  thereto
ceases to hold shares in SGS-THOMSON Holding.

                  The Company has been informed that the  shareholders  of FT2CI
as well as the  shareholders  of FT1CI (the majority  shareholder of FT2CI) have
also entered into separate  shareholder  agreements  that require the consent of
the  Board of  Directors  of each  such  company  to  certain  actions  taken by
SGS-THOMSON Holding, the Company and its subsidiaries.  These agreements provide
for the  management  of the  interests  of  CEA-Industrie,  France  Telecom  and
Thomson-CSF in SGS-THOMSON Holding and the Company,  with the object of defining
among them the  positions,  strategies  and  decisions to be taken by the French
Owner in SGS-THOMSON  Holding  affecting the management of SGS-THOMSON  Holding,
and the  Company and its  subsidiaries.  The Company is not a party to either of
these agreements.

                  In particular, the agreement between the shareholders of FT2CI
(FT1CI and  Thomson-CSF)  provides  that,  subject to the  fulfillment  of their
duties  as   Supervisory   Board   members   in   accordance   with  Dutch  law,
representatives of FT2CI on the Supervisory Board of SGS-THOMSON Holding and the
Company  can only take  positions  on  specified  matters  at  meetings  of such
Supervisory  Boards if such  positions are approved in advance by a majority (or
in certain  circumstances  three-quarters)  of the Board of  Directors  of FT2CI
(which  consists of nine  members,  six of whom are chosen by FT1CI and three of
whom are  chosen by  Thomson-CSF).  Such  matters  requiring  majority  approval
include:  (i) adoption and changes to long-term  business  plans of  SGS-THOMSON
Holding and the Company, (ii) approval of annual budgets prior to their adoption
by the Supervisory Board of the Company,  (iii) approval of the annual financial
statements of  SGS-THOMSON  Holding and the Company,  (iv)  modification  of the
articles  of  association   or  capital   increases  of  any  of  the  Company's
subsidiaries, (v) dissolution or sale of all or a substantial part of the assets
of any of the Company's subsidiaries,  (vi) any equity investment by SGS-THOMSON
Holding,  the Company or any of its  subsidiaries  in another  company or group,
(vii) any  agreement  between  SGS-THOMSON  Holding  and/or the  Company and any
shareholder  of FT1CI or FT2CI outside the ordinary  course of business,  (viii)
any technology transfer agreement allowing the Company to create new families of
technology or allowing  competitors access to major technologies of the Company,
and (ix) any major  modification  to the geographic  distribution  of industrial
sites of the  Company in Europe or the United  States.  Such  matters  requiring
three-quarters'  approval  include:  (i)  any  modification  of  the  amount  or
breakdown of the capital of SGS-THOMSON  Holding or the Company not constituting
a strategic alliance or any issuance or repurchase by SGS-THOMSON Holding or the
Company of their shares or any modification of the rights attached thereto, (ii)
any issue by  SGS-THOMSON  Holding or the Company of shares  giving  rights to a
minimum  number of shares of capital  stock,  with the effect of or leading to a
change in the ownership of share capital of SGS-THOMSON  Holding or the Company,
(iii) any distribution of profits of SGS-

                                     - 48 -

<PAGE>



THOMSON  Holding  and/or the Company,  (iv) any  liquidation  or  dissolution of
SGS-THOMSON  Holding or the Company, or any sale of all or a substantial part of
the  assets  of  either  company,  (v)  any  modification  of  the  articles  of
association of SGS-THOMSON  Holding or the Company,  and (vi) any sale of assets
or business likely to have a significant  negative  impact on the  shareholders'
equity of the Company. In addition, any modification of the Holding Shareholders
Agreement  requires  the  approval of  three-quarters  of the members of FT2CI's
Board of Directors.  The FT2CI  shareholders  agreement  provides that the three
representatives  of the French Owner on the  Supervisory  Boards of  SGS-THOMSON
Holding and the Company  shall be members of the FT2CI  Board of  Directors  and
will  consist  of  two  members  chosen  by  FT1CI  and  one  member  chosen  by
Thomson-CSF.  The FT2CI  shareholders  agreement  also  requires  the consent of
Thomson-CSF   for  the   transfer  of  any  shares  in  FT1CI.   Under   certain
circumstances,  FT1CI is  required to acquire  Thomson-CSF's  interest in FT2CI,
including if (i)  CEA-Industrie  and France Telecom no longer hold a majority of
FT1CI's capital, (ii) FT1CI no longer holds a majority of FT2CI's capital, (iii)
FT2CI and the  Italian  shareholders  together  no  longer  hold a  majority  of
SGS-THOMSON  Holding's  capital,  (iv)  SGS-THOMSON  Holding  no longer  holds a
majority of the  Company's  share  capital or (v) FT2CI  obtains more than a 50%
interest  in  SGS-THOMSON  Holding.  Under  the  FT2CI  shareholders  agreement,
Thomson-CSF  has  agreed  not  to  compete  with  the  Company  in the  area  of
non-military   semiconductor   products  until  February  15,  1998.  The  FT2CI
shareholders agreement terminates in 30 years or in the event one of the parties
ceases to hold shares in FT2CI.

                  The agreement between the shareholders of FT1CI (CEA-Industrie
and France  Telecom)  provides that the following  acts of FT2CI with respect to
SGS-THOMSON  Holding or the Company  must be approved by  three-quarters  of the
Board of Directors of FT1CI (which consists of five directors, three of whom are
chosen by CEA-Industrie  and two of whom are chosen by France Telecom):  (i) any
modification  of the  articles  of  association  of  SGS-THOMSON  Holding or the
Company,  (ii) any change in the capital of SGS-THOMSON  Holding or the Company,
or  issuance,  purchase or sale by  SGS-THOMSON  Holding or the Company of their
shares or rights  attached  thereto,  or the issuance of any  securities  giving
rights to a share in the  capital  or  profits  of  SGS-THOMSON  Holding  or the
Company,  (iii) the  liquidation or  dissolution  of SGS-THOMSON  Holding or the
Company or the sale of all or an important  and material part of the business or
assets of SGS-THOMSON  Holding or the Company  representing at least $10,000,000
of the  consolidated  shareholders'  equity  of the  Company,  (iv) any  merger,
acquisition,  partnership in interest or the execution of any material agreement
relating to  intellectual  property  rights,  in each case in which  SGS-THOMSON
Holding  or  the  Company  participates  or in  which  a  proposal  is  made  to
participate,  or the establishment by SGS-THOMSON  Holding or the Company of new
companies  or groups,  (v)  approval  of the  balance  sheets  and  consolidated
accounts of SGS-THOMSON Holding, the Company and its subsidiaries as well as the
policies of distributions of profits among the group, (vi) any agreement between
SGS-THOMSON  Holding and/or the Company and the  shareholders  of FT1CI which is
out of the  ordinary  course of  business,  (vii) the  approval  of, or material
modifications to, shareholders agreements with the Italian Owner with respect to
SGS-THOMSON  Holding or the Company and (viii) approval of strategic  multi-year
plans and annual  consolidated  budgets of SGS-THOMSON  Holding and the Company.
Transfers of shares in FT1CI to third parties are subject

                                     - 49 -

<PAGE>



to the  approval  of at least four  members of the Board of  Directors,  and are
subject to a right of first refusal of the other shareholders,  as well as other
provisions.  In the event CEA-Industrie  proposes to sell its interest in FT1CI,
in whole or in part,  France  Telecom has the right to require  the  acquiror to
purchase its interest as well. The FT1CI shareholders  agreement terminates upon
the termination of FT1CI.

                  As is the case with other  companies  controlled by the French
Government,  the French  Government  has appointed for each of FT1CI and FT2CI a
Commissaire  du  Gouvernement  and a Controleur  d'Etat.  Pursuant to decree No.
94-214,  dated March 10, 1994, these Government  representatives  have the right
(i) to attend any board  meeting of FT1CI and FT2CI,  and (ii) to veto any board
resolution or any decision of the president of FT1CI and FT2CI within 10 days of
such board meeting (or, if they have not attended the meeting, within 10 days of
the  receipt  of the  board  minutes  or the  notification  of such  president's
decision); such veto lapses if not confirmed within one month by the Ministry of
the Economy or the Ministry of Industry.  FT1CI and FT2CI are subject to certain
points of the arrete of August 9, 1953  pursuant  to which the  Ministry  of the
Economy and any other  relevant  ministries  (a) have the  authority  to approve
decisions  of FT1CI and FT2CI  relating  to budgets or  forecasts  of  revenues,
operating  expenses  and  capital  expenditures,  and  (b)  may  set  accounting
principles and rules of evaluation of fixed assets and amortization.

                  In connection  with the Initial Public  Offering,  SGS-THOMSON
Holding II and the Company entered into a registration rights agreement pursuant
to which the Company agreed that, upon request from SGS-THOMSON  Holding II, the
Company will file a registration  statement under the Securities Act of 1933, as
amended,  to register Common Shares held by SGS-THOMSON Holding II, subject to a
maximum  number of five requests in total as well as a maximum of one request in
any twelve-month period.  Subject to certain conditions,  the Company will grant
SGS-THOMSON   Holding  II  the  right  to  include  its  Common  Shares  in  any
registration  statements  covering  offerings  of Common  Shares by the Company.
SGS-THOMSON  Holding  II will pay a  portion  of the costs of any  requested  or
incidental  registered offering based upon its proportion of the total number of
Common Shares being registered,  except that SGS-THOMSON Holding II will pay any
underwriting  commissions  relating  to  Common  Shares  that it  sells  in such
offerings  and any fees and  expenses of its  separate  advisors,  if any.  Such
registration  rights  agreement  will terminate upon the earlier of December 15,
2004 and such time as  SGS-THOMSON  Holding II and its  affiliates own less than
10% of the Company's outstanding Common Shares.

                  The Company has been informed by SGS-THOMSON  Holding II that,
although  there may be  additional  offering  by  SGS-THOMSON  Holding II of its
shares in the Company,  SGS-THOMSON Holding II does not currently have any plans
to reduce its  ownership  interest  to less than a  controlling  interest in the
Company for the  foreseeable  future.  The timing and size of any future primary
and  secondary  offerings  will depend upon a variety of factors,  including  in
particular market conditions.


                                     - 50 -

<PAGE>



                  The French and Italian  shareholders  of  SGS-THOMSON  Holding
have agreed  that they will  continue  to manage  their  interest in the Company
through  SGS-THOMSON  Holding at least until the end of 1996 or early 1997,  and
accordingly,  for so long as they hold their  interest in  SGS-THOMSON  Holding,
they have undertaken (i) to jointly hold 100% of SGS-THOMSON  Holding's  capital
and voting rights, (ii) to maintain equality between the interests of the French
and Italian  shareholders,  (iii) to ensure that SGS-THOMSON  Holding  maintains
more than 51% of the  Company's  share  capital and voting  rights,  and (iv) to
jointly exercise their decision-making powers and monitor strategies and actions
as part of SGS-THOMSON Holding's management bodies.


                        Item 5: Nature of Trading Market

General

                  The  Company's  Common Shares are listed on the New York Stock
Exchange, which is the principal trading market for the Common Shares, under the
symbol "STM" and on the Bourse de Paris.  Common  Shares are also quoted on SEAQ
International.

Trading Markets

                  The table  below sets  forth,  for the period  indicated,  the
reported high and low sales prices in U.S.  dollars for the Common Shares on the
New York Stock  Exchange and the high and low sales prices in French  francs for
the Common Shares on the Bourse de Paris.


                              New York Stock Exchange         Bourse de Paris
                              Price per Common Share      Price per Common Share
                              ----------------------      ----------------------

Calendar Period                  High         Low           High          Low
---------------                  ----         ---           ----          ---

1995
   First quarter...........    $32 1/2      $22 1/2       FRF160.0      FRF119.0
   Second quarter..........    $41 7/8      $29 3/4       FRF205.5      FRF142.0
   Third quarter...........    $57 1/2      $40 3/8       FRF288.0      FRF197.0
   Fourth quarter..........      $49        $40 3/8       FRF244.0      FRF201.0

1996
   First quarter...........    $41 1/3      $29 1/2       FRF211.9      FRF141.0
   Second quarter..........    $47 1/2      $34 2/3       FRF246.5      FRF175.5
   Third quarter...........    $49 4/5      $29 3/4       FRF258.0      FRF150.0
   Fourth quarter..........    $70 5/8      $44 1/3       FRF397.0      FRF228.0



                  At December 31, 1996,  there were  138,985,580  Common  Shares
issued and  outstanding,  of which  23,608,380 or 16.99% were  registered in the
Common Share registry maintained on the Company's behalf in New York.


                                     - 51 -

<PAGE>




   Item 6: Exchange Controls and Other Limitations Affecting Security Holders

None.


                                Item 7: Taxation

                  The following is a summary of certain tax  consequences of the
acquisition,  ownership and disposition of the Company's  Common Shares based on
tax laws of The  Netherlands  and the United  States as in effect on the date of
this annual  report on Form 20-F,  and is subject to changes in  Netherlands  or
U.S. law,  including changes that could have retroactive  effect.  The following
summary does not take into account or discuss the tax laws of any country  other
than The  Netherlands  or the United  States,  nor does it take into account the
individual circumstances of an investor.  Prospective investors in the Company's
Common Shares in all jurisdictions are advised to consult their own tax advisers
as to Netherlands, U.S. or other tax consequences of the purchase, ownership and
disposition of the Company's Common Shares.

Netherlands Taxation

                  The following  summary of Netherlands  tax  considerations  is
based on present Netherlands tax laws as interpreted under officially  published
case law. The  description  is limited to the tax  implications  for an owner of
Common Shares who is not, or is not deemed to be, a resident of The  Netherlands
for  purposes  of the  relevant  tax  codes  (a  "non-resident  Shareholder"  or
"Shareholder") and who owns less than 10% of the Company's Common Shares.

                  Dividend Withholding Tax

                  General. Dividends distributed by the Company are subject to a
withholding  tax  imposed  by The  Netherlands  at a rate  of,  generally,  25%.
Dividends  include  dividends  in  cash  or  in  kind,  constructive  dividends,
repayment of paid-in  capital not  recognized for  Netherlands  tax purposes and
liquidation  proceeds in excess of, for  Netherlands  tax  purposes,  recognized
paid-in  capital.  Stock  dividends are also subject to  withholding  tax on the
nominal  value  unless  sourced  out  of the  Company's  paid-in  share  premium
recognized for Netherlands tax purposes.

                  No  withholding  tax  applies  on the sale or  disposition  of
Common Shares to persons other than the Company and affiliates of the Company.

                  A  Shareholder  can be eligible for a reduction or a refund of
Netherlands  dividend  withholding tax under a tax convention which is in effect
between the country of residence of the  Shareholder  and The  Netherlands.  The
Netherlands  has concluded  such a convention  with,  among  others,  the United
States, Canada, Switzerland, Japan and all EC Member States except

                                     - 52 -

<PAGE>



Portugal.  Under all of those conventions,  Netherlands dividend withholding tax
is reduced to 15% or a lower rate.

                  U.S.  Shareholders.  Under the Tax  Convention of December 18,
1992,   concluded   between  the  United   States  and  The   Netherlands   (the
"Convention"),  the  withholding  tax on  dividends  paid  by the  Company  to a
resident of the United States (as defined in the  Convention) who is entitled to
the benefits of the  Convention  under Article 26 may be reduced to 15% pursuant
to Article 10 of the Convention.  Dividends paid by the Company to U.S.  pension
funds and U.S.  exempt  organizations  may be  eligible  for an  exemption  from
dividend withholding tax.

                  Relief/refund  Procedure.  If the 15% rate, or an exemption in
case  of  a  qualifying  U.S.  pension  fund,  is  applicable  pursuant  to  the
Convention, the Company is allowed to pay out a dividend under deduction of 15%,
or  respectively  without any  deduction,  if, at the payment date, the relevant
shareholders  have submitted the duly signed form IB 92 USA, which form includes
a banker's  affidavit.  Holders of Shares  through  DTC will  initially  receive
dividends  subject  to a  withholding  rate of  25%.  An  additional  10% of the
dividend will be paid to holders upon receipt by the dividend  disbursing  agent
of notification  from the Participants in DTC that such holders are eligible for
the reduced rate under the  Convention.  Only where the  applicant  has not been
able to claim full or partial relief at source,  will he be entitled to a refund
of the excess tax withheld. In that case he should mention in the Form IB 92 USA
the circumstances that prevented him from claiming relief at source.

                  Qualifying U.S. exempt  organizations  can only ask for a full
refund of the tax withheld by using the Form IB 95 USA, which form also includes
a banker's affidavit.

                  Income Tax and Corporate Income Tax

                  A non-resident individual or corporate Shareholder will not be
subject to Netherlands  income tax with respect to dividends  distributed by the
Company on the Common  Shares or with respect to capital  gains derived from the
sale or disposition of Common Shares in the Company, provided that:

                  (a) the non-resident Shareholder does not own a business which
is, in whole or in part,  carried  on  through a  permanent  establishment  or a
permanent  representative  in The  Netherlands  to which  or to whom the  Common
Shares are attributable;

                  (b) the  non-resident  Shareholder  does not have a direct  or
indirect  substantial or deemed substantial interest in the share capital of the
Company as defined in The  Netherlands tax code or, in the event the Shareholder
does have such a substantial interest, such interest is a business asset; and


                                     - 53 -

<PAGE>



                  (c) the non-resident Shareholder is not entitled to a share in
the profits of an enterprise  effectively  managed in The Netherlands other than
by way of securities or through an employment contract,  the Common Shares being
attributable to that enterprise.

                  In general terms, a substantial  interest in the share capital
of the Company does not exist if the Shareholder  alone or together with certain
relatives does not own, and has not owned in the preceding five years, one-third
or more of the nominal paid-in capital of any class of shares in the Company.

                  Net Wealth Tax

                  A  non-resident  individual  Shareholder  is  not  subject  to
Netherlands net wealth tax with respect to the Shares, provided that:

                  (a) the non-resident Shareholder does not own a business which
is, in whole or in part,  carried  on  through a  permanent  establishment  or a
permanent  representative  in The  Netherlands  to which  or to whom the  Common
Shares are attributable; and

                  (b) the non-resident Shareholder is not entitled to a share in
the profits of an enterprise  effectively  managed in The Netherlands other than
by way of securities or through an employment contract,  the Common Shares being
attributable to that enterprise.

                  Corporations are not subject to Netherlands net wealth tax.

                  Gift and Inheritance Tax

                  A gift or  inheritance  of Common  Shares from a  non-resident
Shareholder  will not be  subject to a  Netherlands  gift and  inheritance  tax,
provided that:

                  (a) the non-resident Shareholder does not own a business which
is, in whole or in part,  carried  on  through a  permanent  establishment  or a
permanent  representative  in The  Netherlands  to which  or to whom the  Common
Shares are attributable; and

                  (b) the non-resident Shareholder is not entitled to a share in
the profits of an enterprise  effectively  managed in The Netherlands other than
by way of securities or through an employment contract,  the Common Shares being
attributable to that enterprise.

United States Taxation

                  The following  discussion  addresses the U.S.  federal  income
taxation  of a  beneficial  owner  of the  Company's  Common  Shares  that is an
individual who is a citizen or resident of the United States,  or a corporation,
partnership  or other entity  created or organized  under the laws of the United
States or any other  state or  political  subdivision  thereof,  or an estate or
trust that is subject to U.S.  federal  income  taxation  without  regard to the
source of its

                                     - 54 -

<PAGE>



income (a "U.S. Investor").  The following summary does not address the U.S. tax
treatment of certain  types of U.S.  Investors  subject to special  rules (e.g.,
dealers in securities,  financial institutions,  U.S. Investors whose functional
currency is not the U.S.  dollar,  individual  retirement and other tax deferred
accounts,  life  insurance  companies,  tax-exempt  organizations  and investors
owning 10% or more of the Common Shares) or of other U.S. federal taxes, such as
U.S.  federal  estate  tax,  or of state or local  tax  laws.  Prospective  U.S.
Investors  are advised to consult  their own tax advisers to  ascertain  the tax
effect of ownership and  disposition  of the Common Shares with respect to their
particular circumstances.

                  Taxation of Dividends

                  To the extent paid out of current or accumulated  earnings and
profits of the Company,  as  determined  for United  States  federal  income tax
purposes,  the gross amount of dividends  (including  the amount of  Netherlands
taxes  withheld  therefrom)  paid with respect to the Common  Shares (other than
certain  pro rata  distributions  of capital  stock of the  Company or rights to
subscribe  for shares of capital  stock of the Company)  will be included in the
gross income of a U.S. Investor as ordinary foreign source income on the date of
receipt.  For  foreign  tax  credit  purposes,  such  dividends  will  generally
constitute  "passive  income",  or  in  the  case  of  certain  U.S.  Investors,
"financial  services  income".  Such  dividends  will  not be  eligible  for the
dividends  received  deduction  allowed  to  United  States  corporations.   Any
distribution  that exceeds the Company's  current and  accumulated  earnings and
profits will be treated as a  nontaxable  return of capital to the extent of the
U.S. Investor's tax basis in the Common Shares and thereafter as a capital gain.
The amount of any cash distribution paid in any currency other than U.S. dollars
("foreign  currency")  will be equal to the U.S.  dollar  value of such  foreign
currency  distribution  on the date of  receipt,  regardless  of  whether a U.S.
Investor  converts  the  payment  into  U.S.  dollars.  Gain  or  loss,  if any,
recognized  by a U.S.  Investor  on the  sale or  disposition  of  such  foreign
currency will be U.S. source ordinary income or loss.

                  Netherlands  withholding  tax imposed on  dividends  paid to a
U.S.  Investor by the Company at the Convention rate of 15% will be treated as a
foreign income tax eligible, subject to certain limitations,  for credit against
such U.S. Investor's U.S. federal tax liability.

                  Taxation on Sale or Exchange

                  A U.S. Investor will generally  recognize a gain or a loss for
U.S. federal income tax purposes on the sale,  exchange or other  disposition of
Common Shares equal to the  difference,  if any,  between the amount realized on
such sale,  exchange or other disposition and the U.S.  Investor's  adjusted tax
basis in the Common Shares. In general, a U.S.  Investor's adjusted tax basis in
Common  Shares  will be equal to the amount paid by the U.S.  Investor  for such
Common  Shares.  Such gain or loss will be  capital  gain or loss if the  Common
Shares are held as a capital asset and will be long-term capital gain or loss if
at the time of sale,  exchange or other  disposition the Common Shares have been
held for more than one year. Gain, if any, will generally be U.S. source income.


                                     - 55 -

<PAGE>



Backup Withholding and Information Reporting

                  In  general,  information  reporting  will  apply  to  certain
dividends  paid on the Common  Shares and to the  proceeds of sale of the Common
Shares paid to U.S.  Investors  other than certain  exempt  recipients  (such as
corporations).  A 31% backup  withholding  tax may apply to such payments if the
U.S.  Investor fails to provide an accurate  taxpayer  identification  number or
certification  of exempt status or fails to report in full dividend and interest
income.


                  Item 8: Selected Consolidated Financial Data

                  Reference  is  made to the  information  appearing  under  the
caption  "Selected  Consolidated  Financial Data" on page 29 of the Registrant's
1996 Annual Report to Shareholders,  which information is hereby incorporated by
reference.


       Item 9: Management's Discussion and Analysis of Financial Condition
                            and Results of Operations

                  Reference  is  made to the  information  appearing  under  the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" on pages 30 through 40 of the Registrant's  1996 Annual Report to
Shareholders, which information is hereby incorporated by reference.


                  Item 10: Directors and Officers of Registrant

Supervisory Board

                  The  management of the Company is entrusted to the  Management
Board under the supervision of the  Supervisory  Board.  The  Supervisory  Board
advises the Management  Board and is responsible  for  supervising  the policies
pursued by the Management Board and the general course of affairs of the Company
and its business.  In fulfilling  their duties,  the members of the  Supervisory
Board must serve the interests of the Company and its business.

                  The Supervisory  Board shall consist of such number of members
as  resolved  by the  general  meeting  of  shareholders  upon  proposal  of the
Supervisory Board, with a minimum of six members. The members of the Supervisory
Board are  appointed  upon  proposal  of the  Supervisory  Board by the  general
shareholders'  meeting  by a majority  of the votes  cast at a meeting  where at
least one-half of the outstanding  share capital is present or  represented.  On
June 24, 1996 the annual general meeting of  shareholders  approved a resolution
of the Supervisory  Board to increase the size of the Supervisory Board from six
to  seven  members  and  appointed  Robert  M.  White  as a new  member  of  the
Supervisory  Board. The Supervisory  Board intends to propose a further increase
in the size of the

                                     - 56 -

<PAGE>



Supervisory  Board to up to eight members,  two of which would not be affiliated
with the Company or its direct or indirect shareholders.  SGS-THOMSON Holding II
has informed the Company that it intends to concur with this proposal.

                  Pursuant to various  shareholders  agreements,  the members of
the  Supervisory  Board of the Company are  required  to include  three  members
designated by the French  shareholders  from the Board of Directors of FT2CI (of
whom  Thomson-CSF  has the right to appoint one member and FTlCI,  a corporation
owned  by  CEA-Industrie  and  France  Telecom,  has the  right to  appoint  two
members),  and three  members  designated by the Italian  shareholders  (of whom
I.R.I.  has the right to appoint two members and  Comitato  SIR has the right to
appoint  one  member).  See  Item  4:  "Control  of  Registrant  --  Shareholder
Agreements".

                  The members of the Supervisory  Board shall appoint a chairman
and vice  chairman  of the  Supervisory  Board  from  among the  members  of the
Supervisory  Board (with approval of at least  three-quarters  of the members of
the  Supervisory  Board)  and may  appoint  one or more  members  as a  delegate
supervisory  director  to  communicate  on a regular  basis with the  Management
Board.  Resolutions  of the  Supervisory  Board require the approval of at least
three-quarters  of its members.  The Supervisory Board must meet upon request by
two or more of its members or by the Management Board. The Supervisory Board has
adopted  internal  regulations to clarify the manner by which it carries out the
supervisory duties imposed upon it by law, the Company's Articles of Association
and resolutions of the  shareholders and the Supervisory  Board itself.  By such
resolution the  Supervisory  Board:  (x) authorized (i) the  establishment  of a
secretariat headed by an individual  approved by it and appointed for a one-year
renewable  term (a) to assist the Chairman and Vice Chairman of the  Supervisory
Board in the operations of the board, (b) to implement and oversee the execution
within the  Company of  decisions  adopted by the  Supervisory  Board and (c) to
cooperate in and  contribute to the execution of the functions of the designated
Secretary  and  Assistant  Secretary  of the  Supervisory  Board,  (ii)  (a) the
possibility  of the  appointment by each member of the  Supervisory  Board of an
assistant and (b) the  appointment by such board of two  controllers to exercise
operational  and financial  control over the operations of the Company who, with
assistants,  will  also  review  operation  reports  and the  implementation  of
Supervisory  Board  decisions,  and (iii) the  establishment  by the Supervisory
Board  of  advisory  committees;  and  (y)  established  the  procedure  for the
preparation of  Supervisory  Board  resolutions  and the setting of such board's
calendar.

                  Members of the Supervisory  Board must retire no later than at
the ordinary general meeting of shareholders  held after a period of three years
following their appointment,  but may be reelected.  A member of the Supervisory
Board shall retire at the ordinary  general meeting of shareholders  held in the
year  in  which  he  reaches  the age  prescribed  by law  for  retirement  of a
supervisory  director.  Members of the  Supervisory  Board may be  suspended  or
dismissed by the general meeting of shareholders. The Supervisory Board may make
a  proposal  to the  general  meeting  of  shareholders  for the  suspension  or
dismissal of one or more of its members.  The members of the  Supervisory  Board
may receive compensation if authorized by the general meeting of shareholders.

                  The  shareholders  agreement  between the consortium of French
shareholders  and the consortium of Italian  shareholders,  as  shareholders  of
SGS-THOMSON Holding, also

                                     - 57 -

<PAGE>



includes certain  provisions  requiring the approval of the Supervisory Board of
SGS-THOMSON Holding for certain actions by SGS-THOMSON  Holding, the Company and
its subsidiaries. In addition, pursuant to certain other shareholders agreements
among the  consortium  of French  shareholders  and a decree  issued by  certain
Ministries of The Republic of France, the approval by members of the Supervisory
Board appointed by the French shareholders of certain actions to be taken by the
Company or its  subsidiaries  requires the approval of the Board of Directors of
certain  companies in the consortium of French  shareholders and is subject to a
veto by certain  Ministries of The Republic of France.  See Item 1: "Description
of Business --  Competition"  and Item 4: "Control of  Registrant  --Shareholder
Agreements".  These requirements for the prior approval of various actions to be
taken by the  Company  and its  subsidiaries  may  give  rise to a  conflict  of
interest  between the interests of the Company and the  individual  shareholders
approving  such  actions,  and may  result  in a  delay  in the  ability  of the
Management  Board to  respond  as quickly  as may be  necessary  in the  rapidly
changing  environment of the  semiconductor  industry.  Such approval process is
subject to the  provisions  of Dutch law  requiring  members of the  Supervisory
Board to act independently in the supervision of the management of the Company.

                  As of the date of this report,  the members of the Supervisory
Board were:

      Name                     Position            Year Appointed       Age
      ----                     --------            --------------       ---

     Bruno Steve               Chairman                 1989            55
     Jean-Pierre Noblanc       Vice Chairman            1994            58
     Remy Dullieux             Member                   1993            46
     Riccardo Gallo            Member                   1997            53
     Alessandro Ovi            Member                   1994            53
     Henri Starck              Member                   1987            68
     Robert M. White           Member                   1996            58

                  Bruno  Steve  has been a member of the  Company's  Supervisory
Board since 1989. He served as Vice Chairman of the Supervisory  Board from 1989
to July 1990.  From July 1990 to March 1993, Mr. Steve served as Chairman of the
Supervisory  Board.  He has been with  I.R.I.,  Finmeccanica's  parent  company,
Finmeccanica and other affiliates of I.R.I. in various senior positions for over
15 years. He has been the Chief Operating Officer of Finmeccanica since 1988 and
Chief  Executive  Officer  since May  1995.  He was  Senior  Vice  President  of
Planning,  Finance and Control of I.R.I.  from 1984 to 1988.  Prior to 1984, Mr.
Steve served in several key executive positions at STET, I.R.I.s holding company
for the telecommunications sector.

                  Jean-Pierre Noblanc has been a member of the Supervisory Board
since 1994 and its Chairman until June 1996.  Mr.  Noblanc is presently  General
Manager  of the  Components  Sector  of CEA  Industrie.  Prior  to  joining  CEA
Industrie, Mr. Noblanc served at CNET, the Research Center of France Telecom, as
Director of the Applied  Research Center of Bagneux and of the  Microelectronics
Center of Grenoble, successively. Mr. Noblanc holds a degree in engineering from
the  Ecole  Superieure  d'Electricite  and a  doctoral  degree  in the  Physical
Sciences from the University of Paris. Mr. Noblanc is an Associate Member of the
Committee on  Applications  of the French  Academy of Sciences and a director of
Thomson S.A.  Mr.  Noblanc also serves on the board of Pixtech Inc. and Picogiga
S.A.

                                     - 58 -

<PAGE>




                  Remy Dullieux has been a member of the Supervisory Board since
1993. He is a graduate of the Ecole Polytechnique. Since June 1996, Mr. Dullieux
has served as a France  Telecom  Executive  Manager for the Northern and Eastern
areas of France.  From 1991 to June 1996, Mr. Dullieux served as Group Executive
Vice President for Strategic Procurement and Development of France Telecom. From
1985 to 1988, Mr. Dullieux served as Regional Manager of Creteil.

                  Alessandro  Ovi has been a  member  of the  Supervisory  Board
since  1994.  He  received a doctoral  degree in  Nuclear  Engineering  from the
Politecnico of Milan and a master degree of science in Operations  Research from
Massachusetts  Institute  of  Technology.  He is currently  the Chief  Executive
Officer of Tecnitel S.p.A., a subsidiary of STET, and President of MEI. Prior to
joining Tecnitel S.p.A.,  Mr. Ovi was the Senior Vice President of International
Affairs  and  Communications  at I.R.I.  He  currently  serves on the  boards of
Alitalia,  STET, Italtel, a STET and Siemens Company, Sirti, Zambon and Carnegie
Mellon University.

                  Riccardo Gallo was appointed to the Supervisory Board in 1997.
He is Associate Professor of Industrial  Economics at the Engineering Faculty of
"La Sapienza" University in Rome. He is also a member of Comitato Sir. From 1982
to 1991 he served as  General  Director  at the  Italian  Ministry  of  National
Budget.  At the beginning of the 1990s he served as Vice  Chairman of I.R.I.  In
1994,  he was  appointed  by the Italian  Minister of Industry as  Extraordinary
Commissioner of Fidia, a research-oriented pharmaceutical company.

                  Henri Starck has been a member of the Supervisory  Board since
1987. Mr. Starck served as Chairman and Vice Chairman of the  Supervisory  Board
from June 1987 to June 1990 and from June 1990 to  January  1993,  respectively,
during which time he was General Manager of Thomson-CSF. Mr. Starck is currently
an adviser to the President of Thomson-CSF and a director of Sextant  Avionique.
Mr.  Starck is a graduate  of the Ecole  Polytechnique  and the Ecole  Nationale
Superieure du Genie Maritime.

                  Robert M. White was appointed to the Supervisory Board in June
1996. Mr. White is currently a Professor and Department  Head at Carnegie Mellon
University  and serves as a member of several  academic  and  corporate  boards,
including those of Ontrack Computer Systems,  Inc., Zilog, Inc.,  Foundation for
the  National  Medals of Science  and  Technology,  Industrial  Advisory  Board,
Lawrence Livermore National Laboratory and NEA Academic.  From 1990 to 1993, Mr.
White served as Under  Secretary of Commerce for Technology in the United States
Government.  Prior to 1990, Mr. White served in several key executive  positions
at Xerox  Corporation,  Control Data Corporation and MCC. He received a doctoral
degree in  Physics  from  Stanford  University  and  graduated  with a degree in
Science from the Massachusetts Institute of Technology.  Mr. White has published
four books, three of which have been translated into foreign languages, and over
one hundred articles in the field of Physics.


                                     - 59 -

<PAGE>



Management Board

                  The  management of the Company is entrusted to the  Management
Board under the  supervision  of the  Supervisory  Board.  Under the Articles of
Association,  the  Management  Board shall  obtain  prior  approval (x) from the
Supervisory Board for (i) all proposals to be submitted to a vote at the general
meeting of  shareholders,  (ii) the formation of all  companies,  acquisition or
sale of any  participation,  and conclusion of any cooperation and participation
agreement,  (iii) all  pluriannual  plans of the  Company and the budget for the
first coming year,  covering  investment  policy,  policy regarding research and
development,  as well as commercial  policy and  objectives,  general  financial
policy,  and  policy  regarding  personnel,  and (iv)  all  acts,  decisions  or
operations  covered by the foregoing and constituting a significant  change with
respect to decisions  already  taken by the  Supervisory  Board and (y) from the
general meeting of shareholders for decisions relating to (i) the sale of all or
of an important part of the Company's assets or concerns,  and (ii) all mergers,
acquisitions  or joint  ventures  which the  Company  wishes to enter  into.  In
addition,  under the Articles of Association,  the Supervisory Board may specify
by resolution  certain  actions by the  Management  Board that require its prior
approval.  Following  the  adoption  of such a  resolution,  the  actions by the
Management  Board  with  respect  to the  Company  and all  direct  or  indirect
subsidiaries of the Company requiring such prior approval include the following:
(i)  modification of its Articles of Association;  (ii) change in its authorized
share capital,  issue,  acquisition or disposal of its own shares, change in any
shareholder  rights or issue of any  instruments  granting  an  interest  in its
capital or profits;  (iii)  liquidation or disposal of all or a substantial  and
material  part of its assets or any shares it holds in any of its  subsidiaries;
(iv) entering into any merger,  acquisition or joint venture  agreement (and, if
substantial and material,  any agreement  relating to intellectual  property) or
formation of a new company;  (v) approval of such company's  draft  consolidated
balance  sheets and  financial  statements  or any profit  distribution  by such
company;  (vi) entering  into any  agreement  with any of the direct or indirect
French or Italian Owners outside the normal course of business; (vii) submission
of documents reporting on (a) approved policy, expected progress and results and
(b) strategic  long-term  business plans and consolidated  annual budgets or any
modifications to such; (viii) preparation of long-term business plans and annual
budgets;  (ix) adoption and  implementation of such long-term business plans and
annual  budgets;  (x) approval of all  operations  outside the normal  course of
business,  including  operations  already provided for in the annual budget; and
(xi) approval of the quarterly,  semi-annual and annual  consolidated  financial
statements  prepared in  accordance  with  internationally  accepted  accounting
principles. Such resolution also requires that the Management Board obtain prior
approval from the  Supervisory  Board for (i) the  appointment of the members of
the  statutory  management,  administration  and control  bodies of  SGS-THOMSON
Microelectronics  S.A. and  SGS-THOMSON  Microelectronics  s.r.l.;  and (ii) the
nomination of the statutory management, administration and control bodies of the
Company  and  each of the  Company's  other  direct  and  indirect  subsidiaries
followed  by   confirmation   to  the   Supervisory   Board  of  such  nominees'
appointments.  The general  meeting of  shareholders  may also  specify  certain
actions  of  the  Management  Board  that  require  shareholder  approval.   The
shareholders  have resolved that the  Management  Board must obtain  shareholder
approval  prior to: (i) the sale of all or of an important part of the Company's
assets and concerns and (ii) all mergers,  acquisitions  or joint ventures which
the  Company  wishes to enter  into.  See "Item 1:  Description  of  Business --
Competition" and "Item 13: Interest of Management in Certain Transactions".

                                     - 60 -

<PAGE>




                  The  Management  Board shall consist of such number of members
as resolved  by the general  meeting of  shareholders  upon the  proposal of the
Supervisory  Board.  The members of the Management Board are appointed for three
year terms upon proposal by the Supervisory  Board by the general  shareholders'
meeting by a majority of the votes cast at a meeting where at least  one-half of
the outstanding  share capital is present or represented.  The Supervisory Board
appoints  one of the  members  of the  Management  Board to be  chairman  of the
Management Board (upon approval of at least three-quarters of the members of the
Supervisory Board).  Resolutions of the Management Board require the approval of
a majority of its members.  Mr. Pasquale Pistorio,  the Company's  President and
Chief Executive Officer, is currently the sole member of the Management Board.

                  The general meeting of shareholders may suspend or dismiss one
or more members of the Management  Board at a meeting at which at least one-half
of the  outstanding  share  capital  is  present  or  represented.  No quorum is
required if a suspension or dismissal is proposed by the Supervisory  Board. The
Supervisory  Board may suspend  members of the Management  Board,  but a general
meeting  of  shareholders  must be  convened  within  three  months  after  such
suspension  to confirm or reject the  suspension.  The  Supervisory  Board shall
appoint  one or more  persons  who shall at any time in the event of  absence or
inability  to act of all the  members  of the  Management  Board be  temporarily
responsible for the management of the Company.  The Supervisory Board determines
the  compensation and other terms and conditions of employment of the members of
the Management Board.

Executive Officers

                  As a legal  matter,  the  executive  officers  of the  Company
support the Management Board in its management of the Company. In practice,  the
executive  officers and the Management Board share management  responsibilities.
The  Company  is  organized  in a matrix  structure  with  geographical  regions
interacting with product divisions,  bringing all levels of management closer to
the customer and  facilitating  communication  among  research and  development,
production, marketing and sales organizations.


                                     - 61 -

<PAGE>



   The executive officers of the Company are (as of the date of this report):
<TABLE>
<CAPTION>
                                                                           Years in
                                                           Years with    Semiconductor
         Name                      Position              the Company(1)    Industry      Age
         ----                      --------              --------------    --------      ---

<S>                      <C>                                   <C>            <C>        <C>
Pasquale Pistorio        President and Chief Executive         17             33         61
                           Officer
Laurent Bosson           Corporate Vice President,             14             14         54
                           Front-end Manufacturing
                           and Americas Region
Carlo Bozotti            Corporate Vice President,             20             20         44
                           European and
                           Headquarters Region
Salvatore Castorina      Corporate Vice President,             15             31         61
                           Discrete and Standard
                           ICs Group
Murray Duffin            Corporate Vice President,             10             37         63
                           Total Quality Management
Alain Dutheil            Corporate Vice President,             14             27         52
                           Strategic Planning and
                           Human Resources
Ennio Filauro            Corporate Vice President,             28             37         64
                           Memory Products Group
Philippe Geyres          Corporate Vice President,             13             21         44
                           Programmable Products Group
Maurizio Ghirga          Corporate Vice President, Chief       14             14         59
                           Financial Officer
Jean-Claude Marquet      Corporate Vice President              11             30         55
                           Asia Pacific Region
Pier Angelo Martinotti   Corporate Vice President, New         16             29         56
                           Ventures Group
Joel Monnier             Corporate Vice President, Central     14             23         52
                           Research and Development
Piero Mosconi            Corporate Vice President,             33             33         57
                           Treasurer
Aldo Romano              Corporate Vice President,             31             31         56
                           Dedicated Products Group
Giordano Seragnoli       Corporate Vice President,             32             34         60
                           Back-end Manufacturing
                           and Subsystems
Keizo Shibata            Corporate Vice President,              5             32         60
                           Japan Region

<FN>
------------------
(1)     Including years with Thomson Semiconducteurs or SGS Microelettronica.
</FN>
</TABLE>

                  Pasquale  Pistorio has more than 30 years of experience in the
semiconductor  industry.  After  graduating in Electrical  Engineering  from the
Polytechnical  University  of Turin in  1963,  he  started  his  career  selling
Motorola  products.  Mr. Pistorio joined Motorola in 1967,  becoming Director of
World Marketing in 1977 and General Manager of the  International  Semiconductor
Division in 1978.  Mr.  Pistorio  joined SGS  Microelettronica  as President and
Chief Executive Officer in 1980 and became President and Chief Executive Officer
of the Company upon its formation in 1987.

                  Laurent Bosson has served as Corporate Vice President, Central
Manufacturing  and VLSI  Fads  since  1989 and in 1992 he was  given  additional
responsibility  as  President  and  Chief  Executive  Officer  of the  Company's
operations in the Americas.  Mr. Bosson  received a Masters  degree in Chemistry
from the University of Dijon in 1969. He joined Thomson-

                                     - 62 -

<PAGE>



CSF in 1964 and has held several positions in engineering and manufacturing.  In
1982,  Mr.  Bosson  was  appointed  General  Manager  of the Tours  and  Alencon
facilities of Thomson Semiconducteurs.  In 1985, he joined the French subsidiary
of SGS  Microelettronica as General Manager of the Rennes,  France manufacturing
facility.

                  Carlo Bozotti has served as Corporate Vice  President,  Europe
and Headquarters  Region since 1994. Mr. Bozotti joined SGS  Microelettronica in
1977 after  graduating in Electronic  Engineering  from the University of Pavia.
Mr. Bozotti served as Product  Manager for the Industrial,  Computer  Peripheral
and Telecom  divisions and as Product  Manager for the Monolithic  Microsystems'
Telecom business unit from 1986 to 1987. He was appointed  Director of Corporate
Strategic  Marketing  and Key Accounts for the  Headquarters  Region in 1988 and
became Vice President, Marketing and Sales, Americas Division in 1991.

                  Salvatore  Castorina has served as Corporate  Vice  President,
Discrete  and  Standard  ICs  Group  since  1989.  Mr.  Castorina  received  his
engineering degree in Electronics from the Polytechnical University of Turin and
began his career as a teacher of electrical and electronic technologies prior to
joining Thomson-CSF in Milan in 1965. In 1967, he joined Motorola Semiconductors
and held various positions in sales and marketing. In 1981, Mr. Castorina joined
the  Company as  Transistor  General  Manager in Catania  and became the General
Manager of the Company's Discrete Division in 1989.

                  Murray Duffin has served as Corporate  Vice  President,  Total
Quality  Management  since 1992.  Mr. Duffin  graduated  from the  University of
Manitoba in Electrical  Engineering and later studied  Semiconductor Physics and
Computer  Logic at the  University of California Los Angeles and received an MBA
from Arizona State  University.  Mr. Duffin  started his career in 1959 as an RF
Applications  Engineer and thereafter held numerous managerial  positions within
most of the departments at TRW and Motorola  Semiconductors prior to joining the
Company in 1986.  From 1986 to 1992, Mr. Duffin was in charge of the quality and
service organization.

                  Alain  Dutheil  has  served  as  Corporate   Vice   President,
Strategic  Planning and Human Resources since 1994 and 1992,  respectively.  Mr.
Dutheil is also President of the Company's French  subsidiary,  SGS-THOMSON S.A.
After   graduating  in  Electrical   Engineering   from  the  Ecole   Superieure
d'Ingenieurs de Marseilles  (ESIM), Mr. Dutheil joined Texas Instruments in 1969
as a Production Engineer,  becoming Director for Discrete Products in France and
Human Resources Director for Texas  Instruments,  France in 1980 and Director of
Operations  for  Texas   Instruments,   Portugal  in  1982.  He  joined  Thomson
Semiconducteurs in 1983 as General Manager of a plant in Aix-en-Provence, France
and then became General  Manager of the Company's  Discrete  Products  Division.
From  1989 to 1994,  Mr.  Dutheil  served as  Director  for  Worldwide  Back-end
Manufacturing  in  addition to serving as  Corporate  Vice  President  for Human
Resources from 1992 until the present.

                  Ennio Filauro has served as Corporate Vice President,  General
Manager Memory  Products  Group since 1990.  After  graduating  with a degree in
Electrical  Engineering  from the  University of Palermo,  Mr. Filauro began his
career in 1958 as a member  of the  Engineering  and  Quality  Control  Group of
Raytheon  Italia.  In 1968, Mr. Filauro joined SGS  Microelettronica  as head of
Quality Control Services at the research and development  center in Castelletto,
and was subsequently responsible for the Central Production Direction of the

                                     - 63 -

<PAGE>



facilities in Rennes, Falkirk and Catania. From 1974 to 1979, Mr. Filauro served
as General Manager of the facility in Catania, and thereafter served as Director
of the Corporate  Engineering  Group in Agrate. He became General Manager of the
VLSI Division of SGS Microelettronica in 1985.

                  Philippe  Geyres  has  served  as  Corporate  Vice  President,
General  Manager  Programmable  Products Group since 1990. Mr. Geyres  graduated
from the Ecole  Polytechnique  in 1973 and began his  career  with IBM in France
before joining  Schlumberger Group in 1980 as Data Processing  Director.  He was
subsequently   appointed  Deputy  Director  of  the  IC  Division  at  Fairchild
Semiconductors. Mr. Geyres joined Thomson Semiconducteurs in 1983 as Director of
the Bipolar Integrated  Circuits Division.  He was appointed  Strategic Programs
Director in 1987,  and later the same year,  became  Corporate  Vice  President,
Strategic Planning of the Company.

                  Maurizio  Ghirga  became   Corporate  Vice  President,   Chief
Financial Officer in 1987, after having served as chief financial  controller of
SGS   Microelettronica   since  1983.  Mr.  Ghirga  has  a  degree  in  Business
Administration from the University of Genoa. He spent more than ten years of his
career in various  financial  capacities at ESSO Company (an Exxon subsidiary in
Italy) and prior to joining the Company was  Financial  Controller of one of the
largest refinery plants in Italy and of an ESSO chemical subsidiary.

                  Jean-Claude  Marquet has served as Corporate  Vice  President,
Asia  Pacific  Region  since July  1995.  After  graduating  in  Electrical  and
Electronics  Engineering  from the Ecole Breguet  Paris,  Mr.  Marquet began his
career in the National French Research Organisation and later joined Alcatel. In
1969, he joined Philips  Components.  He remained at Philips until 1978, when he
joined Ericsson,  eventually becoming President of Ericsson's French operations.
In 1985, Mr. Marquet joined Thomson  Semiconducteurs as Vice President Sales and
Marketing,  France.  Thereafter,  Mr. Marquet served as Vice President Sales and
Marketing for France and Benelux,  and Vice  President Asia Pacific and Director
of Sales and Marketing for the region.

                  Pier Angelo Martinotti has served as Corporate Vice President,
General  Manager  New  Ventures  Group  since  1994.  A graduate  in  Electronic
Engineering from the Polytechnical University of Turin, Mr. Martinotti began his
career at the Company in 1965 as an Application and Marketing Engineer. In 1968,
he joined Motorola  Semiconductors in the area of strategic marketing in Europe,
and in 1975 became the Marketing (Sales) Director for Europe. From 1986 to 1990,
Mr. Martinotti was Chief Executive Officer of Innovative Silicon  Technology,  a
former  subsidiary of the Company.  Mr.  Martinotti  was  appointed  Director of
Corporate Strategic Planning in 1990.

                  Joel Monnier has served as Corporate Vice President,  Director
of Central  Research and Development  since 1989. After graduating in Electrical
Engineering  from  the  Institut  National  Polytechnique  of  Grenoble,   Ecole
Nationale  Superieure  de Radio  Electricite,  Mr.  Monnier  obtained a doctoral
degree  in   microelectronics   at  LETI/CENG.   He  began  his  career  in  the
semiconductor  industry  in 1968 as a  researcher  with CENG,  and  subsequently
joined  the  research  and  development  laboratories  of Texas  Instruments  in
Villeneuve Loubet,  France and Houston,  Texas,  eventually becoming Engineering
Manager  and  Operation  Manager  at  Texas  Instruments.   Mr.  Monnier  joined
Thomson-CSF in 1983 as head of the

                                     - 64 -

<PAGE>



research and  manufacturing  unit of Thomson  Semiconducteurs.  In 1987,  he was
appointed Vice President and Corporate Director of Manufacturing.

                  Piero  Mosconi  has  served  as  Corporate   Vice   President,
Treasurer  since 1987.  After  graduating in accounting  from Monza in 1960, Mr.
Mosconi joined the faculty at the  University of Milan.  Mr. Mosconi worked with
an Italian  bank  before  joining  the Foreign  Subsidiaries  Department  at SGS
Microelettronica in 1964 and becoming Corporate Director of Finance in 1980.

                  Aldo Romano has served as Corporate  Vice  President,  General
Manager  Dedicated  Products  Group  since  1987.  Mr.  Romano is also  Managing
Director  of the  Company's  Italian  subsidiary,  SGS-THOMSON  Microelectronics
s.r.l.  A graduate in Electronic  Engineering  from the  University of Padova in
1963,  Mr.  Romano joined SGS  Microelettronica  in 1965 as a designer of linear
ICs,  becoming  head of the  linear  IC  design  laboratory  in 1968 and head of
Marketing and Applications in 1976. Mr. Romano became Director of the Bipolar IC
Division (which has evolved into the Dedicated Products Group) in 1980.

                  Giordano  Seragnoli  has served as Corporate  Vice  President,
General  Manager  Subsystems  since 1987 and since 1994,  Director for Worldwide
Back-end  Manufacturing.  After  graduating in Electrical  Engineering  from the
University of Bologna,  Mr. Seragnoli joined the Thomson Group as RF Application
Designer  in 1962 and  joined  SGS  Microelettronica  in 1965.  Thereafter,  Mr.
Seragnoli served in various capacities within the Company,  including  Strategic
Marketing Manager and Subsystems  Division Manager,  Subsystems Division Manager
(Agrate), Technical Facilities Manager, Subsystems Division Manager and Back-End
Manager.

                  Keizo  Shibata  has served as  Corporate  Vice  President  and
President of the Company's  Japanese  subsidiary,  SGS-THOMSON  Microelectronics
K.K.,  since  1992.  Mr.  Shibata  obtained  bachelors  and  masters  degrees in
Engineering  from  Osaka  University  and  has 31  years  of  experience  in the
semiconductor industry.  Prior to joining SGS-THOMSON,  Mr. Shibata was employed
with Toshiba  Corporation since 1964 in various  capacities.  From 1987 to 1988,
Mr. Shibata served as Chairman of both World  Semiconductor Trade Statistics and
the Trade Policy Committee of the Electric Industry Association of Japan.

                  As is  common in the  semiconductor  industry,  the  Company's
success depends to a significant extent upon, among other factors, the continued
service of its key senior executives and research and development,  engineering,
marketing, sales, manufacturing, support and other personnel, and on its ability
to continue to attract, retain and motivate qualified personnel. The competition
for such employees is intense,  and the loss of the services of any of these key
personnel without adequate replacement or the inability to attract new qualified
personnel could have a material adverse effect on the Company.  The Company does
not maintain insurance with respect to the loss of any of its key personnel.



                                     - 65 -

<PAGE>



                 Item 11: Compensation of Directors and Officers

                  The  aggregate  cash  compensation  offered  for  1996  to the
members of the Supervisory Board by the Company was approximately  $462,000. The
amount of cash  compensation  for 1996 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 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 members of the  Management  Board
were also  covered  in 1996  under  certain  group  life and  medical  insurance
programs provided by the Company.  The aggregate  additional amount set aside by
the  Company in 1996 to provide  pension,  retirement  or similar  benefits  for
executive officers and members of the Management Board of the Company as a group
was approximately $2.8 million.


     Item 12: Option to Purchase Securities from Registrant or Subsidiaries

                  As of June 24, 1997, options to purchase up to an aggregate of
171,790 Common Shares were  outstanding  under the Company's  first stock option
plan (the "1989 Stock  Option  Plan").  Such  options  are fully  vested and are
exercisable at the original  issue price,  as adjusted to reflect the 40:1 stock
split  effected in connection  with the Initial Public  Offering,  of NLG 25 per
share ($14.51 based on the noon buying rate in New York City for cable transfers
in Dutch guilders as certified for customs  purposes by the Federal Reserve Bank
of New York of US$1=NLG  1.7225 on May 22, 1996 (the "Noon Buying  Rate")) or at
the price of NLG 17.50 per share ($10.15 based on the Noon Buying Rate). Of such
outstanding  options,  49,000 are held by executive officers of the Company as a
group and all outstanding options expire on December 18, 1999.

                  On October 20, 1995, the  Shareholders of the Company approved
resolutions  authorizing  the  Supervisory  Board for a period of five  years to
adopt and  administer a new stock option plan which provides for the granting to
managers and professionals of the Company of options to purchase up to a maximum
of 5.5 million  Common  Shares (the "1995 Stock Option  Plan").  The Company has
granted  1,200,000 options pursuant to the 1995 Stock Option Plan to purchase up
to 1,200,000  Common  Shares at a price per Common Share of $36.25 and of which,
as of May 1, 1997,  1,174,200 options were still  exercisable.  Such options are
exercisable for a period of eight years following the date of grant.

                  On June 24, 1996 the general meeting of shareholders  approved
the  granting of options to purchase up to 72,000  Common  Shares to members and
professionals of the Supervisory Board over a period of three consecutive years,
beginning in 1996. Options

                                     - 66 -

<PAGE>



granted  thereunder  will be  exercisable  until  the  eighth  anniversary  date
following the date of grant at the closing price of the Common Shares on the New
York Stock Exchange on the date such options are exercised.


             Item 13: Interest of Management in Certain Transactions

                  One of the  Company's  key  customers  is Thomson  Multimedia.
Thomson  Multimedia and  Thomson-CSF,  one of the indirect  shareholders  of the
Company (see "Item 4: Control of  Registrant"),  are both  controlled by Thomson
S.A.  The  Company  sells a broad  range  of  products  to  Thomson  Multimedia,
including dedicated products,  microcontrollers  and semicustom devices, for use
in televisions,  video cassette  recorders and satellite  receiver systems.  The
Company  believes that all of the products  that it sells to Thomson  Multimedia
are sold on  commercial  terms no less  favorable  to the Company  than could be
obtained  with  non-affiliated  parties.  The  Company  has also  formed a joint
venture with Thomson  Multimedia to conduct joint  research and  development  on
advanced television products, including digital television products. The Company
and  Thomson  Multimedia  share the  funding of the joint  venture's  designers,
engineers and managers.

                  The  Company  has  formed  a  joint   venture   research   and
development  center with CNET in the form of a Groupement  d'Interet  Economique
("GIE").  CNET is a research  laboratory that is wholly owned by France Telecom,
one of the  indirect  shareholders  of the  Company.  See  "Item 4:  Control  of
Registrant".  The research  center is housed at the  Company's  Crolles,  France
manufacturing  facility.  It is developing submicron process  technologies.  The
joint venture  between the Company and CNET was created  before  France  Telecom
became an indirect shareholder of the Company.

                  The Company  participated  in a joint research and development
project with LETI with respect to  high-density  silicium  integrated  circuits.
LETI is a research  laboratory that is a department of CEA, the parent of one of
the indirect  shareholders of the Company.  See "Item 4: Control of Registrant".
In 1995,  the  Company  has signed an  agreement  providing  for a research  and
development  cooperation with GRESSI, the research and development GIE formed by
CNET and LETI.  The  objectives of the  cooperation  are to develop  know-how on
innovative  aspects of VLSI  technology  evolution  which can be  transferred to
industrial  applications,  and to address the development of innovative  process
steps and process modules to be used in future generations of VLSI products. The
cooperation  agreement is based upon a  pluriannual  plan through 1998, of which
the Company is expected to bear half of the program's total cost.

                  The Company  participates in certain programs sponsored by the
French and Italian  governments  for the funding of research and development and
industrialization  through direct grants as well as low interest financing.  See
"Item  1:  Description  of  Business  --  State  Support  for the  Semiconductor
Industry".  The shareholders of SGS-THOMSON Holding, the corporate parent of the
Company's majority shareholder,  are controlled,  directly or indirectly, by the
governments  of the  Republics  of France  and  Italy.  See "Item 4:  Control of
Registrant".

                  Sales to  shareholders  of the  Company  and their  affiliates
totalled  $232.1  million in 1996. At December 31, 1996 there was no outstanding
indebtedness guaranteed by indirect

                                     - 67 -

<PAGE>



shareholders, other than debt guaranteed by SGS-THOMSON Microelectronics Holding
N.V. See Note 26 to the Consolidated Financial Statements.

                  From time to time,  the Company may deposit with its direct or
indirect shareholders, or their affiliates,  available funds for investment on a
short-term basis at market interest rates.


                                     PART II


               Item 14: Description of Securities to be Registered

Not applicable.

                                    PART III


                    Item 15: Defaults upon Senior Securities

None.


             Item 16: Changes in Securities and Changes in Security
                           for Registered Securities

None.


                                     PART IV


                          Item 17: Financial Statements

Not applicable.


                          Item 18: Financial Statements

                  Consolidated     financial     statements    of    SGS-THOMSON
Microelectronics  N.V. for each of the three years in the period ended  December
31, 1996 are incorporated by reference from the Registrant's  1996 Annual Report
to Shareholders, on pages 41 through 58.



                                     - 68 -

<PAGE>



                   Item 19: Financial Statements and Exhibits

(a)      1.    Financial Statements

               The  financial  statements  listed in the  accompanying  Index to
               Financial  Statements and Financial  Statement Schedule are filed
               or incorporated by reference as part of this annual report.

         2.    Financial Statement Schedule

               The financial statement schedule listed in the accompanying index
               is filed as part of this annual report.

(b)      Exhibits

         The exhibits listed in the accompanying index are filed or incorporated
         by reference as part of this annual report.



                                     - 69 -

<PAGE>




                          INDEX TO FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULE
                                  (Item 19(a))




                                                             Reference Page
                                                             --------------

                                                                    1996 Annual
                                                                     Report to
                                                         Form 20-F  Shareholders
                                                         ---------  ------------

SGS-THOMSON Microelectronics N.V. and Subsidiaries

   Report of Independent Accountants for the Year ended
     December 31, 1996...................................                59

   Consolidated Statements of Income for the Years Ended
     December 31, 1996, 1995 and 1994....................                41

   Consolidated Balance Sheet as of December 31, 1996 and
     1995................................................                42

   Consolidated Statements of Cash Flows for the Years
     Ended December 31, 1996, 1995 and 1994..............                43

   Consolidated Statement of Shareholders' Equity for the
     Years Ended December 31, 1996, 1995 and 1994........                44

   Notes to Consolidated Financial Statements............                45

   Independent Public Accountant's Report for the Years
     ended December 31, 1995 and 1994....................   71

   Schedule - Valuation and Qualifying Accounts for
     the Years Ended December 31, 1996, 1995 and 1994....   72

   Independent Public Accountant's Report on Schedule....   73



                                     - 70 -

<PAGE>








                                AUDITOR'S REPORT

To the Supervisory  Board and the  Shareholders of SGS-THOMSON  Microelectronics
N.V.:

We have audited the  accompanying  consolidated  balance  sheets of  SGS-THOMSON
Microelectronics  N.V. (a Dutch corporation) and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of income,  shareholders'
equity and cash flows for each of the three years in the period  ended  December
31, 1995.  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 in accordance with generally  accepted auditing
standards in the United States. Those standards 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.  An
audit also includes  assessing the accounting  principles  used and  significant
estimates  made by  management,  as well as  evaluating  the  overall  financial
statement  presentation.  We believe that our audits provide a reasonable  basis
for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
SGS-THOMSON  Microelectronics  N.V. and subsidiaries as of December 31, 1995 and
1994,  and the results of their  operations and their cash flows for each of the
three years in the period ended  December 31, 1995 in conformity  with generally
accepted accounting principles, as applied in the United States of America.



Arthur Andersen & Co.
Amsterdam, The Netherlands
January 26th, 1996


                                      -71-

<PAGE>








                                                                        Schedule



                        SGS-THOMSON MICROELECTRONICS N.V.
                        VALUATION AND QUALIFYING ACCOUNTS
                     (Currency - Thousands of U.S. dollars)


<TABLE>
<CAPTION>
                                                                Charged
                                   Balance at                   to costs                  Balance at
                                   beginning     Translation      and                       end of
                                   of period     adjustment     expenses    Deductions      period
                                   ---------     ----------     --------    ----------      ------

<S>                                   <C>           <C>         <C>         <C>             <C>   
Valuation and qualifying accounts
deducted from the related asset
accounts


1996
    Inventories...................    36,500         ----       45,176      (36,500)        45,176
    Accounts Receivable...........    17,881        (514)        1,114         (329)        18,152


1995
    Inventories...................    29,982         ----       36,500      (29,982)        36,500
    Accounts receivable...........    14,018          691        3,467         (295)        17,881


1994
    Inventories...................    28,121         ----       29,982      (28,121)        29,982
    Accounts receivable...........    12,181          893        3,198       (2,254)        14,018
</TABLE>



















                                      -72-

<PAGE>







To the Supervisory  Board and the  Shareholders of SGS-THOMSON  Microelectronics
N.V.:


We have audited the financial  statements of SGS-THOMSON  Microelectronics  N.V.
and  subsidiaries  as of  December  31,  1995 and 1994 and for each of the three
years in the period ended  December 31, 1995 and have issued our report  thereon
dated  January 26,  1996.  We have also  audited the  schedule  included in this
Annual Report on Form 20-F as listed in item 19.

This schedule is the responsibility of the Company's management and is presented
for purpose of complying with the Securities and Exchange Commission's rules and
regulations and is not part of the basic financial statements.

In our opinion,  the schedule  referred to above fairly states,  in all material
respects, the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.




Arthur Andersen & Co
Amsterdam, the Netherlands
June 26, 1996




                                      -73-

<PAGE>



                                    Glossary



ASIC..............     application-specific integrated circuit

ASSP..............     application-specific standard product

BCD...............     bipolar, CMOS and DMOS process technology

BiCMOS............     bipolar and CMOS process technology

CAD...............     computer aided design

CIM...............     computer integrated manufacturing

CMOS..............     complementary metal oxide silicon

DMOS..............     diffused metal oxide silicon

DRAMS.............     dynamic random access memory

DSP...............     digital signal processor

DVD...............     digital video disk

EEPROM............     electrically erasable programmable read-only memory

EPROM.............     erasable programmable read-only memory

HCMOS.............     high-speed complementary metal-oxide-silicon

IC................     integrated circuit

IGBT..............     insulated gate bipolar transistors

ISDN..............     integrated services digital network

Kbit..............     kilobit

Mbit..............     megabit

MOS...............     metal oxide silicon process technology

MOSFET............     metal oxide silicon field effect transistor

MPEG..............     motion picture experts group

PROM..............     programmable read-only memory

RAM...............     random access memory

RF................     radio frequency

RISC..............     reduced instruction set computing

ROM...............     read-only memory

SAM...............     serviceable available market

SLIC..............     subscriber line interface card

SMPS..............     switch mode power supply

SPC...............     statistical process control

SRAM..............     static random access memory

TAM...............     total available market

VLSI..............     very large scale integration





                                      -74-

<PAGE>




                                    SIGNATURE



Pursuant to the  Requirements  of Section 12 of the  Securities  Exchange Act of
1934, the registrant  certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused  this annual  report to be signed on its behalf
by the undersigned, thereunto duly authorized.


                                      SGS-THOMSON Microelectronics N.V.



Date:  June 27, 1997                By:  /s/ Pasquale Pistorio
                                         ---------------------------------------
                                    Name:  Pasquale Pistorio
                                    Title: President and Chief Executive Officer







                                      -75-

<PAGE>



                                INDEX TO EXHIBITS
                                  (Item 19(b))




      Exhibit
      Number           Description
      ------           -----------

        13             SGS-THOMSON Microelectronics N.V. 1996 Annual Report to
                       Shareholders

        23             Consents of Independent Accountants