##### Table of Contents



As filed with the Securities and Exchange Commission on
March 14, 2007








SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 20-F


|   |  |                                                                                                   
|-- |  | --------------------------------------------------------------------------------------------------
|o  |  | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|OR
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934          
|   |  | For the fiscal year ended December 31, 2006                                                       
|   |  | OR                                                                                                
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934      
|   |  | For the transition period
    from          to                                                    
|o  |  | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934   
|   |  | Date of event requiring this shell company report                                                 

Commission file number: 1-13546


STMicroelectronics N.V.


(Exact name of registrant as specified in its charter)


|                                                    |  |                                                    
|--------------------------------------------------- |  | ---------------------------------------------------
|Not Applicable                                      |  | The Netherlands                                    
|(Translation of registrants
    name into English) |  | (Jurisdiction of incorporation
    or organization)

39, Chemin du Champ des Filles


1228 Plan-Les-Ouates


Geneva


Switzerland


(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
    1.04 per share |  | New York Stock Exchange                   

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




897,395,042 common shares at December 31, 2006




þ o




o þ




þ o


12b-2


þ o o




o þ


12b-2


o þ










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##### 










TABLE OF CONTENTS


|                                                                  |           |  |                                                                                  |  |  |     | 
|----------------------------------------------------------------- | --------- |  | -------------------------------------------------------------------------------- |  |  | --- | 
|PRESENTATION OF FINANCIAL AND OTHER
    INFORMATION               |           |  | 2                                                                                | 
|PART I                                                            |           |  | 4                                                                                | 
|                                                                  | Item 1.   |  | Identity of Directors, Senior Management
    and Advisers                        |  |  | 4   | 
|                                                                  | Item 2.   |  | Offer Statistics and Expected Timetable                                          |  |  | 4   | 
|                                                                  | Item 3.   |  | Key Information                                                                  |  |  | 4   | 
|                                                                  | Item 4.   |  | Information on the Company                                                       |  |  | 21  | 
|                                                                  | Item 5.   |  | Operating and Financial Review and
    Prospects                                 |  |  | 50  | 
|                                                                  | Item 6.   |  | Directors, Senior Management and
    Employees                                   |  |  | 86  | 
|                                                                  | Item 7.   |  | Major Shareholders and Related-Party
    Transactions                            |  |  | 108 | 
|                                                                  | Item 8.   |  | Financial Information                                                            |  |  | 115 | 
|                                                                  | Item 9.   |  | Listing                                                                          |  |  | 118 | 
|                                                                  | Item 10.  |  | Additional Information                                                           |  |  | 125 | 
|                                                                  | Item 11.  |  | Quantitative and Qualitative Disclosures
    About Market Risk                   |  |  | 141 | 
|                                                                  | Item 12.  |  | Description of Securities Other Than Equity
    Securities                       |  |  | 143 | 
|PART II                                                           |           |  | 144                                                                              | 
|                                                                  | Item 13.  |  | Defaults, Dividend Arrearages and
    Delinquencies                              |  |  | 144 | 
|                                                                  | Item 14.  |  | Material Modifications to the Rights of
    Security Holders and Use of Proceeds |  |  | 144 | 
|                                                                  | Item 15.  |  | Controls and Procedures                                                          |  |  | 144 | 
|                                                                  | Item 16A. |  | Audit Committee Financial Expert                                                 |  |  | 145 | 
|                                                                  | Item 16B. |  | Code of Ethics                                                                   |  |  | 145 | 
|                                                                  | Item 16C. |  | Principal Accountant Fees and Services                                           |  |  | 145 | 
|                                                                  | Item 16D. |  | Exemptions from the Listing Standards for
    Audit Committees                   |  |  | 146 | 
|                                                                  | Item 16E. |  | Purchases of Equity Securities by the
    Issuer and Affiliated Purchasers       |  |  | 146 | 
|PART III                                                          |           |  | 147                                                                              | 
|                                                                  | Item 17.  |  | Financial Statements                                                             |  |  | 147 | 
|                                                                  | Item 18.  |  | Financial Statements                                                             |  |  | 147 | 
|                                                                  | Item 19.  |  | Exhibits                                                                         |  |  | 147 | 
|EX-8.1: SUBSIDIARIES                                             
|EX-12.1: CERTIFICATION                                           
|EX-12.2: CERTIFICATION                                           
|EX-13.1: CERTIFICATION                                           
|EX-14.A: CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



1



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##### Table of Contents






PRESENTATION OF FINANCIAL AND OTHER INFORMATION


20-F 20-F), 






20-F




CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS


20-F




| |   |                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | future developments of the world semiconductor market, in
    particular the future demand for semiconductor products in the
    key application markets and from key customers served by our
    products;                                                                                                                                                                   
|
| |  | pricing pressures, losses or curtailments of purchases from key
    customers all of which are highly variable and difficult to
    predict;                                                                                                                                                                                                                                  
|
| |  | the financial impact of obsolete or excess inventories if actual
    demand differs from our anticipations;                                                                                                                                                                                                                                                                   
|
| |  | changes in the exchange rates between the U.S. dollar and the
    euro, and between the U.S. dollar and the currencies of the
    other major countries in which we have our operating
    infrastructure;                                                                                                                                                                    
|
| |  | our ability to manage in an intensely competitive and cyclical
    industry where a high percentage of our costs are fixed and
    difficult to reduce in the short term, including our ability to
    adequately utilize and operate our manufacturing facilities at
    sufficient levels to cover fixed operating costs;                                                   
|
| |  | our ability to perform the announced strategic repositioning of
    our Flash memories business in line with the requirements of our
    customers and without adverse effect on existing alliances or
    other agreements relating to this business;                                                                                                                        
|
| |  | our ability in an intensely competitive environment to secure
    customer acceptance and to achieve our pricing expectations for
    high volume supplies of new products in whose development we
    have or are currently investing;                                                                                                                                       
|
| |  | the anticipated benefits of research and development alliances
    and cooperative activities, as well as the uncertainties
    concerning the modalities, conditions and financial impact
    beyond 2007 of the R&D and manufacturing activities in
    Crolles, following the termination of our current agreement with
    NXP Semiconductors and Freescale Semiconductor;

2



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##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the ability of our suppliers to meet our demands for supplies
    and materials and to offer competitive pricing;                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | significant variations in our gross margin compared to
    expectations could be the result of changes in revenue levels,
    product mix and pricing, capacity utilization, variations in
    inventory valuation, excess or obsolete inventory, manufacturing
    yields, changes in unit costs, impairments of long-lived assets,
    including manufacturing, assembly/test and intangible assets,
    and the timing and execution of the manufacturing ramp and
    associated costs, including start-up costs;
|
| |  | changes in the economic, social or political environment,
    including military conflict and/or terrorist activities, as well
    as natural events such as severe weather, health risks,
    epidemics or earthquakes in the countries in which we, our key
    customers and our suppliers operate;                                                                                                                                                                                                               
|
| |  | changes in our overall tax position as a result of changes in
    tax laws or the outcome of tax audits, and our ability to
    accurately estimate tax credits, benefits, deductions and
    provisions and to realize deferred tax assets;                                                                                                                                                                                                                                                                         
|
| |  | our ability to obtain required licenses on third-party
    intellectual property on reasonable terms and conditions, the
    impact of potential claims by third parties involving
    intellectual property rights relating to our business, and the
    outcome of litigation; and                                                                                                                                                                                                                                 
|
| |  | the results of actions by our competitors, including new product
    offerings and our ability to react thereto.                                                                                                                                                                                                                                                                                                                                                                                                     

20-F 20-F




3



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##### Table of Contents






PART I





Item 1.  Identity of Directors, Senior
Management and Advisers







Item 2.  Offer Statistics and Expected
Timetable







Item 3.  Key Information


Selected Financial Data


20-F,


20-F.


|                                                                  |                                                                   |                                               |        |        |      |   |        |        |   |   |        |        |   |      |        |        |   |   |        |        |  
|----------------------------------------------------------------- | ----------------------------------------------------------------- | --------------------------------------------- | ------ | ------ | ---- | - | ------ | ------ | - | - | ------ | ------ | - | ---- | ------ | ------ | - | - | ------ | ------ | -
|                                                                  |                                                                   | Year Ended December 31,                       |       
|                                                                  |                                                                   |                                               |       
|                                                                  |                                                                   | 2006                                          |        |        | 2005 |   |        | 2004   |   |   | 2003   |        |   | 2002 |       
|                                                                  |                                                                   |                                               |        |        |      |   |        |        |   |   |        |        |   |      |       
|                                                                  |                                                                   | (In millions except per share and ratio data) |       
|Consolidated Statement of Income Data:                            |                                                                   |                                               |        |        |      |   |        |        |   |   |        |        |   |      |        |        |   |   |        |       
|Net sales                                                         |                                                                   | $                                             | 9,838  |        |      | $ | 8,876  |        |   | $ | 8,756  |        |   | $    | 7,234  |        |   | $ | 6,270  |       
|Other revenues                                                    |                                                                   |                                               | 16     |        |      |   | 6      |        |   |   | 4      |        |   |      | 4      |        |   |   | 48     |       
|                                                                  |                                                                   |                                               |        |        |      |   |        |        |   |   |        |        |   |      |       
|Net revenues                                                      |                                                                   |                                               | 9,854  |        |      |   | 8,882  |        |   |   | 8,760  |        |   |      | 7,238  |        |   |   | 6,318  |       
|Cost of sales                                                     |                                                                   |                                               | (6,331 | )      |      |   | (5,845 | )      |   |   | (5,532 | )      |   |      | (4,672 | )      |   |   | (4,020 | )     
|                                                                  |                                                                   |                                               |        |        |      |   |        |        |   |   |        |        |   |      |       
|Gross profit                                                      |                                                                   |                                               | 3,523  |        |      |   | 3,037  |        |   |   | 3,228  |        |   |      | 2,566  |        |   |   | 2,298  |       
|Operating expenses:                                               |                                                                   |                                               |        |        |      |   |        |        |   |   |        |        |   |      |        |        |   |   |        |       
|                                                                  | Selling, general and administrative                               |                                               |        | (1,067 | )    |   |        | (1,026 | ) |   |        | (947   | ) |      |        | (785   | ) |   |        | (648   | )
|                                                                  | Research and development(1)                                       |                                               |        | (1,667 | )    |   |        | (1,630 | ) |   |        | (1,532 | ) |      |        | (1,238 | ) |   |        | (1,022 | )
|                                                                  | Other income and expenses, net(1)                                 |                                               |        | (35    | )    |   |        | (9     | ) |   |        | 10     |   |      |        | (4     | ) |   |        | 7      |  
|                                                                  | Impairment, restructuring charges and other related closure costs |                                               |        | (77    | )    |   |        | (128   | ) |   |        | (76    | ) |      |        | (205   | ) |   |        | (34    | )
|                                                                  |                                                                   |                                               |        |        |      |   |        |        |   |   |        |        |   |      |       
|Total operating expenses                                          |                                                                   |                                               | (2,846 | )      |      |   | (2,793 | )      |   |   | (2,545 | )      |   |      | (2,232 | )      |   |   | (1,697 | )     
|Operating income                                                  |                                                                   |                                               | 677    |        |      |   | 244    |        |   |   | 683    |        |   |      | 334    |        |   |   | 601    |       
|Interest income (expense), net                                    |                                                                   |                                               | 93     |        |      |   | 34     |        |   |   | (3     | )      |   |      | (52    | )      |   |   | (68    | )     
|Loss on equity investments                                        |                                                                   |                                               | (6     | )      |      |   | (3     | )      |   |   | (4     | )      |   |      | (1     | )      |   |   | (11    | )     
|Loss on extinguishment of convertible debt                        |                                                                   |                                               |       |        |      |   |       |        |   |   | (4     | )      |   |      | (39    | )      |   |   |       |       
|Income before income taxes and minority interests                 |                                                                   |                                               | 764    |        |      |   | 275    |        |   |   | 672    |        |   |      | 242    |        |   |   | 522    |       
|Income tax benefit (expense)                                      |                                                                   |                                               | 20     |        |      |   | (8     | )      |   |   | (68    | )      |   |      | 14     |        |   |   | (89    | )     
|                                                                  |                                                                   |                                               |        |        |      |   |        |        |   |   |        |        |   |      |       
|Income before minority interests                                  |                                                                   |                                               | 784    |        |      |   | 267    |        |   |   | 604    |        |   |      | 256    |        |   |   | 433    |       
|Minority interests                                                |                                                                   |                                               | (2     | )      |      |   | (1     | )      |   |   | (3     | )      |   |      | (3     | )      |   |   | (4     | )     
|                                                                  |                                                                   |                                               |        |        |      |   |        |        |   |   |        |        |   |      |       
|Net income                                                        |                                                                   | $                                             | 782    |        |      | $ | 266    |        |   | $ | 601    |        |   | $    | 253    |        |   | $ | 429    |       
|                                                                  |                                                                   |                                               |        |        |      |   |        |        |   |   |        |        |   |      |       
|Earnings per share (basic)                                        |                                                                   | $                                             | 0.87   |        |      | $ | 0.30   |        |   | $ | 0.67   |        |   | $    | 0.29   |        |   | $ | 0.48   |       
|Earnings per share (diluted)                                      |                                                                   | $                                             | 0.83   |        |      | $ | 0.29   |        |   | $ | 0.65   |        |   | $    | 0.27   |        |   | $ | 0.48   |       
|Number of shares used in calculating earnings per share (basic)   |                                                                   |                                               | 896.1  |        |      |   | 892.8  |        |   |   | 891.2  |        |   |      | 888.2  |        |   |   | 887.6  |       
|Number of shares used in calculating earnings per share (diluted) |                                                                   |                                               | 958.5  |        |      |   | 935.6  |        |   |   | 935.1  |        |   |      | 937.1  |        |   |   | 893.0  |       

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|                                                              |  |                                               |        |   |      |   |        |      |  |   |        |  |  |      |        |  |  |   |        | 
|------------------------------------------------------------- |  | --------------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ |  |  | ---- | ------ |  |  | - | ------ | 
|                                                              |  | Year Ended December 31,                       |       
|                                                              |  |                                               |       
|                                                              |  | 2006                                          |        |   | 2005 |   |        | 2004 |  |   | 2003   |  |  | 2002 |       
|                                                              |  |                                               |        |   |      |   |        |      |  |   |        |  |  |      |       
|                                                              |  | (In millions except per share and ratio data) |       
|Consolidated Balance Sheet Data (end of period):              |  |                                               |        |   |      |   |        |      |  |   |        |  |  |      |        |  |  |   |        | 
|Cash and cash equivalents(2)                                  |  | $                                             | 1,963  |   |      | $ | 2,027  |      |  | $ | 1,950  |  |  | $    | 2,998  |  |  | $ | 2,564  | 
|Marketable securities                                         |  |                                               | 460    |   |      |   |       |      |  |   |       |  |  |      |       |  |  |   |       | 
|Short-term deposits                                           |  |                                               | 250    |   |      |   |       |      |  |   |       |  |  |      |       |  |  |   |       | 
|Restricted cash for equity investments                        |  |                                               | 218    |   |      |   |       |      |  |   |       |  |  |      |       |  |  |   |       | 
|Total assets                                                  |  |                                               | 14,198 |   |      |   | 12,439 |      |  |   | 13,800 |  |  |      | 13,477 |  |  |   | 12,004 | 
|Short-term debt (including current portion of long-term debt) |  |                                               | 136    |   |      |   | 1,533  |      |  |   | 191    |  |  |      | 151    |  |  |   | 165    | 
|Long-term debt (excluding current portion)(2)                 |  |                                               | 1,994  |   |      |   | 269    |      |  |   | 1,767  |  |  |      | 2,944  |  |  |   | 2,797  | 
|Shareholders equity(2)                                       |  |                                               | 9,747  |   |      |   | 8,480  |      |  |   | 9,110  |  |  |      | 8,100  |  |  |   | 6,994  | 
|Capital stock(3)                                              |  |                                               | 3,177  |   |      |   | 3,120  |      |  |   | 3,074  |  |  |      | 3,051  |  |  |   | 3,008  | 
|Other Data:                                                   |  |                                               |        |   |      |   |        |      |  |   |        |  |  |      |        |  |  |   |        | 
|Dividends per share                                           |  | $                                             | 0.12   |   |      | $ | 0.12   |      |  | $ | 0.12   |  |  | $    | 0.08   |  |  | $ | 0.04   | 
|Capital expenditures(4)                                       |  |                                               | 1,533  |   |      |   | 1,441  |      |  |   | 2,050  |  |  |      | 1,221  |  |  |   | 995    | 
|Net cash provided by operating activities                     |  |                                               | 2,491  |   |      |   | 1,798  |      |  |   | 2,342  |  |  |      | 1,920  |  |  |   | 1,713  | 
|Depreciation and amortization(4)                              |  |                                               | 1,766  |   |      |   | 1,944  |      |  |   | 1,837  |  |  |      | 1,608  |  |  |   | 1,382  | 
|Net debt (cash) to total shareholders equity ratio(5)        |  |                                               | (0.078 | ) |      |   | (0.026 | )    |  |   | 0.001  |  |  |      | 0.012  |  |  |   | 0.057  | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Other income and expenses, net includes, among other
    things, funds received through government agencies for research
    and development expenses, the cost of new production facilities
    start-ups, foreign currency gains and losses, gains on sales of
    marketable securities and non-current assets and the costs of
    certain activities relating to intellectual property. Our
    reported research and development expenses are mainly in the
    areas of product design, technology and development, and do not
    include marketing design center costs, which are accounted for
    as selling expenses, or process engineering, pre-production and
    process-transfer costs, which are accounted for as cost of sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(2) | On November 16, 2000, we issued $2,146 million initial
    aggregate principal amount of zero-coupon senior convertible
    bonds due 2010 (the 2010 Bonds), for net proceeds of
    $1,458 million; in 2003, we repurchased on the market
    approximately $1,674 million aggregate principal amount at
    maturity of 2010 Bonds. During 2004, we completed the repurchase
    of our 2010 Bonds and repurchased on the market approximately
    $472 million aggregate principal amount at maturity for a
    total amount paid of $375 million. In 2001, we redeemed the
    remaining $52 million of our outstanding Liquid Yield
    Option Notes due 2008 (our 2008 LYONs) and converted
    them into common shares in May and June 2001. In 2001, we
    repurchased 9,400,000 common shares for $233 million, and
    in 2002, we repurchased an additional 4,000,000 shares for
    $115 million. We reflected these purchases at cost as a
    reduction of shareholders equity. The repurchased shares
    have been designated to fund share compensation granted to
    employees under our 2001 employee stock plan and may be used for
    subsequent grants. In 2006, 637,109 shares were transferred to
    employees upon vesting of stock awards. In August 2003, we
    issued $1,332 million principal amount at maturity of our
    convertible bonds due 2013 (our 2013 Convertible
    Bonds) with a negative yield of 0.5% that resulted in a
    higher principal amount at issuance of $1,400 million and
    net proceeds of $1,386 million. During 2004, we repurchased
    all of our outstanding Liquid Yield Option Notes due 2009 (our
    2009 LYONs) for a total amount of cash paid of
    $813 million. In February 2006, we issued Zero Coupon
    Senior Convertible Bonds due 2016 (our 2016 Convertible
    Bonds) representing total gross proceeds of
    $974 million. In March 2006, we issued
    500 million
    Floating Rate Senior Bonds due 2013 (our 2013 Senior
    Bonds). In August 2006, as a result of almost all of the
    holders of our 2013 Convertible Bonds exercising their August 4,
    2006 put option, we repurchased $1,397 million aggregate
    principal amount of the outstanding convertible bonds at a
    conversion ratio of $985.09 per $1,000 aggregate principal
    amount at issuance resulting in a cash disbursement of
    $1,377 million.
|   
|(3) | Capital stock consists of common stock and capital surplus.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(4) | Capital expenditures are net of certain funds received through
    government agencies, the effect of which is to decrease
    depreciation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(5) | Net debt (cash) to total shareholders equity ratio is
    a non-U.S. GAAP financial measure. The most directly comparable
    U.S. GAAP financial measure is considered to be
    Debt-to-Equity Ratio. However, the Debt-to-Equity
    Ratio measures gross debt relative to equity, and does not
    reflect the current cash position of the Company. We believe
    that our net debt (cash) to total shareholders equity
    ratio is useful to investors as a measure of our financial
    position and leverage. The ratio is computed on the basis of our
    net financial position divided by total shareholders
    equity. Our net financial position is the difference between our
    total cash position (cash and cash equivalents, marketable
    securities, short-term deposits and restricted cash) net of
    total financial debt (bank overdrafts, current portion of
    long-term debt and long-term debt). For more information on our
    net financial position, see Item 5. Operating and
    Financial Review and Prospects  Liquidity and Capital
    Resources  Capital Resources  Net
    financial position. Our computation of net debt (cash) to
    total shareholders equity ratio may not be consistent with
    that of other companies, which could make comparability
    difficult.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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Risk Factors


Risks Related to the Semiconductor Industry




| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The semiconductor industry is cyclical and downturns in
    the semiconductor industry can negatively affect our results of
    operations and financial condition.







| |                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Increases in production capacity for semiconductor
    products may lead to overcapacity, which in turn may lead to
    plant closures, asset impairments, restructuring charges and
    inventory write-offs.













| |                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Competition in the semiconductor industry is intense, and
    we may not be able to compete successfully if our product design
    technologies, process technologies and products do not meet
    market requirements.





| |   |                                     
| | - | ------------------------------------
| |  | price;                              
|
| |  | technical performance;              
|
| |  | product features;                   
|
| |  | product system compatibility;       
|
| |  | product design and technology;      
|
| |  | timely introduction of new products;
|
| |  | product availability;               

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##### Table of Contents





| |   |                             
| | - | ----------------------------
| |  | manufacturing yields; and   
|
| |  | sales and technical support.







| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In many of the market segments in which we compete for
    business, competition for the selection of suppliers to design
    products for use in our customers equipment and products
    is very intense, and failure to be selected or to execute could
    materially adversely affect our business in that market segment.
    Even after we win and begin a product design, a customer may
    cancel or change its product plans, which could cause us to
    generate no sales from a product, resulting in a materially
    adverse affect on our results of operations and financial
    condition.







| |                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Semiconductor and other products that we design and
    manufacture are characterized by rapidly changing technology and
    new product introductions, and our success depends on our
    ability to develop and manufacture complex products cost-
    effectively and to scale.









| |                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The competitive environment of the semiconductor industry
    may lead to further measures to improve our competitive position
    and cost structure, which in turn may result in loss of
    revenues, asset impairments and/or capital losses.



7



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Risks Related to Our Operations




| |                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our research and development efforts are increasingly
    expensive and dependent on alliances, and our business, results
    of operations and prospects could be materially adversely
    affected by the failure or termination of such alliances, or
    failure to find new partners in such alliances, in developing
    new process technologies in line with market
    requirements.

32-nm








| |                                                                                       
| | --------------------------------------------------------------------------------------
| | In difficult market conditions, our high fixed costs
    adversely impact our results.



8



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| |                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The competitive environment of the semiconductor industry
    has led to industry consolidation and we may face even more
    intense competition from newly merged competitors or we may seek
    to acquire a competitor or become an acquisition target.





| |                                                                           
| | --------------------------------------------------------------------------
| | Future acquisitions or divestitures may adversely affect
    our business.









| |   |                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | diversion of managements attention;                                                                                                                                                               
|
| |  | difficult integration of acquired company operations and
    personnel;                                                                                                                            
|
| |  | loss of activities and technologies that may have complemented
    our remaining businesses;                                                                                                       
|
| |  | assumption of potential liabilities, disclosed or undisclosed,
    associated with the business acquired, which liabilities may
    exceed the amount of indemnification available from the seller;
|
| |  | potential inaccuracies in the financial and accounting systems
    utilized by the business acquired;                                                                                              
|
| |  | that the businesses acquired will not maintain the quality of
    products and services that we have historically provided;                                                                        
|
| |  | whether we are able to attract and retain qualified management
    for the acquired business;                                                                                                      
|
| |  | loss of important services provided by key employees that are
    assigned to divested activities;                                                                                                 
|
| |  | whether we are able to retain customers of the acquired entity;
    and                                                                                                                            
|
| |  | goodwill and other intangible asset impairment, due to the
    inability of the business to meet managements expectations
    at the time of the acquisition.                                     





| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | The strategic repositioning of our memory business may
    fail to produce the operational and strategic benefits which we
    envisioned.



9



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| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | Our financial results can be adversely affected by
    fluctuations in exchange rates, principally in the value of the
    U.S. dollar.





 






| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we have our own manufacturing facilities, our
    capital needs are high compared to competitors who do not
    produce their own products.



10



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| |                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may also need additional funding in the coming years to
    finance our investments or to purchase other companies or
    technologies developed by third parties.





| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our operating results may vary significantly from quarter
    to quarter and annually and may differ significantly from our
    expectations or guidance.





| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | performance of our key customers in the markets they serve;                                                                                          
|
| |  | order cancellations or reschedulings by customers;                                                                                                   
|
| |  | excess inventory held by customers leading to reduced bookings
    or product returns by key customers;                                              
|
| |  | manufacturing capacity and utilization rates;                                                                                                        
|
| |  | restructuring and impairment charges;                                                                                                                
|
| |  | fluctuations in currency exchange rates, particularly between
    the U.S. dollar and other currencies in jurisdictions where we
    have activities;
|
| |  | intellectual property developments;                                                                                                                  
|
| |  | changes in distribution and sales arrangements;                                                                                                      
|
| |  | failure to win new design projects;                                                                                                                  
|
| |  | manufacturing performance and yields;                                                                                                                

11



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| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | product liability or warranty claims;                                                                            
|
| |  | litigation;                                                                                                      
|
| |  | acquisitions or divestitures;                                                                                    
|
| |  | problems in obtaining adequate raw materials or production
    equipment on a timely basis; and                  
|
| |  | property damage or business interruption losses resulting from a
    catastrophic event not covered by insurance.





| |                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business is dependent in large part on continued
    growth in the industries and segments into which our products
    are sold and in our ability to attract and retain new customers.
    A market decline in any of these industries or our inability to
    attract new customers could have a material adverse effect on
    our results of operations.





| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| |  | spending levels of telecommunications equipment and/or
    automotive providers;              
|
| |  | development of new consumer products or applications requiring
    high semiconductor content;
|
| |  | evolving industry standards;                                                                  
|
| |  | the rate of adoption of new or alternative technologies; and                                  
|
| |  | demand for automobiles, consumer confidence and general economic
    conditions.              









| |                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------
| | Disruptions in our relationships with any one of our key
    customers could adversely affect our results of
    operations.



12



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| |                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our operating results can also vary significantly due to
    impairment of goodwill and other intangible assets incurred in
    the course of acquisitions, as well as to impairment of tangible
    assets due to changes in the business environment.





| |                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we depend on a limited number of suppliers for raw
    materials and certain equipment, we may experience supply
    disruptions if suppliers interrupt supply or increase
    prices.





| |                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our manufacturing processes are highly complex, costly and
    potentially vulnerable to impurities, disruptions or inefficient
    implementation of production changes that can significantly
    increase our costs and delay product shipments to our
    customers.



13



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| |                                                               
| | --------------------------------------------------------------
| | We may be faced with product liability or warranty
    claims.





| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | If our outside foundry suppliers fail to perform, this
    could adversely affect our ability to exploit growth
    opportunities.





| |                                                                  
| | -----------------------------------------------------------------
| | We depend on patents to protect our rights to our
    technology.



14



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| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Some of our production processes and materials are
    environmentally sensitive, which could lead to increased costs
    due to environmental regulations or to damage to the
    environment.





| |                                                               
| | --------------------------------------------------------------
| | Loss of key employees could hurt our competitive
    position.





| |                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We operate in many jurisdictions with highly complex and
    varied tax regimes. Changes in tax rules or the outcome of tax
    assessments and audits could cause a material adverse effect on
    our results.





15



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| |                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have been required to prepare consolidated financial
    statements using both International Financial Reporting
    Standards (IFRS) beginning with our 2005 results in
    addition to our consolidated financial statements prepared
    pursuant to Generally Accepted Accounting Principles in the
    United States (U.S. GAAP) and dual reporting
    may impair the clarity of our financial reporting.







| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | Changes in the accounting treatment of stock options and
    other share-based compensation could adversely affect our
    results of operations.

Accounting for Stock Issued to Employees Share-Based Payment






| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our internal control over financial reporting fail to
    meet the requirements of Section 404 of the Sarbanes-Oxley
    Act, it may have a materially adverse effect on our stock
    price.

20-F.


16



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##### Table of Contents





| |                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Reduction in the amount of public funding available to us,
    changes in existing public funding programs or demands for
    repayment may increase our costs and impact our results of
    operations.







 


    inter alia,        


Contratto di Programma


17



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| |                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The interests of our controlling shareholders, which are
    in turn controlled respectively by the French and Italian
    governments, may conflict with investors interests.







| |                                                                                       
| | --------------------------------------------------------------------------------------
| | Our shareholder structure and our preference shares may
    deter a change of control.





18



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| |                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our direct or indirect shareholders may sell our existing
    common shares or issue financial instruments exchangeable into
    our common shares at any time while at the same time seeking to
    retain their rights regarding our preference shares. In
    addition, substantial sales by us of new common shares or
    convertible bonds could cause our common share price to drop
    significantly.










| |                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we are a Dutch company subject to the corporate
    law of the Netherlands, U.S. investors might have more
    difficulty protecting their interests in a court of law or
    otherwise than if we were a U.S. company.







19



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| |                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Removal of our common shares from the CAC 40 on Euronext
    Paris, the S&P/ MIB on the Borsa Italiana or the
    Philadelphia Stock Exchange Semiconductor Sector Index could
    cause the market price of our common shares to drop
    significantly.



20



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##### Table of Contents






Item 4. Information on the Company


History and Development of the Company






Business Overview


Alcatel-Lucent,








21



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##### Table of Contents









| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Application Specific Product Group (ASG)
    segment, comprised of three product lines  our Home,
    Personal and Communication Products (HPC), our
    Computer Peripherals Products (CPG) and our
    Automotive Products (APG). Our HPC Sector is
    comprised of the telecommunications, audio and digital consumer
    groups. Our CPG products cover computer peripherals products,
    specifically disk drives and printers, and our APG products
    comprised of all of our major complex products related to
    automotive applications;
|
| |  | the Memory Products Group (MPG) segment, comprised
    of our memories and Smartcard businesses; and                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | the Micro, Power, Analog Product Group (MPA)
    segment, comprised of discrete and standard products plus
    standard microcontroller and industrial devices (including the
    programmable systems memories (PSM) division); this
    segment was previously known as Micro, Linear and Discrete
    Product Group, but no change has occurred in the segments
    perimeter or organization.                                                                                                                                                             







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##### Table of Contents



Results of Operations




|                                                 |       |                                   |       |       |      |   |       |       |   |   |       |       |  
|------------------------------------------------ | ----- | --------------------------------- | ----- | ----- | ---- | - | ----- | ----- | - | - | ----- | ----- | -
|                                                 |       | Year Ended December 31,           |      
|                                                 |       |                                   |      
|                                                 |       | 2006                              |       |       | 2005 |   |       | 2004  |  
|                                                 |       |                                   |       |       |      |   |       |       |  
|                                                 |       | (In millions, except percentages) |      
|Net Revenues by Product Segment                  |       |                                   |       |       |      |   |       |       |   |   |       |      
|Application Specific Product Group Segment (ASG) |       | $                                 | 5,396 |       |      | $ | 4,991 |       |   | $ | 4,902 |      
|Memory Products Group Segment (MPG)              |       |                                   | 2,137 |       |      |   | 1,948 |       |   |   | 1,887 |      
|Micro, Power, Analog Product Group Segment (MPA) |       |                                   | 2,243 |       |      |   | 1,882 |       |   |   | 1,902 |      
|Others(1)                                        |       |                                   | 78    |       |      |   | 61    |       |   |   | 69    |      
|                                                 |       |                                   |       |       |      |   |       |       |  
|                                                 | Total |                                   | $     | 9,854 |      |   | $     | 8,882 |   |   | $     | 8,760 |  
|                                                 |       |                                   |       |       |      |   |       |       |  
|Net Revenues by Location of Order Shipment(2)    |       |                                   |       |       |      |   |       |       |   |   |       |      
|Europe(3)                                        |       | $                                 | 3,073 |       |      | $ | 2,789 |       |   | $ | 2,827 |      
|North America(6)                                 |       |                                   | 1,232 |       |      |   | 1,281 |       |   |   | 1,360 |      
|Asia Pacific(4)                                  |       |                                   | 2,084 |       |      |   | 1,860 |       |   |   | 1,852 |      
|Greater China(4)                                 |       |                                   | 2,552 |       |      |   | 2,203 |       |   |   | 1,859 |      
|Japan                                            |       |                                   | 400   |       |      |   | 307   |       |   |   | 403   |      
|Emerging Markets(3)(5)(6)                        |       |                                   | 513   |       |      |   | 442   |       |   |   | 459   |      
|                                                 |       |                                   |       |       |      |   |       |       |  
|                                                 | Total |                                   | $     | 9,854 |      |   | $     | 8,882 |   |   | $     | 8,760 |  
|                                                 |       |                                   |       |       |      |   |       |       |  
|Net Revenues by Product Segment                  |       |                                   |       |       |      |   |       |       |   |   |       |      
|Application Specific Product Group Segment (ASG) |       |                                   | 54.7  | %     |      |   | 56.2  | %     |   |   | 56.0  | %    
|Memory Products Group Segment (MPG)              |       |                                   | 21.7  |       |      |   | 21.9  |       |   |   | 21.5  |      
|Micro, Power, Analog Product Group Segment (MPA) |       |                                   | 22.8  |       |      |   | 21.2  |       |   |   | 21.7  |      
|Others(1)                                        |       |                                   | 0.8   |       |      |   | 0.7   |       |   |   | 0.8   |      
|                                                 |       |                                   |       |       |      |   |       |       |  
|                                                 | Total |                                   |       | 100.0 | %    |   |       | 100.0 | % |   |       | 100.0 | %
|                                                 |       |                                   |       |       |      |   |       |       |  
|Net Revenues by Location of Order Shipment(2)    |       |                                   |       |       |      |   |       |       |   |   |       |      
|Europe(3)                                        |       |                                   | 31.2  | %     |      |   | 31.4  | %     |   |   | 32.3  | %    
|North America(6)                                 |       |                                   | 12.5  |       |      |   | 14.4  |       |   |   | 15.5  |      
|Asia Pacific(4)                                  |       |                                   | 21.1  |       |      |   | 20.9  |       |   |   | 21.2  |      
|Greater China(4)                                 |       |                                   | 25.9  |       |      |   | 24.8  |       |   |   | 21.2  |      
|Japan                                            |       |                                   | 4.1   |       |      |   | 3.5   |       |   |   | 4.6   |      
|Emerging Markets(3)(5)(6)                        |       |                                   | 5.2   |       |      |   | 5.0   |       |   |   | 5.2   |      
|                                                 |       |                                   |       |       |      |   |       |       |  
|Total                                            |       |                                   | 100.0 | %     |      |   | 100.0 | %     |   |   | 100.0 | %    
|                                                 |       |                                   |       |       |      |   |       |       |  






|    |                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes revenues from sales of subsystems and other revenues
    not allocated to product segments.                                                                                                                                                                                                                                                                  
|   
|(2) | Net revenues by location of order shipment are classified by
    location of customer invoiced. For example, products ordered by
    companies to be invoiced to Asia Pacific affiliates are
    classified as Asia Pacific revenues.                                                                                                                                 
|   
|(3) | Since January 1, 2005, the region Europe
    includes the former East European countries that joined the EU
    in 2004. These countries were part of the Emerging Markets
    region in the previous periods. Net revenues for Europe and
    Emerging Markets for prior periods were restated to include such
    countries in the Europe region for such periods.
|   
|(4) | As of January 1, 2006, we created a new region,
    Greater China to focus exclusively on our operations
    in China, Hong Kong and Taiwan. Net revenues for Asia Pacific
    for prior periods were restated according to the new perimeter.                                                                                                                      
|   
|(5) | Emerging Markets in 2005 and 2006 included markets such as
    India, Latin America (excluding Mexico), the Middle East and
    Africa, Europe (non-EU and non-EFTA) and Russia.                                                                                                                                                                                      
|   
|(6) | As of July 2, 2006, the region North America
    includes Mexico which was part of Emerging Markets in prior
    periods. Amounts have been reclassified to reflect this change.                                                                                                                                                                                    

23



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##### Table of Contents



Strategy






| |   |                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the changing long-term structural growth of the overall market
    for semiconductor products, which has moved from double-digit
    growth to single-digit average growth over the last several
    years;                                                                                      
|
| |  | the strong development of new emerging applications in areas
    such as wireless communications, solid-state storage, digital TV
    and video products and games;                                                                                                                              
|
| |  | the increasing importance of the Asia Pacific region and
    emerging countries, particularly China, which represents the
    fastest growing regional market;                                                                                                                                   
|
| |  | the importance of convergence between wireless, consumer and
    computer applications, which drives customer demand to seek new
    system-level, turnkey solutions from semiconductor suppliers;                                                                                               
|
| |  | the evolution of the customer base from original equipment
    manufacturers (OEM) to a mix of OEM, electronic
    manufacturing service providers (EMS) and original
    design manufacturers (ODM);                                                                                      
|
| |  | the expansion of available manufacturing capacity through
    third-party providers; and                                                                                                                                                                                                         
|
| |  | the increased participation in the semiconductor industry of
    private equity firms, exemplified by the takeovers in 2006 of
    two of the top ten semiconductor companies, which may lead to
    strategic repositionings of those companies and reorganization
    amongst industry players.



Broad, balanced market exposure.


Product strategy and innovation.






Customer-based initiatives. Alcatel-Lucent,


24



---



##### Table of Contents





Global integrated manufacturing infrastructure.


Research and development partnerships.


Integrated presence in key regional markets.


Product quality excellence.


Return on capital employed.


Products and Technology








| |   |                                               
| | - | ----------------------------------------------
| |  | Application Specific Product Group segment;   
|
| |  | Memory Products Group segment; and            
|
| |  | Micro, Power and Analog Product Group segment.

25



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##### Table of Contents







| |                                           
| | ------------------------------------------
| | Application Specific Product Group Segment







Home, Personal and Communication Products




Personal and Multimedia Group.




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) Cellular Communications Division.We focus our
    product offerings on cellular phones serving several major OEMs,
    with differentiated ICs. In this market, we are strategically
    positioned in energy management, audio coding and decoding
    functions (CODEC) and radio frequency ICs. We
    estimate that we ship over 30%, by volume, of the mobile-phone
    industrys primary energy-management devices and audio ICs.
    We are transitioning from ICs to modular solutions in the field
    of radio frequency and energy management for 3G handsets. In
    December 2006, we announced a major design win for an ASIC
    solution for use in 3G/3.5G digital basebands at Ericsson Mobile
    Platforms. This award represents a significant new product
    category for us.                                                           
|
| | (b) Application Processor Division.We offer a
    family of products, known as the Nomadik family,
    addressing the market for multimedia application processor
    chips. These products are designed for 2.5/3G mobile phones,
    portable wireless products and other applications, and the chips
    are being sampled by a wide range of potential customers. We
    have several design wins in 2.5/3G mobile smart and feature
    phones for three tier-one customers, Nokia, Samsung and LG.                                                                                                                                                                                                                                                                                                                                                            
|
| | (c) Imaging Division.We focus on the wireless
    handset image-sensor market. We are in production of CMOS-based
    camera modules and processors for low-and-high density pixel
    resolutions, which also meet the auto focus, advanced fixed
    focus and miniaturization requirements of this market. We have
    cumulatively shipped approximately 200 million CMOS
    camera-phone solutions since entering this market in 2003.
    According to Prismark, we were tied for the number one position
    in camera module manufacturing in 2006.                                                                                                                                                                                                                                                                                                          
|
| | (d) Connectivity Division.To respond to the market
    need for increased functionality of handsets, we created the
    Connectivity Division to address wireless LAN
    (WLAN), Bluetooth and connectivity requirements. Our
    product offerings include WLAN and Bluetooth and Bluetooth FM
    radio combination chips designed for low power consumption and a
    small form factor. We have multiple design wins and are in
    volume production for several customers in Asia and Europe for
    our products. In particular, we are manufacturing in volume our
    single-chip WLAN, Bluetooth and combination ICs for several
    customers, including a tier-one cellphone manufacturer. Our next
    generation of ICs increase combination options, with our
    third-generation chips offering single-die multi-function
    capability in 65-nm.

Home Entertainment Group. .




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) Home Video Division.This division focuses on
    products for digital retail, satellite, cable and IPTV set-top
    box products and digital television offerings. We continue to
    expand our product offerings and customer base by introducing
    solutions for the set-top box market with features such as
    web-browsing, digital video recording and time-shifting
    capabilities. In 2006, we reinforced the market leadership of our

26



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | OMEGA family of set-top box back-end decoders with the
    introduction of the STi710x series of products, the latest
    member of our OMEGA family of set-top box decoder solutions.
    This 90-nm family of single-chip SoC device addresses the
    high-definition market, performs at an advanced speed and has
    enhanced graphics and security features as well as integrated
    DVR capability, while retaining compatibility with our earlier
    products. We continue to strengthen our product offerings by
    addressing software solutions supporting multiple codes,
    including DVB-MHP (Java) and Microsoft Windows Media based
    systems.









| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) Interactive System Solutions Division.We offer
    customers and partners the capability to jointly develop highly
    integrated solutions for their consumer products. We utilize a
    broad and proven base of expertise, advanced technologies and
    hardware/software intellectual property to provide best-in-class
    differentiated products for a select base of customers and
    markets.                                                                                               
|
| | (c) Home Display Peripherals Division.This division
    offers products aimed at the analog TV market, switches and
    sound processors as well as CRT monitors.                                                                                                                                                                                                                                                                                                                                          
|
| | (d) Audio Division.We design and manufacture a wide
    variety of components for use in audio applications. Our audio
    products include audio power amplifiers, audio processors and
    graphic-equalizer ICs. We recently introduced a family of class
    D audio amplifier offerings aimed primarily at home,
    desktop and mobile applications with digital-to-digital complete
    system solution capability that improve sound quality while
    reducing power consumption, size and cost.

Communications Infrastructure and Displays Group.




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) Wireless Infrastructure Division.We formed the
    Wireless Infrastructure division to develop dedicated
    infrastructure chip solutions that will be focused on
    third-generation telecom standards, while supporting existing
    standards as well. We have already developed all of the
    technologies required for the wireless infrastructure ASIC
    market due to our many years of experience in the fields of
    digital baseband chip, radio frequency and mixed-signal products.



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Greenside family of products combine the markets first
    SoC baseband processor for wireless infrastructure applications
    with multi-standard software libraries, optimized for GSM, EDGE,
    W-CDMA, and WiMAX networks. This family of products is geared
    toward addressing the needs of both Macro and Femto basestation
    markets.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) Wireline Infrastructure Division.Our wireline
    telecommunications products, both ASIC and ASSP, are used in
    telephone sets, modems, subscriber line interface cards
    (SLICs) for digital central office switching
    equipment and the high-speed electronic and optical
    communications networks.                                                                                                                                                                                                                                               
|
| | (c) Display Division.Our products cover driver
    chips for the flat-panel industry and CRT applications. Our
    product development is focused mainly on driver chips for
    various kinds of flat-panel display technologies such as small
    and large LCDs, Plasma, OLED (Organic Light Emitting Diode) and
    E-Paper. These products use proprietary technologies fitting the
    various electrical parameters required by those market segments,
    ranging from low to very high voltages and currents and from
    junction to oxide isolation (SOI).



| |                              
| | -----------------------------
| | Computer Peripherals Products

Data Storage Division.


27



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Printer Division.


Microfluidics Division.




| |                    
| | -------------------
| | Automotive Products



Powertrain and Safety Division.


Car Body Division.


Car, Radio and Multimedia Division.


Digital Broadcast Radio Division.




| |                              
| | -----------------------------
| | Memory Products Group Segment





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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) Wireless Flash Memories Division.Wireless
    applications have very specific requirements in power
    consumption, packaging and memory addressing. We offer a very
    wide portfolio of wireless NOR Flash memories from single-die
    low-density products through high-density 1-Gbit solutions, as
    well as multiple chip packages containing several memory
    technology components.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | (ii) Standard Nonvolatile Memories Division. We
    produce a broad range of industry-standard, general-purpose
    Flash memories from 1 to 64 Mbit and we are in the process of
    producing Flash memories that will go up to 128 Mbit. We
    also produce the more mature erasable programmable read-only
    memory (EPROM), from 64 Kilobit
    (Kbit) to 32 Mbit. Efficient manufacturing, together
    with our sales and distribution channels, has contributed to the
    exploitation of our technological advantage in Flash and EPROM.
    The same approach is being applied to industry-standard Flash.                                                                                                                                                                                                                                                                                                                                                                        
|
| | (iii) Serial Nonvolatile Memories Division. We offer
    serial electronically erasable programmable read-only memory
    (EEPROM) up to 512 Kbit, and serial Flash memories
    (SNVM). Serial EEPROMs are the most popular type of
    EEPROMs and are used in computer, automotive and consumer
    applications. Combining the typical interface of serial EEPROM
    and Flash technology, we pioneered the concept of serial Flash.
    Serial Flash allows integration of up to 64 Mbit and 128 Mbit in
    an 8-pin package for a large variety of applications.                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | (iv) NAND Flash and Storage Media Division. In 2004,
    we began offering NAND Flash memory products pursuant to a
    co-development and manufacturing agreement with Hynix
    Semiconductor. Our efforts are targeted at the lower density
    memory requirements evolving for embedded wireless applications.
    Our most advanced offering, a single die 8 Gigabit
    (Gbit) NAND Flash manufactured in
    60-nm technology, is
    now available in production. NAND Flash is primarily used to
    store information such as music, still pictures, video and data
    files in a variety of consumer applications, including mobile
    phones, MP3 readers, universal serial bus (USB) keys
    and digital still cameras.                                                                                                                                                                                                                                                        
|
| | (v) Smartcard IC Division. Smartcards are card
    devices containing ICs 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,
    cellular telephone systems and banks, as well as pay television
    systems and ID/passport cards. Other applications include
    medical record applications, card-access security systems,
    toll-payment and secure transactions over the Internet
    applications. We have a long track record of leadership in
    Smartcard ICs. Our expertise in security is a key to our
    leadership in the finance and
    pay-TV segments and
    development of IT applications. If addition, our mastering of
    the nonvolatile memory technologies is instrumental to offering
    the highest memory sizes (up to 128 KBytes and even
    1 MByte), particularly important to address the emerging
    high-end mobile phone market.
|
| | (vi) Incard Division. The division develops,
    manufactures and sells plastic cards (both memory- and
    microprocessors-based) for banking, identification and telecom
    applications. Incard operates as a standalone organization and
    also directly controls the sales force for this product offering.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 





| |                                              
| | ---------------------------------------------
| | Micro, Power and Analog Product Group Segment



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Power MOSFET Division.


Power Bipolar, IGBT and RF Division.


ASD and IPAD Division. tm


Linear and Interface Division.


Microcontroller Division.


Industrial and Power Conversion Division.


Advanced Analog and Logic Division.


Strategic Alliances with Customers and Industry
Partnerships


Alcatel-Lucent,


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Customers and Applications


Alcatel-Lucent,






|                   |  |                                                                                                                                                                                                                |  |                                                                                                                                                                   |  |                 |  |                
|------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- |  | ---------------
|Telecommunications
|Customers:         |  | 2Wire                                                                                                                                                                                                          |  | Finisar                                                                                                                                                           |  | Nokia           |  | BG/Tech        
|                   |  | Alcatel-Lucent                                                                                                                                                                                                 |  | Huawei                                                                                                                                                            |  | Nortel Networks |  | Siemens        
|                   |  | BenQ                                                                                                                                                                                                           |  | LG Electronics                                                                                                                                                    |  | Philips         |  | Sony Ericsson  
|                   |  | Cisco                                                                                                                                                                                                          |  | Motorola                                                                                                                                                          |  | Samsung         |  | TCL Corporation
|Applications:      |  | Camera modules/ mobile imaging
    Central office switching systems
    Data transport (routing, switching for electronic and
    optical networks)
    Digital cellular telephones
    Internet access (XDSL) |  | Portable multimedia
    Telephone terminals
    (wireline and wireless)
    Wireless connectivity
    (Bluetooth, WLAN,
    FM radio)
    Wireless infrastructure

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|                                   |  |                                                                                                                                                       |  |                                                                                                                       |  |                     |  |                
|---------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------- |  | ------------------- |  | ---------------
|Computer Peripherals              
|Customers:                         |  | Agilent                                                                                                                                               |  | Delta                                                                                                                 |  | Lexmark             |  | Samsung        
|                                   |  | Apple                                                                                                                                                 |  | Hewlett-Packard                                                                                                       |  | Taiwan-Liton        |  | Seagate        
|                                   |  | Xilinx                                                                                                                                                |  | Intel                                                                                                                 |  | Maxtor              |  | Western Digital
|                                   |  | Dell                                                                                                                                                  |  | Lenovo-IBM                                                                                                            |  | Microsoft           |  | Wintech        
|Applications:                      |  | Data storage
    Monitors and displays                                                                                                                |  | Power management
    Printers
    Webcams                                                                            
|Automotive                        
|Customers:                         |  | Bosch                                                                                                                                                 |  | Harman                                                                                                                |  | Hitachi             |  | TRW            
|                                   |  | Conti                                                                                                                                                 |  | Hella                                                                                                                 |  | Marelli             |  | Valeo          
|                                   |  | Delphi                                                                                                                                                |  | Kostal                                                                                                                |  | Pioneer             |  | Visteon        
|                                   |  | Denso                                                                                                                                                 |  | Lear                                                                                                                  |  | Siemens VDO         |  | Oasis          
|                                   |  |                                                                                                                                                       |  |                                                                                                                       |  | Sirius              |  | XM Satellite   
|Applications:                      |  | Airbags
    Anti-lock braking systems
    Body and chassis electronics
    Engine management systems
    (ignition and injection)                     |  | Global positioning
    systems Multimedia
    Radio/ satellite radio
    Telematics
    Vehicle stability
    control
|Consumer                          
|Customers:                         |  | ADB                                                                                                                                                   |  | LG Electronics                                                                                                        |  | Pace                |  | AOC            
|                                   |  | Bose Corporation                                                                                                                                      |  | Nintendo                                                                                                              |  | Philips             |  | Sony           
|                                   |  | Echostar                                                                                                                                              |  | Skyworth                                                                                                              |  | Samsung             |  | Thomson        
|                                   |  | Humax                                                                                                                                                 |  | Safran                                                                                                                |  | Scientific Atlanta  |  | TTE WW         
|                                   |  |                                                                                                                                                       |  |                                                                                                                       |  | Matsushita          |  | Vestel         
|Applications:                      |  | Audio processing (CD, DVD, Hi-Fi)                                                                                                                     |  |                                                                                                                       |  | DVDs
    Imaging    |  |                
|                                   |  | Analog/ digital TVs                                                                                                                                   |  |                                                                                                                       |  | Set-top boxes       |  |                
|                                   |  | Digital cameras                                                                                                                                       |  |                                                                                                                       |  | VCRs                |  |                
|                                   |  | Digital music players                                                                                                                                 |  |                                                                                                                       |  | Displays            |  |                
|Industrial/ Other
    Applications
|Customers:                         |  | American Power Conversion                                                                                                                             |  | Delta                                                                                                                 |  | General Electric    |  | Philips        
|                                   |  | Artesyn                                                                                                                                               |  | Gemalto                                                                                                               |  | Vodafone            |  | Siemens        
|                                   |  | Astec                                                                                                                                                 |  | Universal Lighting                                                                                                    |  | Nagra               |  | TIM            
|                                   |  | Autostrade                                                                                                                                            |  |                                                                                                                       |  | Giesecke & Devrient |  | Mikron JSC     
|Applications:                      |  | Battery chargers
    Smartcard ICs
    Intelligent power switches
    Industrial automation/ control systems
    Lighting systems
    (lamp ballasts) |  | MEMS
    Motor controllers
    Power supplies
    Switch mode power
    supplies                                     



Sales, Marketing and Distribution




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just-in
















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Research and Development












|                                |  |                                   |       |   |      |   |       |      |  |   |       |  
|------------------------------- |  | --------------------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                |  | Year Ended December 31,           |      
|                                |  |                                   |      
|                                |  | 2006                              |       |   | 2005 |   |       | 2004 | 
|                                |  |                                   |       |   |      |   |       |      | 
|                                |  | (In millions, except percentages) |      
|Expenditures                    |  | $                                 | 1,667 |   |      | $ | 1,630 |      |  | $ | 1,532 |  
|As a percentage of net revenues |  |                                   | 16.9  | % |      |   | 18.3  | %    |  |   | 17.5  | %



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90-nm 45-nm,


Groupement dintérêt
économique










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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Soft Computing, in which a variety of problem-solving techniques
    such as fuzzy logic, neural networks and genetic algorithms are
    applied to situations where the knowledge is inexact or the
    computational resources required to obtain a complete solution
    would be excessive using traditional computing architectures.
    Potential applications include more effective automotive engine
    control, emerging fuel-cell technology and future
    quantum-computing techniques that will offer much greater
    computational speeds than are currently achievable;                        
|
| |  | Nano-Organics, which encompasses a variety of emerging
    technologies that deal with structures smaller than the deep
    sub-micron scale containing as little as a few hundred or
    thousand atoms. Examples include carbon nanotubes, which have
    potential applications in displays and memories, and all
    applications that involve electronic properties of large
    molecules such as proteins; and                                                                                                                                                                                            
|
| |  | Micro-Machining, in which the ability to precisely control the
    mechanical attributes of silicon structures is exploited. There
    are many potential applications, including highly sensitive
    pressure and acceleration sensors, miniature microphones,
    microfluidic devices and optical devices. In addition, along
    with its optical properties, the mechanical properties of
    silicon represent one of the most important links between
    conventional SoC technology and all the emerging technologies
    such as bioelectronics that can benefit from our semiconductor
    expertise.

system-on








tm


TM TM




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| |   |                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Two in the area of consumer: set-top boxes, ranging from digital
    terrestrial, to cable, and satellite to Internet Protocol based
    devices, and Integrated Digital TV, which will include the
    expected promising new wave of High-Definition sets;
|
| |  | One in the area of computer peripherals: the SPEAr family of
    reconfigurable SoC ICs for printers and related
    applications; and                                                                                                                      
|
| |  | Two in the area of wireless: Application Processors, namely our
    Nomadik platform that is bringing multimedia to the
    next-generation mobile devices and Wireless Infrastructure for
    3G base-stations.                                            

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Property, Plants and Equipment




|                      |  |                                                                                                                      |  |                                                                                                                                                                                                    
|--------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Location              |  | Products                                                                                                             |  | Technologies                                                                                                                                                                                       
|                      |  |                                                                                                                      |  |                                                                                                                                                                                                    
|Front-end facilities  |  |                                                                                                                      |  |                                                                                                                                                                                                    
|Crolles1, France      |  | Application-specific products                                                                                        |  | Fab: 200-mm CMOS and BiCMOS, research and development on VLSI
    sub-micron technologies                                                                                                          
|Crolles2, France(1)   |  | Application-specific products and leading edge logic products                                                        |  | Fab: 300-mm research and development on deep sub-micron (90-nm
    and below) CMOS and system-on-chip (SoC) technology
    development                                                           
|Phoenix, Arizona      |  | Application-specific products and microcontrollers                                                                   |  | Fab: 200-mm CMOS, BiCMOS, BCD                                                                                                                                                                      
|Agrate, Italy         |  | Nonvolatile memories,                                                                                                |  | Fab 1: 200-mm BCD, nonvolatile                                                                                                                                                                     
|                      |  | microcontrollers and application-                                                                                    |  | memories, MEMS                                                                                                                                                                                     
|                      |  | specific products                                                                                                    |  | Fab 2: 200-mm Flash, embedded Flash, research and development on
    nonvolatile memories and BCD technologies                                                                                     
|Rousset, France       |  | Microcontrollers, nonvolatile                                                                                        |  | Fab 1: 150-mm CMOS, Smartcard                                                                                                                                                                      
|                      |  | memories and Smartcard ICs and                                                                                       |  | (phase-out to be completed in early                                                                                                                                                                
|                      |  | application-specific products                                                                                        |  | 2007)                                                                                                                                                                                              
|                      |  |                                                                                                                      |  | Fab 2: 200-mm CMOS, Smartcard, embedded Flash                                                                                                                                                      
|Catania, Italy        |  | Power transistors, Smart Power                                                                                       |  | Fabs 1/2: 150-mm Power metal-on                                                                                                                                                                    
|                      |  | ICs and nonvolatile memories                                                                                         |  | silicon oxide semiconductor process technology
    (MOS),VIPpowertm,
    MO-3 and Pilot Line RF                                                                                                  
|                      |  |                                                                                                                      |  | Fab 3: 200-mm Flash, Smartcard, EEPROM 300-mm building
    constructed but not fully facilitized and equipped                                                                                      
|Tours, France         |  | Protection thyristors, diodes and application specific
    discrete-power transistors                                |  | Fab: 125-mm, 150-mm and 200-mm pilot line discrete                                                                                                                                                 
|Ang Mo Kio, Singapore |  | Microcontrollers, power transistors, commodity products,
    nonvolatile memories, and application-specific products |  | Fab 1: 125-mm, power MOS, bipolar transistor, bipolar ICs,
    standard linear
    Fab 2: 150-mm bipolar, power MOS and BCD, EEPROM, Smartcard,
    Micros
    Fab 3: 200-mm BiCMOS, Flash Memories
|Carrollton, Texas     |  | Memories and application-specific products                                                                           |  | Fab: 150-mm BiCMOS, BCD and CMOS                                                                                                                                                                   
|Back-end facilities   |  |                                                                                                                      |  |                                                                                                                                                                                                    
|Muar, Malaysia        |  | Application-specific and standard products, microcontrollers                                                         |  |                                                                                                                                                                                                    
|Kirkop, Malta         |  | Application-specific products                                                                                        |  |                                                                                                                                                                                                    
|Toa Payoh, Singapore  |  | Nonvolatile memories and power ICs                                                                                   |  |                                                                                                                                                                                                    
|Ain Sebaa, Morocco    |  | Discrete and standard products                                                                                       |  |                                                                                                                                                                                                    
|Bouskoura, Morocco    |  | Nonvolatile memories, discrete and standard products,
    micromodules, RF and subsystems                            |  |                                                                                                                                                                                                    
|Shenzhen, China(2)    |  | Nonvolatile memories, discrete and standard products                                                                 |  |                                                                                                                                                                                                    

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|    |                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------
|(1) | Operated jointly with NXP Semiconductors and Freescale
    Semiconductor. The agreement will terminate at the end of 2007.
|   
|(2) | Jointly operated with SHIC, a subsidiary of Shenzhen Electronics
    Group.                                               



start-up










ramp-up ramp-up


ramp-up


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state-of


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Intellectual Property










Backlog






just-in


41



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Competition








Organizational Structure and History






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|                            |  |                                                                          |  |                      |     | 
|--------------------------- |  | ------------------------------------------------------------------------ |  | -------------------- | --- | 
|                            |  |                                                                          |  | Percentage Ownership |    
|Legal Seat                  |  | Name                                                                     |  | (Direct or Indirect) |    
|                            |  |                                                                          |  |                      |    
|Australia  Sydney          |  | STMicroelectronics PTY Ltd                                               |  |                      | 100 | 
|Belgium  Zaventem          |  | STMicroelectronics Belgium N.V.                                          |  |                      | 100 | 
|Belgium  Zaventem          |  | Proton World International N.V.                                          |  |                      | 100 | 
|Brazil  Sao Paolo          |  | STMicroelectronics Ltda                                                  |  |                      | 100 | 
|Brazil  Sao Paulo          |  | Incard do Brazil Ltda                                                    |  |                      | 50  | 
|Canada  Ottawa             |  | STMicroelectronics (Canada), Inc.                                        |  |                      | 100 | 
|China  Shenzhen            |  | Shenzhen STS Microelectronics Co. Ltd                                    |  |                      | 60  | 
|China  Shenzhen            |  | STMicroelectronics (Shenzhen) Co. Ltd                                    |  |                      | 100 | 
|China  Shenzhen            |  | STMicroelectronics (Shenzhen) Manufacturing Co. Ltd                      |  |                      | 100 | 
|China  Shenzhen            |  | STMicroelectronics (Shenzhen) R&D Co. Ltd                                |  |                      | 100 | 
|China  Shanghai            |  | STMicroelectronics (Shanghai) Co. Ltd                                    |  |                      | 100 | 
|China  Shanghai            |  | STMicroelectronics (Shanghai) R&D Co. Ltd                                |  |                      | 100 | 
|China  Shanghai            |  | Shanghai Blue Media Co. Ltd                                              |  |                      | 65  | 
|China  Shanghai            |  | STMicroelectronics (China) Investment Co. Ltd                            |  |                      | 100 | 
|China  Jiangsu(1)          |  | Hynix-ST Semiconductor Ltd                                               |  |                      | 33  | 
|China  Beijing             |  | STMicroelectronics (Beijing) R&D Co. Ltd                                 |  |                      | 100 | 
|Czech Republic  Prague     |  | STMicroelectronics Design and Application s.r.o.                         |  |                      | 100 | 
|Finland  Lohja             |  | STMicroelectronics OY                                                    |  |                      | 100 | 
|France  Crolles            |  | STMicroelectronics (Crolles 2) SAS                                       |  |                      | 100 | 
|France  Montrouge          |  | STMicroelectronics S.A.                                                  |  |                      | 100 | 
|France  Rousset            |  | STMicroelectronics (Rousset) SAS                                         |  |                      | 100 | 
|France  Tours              |  | STMicroelectronics (Tours) SAS                                           |  |                      | 100 | 
|France  Grenoble           |  | STMicroelectronics (Grenoble) SAS                                        |  |                      | 100 | 
|Germany  Grasbrunn         |  | STMicroelectronics GmbH                                                  |  |                      | 100 | 
|Germany  Grasbrunn         |  | STMicroelectronics Design and Application GmbH                           |  |                      | 100 | 
|Holland  Amsterdam         |  | STMicroelectronics Finance B.V.                                          |  |                      | 100 | 
|Hong Kong  Hong Kong       |  | STMicroelectronics LTD                                                   |  |                      | 100 | 
|India  Noida               |  | STMicroelectronics Pvt Ltd                                               |  |                      | 100 | 
|Israel  Netanya            |  | STMicroelectronics Ltd                                                   |  |                      | 100 | 
|Italy  Catania             |  | CO.RI.M.ME.                                                              |  |                      | 100 | 
|Italy  Aosta               |  | DORA S.p.a.                                                              |  |                      | 100 | 
|Italy  Agrate Brianza      |  | ST Incard S.r.l.                                                         |  |                      | 100 | 
|Italy  Naples              |  | STMicroelectronics Services S.r.l.                                       |  |                      | 100 | 
|Italy  Agrate Brianza      |  | STMicroelectronics S.r.l.                                                |  |                      | 100 | 
|Italy  Caivano(1)          |  | INGAM Srl                                                                |  |                      | 20  | 
|Japan  Tokyo               |  | STMicroelectronics KK                                                    |  |                      | 100 | 
|Malaysia  Kuala Lumpur     |  | STMicroelectronics Marketing SDN BHD                                     |  |                      | 100 | 
|Malaysia  Muar             |  | STMicroelectronics SDN BHD                                               |  |                      | 100 | 
|Malta  Kirkop              |  | STMicroelectronics Ltd                                                   |  |                      | 100 | 
|Mexico  Guadalajara        |  | STMicroelectronics Marketing, S. de R.L. de C.V.                         |  |                      | 100 | 
|Mexico  Guadalajara        |  | STMicroelectronics Design and Applications, S. de R.L. de C.V.           |  |                      | 100 | 
|Morocco  Rabat             |  | Electronic Holding S.A.                                                  |  |                      | 100 | 
|Morocco  Casablanca        |  | STMicroelectronics S.A.                                                  |  |                      | 100 | 
|Singapore  Ang Mo Kio      |  | STMicroelectronics ASIA PACIFIC Pte Ltd                                  |  |                      | 100 | 
|Singapore  Ang Mo Kio      |  | STMicroelectronics Pte Ltd                                               |  |                      | 100 | 
|Spain  Madrid              |  | STMicroelectronics S.A.                                                  |  |                      | 100 | 
|Sweden  Kista              |  | STMicroelectronics A.B.                                                  |  |                      | 100 | 
|Switzerland  Geneva        |  | STMicroelectronics S.A.                                                  |  |                      | 100 | 
|Switzerland  Geneva        |  | INCARD SA                                                                |  |                      | 100 | 
|Switzerland  Geneva        |  | INCARD Sales and Marketing SA                                            |  |                      | 100 | 
|Turkey  Istanbul           |  | STMicroelectronics Elektronik Arastirma ve Gelistirme Anonim
    Sirketi |  |                      | 100 | 
|United Kingdom  Marlow     |  | STMicroelecrtonics Limited                                               |  |                      | 100 | 
|United Kingdom  Marlow     |  | STMicroelectronics (Research & Development) Limited                      |  |                      | 100 | 
|United Kingdom  Bristol    |  | Inmos Limited                                                            |  |                      | 100 | 
|United Kingdom  Reading    |  | Synad Technologies Limited                                               |  |                      | 100 | 
|United States  Carrollton  |  | STMicroelectronics Inc.                                                  |  |                      | 100 | 
|United States  Wilmington  |  | STMicroelectronics (North America) Holding, Inc.                         |  |                      | 100 | 
|United States  Wilsonville |  | The Portland Group, Inc.                                                 |  |                      | 100 | 






|    |                   
|--- | ------------------
|(1) | Equity Investments

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Public Funding










Fondo per gli Investimenti della Ricerca di
Base, Fondo
per le Agevolazioni alla Ricerca, Fondo per lInnovazione
Tecnologica,


 


    inter alia


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       


Contratto di Programma




Revenue Recognition






Elements of Financial Statements






45



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Suppliers






just-in




Environmental Matters








46



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Industry Background




| |                         
| | ------------------------
| | The Semiconductor Market





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|                                |        |                                  |       |      |                                 |   |       |      |  |   |       |      |  |      |       |      |      |   |       |       |  |   |       |     |  |       |      |      |       |  |      |       |   |  |       |      |  |  |      |      |  |  |      |     |  |  |      |      | 
|------------------------------- | ------ | -------------------------------- | ----- | ---- | ------------------------------- | - | ----- | ---- |  | - | ----- | ---- |  | ---- | ----- | ---- | ---- | - | ----- | ----- |  | - | ----- | --- |  | ----- | ---- | ---- | ----- |  | ---- | ----- | - |  | ----- | ---- |  |  | ---- | ---- |  |  | ---- | --- |  |  | ---- | ---- | 
|                                |        | Worldwide Semiconductor Sales(1) |       |      | Compound Annual Growth Rates(2) |  
|                                |        |                                  |       |      |                                 |  
|                                |        | 2006                             |       |      | 2005                            |   |       | 2004 |  |   | 2003  |      |  | 1998 |       |      | 1988 |   |       | 05-06 |  |   | 04-05 |     |  | 03-04 |      |      | 88-06 |  |      | 88-98 |   |  | 98-03 |     
|                                |        |                                  |       |      |                                 |   |       |      |  |   |       |      |  |      |       |      |      |   |       |       |  |   |       |     |  |       |      |      |       |  |      |       |   |  |       |     
|                                |        | (In billions)                    |       |      | (Expressed as percentages)      |  
|Integrated Circuits and Sensors |        | $                                | 214.8 |      |                                 | $ | 197.3 |      |  | $ | 183.5 |      |  | $    | 143.5 |      |      | $ | 109.1 |       |  | $ | 35.9  |     |  |       | 8.9  | %    |       |  | 7.5  | %     |   |  | 27.9  | %    |  |  | 10.5 | %    |  |  | 11.8 | %   |  |  | 5.6  | %   
|Analog, Sensors and Actuators   |        |                                  | 42.3  |      |                                 |   | 36.5  |      |  |   | 36.1  |      |  |      | 30.4  |      |      |   | 19.1  |       |  |   | 7.2   |     |  |       | 16.0 |      |       |  | 0.9  |       |   |  | 19.0  |      |  |  | 10.3 |      |  |  | 10.2 |     |  |  | 9.7  |     
|Digital Logic                   |        |                                  | 114.1 |      |                                 |   | 112.4 |      |  |   | 100.3 |      |  |      | 80.7  |      |      |   | 67.0  |       |  |   | 17.8  |     |  |       | 1.5  |      |       |  | 12.1 |       |   |  | 24.3  |      |  |  | 10.9 |      |  |  | 14.2 |     |  |  | 3.8  |     
|Memory:                         |        |                                  |       |      |                                 |   |       |      |  |   |       |      |  |      |       |      |      |   |       |       |  |   |       |     |  |       |      |      |       |  |      |       |   |  |       |      |  |  |      |      |  |  |      |     |  |  |      |     
|                                | DRAM   |                                  |       | 33.8 |                                 |   |       | 25.6 |  |   |       | 26.8 |  |      |       | 16.7 |      |   |       | 14.0  |  |   |       | 6.3 |  |       |      | 32.0 |       |  |      | (4.7  | ) |  |       | 60.9 |  |  |      | 9.8  |  |  |      | 8.3 |  |  |      | 3.6  | 
|                                | Others |                                  |       | 24.7 |                                 |   |       | 22.9 |  |   |       | 20.3 |  |      |       | 15.8 |      |   |       | 9.0   |  |   |       | 4.6 |  |       |      | 7.7  |       |  |      | 13.0  |   |  |       | 28.3 |  |  |      | 9.8  |  |  |      | 6.9 |  |  |      | 12.0 | 
|                                |        |                                  |       |      |                                 |   |       |      |  |   |       |      |  |      |       |      |      |   |       |       |  |   |       |     |  |       |      |      |       |  |      |       |   |  |       |     
|Total Memory                    |        |                                  | 58.5  |      |                                 |   | 48.5  |      |  |   | 47.1  |      |  |      | 32.5  |      |      |   | 23.0  |       |  |   | 10.9  |     |  |       | 20.5 |      |       |  | 2.9  |       |   |  | 45.0  |      |  |  | 9.8  |      |  |  | 7.7  |     |  |  | 7.2  |     
|Total Digital                   |        |                                  | 172.6 |      |                                 |   | 160.9 |      |  |   | 147.4 |      |  |      | 113.2 |      |      |   | 90.0  |       |  |   | 28.7  |     |  |       | 7.3  |      |       |  | 9.1  |       |   |  | 30.3  |      |  |  | 10.5 |      |  |  | 12.1 |     |  |  | 4.7  |     
|Discrete                        |        |                                  | 16.6  |      |                                 |   | 15.2  |      |  |   | 15.8  |      |  |      | 13.3  |      |      |   | 11.9  |       |  |   | 7.0   |     |  |       | 8.8  |      |       |  | (3.3 | )     |   |  | 18.1  |      |  |  | 4.9  |      |  |  | 5.5  |     |  |  | 2.3  |     
|Optoelectronics                 |        |                                  | 16.3  |      |                                 |   | 14.9  |      |  |   | 13.7  |      |  |      | 9.5   |      |      |   | 4.6   |       |  |   | 2.1   |     |  |       | 9.3  |      |       |  | 8.6  |       |   |  | 43.8  |      |  |  | 12.0 |      |  |  | 8.1  |     |  |  | 15.6 |     
|                                |        |                                  |       |      |                                 |   |       |      |  |   |       |      |  |      |       |      |      |   |       |       |  |   |       |     |  |       |      |      |       |  |      |       |   |  |       |     
|TAM                             |        | $                                | 247.7 |      |                                 | $ | 227.5 |      |  | $ | 213.0 |      |  | $    | 166.4 |      |      | $ | 125.6 |       |  | $ | 45.0  |     |  |       | 8.9  | %    |       |  | 6.8  | %     |   |  | 28.0  | %    |  |  | 9.9  | %(3) |  |  | 10.8 | %   |  |  | 5.8  | %(3)
|                                |        |                                  |       |      |                                 |   |       |      |  |   |       |      |  |      |       |      |      |   |       |       |  |   |       |     |  |       |      |      |       |  |      |       |   |  |       |     
|Europe                          |        |                                  | 39.9  |      |                                 |   | 39.3  |      |  |   | 39.4  |      |  |      | 32.3  |      |      |   | 29.4  |       |  |   | 8.1   |     |  |       | 1.6  |      |       |  | (0.4 | )     |   |  | 22.0  |      |  |  | 9.3  |      |  |  | 13.8 |     |  |  | 1.9  |     
|Americas                        |        |                                  | 44.9  |      |                                 |   | 40.7  |      |  |   | 39.1  |      |  |      | 32.3  |      |      |   | 41.4  |       |  |   | 13.4  |     |  |       | 10.3 |      |       |  | 4.3  |       |   |  | 20.8  |      |  |  | 6.9  |      |  |  | 11.9 |     |  |  | (4.8 | )   
|Asia Pacific                    |        |                                  | 116.5 |      |                                 |   | 103.4 |      |  |   | 88.8  |      |  |      | 62.8  |      |      |   | 28.9  |       |  |   | 5.4   |     |  |       | 12.7 |      |       |  | 16.5 |       |   |  | 41.3  |      |  |  | 18.6 |      |  |  | 18.3 |     |  |  | 16.8 |     
|Japan                           |        |                                  | 46.4  |      |                                 |   | 44.1  |      |  |   | 45.8  |      |  |      | 38.9  |      |      |   | 25.9  |       |  |   | 18.1  |     |  |       | 5.3  |      |       |  | (3.7 | )     |   |  | 17.5  |      |  |  | 5.4  |      |  |  | 3.7  |     |  |  | 8.5  |     
|                                |        |                                  |       |      |                                 |   |       |      |  |   |       |      |  |      |       |      |      |   |       |       |  |   |       |     |  |       |      |      |       |  |      |       |   |  |       |     
|TAM                             |        | $                                | 247.7 |      |                                 | $ | 227.5 |      |  | $ | 213.0 |      |  | $    | 166.4 |      |      | $ | 125.6 |       |  | $ | 45.0  |     |  |       | 8.9  | %    |       |  | 6.8  | %     |   |  | 28.0  | %    |  |  | 9.9  | %(3) |  |  | 10.8 | %   |  |  | 5.8  | %(3)
|                                |        |                                  |       |      |                                 |   |       |      |  |   |       |      |  |      |       |      |      |   |       |       |  |   |       |     |  |       |      |      |       |  |      |       |   |  |       |     






|    |                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Source: WSTS.                                                                                                                                  
|   
|(2) | Calculated using end points of the periods specified.                                                                                          
|   
|(3) | Calculated on a comparable basis, without information with
    respect to actuators as they were not included in the indicator
    before 2003.





| |                              
| | -----------------------------
| | Semiconductor Classifications







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|        |                                             
|------- | --------------------------------------------
|Item 5. | Operating and Financial Review and Prospects

Overview


The following discussion should be read in conjunction with
our Consolidated Financial Statements and Notes thereto included
elsewhere in this
Form 20-F. The
following discussion contains statements of future expectations
and other forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, or
Section 21E of the Securities Exchange Act of 1934, each as
amended, particularly in the sections  Critical
Accounting Policies Using Significant Estimates,
 Business Outlook and
 Liquidity and Capital Resources 
Financial Outlook. Our actual results may differ
significantly from those projected in the forward-looking
statements. For a discussion of factors that might cause future
actual results to differ materially from our recent results or
those projected in the forward-looking statements in addition to
the factors set forth below, see Cautionary
Note Regarding Forward-Looking Statements and
Item 3. Key Information  Risk
Factors. We assume no obligation to update the
forward-looking statements or such risk factors.




| |                                                             
| | ------------------------------------------------------------
| | Critical Accounting Policies Using Significant
    Estimates







| |   |                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenue recognition. Our policy is to recognize revenues
    from sales of products to our customers when all of the
    following conditions have been met: (a) persuasive evidence
    of an arrangement exists; (b) delivery has occurred;
    (c) the selling price is fixed or determinable; and
    (d) collectibility is reasonably assured. This usually
    occurs at the time of shipment.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Consistent with standard business practice in the semiconductor
    industry, price protection is granted to distribution customers
    on their existing inventory of our products to compensate them
    for declines in market prices. The ultimate decision to
    authorize a distributor refund remains fully within our control.
    We accrue a provision for price protection based on a rolling
    historical price trend computed on a monthly basis as a
    percentage of gross distributor sales. This historical price
    trend represents differences in recent months between the
    invoiced price and the final price to the distributor, adjusted
    if required, to accommodate a significant move in the current
    market price. The short outstanding inventory time period,
    visibility into the standard inventory product pricing (as
    opposed to certain customized products) and long distributor
    pricing history have enabled us to reliably estimate price
    protection provisions at period-end. We record the accrued
    amounts as a deduction of revenue at the time of the sale. If
    market conditions differ from our assumptions, this could have
    an impact on future periods; in particular, if market conditions
    were to deteriorate, net revenues could be reduced due to higher
    product returns and price reductions at the time these
    adjustments occur.
|
| | Our customers occasionally return our products from time to time
    for technical reasons. Our standard terms and conditions of sale
    provide that if we determine that products are non-conforming,
    we will repair or replace the non-conforming products, or issue
    a credit or rebate of the purchase price. Quality returns are
    not related to any technological obsolescence issues and are
    identified shortly after sale in customer                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | quality control testing. Quality returns are always associated
    with end-user customers, not with distribution channels. We
    provide for such returns when they are considered as probable
    and can be reasonably estimated. We record the accrued amounts
    as a reduction of revenue.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | Our insurance policies relating to product liability only cover
    physical and other direct damages caused by defective products.
    We do not carry insurance against immaterial, non-consequential
    damages. We record a provision for warranty costs as a charge
    against cost of sales based on historical trends of warranty
    costs incurred as a percentage of sales which we have determined
    to be a reasonable estimate of the probable losses to be
    incurred for warranty claims in a period. Any potential warranty
    claims are subject to our determination that we are at fault and
    liable for damages, and such claims usually must be submitted
    within a short period following the date of sale. This warranty
    is given in lieu of all other warranties, conditions or terms
    expressed or implied by statute or common law. Our contractual
    terms and conditions typically limit our liability to the sales
    value of the products which gave rise to the claims.
|
| | We maintain an allowance for doubtful accounts for potential
    estimated losses resulting from our customers inability to
    make required payments. We base our estimates on historical
    collection trends and record a provision accordingly.
    Furthermore, we are required to evaluate our customers
    credit ratings from time to time and take an additional
    provision for any specific account that we estimate as doubtful.
    In 2006, we recorded specific provisions amounting to
    $4 million related to the expected inability to fully
    collect a certain customers receivables, in addition to
    our standard provision of 1% of total receivables based on the
    estimated historical collection trends. If we receive
    information that the financial condition of our customers has
    deteriorated, resulting in an impairment of their ability to
    make payments, additional allowances could be required.                                                              
|
| | While the majority of our sales agreements contain standard
    terms and conditions, we may, from time to time, enter into
    agreements that contain multiple elements or non-standard terms
    and conditions, which require revenue recognition judgments.
    Where multiple elements exist in an arrangement, the arrangement
    is allocated to the different elements based upon verifiable
    objective evidence of the fair value of the elements, as
    governed under Emerging Issues Task Force Issue
    No. 00-21,
    Revenue Arrangements with Multiple Deliverables(EITF 00-21).
    In 2006, we signed a $17 million licensing agreement which
    included $10 million of upfront revenue recognition related
    to the perpetual license granted and separate training and
    consulting units that will be recognized as revenue as services
    are provided.                                                                                                                                 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Goodwill and purchased intangible assets. The purchase
    method of accounting for acquisitions requires extensive use of
    estimates and judgments to allocate the purchase price to the
    fair value of the net tangible and intangible assets acquired,
    including in-process research and development, which is expensed
    immediately. Goodwill and intangible assets deemed to have
    indefinite lives are not amortized but are instead subject to
    annual impairment tests. The amounts and useful lives assigned
    to other intangible assets impact future amortization. If the
    assumptions and estimates used to allocate the purchase price
    are not correct or if business conditions change, purchase price
    adjustments or future asset impairment charges could be
    required. At December 31, 2006, the value of goodwill in
    our Consolidated Financial Statements amounted to
    $223 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Impairment of goodwill. Goodwill recognized in business
    combinations is not amortized and is instead subject to an
    impairment test to be performed on an annual basis, or more
    frequently if indicators of impairment exist, in order to assess
    the recoverability of its carrying value. Goodwill subject to
    potential impairment is tested at a reporting unit level, which
    represents a component of an operating segment for which
    discrete financial information is available and is subject to
    regular review by segment management. This impairment test
    determines whether the fair value of each reporting unit for
    which goodwill is allocated is lower than the total carrying
    amount of relevant net assets allocated to such reporting unit,
    including its allocated goodwill. If lower, the implied fair
    value of the reporting unit goodwill is then compared to the
    carrying value of the goodwill and an impairment charge is
    recognized for any excess. In determining the fair value of a
    reporting unit, we usually estimate the expected discounted
    future cash flows associated with the reporting unit.
    Significant management judgments and estimates are used in
    forecasting the future discounted cash flows including: the
    applicable industrys sales volume forecast and selling
    price evolution; the reporting units market penetration;
    the market acceptance of certain new technologies and relevant
    cost structure; the discount rates applied using a weighted
    average cost of capital; and the perpetuity rates used in
    calculating cash flow terminal values. Our evaluations are based
    on financial plans updated with the latest available projections
    of the semiconductor market evolution, our sales expectations
    and our costs evaluation and are consistent with the plans and
    estimates that we use to manage our business. It is possible,
    however, that the plans and estimates used may be incorrect, and

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | future adverse changes in market conditions or operating results
    of acquired businesses not in line with our estimates may
    require impairment of certain goodwill. In 2006, we recorded a
    goodwill impairment charge of $6 million due to our
    decision to discontinue developing products from our Tioga
    Technologies Ltd. (Tioga) business acquisition. See
    Note 7 to our Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Intangible assets subject to amortization. Intangible
    assets subject to amortization include the cost of technologies
    and licenses purchased from third parties, internally developed
    software which is capitalized and purchased software. Intangible
    assets subject to amortization are reflected net of any
    impairment losses. These are amortized over a period ranging
    from three to seven years. The carrying value of intangible
    assets subject to amortization is evaluated whenever changes in
    circumstances indicate that the carrying amount may not be
    recoverable. In determining recoverability, we initially assess
    whether the carrying value exceeds the undiscounted cash flows
    associated with the intangible assets. If exceeded, we then
    evaluate whether an impairment charge is required by determining
    if the assets carrying value also exceeds its fair value.
    An impairment loss is recognized for the excess of the carrying
    amount over the fair value. We normally estimate the fair value
    based on the projected discounted future cash flows associated
    with the intangible assets. Significant management judgments and
    estimates are required and used in the forecasts of future
    operating results that are used in the discounted cash flow
    method of valuation, including: the applicable industrys
    sales volume forecast and selling price evolution; our market
    penetration; the market acceptance of certain new technologies;
    and costs evaluation. Our evaluations are based on financial
    plans updated with the latest available projections of the
    semiconductor market evolution and our sales expectations and
    are consistent with the plans and estimates that we use to
    manage our business. It is possible, however, that the plans and
    estimates used may be incorrect and that future adverse changes
    in market conditions or operating results of businesses acquired
    may not be in line with our estimates and may therefore require
    impairment of certain intangible assets. In 2006, we recorded an
    impairment charge of $4 million due to the discontinuance
    of product development related to our Tioga business
    acquisition, which was determined to be without any alternative
    use. See Note 8 to our Consolidated Financial Statements.
    At December 31, 2006, the value of intangible assets in our
    Consolidated Financial Statements subject to amortization
    amounted to $211 million.
|
| |  | Property, plant and equipment. Our business requires
    substantial investments in technologically advanced
    manufacturing facilities, which may become significantly
    underutilized or obsolete as a result of rapid changes in demand
    and ongoing technological evolution. We estimate the useful life
    for the majority of our manufacturing equipment, which is the
    largest component of our long-lived assets, to be six years.
    This estimate is based on our experience with using equipment
    over time. Depreciation expense is a major element of our
    manufacturing cost structure. We begin to depreciate new
    equipment when it is put into use.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We evaluate each period whether there is reason to suspect that
    the carrying value of tangible assets or groups of assets might
    not be recoverable. Factors we consider important which could
    trigger an impairment review include: significant negative
    industry trends, significant underutilization of the assets or
    available evidence of obsolescence of an asset and strategic
    management decisions impacting production or an indication that
    its economic performance is, or will be, worse than expected. In
    determining the recoverability of assets to be held and used, we
    initially assess whether the carrying value exceeds the
    undiscounted cash flows associated with the tangible assets or
    group of assets. If exceeded, we then evaluate whether an
    impairment charge is required by determining if the assets
    carrying value also exceeds its fair value. We normally estimate
    this fair value based on independent market appraisals or the
    sum of discounted future cash flows, using market assumptions
    such as the utilization of our fabrication facilities and the
    ability to upgrade such facilities, change in the selling price
    and the adoption of new technologies. We also evaluate the
    continued validity of an assets useful life when
    impairment indicators are identified. Assets classified as held
    for disposal are reflected at the lower of their carrying amount
    or fair value less selling costs and are not depreciated during
    the selling period. Selling costs include incremental direct
    costs to transact the sale that we would not have incurred
    except for the decision to sell.
|
| | Our evaluations are based on financial plans updated with the
    latest projections of the semiconductor market and of our sales
    expectations, from which we derive the future production needs
    and loading of our manufacturing facilities, and which are
    consistent with the plans and estimates that we use to manage
    our business. These plans are highly variable due to the high
    volatility of the semiconductor business and therefore are
    subject to continuous modifications. If the future evolution
    differs from the basis of our plans, both in terms of market
    evolution and production allocation to our manufacturing plants,
    this could require a further review of the carrying amount of
    our tangible assets resulting in a potential impairment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | loss. In 2006, we recorded an impairment charge of
    $7 million related to optimizing our Electrical Wafer
    Sorting (EWS) activities (wafer test).



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Inventory. Inventory is stated at the lower of cost or
    net realizable value. Cost is based on the weighted average cost
    by adjusting standard cost to approximate actual manufacturing
    costs on a quarterly basis; the cost is therefore dependent on
    our manufacturing performance. In the case of underutilization
    of our manufacturing facilities, we estimate the costs
    associated with the excess capacity; these costs are not
    included in the valuation of inventories but are charged
    directly to cost of sales. Net realizable value is the estimated
    selling price in the ordinary course of business less applicable
    variable selling expenses.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The valuation of inventory requires us to estimate obsolete or
    excess inventory as well as inventory that is not of saleable
    quality. Provisions for obsolescence are estimated for excess
    uncommitted inventories based on the previous quarter sales,
    order backlog and production plans. To the extent that future
    negative market conditions generate order backlog cancellations
    and declining sales, or if future conditions are less favorable
    than the projected revenue assumptions, we could be required to
    record additional inventory provisions, which would have a
    negative impact on our gross margin.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Asset disposal. At December 31, 2006, we were
    required to evaluate the likelihood of the announced
    deconsolidation of our Flash memory business under Statement of
    Financial Accounting Standards No. 144, Accounting for
    the Impairment or Disposal of Long-Lived Assets(FAS 144). Given the status of the project
    at the closure date, we determined that the deconsolidation was
    more likely than not to occur for accounting purposes, thus
    triggering an impairment review for Flash memory activity. The
    outcome of this test determined that no impairment was required
    at December 31, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Restructuring charges. We have undertaken, and we may
    continue to undertake, significant restructuring initiatives,
    which have required us, or may require us in the future, to
    develop formalized plans for exiting any of our existing
    activities. We recognize the fair value of a liability for costs
    associated with exiting an activity when a probable liability
    exists and it can be reasonably estimated. We record estimated
    charges for non-voluntary termination benefit arrangements such
    as severance and outplacement costs meeting the criteria for a
    liability as described above. Given the significance of and the
    timing of the execution of such activities, the process is
    complex and involves periodic reviews of estimates made at the
    time the original decisions were taken. As we operate in a
    highly cyclical industry, we monitor and evaluate business
    conditions on a regular basis. If broader or new initiatives,
    which could include production curtailment or closure of other
    manufacturing facilities, were to be taken, we may be required
    to incur additional charges as well as to change estimates of
    amounts previously recorded. The potential impact of these
    changes could be material and have a material adverse effect on
    our results of operations or financial condition. In 2006, the
    amount of restructuring charges and other related closure costs
    amounted to $65 million before taxes. See Note 19 to
    our Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Share-based compensation. In December 2004, the FASB
    issued revised Statement of Financial Accounting Standards
    No. 123, Share-Based Payment(FAS 123R), which requires companies to
    expense employee share-based compensation for financial
    reporting purposes. We adopted FAS 123R early, in the
    fourth quarter of 2005, to account for charges related to
    non-vested stock awards distributed to our employees. As a
    result, we were required to value our current and anticipated
    future employee share-based compensation pursuant to a pricing
    model, and then amortize that value against our reported
    earnings over the vesting period in effect for those awards. Due
    to this accounting treatment, the share-based compensation
    expense is charged directly against our earnings. In order to
    assess the fair value of this share-based compensation through a
    financial evaluation model, we were required to make significant
    estimates since, pursuant to our plan, awarding shares is
    contingent on the achievement of certain financial objectives,
    including market performance and financial results. We are
    required to estimate certain items, including the probability of
    meeting the market performance objective, the forfeitures and
    the service period of our employees. As a result, we recorded in
    2006 a total pre-tax charge of $13 million related to the
    2005 stock-based compensation plan and are expecting a pre-tax
    charge of approximately $2 million in each of the first two
    quarters of 2007 and $1 million in each of the last two
    quarters of 2007. The impact is further detailed in
    Note 16.6 to our Consolidated Financial Statements.
    Furthermore, on September 29, 2006 our Compensation
    Committee gave its final approval of the 2006 stock-based
    compensation plan which is contingent on Company performance
    criteria. All performance criteria have been met; therefore, we
    recorded for the 2006 stock-based compensation plan a pre-tax
    charge of $15 million in 2006, of which $3 million was
    capitalized in inventory, and are expecting a pre-tax charge of
    approximately $15 million in the first quarter of 2007,
    $9 million in the second quarter of 2007 and
    $6 million in each of the last two quarters of 2007.

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| |   |                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Income taxes. We are required to make estimates and
    judgments in determining income tax expense for financial
    statement purposes. These estimates and judgments also occur in
    the calculation of certain tax assets and liabilities and
    provisions.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are required to assess the likelihood of recovery of our
    deferred tax assets. If recovery is not likely, we are required
    to record a valuation allowance against the deferred tax assets
    that we estimate will not ultimately be recoverable, which would
    increase our provision for income taxes. On the basis of this
    assessment, at the end of 2006 we recorded a provision of
    approximately $15 million in one of our tax jurisdictions.
    As of December 31, 2006, we believed that all of the
    deferred tax assets, net of valuation allowances, as recorded on
    our balance sheet, would ultimately be recovered. However,
    should there be a change in our ability to recover our deferred
    tax assets, in our estimates of the valuation allowance, or a
    change in the tax rates applicable in the various jurisdictions,
    this could have an impact on our future tax provision in the
    periods in which these changes could occur.                                                                                                                                                                     
|
| | In addition, the calculation of our tax liabilities involves
    dealing with uncertainties in the application of complex tax
    regulations. We record provisions for anticipated tax audit
    issues based on our estimate that probable additional taxes will
    be due. We reverse provisions and recognize a tax benefit during
    the period if we ultimately determine that the liability is no
    longer necessary. We received in the past a tax assessment from
    the United States tax authorities, and accordingly we took a
    provision at the moment the assessment was received. In the
    second quarter of 2006, we received a favorable recommendation
    from the United States tax authorities Appeals Team Case
    Leader in relation to this tax assessment. This recommendation
    was sent to the Joint Committee for Taxation for final ruling.
    In December 2006, the Joint Committee for Taxation decided that
    there was no tax liability for us and as a result we reversed
    the entire $90 million provision we established to cover
    these claims. See Note 24 to our Consolidated Financial
    Statements.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Patent and other intellectual property litigation or
    claims. As is the case with many companies in the
    semiconductor industry, we have from time to time received, and
    may in the future receive, communications alleging possible
    infringement of patents and other intellectual property rights
    of others. Furthermore, we may become involved in costly
    litigation brought against us regarding patents, mask works,
    copyrights, trademarks or trade secrets. In the event that the
    outcome of any litigation would be unfavorable to us, we may be
    required to take a license to the underlying intellectual
    property right upon economically unfavorable terms and
    conditions, and possibly pay damages for prior use, and/or face
    an injunction, all of which singly or in the aggregate could
    have a material adverse effect on our results of operations and
    ability to compete. See Item 3. Key
    Information  Risk Factors  Risks Related
    to Our Operations  We depend on patents to protect
    our rights to our technology.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We record a provision when we believe that it is probable that a
    liability has been incurred and when the amount of the loss can
    be reasonably estimated. We regularly evaluate losses and claims
    with the support of our outside attorneys to determine whether
    they need to be adjusted based on the current information
    available to us. Legal costs associated with claims are expensed
    as incurred. We are in discussion with several parties with
    respect to claims against us relating to possible infringements
    of patents and similar intellectual property rights of others.                                                                                                                                                                                 
|
| | We are currently a party to several legal proceedings, including
    legal proceedings with SanDisk Corporation (SanDisk)
    and Tessera, Inc. See Item 8. Financial
    Information  Legal Proceedings. As of
    December 31, 2006, based on our assessment, we did not
    record any provisions in our Consolidated Financial Statements
    relating to those legal proceedings, because we had not
    identified any risk of probable loss that is likely to arise out
    of the proceedings. There can be no assurance, however, that we
    will be successful in resolving these proceedings. If we are
    unsuccessful, or if the outcome of any other litigation or claim
    were to be unfavorable to us, we may incur monetary damages, or
    an injunction or exclusion order.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Pension and Post Retirement Benefits. Our results of
    operations and our balance sheet include the impact of pension
    and post retirement benefits that are measured using actuarial
    valuations. These valuations are based on key assumptions,
    including discount rates, expected long-term rates of return on
    funds and salary increase rates. These assumptions are updated
    on an annual basis at the beginning of each fiscal year or more
    frequently upon the occurrence of significant events. Any
    changes in the pension schemes or in the above assumptions can
    have an impact on our valuations. As of December 31, 2006,
    the Company adopted Statement of Financial Accounting Standards
    No. 158, Employers Accounting for Defined Benefit
    Pension and Other Postretirement Plans  an amendment
    of FASB Statements No. 87, 88, 106 and 132(R)(FAS 158), which requires the Company to
    account for the overfunded and underfunded status of defined
    benefit and other post retirement plans in its consolidated
    financial statements. As of

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | December 31, 2006, we had a total benefit obligation
    estimated at $575 million, and total plan assets estimated
    at $241 million resulting in an underfunded status of
    $334 million, recorded in our balance sheet at
    December 31, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Other claims. We are subject to the possibility of loss
    contingencies arising in the ordinary course of business. These
    include, but are not limited to: warranty costs on our products
    not covered by insurance, breach of contract claims, tax claims
    and provisions for specifically identified income tax exposures
    as well as claims for environmental damages. In determining loss
    contingencies, we consider the likelihood of a loss of an asset
    or the incurrence of a liability, as well as our ability to
    reasonably estimate the amount of such loss or liability. An
    estimated loss is recorded when we believe that it is probable
    that a liability has been incurred and the amount of the loss
    can be reasonably estimated. We regularly reevaluate any losses
    and claims and determine whether our provisions need to be
    adjusted based on the current information available to us. In
    the event of litigation that is adversely determined with
    respect to our interests, or in the event that we need to change
    our evaluation of a potential third party claim based on new
    evidence or communications, this could have a material adverse
    effect on our results of operations or financial condition at
    the time it were to materialize.



| |                 
| | ----------------
| | Fiscal Year 2006





| |                       
| | ----------------------
| | 2006 Business Overview


















55



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


















| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | higher sales volume and a more favorable product mix in our
    revenues, which contributed to a solid increase in our net
    revenues over 2005;
|
| |  | continuous strong improvement of our manufacturing performance;                                                                                   
|
| |  | a more favorable effective exchange rate for the
    U.S. dollar;                                                                                 
|
| |  | net interest income;                                                                                                                              
|
| |  | lower impairment, restructuring charges and other related
    closure costs; and                                                                  
|
| |  | income tax benefit.                                                                                                                               





| |   |                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | negative pricing trends due to a persisting overcapacity in the
    industry, which translated into our average selling prices
    declining by approximately 8%, as a pure pricing effect;
|
| |  | stock-based compensation charges related to 2005 and 2006
    grants; and                                                                                                                  
|
| |  | higher amount of other expenses.                                                                                                                                                           





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| |                 
| | ----------------
| | Business Outlook










These are forward-looking statements that are subject to
known and unknown risks and uncertainties that could cause
actual results to differ materially; in particular, refer to
those known risks and uncertainties described in
Cautionary Note Regarding Forward-Looking
Statements and Item 3. Key
Information  Risk Factors in this
Form 20-F.




| |                   
| | ------------------
| | Other Developments














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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Companys accounts, which were for the first time
    reported in accordance with International Financial Reporting
    Standards (IFRS);                                                                                                                                                                                                                                                                                                                           
|
| |  | a cash dividend of $0.12 per share, equal to last
    years cash dividend distribution. The cash dividend was
    distributed in May 2006. On May 22, 2006, our common shares
    traded ex-dividend on the three stock exchanges on which they
    are listed;                                                                                                                                                                                                        
|
| |  | the reappointment of Mr. Doug Dunn for a new three-year
    term until the 2009 annual general meeting of shareholders and
    of Mr. Robert White for an additional one-year-term until
    the 2007 annual general meeting of shareholders, as well as the
    three-year term appointment of Mr. Didier Lamouche as a new
    Supervisory Board member in replacement of Mr. Francis
    Gavois whose mandate was up at this years annual
    shareholders meeting;
|
| |  | the approval of the main principles of the 2006 stock-based
    compensation plan for our employees and CEO. As part of such
    plan and specifically as approved by the general meeting of
    shareholders, our President and CEO will be entitled to receive
    a maximum of 100,000 common shares;                                                                                                                                                                
|
| |  | the adoption of the compensation, including stock-based
    compensation, for members of our Supervisory Board; and                                                                                                                                                                                                                                                                                                                                                     
|
| |  | the delegation of authority to our Supervisory Board for five
    years to issue new shares, to grant rights, to subscribe for new
    shares and to limit and/or exclude existing shareholders
    pre-emptive rights.                                                                                                                                                                                                                                                











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Results of Operations




| |                    
| | -------------------
| | Segment Information









| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Application Specific Product Group (ASG)
    segment, comprised of three product lines  our Home,
    Personal and Communication Products (HPC), our
    Computer Peripherals Products (CPG) and our
    Automotive Products (APG). Our HPC Sector is
    comprised of the telecommunications, audio and digital consumer
    groups. Our CPG products cover computer peripherals products,
    specifically disk drives and printers, and our APG products are
    comprised of all of our major complex products related to
    automotive applications;
|
| |  | the Memory Products Group (MPG) segment, comprised
    of our memories and Smart Card businesses; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | the Micro, Power, Analog Product Group (MPA)
    segment, comprised of discrete and standard products plus
    standard microcontroller and industrial devices (including the
    programmable systems memories                                                                                                                                                                                                                                                                                                                                                      

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| |  |                                                                                                                                                                                             
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (PSM) division); this segment was previously known
    as Micro, Linear and Discrete Product Group (MLD),
    but no change has occurred in the segments perimeter or
    organization.





Disclosures about Segments of an Enterprise and
Related Information


start-up start-up


|                                                 |  |                         |       |  |      |   |       |      |  |   |       | 
|------------------------------------------------ |  | ----------------------- | ----- |  | ---- | - | ----- | ---- |  | - | ----- | 
|                                                 |  | Year Ended December 31, |      
|                                                 |  |                         |      
|                                                 |  | 2006                    |       |  | 2005 |   |       | 2004 | 
|                                                 |  |                         |       |  |      |   |       |      | 
|                                                 |  | (In millions)           |      
|Net revenues by product group segment:           |  |                         |       |  |      |   |       |      |  |   |       | 
|Application Specific Product Group Segment (ASG) |  | $                       | 5,396 |  |      | $ | 4,991 |      |  | $ | 4,902 | 
|Memory Products Group Segment (MPG)              |  |                         | 2,137 |  |      |   | 1,948 |      |  |   | 1,887 | 
|Micro, Power, Analog Product Group Segment (MPA) |  |                         | 2,243 |  |      |   | 1,882 |      |  |   | 1,902 | 
|Others(1)                                        |  |                         | 78    |  |      |   | 61    |      |  |   | 69    | 
|                                                 |  |                         |       |  |      |   |       |      | 
|Total consolidated net revenues                  |  | $                       | 9,854 |  |      | $ | 8,882 |      |  | $ | 8,760 | 
|                                                 |  |                         |       |  |      |   |       |      | 






|    |                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Net revenues of Others include revenues from sales
    of subsystems mainly and other products not allocated to product
    group segments.

|                                                  |  |                         |      |   |      |   |      |      |  |   |      |  
|------------------------------------------------- |  | ----------------------- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                                  |  | Year Ended December 31, |     
|                                                  |  |                         |     
|                                                  |  | 2006                    |      |   | 2005 |   |      | 2004 | 
|                                                  |  |                         |      |   |      |   |      |      | 
|                                                  |  | (In millions)           |     
|Operating income (loss) by product group segment: |  |                         |      |   |      |   |      |      |  |   |      |  
|Application Specific Product Group Segment (ASG)  |  | $                       | 439  |   |      | $ | 355  |      |  | $ | 530  |  
|Memory Products Group Segment (MPG)               |  |                         | 34   |   |      |   | (118 | )    |  |   | 42   |  
|Micro, Power, Analog Product Group Segment (MPA)  |  |                         | 362  |   |      |   | 271  |      |  |   | 413  |  
|                                                  |  |                         |      |   |      |   |      |      | 
|Total operating income of product group segments  |  |                         | 835  |   |      |   | 508  |      |  |   | 985  |  
|Others(1)                                         |  |                         | (158 | ) |      |   | (264 | )    |  |   | (302 | )
|                                                  |  |                         |      |   |      |   |      |      | 
|Total consolidated operating income               |  | $                       | 677  |   |      | $ | 244  |      |  | $ | 683  |  
|                                                  |  |                         |      |   |      |   |      |      | 






|    |                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Operating income (loss) of Others includes items
    such as impairment, restructuring charges and other related
    closure costs, start-up
    costs, and other unallocated expenses, such as: strategic or
    special research and development programs, certain
    corporate-level operating expenses, certain patent claims and
    litigations, and

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| |                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | other costs that are not allocated to the product group
    segments, as well as operating earnings or losses of the
    Subsystems and Other Products Group. Certain costs, mainly
    R&D, formerly in the Others category, have been
    allocated to the product group segments; comparable amounts
    reported in this category have been reclassified accordingly in
    the above table.

|                                                    |  |                     |      |   |      |  |      |      |  |  |      |  
|--------------------------------------------------- |  | ------------------- | ---- | - | ---- |  | ---- | ---- |  |  | ---- | -
|                                                    |  | Year Ended          |     
|                                                    |  | December 31,        |     
|                                                    |  |                     |     
|                                                    |  | 2006                |      |   | 2005 |  |      | 2004 | 
|                                                    |  |                     |      |   |      |  |      |      | 
|                                                    |  | (As a percentage of |     
|                                                    |  | total net revenues) |     
|Operating income (loss) by product group segment:   |  |                     |      |   |      |  |      |      |  |  |      |  
|Application Specific Product Group Segment (ASG)(1) |  |                     | 8.1  | % |      |  | 7.1  | %    |  |  | 10.8 | %
|Memory Products Group Segment (MPG)(1)              |  |                     | 1.6  |   |      |  | (6.1 | )    |  |  | 2.2  |  
|Micro, Power, Analog Product Group Segment (MPA)(1) |  |                     | 16.1 |   |      |  | 14.4 |      |  |  | 21.7 |  
|Others(2)                                           |  |                     | (1.6 | ) |      |  | (3.0 | )    |  |  | (3.5 | )
|Total consolidated operating income(3)              |  |                     | 6.9  | % |      |  | 2.7  | %    |  |  | 7.8  | %






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As a percentage of net revenues per product segment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(2) | As a percentage of total net revenues. Operating income (loss)
    of Others includes items or parts of them, which are
    not allocated to product group segments such as impairment,
    restructuring charges and other related closure costs,
    start-up costs, and
    other unallocated expenses, such as: strategic or special
    research and development programs, certain corporate-level
    operating expenses, certain patent claims and litigations, and
    other costs that are not allocated to the product group
    segments, as well as operating earnings or losses of the
    Subsystems and Other Products segment. Certain costs, mainly
    R&D, formerly in the Others category, have been
    allocated to the product group segments; comparable amounts
    reported in this category have been reclassified accordingly in
    the above table.
|   
|(3) | As a percentage of total net revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|                                                 |                                                                   |                         |      |     |      |   |      |      |   |   |      |     |  
|------------------------------------------------ | ----------------------------------------------------------------- | ----------------------- | ---- | --- | ---- | - | ---- | ---- | - | - | ---- | --- | -
|                                                 |                                                                   | Year Ended December 31, |     
|                                                 |                                                                   |                         |     
|                                                 |                                                                   | 2006                    |      |     | 2005 |   |      | 2004 |  
|                                                 |                                                                   |                         |      |     |      |   |      |      |  
|                                                 |                                                                   | (In millions)           |     
|Reconciliation to consolidated operating income: |                                                                   |                         |      |     |      |   |      |      |   |   |      |    
|Total operating income of product group segments |                                                                   | $                       | 835  |     |      | $ | 508  |      |   | $ | 985  |    
|Operating Income of others(1)                    |                                                                   |                         |      |     |      |   |      |      |   |   |      |    
|                                                 | Strategic and other research and development programs             |                         |      | (17 | )    |   |      | (49  | ) |   |      | (91 | )
|                                                 | Start-up costs                                                    |                         |      | (57 | )    |   |      | (56  | ) |   |      | (63 | )
|                                                 | Impairment, restructuring charges and other related closure costs |                         |      | (77 | )    |   |      | (128 | ) |   |      | (76 | )
|                                                 | Subsystems                                                        |                         |      | (1  | )    |   |      | 1    |   |   |      | (1  | )
|                                                 | One-time compensation and special contributions(2)                |                         |      |    |      |   |      | (22  | ) |   |      |    |  
|                                                 | Patent claim costs                                                |                         |      |    |      |   |      |     |   |   |      | (4  | )
|                                                 | Other non-allocated provisions(3)                                 |                         |      | (6  | )    |   |      | (10  | ) |   |      | (67 | )
|Total operating income (loss) of others          |                                                                   |                         | (158 | )   |      |   | (264 | )    |   |   | (302 | )  
|                                                 |                                                                   |                         |      |     |      |   |      |      |  
|Total consolidated operating income              |                                                                   | $                       | 677  |     |      | $ | 244  |      |   | $ | 683  |    
|                                                 |                                                                   |                         |      |     |      |   |      |      |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Operating income (loss) of Others includes items or
    parts of them, which are not allocated to product group segments
    such as impairment, restructuring charges and other related
    closure costs, start-up
    costs, and other unallocated expenses, such as: strategic or
    special research and development programs, certain
    corporate-level operating expenses, certain patent claims and
    litigations, and other costs that are not allocated to the
    product group segments, as well as operating earnings or losses
    of the Subsystems and Other Products segment. Certain costs,
    mainly R&D, formerly in the Others category,
    have been allocated to the product group segments; comparable
    amounts reported in this category have been reclassified
    accordingly in the above table.
|   
|(2) | One-time compensation and special contributions to our former
    CEO and other executives not allocated to product group segments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(3) | Includes unallocated expenses such as certain corporate level
    operating expenses and other costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

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| |                                           
| | ------------------------------------------
| | Net Revenues by Location of Order Shipment



|                                               |  |                         |       |   |      |   |       |      |  |   |       |  
|---------------------------------------------- |  | ----------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                               |  | Year Ended December 31, |      
|                                               |  |                         |      
|                                               |  | 2006                    |       |   | 2005 |   |       | 2004 | 
|                                               |  |                         |       |   |      |   |       |      | 
|                                               |  | (In millions)           |      
|Net Revenues by Location of Order Shipment:(1) |  |                         |       |   |      |   |       |      |  |   |       |  
|Europe(2)                                      |  | $                       | 3,073 |   |      | $ | 2,789 |      |  | $ | 2,827 |  
|North America(5)                               |  |                         | 1,232 |   |      |   | 1,281 |      |  |   | 1,360 |  
|Asia Pacific(3)                                |  |                         | 2,084 |   |      |   | 1,860 |      |  |   | 1,852 |  
|Greater China(3)                               |  |                         | 2,552 |   |      |   | 2,203 |      |  |   | 1,859 |  
|Japan                                          |  |                         | 400   |   |      |   | 307   |      |  |   | 403   |  
|Emerging Markets(2)(4)(5)                      |  |                         | 513   |   |      |   | 442   |      |  |   | 459   |  
|                                               |  |                         |       |   |      |   |       |      | 
|Total                                          |  | $                       | 9,854 |   |      | $ | 8,882 |      |  | $ | 8,760 |  
|                                               |  |                         |       |   |      |   |       |      | 
|Net Revenues by Location of Order Shipment:(1) |  |                         |       |   |      |   |       |      |  |   |       |  
|Europe(2)                                      |  |                         | 31.2  | % |      |   | 31.4  | %    |  |   | 32.3  | %
|North America(5)                               |  |                         | 12.5  |   |      |   | 14.4  |      |  |   | 15.5  |  
|Asia Pacific(3)                                |  |                         | 21.1  |   |      |   | 20.9  |      |  |   | 21.2  |  
|Greater China(3)                               |  |                         | 25.9  |   |      |   | 24.8  |      |  |   | 21.2  |  
|Japan                                          |  |                         | 4.1   |   |      |   | 3.5   |      |  |   | 4.6   |  
|Emerging Markets(2)(4)(5)                      |  |                         | 5.2   |   |      |   | 5.0   |      |  |   | 5.2   |  
|                                               |  |                         |       |   |      |   |       |      | 
|Total                                          |  |                         | 100.0 | % |      |   | 100.0 | %    |  |   | 100.0 | %
|                                               |  |                         |       |   |      |   |       |      | 






|    |                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Net revenues by location of order shipment region are classified
    by location of customer invoiced. For example, products ordered
    by U.S.-based companies
    to be invoiced to Asia Pacific affiliates are classified as Asia
    Pacific revenues.                                                                                                                       
|   
|(2) | Since January 1, 2005, the region Europe
    includes the former East European countries that joined the
    European Union in 2004. These countries were part of the
    Emerging Markets region in the previous periods. Net revenues
    for Europe and Emerging Markets for prior periods were restated
    to include such countries in the Europe region for such periods.
|   
|(3) | As of January 1, 2006, we created a new region
    Greater China to focus exclusively on our operations
    in China, Hong Kong and Taiwan. Net revenues for Asia Pacific
    for prior periods were restated according to the new perimeter.                                                                                                                                   
|   
|(4) | Emerging Markets in 2005 and 2006 included markets such as
    India, Latin America (excluding Mexico), the Middle East and
    Africa, Europe (non-EU and non-EFTA) and Russia.                                                                                                                                                                                                  
|   
|(5) | As of July 2, 2006, the region North America
    includes Mexico which was part of Emerging Markets in prior
    periods. Amounts have been reclassified to reflect this change.                                                                                                                                                                                                



| |                               
| | ------------------------------
| | Net Revenues by Market Segment



|                                |  |                     |     |   |      |  |     |      |  |  |     |  
|------------------------------- |  | ------------------- | --- | - | ---- |  | --- | ---- |  |  | --- | -
|                                |  | Year Ended          |    
|                                |  | December 31,        |    
|                                |  |                     |    
|                                |  | 2006                |     |   | 2005 |  |     | 2004 | 
|                                |  |                     |     |   |      |  |     |      | 
|                                |  | (As a percentage of |    
|                                |  | net revenues)       |    
|Net Revenues by Market Segment: |  |                     |     |   |      |  |     |      |  |  |     |  
|Automotive                      |  |                     | 15  | % |      |  | 16  | %    |  |  | 15  | %
|Consumer                        |  |                     | 16  |   |      |  | 18  |      |  |  | 21  |  
|Computer                        |  |                     | 17  |   |      |  | 17  |      |  |  | 16  |  
|Telecom                         |  |                     | 38  |   |      |  | 35  |      |  |  | 32  |  
|Industrial and Other            |  |                     | 14  |   |      |  | 14  |      |  |  | 16  |  
|                                |  |                     |     |   |      |  |     |      | 
|Total                           |  |                     | 100 | % |      |  | 100 | %    |  |  | 100 | %
|                                |  |                     |     |   |      |  |     |      | 

62



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|                                                  |                                                                   |                         |       |       |      |  |       |       |   |  |       |       |  
|------------------------------------------------- | ----------------------------------------------------------------- | ----------------------- | ----- | ----- | ---- |  | ----- | ----- | - |  | ----- | ----- | -
|                                                  |                                                                   | Year Ended December 31, |      
|                                                  |                                                                   |                         |      
|                                                  |                                                                   | 2006                    |       |       | 2005 |  |       | 2004  |  
|                                                  |                                                                   |                         |       |       |      |  |       |       |  
|                                                  |                                                                   | (As a percentage of     |      
|                                                  |                                                                   | net revenues)           |      
|Net sales                                         |                                                                   |                         | 99.8  | %     |      |  | 99.9  | %     |   |  | 100.0 | %    
|Other revenues                                    |                                                                   |                         | 0.2   |       |      |  | 0.1   |       |   |  |      |      
|                                                  |                                                                   |                         |       |       |      |  |       |       |  
|Net revenues                                      |                                                                   |                         | 100.0 |       |      |  | 100.0 |       |   |  | 100.0 |      
|Cost of sales                                     |                                                                   |                         | (64.2 | )     |      |  | (65.8 | )     |   |  | (63.2 | )    
|                                                  |                                                                   |                         |       |       |      |  |       |       |  
|Gross profit                                      |                                                                   |                         | 35.8  |       |      |  | 34.2  |       |   |  | 36.8  |      
|                                                  | Selling, general and administrative                               |                         |       | (10.8 | )    |  |       | (11.6 | ) |  |       | (10.8 | )
|                                                  | Research and development                                          |                         |       | (16.9 | )    |  |       | (18.3 | ) |  |       | (17.5 | )
|                                                  | Other income and expenses, net                                    |                         |       | (0.4  | )    |  |       | (0.1  | ) |  |       | 0.2   |  
|                                                  | Impairment, restructuring charges and other related closure costs |                         |       | (0.8  | )    |  |       | (1.5  | ) |  |       | (0.9  | )
|                                                  | Total operating expenses                                          |                         |       | (28.9 | )    |  |       | (31.5 | ) |  |       | (29.0 | )
|                                                  |                                                                   |                         |       |       |      |  |       |       |  
|Operating income                                  |                                                                   |                         | 6.9   |       |      |  | 2.7   |       |   |  | 7.8   |      
|Interest income (expense), net                    |                                                                   |                         | 0.9   |       |      |  | 0.4   |       |   |  |      |      
|Loss on equity investment                         |                                                                   |                         | (0.1  | )     |      |  |      |       |   |  |      |      
|Loss on extinguishment of convertible debt        |                                                                   |                         |      |       |      |  |      |       |   |  | (0.1  | )    
|                                                  |                                                                   |                         |       |       |      |  |       |       |  
|Income before income taxes and minority interests |                                                                   |                         | 7.7   |       |      |  | 3.1   |       |   |  | 7.7   |      
|Income tax benefit (expense)                      |                                                                   |                         | 0.2   |       |      |  | (0.1  | )     |   |  | (0.8  | )    
|                                                  |                                                                   |                         |       |       |      |  |       |       |  
|Income before minority interests                  |                                                                   |                         | 7.9   |       |      |  | 3.0   |       |   |  | 6.9   |      
|Minority interests                                |                                                                   |                         |      |       |      |  |      |       |   |  |      |      
|                                                  |                                                                   |                         |       |       |      |  |       |       |  
|Net income                                        |                                                                   |                         | 7.9   | %     |      |  | 3.0   | %     |   |  | 6.9   | %    
|                                                  |                                                                   |                         |       |       |      |  |       |       |  

2006 vs. 2005






| |             
| | ------------
| | Net revenues

|               |  |               |       |  |      |   |       |             |  |  |       |  
|-------------- |  | ------------- | ----- |  | ---- | - | ----- | ----------- |  |  | ----- | -
|               |  | 2006          |       |  | 2005 |   |       | % Variation | 
|               |  |               |       |  |      |   |       |             | 
|               |  | (In millions) |      
|Net sales      |  | $             | 9,838 |  |      | $ | 8,876 |             |  |  | 10.8  | %
|Other revenues |  |               | 16    |  |      |   | 6     |             |  |  | 192.9 | %
|               |  |               |       |  |      |   |       |             | 
|Net revenues   |  | $             | 9,854 |  |      | $ | 8,882 |             |  |  | 11.0  | %
|               |  |               |       |  |      |   |       |             | 







63



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##### Table of Contents









| |             
| | ------------
| | Gross profit

|                                               |  |               |        |   |      |   |        |             |  |  |      |   
|---------------------------------------------- |  | ------------- | ------ | - | ---- | - | ------ | ----------- |  |  | ---- | --
|                                               |  | 2006          |        |   | 2005 |   |        | % Variation | 
|                                               |  |               |        |   |      |   |        |             | 
|                                               |  | (In millions) |       
|Cost of sales                                  |  | $             | (6,331 | ) |      | $ | (5,845 | )           |  |  | (8.3 | )%
|Gross profit                                   |  | $             | 3,523  |   |      | $ | 3,037  |             |  |  | 16.0 |   
|Gross margin (as a percentage of net revenues) |  |               | 35.8   | % |      |   | 34.2   | %           |  |  |     |   





| |                                             
| | --------------------------------------------
| | Selling, general and administrative expenses

|                                             |  |               |        |    |      |   |        |             |  |  |      |   
|-------------------------------------------- |  | ------------- | ------ | -- | ---- | - | ------ | ----------- |  |  | ---- | --
|                                             |  | 2006          |        |    | 2005 |   |        | % Variation | 
|                                             |  |               |        |    |      |   |        |             | 
|                                             |  | (In millions) |       
|Selling, general and administrative expenses |  | $             | (1,067 | )  |      | $ | (1,026 | )           |  |  | (4.0 | )%
|As a percentage of net revenues              |  |               | (10.8  | )% |      |   | (11.6  | )%          |  |  |     |   





| |                                  
| | ---------------------------------
| | Research and development expenses

|                                  |  |               |        |    |      |   |        |             |  |  |      |   
|--------------------------------- |  | ------------- | ------ | -- | ---- | - | ------ | ----------- |  |  | ---- | --
|                                  |  | 2006          |        |    | 2005 |   |        | % Variation | 
|                                  |  |               |        |    |      |   |        |             | 
|                                  |  | (In millions) |       
|Research and development expenses |  | $             | (1,667 | )  |      | $ | (1,630 | )           |  |  | (2.3 | )%
|As a percentage of net revenues   |  |               | (16.9  | )% |      |   | (18.3  | )%          |  |  |     |   





| |                               
| | ------------------------------
| | Other income and expenses, net

|                                        |  |               |      |    |      |   |      |   
|--------------------------------------- |  | ------------- | ---- | -- | ---- | - | ---- | --
|                                        |  | 2006          |      |    | 2005 |  
|                                        |  |               |      |    |      |  
|                                        |  | (In millions) |     
|Research and development funding        |  | $             | 54   |    |      | $ | 76   |   
|Start-up costs                          |  |               | (57  | )  |      |   | (56  | ) 
|Exchange gain (loss), net               |  |               | (9   | )  |      |   | (16  | ) 
|Patent litigation costs                 |  |               | (22  | )  |      |   | (14  | ) 
|Patent pre-litigation costs             |  |               | (7   | )  |      |   | (8   | ) 
|Gain on sale of Accent subsidiary       |  |               | 6    |    |      |   |     |   
|Gain on sale of non-current assets, net |  |               | 2    |    |      |   | 12   |   
|Other, net                              |  |               | (2   | )  |      |   | (3   | ) 
|Other income and expenses, net          |  | $             | (35  | )  |      | $ | (9   | ) 
|As a percentage of net revenues         |  |               | (0.4 | )% |      |   | (0.1 | )%

64



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start-up Start-up build-up




| |                                                                      
| | ---------------------------------------------------------------------
| | Impairment, restructuring charges and other related
    closure costs

|                                                                  |  |               |      |    |      |   |      |   
|----------------------------------------------------------------- |  | ------------- | ---- | -- | ---- | - | ---- | --
|                                                                  |  | 2006          |      |    | 2005 |  
|                                                                  |  |               |      |    |      |  
|                                                                  |  | (In millions) |     
|Impairment, restructuring charges and other related closure costs |  | $             | (77  | )  |      | $ | (128 | ) 
|As a percentage of net revenues                                   |  |               | (0.8 | )% |      |   | (1.5 | )%





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our headcount restructuring plan announced in May 2005, which
    resulted in total charges of $45 million mainly for
    employee termination benefits; the total cost of this
    restructuring plan was estimated to be approximately
    $100 million and was substantially complete at the end of
    2006, with total charges of $86 million incurred through
    December 31, 2006;                                                
|
| |  | An impairment charge of approximately $10 million was
    recorded pursuant to subsequent decisions to discontinue
    adoption of Tioga related technologies in certain products, of
    which $6 million corresponded to the write-off of Tioga
    goodwill and $4 million to impairment charges on
    technologies purchased as part of the Tioga business acquisition
    which were determined to be without any alternative use;  
|
| |  | Our ongoing 150-mm restructuring plan and related manufacturing
    initiatives generated restructuring charges of approximately
    $22 million. As of December 31, 2006, we have incurred
    $316 million of the total expected of approximately
    $330 million in pre-tax charges in connection with this
    restructuring plan, slightly down from the original estimate of
    $350 million, which was announced in October 2003.





| |                 
| | ----------------
| | Operating income

|                                |  |               |     |   |      |   |     |             |  |  |       |  
|------------------------------- |  | ------------- | --- | - | ---- | - | --- | ----------- |  |  | ----- | -
|                                |  | 2006          |     |   | 2005 |   |     | % Variation | 
|                                |  |               |     |   |      |   |     |             | 
|                                |  | (In millions) |    
|Operating income                |  | $             | 677 |   |      | $ | 244 |             |  |  | 178.0 | %
|As a percentage of net revenues |  |               | 6.9 | % |      |   | 2.7 | %           |  |  |      |  







| |                               
| | ------------------------------
| | Interest income (expense), net

|                               |  |               |    |  |      |   |    | 
|------------------------------ |  | ------------- | -- |  | ---- | - | -- | 
|                               |  | 2006          |    |  | 2005 |  
|                               |  |               |    |  |      |  
|                               |  | (In millions) |   
|Interest income (expense), net |  | $             | 93 |  |      | $ | 34 | 



65



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| |                           
| | --------------------------
| | Loss on equity investments

|                           |  |               |    |   |      |   |    |  
|-------------------------- |  | ------------- | -- | - | ---- | - | -- | -
|                           |  | 2006          |    |   | 2005 |  
|                           |  |               |    |   |      |  
|                           |  | (In millions) |   
|Loss on equity investments |  | $             | (6 | ) |      | $ | (3 | )

start-up




| |                             
| | ----------------------------
| | Income tax benefit (expense)

|                             |  |               |    |  |      |   |    |  
|---------------------------- |  | ------------- | -- |  | ---- | - | -- | -
|                             |  | 2006          |    |  | 2005 |  
|                             |  |               |    |  |      |  
|                             |  | (In millions) |   
|Income tax benefit (expense) |  | $             | 20 |  |      | $ | (8 | )





| |           
| | ----------
| | Net income

|                                |  |               |      |   |      |  |      |             |  |  |       |  
|------------------------------- |  | ------------- | ---- | - | ---- |  | ---- | ----------- |  |  | ----- | -
|                                |  | 2006          |      |   | 2005 |  |      | % Variation | 
|                                |  |               |      |   |      |  |      |             | 
|                                |  | (In millions) |     
|Net income                      |  |               | $782 |   |      |  | $266 |             |  |  | 193.9 | %
|As a percentage of net revenues |  |               | 7.9  | % |      |  | 3.0  | %           |  |  |      |  



2005 vs. 2004






| |             
| | ------------
| | Net revenues

|               |  |               |       |  |      |   |       |             |  |  |     |  
|-------------- |  | ------------- | ----- |  | ---- | - | ----- | ----------- |  |  | --- | -
|               |  | 2005          |       |  | 2004 |   |       | % Variation | 
|               |  |               |       |  |      |   |       |             | 
|               |  | (In millions) |      
|Net sales      |  | $             | 8,876 |  |      | $ | 8,756 |             |  |  | 1.4 | %
|Other revenues |  |               | 6     |  |      |   | 4     |             |  |  |    |  
|               |  |               |       |  |      |   |       |             | 
|Net revenues   |  | $             | 8,882 |  |      | $ | 8,760 |             |  |  | 1.4 | %
|               |  |               |       |  |      |   |       |             | 







66



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##### Table of Contents











| |             
| | ------------
| | Gross profit

|                                               |  |               |        |   |      |   |        |             |  |  |      |   
|---------------------------------------------- |  | ------------- | ------ | - | ---- | - | ------ | ----------- |  |  | ---- | --
|                                               |  | 2005          |        |   | 2004 |   |        | % Variation | 
|                                               |  |               |        |   |      |   |        |             | 
|                                               |  | (In millions) |       
|Cost of sales                                  |  | $             | (5,845 | ) |      | $ | (5,532 | )           |  |  | (5.7 | )%
|Gross profit                                   |  | $             | 3,037  |   |      | $ | 3,228  |             |  |  | (5.9 | )%
|Gross margin (as a percentage of net revenues) |  |               | 34.2   | % |      |   | 36.8   | %           |  |  |     |   





| |                                             
| | --------------------------------------------
| | Selling, general and administrative expenses

|                                             |  |               |        |    |      |   |       |             |  |  |      |   
|-------------------------------------------- |  | ------------- | ------ | -- | ---- | - | ----- | ----------- |  |  | ---- | --
|                                             |  | 2005          |        |    | 2004 |   |       | % Variation | 
|                                             |  |               |        |    |      |   |       |             | 
|                                             |  | (In millions) |       
|Selling, general and administrative expenses |  | $             | (1,026 | )  |      | $ | (947  | )           |  |  | (8.4 | )%
|As a percentage of net revenues              |  |               | (11.6  | )% |      |   | (10.8 | )%          |  |  |     |   





| |                                  
| | ---------------------------------
| | Research and development expenses

|                                  |  |               |        |    |      |   |        |             |  |  |      |   
|--------------------------------- |  | ------------- | ------ | -- | ---- | - | ------ | ----------- |  |  | ---- | --
|                                  |  | 2005          |        |    | 2004 |   |        | % Variation | 
|                                  |  |               |        |    |      |   |        |             | 
|                                  |  | (In millions) |       
|Research and development expenses |  | $             | (1,630 | )  |      | $ | (1,532 | )           |  |  | (6.3 | )%
|As a percentage of net revenues   |  |               | (18.3  | )% |      |   | (17.5  | )%          |  |  |     |   



67



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| |                               
| | ------------------------------
| | Other income and expenses, net

|                                        |  |               |      |    |      |   |     |  
|--------------------------------------- |  | ------------- | ---- | -- | ---- | - | --- | -
|                                        |  | 2005          |      |    | 2004 |  
|                                        |  |               |      |    |      |  
|                                        |  | (In millions) |     
|Research and development funding        |  | $             | 76   |    |      | $ | 84  |  
|Start-up costs                          |  |               | (56  | )  |      |   | (63 | )
|Exchange gain (loss), net               |  |               | (16  | )  |      |   | 33  |  
|Patent claim costs                      |  |               | (22  | )  |      |   | (37 | )
|Gain on sale of non-current assets, net |  |               | 12   |    |      |   | 6   |  
|Other, net                              |  |               | (3   | )  |      |   | (13 | )
|Other income and expenses, net          |  | $             | (9   | )  |      | $ | 10  |  
|As a percentage of net revenues         |  |               | (0.1 | )% |      |   | 0.2 | %

start-up Start-up build-up




| |                                                                      
| | ---------------------------------------------------------------------
| | Impairment, restructuring charges and other related
    closure costs

|                                                                  |  |               |      |    |      |   |      |   
|----------------------------------------------------------------- |  | ------------- | ---- | -- | ---- | - | ---- | --
|                                                                  |  | 2005          |      |    | 2004 |  
|                                                                  |  |               |      |    |      |  
|                                                                  |  | (In millions) |     
|Impairment, restructuring charges and other related closure costs |  | $             | (128 | )  |      | $ | (76  | ) 
|As a percentage of net revenues                                   |  |               | (1.5 | )% |      |   | (0.9 | )%





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our new headcount restructuring plan announced in May 2005,
    which resulted in total charges of $41 million mainly for
    employee termination benefits; the total cost of this
    restructuring plan is estimated to be in a range of between $100
    and $130 million and its completion is expected by the
    second half of 2006;                                                                                                                                                                                                                                                                                                                                     
|
| |  | Our restructuring and reorganization activities initiated in the
    first quarter of 2005, which generated a total charge of
    impairment on goodwill and other intangible assets of
    $63 million and $10 million for restructuring and
    other related closure costs; this restructuring plan was fully
    completed in 2005;                                                                                                                                                                                                                                                                                                                                          
|
| |  | Our ongoing 150-mm restructuring plan and related manufacturing
    initiatives generated restructuring charges of approximately
    $13 million. As of December 31, 2005, we have incurred
    $294 million of the total expected of approximately
    $330 million in pre-tax charges in connection with this
    restructuring plan, slightly down from the original estimate of
    $350 million, which was announced in October 2003. We
    expect to incur the balance in the coming quarters, which is
    later than anticipated to accommodate unforeseen qualification
    requirements of our customers, and to complete the plan in the
    second half of 2006; and
|
| |  | Our impairment review of goodwill and intangible assets that
    resulted in a charge of $1 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             





| |                 
| | ----------------
| | Operating income

|                                |  |               |     |   |      |   |     |             |  |  |       |   
|------------------------------- |  | ------------- | --- | - | ---- | - | --- | ----------- |  |  | ----- | --
|                                |  | 2005          |     |   | 2004 |   |     | % Variation | 
|                                |  |               |     |   |      |   |     |             | 
|                                |  | (In millions) |    
|Operating income                |  | $             | 244 |   |      | $ | 683 |             |  |  | (64.3 | %)
|As a percentage of net revenues |  |               | 2.7 | % |      |   | 7.8 | %           |  |  |       |   

68



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| |                               
| | ------------------------------
| | Interest income (expense), net

|                               |  |               |    |  |      |   |    |  
|------------------------------ |  | ------------- | -- |  | ---- | - | -- | -
|                               |  | 2005          |    |  | 2004 |  
|                               |  |               |    |  |      |  
|                               |  | (In millions) |   
|Interest income (expense), net |  | $             | 34 |  |      | $ | (3 | )





| |                           
| | --------------------------
| | Loss on equity investments

|                           |  |               |    |   |      |   |    |  
|-------------------------- |  | ------------- | -- | - | ---- | - | -- | -
|                           |  | 2005          |    |   | 2004 |  
|                           |  |               |    |   |      |  
|                           |  | (In millions) |   
|Loss on equity investments |  | $             | (3 | ) |      | $ | (4 | )

start-up




| |                                           
| | ------------------------------------------
| | Loss on extinguishment of convertible debt

|                                           |  |               |   |  |      |   |    |  
|------------------------------------------ |  | ------------- | - |  | ---- | - | -- | -
|                                           |  | 2005          |   |  | 2004 |  
|                                           |  |               |   |  |      |  
|                                           |  | (In millions) |  
|Loss on extinguishment of convertible debt |  |               |  |  |      | $ | (4 | )





| |                             
| | ----------------------------
| | Income tax benefit (expense)

|                   |  |               |    |   |      |      
|------------------ |  | ------------- | -- | - | ---- | -----
|                   |  | 2005          |    |   | 2004
|                   |  |               |    |   |     
|                   |  | (In millions)
|Income tax expense |  | $             | (8 | ) |      | $(68)



69



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| |           
| | ----------
| | Net income

|                                |  |               |     |   |      |   |     |             |  |  |       |   
|------------------------------- |  | ------------- | --- | - | ---- | - | --- | ----------- |  |  | ----- | --
|                                |  | 2005          |     |   | 2004 |   |     | % Variation | 
|                                |  |               |     |   |      |   |     |             | 
|                                |  | (In millions) |    
|Net income                      |  | $             | 266 |   |      | $ | 601 |             |  |  | (55.7 | %)
|As a percentage of net revenues |  |               | 3.0 | % |      |   | 6.9 | %           |  |  |       |   



Quarterly Results of Operations


period-to








| |             
| | ------------
| | Net revenues

|               |  |               |       |  |               |   |       |              |  |   |            |  |  |                |       |    |  |  |      |  
|-------------- |  | ------------- | ----- |  | ------------- | - | ----- | ------------ |  | - | ---------- |  |  | -------------- | ----- | -- |  |  | ---- | -
|               |  | Quarter Ended |       |  | % Variation   |  
|               |  |               |       |  |               |  
|               |  | Dec 31, 2006  |       |  | Sept 30, 2006 |   |       | Dec 31, 2005 |  |   | Sequential |  |  | Year-Over-Year |      
|               |  |               |       |  |               |   |       |              |  |   |            |  |  |                |      
|               |  | (In millions) |       |  |               |   |      
|Net sales      |  | $             | 2,482 |  |               | $ | 2,502 |              |  | $ | 2,388      |  |  |                | (0.8  | )% |  |  | 3.9  | %
|Other revenues |  |               | 1     |  |               |   | 11    |              |  |   | 1          |  |  |                | (89.0 | )  |  |  | (7.7 | )
|               |  |               |       |  |               |   |       |              |  |   |            |  |  |                |      
|Net revenues   |  | $             | 2,483 |  |               | $ | 2,513 |              |  | $ | 2,389      |  |  |                | (1.2  | )% |  |  | 3.9  | %
|               |  |               |       |  |               |   |       |              |  |   |            |  |  |                |      



| |                          
| | -------------------------
| | Year-over-year comparison





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| |                      
| | ---------------------
| | Sequential comparison











| |             
| | ------------
| | Gross profit

|              |  |               |        |   |               |   |        |              |  |   |            |   |  |                |      |    |  |  |      |   
|------------- |  | ------------- | ------ | - | ------------- | - | ------ | ------------ |  | - | ---------- | - |  | -------------- | ---- | -- |  |  | ---- | --
|              |  | Quarter Ended |        |   | % Variation   |  
|              |  |               |        |   |               |  
|              |  | Dec 31, 2006  |        |   | Sept 30, 2006 |   |        | Dec 31, 2005 |  |   | Sequential |   |  | Year-Over-Year |     
|              |  |               |        |   |               |   |        |              |  |   |            |   |  |                |     
|              |  | (In millions) |        |   |               |   |       
|Cost of sales |  | $             | (1,582 | ) |               | $ | (1,609 | )            |  | $ | (1,517     | ) |  |                | 1.7  | %  |  |  | (4.3 | )%
|Gross profit  |  | $             | 901    |   |               | $ | 904    |              |  | $ | 872        |   |  |                | (0.3 | )% |  |  | 3.3  | % 
|Gross margin  |  |               | 36.3   | % |               |   | 36.0   | %            |  |   | 36.5       | % |  |                |      |    |  |  |      |   

 




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| |                                             
| | --------------------------------------------
| | Selling, general and administrative expenses

|                                             |  |               |       |    |               |   |       |              |  |   |            |    |  |                |      |    |  |  |      |   
|-------------------------------------------- |  | ------------- | ----- | -- | ------------- | - | ----- | ------------ |  | - | ---------- | -- |  | -------------- | ---- | -- |  |  | ---- | --
|                                             |  | Quarter Ended |       |    | % Variation   |  
|                                             |  |               |       |    |               |  
|                                             |  | Dec 31, 2006  |       |    | Sept 30, 2006 |   |       | Dec 31, 2005 |  |   | Sequential |    |  | Year-Over-Year |     
|                                             |  |               |       |    |               |   |       |              |  |   |            |    |  |                |     
|                                             |  | (In millions) |       |    |               |   |      
|Selling, general and administrative expenses |  | $             | (281  | )  |               | $ | (264  | )            |  | $ | (259       | )  |  |                | (6.5 | )% |  |  | (8.2 | )%
|As percentage of net revenues                |  |               | (11.3 | )% |               |   | (10.5 | )%           |  |   | (10.9      | )% |  |                |      |    |  |  |      |   







| |                                  
| | ---------------------------------
| | Research and development expenses

|                                  |  |               |       |    |               |   |       |              |  |   |            |    |  |                |      |    |  |  |      |   
|--------------------------------- |  | ------------- | ----- | -- | ------------- | - | ----- | ------------ |  | - | ---------- | -- |  | -------------- | ---- | -- |  |  | ---- | --
|                                  |  | Quarter Ended |       |    | % Variation   |  
|                                  |  |               |       |    |               |  
|                                  |  | Dec 31, 2006  |       |    | Sept 30, 2006 |   |       | Dec 31, 2005 |  |   | Sequential |    |  | Year-Over-Year |     
|                                  |  |               |       |    |               |   |       |              |  |   |            |    |  |                |     
|                                  |  | (In millions) |       |    |               |   |      
|Research and development expenses |  | $             | (430  | )  |               | $ | (421  | )            |  | $ | (402       | )  |  |                | (2.1 | )% |  |  | (7.0 | )%
|As percentage of net revenues     |  |               | (17.3 | )% |               |   | (16.8 | )%           |  |   | (16.8      | )% |  |                |      |    |  |  |      |   





| |                               
| | ------------------------------
| | Other income and expenses, net

|                                         |  |               |      |    |               |   |      |              |  |   |     |  
|---------------------------------------- |  | ------------- | ---- | -- | ------------- | - | ---- | ------------ |  | - | --- | -
|                                         |  | Quarter Ended |     
|                                         |  |               |     
|                                         |  | Dec 31, 2006  |      |    | Sept 30, 2006 |   |      | Dec 31, 2005 | 
|                                         |  |               |      |    |               |   |      |              | 
|                                         |  | (In millions) |     
|Research and development funding         |  | $             | 21   |    |               | $ | 19   |              |  | $ | 29  |  
|Start-up costs                           |  |               | (16  | )  |               |   | (15  | )            |  |   | (10 | )
|Exchange gain (loss) net                 |  |               | 1    |    |               |   | (1   | )            |  |   | (20 | )
|Patent litigation costs                  |  |               | (8   | )  |               |   | (5   | )            |  |   | (6  | )
|Patent pre-litigation costs              |  |               | (3   | )  |               |   | (2   | )            |  |   |    |  
|Gain on sale of other non-current assets |  |               |     |    |               |   |     |              |  |   | 8   |  
|Other, net                               |  |               | (2   | )  |               |   | (1   | )            |  |   | 1   |  
|Other income and expenses, net           |  |               | (7   | )  |               |   | (5   | )            |  |   | 2   |  
|As a percentage of net revenues          |  |               | (0.3 | )% |               |   | (0.2 | )%           |  |   | 0.1 | %

start-up start-up/phase build-up


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| |                                                                      
| | ---------------------------------------------------------------------
| | Impairment, restructuring charges and other related
    closure costs

|                                                                  |  |               |      |    |               |   |      |              |  |   |      |   
|----------------------------------------------------------------- |  | ------------- | ---- | -- | ------------- | - | ---- | ------------ |  | - | ---- | --
|                                                                  |  | Quarter Ended |     
|                                                                  |  |               |     
|                                                                  |  | Dec 31, 2006  |      |    | Sept 30, 2006 |   |      | Dec 31, 2005 | 
|                                                                  |  |               |      |    |               |   |      |              | 
|                                                                  |  | (In millions) |     
|Impairment, restructuring charges and other related closure costs |  | $             | (10  | )  |               | $ | (20  | )            |  | $ | (16  | ) 
|As a percentage of net revenues                                   |  |               | (0.4 | )% |               |   | (0.8 | )%           |  |   | (0.7 | )%





| |   |                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our headcount restructuring plan announced in May 2005, which
    resulted in charges of $4 million mainly for employee
    termination benefits;
|
| |  | Our ongoing 150-mm restructuring plan and related manufacturing
    initiatives, which resulted in a charge of $6 million.                       





| |                 
| | ----------------
| | Operating income

|                              |  |               |     |   |               |   |     |              |  |   |     |  
|----------------------------- |  | ------------- | --- | - | ------------- | - | --- | ------------ |  | - | --- | -
|                              |  | Quarter Ended |    
|                              |  |               |    
|                              |  | Dec 31, 2006  |     |   | Sept 30, 2006 |   |     | Dec 31, 2005 | 
|                              |  |               |     |   |               |   |     |              | 
|                              |  | (In millions) |    
|Operating income              |  | $             | 173 |   |               | $ | 195 |              |  | $ | 197 |  
|In percentage of net revenues |  |               | 7.0 | % |               |   | 7.7 | %            |  |   | 8.2 | %











| |                     
| | --------------------
| | Interest income, net

|                     |  |               |    |  |               |   |    |              |  |   |    | 
|-------------------- |  | ------------- | -- |  | ------------- | - | -- | ------------ |  | - | -- | 
|                     |  | Quarter Ended |   
|                     |  |               |   
|                     |  | Dec 31, 2006  |    |  | Sept 30, 2006 |   |    | Dec 31, 2005 | 
|                     |  |               |    |  |               |   |    |              | 
|                     |  | (In millions) |   
|Interest income, net |  | $             | 25 |  |               | $ | 17 |              |  | $ | 11 | 



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| |                           
| | --------------------------
| | Loss on equity investments

|                           |  |               |    |   |               |   |    |              |  |  |   | 
|-------------------------- |  | ------------- | -- | - | ------------- | - | -- | ------------ |  |  | - | 
|                           |  | Quarter Ended |   
|                           |  |               |   
|                           |  | Dec 31, 2006  |    |   | Sept 30, 2006 |   |    | Dec 31, 2005 | 
|                           |  |               |    |   |               |   |    |              | 
|                           |  | (In millions) |   
|Loss on equity investments |  | $             | (1 | ) |               | $ | (1 | )            |  |  |  | 

start-up




| |                             
| | ----------------------------
| | Income tax benefit (expense)

|                             |  |               |    |  |               |   |    |              |  |   |     |  
|---------------------------- |  | ------------- | -- |  | ------------- | - | -- | ------------ |  | - | --- | -
|                             |  | Quarter Ended |   
|                             |  |               |   
|                             |  | Dec 31, 2006  |    |  | Sept 30, 2006 |   |    | Dec 31, 2005 | 
|                             |  |               |    |  |               |   |    |              | 
|                             |  | (In millions) |   
|Income tax benefit (expense) |  | $             | 80 |  |               | $ | (2 | )            |  | $ | (25 | )







| |           
| | ----------
| | Net income

|                              |  |               |      |   |               |   |     |              |  |   |     |  
|----------------------------- |  | ------------- | ---- | - | ------------- | - | --- | ------------ |  | - | --- | -
|                              |  | Quarter Ended |     
|                              |  |               |     
|                              |  | Dec 31, 2006  |      |   | Sept 30, 2006 |   |     | Dec 31, 2005 | 
|                              |  |               |      |   |               |   |     |              | 
|                              |  | (In millions) |     
|Net income                    |  | $             | 276  |   |               | $ | 207 |              |  | $ | 183 |  
|As percentage of net revenues |  |               | 11.1 | % |               |   | 8.2 | %            |  |   | 7.7 | %



Impact of Changes in Exchange Rates




non-U.S.


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 


 










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Impact of Changes in Interest Rates














Liquidity and Capital Resources






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| |          
| | ---------
| | Liquidity



Net cash from operating activities.




Net cash used in investing activities.






| |   |                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| |  | the expansion of the 300-mm front-end joint project with NXP
    Semiconductors and Freescale Semiconductor in Crolles2 (France);
|
| |  | the capacity expansion and the upgrading to finer geometry
    technologies for our 200-mm plant in Rousset (France);            
|
| |  | the capacity expansion and the upgrading of our 150-mm and
    200-mm plant in Singapore;                                        
|
| |  | the upgrading of our 200-mm fab and pilot line in Agrate
    (Italy); and                                                        
|
| |  | the capacity expansion for our back-end facilities in Malta,
    Shenzhen (China), Bouskoura (Morocco) and Muar (Malaysia).      





| |   |                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| |  | the capacity expansion of our 200-mm and 150-mm front-end
    facilities in Singapore;                                           
|
| |  | the conversion to 200-mm of our front-end facility in Agrate
    (Italy);                                                        
|
| |  | the capacity expansion of our back-end plants in Muar
    (Malaysia), Shenzhen (China), Toa Payoh (Singapore) and Malta;         
|
| |  | the expansion of our 200-mm front-end facility in Phoenix
    (Arizona);                                                         
|
| |  | the capacity expansion of our 200-mm front-end facility in
    Rousset (France);                                                 
|
| |  | the completion of building and continuation of facilities for
    our 300-mm front-end plant in Catania (Italy);                 
|
| |  | the expansion of a 150-mm front-end and a 200-mm pilot line in
    Tours (France); and                                           
|
| |  | the expansion of the 300-mm front-end joint project with NXP
    Semiconductors and Freescale Semiconductor in Crolles2 (France).





| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | the expansion of our 200-mm and 150-mm front-end facilities in
    Singapore;                                              
|
| |  | the expansion of our 200-mm front-end facility in Rousset
    (France);                                                    
|
| |  | the facilitization of our 300-mm facility in Catania (Italy);                                                              
|
| |  | the upgrading of our front-end and research and development
    pilot line in Agrate (Italy);                              
|
| |  | the upgrading of our 200-mm front-end facility in Catania
    (Italy);                                                     
|
| |  | the expansion and upgrading of our front-end facilities 200-mm
    in Phoenix and 150-mm in Carrollton (United States); and
|
| |  | the capacity expansion in our back-end plants of Muar
    (Malaysia), Toa Payoh (Singapore), Shenzhen (China) and Malta.   

Net operating cash flow.


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|                                                                                                                       |  |                         |        |   |      |   |        |      |  |   |        |  
|---------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                                       |  | Year Ended December 31, |       
|                                                                                                                       |  |                         |       
|                                                                                                                       |  | 2006                    |        |   | 2005 |   |        | 2004 | 
|                                                                                                                       |  |                         |        |   |      |   |        |      | 
|                                                                                                                       |  | (In millions)           |       
|Net cash from operating activities                                                                                     |  | $                       | 2,491  |   |      | $ | 1,798  |      |  | $ | 2,342  |  
|Net cash used in investing activities                                                                                  |  |                         | (2,753 | ) |      |   | (1,528 | )    |  |   | (2,134 | )
|Payment for purchase and proceeds from sale of marketable
    securities, short-term deposits and restricted cash, net |  |                         | 928    |   |      |   |       |      |  |   |       |  
|Net operating cash flow                                                                                                |  | $                       | 666    |   |      | $ | 270    |      |  | $ | 208    |  
|                                                                                                                       |  |                         |        |   |      |   |        |      | 



Net cash used in financing activities.




| |                  
| | -----------------
| | Capital Resources



| |                       
| | ----------------------
| | Net financial position



|                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|--------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                  |  | Year Ended December 31, |       
|                                  |  |                         |       
|                                  |  | 2006                    |        |   | 2005 |   |        | 2004 | 
|                                  |  |                         |        |   |      |   |        |      | 
|                                  |  | (In millions)           |       
|Cash and cash equivalents         |  | $                       | 1,963  |   |      | $ | 2,027  |      |  | $ | 1,950  |  
|Marketable securities             |  |                         | 460    |   |      |   |       |      |  |   |       |  
|Short-term deposits               |  |                         | 250    |   |      |   |       |      |  |   |       |  
|Restricted cash                   |  |                         | 218    |   |      |   |       |      |  |   |       |  
|                                  |  |                         |        |   |      |   |        |      | 
|Total cash position               |  |                         | 2,891  |   |      |   | 2,027  |      |  |   | 1,950  |  
|                                  |  |                         |        |   |      |   |        |      | 
|Bank overdrafts                   |  |                         |       |   |      |   | (11    | )    |  |   | (58    | )
|Current portion of long-term debt |  |                         | (136   | ) |      |   | (1,522 | )    |  |   | (133   | )
|Long-term debt                    |  |                         | (1,994 | ) |      |   | (269   | )    |  |   | (1,767 | )
|                                  |  |                         |        |   |      |   |        |      | 
|Total financial debt              |  |                         | (2,130 | ) |      |   | (1,802 | )    |  |   | (1,958 | )
|                                  |  |                         |        |   |      |   |        |      | 
|Net financial position            |  | $                       | 761    |   |      | $ | 225    |      |  | $ | (8     | )
|                                  |  |                         |        |   |      |   |        |      | 



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




|                                           |  |                        |  |      |     |  |      |   |    |      |  |   |      |  |  |      |    |            |  |        |  |   |     | 
|------------------------------------------ |  | ---------------------- |  | ---- | --- |  | ---- | - | -- | ---- |  | - | ---- |  |  | ---- | -- | ---------- |  | ------ |  | - | --- | 
|                                           |  | Payments Due by Period | 
|                                           |  |                        | 
|                                           |  | Total                  |  | 2007 |     |  | 2008 |   |    | 2009 |  |   | 2010 |  |  | 2011 |    | Thereafter | 
|                                           |  |                        |  |      |     |  |      |   |    |      |  |   |      |  |  |      |    |            | 
|                                           |  | (In millions)          | 
|Long-term debt (including current portion) |  | $2,130                 |  | $    | 136 |  |      | $ | 89 |      |  | $ | 83   |  |  | $    | 45 |            |  | $1,020 |  | $ | 757 | 







|                                              |  |                   |    |  |            |  |    | 
|--------------------------------------------- |  | ----------------- | -- |  | ---------- |  | -- | 
|                                              |  | Moodys Investors |    |  | Standard & | 
|                                              |  | Service           |    |  | Poors     | 
|                                              |  |                   |    |  |            | 
|Zero Coupon Senior Convertible Bonds due 2013 |  |                   | A3 |  |            |  | A- | 
|Zero Coupon Senior Convertible Bonds due 2016 |  |                   | A3 |  |            |  | A- | 
|Floating Rate Senior Bonds due 2013           |  |                   | A3 |  |            |  | A- | 





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| |                                                                      
| | ---------------------------------------------------------------------
| | Contractual Obligations, Commercial Commitments and
    Contingencies



|                                                                |                                          |               |       |     |      |   |       |      |  |   |      |    |  |      |     |    |      |   |     |            |  |   |       |   |  |   |       |   | 
|--------------------------------------------------------------- | ---------------------------------------- | ------------- | ----- | --- | ---- | - | ----- | ---- |  | - | ---- | -- |  | ---- | --- | -- | ---- | - | --- | ---------- |  | - | ----- | - |  | - | ----- | - | 
|                                                                |                                          | Total         |       |     | 2007 |   |       | 2008 |  |   | 2009 |    |  | 2010 |     |    | 2011 |   |     | Thereafter | 
|                                                                |                                          |               |       |     |      |   |       |      |  |   |      |    |  |      |     |    |      |   |     |            | 
|                                                                |                                          | (In millions) |      
|Capital leases(3)                                               |                                          | $             | 29    |     |      | $ | 6     |      |  | $ | 6    |    |  | $    | 5   |    |      | $ | 6   |            |  | $ | 2     |   |  | $ | 4     |  
|Operating leases(2)                                             |                                          |               | 304   |     |      |   | 54    |      |  |   | 44   |    |  |      | 40  |    |      |   | 31  |            |  |   | 28    |   |  |   | 107   |  
|Purchase obligations(2)                                         |                                          |               | 1,052 |     |      |   | 959   |      |  |   | 68   |    |  |      | 25  |    |      |   |    |            |  |   |      |   |  |   |      |  
|of which:                                                       |                                          |               |       |     |      |   |       |      |  |   |      |    |  |      |     |    |      |   |     |            |  |   |       |   |  |   |       |  
|                                                                | Equipment purchase                       |               |       | 467 |      |   |       | 467  |  |   |      |   |  |      |     |   |      |   |     |           |  |   |       |  |  |   |       |  | 
|                                                                | Foundry purchase                         |               |       | 373 |      |   |       | 373  |  |   |      |   |  |      |     |   |      |   |     |           |  |   |       |  |  |   |       |  | 
|                                                                | Software, technology licenses and design |               |       | 212 |      |   |       | 119  |  |   |      | 68 |  |      |     | 25 |      |   |     |           |  |   |       |  |  |   |       |  | 
|Hynix ST Joint Venture Debt Financing                           |                                          |               | 32    |     |      |   | 32    |      |  |   |     |    |  |      |    |    |      |   |    |            |  |   |      |   |  |   |      |  
|Other Obligations(2)                                            |                                          |               | 110   |     |      |   | 67    |      |  |   | 23   |    |  |      | 11  |    |      |   | 5   |            |  |   | 1     |   |  |   | 3     |  
|Long-term debt obligations (including current portion)(3)(4)(5) |                                          |               | 2,130 |     |      |   | 136   |      |  |   | 89   |    |  |      | 83  |    |      |   | 45  |            |  |   | 1,020 |   |  |   | 757   |  
|Pension obligations(3)                                          |                                          |               | 342   |     |      |   | 16    |      |  |   | 22   |    |  |      | 27  |    |      |   | 23  |            |  |   | 22    |   |  |   | 232   |  
|Other non-current liabilities(3)                                |                                          |               | 43    |     |      |   | 8     |      |  |   | 9    |    |  |      | 3   |    |      |   | 2   |            |  |   | 1     |   |  |   | 20    |  
|Total                                                           |                                          | $             | 4,042 |     |      | $ | 1,278 |      |  | $ | 261  |    |  | $    | 194 |    |      | $ | 112 |            |  | $ | 1,074 |   |  | $ | 1,123 |  






|    |                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Contingent liabilities which cannot be quantified are excluded
    from the table above.                                                                                                                                               
|   
|(2) | Items not reflected on the Consolidated Balance Sheet at
    December 31, 2006.                                                                                                                                                        
|   
|(3) | Items reflected on the Consolidated Balance Sheet at
    December 31, 2006.                                                                                                                                                            
|   
|(4) | See Note 15 to our Consolidated Financial Statements at
    December 31, 2006 for additional information related to
    long-term debt and redeemable convertible securities.                                                          
|   
|(5) | Year of payment is based on maturity before taking into account
    any potential acceleration that could result from a triggering
    of the change of control provisions of the 2016 Convertible
    Bonds and the 2013 Senior Bonds.













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










| |                               
| | ------------------------------
| | Off-Balance Sheet Arrangements









| |                  
| | -----------------
| | Financial Outlook



ramp-up




81



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


Impact of Recently Issued U.S. Accounting Standards


Accounting for Certain Hybrid Financial
Instruments  an amendment of FASB Statements
No. 133 and 140 Accounting for Derivative Instruments and
Hedging Activities Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities


Accounting for Servicing of Financial Assets  an
amendment of FASB Statement No. 140


Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109 Accounting for Income
Taxes


Fair Value Measurements


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Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans  an amendment of FASB
Statements No. 87, 88, 106 and 132(R)


Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements


The Fair Value Option for Financial Assets and
Financial Liabilities- Including an amendment of FASB Statement
No. 115


Impairment, Restructuring Charges and Other Related Closure
Costs




ramp-ups


83



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|                                                      |  |                              |     |                   |         |   |               |               |  |               |               |   |  |   |     |  
|----------------------------------------------------- |  | ---------------------------- | --- | ----------------- | ------- | - | ------------- | ------------- |  | ------------- | ------------- | - |  | - | --- | -
|                                                      |  | Year Ended December 31, 2006 |    
|                                                      |  |                              |    
|                                                      |  |                              |     | Total Impairment, |        
|                                                      |  |                              |     | Restructuring     |        
|                                                      |  |                              |     | Charges and       |        
|                                                      |  |                              |     | Restructuring     |         |   | Other Related |               |  | Other Related |              
|                                                      |  | Impairment                   |     |                   | Charges |   |               | Closure Costs |  |               | Closure Costs |  
|                                                      |  |                              |     |                   |         |   |               |               |  |               |               |  
|                                                      |  | (In millions)                |    
|150-mm fab plan                                       |  | $                            | (1  | )                 |         | $ | (7            | )             |  | $             | (14           | ) |  | $ | (22 | )
|Restructuring plan decided in the second quarter 2005 |  |                              | (1  | )                 |         |   | (36           | )             |  |               | (8            | ) |  |   | (45 | )
|Other                                                 |  |                              | (10 | )                 |         |   |              |               |  |               |              |   |  |   | (10 | )
|                                                      |  |                              |     |                   |         |   |               |               |  |               |               |  
|Total                                                 |  | $                            | (12 | )                 |         | $ | (43           | )             |  | $             | (22           | ) |  | $ | (77 | )
|                                                      |  |                              |     |                   |         |   |               |               |  |               |               |  





Equity Method Investments




| |             
| | ------------
| | SuperH, Inc.







| |          
| | ---------
| | UPEK Inc.



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| |                       
| | ----------------------
| | Hynix ST Joint Venture





Backlog and Customers




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|        |                                           
|------- | ------------------------------------------
|Item 6. | Directors, Senior Management and Employees

Directors and Senior Management






| |                  
| | -----------------
| | Supervisory Board





|                  |  |          |               |  |                   |  |      |              |  |  |      |  |  |  |    | 
|----------------- |  | -------- | ------------- |  | ----------------- |  | ---- | ------------ |  |  | ---- |  |  |  | -- | 
|Name(1)           |  | Position |               |  | Year Appointed(2) |  |      | Term Expires |  |  | Age  | 
|                  |  |          |               |  |                   |  |      |              |  |  |      | 
|Gérald Arbola     |  |          | Chairman      |  |                   |  | 2004 |              |  |  | 2008 |  |  |  | 58 | 
|Bruno Steve       |  |          | Vice Chairman |  |                   |  | 1989 |              |  |  | 2008 |  |  |  | 65 | 
|Matteo del Fante  |  |          | Member        |  |                   |  | 2005 |              |  |  | 2008 |  |  |  | 40 | 
|Tom de Waard      |  |          | Member        |  |                   |  | 1998 |              |  |  | 2008 |  |  |  | 60 | 
|Douglas Dunn      |  |          | Member        |  |                   |  | 2001 |              |  |  | 2009 |  |  |  | 62 | 
|Didier Lamouche   |  |          | Member        |  |                   |  | 2006 |              |  |  | 2009 |  |  |  | 47 | 
|Didier Lombard    |  |          | Member        |  |                   |  | 2004 |              |  |  | 2008 |  |  |  | 65 | 
|Antonino Turicchi |  |          | Member        |  |                   |  | 2005 |              |  |  | 2008 |  |  |  | 41 | 
|Robert M. White   |  |          | Member        |  |                   |  | 1996 |              |  |  | 2007 |  |  |  | 68 | 






|    |                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Mr. Francis Gavois was a Supervisory Board member until our
    2006 annual shareholders meeting, at which time he was
    succeeded by Mr. Didier Lamouche.
|   
|(2) | As a member of the Supervisory Board.                                                                                                                        









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| |            
| | -----------
| | Biographies









87



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88



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| |                           
| | --------------------------
| | Corporate Governance at ST





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our corporate organization under Dutch law that entrusts our
    management to a Managing Board acting under the supervision and
    control of a Supervisory Board totally independent from the
    Managing Board. Members of our Managing Board and of our
    Supervisory Board are appointed and dismissed by our
    shareholders.                                                                                                
|
| |  | Our early adoption of policies on important issues such as
    business ethics and conflicts of
    interest and strict policies to comply with applicable
    regulatory requirements concerning financial reporting, insider
    trading and public disclosures.                                                                                                                                                                  
|
| |  | Our compliance with Dutch securities laws, because we are a
    company incorporated under the laws of the Netherlands, as well
    as our compliance with United States, French and Italian
    securities laws, because our shares are listed in these
    jurisdictions, in addition to our compliance with the corporate,
    social and financial laws applicable to our subsidiaries in the
    countries in which we do business.
|
| |  | Our broad-based activities in the field of corporate social
    responsibility, encompassing environmental, social, health,
    safety, educational and other related issues.                                                                                                                                                                                                                                                           







89



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non-U.S.


20-F, 20-F 20-F.






90



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| |                             
| | ----------------------------
| | Supervisory Board Committees

Membership and Attendance.


|                                       |  |            |    |       |           |  |              |           |  |            |           |  |            |           |   |        |            |  |   |  |  |  |   | 
|-------------------------------------- |  | ---------- | -- | ----- | --------- |  | ------------ | --------- |  | ---------- | --------- |  | ---------- | --------- | - | ------ | ---------- |  | - |  |  |  | - | 
|                                       |  |            |    |       |           |  |              |           |  | Nomination |           |  |           
|                                       |  |            |    |       |           |  |              |           |  | and        |           |  |           
|                                       |  |            |    |       |           |  |              |           |  | Corporate  |           |  |           
|                                       |  |            |    | Audit |           |  | Compensation |           |  | Strategic  |           |  | Governance |           |   | Ad hoc |           
|Number of Meetings Attended in 2006(1) |  | Full Board |    |       | Committee |  |              | Committee |  |            | Committee |  |            | Committee |   |        | Committees | 
|                                       |  |            |    |       |           |  |              |           |  |            |           |  |            |           |   |        |            | 
|Gérald Arbola                          |  |            | 11 |       |           |  |             |           |  |            | 5         |  |            |           | 4 |        |            |  | 8 |  |  |  | 1 | 
|Matteo del Fante(3)                    |  |            | 11 |       |           |  | 13           |           |  |            |          |  |            |           |  |        |            |  |  |  |  |  | 3 | 
|Tom de Waard                           |  |            | 11 |       |           |  | 14           |           |  |            | 5         |  |            |           |  |        |            |  | 8 |  |  |  | 3 | 
|Douglas Dunn                           |  |            | 7  |       |           |  | 5            |           |  |            |          |  |            |           |  |        |            |  |  |  |  |  |  | 
|Francis Gavois(2)(3)                   |  |            | 4  |       |           |  | 6            |           |  |            |          |  |            |           |  |        |            |  |  |  |  |  | 3 | 
|Didier Lamouche(2)(3)(4)               |  |            | 7  |       |           |  | 4            |           |  |            |          |  |            |           |  |        |            |  |  |  |  |  |  | 
|Didier Lombard                         |  |            | 8  |       |           |  |             |           |  |            | 5         |  |            |           | 4 |        |            |  |  |  |  |  |  | 
|Bruno Steve                            |  |            | 11 |       |           |  |             |           |  |            | 6         |  |            |           | 4 |        |            |  | 7 |  |  |  |  | 
|Antonino Turicchi                      |  |            | 11 |       |           |  |             |           |  |            | 6         |  |            |           | 4 |        |            |  | 7 |  |  |  |  | 
|Robert M. White                        |  |            | 10 |       |           |  | 13           |           |  |            |          |  |            |           | 4 |        |            |  |  |  |  |  |  | 






|    |                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes meetings attended by way of conference call.                                                                                                        
|   
|(2) | Mr. Francis Gavois was a Supervisory Board member until our
    2006 annual shareholders meeting, at which time he was
    succeeded by Mr. Didier Lamouche.
|   
|(3) | Appointed as non-voting observer to Audit Committee.                                                                                                         
|   
|(4) | Mr. Lamouches total attendance of seven Supervisory
    Board meetings includes two meetings in which he was represented
    by Mr. Arbola.                 

Audit Committee.


The Audit Committee met 14 times during 2006.




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20-F.










Compensation Committee.








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Strategic Committee.








Nominating and Corporate Governance Committee.


set-up


Ad hoc Committees.




Secretariat and Controllers.




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| |               
| | --------------
| | Managing Board









94



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| |                   
| | ------------------
| | Executive Officers



|                     |  |                                                                                                                      |  |            |    |          |           |  |    |     |  |  |    | 
|-------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ---------- | -- | -------- | --------- |  | -- | --- |  |  | -- | 
|                     |  |                                                                                                                      |  |            |    | Years in |           |  |   
|                     |  |                                                                                                                      |  |            |    | Semi-    |           |  |   
|                     |  |                                                                                                                      |  | Years with |    |          | Conductor |  |    |    
|Name                 |  | Position                                                                                                             |  | Company    |    |          | Industry  |  |    | Age | 
|                     |  |                                                                                                                      |  |            |    |          |           |  |    |     | 
|Executive Committee  |  |                                                                                                                      |  |            |    |          |           |  |    |     |  |  |    | 
|Carlo Bozotti        |  | President and Chief Executive Officer                                                                                |  |            | 30 |          |           |  | 30 |     |  |  | 54 | 
|Alain Dutheil        |  | Chief Operating Officer                                                                                              |  |            | 24 |          |           |  | 37 |     |  |  | 61 | 
|Laurent Bosson       |  | Executive Vice President, Front-end Technology and Manufacturing                                                     |  |            | 24 |          |           |  | 24 |     |  |  | 64 | 
|Andrea Cuomo         |  | Executive Vice President, Advanced System Technology and Chief
    Strategic Officer (and for other staff functions) |  |            | 24 |          |           |  | 24 |     |  |  | 52 | 
|Carlo Ferro          |  | Executive Vice President, Chief Financial Officer (and for
    Infrastructure and Services organization)             |  |            | 7  |          |           |  | 7  |     |  |  | 46 | 
|Philippe Geyres(1)   |  | Executive Vice President, HPC (and for the other product
    segments)                                               |  |            | 23 |          |           |  | 30 |     |  |  | 54 | 
|Carmelo Papa(2)      |  | Executive Vice President, MPA                                                                                        |  |            | 24 |          |           |  | 24 |     |  |  | 57 | 
|Tommi Uhari(2)(3)    |  | Executive Vice President, ASPG                                                                                       |  |            | 1  |          |           |  | 13 |     |  |  | 35 | 
|Enrico Villa         |  | Executive Vice President, Europe Region (and for Sales and
    Marketing organizations)                              |  |            | 40 |          |           |  | 40 |     |  |  | 65 | 
|Executive Staff      |  |                                                                                                                      |  |            |    |          |           |  |    |     |  |  |    | 
|Georges Auguste      |  | Corporate Vice President, Total Quality and Environmental
    Management                                             |  |            | 20 |          |           |  | 33 |     |  |  | 57 | 
|Gian Luca Bertino    |  | Corporate Vice President, CPG                                                                                        |  |            | 10 |          |           |  | 21 |     |  |  | 47 | 
|Ugo Carena           |  | Corporate Vice President, APG                                                                                        |  |            | 10 |          |           |  | 29 |     |  |  | 63 | 
|Marco Luciano Cassis |  | Corporate Vice President, Japan Region                                                                               |  |            | 19 |          |           |  | 19 |     |  |  | 43 | 

95



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|                       |  |                                                                                        |  |            |    |          |           |  |    |     |  |  |    | 
|---------------------- |  | -------------------------------------------------------------------------------------- |  | ---------- | -- | -------- | --------- |  | -- | --- |  |  | -- | 
|                       |  |                                                                                        |  |            |    | Years in |           |  |   
|                       |  |                                                                                        |  |            |    | Semi-    |           |  |   
|                       |  |                                                                                        |  | Years with |    |          | Conductor |  |    |    
|Name                   |  | Position                                                                               |  | Company    |    |          | Industry  |  |    | Age | 
|                       |  |                                                                                        |  |            |    |          |           |  |    |     | 
|Patrice Chastagner     |  | Corporate Vice President, Human Resources                                              |  |            | 21 |          |           |  | 21 |     |  |  | 59 | 
|Claude Dardanne(4)     |  | Corporate Vice President, General Manager, Microcontrollers,
    Memories & Smartcards |  |            | 25 |          |           |  | 28 |     |  |  | 54 | 
|François Guibert       |  | Corporate Vice President, Asia Pacific Region                                          |  |            | 26 |          |           |  | 29 |     |  |  | 53 | 
|Reza Kazerounian       |  | Corporate Vice President, North America Region                                         |  |            | 7  |          |           |  | 22 |     |  |  | 49 | 
|Otto Kosgalwies        |  | Corporate Vice President, Infrastructure and Services                                  |  |            | 23 |          |           |  | 23 |     |  |  | 51 | 
|Robert Krysiak         |  | Corporate Vice President and General Manager, Greater China
    Region                 |  |            | 18 |          |           |  | 24 |     |  |  | 52 | 
|Christos Lagomichos(4) |  | Corporate Vice President, General Manager, Home
    Entertainment & Displays Group     |  |            | 22 |          |           |  | 25 |     |  |  | 51 | 
|Mario Licciardello     |  | Corporate Vice President, MPG                                                          |  |            | 42 |          |           |  | 42 |     |  |  | 65 | 
|Jean-Claude Marquet(5) |  | Corporate Vice President, Asia Pacific Region                                          |  |            | 21 |          |           |  | 40 |     |  |  | 64 | 
|Carlo Ottaviani        |  | Corporate Vice President, Communications                                               |  |            | 42 |          |           |  | 42 |     |  |  | 63 | 
|Jeffrey See            |  | Corporate Vice President, Central Back-End General Manager                             |  |            | 37 |          |           |  | 37 |     |  |  | 61 | 
|Giordano Seragnoli(6)  |  | Corporate Vice President, Back-end Manufacturing and Subsystems
    Products Group     |  |            | 42 |          |           |  | 44 |     |  |  | 70 | 
|Thierry Tingaud        |  | Corporate Vice President, Emerging Markets Region                                      |  |            | 22 |          |           |  | 22 |     |  |  | 47 | 






|    |                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------
|(1) | Philippe Geyres announced his resignation in December 2006.                                            
|   
|(2) | In January 2007, Carmelo Papa and Tommi Uhari were appointed to
    our Executive Committee.           
|   
|(3) | Tommi Uhari joined us from Nokia in December 2006 as Manager of
    the Personal Multimedia Group.     
|   
|(4) | Claude Dardanne and Christos Lagomichos were promoted to
    corporate vice presidents in January 2007.
|   
|(5) | Mr. Jean-Claude Marquet retired in October 2006.                                                       
|   
|(6) | Mr. Giordano Seragnoli retired in June 2006.                                                           





| |            
| | -----------
| | Biographies



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98



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99



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start-up








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Compensation




|                         |  |                 |           | 
|------------------------ |  | --------------- | --------- | 
|Supervisory Board Member |  | Directors Fees |          
|                         |  |                 |          
|Gérald Arbola            |  | $               | 215,500   | 
|Matteo del Fante         |  |                 | 129,000   | 
|Tom de Waard(2)          |  |                 | 246,500   | 
|Douglas Dunn             |  |                 | 105,000   | 
|Francis Gavois(1)        |  |                 | 17,000    | 
|Didier Lamouche(1)       |  |                 | 98,500    | 
|Didier Lombard           |  |                 | 132,000   | 
|Bruno Steve              |  |                 | 213,500   | 
|Antonino Turicchi        |  |                 | 138,500   | 
|Robert M. White          |  |                 | 134,000   | 
|                         |  |                 |          
|Total                    |  | $               | 1,429,500 | 
|                         |  |                 |          






|    |                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Mr. Francis Gavois was a Supervisory Board Member until the
    2006 annual shareholders meeting, at which time he was
    succeeded by Mr. Didier Lamouche.
|   
|(2) | Compensation, including attendance fees of $2,000 per
    meeting of the Supervisory Board or committee thereof, was paid
    to Clifford Chance LLP.        

inter alia


|                                      |  |        |             |  |          |          |         |          |  |   |        |     |  |   |           | 
|------------------------------------- |  | ------ | ----------- |  | -------- | -------- | ------- | -------- |  | - | ------ | --- |  | - | --------- | 
|Sole Member of Our Managing Board and |  |        |             |  |          | Non-cash |         |          | 
|President and CEO                     |  | Salary |             |  | Bonus(1) |          |         | Benefits |  |   | Total  |    
|                                      |  |        |             |  |          |          |         |          |  |   |        |    
|Carlo Bozotti                         |  |        | $720,000(2) |  |          | $        | 680,000 |          |  | $ | 70,000 | (3) |  | $ | 1,470,000 | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The bonus paid to the sole member of our Managing Board and
    President and CEO during the 2006 financial year was approved by
    the Compensation Committee and approved by the Supervisory Board
    in respect of the 2005 financial year, based on fulfillment of a
    number of pre-defined objectives for 2005.                                                                                                                                                                                    
|   
|(2) | Our Supervisory Board, upon the recommendation of our
    Compensation Committee, approved an annual salary for 2006 for
    our Managing Board and President and CEO of $700,000. The
    difference between the amount approved and the amount actually
    received by Mr. Bozotti resulted because the salary was
    paid partially in euros using an exchange rate of approximately
    1.00 to $1.25
    and partially in Swiss francs using an exchange rate of
    approximately CHF 1.00 to $0.80.
|   
|(3) | Including employer social contributions, company car allowance
    and miscellaneous allowances.                                                                                                                                                                                                                                                                                                                                                                                                             



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Share Ownership




Stock Awards and Options








| |   |                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | approved the terms and conditions of the 2005 Supervisory Board
    Stock-Based Compensation Plan for members and professionals
    valid for a three year period;                                                                                                                                                                             
|
| |  | amended our 2001 Employee Stock Option Plan which expired at the
    end of 2005 with the aim of enhancing our ability to retain key
    employees and motivate them to shareholder value creation;                                                                                                                                            
|
| |  | approved the vesting conditions, linked to our future
    performance and their continued service with us, to apply to
    non-vested stock awards granted to employees in 2005;                                                                                                                                                               
|
| |  | adopted our new 2006 Unvested Stock Award Plan for Executives
    and Key Employees (the Employee USA Plan) with the
    aim of enhancing our ability to retain key employees and
    motivate them to shareholder value creation and approved vesting
    conditions linked to our future performance and continued
    service with us; and
|
| |  | reviewed the terms of the 2007 Unvested Stock Award Plan for
    Executives and Key Employees to be presented to our 2007 annual
    shareholders meeting.                                                                                                                                                                                     



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|                        |  |                |       |  |             |  |      |                   |  |  |             |  |  |               |      |  |             |  |        |  |  |  |       | 
|----------------------- |  | -------------- | ----- |  | ----------- |  | ---- | ----------------- |  |  | ----------- |  |  | ------------- | ---- |  | ----------- |  | ------ |  |  |  | ----- | 
|                        |  | 2006           |       |  | 2005        |  |      | 2004              | 
|                        |  |                |       |  |             |  |      |                   | 
|                        |  | Number of      |       |  |             |  |      |                   | 
|                        |  | Non-vested     |       |  | Acquisition |  |      | Number of         |  |  | Acquisition |  |  | Number of     |      |  |            
|                        |  | Shares Granted |       |  | Price       |  |      | Non-vested        |  |  | Price       |  |  | Stock Options |      |  | Grant Price | 
|                        |  |                |       |  |            |  |      | Shares Granted(1) |  |  |            |  |  | Granted(2)    |      |  | U.S.$       | 
|                        |  |                |       |  |             |  |      |                   |  |  |             |  |  |               |      |  |            
|Gérald Arbola           |  |                | 6,000 |  |             |  | 1.04 |                   |  |  | 6,000       |  |  |               | 1.04 |  |             |  | 12,000 |  |  |  | 22.71 | 
|Bruno Steve             |  |                | 6,000 |  |             |  | 1.04 |                   |  |  | 6,000       |  |  |               | 1.04 |  |             |  | 12,000 |  |  |  | 22.71 | 
|Tom de Waard            |  |                | 6,000 |  |             |  | 1.04 |                   |  |  | 6,000       |  |  |               | 1.04 |  |             |  | 12,000 |  |  |  | 22.71 | 
|Matteo del Fante(3)(4)  |  |                | 6,000 |  |             |  | 1.04 |                   |  |  | 6,000       |  |  |               | 1.04 |  |             |  |       |  |  |  |      | 
|Douglas Dunn            |  |                | 6,000 |  |             |  | 1.04 |                   |  |  | 6,000       |  |  |               | 1.04 |  |             |  | 12,000 |  |  |  | 22.71 | 
|Francis Gavois(5)       |  |                |      |  |             |  |     |                   |  |  | 6,000       |  |  |               | 1.04 |  |             |  | 12,000 |  |  |  | 22.71 | 
|Didier Lamouche(5)      |  |                | 6,000 |  |             |  | 1.04 |                   |  |  |            |  |  |               |     |  |             |  |       |  |  |  |      | 
|Didier Lombard          |  |                | 6,000 |  |             |  | 1.04 |                   |  |  | 6,000       |  |  |               | 1.04 |  |             |  | 12,000 |  |  |  | 22.71 | 
|Antonino Turicchi(3)(4) |  |                | 6,000 |  |             |  | 1.04 |                   |  |  | 6,000       |  |  |               | 1.04 |  |             |  |       |  |  |  |      | 
|Robert M. White         |  |                | 6,000 |  |             |  | 1.04 |                   |  |  | 6,000       |  |  |               | 1.04 |  |             |  | 12,000 |  |  |  | 22.71 | 
|Riccardo Gallo(3)       |  |                |      |  |             |  |     |                   |  |  |            |  |  |               |     |  |             |  | 12,000 |  |  |  | 22.71 | 
|Alessandro Ovi(3)       |  |                |      |  |             |  |     |                   |  |  |            |  |  |               |     |  |             |  | 12,000 |  |  |  | 22.71 | 






|    |                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Pursuant to the 2005 Stock-Based Compensation Plan for
    Supervisory Board Members and Professionals of the Supervisory
    Board.                                                                                  
|   
|(2) | Pursuant to the 2002 Stock Option Plan for Supervisory Board
    Members and Professionals of the Supervisory Board.                                                                                                  
|   
|(3) | Messrs. Riccardo Gallo and Alessandro Ovi were Supervisory
    Board Members until our 2005 annual shareholders meeting,
    at which time they were succeeded by Messrs. Antonino
    Turicchi and Matteo del Fante.
|   
|(4) | Messrs. Antonino Turicchi and Matteo del Fante declined
    their grants of restricted shares.                                                                                                                        
|   
|(5) | Mr. Francis Gavois was a Supervisory Board Member until our
    2006 annual shareholders meeting, at which time he was
    succeeded by Mr. Didier Lamouche.                                                         









inter alia,




| |                                               
| | ----------------------------------------------
| | Employee and Managing Board Stock Option Plans

1995 Stock Option Plan.


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1995 Plan (Employees)


October 20, 1995


Annual Shareholders Meeting


|                                                                                |  |               |  |               |  |               |  |               |  |               |  |              |  |               |  |              
|------------------------------------------------------------------------------- |  | ------------- |  | ------------- |  | ------------- |  | ------------- |  | ------------- |  | ------------ |  | ------------- |  | -------------
|                                                                                |  | Tranche 3     |  | Tranche 4     |  | Special Grant |  | Tranche 5     |  | Special Grant |  | Tranche 6    |  | Special Grant |  | Tranche 7    
|                                                                                |  |               |  |               |  |               |  |               |  |               |  |              |  |               |  |              
|Date of Supervisory Board Meeting                                               |  | July 28, 1998 |  | Sept 16, 1999 |  | Jan 24, 2000  |  | June 16, 2000 |  | Sept 18, 2000 |  | Dec 11, 2000 |  | Dec 18, 2000  |  | March 1, 2001
|Total Number of Shares which may be purchased                                   |  | 3,900,000     |  | 8,878,200     |  | 150,000       |  | 5,331,250     |  | 70,000        |  | 2,019,640    |  | 26,501        |  | 113,350      
|Vesting Date                                                                    |  | July 28, 2001 |  | Sept 16, 2002 |  | Jan 24, 2003  |  | June 16, 2002 |  | Sept 18, 2002 |  | Dec 11, 2002 |  | Dec 18, 2002  |  | March 1, 2003
|Expiration Date                                                                 |  | July 28, 2006 |  | Sept 16, 2007 |  | Jan 24, 2008  |  | June 16, 2008 |  | Sept 18, 2008 |  | Dec 11, 2008 |  | Dec 18, 2008  |  | March 1, 2009
|Exercise Price                                                                  |  | $12.03        |  | $24.88        |  | $55.25        |  | $62.01        |  | $52.88        |  | $50.69       |  | $44.00        |  | $31.65       
|Terms of Exercise                                                               |  | 50% on        |  | 50% on        |  | 50% on        |  | 32% on        |  | 32% on        |  | 32% on       |  | 32% on        |  | 32% on       
|                                                                                |  | July 28, 2001 |  | Sept 16, 2002 |  | Jan 24, 2003  |  | June 16, 2002 |  | Sept 18, 2002 |  | Dec 11, 2002 |  | Dec 18, 2002  |  | March 1, 2003
|                                                                                |  | 50% on        |  | 50% on        |  | 50% on        |  | 32% on        |  | 32% on        |  | 32% on       |  | 32% on        |  | 32% on       
|                                                                                |  | July 28, 2002 |  | Sept 16, 2003 |  | Jan 24, 2004  |  | June 16, 2003 |  | Sept 18, 2003 |  | Dec 11, 2003 |  | Dec 18, 2003  |  | March 1, 2004
|                                                                                |  |               |  |               |  |               |  | 36% on        |  | 36% on        |  | 36% on       |  | 36% on        |  | 36% on       
|                                                                                |  |               |  |               |  |               |  | June 16, 2004 |  | Sept 18, 2004 |  | Dec 11, 2004 |  | Dec 18, 2004  |  | March 1, 2005
|Number of Shares to be acquired with Outstanding Options as of
    Dec 31, 2006 |  | 0             |  | 7,661,670     |  | 1,980         |  | 4,507,280     |  | 39,745        |  | 1,572,610    |  | 20,527        |  | 49,690       
|Held by Managing Board/ Executive Officers                                      |  | 0             |  | 398,400       |  | 0             |  | 187,000       |  | 0             |  | 0            |  | 0             |  | 0            



2001 Stock Option Plan.


104



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##### Table of Contents



2001 Plan (Employees)


April 25, 2001


Annual Shareholders Meeting


|                                                                                     |  |           |                |  |           |  |              |           |  |  |             |  |  |           |             |  |           |  |              |           |  |  |                |  |  |  |               | 
|------------------------------------------------------------------------------------ |  | --------- | -------------- |  | --------- |  | ------------ | --------- |  |  | ----------- |  |  | --------- | ----------- |  | --------- |  | ------------ | --------- |  |  | -------------- |  |  |  | ------------- | 
|                                                                                     |  | Tranche 1 |                |  | Tranche 2 |  |              | Tranche 3 |  |  | Tranche 4   |  |  | Tranche 5 |             |  | Tranche 6 |  |              | Tranche 7 | 
|                                                                                     |  |           |                |  |           |  |              |           |  |  |             |  |  |           |             |  |           |  |              |           | 
|Date of the grant                                                                    |  |           | April 27, 2001 |  |           |  | Sept 4, 2001 |           |  |  | Nov 1, 2001 |  |  |           | Jan 2, 2002 |  |           |  | Jan 25, 2002 |           |  |  | April 25, 2002 |  |  |  | June 26, 2002 | 
|Total Number of Shares which may be purchased                                        |  |           | 9,521,100      |  |           |  | 16,000       |           |  |  | 61,900      |  |  |           | 29,400      |  |           |  | 3,656,103    |           |  |  | 9,708,390      |  |  |  | 318,600       | 
|Vesting Date                                                                         |  |           | April 27, 2003 |  |           |  | Sept 4, 2003 |           |  |  | Nov 1, 2003 |  |  |           | Jan 2, 2004 |  |           |  | Jan 25, 2003 |           |  |  | April 25, 2004 |  |  |  | June 26, 2004 | 
|Expiration Date                                                                      |  |           | April 27, 2011 |  |           |  | Sept 4, 2011 |           |  |  | Nov 1, 2011 |  |  |           | Jan 2, 2012 |  |           |  | Jan 25, 2012 |           |  |  | April 25, 2012 |  |  |  | June 26, 2012 | 
|Exercise Price                                                                       |  |           | $39.00         |  |           |  | $29.70       |           |  |  | $29.61      |  |  |           | $33.70      |  |           |  | $31.09       |           |  |  | $31.11         |  |  |  | $22.30        | 
|                                                                                     |  |           | 32% on         |  |           |  | 32% on       |           |  |  | 32% on      |  |  |           | 32% on      |  |           |  | 50% on       |           |  |  | 32% on         |  |  |  | 32% on        | 
|                                                                                     |  |           | April 27, 2003 |  |           |  | Sept 4, 2003 |           |  |  | Nov 1, 2003 |  |  |           | Jan 2, 2004 |  |           |  | Jan 25, 2003 |           |  |  | April 25, 2004 |  |  |  | June 26, 2004 | 
|Terms of Exercise                                                                    |  |           | 32% on         |  |           |  | 32% on       |           |  |  | 32% on      |  |  |           | 32% on      |  |           |  | 50% on       |           |  |  | 32% on         |  |  |  | 32% on        | 
|                                                                                     |  |           | April 27, 2004 |  |           |  | Sept 4, 2004 |           |  |  | Nov 1, 2004 |  |  |           | Jan 2, 2005 |  |           |  | Jan 25, 2004 |           |  |  | April 25, 2005 |  |  |  | June 26, 2005 | 
|                                                                                     |  |           | 36% on         |  |           |  | 36% on       |           |  |  | 36% on      |  |  |           | 36% on      |  |           |  |              |           |  |  | 36% on         |  |  |  | 36% on        | 
|                                                                                     |  |           | April 27, 2005 |  |           |  | Sept 4, 2005 |           |  |  | Nov 1, 2005 |  |  |           | Jan 2, 2006 |  |           |  |              |           |  |  | April 25, 2006 |  |  |  | June 26, 2006 | 
|Number of Shares to be acquired with Outstanding Options as of
    December 31, 2006 |  |           | 8,112,170      |  |           |  | 16,000       |           |  |  | 50,460      |  |  |           | 25,100      |  |           |  | 3,014,612    |           |  |  | 8,549,588      |  |  |  | 142,306       | 
|Held by Managing Board/ Executive Officers                                           |  |           | 247,000        |  |           |  | 0            |           |  |  | 0           |  |  |           | 0           |  |           |  | 93,500       |           |  |  | 280,000        |  |  |  | 0             | 

2001 Plan (Employees)


April 25, 2001


Annual Shareholders Meeting


|                                                                                |  |             |  |              |  |                |  |              |  |              |  |             |  |                |  |              |  |              |  |               
|------------------------------------------------------------------------------- |  | ----------- |  | ------------ |  | -------------- |  | ------------ |  | ------------ |  | ----------- |  | -------------- |  | ------------ |  | ------------ |  | --------------
|                                                                                |  | Tranche 8   |  | Tranche 9    |  | Tranche 10     |  | Tranche 11   |  | Tranche 12   |  | Tranche 13  |  | Tranche 14     |  | Tranche 15   |  | Tranche 16   |  | Tranche 17    
|                                                                                |  |             |  |              |  |                |  |              |  |              |  |             |  |                |  |              |  |              |  |               
|Date of the grant                                                               |  | Aug 1, 2002 |  | Dec 17, 2002 |  | March 14, 2003 |  | June 3, 2003 |  | Oct 24, 2003 |  | Jan 2, 2004 |  | April 26, 2004 |  | Sept 1, 2004 |  | Jan 31, 2005 |  | March 17, 2005
|Total Number of Shares which may be purchased                                   |  | 24,500      |  | 14,400       |  | 11,533,960     |  | 306,850      |  | 135,500      |  | 86,400      |  | 12,103,490     |  | 175,390      |  | 29,200       |  | 13,000        
|Vesting Date                                                                    |  | Aug 1, 2004 |  | Dec 17, 2004 |  | March 14, 2005 |  | June 3, 2005 |  | Oct 24, 2005 |  | Jan 2, 2006 |  | April 26, 2006 |  | Sept 1, 2006 |  | Jan 31, 2007 |  | March 17, 2007
|Expiration Date                                                                 |  | Aug 1, 2012 |  | Dec 17, 2012 |  | March 14, 2013 |  | June 3, 2013 |  | Oct 24, 2013 |  | Jan 2, 2014 |  | April 26, 2014 |  | Sept 1, 2014 |  | Jan 31, 2015 |  | March 17, 2015
|Exercise Price                                                                  |  | $20.02      |  | $21.59       |  | $19.18         |  | $22.83       |  | $25.90       |  | $27.21      |  | $22.71         |  | $17.08       |  | $16.73       |  | $17.31        
|                                                                                |  | 32% on      |  | 32% on       |  | 32% on         |  | 32% on       |  | 32% on       |  | 32% on      |  | 32% on         |  | 32% on       |  | 32% on       |  | 32% on        
|                                                                                |  | Aug 1, 2004 |  | Dec 17, 2004 |  | March 14, 2005 |  | June 3, 2005 |  | Oct 24, 2005 |  | Jan 2, 2006 |  | April 26, 2006 |  | Sept 1, 2006 |  | Jan 31, 2007 |  | March 17, 2007
|                                                                                |  | 32% on      |  | 32% on       |  | 32% on         |  | 32% on       |  | 32% on       |  | 32% on      |  | 32% on         |  | 32% on       |  | 32% on       |  | 32% on        
|Terms of Exercise                                                               |  | Aug 1, 2005 |  | Dec 17, 2005 |  | March 14, 2006 |  | June 3, 2006 |  | Oct 24, 2006 |  | Jan 2, 2007 |  | April 26, 2007 |  | Sept 1, 2007 |  | Jan 31, 2008 |  | March 17, 2008
|                                                                                |  | 36% on      |  | 36% on       |  | 36% on         |  | 36% on       |  | 36% on       |  | 36% on      |  | 36% on         |  | 36% on       |  | 36% on       |  | 36% on        
|                                                                                |  | Aug 1, 2006 |  | Dec 17, 2006 |  | March 14, 2007 |  | June 3, 2007 |  | Oct 24, 2007 |  | Jan 2, 2008 |  | March 14, 2008 |  | Sept 1, 2008 |  | Jan 31, 2009 |  | March 17, 2009
|Number of Shares to be acquired with Outstanding Options as of
    Dec 31, 2006 |  | 18,100      |  | 14,400       |  | 10,302,239     |  | 201,550      |  | 124,200      |  | 26,700      |  | 10,970,870     |  | 147,255      |  | 29,200       |  | 13,000        
|Held by Managing Board/ Executive Officers                                      |  | 0           |  | 0            |  | 352,000        |  | 0            |  | 31,000       |  | 0           |  | 465,000        |  | 0            |  | 0            |  | 0             







105



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| |                               
| | ------------------------------
| | 2006 Unvested Stock Award Plan









| |                               
| | ------------------------------
| | 2005 Unvested Stock Award Plan





| |                                     
| | ------------------------------------
| | Supervisory Board Stock Option Plans

1996 Stock Option Plan for members and professionals of the
Supervisory Board.




1999 Stock Option Plan for members and professionals of the
Supervisory Board.


2002 Stock Option Plan for members and professionals of the
Supervisory Board.






|                                                                                         |  |                 |  |                 |  |                 |  |                 |  |                 |  |                 |  |                
|---------------------------------------------------------------------------------------- |  | --------------- |  | --------------- |  | --------------- |  | --------------- |  | --------------- |  | --------------- |  | ---------------
|                                                                                         |  | June 24, 1996   |  | May 31, 1999    |  | March 27, 2002 
|Date of Annual                                                                           |  |                 |  |                 |  |                
|Shareholders Meeting                                                                    |  | Tranche 3       |  | Tranche 1       |  | Tranche 2       |  | Tranche 3       |  | Tranche 1       |  | Tranche 2       |  | Tranche 3      
|                                                                                         |  |                 |  |                 |  |                 |  |                 |  |                 |  |                 |  |                
|Date of the grant                                                                        |  | July 28, 1998   |  | Sept 16, 1999   |  | June 16, 2000   |  | April 27, 2001  |  | April 25, 2002  |  | March 14, 2003  |  | April 26, 2004 
|Total Number of Shares which
    may be purchased                                        |  | 103,500         |  | 207,000         |  | 103,500         |  | 112,500         |  | 132,000         |  | 132,000         |  | 132,000        
|Vesting Date                                                                             |  | July 28, 1999   |  | Sept 16, 2000   |  | June 16, 2001   |  | April 27, 2002  |  | May 25, 2002    |  | April 14, 2003  |  | April 26, 2004 
|Expiration Date                                                                          |  | July 28, 2006   |  | Sept 16, 2007   |  | June 16, 2008   |  | April 27, 2011  |  | April 25, 2012  |  | March 14, 2013  |  | April 26, 2014 
|Exercise Price                                                                           |  | $12.03          |  | $24.88          |  | $62.01          |  | $39.00          |  | $31.11          |  | $19.18          |  | $22.71         
|                                                                                         |  | All exercisable |  | All exercisable |  | All exercisable |  | All exercisable |  | All exercisable |  | All exercisable |  | All exercisable
|Terms of Exercise                                                                        |  | after 1 year    |  | after 1 year    |  | after 1 year    |  | after 1 year    |  | after 1 year    |  | after 1 year    |  | after 1 year   
|Number of Shares to be acquired with Outstanding
    Options as of December 31,
    2006 |  | 0               |  | 153,000         |  | 90,000          |  | 99,000          |  | 120,000         |  | 120,000         |  | 132,000        

106



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2005 Stock-based Compensation Plan for members and
professionals of the Supervisory Board.




| |   |                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a maximum number of 6,000 newly issued shares per year for each
    member of the Supervisory Board and 3,000 newly issued shares
    per year for each professional of the Supervisory Board; and
|
| |  | at a price per share of
    1.04 per
    share, the nominal value of ST shares.                                                                                                                  







|                                              |  |      |                  |  |      |  |                | 
|--------------------------------------------- |  | ---- | ---------------- |  | ---- |  | -------------- | 
|                                              |  | 2005 |                  |  | 2006 | 
|                                              |  |      |                  |  |      | 
|Total number of Shares which may be purchased |  |      | 34,000           |  |      |  | 51,000         | 
|Expiration date                               |  |      | October 25, 2015 |  |      |  | April 29, 2016 | 



| |                  
| | -----------------
| | Terms of Exercise

Summary of Stock Options and Share Awards.


|                                                         |  |           |            |         |           |  |            |      |                |  |           |  |  |         |           |  |  |  |            | 
|-------------------------------------------------------- |  | --------- | ---------- | ------- | --------- |  | ---------- | ---- | -------------- |  | --------- |  |  | ------- | --------- |  |  |  | ---------- | 
|                                                         |  | Employees |           
|                                                         |  |           |           
|                                                         |  |           |            | Total   |          
|                                                         |  |           |            | 2001    |           |  |            |      | (stock options | 
|                                                         |  |           |            | Amended |           |  |            |      | and stock      | 
|                                                         |  | 1995 Plan |            |         | 2001 Plan |  |            | Plan |                |  | 2006 Plan |  |  | awards) |          
|                                                         |  |           |            |         |           |  |            |      |                |  |           |  |  |         |          
|Remaining amount authorized to be granted                |  |           | 0          |         |           |  | 0          |      |                |  | 0         |  |  |         | 301,790   |  |  |  | 301,790    | 
|Amount exercised (stock options) or vested (stock awads) |  |           | 14,523,601 |         |           |  | 10,050     |      |                |  | 637,109   |  |  |         | 0         |  |  |  | 15,170,760 | 
|Amount cancelled                                         |  |           | 3,184,838  |         |           |  | 5,966,383  |      |                |  | 1,529,362 |  |  |         | 118,430   |  |  |  | 10,799,013 | 
|Amount outstanding                                       |  |           | 13,853,502 |         |           |  | 41,757,750 |      |                |  | 1,993,444 |  |  |         | 4,798,210 |  |  |  | 62,402,906 | 

|                                          |  |                   |         |  |      |  |         |      |  |  |         |  |  |       |        |  |  |  |         | 
|----------------------------------------- |  | ----------------- | ------- |  | ---- |  | ------- | ---- |  |  | ------- |  |  | ----- | ------ |  |  |  | ------- | 
|                                          |  | Supervisory Board |        
|                                          |  |                   |        
|                                          |  | 1996              |         |  | 1999 |  |         | 2002 |  |  | 2005    |  |  | Total |       
|                                          |  |                   |         |  |      |  |         |      |  |  |         |  |  |       |       
|Remaining amount authorized to be granted |  |                   | 0       |  |      |  | 0       |      |  |  | 0       |  |  |       | 0      |  |  |  | 0       | 
|Amount exercised or vested for 2005 plan  |  |                   | 328,500 |  |      |  | 18,000  |      |  |  | 0       |  |  |       | 17,000 |  |  |  | 363,500 | 
|Amount cancelled                          |  |                   | 72,000  |  |      |  | 63,000  |      |  |  | 24,000  |  |  |       | 30,000 |  |  |  | 189,000 | 
|Amount outstanding                        |  |                   | 0       |  |      |  | 342,000 |      |  |  | 372,000 |  |  |       | 85,000 |  |  |  | 799,000 | 





107



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| |          
| | ---------
| | Employees



|                  |  |                 |        |  |      |  |        |      |  |  |        | 
|----------------- |  | --------------- | ------ |  | ---- |  | ------ | ---- |  |  | ------ | 
|                  |  | At December 31, |       
|                  |  |                 |       
|                  |  | 2006            |        |  | 2005 |  |        | 2004 | 
|                  |  |                 |        |  |      |  |        |      | 
|France            |  |                 | 10,660 |  |      |  | 10,330 |      |  |  | 9,990  | 
|Italy             |  |                 | 10,320 |  |      |  | 10,500 |      |  |  | 10,940 | 
|Rest of Europe    |  |                 | 1,580  |  |      |  | 1,550  |      |  |  | 1,660  | 
|United States     |  |                 | 3,280  |  |      |  | 3,120  |      |  |  | 3,180  | 
|Malta and Morocco |  |                 | 7,330  |  |      |  | 6,900  |      |  |  | 7,200  | 
|Asia              |  |                 | 18,600 |  |      |  | 17,600 |      |  |  | 16,530 | 
|                  |  |                 |        |  |      |  |        |      | 
|Total             |  |                 | 51,770 |  |      |  | 50,000 |      |  |  | 49,500 | 
|                  |  |                 |        |  |      |  |        |      | 

|                                    |  |                 |        |  |      |  |        |      |  |  |        | 
|----------------------------------- |  | --------------- | ------ |  | ---- |  | ------ | ---- |  |  | ------ | 
|                                    |  | At December 31, |       
|                                    |  |                 |       
|                                    |  | 2006            |        |  | 2005 |  |        | 2004 | 
|                                    |  |                 |        |  |      |  |        |      | 
|Research and Development            |  |                 | 10,300 |  |      |  | 9,700  |      |  |  | 9,800  | 
|Marketing and Sales                 |  |                 | 2,850  |  |      |  | 2,880  |      |  |  | 2,850  | 
|Manufacturing                       |  |                 | 33,420 |  |      |  | 32,400 |      |  |  | 32,150 | 
|Administration and General Services |  |                 | 2,600  |  |      |  | 2,550  |      |  |  | 2,400  | 
|Divisional Functions                |  |                 | 2,600  |  |      |  | 2,470  |      |  |  | 2,300  | 
|                                    |  |                 |        |  |      |  |        |      | 
|Total                               |  |                 | 51,770 |  |      |  | 50,000 |      |  |  | 49,500 | 
|                                    |  |                 |        |  |      |  |        |      | 










|        |                                                  
|------- | -------------------------------------------------
|Item 7. | Major Shareholders and Related-Party Transactions

Major Shareholders




|                                                         |  |                     |             |  |   |  |      | 
|-------------------------------------------------------- |  | ------------------- | ----------- |  | - |  | ---- | 
|                                                         |  | Common Shares Owned |            
|                                                         |  |                     |            
|Shareholders(1)                                          |  | Number              |             |  | % | 
|                                                         |  |                     |             |  |   | 
|STMicroelectronics Holding II B.V. (ST
    Holding II) |  |                     | 250,704,754 |  |   |  | 27.5 | 
|Public                                                   |  |                     | 553,818,764 |  |   |  | 60.8 | 
|Brandes Investment Partners                              |  |                     | 92,871,524  |  |   |  | 10.2 | 
|Treasury shares                                          |  |                     | 12,762,891  |  |   |  | 1.4  | 






|    |                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | At the end of 2004, Capital Group International, Inc. owned more
    than 5% of our share capital. As of December 31, 2006,
    Capital Group International, Inc. no longer held more than 5% of
    our share capital and is, consequently, no longer one of our
    major shareholders.





108



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##### Table of Contents



Ministero
dellEconomia e delle Finanze




|                  |  |                     |             |  |   |  |      | 
|----------------- |  | ------------------- | ----------- |  | - |  | ---- | 
|                  |  | Common Shares Owned |            
|                  |  |                     |            
|                  |  | Number              |             |  | % | 
|                  |  |                     |             |  |   | 
|December 31, 2006 |  |                     | 250,704,754 |  |   |  | 27.5 | 
|December 31, 2005 |  |                     | 250,704,754 |  |   |  | 27.6 | 
|December 31, 2004 |  |                     | 278,483,280 |  |   |  | 30.8 | 















|    |                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------
|(1) | FT1CI owns 50% of ST Holding and indirectly holds 99,318,236 of
    our common shares.                                                
|   
|(2) | Not a legal entity, purely for illustrative purposes.                                                                                 
|   
|(3) | CDP and Finmeccanica own 50% of ST Holding and indirectly hold
    91,644,941 and 59,741,577 of our common shares, respectively.      
|   
|(4) | CDP owns 30% of ST Holding, while Finmeccanica owns 20% of ST
    Holding.                                                            
|   
|(5) | The 71.1% owned by the public includes the 10.2% shareholding of
    Brandes Investment Partners.                                     
|   
|(6) | ST Holding II owns 27.5% of our shares, the Public owns
    71.1% of our shares and we hold the remaining 1.4% as Treasury
    Shares.




109



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##### Table of Contents





 


  











| |                         
| | ------------------------
| | Shareholders Agreements



| |                            
| | ---------------------------
| | STH Shareholders Agreement





110



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##### Table of Contents





| |                                       
| | --------------------------------------
| | Restructuring of the Holding Companies





| |           
| | ----------
| | Standstill





| |                     
| | --------------------
| | Corporate Governance









111



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##### Table of Contents













| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) As long as any of the shareholders indirectly owns at
    least equal to the lesser of 3% of our issued and outstanding
    share capital or 10% of the remaining STH shareholders
    stake in us at such time, with respect to the holding company,
    any changes to the articles of association, any issue,
    acquisition or disposal of shares in the holding company or
    change in the rights of its shares, its liquidation or
    dissolution and any legal merger, de-merger, acquisition or
    joint venture agreement to which the holding company is proposed
    to be a party.                                                                                                                                                                                       
|
| | (ii) As long as any of the shareholders indirectly owns at
    least 33% of the holding company, certain changes to our
    Articles of Association (including any alteration in our
    authorized share capital, or any issue of share capital and/or
    financial instrument giving the right to subscribe for our
    common shares, changes to the rights attached to our shares,
    changes to the preemptive rights, issues relating to the form,
    rights and transfer mechanics of the shares, the composition and
    operation of the Managing and Supervisory Boards, matters
    subject to the Supervisory Boards approval, the
    Supervisory Boards voting procedures, extraordinary
    meetings of shareholders and quorums for voting at
    shareholders meetings).
|
| | (iii) Any decision to vote our shares held by the holding
    company at any shareholders meeting of our shareholders
    with respect to any substantial and material merger decision. In
    the event of a failure by the shareholders to reach a common
    decision on the relevant merger proposal, our shares
    attributable to the minority shareholder and held by the holding
    company will be counted as present for purposes of a quorum of
    shareholders at one of our shareholders meetings, but will
    not be voted (i.e., will be abstained from the vote in a way
    that they will not be counted as a negative vote or as a
    positive vote).                                                                                                                
|
| | (iv) In addition, the minority shareholder will have the
    right to designate at least one member of the list of candidates
    for our Supervisory Board to be proposed by the holding company
    if that shareholder indirectly owns at least 3% of our total
    issued and outstanding share capital, with the majority STH
    shareholder retaining the right to appoint that number of
    members to our Supervisory Board that is at least proportional
    to such majority STH shareholders voting stake.                                                                                                                                                                                                                                                                       



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| |                               
| | ------------------------------
| | Disposals of our Common Shares







| |                                      
| | -------------------------------------
| | Re-adjusting and Re-balancing options







| |                            
| | ---------------------------
| | Change of Control Provision





| |                
| | ---------------
| | Non-competition





| |         
| | --------
| | Deadlock



113



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##### Table of Contents





| |                  
| | -----------------
| | Preference Shares









| |                               
| | ------------------------------
| | Other Shareholders Agreements



| |                           
| | --------------------------
| | Italian Shareholders Pact







| |                         
| | ------------------------
| | Statutory Considerations

Commissaire
du Gouvernement Contrôleur dEtat 94-214,


114



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##### Table of Contents







(società per
azioni).


Related-Party Transactions


end-to











|        |                      
|------- | ---------------------
|Item 8. | Financial Information

Financial Statements


20-F.


Legal Proceedings






115



---



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116



---



##### Table of Contents



Risk Management and Insurance










| |   |                                           
| | - | ------------------------------------------
| |  | Property damage and business interruption;
|
| |  | General liability and product liability;  
|
| |  | Directors and officers liability; and     
|
| |  | Transportation risks.                     





Reporting Obligations in International Financial Reporting
Standards (IFRS)










Dividend Policy






117



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| |   |                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On April 27, 2006, our shareholders approved the payment of
    a cash dividend with respect to the year ended December 31,
    2005 of $0.12 per share payable to Dutch Registry
    Shareholders of record on May 22, 2006 and New York
    Registry Shareholders as of May 24, 2006. This dividend was
    approximately 40% of our earnings in 2005. 
|
| |  | On March 18, 2005, our shareholders approved the payment of
    a cash dividend with respect to the year ended December 31,
    2004 of $0.12 per share payable to Dutch Registry
    Shareholders of record on May 23, 2005 and New York
    registry shareholders as of May 25, 2005. This dividend was
    approximately 18% of our earnings in 2004. 
|
| |  | On April 23, 2004, our shareholders approved the payment of
    a cash dividend with respect to the year ended December 31,
    2003 of $0.12 per share payable to Dutch Registry
    shareholders of record on May 21, 2004 and New York
    registry shareholders as of May 26, 2004. This dividend was
    approximately 42% of our earnings for 2003.
|
| |  | In 2003, we paid a cash dividend with respect to the year ended
    December 31, 2002 of $0.08 per share. This dividend
    was approximately 17% of our earnings for 2002.                                                                                                                                                                              
|
| |  | In 2002, we paid a cash dividend with respect to the year ended
    December 31, 2001 of $0.04 per share. This dividend
    was approximately 14% of our earnings for 2001.                                                                                                                                                                              








|        |        
|------- | -------
|Item 9. | Listing

Trading History of the Companys Shares












| |                  
| | -----------------
| | Our Common Shares



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2-to 3-to


119



---



##### Table of Contents



Euronext Paris(1)


|                                             |                               |                       |  |           |              |  |     |             |  |     |       |       |  |  |       |       | 
|-------------------------------------------- | ----------------------------- | --------------------- |  | --------- | ------------ |  | --- | ----------- |  | --- | ----- | ----- |  |  | ----- | ----- | 
|                                             |                               | Average Daily Trading |  |           |              |  |    
|                                             |                               | Volumes               |  |           |             
|                                             |                               |                       |  |           | Price Ranges | 
|                                             |                               | Number of             |  |           |              |  |     |            
|Calendar Period                              |                               | Shares                |  |           | Capital      |  |     | High        |  |     | Low   |      
|                                             |                               |                       |  |           |              |  |     |             |  |     |       |      
|                                             |                               |                       |  | ()       |              |  | () |             |  | () |      
|Annual Information for the Past Five Years   |                               |                       |  |           |              |  |     |             |  |     |       |       |  |  |       |      
|2002                                         |                               |                       |  |           |              |  |     |             |  |     | 39.70 |       |  |  | 11.10 |      
|2003                                         |                               |                       |  |           |              |  |     |             |  |     | 24.74 |       |  |  | 15.20 |      
|2004                                         |                               |                       |  |           |              |  |     |             |  |     | 23.81 |       |  |  | 13.25 |      
|2005                                         |                               |                       |  |           |              |  |     |             |  |     | 15.81 |       |  |  | 10.83 |      
|2006                                         |                               |                       |  |           |              |  |     |             |  |     | 16.56 |       |  |  | 11.34 |      
|Quarterly Information for the Past Two Years |                               |                       |  |           |              |  |     |             |  |     |       |       |  |  |       |      
|2005                                         |                               |                       |  |           |              |  |     |             |  |     |       |       |  |  |       |      
|                                             | First quarter                 |                       |  |           |              |  |     |             |  |     |       | 14.47 |  |  |       | 12.38 | 
|                                             | Second quarter                |                       |  |           |              |  |     |             |  |     |       | 13.71 |  |  |       | 10.83 | 
|                                             | Third quarter                 |                       |  |           |              |  |     |             |  |     |       | 15.17 |  |  |       | 12.58 | 
|                                             | Fourth quarter                |                       |  |           |              |  |     |             |  |     |       | 15.81 |  |  |       | 13.21 | 
|2006                                         |                               |                       |  |           |              |  |     |             |  |     |       |       |  |  |       |      
|                                             | First quarter                 |                       |  |           |              |  |     |             |  |     |       | 16.56 |  |  |       | 13.98 | 
|                                             | Second quarter                |                       |  |           |              |  |     |             |  |     |       | 15.97 |  |  |       | 11.82 | 
|                                             | Third quarter                 |                       |  |           |              |  |     |             |  |     |       | 13.91 |  |  |       | 11.34 | 
|                                             | Fourth quarter                |                       |  |           |              |  |     |             |  |     |       | 14.45 |  |  |       | 13.03 | 
|Monthly Information for the Past 18 Months   |                               |                       |  |           |              |  |     |             |  |     |       |       |  |  |       |      
|2005                                         |                               |                       |  |           |              |  |     |             |  |     |       |       |  |  |       |      
|                                             | September                     |                       |  | 4,864,941 |              |  |     | 67,454,878  |  |     |       | 14.52 |  |  |       | 13.01 | 
|                                             | October                       |                       |  | 5,057,766 |              |  |     | 70,267,543  |  |     |       | 14.82 |  |  |       | 13.21 | 
|                                             | November                      |                       |  | 4,984,709 |              |  |     | 72,487,638  |  |     |       | 15.19 |  |  |       | 13.40 | 
|                                             | December                      |                       |  | 3,947,090 |              |  |     | 61,022,011  |  |     |       | 15.81 |  |  |       | 15.02 | 
|2006                                         |                               |                       |  |           |              |  |     |             |  |     |       |       |  |  |       |      
|                                             | January                       |                       |  | 6,316,739 |              |  |     | 99,311,771  |  |     |       | 16.56 |  |  |       | 15.03 | 
|                                             | February                      |                       |  | 5,298,108 |              |  |     | 78,369,620  |  |     |       | 15.43 |  |  |       | 14.22 | 
|                                             | March                         |                       |  | 6,951,076 |              |  |     | 101,914,860 |  |     |       | 15.49 |  |  |       | 13.98 | 
|                                             | April                         |                       |  | 6,521,910 |              |  |     | 99,578,697  |  |     |       | 15.97 |  |  |       | 14.51 | 
|                                             | May                           |                       |  | 6,408,609 |              |  |     | 86,134,611  |  |     |       | 14.92 |  |  |       | 12.36 | 
|                                             | June                          |                       |  | 5,591,297 |              |  |     | 69,327,001  |  |     |       | 13.11 |  |  |       | 11.82 | 
|                                             | July                          |                       |  | 5,547,263 |              |  |     | 66,749,417  |  |     |       | 12.82 |  |  |       | 11.34 | 
|                                             | August                        |                       |  | 4,328,541 |              |  |     | 52,985,109  |  |     |       | 13.20 |  |  |       | 11.38 | 
|                                             | September                     |                       |  | 6,107,356 |              |  |     | 79,814,418  |  |     |       | 13.91 |  |  |       | 12.35 | 
|                                             | October                       |                       |  | 5,944,635 |              |  |     | 80,676,802  |  |     |       | 14.24 |  |  |       | 13.03 | 
|                                             | November                      |                       |  | 5,187,519 |              |  |     | 71,998,052  |  |     |       | 14.45 |  |  |       | 13.20 | 
|                                             | December                      |                       |  | 4,750,629 |              |  |     | 66,096,256  |  |     |       | 14.36 |  |  |       | 13.38 | 
|2007                                         |                               |                       |  |           |              |  |     |             |  |     |       |       |  |  |       |      
|                                             | January                       |                       |  | 6,022,753 |              |  |     | 86,746,809  |  |     |       | 15.00 |  |  |       | 13.57 | 
|                                             | February                      |                       |  | 5,135,836 |              |  |     | 74,885,620  |  |     |       | 15.31 |  |  |       | 14.13 | 
|                                             | March (through March 9, 2007) |                       |  | 6,577,348 |              |  |     | 94,366,147  |  |     |       | 14.75 |  |  |       | 14.02 | 






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Borsa Italiana (Milan)(1)


|                                             |                               |                       |  |            |              |  |     |             |  |     |       |       |  |  |       |       | 
|-------------------------------------------- | ----------------------------- | --------------------- |  | ---------- | ------------ |  | --- | ----------- |  | --- | ----- | ----- |  |  | ----- | ----- | 
|                                             |                               | Average Daily Trading |  |            |              |  |    
|                                             |                               | Volumes               |  |            |             
|                                             |                               |                       |  |            | Price Ranges | 
|                                             |                               | Number of             |  |            |              |  |     |            
|Calendar Period                              |                               | Shares                |  |            | Capital      |  |     | High        |  |     | Low   |      
|                                             |                               |                       |  |            |              |  |     |             |  |     |       |      
|                                             |                               |                       |  | ()        |              |  | () |             |  | () |      
|Annual Information for the Past Five Years   |                               |                       |  |            |              |  |     |             |  |     |       |       |  |  |       |      
|2002                                         |                               |                       |  |            |              |  |     |             |  |     | 39.65 |       |  |  | 11.09 |      
|2003                                         |                               |                       |  |            |              |  |     |             |  |     | 24.75 |       |  |  | 15.21 |      
|2004                                         |                               |                       |  |            |              |  |     |             |  |     | 23.81 |       |  |  | 13.25 |      
|2005                                         |                               |                       |  |            |              |  |     |             |  |     | 15.82 |       |  |  | 10.82 |      
|2006                                         |                               |                       |  |            |              |  |     |             |  |     | 16.55 |       |  |  | 11.33 |      
|Quarterly Information for the Past Two Years |                               |                       |  |            |              |  |     |             |  |     |       |       |  |  |       |      
|2005                                         |                               |                       |  |            |              |  |     |             |  |     |       |       |  |  |       |      
|                                             | First quarter                 |                       |  |            |              |  |     |             |  |     |       | 14.48 |  |  |       | 12.37 | 
|                                             | Second quarter                |                       |  |            |              |  |     |             |  |     |       | 13.71 |  |  |       | 10.82 | 
|                                             | Third quarter                 |                       |  |            |              |  |     |             |  |     |       | 15.18 |  |  |       | 12.59 | 
|                                             | Fourth quarter                |                       |  |            |              |  |     |             |  |     |       | 15.82 |  |  |       | 13.21 | 
|2006                                         |                               |                       |  |            |              |  |     |             |  |     |       |       |  |  |       |      
|                                             | First quarter                 |                       |  |            |              |  |     |             |  |     |       | 16.55 |  |  |       | 13.99 | 
|                                             | Second quarter                |                       |  |            |              |  |     |             |  |     |       | 15.94 |  |  |       | 11.81 | 
|                                             | Third quarter                 |                       |  |            |              |  |     |             |  |     |       | 13.92 |  |  |       | 11.33 | 
|                                             | Fourth quarter                |                       |  |            |              |  |     |             |  |     |       | 14.46 |  |  |       | 13.07 | 
|Monthly Information for the Past 18 Months   |                               |                       |  |            |              |  |     |             |  |     |       |       |  |  |       |      
|2005                                         |                               |                       |  |            |              |  |     |             |  |     |       |       |  |  |       |      
|                                             | September                     |                       |  | 13,187,754 |              |  |     | 183,520,785 |  |     |       | 14.52 |  |  |       | 13.00 | 
|                                             | October                       |                       |  | 13,057,791 |              |  |     | 181,424,948 |  |     |       | 14.79 |  |  |       | 13.21 | 
|                                             | November                      |                       |  | 11,546,608 |              |  |     | 167,933,867 |  |     |       | 15.20 |  |  |       | 13.42 | 
|                                             | December                      |                       |  | 9,162,791  |              |  |     | 141,711,726 |  |     |       | 15.82 |  |  |       | 15.00 | 
|2006                                         |                               |                       |  |            |              |  |     |             |  |     |       |       |  |  |       |      
|                                             | January                       |                       |  | 13,055,279 |              |  |     | 205,085,378 |  |     |       | 16.55 |  |  |       | 15.05 | 
|                                             | February                      |                       |  | 9,938,177  |              |  |     | 146,977,188 |  |     |       | 15.43 |  |  |       | 14.21 | 
|                                             | March                         |                       |  | 11,358,887 |              |  |     | 166,535,110 |  |     |       | 15.49 |  |  |       | 13.99 | 
|                                             | April                         |                       |  | 11,466,922 |              |  |     | 175,035,563 |  |     |       | 15.94 |  |  |       | 14.52 | 
|                                             | May                           |                       |  | 10,073,843 |              |  |     | 135,548,140 |  |     |       | 14.92 |  |  |       | 12.40 | 
|                                             | June                          |                       |  | 8,157,664  |              |  |     | 101,218,438 |  |     |       | 13.11 |  |  |       | 11.81 | 
|                                             | July                          |                       |  | 8,726,601  |              |  |     | 105,018,826 |  |     |       | 12.82 |  |  |       | 11.33 | 
|                                             | August                        |                       |  | 8,251,367  |              |  |     | 100,977,598 |  |     |       | 13.20 |  |  |       | 11.38 | 
|                                             | September                     |                       |  | 11,221,327 |              |  |     | 146,557,480 |  |     |       | 13.92 |  |  |       | 12.35 | 
|                                             | October                       |                       |  | 12,183,594 |              |  |     | 165,369,033 |  |     |       | 14.25 |  |  |       | 13.07 | 
|                                             | November                      |                       |  | 11,129,232 |              |  |     | 154,443,388 |  |     |       | 14.46 |  |  |       | 13.19 | 
|                                             | December                      |                       |  | 8,004,114  |              |  |     | 111,322,904 |  |     |       | 14.36 |  |  |       | 13.37 | 
|2007                                         |                               |                       |  |            |              |  |     |             |  |     |       |       |  |  |       |      
|                                             | January                       |                       |  | 10,773,375 |              |  |     | 155,258,040 |  |     |       | 15.00 |  |  |       | 13.63 | 
|                                             | February                      |                       |  | 9,588,295  |              |  |     | 140,184,233 |  |     |       | 15.32 |  |  |       | 14.13 | 
|                                             | March (through March 9, 2007) |                       |  | 10,410,714 |              |  |     | 149,396,724 |  |     |       | 14.76 |  |  |       | 14.02 | 






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New York Stock Exchange


|                                             |                               |                       |  |           |              |  |         |            |  |         |       |       |  |  |       |       | 
|-------------------------------------------- | ----------------------------- | --------------------- |  | --------- | ------------ |  | ------- | ---------- |  | ------- | ----- | ----- |  |  | ----- | ----- | 
|                                             |                               | Average Daily Trading |  |           |              |  |        
|                                             |                               | Volumes               |  |           |             
|                                             |                               |                       |  |           | Price Ranges | 
|                                             |                               | Number of             |  |           |              |  |         |           
|Calendar Period                              |                               | Shares                |  |           | Capital      |  |         | High       |  |         | Low   |      
|                                             |                               |                       |  |           |              |  |         |            |  |         |       |      
|                                             |                               |                       |  | (U.S.$)   |              |  | (U.S.$) |            |  | (U.S.$) |      
|Annual Information for the Past Five Years   |                               |                       |  |           |              |  |         |            |  |         |       |       |  |  |       |      
|2002                                         |                               |                       |  |           |              |  |         |            |  |         | 35.81 |       |  |  | 11.00 |      
|2003                                         |                               |                       |  |           |              |  |         |            |  |         | 28.67 |       |  |  | 16.67 |      
|2004                                         |                               |                       |  |           |              |  |         |            |  |         | 29.90 |       |  |  | 16.36 |      
|2005                                         |                               |                       |  |           |              |  |         |            |  |         | 19.47 |       |  |  | 13.96 |      
|2006                                         |                               |                       |  |           |              |  |         |            |  |         | 19.90 |       |  |  | 14.55 |      
|Quarterly Information for the Past Two Years |                               |                       |  |           |              |  |         |            |  |         |       |       |  |  |       |      
|2005                                         |                               |                       |  |           |              |  |         |            |  |         |       |       |  |  |       |      
|                                             | First quarter                 |                       |  |           |              |  |         |            |  |         |       | 19.47 |  |  |       | 16.13 | 
|                                             | Second quarter                |                       |  |           |              |  |         |            |  |         |       | 16.85 |  |  |       | 13.96 | 
|                                             | Third quarter                 |                       |  |           |              |  |         |            |  |         |       | 18.34 |  |  |       | 15.58 | 
|                                             | Fourth quarter                |                       |  |           |              |  |         |            |  |         |       | 18.86 |  |  |       | 15.98 | 
|2006                                         |                               |                       |  |           |              |  |         |            |  |         |       |       |  |  |       |      
|                                             | First quarter                 |                       |  |           |              |  |         |            |  |         |       | 19.90 |  |  |       | 16.67 | 
|                                             | Second quarter                |                       |  |           |              |  |         |            |  |         |       | 19.60 |  |  |       | 14.83 | 
|                                             | Third quarter                 |                       |  |           |              |  |         |            |  |         |       | 17.79 |  |  |       | 14.55 | 
|                                             | Fourth quarter                |                       |  |           |              |  |         |            |  |         |       | 18.82 |  |  |       | 16.50 | 
|Monthly Information for the Past 18 Months   |                               |                       |  |           |              |  |         |            |  |         |       |       |  |  |       |      
|2005                                         |                               |                       |  |           |              |  |         |            |  |         |       |       |  |  |       |      
|                                             | September                     |                       |  | 914,219   |              |  |         | 15,613,946 |  |         |       | 17.77 |  |  |       | 16.27 | 
|                                             | October                       |                       |  | 1,100,181 |              |  |         | 18,353,219 |  |         |       | 17.63 |  |  |       | 15.98 | 
|                                             | November                      |                       |  | 909,276   |              |  |         | 15,600,448 |  |         |       | 17.75 |  |  |       | 16.15 | 
|                                             | December                      |                       |  | 715,167   |              |  |         | 13,095,423 |  |         |       | 18.86 |  |  |       | 17.86 | 
|2006                                         |                               |                       |  |           |              |  |         |            |  |         |       |       |  |  |       |      
|                                             | January                       |                       |  | 1,121,390 |              |  |         | 21,417,428 |  |         |       | 19.90 |  |  |       | 18.23 | 
|                                             | February                      |                       |  | 720,832   |              |  |         | 12,742,785 |  |         |       | 18.58 |  |  |       | 16.90 | 
|                                             | March                         |                       |  | 805,387   |              |  |         | 14,168,858 |  |         |       | 18.58 |  |  |       | 16.67 | 
|                                             | April                         |                       |  | 967,905   |              |  |         | 18,144,658 |  |         |       | 19.60 |  |  |       | 18.11 | 
|                                             | May                           |                       |  | 939,291   |              |  |         | 16,209,172 |  |         |       | 18.76 |  |  |       | 16.00 | 
|                                             | June                          |                       |  | 854,141   |              |  |         | 13,431,366 |  |         |       | 16.76 |  |  |       | 14.83 | 
|                                             | July                          |                       |  | 885,240   |              |  |         | 13,474,681 |  |         |       | 16.28 |  |  |       | 14.55 | 
|                                             | August                        |                       |  | 786,000   |              |  |         | 12,346,351 |  |         |       | 16.97 |  |  |       | 14.59 | 
|                                             | September                     |                       |  | 1,215,410 |              |  |         | 20,286,408 |  |         |       | 17.79 |  |  |       | 15.75 | 
|                                             | October                       |                       |  | 1,363,027 |              |  |         | 23,423,624 |  |         |       | 17.82 |  |  |       | 16.50 | 
|                                             | November                      |                       |  | 1,753,133 |              |  |         | 31,380,252 |  |         |       | 18.66 |  |  |       | 16.91 | 
|                                             | December                      |                       |  | 1,453,165 |              |  |         | 26,690,282 |  |         |       | 18.82 |  |  |       | 17.85 | 
|2007                                         |                               |                       |  |           |              |  |         |            |  |         |       |       |  |  |       |      
|                                             | January 2007                  |                       |  | 1,611,140 |              |  |         | 30,090,456 |  |         |       | 19.40 |  |  |       | 17.97 | 
|                                             | February                      |                       |  | 1,901,586 |              |  |         | 36,437,396 |  |         |       | 20.18 |  |  |       | 18.40 | 
|                                             | March (through March 9, 2007) |                       |  | 1,903,501 |              |  |         | 35,818,453 |  |         |       | 19.25 |  |  |       | 18.41 | 








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Market Information




| |         
| | --------
| | Euronext



| |        
| | -------
| | General

SBF R




| |               
| | --------------
| | Euronext Paris

TM Premier Marché,
Second Marché Nouveau Marché.


Premier Marché




| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | Compartment A comprises the companies with market
    capitalizations above
    1 billion;                                                
|
| |  | Compartment B comprises the companies with market
    capitalizations from
    150 million
    and up to and including
    1 billion; and
|
| |  | Compartment C comprises the companies with capitalizations below
    150 million.                                                         



(Continu Fixing) Continu, Continu




Continu


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Continu Autorité des marchés financiers


Service à Réglement
Différé   (date de liquidation)












| |                            
| | ---------------------------
| | Securities Trading in Italy





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vis-à-vis













|         |                       
|-------- | ----------------------
|Item 10. | Additional Information

Memorandum and Articles of Association




| |                                   
| | ----------------------------------
| | Applicable
    non-U.S.Regulations



| |                             
| | ----------------------------
| | Applicable Dutch Legislation





(Wet op het financieel
toezicht)


(Autoriteit Financiële
Martken)


125



---



##### Table of Contents







(Tijdelijke vrijstellingsregeling
overnamebiedingen)




| |                              
| | -----------------------------
| | Applicable French Legislation



222-8 222-9 223-20


223-14


241-1 611-1




tm Premier, Second Nouveau Marché








| |                               
| | ------------------------------
| | Applicable Italian Legislation



126



---



##### Table of Contents











| |                        
| | -----------------------
| | Articles of Association



| |                                    
| | -----------------------------------
| | Purposes of the Company (Article 2)





| |                           
| | --------------------------
| | Company and Trade Registry

(Kamer van Koophandel en Fabrieken voor Amsterdam)




| |                                     
| | ------------------------------------
| | Supervisory Board and Managing Board





| |   |                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |  | power to vote on proposals, arrangements or contracts in which
    such member is directly interested;                                   
|
| |  | power, in the absence of an independent quorum, to vote on
    compensation to themselves or any members of the Supervisory
    Board; or
|
| |  | borrowing powers exercisable by the directors and how such
    borrowing powers can be varied.                                           







| |                                                
| | -----------------------------------------------
| | Compensation of our Managing Board (Article 12)





| |                                                   
| | --------------------------------------------------
| | Compensation of our Supervisory Board (Article 23)



127



---



##### Table of Contents





| |                                                                              
| | -----------------------------------------------------------------------------
| | Information from our Managing Board to our Supervisory Board
    (Article 18)







| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | our operational and financial objectives;                                                            
|
| |  | our strategy designed to achieve the objectives; and                                                 
|
| |  | the parameters to be applied in relation to our strategy,
    inter alia, regarding financial ratios.





| |                                                                                                   
| | --------------------------------------------------------------------------------------------------
| | Adoption of Annual Accounts and Discharge of Management and
    Supervision Liability (Article 25)







| |                                                     
| | ----------------------------------------------------
| | Distribution of Profits (Articles 37, 38, 39 and 40)









| |                                                                                   
| | ----------------------------------------------------------------------------------
| | Shareholders Meetings, Attendance at
    Shareholders Meetings and Voting Rights



| |                                                                                
| | -------------------------------------------------------------------------------
| | Notice Convening the Shareholders Meeting
    (Articles 25, 26, 27, 28 and 29)





128



---



##### Table of Contents












| |                                                                                    
| | -----------------------------------------------------------------------------------
| | Attendance at Shareholders Meetings and Voting Rights
    (Articles 30, 31 and 33)



inter alia,








129



---



##### Table of Contents







| |                                                                                
| | -------------------------------------------------------------------------------
| | Authority of the Shareholders Meeting
    (Articles 12, 16, 19, 25, 28 and 41)



(dochtermaatschappij) (dochtermaatschappij)






| |                                            
| | -------------------------------------------
| | Quorum and Majority (Articles 4, 13 and 32)







| |                       
| | ----------------------
| | Disclosure of Holdings







130



---



##### Table of Contents













| |                                      
| | -------------------------------------
| | Share Capital as of December 31, 2006

 














| |                                                                
| | ---------------------------------------------------------------
| | Non-issued Authorized Share Capital as of December 31,
    2006



131



---



##### Table of Contents







| |                                                                                
| | -------------------------------------------------------------------------------
| | Other Securities Giving Access to Our Share Capital as of
    December 31, 2006





| |                                              
| | ---------------------------------------------
| | Securities Not Representing Our Share Capital





| |                                                                            
| | ---------------------------------------------------------------------------
| | Issuance of Shares, Preemptive Rights and Preference Shares
    (Article 4)

















132



---



##### Table of Contents











| |                                                     
| | ----------------------------------------------------
| | Changes to Our Share Capital and Stock Option Grants

|                   |  |                                        |           |           |           |         |           |            |           |         |        |            |               |        |              |              |             |       |             |        |              |               |           |  |             |  |            |  |               |  |               | 
|------------------ |  | -------------------------------------- | --------- | --------- | --------- | ------- | --------- | ---------- | --------- | ------- | ------ | ---------- | ------------- | ------ | ------------ | ------------ | ----------- | ----- | ----------- | ------ | ------------ | ------------- | --------- |  | ----------- |  | ---------- |  | ------------- |  | ------------- | 
|                   |  |                                        |           |           |           |         |           | Cumulative |           |         |        |            | Nominal Value |        |              | Amount of    |             |       |            
|                   |  |                                        |           |           |           | Nominal |           |            | Amount of |         |        | Cumulative |               |        | of Increase/ |              |             | Issue |             |        | Cumulative  |              
|                   |  |                                        |           | Number of |           |         | Value     |            |           | Capital |        |            | Number of     |        |              | Reduction in |             |       | Premium     |        |              | Issue Premium |          
|Year               |  | Transaction                            |           |           | Shares    |         |           | (Euro)     |           |         | (Euro) |            |               | Shares |              |              | Capital     |       |             | (Euro) |              |               | (Euro)    | 
|                   |  |                                        |           |           |           |         |           |            |           |         |        |            |               |        |              |              |             |       |             |        |              |               |           | 
|March 31, 2001     |  | Exercise of options                    |           |           | 277,695   |         |           |            | 1.04      |         |        |            | 925,765,341   |        |              |              | 890,158,982 |       |             |        | 288,803      |               |           |  | 2,319,055   |  |            |  | 1,486,731,074 | 
|March 31, 2001     |  | LYONs conversion                       |           |           | 151,251   |         |           |            | 1.04      |         |        |            | 925,922,642   |        |              |              | 890,310,233 |       |             |        | 157,301      |               |           |  | 2,453,756   |  |            |  | 1,489,184,830 | 
|December 31, 2001  |  | Exercise of options                    |           |           | 2,062,234 |         |           |            | 1.04      |         |        |            | 928,067,365   |        |              |              | 892,372,467 |       |             |        | 2,144,723    |               |           |  | 44,383,800  |  |            |  | 1,533,568,630 | 
|December 31, 2001  |  | LYONs conversion                       |           |           | 6,726,714 |         |           |            | 1.04      |         |        |            | 935,063,148   |        |              |              | 899,099,181 |       |             |        | 6,995,782    |               |           |  | 114,600,190 |  |            |  | 1,648,168,820 | 
|March 30, 2002     |  | Exercise of options                    |           |           | 140,455   |         |           |            | 1.04      |         |        |            | 935,209,221   |        |              |              | 899,239,636 |       |             |        | 146,073      |               |           |  | 1,081,691   |  |            |  | 1,649,250,511 | 
|September 28, 2002 |  | LYONs conversion                       |           |           | 945       |         |           |            | 1.04      |         |        |            | 935,210,204   |        |              |              | 899,240,581 |       |             |        | 983          |               |           |  | 30,482      |  |            |  | 1,649,280,993 | 
|                   |  | Exercise of options and employee stock |           |           |           |         |           |            |           |         |        |            |               |        |              |              |             |       |             |        |              |               |           |  |             |  |            |  |               | 
|September 28, 2002 |  |                                        | purchases |           |           |         | 601,284   |            |           |         | 1.04   |            |               |        | 935,835,540  |              |             |       | 899,841,865 |        |              |               | 625,335   |  |             |  | 10,830,842 |  |               |  | 1,660,111,835 | 
|                   |  | Exercise of options and employee stock |           |           |           |         |           |            |           |         |        |            |               |        |              |              |             |       |             |        |              |               |           |  |             |  |            |  |               | 
|December 31, 2002  |  |                                        | purchases |           |           |         | 1,081,689 |            |           |         | 1.04   |            |               |        | 936,960,496  |              |             |       | 900,923,554 |        |              |               | 1,124,957 |  |             |  | 15,671,916 |  |               |  | 1,675,783,751 | 
|March 29, 2003     |  | Exercise of options                    |           |           | 91,146    |         |           |            | 1.04      |         |        |            | 937,055,288   |        |              |              | 901,014,700 |       |             |        | 94,792       |               |           |  | 404,011     |  |            |  | 1,676,187,762 | 
|                   |  | Exercise of options and employee stock |           |           |           |         |           |            |           |         |        |            |               |        |              |              |             |       |             |        |              |               |           |  |             |  |            |  |               | 
|June 28, 2003      |  |                                        | purchases |           |           |         | 217,490   |            |           |         | 1.04   |            |               |        | 937,281,478  |              |             |       | 901,232,190 |        |              |               | 226,190   |  |             |  | 2,075,922  |  |               |  | 1,678,263,684 | 
|September 27, 2003 |  | Exercise of options                    |           |           | 903,283   |         |           |            | 1.04      |         |        |            | 938,220,892   |        |              |              | 902,135,473 |       |             |        | 939,414      |               |           |  | 10,857,587  |  |            |  | 1,689,121,271 | 
|December 31, 2003  |  | Exercise of options                    |           |           | 634,261   |         |           |            | 1.04      |         |        |            | 938,880,523   |        |              |              | 902,769,734 |       |             |        | 659,631      |               |           |  | 4,458,391   |  |            |  | 1,693,579,662 | 
|March 27, 2004     |  | Exercise of options                    |           |           | 1,964,551 |         |           |            | 1.04      |         |        |            | 940,923,656   |        |              |              | 904,734,285 |       |             |        | 2,043,133    |               |           |  | 9,048,811   |  |            |  | 1,702,628,473 | 
|June 26, 2004      |  | Exercise of options                    |           |           | 84,740    |         |           |            | 1.04      |         |        |            | 941,011,786   |        |              |              | 904,819,025 |       |             |        | 88,130       |               |           |  | 1,640,712   |  |            |  | 1,704,269,185 | 
|September 25, 2004 |  | Exercise of options                    |           |           | 65,990    |         |           |            | 1.04      |         |        |            | 941,080,416   |        |              |              | 904,885,015 |       |             |        | 68,630       |               |           |  | 605,542     |  |            |  | 1,704,874,727 | 
|September 25, 2004 |  | Bonds conversion                       |           |           | 101       |         |           |            | 1.04      |         |        |            | 941,080,521   |        |              |              | 904,885,116 |       |             |        | 105          |               |           |  | 7,006       |  |            |  | 1,704,881,733 | 
|December 31, 2004  |  | Exercise of options                    |           |           | 422,120   |         |           |            | 1.04      |         |        |            | 941,519,525   |        |              |              | 905,307,236 |       |             |        | 439,005      |               |           |  | 4,021,536   |  |            |  | 1,708,903,269 | 
|December 31, 2004  |  | LYONs conversion                       |           |           | 1,761     |         |           |            | 1.04      |         |        |            | 941,521,357   |        |              |              | 905,308,997 |       |             |        | 1,831        |               |           |  | 46,225      |  |            |  | 1,708,949,494 | 
|April 2, 2005      |  | Exercise of options                    |           |           | 63,270    |         |           |            | 1.04      |         |        |            | 941,587,158   |        |              |              | 905,372,267 |       |             |        | 65,801       |               |           |  | 571,525     |  |            |  | 1,709,521,019 | 
|April 2, 2005      |  | LYONs conversion                       |           |           | 59        |         |           |            | 1.04      |         |        |            | 941,587,219   |        |              |              | 905,372,326 |       |             |        | 61           |               |           |  | 1,448       |  |            |  | 1,709,522,467 | 
|June 2, 2005       |  | Exercise of options                    |           |           | 145,454   |         |           |            | 1.04      |         |        |            | 941,738,491   |        |              |              | 905,517,780 |       |             |        | 151,272      |               |           |  | 1,436,236   |  |            |  | 1,710,958,703 | 
|October 1, 2005    |  | Exercise of options                    |           |           | 2,079,369 |         |           |            | 1.04      |         |        |            | 943,901,035   |        |              |              | 907,597,149 |       |             |        | 2,162,544    |               |           |  | 21,629,617  |  |            |  | 1,732,651,320 | 
|December 31, 2005  |  | Exercise of options                    |           |           | 227,130   |         |           |            | 1.04      |         |        |            | 944,137,250   |        |              |              | 907,824,279 |       |             |        | 236,215      |               |           |  | 2,062,234   |  |            |  | 1,734,713,554 | 
|April 1, 2006      |  | Exercise of options                    |           |           | 201,340   |         |           |            | 1.04      |         |        |            | 944,346,644   |        |              |              | 908,025,619 |       |             |        | 209,394      |               |           |  | 2,360,525   |  |            |  | 1,737,074,079 | 
|July 1, 2006       |  | Exercise of options                    |           |           | 1,398,210 |         |           |            | 1.04      |         |        |            | 945,800,782   |        |              |              | 909,423,829 |       |             |        | 1,454,138    |               |           |  | 9,009,053   |  |            |  | 1,746,083,132 | 
|September 30, 2006 |  | Exercise of options                    |           |           | 731,904   |         |           |            | 1.04      |         |        |            | 946,561,962   |        |              |              | 910,155,733 |       |             |        | 761,180      |               |           |  | 8,447,102   |  |            |  | 1,754,530,234 | 
|December 31, 2006  |  | Exercise of options                    |           |           | 2,200     |         |           |            | 1.04      |         |        |            | 946,564,250   |        |              |              | 910,157,933 |       |             |        | 2,288        |               |           |  | 2,420       |  |            |  | 1,754,532,654 | 



| |                                        
| | ---------------------------------------
| | Liquidation Rights (Articles 42 and 43)





| |                                                               
| | --------------------------------------------------------------
| | Acquisition of Shares in Our Own Share Capital
    (Article 5)

paid-up called-up


133



---



##### Table of Contents











| |                                                                        
| | -----------------------------------------------------------------------
| | Changes to Our Share Capital, Stock Option Grants and
    Other Matters



|                  |  |             |                     |           |        |         |           |            |           |         |        |            |           |        |             |           |            |       |             |        |            |               |           |  |  |  |            |  |  |  |               | 
|----------------- |  | ----------- | ------------------- | --------- | ------ | ------- | --------- | ---------- | --------- | ------- | ------ | ---------- | --------- | ------ | ----------- | --------- | ---------- | ----- | ----------- | ------ | ---------- | ------------- | --------- |  |  |  | ---------- |  |  |  | ------------- | 
|                  |  |             |                     |           |        |         |           |            |           |         |        | Nominal    |           |        |             |           |           
|                  |  |             |                     |           |        |         |           | Cumulative |           |         |        |            | Value of  |        |             | Amount of |            |       |            
|                  |  |             |                     |           |        | Nominal |           |            | Amount of |         |        | Cumulative |           |        | Increase/   |           |            | Issue |             |        | Cumulative |              
|                  |  |             |                     | Number of |        |         | Value     |            |           | Capital |        |            | Number of |        |             | Reduction |            |       | Premium     |        |            | Issue Premium |          
|Year              |  | Transaction |                     |           | Shares |         |           | (Euro)     |           |         | (Euro) |            |           | Shares |             |           | in Capital |       |             | (Euro) |            |               | (Euro)    | 
|                  |  |             |                     |           |        |         |           |            |           |         |        |            |           |        |             |           |            |       |             |        |            |               |           | 
|December 31, 2004 |  |             | LYONs conversion    |           |        |         | 1,761     |            |           |         | 1.04   |            |           |        | 941,521,357 |           |            |       | 905,308,997 |        |            |               | 1,831     |  |  |  | 46,225     |  |  |  | 1,708,949,494 | 
|December 31, 2005 |  |             | Conversion of bonds |           |        |         | 59        |            |           |         | 1.04   |            |           |        | 941,521,418 |           |            |       | 905,309,056 |        |            |               | 61        |  |  |  | 1,448      |  |  |  | 1,708,950,942 | 
|December 31, 2005 |  |             | Exercise of options |           |        |         | 2,515,223 |            |           |         | 1.04   |            |           |        | 944,137,250 |           |            |       | 907,824,279 |        |            |               | 2,615,832 |  |  |  | 25,762,612 |  |  |  | 1,734,713,554 | 
|December 31, 2006 |  |             | Exercise of options |           |        |         | 2,333,654 |            |           |         | 1.04   |            |           |        | 946,564,250 |           |            |       | 910,157,933 |        |            |               | 2,427,000 |  |  |  | 19,819,100 |  |  |  | 1,754,532,654 | 



|                                                         |  |           |            |         |           |  |            |      |                |  |           |  |  |         |           |  |  |  |            | 
|-------------------------------------------------------- |  | --------- | ---------- | ------- | --------- |  | ---------- | ---- | -------------- |  | --------- |  |  | ------- | --------- |  |  |  | ---------- | 
|                                                         |  | Employees |           
|                                                         |  |           |           
|                                                         |  |           |            | Total   |          
|                                                         |  |           |            | 2001    |           |  |            |      | (stock options | 
|                                                         |  |           |            | Amended |           |  |            |      | and stock      | 
|                                                         |  | 1995 Plan |            |         | 2001 Plan |  |            | Plan |                |  | 2006 Plan |  |  | awards) |          
|                                                         |  |           |            |         |           |  |            |      |                |  |           |  |  |         |          
|Remaining amount authorized to be granted                |  |           | 0          |         |           |  | 0          |      |                |  | 0         |  |  |         | 301,790   |  |  |  | 301,790    | 
|Amount exercised (stock options) or vested (stock awads) |  |           | 14,523,601 |         |           |  | 10,050     |      |                |  | 637,109   |  |  |         | 0         |  |  |  | 15,170,760 | 
|Amount cancelled                                         |  |           | 3,184,838  |         |           |  | 5,966,383  |      |                |  | 1,530,112 |  |  |         | 118,430   |  |  |  | 10,799,763 | 
|Amount outstanding                                       |  |           | 13,853,502 |         |           |  | 41,757,750 |      |                |  | 1,993,444 |  |  |         | 4,798,210 |  |  |  | 62,402,906 | 

|                                          |  |                   |         |  |      |  |         |      |  |  |         |  |  |       |        |  |  |  |         | 
|----------------------------------------- |  | ----------------- | ------- |  | ---- |  | ------- | ---- |  |  | ------- |  |  | ----- | ------ |  |  |  | ------- | 
|                                          |  | Supervisory Board |        
|                                          |  |                   |        
|                                          |  | 1996              |         |  | 1999 |  |         | 2002 |  |  | 2005    |  |  | Total |       
|                                          |  |                   |         |  |      |  |         |      |  |  |         |  |  |       |       
|Remaining amount authorized to be granted |  |                   | 0       |  |      |  | 0       |      |  |  | 0       |  |  |       | 0      |  |  |  | 0       | 
|Amount exercised or vested for 2005 plan  |  |                   | 328,500 |  |      |  | 18,000  |      |  |  | 0       |  |  |       | 17,000 |  |  |  | 363,500 | 
|Amount cancelled                          |  |                   | 72,000  |  |      |  | 63,000  |      |  |  | 24,000  |  |  |       | 30,000 |  |  |  | 189,000 | 
|Amount outstanding                        |  |                   | 0       |  |      |  | 342,000 |      |  |  | 372,000 |  |  |       | 85,000 |  |  |  | 799,000 | 





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| |   |                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | determined that for the 2005 stock-based compensation plan, two
    out of the three criteria linked to the performance of our
    Company had been met; consequently, a maximum of approximately
    2.7 million shares of the total 4.1 million shares
    granted are expected to vest; and
|
| |  | approved the vesting conditions, linked to our future
    performance and their continued service with us, to apply to
    non-vested stock awards granted to employees in 2006, the
    maximum number of which will be 5.1 million.                                                         





Limitations on Right to Hold or Vote Shares




Material Contracts




Exchange Controls




Taxation




| |               
| | --------------
| | Dutch Taxation

This is a general summary and the tax consequences as
described here may not apply to a holder of common shares. Any
potential investor should consult his own tax adviser for more
information about the tax consequences of acquiring, owning and
disposing of common shares.




20-F.




| |                                  
| | ---------------------------------
| | Taxes on income and capital gains



135



---



##### Table of Contents







| |                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) you are neither resident, nor deemed to be resident, in
    the Netherlands for purposes of Dutch income tax or corporation
    tax, as the case may be, and, if you are an individual, you have
    not elected to be treated as a resident of the Netherlands for
    Dutch income tax purposes;
|
| | (b) your common shares and any benefits derived or deemed
    to be derived therefrom have no connection with your past,
    present or future employment or membership of a management board
    (bestuurder) or a supervisory board
    (commissaris);                                          
|
| | (c) your common shares do not form part of a substantial
    interest or a deemed substantial interest in us within the
    meaning of Chapter 4 of the Dutch Income Tax Act 2001,
    unless such interest forms part of the assets of an enterprise;                                                
|
| | (d) if you are not an individual, no part of the benefits
    derived from your common shares is exempt from Dutch corporation
    tax under the participation exemption as laid down in the Dutch
    Corporation Tax Act 1969; and                                                                  
|
| | (e) you are not an entity that is a resident in a Member
    State of the European Union and that is not subject to a tax on
    profits levied there.                                                                                                                                                





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Such person alone or, if he is an individual, together
    with his partner (partner, as defined in Article 1.2
    of the Dutch Income Tax Act 2001), if any, owns, directly or
    indirectly, a number of shares in us representing 5% or more of
    our total issued and outstanding capital (or the issued and
    outstanding capital of any class of our shares), or rights to
    acquire, directly or indirectly, shares, whether or not already
    issued, representing 5% or more of our total issued and
    outstanding capital (or the issued and outstanding capital of
    any class of our shares), or the ownership of profit
    participating certificates (winstbewijzen)relating to 5%
    or more of our annual profit or to 5% or more of our liquidation
    proceeds.
|
| | 2. Such persons shares, profit participating
    certificates or rights to acquire shares or profit participating
    certificates in us have been acquired by him or are deemed to
    have been acquired by him under a non-recognition provision.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | 3. Such persons partner or any of his relatives by
    blood or by marriage in the direct line (including
    foster-children) or of those of his partner has a substantial
    interest (as described under 1. and 2. above) in us.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



20-F.






| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. (i) you derive profits from an enterprise as an
    entrepreneur (ondernemer)or pursuant to a co-entitlement
    to the net value of such enterprise, other than as a
    shareholder, if you are an individual, or other than as a holder
    of securities if you are not an individual; (ii) such
    enterprise is either managed in the Netherlands or carried on,
    in whole or in part, through a permanent establishment or a
    permanent representative in the Netherlands; and (iii) your
    common shares are attributable to such enterprise; or                                                                                                                
|
| | 2. you are an individual and you derive benefits from
    common shares that are taxable as benefits from miscellaneous
    activities in the Netherlands. You may, inter alia,
    derive benefits from common shares that are taxable as benefits
    from miscellaneous activities if your investment activities go
    beyond the activities of an active portfolio investor, for
    instance in the case of the use of insider knowledge
    (voorkennis) or comparable forms of special knowledge, on
    the understanding that such benefits will be taxable in the
    Netherlands only if such activities are performed or deemed to
    be performed in the Netherlands.



| |                         
| | ------------------------
| | Dividend withholding tax



136



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | distributions in cash or in kind, deemed and constructive
    distributions and repayments of capital not recognized as
    paid-in for Dutch dividend withholding tax purposes;                                                                                                                                                                                                                                              
|
| |  | liquidation proceeds and proceeds of repurchase or redemption of
    shares in excess of the average capital recognized as paid-in
    for Dutch dividend withholding tax purposes;                                                                                                                                                                                                                                           
|
| |  | the par value of shares issued by us to a holder of shares or an
    increase of the par value of shares, as the case may be, to the
    extent that it does not appear that a contribution, recognized
    for Dutch dividend withholding tax purposes, has been made or
    will be made; and                                                                                                                               
|
| |  | partial repayment of capital, recognized as paid-in for Dutch
    dividend withholding tax purposes, if and to the extent that
    there are net profits (zuivere winst), unless
    (a) our general shareholders meeting has resolved in
    advance to make such repayment and (b) the par value of the
    shares concerned has been reduced by an equal amount by way of
    an amendment to our Articles of Association.

(Belastingregeling voor het
Koninkrijk) (kortlopende
genotsrechten op aandelen)






| |                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. it takes one of the legal forms listed in the Annex to
    the EU Parent Subsidiary Directive (Directive 90/435/ EEC, as
    amended) or a legal form designated by ministerial decree;
|
| | 2. any one or more of the following threshold conditions
    are satisfied:                                                                                                               



| |                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. at the time the dividend is distributed by us, it holds
    common shares representing at least 5% of our nominal paid up
    capital; or                                                                                                                                                          
|
| | b. it has held common shares representing at least 5% of
    our nominal paid up capital for a continuous period of more than
    one year at any time during the four years preceding the time
    the dividend is distributed by us, provided that such period
    ended after December 31, 2006; or
|
| | c. it is connected with us within the meaning of article
    10a, paragraph 4 of the Dutch Corporation Tax Act; or                                                                                                                                                                                    
|
| | d. an entity connected with it within the meaning of
    article 10a, paragraph 4 of the Dutch Corporation Tax Act
    holds at the time the dividend is made available by us, common
    shares representing at least 5% of our nominal paid up capital;                                             



| |                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3. it is subject to the tax levied in its country of
    residence as meant in article 2, paragraph 1, letter c
    of the EU Parent Subsidiary Directive (Directive 90/435/ EEC, as
    amended) without the possibility of an option or of being
    exempt; and
|
| | 4. it is not considered to be resident outside the Member
    States of the European Union under the terms of a double
    taxation treaty concluded with a third State.                                                                                          



137



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Reduction.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 3% of the dividends paid by us in respect of which Dutch
    dividend withholding tax is withheld; and                                                                                                                                                                                                                                                                                                  
|
| |  | 3% of the qualifying profit distributions grossed up by the
    foreign tax withheld on such distributions received from foreign
    subsidiaries and branches prior to the distribution of the
    dividend by us during the current calendar year and the two
    preceding calendar years (to the extent such distributions have
    not been taken into account previously when applying this test).







| |                           
| | --------------------------
| | Gift and inheritance taxes





| |   |                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the donor is, or the deceased was, resident or deemed to be
    resident in the Netherlands for purposes of gift or inheritance
    tax (as the case may be); or                                                                                                                         
|
| |  | the common shares are or were attributable to an enterprise or
    part of an enterprise that the donor or deceased carried on
    through a permanent establishment or a permanent representative
    in the Netherlands at the time of the gift or of the death of
    the deceased; or
|
| |  | the donor made a gift of common shares, then became a resident
    or deemed resident of the Netherlands, and died as a resident or
    deemed resident of the Netherlands within 180 days of the
    date of the gift.                                                                  



| |                       
| | ----------------------
| | Other taxes and duties



United States Federal Income Taxation






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | that is, for U.S. federal income tax purposes, (a) a
    citizen or individual resident of the United States, (b) a
    U.S. domestic corporation or a domestic entity taxable as a
    corporation, (c) an estate the income of which is subject
    to U.S. federal income taxation regardless of its source,
    or (d) a trust if a court within the United States can
    exercise primary supervision over the administration of the
    trust and one or more U.S. persons are authorized to
    control all substantial decisions of the trust;

138



---



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| |   |                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | that owns, directly, indirectly or by attribution, less than 10%
    of our voting power or outstanding share capital;                                                     
|
| |  | that holds the common shares as capital assets;                                                                                                                            
|
| |  | whose functional currency for U.S. federal income tax
    purposes is the U.S. dollar;                                                                                     
|
| |  | that is a resident of the United States and not also a resident
    of the Netherlands for purposes of the U.S./NL Income Tax Treaty;                                      
|
| |  | that is entitled, under the limitation on benefits
    provisions contained in the U.S./ NL Income Tax Treaty, to the
    benefits of the U.S./ NL Income Tax Treaty; and
|
| |  | that does not have a permanent establishment or fixed base in
    the Netherlands.                                                                                         

mark-to




20-F,




| |          
| | ---------
| | Dividends

U.S.-source




139



---



##### Table of Contents





non-U.S. non-U.S. non-U.S. non-U.S.




| |                                                         
| | --------------------------------------------------------
| | Sale, Exchange or Other Disposition of Common
    Shares

U.S.-source




| |                                          
| | -----------------------------------------
| | Passive Foreign Investment Company Status





| |                                                      
| | -----------------------------------------------------
| | U.S. Information Reporting and Backup
    Withholding

W-9. Non-U.S. non-U.S. W-8BEN) U.S.-related


Documents on Display


20-F 20-F 20-F.




140



---



##### Table of Contents





1-800-SEC-0330











|         |                                                           
|-------- | ----------------------------------------------------------
|Item 11. | Quantitative and Qualitative Disclosures About Market Risk









141



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|                      |                       |       |       |      |      |  |     |      |   |  |      |      |   |      |    |               |      |  |    |            |   |  |                   |      |   |  |       |      |   |  |       |  | 
|--------------------- | --------------------- | ----- | ----- | ---- | ---- |  | --- | ---- | - |  | ---- | ---- | - | ---- | -- | ------------- | ---- |  | -- | ---------- | - |  | ----------------- | ---- | - |  | ----- | ---- | - |  | ----- |  | 
|                      |                       |       |       |      |      |  |     |      |   |  |      |      |   |      |    | Fair Value at |     
|                      |                       | Total |       |      | 2007 |  |     | 2008 |   |  | 2009 |      |   | 2010 |    |               | 2011 |  |    | Thereafter |   |  | December 31, 2006 |     
|                      |                       |       |       |      |      |  |     |      |   |  |      |      |   |      |    |               |      |  |    |            |   |  |                   |     
|Assets:               |                       |       |       |      |      |  |     |      |   |  |      |      |   |      |    |               |      |  |    |            |   |  |                   |      |   |  |       |      |   |  |       | 
|Cash equivalents      |                       |       | 1,963 |      |      |  |     |      |   |  |      |      |   |      |    |               |      |  |    |            |   |  |                   |      |   |  |       |      |   |  | 1,963 | 
|                      | Average interest rate |       |       | 4.28 | %    |  |     |      |   |  |      |      |   |      |    |               |      |  |    |            |   |  |                   |      |   |  |       |      |   |  |       |  | 
|Marketable securities |                       |       | 460   |      |      |  |     |      |   |  |      |      |   |      |    |               |      |  |    |            |   |  |                   |      |   |  |       |      |   |  | 460   | 
|                      | Average interest rate |       |       | 4.45 | %    |  |     |      |   |  |      |      |   |      |    |               |      |  |    |            |   |  |                   |      |   |  |       |      |   |  |       |  | 
|Short-term deposits   |                       |       | 250   |      |      |  |     |      |   |  |      |      |   |      |    |               |      |  |    |            |   |  |                   |      |   |  |       |      |   |  | 250   | 
|                      | Average interest rate |       |       | 5.14 | %    |  |     |      |   |  |      |      |   |      |    |               |      |  |    |            |   |  |                   |      |   |  |       |      |   |  |       |  | 
|Restricted Cash       |                       |       | 218   |      |      |  |     |      |   |  |      |      |   |      |    |               |      |  |    |            |   |  |                   |      |   |  |       |      |   |  | 218   | 
|                      | Average interest rate |       |       | 6.06 | %    |  |     |      |   |  |      |      |   |      |    |               |      |  |    |            |   |  |                   |      |   |  |       |      |   |  |       |  | 
|Long-term debt:       |                       |       |       |      |      |  |     |      |   |  |      |      |   |      |    |               |      |  |    |            |   |  |                   |      |   |  |       |      |   |  |       | 
|Fixed rate            |                       |       | 2,130 |      |      |  | 136 |      |   |  | 89   |      |   |      | 83 |               |      |  | 45 |            |   |  | 30                |      |   |  | 1,747 |      |   |  | 2,131 | 
|                      | Average interest rate |       |       | 2.82 | %    |  |     | 3.35 | % |  |      | 4.26 | % |      |    | 4.34          | %    |  |    | 3.46       | % |  |                   | 4.22 | % |  |       | 2.59 | % |  |       |  | 

|                                                    |                  |                     |       |     | 
|--------------------------------------------------- | ---------------- | ------------------- | ----- | --- | 
|                                                    |                  | Amounts in Millions |      
|                                                    |                  | of U.S. Dollars     |      
|                                                    |                  |                     |      
|Long-term debt by currency as of December 31, 2006: |                  |                     |       |    
|U.S. dollar                                         |                  |                     | 1,242 |    
|                                                    | Euro             |                     |       | 818 | 
|                                                    | Singapore dollar |                     |       | 65  | 
|Other currencies                                    |                  |                     | 5     |    
|                                                    |                  |                     |      
|Total in U.S. dollars                               |                  |                     | 2,130 |    

|                                                    |                  |                     |       |     | 
|--------------------------------------------------- | ---------------- | ------------------- | ----- | --- | 
|                                                    |                  | Amounts in Millions |      
|                                                    |                  | of U.S. Dollars     |      
|                                                    |                  |                     |      
|Long-term debt by currency as of December 31, 2005: |                  |                     |       |    
|U.S. dollar                                         |                  |                     | 1,454 |    
|                                                    | Euro             |                     |       | 206 | 
|                                                    | Singapore dollar |                     |       | 120 | 
|Other currencies                                    |                  |                     | 11    |    
|                                                    |                  |                     |      
|Total in U.S. dollars                               |                  |                     | 1,791 |    
|                                                    |                  |                     |      

142



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FORWARD CONTRACTS AS AT DECEMBER 31, 2006


|    |  |  |     |  |  |  |      |                 |  |  |              |  |  |            |     |  |  |  |       |  |  |  |    | 
|--- |  |  | --- |  |  |  | ---- | --------------- |  |  | ------------ |  |  | ---------- | --- |  |  |  | ----- |  |  |  | -- | 
|    |  |  |     |  |  |  |      | Notional Amount |  |  | Average Rate |  |  | Fair Value |    
|    |  |  |     |  |  |  |      |                 |  |  |              |  |  |            |    
|Buy |  |  | EUR |  |  |  | Sell |                 |  |  | USD          |  |  |            | 594 |  |  |  | 1.3   |  |  |  | 12 | 
|Buy |  |  | USD |  |  |  | Sell |                 |  |  | CAD          |  |  |            | 8   |  |  |  | 1.2   |  |  |  | 0  | 
|Buy |  |  | JPY |  |  |  | Sell |                 |  |  | EUR          |  |  |            | 11  |  |  |  | 153.1 |  |  |  | 0  | 
|Buy |  |  | INR |  |  |  | Sell |                 |  |  | USD          |  |  |            | 27  |  |  |  | 45.2  |  |  |  | 0  | 
|Buy |  |  | USD |  |  |  | Sell |                 |  |  | JPY          |  |  |            | 20  |  |  |  | 117.5 |  |  |  | 0  | 
|Buy |  |  | JPY |  |  |  | Sell |                 |  |  | USD          |  |  |            | 1   |  |  |  | 117.4 |  |  |  | 0  | 
|Buy |  |  | SGD |  |  |  | Sell |                 |  |  | USD          |  |  |            | 74  |  |  |  | 1.5   |  |  |  | 1  | 
|Buy |  |  | MYR |  |  |  | Sell |                 |  |  | USD          |  |  |            | 27  |  |  |  | 3.5   |  |  |  | 0  | 
|Buy |  |  | GBP |  |  |  | Sell |                 |  |  | USD          |  |  |            | 43  |  |  |  | 2.0   |  |  |  | 0  | 
|Buy |  |  | CHF |  |  |  | Sell |                 |  |  | USD          |  |  |            | 9   |  |  |  | 1.2   |  |  |  | 0  | 
|Buy |  |  | SEK |  |  |  | Sell |                 |  |  | USD          |  |  |            | 11  |  |  |  | 6.7   |  |  |  | 0  | 
|    |  |  |     |  |  |  |      |                 |  |  |              |  |  |            |     |  |  | 
|    |  |  |     |  |  |  |      |                 |  |  |              |  |  |            | 825 |  |  |  |       |  |  |  | 13 | 
|    |  |  |     |  |  |  |      |                 |  |  |              |  |  |            |     |  |  | 



FORWARD CONTRACTS AS AT DECEMBER 31, 2005


|     |  |  |     |  |  |  |      |                 |  |  |              |  |  |            |       |  |  |  |       |  |  |  |     |  
|---- |  |  | --- |  |  |  | ---- | --------------- |  |  | ------------ |  |  | ---------- | ----- |  |  |  | ----- |  |  |  | --- | -
|     |  |  |     |  |  |  |      | Notional Amount |  |  | Average Rate |  |  | Fair Value |      
|     |  |  |     |  |  |  |      |                 |  |  |              |  |  |            |      
|Buy  |  |  | USD |  |  |  | Sell |                 |  |  | JPY          |  |  |            | 71    |  |  |  | 116.6 |  |  |  | 0   |  
|Sell |  |  | USD |  |  |  | Buy  |                 |  |  | JPY          |  |  |            | 48    |  |  |  | 116.3 |  |  |  | 0   |  
|Buy  |  |  | USD |  |  |  | Sell |                 |  |  | CAD          |  |  |            | 72    |  |  |  | 1.17  |  |  |  | 0   |  
|Sell |  |  | USD |  |  |  | Buy  |                 |  |  | SGD          |  |  |            | 37    |  |  |  | 1.66  |  |  |  | 0   |  
|Sell |  |  | USD |  |  |  | Buy  |                 |  |  | INR          |  |  |            | 3     |  |  |  | 45.9  |  |  |  | 0   |  
|Sell |  |  | USD |  |  |  | Buy  |                 |  |  | SEK          |  |  |            | 12    |  |  |  | 8.0   |  |  |  | 0   |  
|Buy  |  |  | GBP |  |  |  | Sell |                 |  |  | USD          |  |  |            | 33    |  |  |  | 1.73  |  |  |  | 0   |  
|Buy  |  |  | EUR |  |  |  | Sell |                 |  |  | USD          |  |  |            | 1,771 |  |  |  | 1.20  |  |  |  | (27 | )
|Sell |  |  | EUR |  |  |  | Buy  |                 |  |  | USD          |  |  |            | 130   |  |  |  | 1.18  |  |  |  | 0   |  
|Sell |  |  | EUR |  |  |  | Buy  |                 |  |  | CHF          |  |  |            | 4     |  |  |  | 1.55  |  |  |  | 0   |  
|Sell |  |  | EUR |  |  |  | Buy  |                 |  |  | JPY          |  |  |            | 25    |  |  |  | 139.8 |  |  |  | 0   |  
|     |  |  |     |  |  |  |      |                 |  |  |              |  |  |            |       |  |  | 
|     |  |  |     |  |  |  |      |                 |  |  |              |  |  |            | 2,206 |  |  |  |       |  |  |  | (27 | )
|     |  |  |     |  |  |  |      |                 |  |  |              |  |  |            |       |  |  | 






|         |                                                       
|-------- | ------------------------------------------------------
|Item 12. | Description of Securities Other Than Equity Securities



143



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##### Table of Contents






PART II







|         |                                                
|-------- | -----------------------------------------------
|Item 13. | Defaults, Dividend Arrearages and Delinquencies








|         |                                                                                 
|-------- | --------------------------------------------------------------------------------
|Item 14. | Material Modifications to the Rights of Security Holders and
    Use of Proceeds








|         |                        
|-------- | -----------------------
|Item 15. | Controls and Procedures

Disclosure Controls and Procedures


13a-15(e) 20-F.


Managements Annual Report on Internal Control over
Financial Reporting


13a-15(f)






Internal
Control  Integrated Framework


20-F.


Attestation Report of the Registered Public Accounting
Firm




Changes in Internal Control over Financial Reporting


20-F


144



---



##### Table of Contents








|          |                                 
|--------- | --------------------------------
|Item 16A. | Audit Committee Financial Expert

20-F







|          |               
|--------- | --------------
|Item 16B. | Code of Ethics

Policy on Business Conduct and Ethics













|          |                                       
|--------- | --------------------------------------
|Item 16C. | Principal Accountant Fees and Services





|                                                                                              |  |      |           |               |            |  |     |      |               |   |            |  |  |  |     |  
|--------------------------------------------------------------------------------------------- |  | ---- | --------- | ------------- | ---------- |  | --- | ---- | ------------- | - | ---------- |  |  |  | --- | -
|                                                                                              |  |      |           | Percentage of |            |  |     |      | Percentage of |  
|                                                                                              |  | 2006 |           |               | Total Fees |  |     | 2005 |               |   | Total Fees | 
|                                                                                              |  |      |           |               |            |  |     |      |               |   |            | 
|Audit Fees                                                                                    |  |      |           |               |            |  |     |      |               |   |            |  |  |  |     |  
|Statutory audit, certification, audit of individual and
    consolidated financial statements |  | $    | 4,866,174 |               |            |  | 92  | %    |               | $ | 2,494,626  |  |  |  | 94  | %
|Audit-related fees                                                                            |  |      | 404,639   |               |            |  | 8   | %    |               |   | 138,312    |  |  |  | 5   | %
|Non-audit Fees                                                                                |  |      |           |               |            |  |     |      |               |   |            |  |  |  |     |  
|Tax compliance fees                                                                           |  |      |          |               |            |  |     |      |               |   | 24,028     |  |  |  | 1   | %
|Other fees                                                                                    |  |      |          |               |            |  |     |      |               |   |           |  |  |  |     |  
|                                                                                              |  |      |           |               |            |  |     |      |               |   |            | 
|Total                                                                                         |  | $    | 5,270,813 |               |            |  | 100 | %    |               | $ | 2,656,966  |  |  |  | 100 | %
|                                                                                              |  |      |           |               |            |  |     |      |               |   |            | 









| |                                                         
| | --------------------------------------------------------
| | Audit Committee Pre-approval Policies and
    Procedures



145



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##### Table of Contents











2-01 S-X.







|          |                                                           
|--------- | ----------------------------------------------------------
|Item 16D. | Exemptions from the Listing Standards for Audit Committees








|          |                                                                           
|--------- | --------------------------------------------------------------------------
|Item 16E. | Purchases of Equity Securities by the Issuer and Affiliated
    Purchasers

|                         |  |                 |   |  |                    |                 |                      |                     |                    |            |                 |  |  |  |   | 
|------------------------ |  | --------------- | - |  | ------------------ | --------------- | -------------------- | ------------------- | ------------------ | ---------- | --------------- |  |  |  | - | 
|                         |  |                 |   |  |                    |                 |                      | Maximum Number      |                   
|                         |  |                 |   |  |                    | Total Number of |                      |                     | of Securities that |           
|                         |  | Total Number of |   |  |                    |                 | Securities Purchased |                     |                    | May yet be |                
|                         |  | Securities      |   |  | Average Price Paid |                 |                      | as Part of Publicly |                    |            | Purchased Under | 
|Period                   |  | Purchased       |   |  | per Security       |                 |                      | Announced Programs  |                    |            | the Programs    | 
|                         |  |                 |   |  |                    |                 |                      |                     |                    |            |                 | 
|2006-01-01 to 2006-01-31 |  |                 |  |  |                    |                 |                     |                     |                    |            |                |  |  |  |  | 
|2006-02-01 to 2006-02-28 |  |                 |  |  |                    |                 |                     |                     |                    |            |                |  |  |  |  | 
|2006-03-01 to 2006-03-31 |  |                 |  |  |                    |                 |                     |                     |                    |            |                |  |  |  |  | 
|2006-04-01 to 2006-04-30 |  |                 |  |  |                    |                 |                     |                     |                    |            |                |  |  |  |  | 
|2006-05-01 to 2006-05-31 |  |                 |  |  |                    |                 |                     |                     |                    |            |                |  |  |  |  | 
|2006-06-01 to 2006-06-30 |  |                 |  |  |                    |                 |                     |                     |                    |            |                |  |  |  |  | 
|2006-07-01 to 2006-07-31 |  |                 |  |  |                    |                 |                     |                     |                    |            |                |  |  |  |  | 
|2006-08-01 to 2006-08-31 |  |                 |  |  |                    |                 |                     |                     |                    |            |                |  |  |  |  | 
|2006-09-01 to 2006-09-30 |  |                 |  |  |                    |                 |                     |                     |                    |            |                |  |  |  |  | 
|2006-10-01 to 2006-10-31 |  |                 |  |  |                    |                 |                     |                     |                    |            |                |  |  |  |  | 
|2006-11-01 to 2006-11-30 |  |                 |  |  |                    |                 |                     |                     |                    |            |                |  |  |  |  | 
|2006-12-01 to 2006-12-31 |  |                 |  |  |                    |                 |                     |                     |                    |            |                |  |  |  |  | 





146



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PART III







|         |                     
|-------- | --------------------
|Item 17. | Financial Statements








|         |                     
|-------- | --------------------
|Item 18. | Financial Statements

|                                                                                                                        |  |      |     | 
|----------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                        |  | Page |    
|                                                                                                                        |  |      |    
|Financial Statements:                                                                                                   |  |      |     | 
|Report of Independent Registered Public
    Accounting Firm for Years Ended December 31, 2006, 2005 and
    2004        |  |      | F-2 | 
|Consolidated Statements of Income for the
    Years Ended December 31, 2006, 2005 and 2004                              |  |      | F-4 | 
|Consolidated Balance Sheets as at
    December 31, 2006 and 2005                                                        |  |      | F-5 | 
|Consolidated Statements of Cash Flows for
    the Years Ended December 31, 2006, 2005 and 2004                          |  |      | F-6 | 
|Consolidated Statements of Changes in
    Shareholders Equity for the Years Ended December 31,
    2006, 2005 and 2004 |  |      | F-7 | 
|Notes to Consolidated Financial
    Statements                                                                          |  |      | F-8 | 
|Financial Statement Schedule:                                                                                           |  |      |     | 
|For each of the three years in the period
    ended December 31, Schedule II Valuation and
    Qualifying Accounts      |  |      | S-1 | 






|         |         
|-------- | --------
|Item 19. | Exhibits

|      |  |                                                                                                                                                                                                                                                                                                              
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|8.1   |  | Subsidiaries and Equity Investments of the Company.                                                                                                                                                                                                                                                          
|12.1  |  | Certification of Carlo Bozotti, President and Chief Executive
    Officer of STMicroelectronics N.V., pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002.                                                                                                                                         
|12.2  |  | Certification of Carlo Ferro, Executive Vice President and Chief
    Financial Officer of STMicroelectronics N.V., pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                            
|13.1  |  | Certification of Carlo Bozotti, President and Chief Executive
    Officer of STMicroelectronics N.V., and Carlo Ferro, Executive
    Vice President and Chief Financial Officer of STMicroelectronics
    N.V., pursuant to 18 U.S.C. §1350, as adopted by
    Section 906 of the Sarbanes-Oxley Act of 2002.
|14(a) |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                    

147



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CERTAIN TERMS




|          |  |                                                                                                                                                                                                
|--------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ADSL      |  | assymetrical digital subscriber line                                                                                                                                                           
|         
|ASD       |  | application-specific discrete technology                                                                                                                                                       
|         
|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                                                                                                                                                                          
|         
|CMOS      |  | complementary metal-on silicon oxide semiconductor                                                                                                                                             
|         
|CODEC     |  | audio coding and decoding functions                                                                                                                                                            
|         
|CPE       |  | customer premises equipment                                                                                                                                                                    
|         
|DMOS      |  | diffused metal-on silicon oxide semiconductor                                                                                                                                                  
|         
|DRAMs     |  | dynamic random access memory                                                                                                                                                                   
|         
|DSL       |  | digital subscriber line                                                                                                                                                                        
|         
|DSP       |  | digital signal processor                                                                                                                                                                       
|         
|EMAS      |  | Eco-Management and Audit Scheme, the voluntary European
    Community scheme for companies performing industrial activities
    for the evaluation and improvement of environmental performance
|         
|EEPROM    |  | electrically erasable programmable read-only memory                                                                                                                                            
|         
|EPROM     |  | erasable programmable read-only memory                                                                                                                                                         
|         
|EWS       |  | electrical wafer sorting                                                                                                                                                                       
|         
|G-bit     |  | gigabit                                                                                                                                                                                        
|         
|GPRS      |  | global packet radio service                                                                                                                                                                    
|         
|GPS       |  | global positioning system                                                                                                                                                                      
|         
|GSM       |  | global system for mobile communications                                                                                                                                                        
|         
|GSM/ GPRS |  | European standard for mobile phones                                                                                                                                                            
|         
|HCMOS     |  | high-speed complementary metal-on silicon oxide semiconductor                                                                                                                                  
|         
|IC        |  | integrated circuit                                                                                                                                                                             
|         
|IGBT      |  | insulated gate bipolar transistors                                                                                                                                                             
|         
|IPAD      |  | integrated passive and active devices                                                                                                                                                          
|         
|ISO       |  | International Organization for Standardization                                                                                                                                                 
|         
|K-bit     |  | kilobit                                                                                                                                                                                        
|         
|LAN       |  | local area network                                                                                                                                                                             
|         
|M-bit     |  | megabit                                                                                                                                                                                        
|         
|MEMS      |  | micro-electro-mechanical system                                                                                                                                                                
|         
|MOS       |  | metal-on silicon oxide semiconductor process technology                                                                                                                                        
|         
|MOSFET    |  | metal-on silicon oxide semiconductor field effect transistor                                                                                                                                   
|         
|MPEG      |  | motion picture experts group                                                                                                                                                                   
|         
|ODM       |  | original design manufacturer                                                                                                                                                                   
|         
|OEM       |  | original equipment manufacturer                                                                                                                                                                
|         
|OTP       |  | one-time programmable                                                                                                                                                                          
|         
|PDA       |  | personal digital assistant                                                                                                                                                                     
|         
|PFC       |  | power factor corrector                                                                                                                                                                         
|         
|PROM      |  | programmable read-only memory                                                                                                                                                                  
|         
|PSM       |  | programmable system memories                                                                                                                                                                   

148



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|           |  |                                  
|---------- |  | ---------------------------------
|RAM        |  | random access memory             
|          
|RF         |  | radio frequency                  
|          
|RISC       |  | reduced instruction set computing
|          
|ROM        |  | read-only memory                 
|          
|SAM        |  | serviceable available market     
|          
|SCR        |  | silicon controlled rectifier     
|          
|SLIC       |  | subscriber line interface card   
|          
|SMPS       |  | switch-mode power supply         
|          
|SoC        |  | system-on-chip                   
|          
|SRAM       |  | static random access memory      
|          
|SNVM       |  | serial nonvolatile memories      
|          
|TAM        |  | total available market           
|          
|USB        |  | universal serial bus             
|          
|VIPpowerTM |  | vertical integration power       
|          
|VLSI       |  | very large scale integration     
|          
|XDSL       |  | digital subscriber line          

149



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##### Table of Contents



SIGNATURES


20-F




| |                        
| | -----------------------
| | STMICROELECTRONICS N.V.



| |     |                  
| | --- | -----------------
| | By: | /s/ Carlo Bozotti

| |                                      
| | -------------------------------------
| |                                      
| | Carlo Bozotti                        
| | President and Chief Executive Officer

150



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##### Table of Contents



CONSOLIDATED FINANCIAL STATEMENTS


Index to Consolidated Financial Statements


|                                                                                                                        |  |      |     | 
|----------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                        |  | Page |    
|                                                                                                                        |  |      |    
|Financial Statements:                                                                                                   |  |      |     | 
|Report of Independent Registered Public
    Accounting Firm for the Years Ended December 31, 2006, 2005
    and 2004    |  |      | F-2 | 
|Consolidated Statements of Income for the
    Years Ended December 31, 2006, 2005 and 2004                              |  |      | F-4 | 
|Consolidated Balance Sheets as at
    December 31, 2006 and 2005                                                        |  |      | F-5 | 
|Consolidated Statements of Cash Flows for
    the Years Ended December 31, 2006, 2005 and 2004                          |  |      | F-6 | 
|Consolidated Statements of Changes in
    Shareholders Equity for the Years Ended December 31,
    2006, 2005 and 2004 |  |      | F-7 | 
|Notes to Consolidated Financial
    Statements                                                                          |  |      | F-8 | 

F-1



---



##### Table of Contents









Report of Independent Registered Public Accounting Firm






Consolidated financial statements


20-F


Share-Based
Payment Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans




F-2



---



##### Table of Contents






Internal control over financial reporting


20-F, Internal Control  Integrated
Framework Internal Control  Integrated
Framework















F-3



---



##### Table of Contents



STMicroelectronics N.V.





CONSOLIDATED STATEMENTS OF INCOME


In million of U.S. dollars except per share amounts


|                                                                  |  |                     |        |   |              |  |        |              |  |  |        |  
|----------------------------------------------------------------- |  | ------------------- | ------ | - | ------------ |  | ------ | ------------ |  |  | ------ | -
|                                                                  |  | Twelve months ended |       
|                                                                  |  |                     |       
|                                                                  |  | December 31,        |        |   | December 31, |  |        | December 31, | 
|                                                                  |  | 2006                |        |   | 2005         |  |        | 2004         | 
|                                                                  |  |                     |        |   |              |  |        |              | 
|Net sales                                                         |  |                     | 9,838  |   |              |  | 8,876  |              |  |  | 8,756  |  
|Other revenues                                                    |  |                     | 16     |   |              |  | 6      |              |  |  | 4      |  
|                                                                  |  |                     |        |   |              |  |        |              | 
|Net revenues                                                      |  |                     | 9,854  |   |              |  | 8,882  |              |  |  | 8,760  |  
|Cost of sales                                                     |  |                     | (6,331 | ) |              |  | (5,845 | )            |  |  | (5,532 | )
|                                                                  |  |                     |        |   |              |  |        |              | 
|Gross profit                                                      |  |                     | 3,523  |   |              |  | 3,037  |              |  |  | 3,228  |  
|Selling, general and administrative                               |  |                     | (1,067 | ) |              |  | (1,026 | )            |  |  | (947   | )
|Research and development                                          |  |                     | (1,667 | ) |              |  | (1,630 | )            |  |  | (1,532 | )
|Other income and expenses, net                                    |  |                     | (35    | ) |              |  | (9     | )            |  |  | 10     |  
|Impairment, restructuring charges and other related closure costs |  |                     | (77    | ) |              |  | (128   | )            |  |  | (76    | )
|                                                                  |  |                     |        |   |              |  |        |              | 
|Operating income                                                  |  |                     | 677    |   |              |  | 244    |              |  |  | 683    |  
|Interest income (expense), net                                    |  |                     | 93     |   |              |  | 34     |              |  |  | (3     | )
|Loss on equity investments                                        |  |                     | (6     | ) |              |  | (3     | )            |  |  | (4     | )
|Loss on extinguishment of convertible debt                        |  |                     | 0      |   |              |  | 0      |              |  |  | (4     | )
|                                                                  |  |                     |        |   |              |  |        |              | 
|Income before income taxes and minority interests                 |  |                     | 764    |   |              |  | 275    |              |  |  | 672    |  
|Income tax benefit (expense)                                      |  |                     | 20     |   |              |  | (8     | )            |  |  | (68    | )
|                                                                  |  |                     |        |   |              |  |        |              | 
|Income before minority interests                                  |  |                     | 784    |   |              |  | 267    |              |  |  | 604    |  
|Minority interests                                                |  |                     | (2     | ) |              |  | (1     | )            |  |  | (3     | )
|                                                                  |  |                     |        |   |              |  |        |              | 
|Net income                                                        |  |                     | 782    |   |              |  | 266    |              |  |  | 601    |  
|                                                                  |  |                     |        |   |              |  |        |              | 
|Earnings per share (Basic)                                        |  |                     | 0.87   |   |              |  | 0.30   |              |  |  | 0.67   |  
|                                                                  |  |                     |        |   |              |  |        |              | 
|Earnings per share (Diluted)                                      |  |                     | 0.83   |   |              |  | 0.29   |              |  |  | 0.65   |  
|                                                                  |  |                     |        |   |              |  |        |              | 

The accompanying notes are an integral part of these audited
consolidated financial statements.


F-4



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##### Table of Contents



STMicroelectronics N.V.





CONSOLIDATED BALANCE SHEETS


In million of U.S. dollars


|                                                                                                                                                                                                                         |  |              |        |   |              |  |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------ | - | ------------ |  | ------ | -
|                                                                                                                                                                                                                         |  | As at        |       
|                                                                                                                                                                                                                         |  |              |       
|                                                                                                                                                                                                                         |  | December 31, |        |   | December 31, | 
|                                                                                                                                                                                                                         |  | 2006         |        |   | 2005         | 
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|Assets                                                                                                                                                                                                                   |  |              |        |   |              |  |        |  
|Current assets:                                                                                                                                                                                                          |  |              |        |   |              |  |        |  
|Cash and cash equivalents                                                                                                                                                                                                |  |              | 1,963  |   |              |  | 2,027  |  
|Marketable securities                                                                                                                                                                                                    |  |              | 460    |   |              |  | 0      |  
|Short-term deposits                                                                                                                                                                                                      |  |              | 250    |   |              |  | 0      |  
|Trade accounts receivable, net                                                                                                                                                                                           |  |              | 1,589  |   |              |  | 1,490  |  
|Inventories, net                                                                                                                                                                                                         |  |              | 1,639  |   |              |  | 1,411  |  
|Deferred tax assets                                                                                                                                                                                                      |  |              | 187    |   |              |  | 152    |  
|Other receivables and assets                                                                                                                                                                                             |  |              | 498    |   |              |  | 531    |  
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|Total current assets                                                                                                                                                                                                     |  |              | 6,586  |   |              |  | 5,611  |  
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|Goodwill                                                                                                                                                                                                                 |  |              | 223    |   |              |  | 221    |  
|Other intangible assets, net                                                                                                                                                                                             |  |              | 211    |   |              |  | 224    |  
|Property, plant and equipment, net                                                                                                                                                                                       |  |              | 6,426  |   |              |  | 6,175  |  
|Long-term deferred tax assets                                                                                                                                                                                            |  |              | 124    |   |              |  | 55     |  
|Equity investments                                                                                                                                                                                                       |  |              | 261    |   |              |  | 34     |  
|Restricted cash for equity investments                                                                                                                                                                                   |  |              | 218    |   |              |  | 0      |  
|Other investments and other non-current assets                                                                                                                                                                           |  |              | 149    |   |              |  | 119    |  
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|                                                                                                                                                                                                                         |  |              | 7,612  |   |              |  | 6,828  |  
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|Total assets                                                                                                                                                                                                             |  |              | 14,198 |   |              |  | 12,439 |  
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|Liabilities and shareholders equity                                                                                                                                                                                     |  |              |        |   |              |  |        |  
|Current liabilities:                                                                                                                                                                                                     |  |              |        |   |              |  |        |  
|Bank overdrafts                                                                                                                                                                                                          |  |              | 0      |   |              |  | 11     |  
|Current portion of long-term debt                                                                                                                                                                                        |  |              | 136    |   |              |  | 1,522  |  
|Trade accounts payable                                                                                                                                                                                                   |  |              | 1,044  |   |              |  | 965    |  
|Other payables and accrued liabilities                                                                                                                                                                                   |  |              | 664    |   |              |  | 642    |  
|Deferred tax liabilities                                                                                                                                                                                                 |  |              | 7      |   |              |  | 7      |  
|Accrued income tax                                                                                                                                                                                                       |  |              | 112    |   |              |  | 152    |  
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|Total current liabilities                                                                                                                                                                                                |  |              | 1,963  |   |              |  | 3,299  |  
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|Long-term debt                                                                                                                                                                                                           |  |              | 1,994  |   |              |  | 269    |  
|Reserve for pension and termination indemnities                                                                                                                                                                          |  |              | 342    |   |              |  | 270    |  
|Long-term deferred tax liabilities                                                                                                                                                                                       |  |              | 57     |   |              |  | 55     |  
|Other non-current liabilities                                                                                                                                                                                            |  |              | 43     |   |              |  | 16     |  
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|                                                                                                                                                                                                                         |  |              | 2,436  |   |              |  | 610    |  
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|Total liabilities                                                                                                                                                                                                        |  |              | 4,399  |   |              |  | 3,909  |  
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|Commitment and contingencies                                                                                                                                                                                             |  |              |        |   |              |  |        |  
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|Minority interests                                                                                                                                                                                                       |  |              | 52     |   |              |  | 50     |  
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|Common stock (preferred stock: 540,000,000 shares
    authorized, not issued; common stock: Euro 1.04 nominal
    value, 1,200,000,000 shares authorized,
    910,157,933 shares issued, 897,395,042 shares outstanding) |  |              | 1,156  |   |              |  | 1,153  |  
|Capital surplus                                                                                                                                                                                                          |  |              | 2,021  |   |              |  | 1,967  |  
|Accumulated result                                                                                                                                                                                                       |  |              | 6,086  |   |              |  | 5,427  |  
|Accumulated other comprehensive income                                                                                                                                                                                   |  |              | 816    |   |              |  | 281    |  
|Treasury stock                                                                                                                                                                                                           |  |              | (332   | ) |              |  | (348   | )
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|Shareholders equity                                                                                                                                                                                                     |  |              | 9,747  |   |              |  | 8,480  |  
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|Total liabilities and shareholders equity                                                                                                                                                                               |  |              | 14,198 |   |              |  | 12,439 |  
|                                                                                                                                                                                                                         |  |              |        |   |              | 

The accompanying notes are an integral part of these audited
consolidated financial statements.


F-5



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##### Table of Contents



STMicroelectronics N.V.





CONSOLIDATED STATEMENTS OF CASH FLOWS


In million of U.S. dollars


|                                                     |                                                                             |                                                                                             |        |        |              |   |        |              |       |   |        |        |       |  
|---------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ------ | ------ | ------------ | - | ------ | ------------ | ----- | - | ------ | ------ | ----- | -
|                                                     |                                                                             | Twelve Months Ended                                                                         |       
|                                                     |                                                                             |                                                                                             |       
|                                                     |                                                                             | December 31,                                                                                |        |        | December 31, |   |        | December 31, |      
|                                                     |                                                                             | 2006                                                                                        |        |        | 2005         |   |        | 2004         |      
|                                                     |                                                                             |                                                                                             |        |        |              |   |        |              |      
|Cash flows from operating activities:                |                                                                             |                                                                                             |        |        |              |   |        |              |       |   |        |       
|                                                     | Net income                                                                  |                                                                                             |        | 782    |              |   |        | 266          |       |   |        | 601    |      
|                                                     | Items to reconcile net income and cash flows from operating
    activities: |                                                                                             |        |        |              |   |        |              |       |   |        |        |      
|                                                     |                                                                             | Depreciation and amortization                                                               |        |        | 1,766        |   |        |              | 1,944 |   |        |        | 1,837 |  
|                                                     |                                                                             | Amortization of discount on convertible debt                                                |        |        | 18           |   |        |              | 5     |   |        |        | 28    |  
|                                                     |                                                                             | Loss on extinguishment of convertible debt                                                  |        |        |             |   |        |              |      |   |        |        | 4     |  
|                                                     |                                                                             | Other non-cash items                                                                        |        |        | 50           |   |        |              | 10    |   |        |        | 5     |  
|                                                     |                                                                             | Minority interest in net income of subsidiaries                                             |        |        | 2            |   |        |              | 1     |   |        |        | 3     |  
|                                                     |                                                                             | Deferred income tax                                                                         |        |        | (74          | ) |        |              | (31   | ) |        |        | (6    | )
|                                                     |                                                                             | Loss on equity investments                                                                  |        |        | 6            |   |        |              | 3     |   |        |        | 4     |  
|                                                     |                                                                             | Impairment, restructuring charges and other related closure
    costs, net of cash payments |        |        | 1            |   |        |              | 72    |   |        |        | 8     |  
|                                                     | Changes in assets and liabilities:                                          |                                                                                             |        |        |              |   |        |              |       |   |        |        |      
|                                                     |                                                                             | Trade receivables, net                                                                      |        |        | (104         | ) |        |              | (117  | ) |        |        | (119  | )
|                                                     |                                                                             | Inventories, net                                                                            |        |        | (161         | ) |        |              | (174  | ) |        |        | (144  | )
|                                                     |                                                                             | Trade payables                                                                              |        |        | 36           |   |        |              | (71   | ) |        |        | 128   |  
|                                                     |                                                                             | Other assets and liabilities, net                                                           |        |        | 169          |   |        |              | (110  | ) |        |        | (7    | )
|                                                     |                                                                             |                                                                                             |        |        |              |   |        |              |      
|Net cash from operating activities                   |                                                                             |                                                                                             | 2,491  |        |              |   | 1,798  |              |       |   | 2,342  |       
|                                                     |                                                                             |                                                                                             |        |        |              |   |        |              |      
|Cash flows from investing activities:                |                                                                             |                                                                                             |        |        |              |   |        |              |       |   |        |       
|                                                     | Payment for purchase of tangible assets                                     |                                                                                             |        | (1,533 | )            |   |        | (1,441       | )     |   |        | (2,050 | )    
|                                                     | Payment for purchase of marketable securities                               |                                                                                             |        | (460   | )            |   |        |             |       |   |        |       |      
|                                                     | Investment in short-term deposits                                           |                                                                                             |        | (903   | )            |   |        |             |       |   |        |       |      
|                                                     | Proceeds from matured short-term deposits                                   |                                                                                             |        | 653    |              |   |        |             |       |   |        |       |      
|                                                     | Restricted cash for equity investments                                      |                                                                                             |        | (218   | )            |   |        |             |       |   |        |       |      
|                                                     | Investment in intangible and financial assets                               |                                                                                             |        | (86    | )            |   |        | (49          | )     |   |        | (79    | )    
|                                                     | Proceeds from the sale of Accent subsidiary                                 |                                                                                             |        | 7      |              |   |        |             |       |   |        |       |      
|                                                     | Capital contributions to equity investments                                 |                                                                                             |        | (213   | )            |   |        | (38          | )     |   |        | (2     | )    
|                                                     | Payment of acquisitions, net of cash received                               |                                                                                             |        |       |              |   |        |             |       |   |        | (3     | )    
|                                                     |                                                                             |                                                                                             |        |        |              |   |        |              |      
|Net cash used in investing activities                |                                                                             |                                                                                             | (2,753 | )      |              |   | (1,528 | )            |       |   | (2,134 | )     
|                                                     |                                                                             |                                                                                             |        |        |              |   |        |              |      
|Cash flows from financing activities:                |                                                                             |                                                                                             |        |        |              |   |        |              |       |   |        |       
|                                                     | Proceeds from issuance of long-term debt                                    |                                                                                             |        | 1,744  |              |   |        | 50           |       |   |        | 91     |      
|                                                     | Repayment of long-term debt                                                 |                                                                                             |        | (1,522 | )            |   |        | (110         | )     |   |        | (1,288 | )    
|                                                     | Increase (decrease) in short-term facilities                                |                                                                                             |        | (12    | )            |   |        | (47          | )     |   |        | 10     |      
|                                                     | Capital increase                                                            |                                                                                             |        | 28     |              |   |        | 35           |       |   |        | 23     |      
|                                                     | Dividends paid                                                              |                                                                                             |        | (107   | )            |   |        | (107         | )     |   |        | (107   | )    
|                                                     | Other financing activities                                                  |                                                                                             |        | 1      |              |   |        | 1            |       |   |        |       |      
|                                                     |                                                                             |                                                                                             |        |        |              |   |        |              |      
|Net cash from (used in) financing activities         |                                                                             |                                                                                             | 132    |        |              |   | (178   | )            |       |   | (1,271 | )     
|                                                     |                                                                             |                                                                                             |        |        |              |   |        |              |      
|                                                     | Effect of changes in exchange rates                                         |                                                                                             |        | 66     |              |   |        | (15          | )     |   |        | 15     |      
|                                                     |                                                                             |                                                                                             |        |        |              |   |        |              |      
|Net cash increase (decrease)                         |                                                                             |                                                                                             | (64    | )      |              |   | 77     |              |       |   | (1,048 | )     
|                                                     |                                                                             |                                                                                             |        |        |              |   |        |              |      
|Cash and cash equivalents at beginning of the period |                                                                             |                                                                                             | 2,027  |        |              |   | 1,950  |              |       |   | 2,998  |       
|                                                     |                                                                             |                                                                                             |        |        |              |   |        |              |      
|Cash and cash equivalents at end of the period       |                                                                             |                                                                                             | 1,963  |        |              |   | 2,027  |              |       |   | 1,950  |       
|                                                     |                                                                             |                                                                                             |        |        |              |   |        |              |      
|Supplemental cash information:                       |                                                                             |                                                                                             |        |        |              |   |        |              |       |   |        |       
|Interest paid                                        |                                                                             |                                                                                             | 29     |        |              |   | 17     |              |       |   | 16     |       
|Income tax paid                                      |                                                                             |                                                                                             | 117    |        |              |   | 90     |              |       |   | 84     |       

The accompanying notes are an integral part of these audited
consolidated financial statements.


F-6



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##### Table of Contents






CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY


In million of U.S. dollars, except per share amounts


|                                 |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               |  |       |      |   |  |       |      |  
|-------------------------------- | -------------------------------------- | ------ | ----- |  | ------- |  | ----- | -------- |  | ----------- | ----------- | - |  | ------------- | ----- | --- | ------------- |  | ----- | ---- | - |  | ----- | ---- | -
|                                 |                                        |        |       |  |         |  |       |          |  | Accumulated |             |   | 
|                                 |                                        |        |       |  |         |  |       |          |  | Other       |             |   | 
|                                 |                                        | Common |       |  | Capital |  |       | Treasury |  |             | Accumulated |   |  | Comprehensive |       |     | Shareholders | 
|                                 |                                        | Stock  |       |  | Surplus |  |       | Stock    |  |             | Result      |   |  | income (loss) |       |     | Equity        | 
|                                 |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               | 
|Balance as of December 31, 2003  |                                        |        | 1,146 |  |         |  | 1,905 |          |  |             | (348        | ) |  |               | 4,774 |     |               |  | 623   |      |   |  | 8,100 |     
|                                 |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               | 
|Capital increase                 |                                        |        | 4     |  |         |  | 19    |          |  |             |             |   |  |               |       |     |               |  |       |      |   |  | 23    |     
|Comprehensive income (loss):     |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               |  |       |      |   |  |       |     
|                                 | Net Income                             |        |       |  |         |  |       |          |  |             |             |   |  |               |       | 601 |               |  |       |      |   |  |       | 601  |  
|                                 | Other comprehensive income, net of tax |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               |  |       | 493  |   |  |       | 493  |  
|                                 |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               | 
|Comprehensive income             |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               |  |       |      |   |  | 1,094 |     
|Dividends, $0.12 per share       |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               | (107  | )   |               |  |       |      |   |  | (107  | )   
|                                 |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               | 
|Balance as of December 31, 2004  |                                        |        | 1,150 |  |         |  | 1,924 |          |  |             | (348        | ) |  |               | 5,268 |     |               |  | 1,116 |      |   |  | 9,110 |     
|                                 |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               | 
|Capital increase                 |                                        |        | 3     |  |         |  | 32    |          |  |             |             |   |  |               |       |     |               |  |       |      |   |  | 35    |     
|Stock-based compensation expense |                                        |        |       |  |         |  | 11    |          |  |             |             |   |  |               |       |     |               |  |       |      |   |  | 11    |     
|Comprehensive income (loss):     |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               |  |       |      |   |  |       |     
|                                 | Net Income                             |        |       |  |         |  |       |          |  |             |             |   |  |               |       | 266 |               |  |       |      |   |  |       | 266  |  
|                                 | Other comprehensive loss, net of tax   |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               |  |       | (835 | ) |  |       | (835 | )
|                                 |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               | 
|Comprehensive loss               |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               |  |       |      |   |  | (569  | )   
|Dividends, $0.12 per share       |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               | (107  | )   |               |  |       |      |   |  | (107  | )   
|                                 |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               | 
|Balance as of December 31, 2005  |                                        |        | 1,153 |  |         |  | 1,967 |          |  |             | (348        | ) |  |               | 5,427 |     |               |  | 281   |      |   |  | 8,480 |     
|                                 |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               | 
|Capital increase                 |                                        |        | 3     |  |         |  | 25    |          |  |             |             |   |  |               |       |     |               |  |       |      |   |  | 28    |     
|Stock-based compensation expense |                                        |        |       |  |         |  | 29    |          |  |             | 16          |   |  |               | (16   | )   |               |  |       |      |   |  | 29    |     
|Comprehensive income (loss):     |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               |  |       |      |   |  |       |     
|                                 | Net Income                             |        |       |  |         |  |       |          |  |             |             |   |  |               |       | 782 |               |  |       |      |   |  |       | 782  |  
|                                 | Other comprehensive income, net of tax |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               |  |       | 535  |   |  |       | 535  |  
|                                 |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               | 
|Comprehensive income             |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               |  |       |      |   |  | 1,317 |     
|Dividends, $0.12 per share       |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               | (107  | )   |               |  |       |      |   |  | (107  | )   
|                                 |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               | 
|Balance as of December 31, 2006  |                                        |        | 1,156 |  |         |  | 2,021 |          |  |             | (332        | ) |  |               | 6,086 |     |               |  | 816   |      |   |  | 9,747 |     
|                                 |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               | 

The accompanying notes are an integral part of these audited
consolidated financial statements.


F-7



---



##### Table of Contents






NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)


1  THE COMPANY




system-level high-growth mixed-signal


2  ACCOUNTING POLICIES


per-share period-end


2.1  Principles of consolidation


majority-owned Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51


2.2  Use of estimates


share-based


2.3  Foreign currency






F-8



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)






2.4  Derivative instruments


Derivative
instruments Not Designated as a Hedge


Accounting for Derivative Instruments
and Hedging Activities marked-to-market period-end


Derivative
instruments Designated as Cash Flow Hedge


euro-denominated year-end front-end semi-finished one-to-one on-going




Derivative
instruments Designated as Fair Value Hedge




F-9



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)




2.5  Revenue Recognition




Net
sales


Revenue
Recognition


period-end.


non-conforming, non-conforming end-user




non-standard 00-21, Revenue Arrangements with Multiple Deliverables 00-21). performance-, cancellation-, termination-or refund-type


Other
revenues




F-10



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)


Funding






value-added long-term non-operating




2.6  Advertising costs




2.7  Research and development




2.8  Start-up costs


Start-up


2.9  Income taxes




F-11



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)


flow-through




2.10  Earnings per share


(adding-back stock-options


2.11  Cash and cash equivalents




2.12  Restricted cash




2.13  Marketable securities


available-for-sale,


2.14  Trade accounts receivable




2.15  Inventories




F-12



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)




write-off


2.16  Intangible assets subject to amortization




|                              |  |  |           | 
|----------------------------- |  |  | --------- | 
|Technologies & licenses       |  |  | 3-7 years | 
|Purchased software            |  |  | 3-4 years | 
|Internally developed software |  |  | 4 years   | 





2.17  Goodwill




2.18  Property, plant and equipment




F-13



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)




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









2.19  Investments






F-14



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)




Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51


2.20  Employee benefits


(a) Pension
obligations




Employers Accounting for
Defined Benefit Pension and Other Postretirement
Plans  an amendment of FASB Statements No. 87,
88, 106 and 132(R)




(b) Other
post-employment obligations




F-15



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)




(c) Termination
benefits






(d) Profit-sharing
and bonus plans




(e) Share-based
compensation


Stock
options


Accounting
for Stock Issued to Employees






F-16



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)


Accounting for Stock-Based Compensation


|                                                                                                                  |                      |              |     |      |              |  |      |              |  |  |      |      | 
|----------------------------------------------------------------------------------------------------------------- | -------------------- | ------------ | --- | ---- | ------------ |  | ---- | ------------ |  |  | ---- | ---- | 
|                                                                                                                  |                      | Year ended   |     |      | Year ended   |  |      | Year ended   | 
|                                                                                                                  |                      | December 31, |     |      | December 31, |  |      | December 31, | 
|                                                                                                                  |                      | 2006         |     |      | 2005         |  |      | 2004         | 
|                                                                                                                  |                      |              |     |      |              |  |      |              | 
|Net income, as reported                                                                                           |                      |              | 782 |      |              |  | 266  |              |  |  | 601  |     
|of which compensation expense on nonvested shares, net of tax
    effect                                          |                      |              | (20 | )    |              |  | (7   | )            |  |  |     |     
|Deduct: Total stock-option employee compensation expense
    determined under FAS 123, net of related tax effects |                      |              |    |      |              |  | (244 | )            |  |  | (166 | )   
|Net income, pro forma                                                                                             |                      |              | 782 |      |              |  | 22   |              |  |  | 435  |     
|Earnings per share:                                                                                               |                      |              |     |      |              |  |      |              |  |  |      |     
|                                                                                                                  | Basic, as reported   |              |     | 0.87 |              |  |      | 0.30         |  |  |      | 0.67 | 
|                                                                                                                  | Basic, pro forma     |              |     | 0.87 |              |  |      | 0.02         |  |  |      | 0.49 | 
|                                                                                                                  | Diluted, as reported |              |     | 0.83 |              |  |      | 0.29         |  |  |      | 0.65 | 
|                                                                                                                  | Diluted, pro forma   |              |     | 0.83 |              |  |      | 0.02         |  |  |      | 0.47 | 







|                                          |  |              |   |  |              |  |      |              |  |  |      |  
|----------------------------------------- |  | ------------ | - |  | ------------ |  | ---- | ------------ |  |  | ---- | -
|                                          |  | Year ended   |   |  | Year ended   |  |      | Year ended   | 
|                                          |  | December 31, |   |  | December 31, |  |      | December 31, | 
|                                          |  | 2006         |   |  | 2005         |  |      | 2004         | 
|                                          |  |              |   |  |              |  |      |              | 
|Expected life (years)                     |  |              |  |  |              |  | 6.1  |              |  |  | 6.1  |  
|Historical Company share price volatility |  |              |  |  |              |  | 52.9 | %            |  |  | 56.4 | %
|Risk-free interest rate                   |  |              |  |  |              |  | 3.84 | %            |  |  | 3.6  | %
|Dividend yield                            |  |              |  |  |              |  | 0.69 | %            |  |  | 0.56 | %



Nonvested
shares




Share-Based grant-date


F-17



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)


stock-based




2.21  Long-term debt


(a) Convertible
debt








(b) Bank
loans and Senior bonds


non-convertible




2.22  Share capital






2.23  Comprehensive income (loss)


available-for-sale,


2.24  Provisions




F-18



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)




Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of FASB Statements No. 5, 57 and
107 and Rescission of FASB Interpretation No. 34


2.25  Recent accounting pronouncements


Accounting for Certain Hybrid Financial
Instruments  an amendment of FASB Statements
No. 133 and 140 . Accounting for Derivative Instruments and
Hedging Activities Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities principal-only


Accounting for Servicing of Financial Assets  an
amendment of FASB Statement No. 140


Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109 Accounting for Income
Taxes


Fair Value Measurements


F-19



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)




Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans  an amendment of FASB
Statements No. 87, 88, 106 and 132(R)


Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements one-time


The Fair Value Option for Financial Assets and
Financial Liabilities-
Including an amendment of FASB Statement No. 115


F-20



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)


3  EQUITY INVESTMENTS




SuperH Joint Venture






UPEK
Inc.


capitalist-funded




Hynix
ST Joint Venture


joint-venture front-end memory-manufacturing long-term joint-ventures deal-related


long-term


F-21



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)


joint-ventures


non-current




4  TRADE ACCOUNTS RECEIVABLE, NET




|                          |  |              |       |   |              |  |       |  
|------------------------- |  | ------------ | ----- | - | ------------ |  | ----- | -
|                          |  | December 31, |       |   | December 31, | 
|                          |  | 2006         |       |   | 2005         | 
|                          |  |              |       |   |              | 
|Trade accounts receivable |  |              | 1,620 |   |              |  | 1,517 |  
|Less valuation allowance  |  |              | (31   | ) |              |  | (27   | )
|                          |  |              |       |   |              | 
|Total                     |  |              | 1,589 |   |              |  | 1,490 |  
|                          |  |              |       |   |              | 



5  INVENTORIES, NET




|                  |  |              |       |  |              |  |       | 
|----------------- |  | ------------ | ----- |  | ------------ |  | ----- | 
|                  |  | December 31, |       |  | December 31, | 
|                  |  | 2006         |       |  | 2005         | 
|                  |  |              |       |  |              | 
|Raw materials     |  |              | 80    |  |              |  | 60    | 
|Work-in-process   |  |              | 1,032 |  |              |  | 880   | 
|Finished products |  |              | 527   |  |              |  | 471   | 
|                  |  |              |       |  |              | 
|Total             |  |              | 1,639 |  |              |  | 1,411 | 
|                  |  |              |       |  |              | 

F-22



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)


6  OTHER RECEIVABLES AND ASSETS




|                                             |  |              |     |  |              |  |     | 
|-------------------------------------------- |  | ------------ | --- |  | ------------ |  | --- | 
|                                             |  | December 31, |     |  | December 31, | 
|                                             |  | 2006         |     |  | 2005         | 
|                                             |  |              |     |  |              | 
|Receivables from government agencies         |  |              | 122 |  |              |  | 168 | 
|Taxes and other government receivables       |  |              | 194 |  |              |  | 200 | 
|Advances to suppliers                        |  |              | 5   |  |              |  | 2   | 
|Advances to employees                        |  |              | 13  |  |              |  | 10  | 
|Advances to State and government agencies    |  |              | 12  |  |              |  | 11  | 
|Insurance prepayments                        |  |              | 4   |  |              |  | 6   | 
|Rental prepayments                           |  |              | 3   |  |              |  | 2   | 
|License and technology agreement prepayments |  |              | 7   |  |              |  | -   | 
|Other prepaid expenses                       |  |              | 23  |  |              |  | 29  | 
|Loans and deposits                           |  |              | 15  |  |              |  | 12  | 
|Accrued income                               |  |              | 9   |  |              |  | 15  | 
|Interest receivable                          |  |              | 27  |  |              |  | 5   | 
|Long-lived assets held for sale              |  |              | 4   |  |              |  | 4   | 
|Foreign exchange forward contracts           |  |              | 14  |  |              |  | 3   | 
|Sundry debtors within cooperation agreements |  |              | 31  |  |              |  | 32  | 
|Other current assets                         |  |              | 15  |  |              |  | 32  | 
|                                             |  |              |     |  |              | 
|Total                                        |  |              | 498 |  |              |  | 531 | 
|                                             |  |              |     |  |              | 

Long-lived held-for-sale Accounting for the impairment or
disposal of long-term assets back-end


7  GOODWILL




|                             |  |             |     |   |          |  |    |       |  |  |       |   |  |  |     |  
|---------------------------- |  | ----------- | --- | - | -------- |  | -- | ----- |  |  | ----- | - |  |  | --- | -
|                             |  | Application |     |   |          |  |    |       | 
|                             |  | Specific    |     |   | Memory   |  |    |       |  | 
|                             |  | Products    |     |   | Products |  |    | Other |  |  | Total |  
|                             |  |             |     |   |          |  |    |       |  |  |       |  
|December 31, 2004            |  |             | 173 |   |          |  | 88 |       |  |  | 3     |   |  |  | 264 |  
|CPE goodwill impairment    |  |             | (39 | ) |          |  |    |       |  |  |       |   |  |  | (39 | )
|Foreign currency translation |  |             |    |   |          |  | (3 | )     |  |  | (1    | ) |  |  | (4  | )
|                             |  |             |     |   |          |  |    |       |  |  |       |  
|December 31, 2005            |  |             | 134 |   |          |  | 85 |       |  |  | 2     |   |  |  | 221 |  
|                             |  |             |     |   |          |  |    |       |  |  |       |  
|Tioga goodwill impairment    |  |             | (6  | ) |          |  |   |       |  |  |      |   |  |  | (6  | )
|Foreign currency translation |  |             |    |   |          |  | 8  |       |  |  |      |   |  |  | 8   |  
|                             |  |             |     |   |          |  |    |       |  |  |       |  
|December 31, 2006            |  |             | 128 |   |          |  | 93 |       |  |  | 2     |   |  |  | 223 |  
|                             |  |             |     |   |          |  |    |       |  |  |       |  



F-23



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)


Goodwill and Other Intangible Assets


8  INTANGIBLE ASSETS




|                              |  |            |     |             |              |  |      |          |  |  |     | 
|----------------------------- |  | ---------- | --- | ----------- | ------------ |  | ---- | -------- |  |  | --- | 
|                              |  |            |     | Accumulated |              |  |     
|December 31, 2006             |  | Gross Cost |     |             | Amortization |  |      | Net Cost | 
|                              |  |            |     |             |              |  |      |          | 
|Technologies & licenses       |  |            | 353 |             |              |  | (258 | )        |  |  | 95  | 
|Purchased software            |  |            | 193 |             |              |  | (149 | )        |  |  | 44  | 
|Internally developed software |  |            | 134 |             |              |  | (62  | )        |  |  | 72  | 
|                              |  |            |     |             |              |  |      |          | 
|Total                         |  |            | 680 |             |              |  | (469 | )        |  |  | 211 | 
|                              |  |            |     |             |              |  |      |          | 

|                              |  |            |     |             |              |  |      |          |  |  |     | 
|----------------------------- |  | ---------- | --- | ----------- | ------------ |  | ---- | -------- |  |  | --- | 
|                              |  |            |     | Accumulated |              |  |     
|December 31, 2005             |  | Gross Cost |     |             | Amortization |  |      | Net Cost | 
|                              |  |            |     |             |              |  |      |          | 
|Technologies & licenses       |  |            | 309 |             |              |  | (199 | )        |  |  | 110 | 
|Purchased software            |  |            | 162 |             |              |  | (114 | )        |  |  | 48  | 
|Internally developed software |  |            | 114 |             |              |  | (48  | )        |  |  | 66  | 
|                              |  |            |     |             |              |  |      |          | 
|Total                         |  |            | 585 |             |              |  | (361 | )        |  |  | 224 | 
|                              |  |            |     |             |              |  |      |          | 









|           |  |  |     | 
|---------- |  |  | --- | 
|Year       |  | 
|           |  | 
|2007       |  |  | 100 | 
|2008       |  |  | 61  | 
|2009       |  |  | 31  | 
|2010       |  |  | 12  | 
|2011       |  |  | 4   | 
|Thereafter |  |  | 3   | 
|           |  |  |    
|Total      |  |  | 211 | 
|           |  |  |    

F-24



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)


9  PROPERTY, PLANT AND EQUIPMENT




|                                    |  |       |        |  |              |  |         |      |  |  |       | 
|----------------------------------- |  | ----- | ------ |  | ------------ |  | ------- | ---- |  |  | ----- | 
|                                    |  | Gross |        |  | Accumulated  |  |         | Net  | 
|December 31, 2006                   |  | Cost  |        |  | Depreciation |  |         | Cost | 
|                                    |  |       |        |  |              |  |         |      | 
|Land                                |  |       | 91     |  |              |  |        |      |  |  | 91    | 
|Buildings                           |  |       | 1,208  |  |              |  | (319    | )    |  |  | 889   | 
|Capital leases                      |  |       | 61     |  |              |  | (39     | )    |  |  | 22    | 
|Facilities & leasehold improvements |  |       | 3,135  |  |              |  | (1,668  | )    |  |  | 1,467 | 
|Machinery and equipment             |  |       | 14,463 |  |              |  | (10,940 | )    |  |  | 3,523 | 
|Computer and R&D equipment          |  |       | 551    |  |              |  | (441    | )    |  |  | 110   | 
|Other tangible assets               |  |       | 156    |  |              |  | (118    | )    |  |  | 38    | 
|Construction in progress            |  |       | 286    |  |              |  |        |      |  |  | 286   | 
|                                    |  |       |        |  |              |  |         |      | 
|Total                               |  |       | 19,951 |  |              |  | (13,525 | )    |  |  | 6,426 | 
|                                    |  |       |        |  |              |  |         |      | 

|                                    |  |       |        |  |              |  |         |      |  |  |       | 
|----------------------------------- |  | ----- | ------ |  | ------------ |  | ------- | ---- |  |  | ----- | 
|                                    |  | Gross |        |  | Accumulated  |  |         | Net  | 
|December 31, 2005                   |  | Cost  |        |  | Depreciation |  |         | Cost | 
|                                    |  |       |        |  |              |  |         |      | 
|Land                                |  |       | 84     |  |              |  |        |      |  |  | 84    | 
|Buildings                           |  |       | 1,071  |  |              |  | (267    | )    |  |  | 804   | 
|Capital leases                      |  |       | 55     |  |              |  | (29     | )    |  |  | 26    | 
|Facilities & leasehold improvements |  |       | 2,715  |  |              |  | (1,294  | )    |  |  | 1,421 | 
|Machinery and equipment             |  |       | 12,473 |  |              |  | (9,063  | )    |  |  | 3,410 | 
|Computer and R&D equipment          |  |       | 492    |  |              |  | (381    | )    |  |  | 111   | 
|Other tangible assets               |  |       | 131    |  |              |  | (103    | )    |  |  | 28    | 
|Construction in progress            |  |       | 291    |  |              |  |        |      |  |  | 291   | 
|                                    |  |       |        |  |              |  |         |      | 
|Total                               |  |       | 17,312 |  |              |  | (11,137 | )    |  |  | 6,175 | 
|                                    |  |       |        |  |              |  |         |      | 







10  AVAILABLE-FOR-SALE FINANCIAL ASSETS


available-for-sale


available-for-sale available-for-sale.


F-25



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)


11  SHORT-TERM DEPOSITS


A- long-term short-term


12  OTHER INVESTMENTS AND OTHER NON-CURRENT
ASSETS




|                                                 |  |              |     |  |              |  |     | 
|------------------------------------------------ |  | ------------ | --- |  | ------------ |  | --- | 
|                                                 |  | December 31, |     |  | December 31, | 
|                                                 |  | 2006         |     |  | 2005         | 
|                                                 |  |              |     |  |              | 
|Cost investments                                 |  |              | 39  |  |              |  | 36  | 
|Long-term receivables related to funding         |  |              | 36  |  |              |  | 33  | 
|Long-term receivables related to tax refund      |  |              | 33  |  |              |  | 27  | 
|Debt issuance costs, net                         |  |              | 12  |  |              |  | 3   | 
|Cancellable swaps designated as fair value hedge |  |              | 4   |  |              |  |    | 
|Deposits and other long-term receivables         |  |              | 25  |  |              |  | 20  | 
|                                                 |  |              |     |  |              | 
|Total                                            |  |              | 149 |  |              |  | 119 | 
|                                                 |  |              |     |  |              | 

 


long-term


Long-term




long-term


F-26



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)


13  OTHER PAYABLES AND ACCRUED LIABILITIES




|                                               |  |              |     |  |              |  |     | 
|---------------------------------------------- |  | ------------ | --- |  | ------------ |  | --- | 
|                                               |  | December 31, |     |  | December 31, | 
|                                               |  | 2006         |     |  | 2005         | 
|                                               |  |              |     |  |              | 
|Taxes other than income taxes                  |  |              | 78  |  |              |  | 77  | 
|Salaries and wages                             |  |              | 308 |  |              |  | 248 | 
|Social charges                                 |  |              | 124 |  |              |  | 110 | 
|Advances received on government funding        |  |              | 28  |  |              |  | 24  | 
|Advances from customers                        |  |              | 10  |  |              |  | 3   | 
|Foreign exchange forward contracts             |  |              | 1   |  |              |  | 31  | 
|Current portion of provision for restructuring |  |              | 28  |  |              |  | 40  | 
|Pension and termination benefits               |  |              | 10  |  |              |  | 21  | 
|Warranty and product guarantee provisions      |  |              | 6   |  |              |  | 7   | 
|Accrued interest                               |  |              | 4   |  |              |  | 3   | 
|Other                                          |  |              | 67  |  |              |  | 78  | 
|                                               |  |              |     |  |              | 
|Total                                          |  |              | 664 |  |              |  | 642 | 
|                                               |  |              |     |  |              | 



14  RETIREMENT PLANS




88-1, Determination of Vested Benefit Obligation for a Defined
Benefit Pension Plan 88-1).




F-27



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)




|                                                                           |  |              |      |   |              |  |      |  
|-------------------------------------------------------------------------- |  | ------------ | ---- | - | ------------ |  | ---- | -
|                                                                           |  | December 31, |      |   | December 31, | 
|                                                                           |  | 2006         |      |   | 2005         | 
|                                                                           |  |              |      |   |              | 
|Change in benefit obligation:                                              |  |              |      |   |              |  |      |  
|Benefit obligation at beginning of year                                    |  |              | 505  |   |              |  | 478  |  
|Service cost (net of employee contributions)                               |  |              | 39   |   |              |  | 42   |  
|Interest cost                                                              |  |              | 25   |   |              |  | 24   |  
|Employee contributions                                                     |  |              | 3    |   |              |  | 1    |  
|Benefits paid                                                              |  |              | (41  | ) |              |  | (28  | )
|Settlement                                                                 |  |              | (6   | ) |              |  |     |  
|Actuarial losses (gain)                                                    |  |              | (14  | ) |              |  | 34   |  
|Foreign currency translation adjustments                                   |  |              | 48   |   |              |  | (50  | )
|Plan amendments                                                            |  |              | 16   |   |              |  | 3    |  
|Other                                                                      |  |              |     |   |              |  | 1    |  
|                                                                           |  |              |      |   |              | 
|Benefit obligation at end of year                                          |  |              | 575  |   |              |  | 505  |  
|                                                                           |  |              |      |   |              | 
|Change in plan assets:                                                     |  |              |      |   |              |  |      |  
|Plan assets at fair value at beginning of year                             |  |              | 194  |   |              |  | 181  |  
|Expected return on plan assets                                             |  |              | 13   |   |              |  | 11   |  
|Employer contributions                                                     |  |              | 28   |   |              |  | 12   |  
|Employee contributions                                                     |  |              | 3    |   |              |  | 4    |  
|Benefits paid                                                              |  |              | (11  | ) |              |  | (10  | )
|Settlement                                                                 |  |              | (6   | ) |              |  |     |  
|Actuarial gain                                                             |  |              | 2    |   |              |  | 10   |  
|Foreign currency translation adjustments                                   |  |              | 16   |   |              |  | (14  | )
|Other                                                                      |  |              | 2    |   |              |  |     |  
|                                                                           |  |              |      |   |              | 
|Plan assets at fair value at end of year                                   |  |              | 241  |   |              |  | 194  |  
|                                                                           |  |              |      |   |              | 
|Funded status                                                              |  |              | (334 | ) |              |  | (311 | )
|Unrecognized prior service cost                                            |  |              | 11   |   |              |  | (3   | )
|Unrecognized transition obligation                                         |  |              | (1   | ) |              |  | (1   | )
|Unrecognized actuarial loss                                                |  |              | 62   |   |              |  | 77   |  
|Recognized unfunded status as at FAS 158 adoption                          |  |              | (72  | ) |              |  |     |  
|                                                                           |  |              |      |   |              | 
|Net amount recognized                                                      |  |              | (334 | ) |              |  | (238 | )
|                                                                           |  |              |      |   |              | 
|Net amount recognized in the balance sheet consisted of the
    following: |  |              |      |   |              |  |      |  
|Non-current assets                                                         |  |              | 3    |   |              |  |      |  
|Current liabilities                                                        |  |              | (3   | ) |              |  |      |  
|Non-current liabilities                                                    |  |              | (334 | ) |              |  |      |  
|Prepaid benefit cost                                                       |  |              |      |   |              |  | 2    |  
|Accrued benefit liability                                                  |  |              |      |   |              |  | (275 | )
|Intangible asset                                                           |  |              |      |   |              |  | 1    |  
|Accumulated other comprehensive income                                     |  |              |      |   |              |  | 34   |  
|                                                                           |  |              |      |   |              | 
|Net amount recognized                                                      |  |              | (334 | ) |              |  | (238 | )
|                                                                           |  |              |      |   |              | 

F-28



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)




|                                                   |  |              |     |   |              |  |     |              |  |  |     |  
|-------------------------------------------------- |  | ------------ | --- | - | ------------ |  | --- | ------------ |  |  | --- | -
|                                                   |  | Year ended   |     |   | Year ended   |  |     | Year ended   | 
|                                                   |  | December 31, |     |   | December 31, |  |     | December 31, | 
|                                                   |  | 2006         |     |   | 2005         |  |     | 2004         | 
|                                                   |  |              |     |   |              |  |     |              | 
|Service cost                                       |  |              | 39  |   |              |  | 42  |              |  |  | 42  |  
|Interest cost                                      |  |              | 25  |   |              |  | 24  |              |  |  | 22  |  
|Expected return on plan assets                     |  |              | (13 | ) |              |  | (11 | )            |  |  | (11 | )
|Amortization of unrecognized transition obligation |  |              |    |   |              |  |    |              |  |  |    |  
|Amortization of net loss                           |  |              | 4   |   |              |  | 3   |              |  |  | 8   |  
|Settlement                                         |  |              | 6   |   |              |  |    |              |  |  |    |  
|Amortization of prior service cost                 |  |              | (4  | ) |              |  |    |              |  |  | 1   |  
|                                                   |  |              |     |   |              |  |     |              | 
|Net periodic benefit cost                          |  |              | 57  |   |              |  | 58  |              |  |  | 62  |  
|                                                   |  |              |     |   |              |  |     |              | 



|                                                                                   |  |              |      |   |              |  |      |              |  |  |      |  
|---------------------------------------------------------------------------------- |  | ------------ | ---- | - | ------------ |  | ---- | ------------ |  |  | ---- | -
|                                                                                   |  | December 31, |      |   | December 31, |  |      | December 31, | 
|Assumptions                                                                        |  | 2006         |      |   | 2005         |  |      | 2004         | 
|                                                                                   |  |              |      |   |              |  |      |              | 
|Discount rate                                                                      |  |              | 4.86 | % |              |  | 4.54 | %            |  |  | 5.02 | %
|Salary increase rate                                                               |  |              | 2.95 | % |              |  | 3.75 | %            |  |  | 3.34 | %
|Expected long-term rate of return on funds for the pension
    expense of the year |  |              | 6.05 | % |              |  | 6.34 | %            |  |  | 6.44 | %

long-term long-term long-term




|                        |  |                   |     |                |      |  |     |      |  |  |     |  
|----------------------- |  | ----------------- | --- | -------------- | ---- |  | --- | ---- |  |  | --- | -
|                        |  |                   |     | Percentage of  |     
|                        |  |                   |     | Plan Assets at |     
|                        |  |                   |     | December       |     
|                        |  | Target allocation |     |                |      | 
|Asset Category          |  | 2006              |     |                | 2006 |  |     | 2005 | 
|                        |  |                   |     |                |      |  |     |      | 
|Equity securities       |  |                   | 53  | %              |      |  | 55  | %    |  |  | 61  | %
|Fixed income securities |  |                   | 33  | %              |      |  | 33  | %    |  |  | 37  | %
|Real estate             |  |                   | 5   | %              |      |  | 4   | %    |  |  | 2   | %
|Other                   |  |                   | 9   | %              |      |  | 8   | %    |  |  |    |  
|                        |  |                   |     |                |      |  |     |      | 
|Total                   |  |                   | 100 | %              |      |  | 100 | %    |  |  | 100 | %
|                        |  |                   |     |                |      |  |     |      | 

long-term short-term


F-29



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)




|                  |  |                  |     | 
|----------------- |  | ---------------- | --- | 
|                  |  | Estimated future |    
|Years             |  | benefit payments |    
|                  |  |                  |    
|2007              |  |                  | 16  | 
|2008              |  |                  | 25  | 
|2009              |  |                  | 27  | 
|2010              |  |                  | 27  | 
|2011              |  |                  | 22  | 
|From 2012 to 2016 |  |                  | 142 | 



15  LONG-TERM DEBT




|                                                                                |  |              |       |   |              |  |        |  
|------------------------------------------------------------------------------- |  | ------------ | ----- | - | ------------ |  | ------ | -
|                                                                                |  | December 31, |       |   | December 31, | 
|                                                                                |  | 2006         |       |   | 2005         | 
|                                                                                |  |              |       |   |              | 
|Bank loans:                                                                     |  |              |       |   |              |  |        |  
|3.42% (weighted average), due 2006, floating interest rate at
    Libor + 0.30% |  |              |      |   |              |  | 45     |  
|2.54% (weighted average), due 2007, fixed interest rate                         |  |              | 65    |   |              |  | 120    |  
|5.68% (weighted average rate), due 2007, variable interest rate                 |  |              | 30    |   |              |  | 36     |  
|5.72% due 2008, floating interest rate at Libor + 0.40%                         |  |              | 49    |   |              |  | 25     |  
|5.81% due 2009, floating interest rate at Libor + 0.40%                         |  |              | 35    |   |              |  |       |  
|5.81% due 2010, floating interest rate at Libor + 0.40%                         |  |              |      |   |              |  | 25     |  
|Funding program loans:                                                          |  |              |       |   |              |  |        |  
|5.35% (weighted average), due 2006, fixed interest rate                         |  |              |      |   |              |  | 4      |  
|1.43% (weighted average), due 2009, fixed interest rate                         |  |              | 18    |   |              |  | 22     |  
|0.90% (weighted average), due 2010, fixed interest rate                         |  |              | 45    |   |              |  | 50     |  
|2.87% (weighted average), due 2012, fixed interest rate                         |  |              | 12    |   |              |  | 12     |  
|0.50% (weighted average), due 2014, fixed interest rate                         |  |              | 8     |   |              |  |       |  
|0.83% (weighted average), due 2017, fixed interest rate                         |  |              | 53    |   |              |  | 47     |  
|5.38% due 2014, floating interest rate at Libor + 0.017%                        |  |              | 140   |   |              |  |       |  
|Capital leases:                                                                 |  |              |       |   |              |  |        |  
|4.89% (weighted average), due 2011, fixed interest rate                         |  |              | 23    |   |              |  | 26     |  
|Senior Bonds:                                                                   |  |              |       |   |              |  |        |  
|4.08%, due 2013, floating interest rate at Euribor + 0.40%                      |  |              | 659   |   |              |  |       |  
|Convertible debt:                                                               |  |              |       |   |              |  |        |  
|-0.50% convertible bonds due 2013                                               |  |              | 2     |   |              |  | 1,379  |  
|1.5% convertible bonds due 2016                                                 |  |              | 991   |   |              |  |       |  
|                                                                                |  |              |       |   |              | 
|Total long-term debt                                                            |  |              | 2,130 |   |              |  | 1,791  |  
|Less current portion                                                            |  |              | (136  | ) |              |  | (1,522 | )
|                                                                                |  |              |       |   |              | 
|Total long-term debt, less current portion                                      |  |              | 1,994 |   |              |  | 269    |  
|                                                                                |  |              |       |   |              | 

F-30



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)




|                 |  |              |       |  |              |  |       | 
|---------------- |  | ------------ | ----- |  | ------------ |  | ----- | 
|                 |  | December 31, |       |  | December 31, | 
|                 |  | 2006         |       |  | 2005         | 
|                 |  |              |       |  |              | 
|U.S. dollar      |  |              | 1,242 |  |              |  | 1,454 | 
|Euro             |  |              | 818   |  |              |  | 206   | 
|Singapore dollar |  |              | 65    |  |              |  | 120   | 
|Other            |  |              | 5     |  |              |  | 11    | 
|                 |  |              |       |  |              | 
|Total            |  |              | 2,130 |  |              |  | 1,791 | 
|                 |  |              |       |  |              | 



|           |  |              |       | 
|---------- |  | ------------ | ----- | 
|           |  | December 31, |      
|           |  | 2006         |      
|           |  |              |      
|2007       |  |              | 136   | 
|2008       |  |              | 89    | 
|2009       |  |              | 83    | 
|2010       |  |              | 45    | 
|2011       |  |              | 30    | 
|Thereafter |  |              | 1,747 | 
|           |  |              |      
|Total      |  |              | 2,130 | 
|           |  |              |      





F-31



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)


th


Credit facilities




16  SHAREHOLDERS EQUITY


16.1  Outstanding shares






16.2  Preference shares






16.3  Treasury stock






F-32



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)




16.4  Stock option plans




three-year 1996-1998,








F-33



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)




|                                 |                        |                  |            |                 |       |          |              |              |  |   |       |       | 
|-------------------------------- | ---------------------- | ---------------- | ---------- | --------------- | ----- | -------- | ------------ | ------------ |  | - | ----- | ----- | 
|                                 |                        |                  |            | Price Per Share |      
|                                 |                        |                  |            |                 |      
|                                 |                        |                  |            |                 |       | Weighted |             
|                                 |                        | Number of Shares |            |                 | Range |          |              | Average      | 
|                                 |                        |                  |            |                 |       |          |              |              | 
|Outstanding at December 31, 2003 |                        |                  | 56,769,297 |                 |       | $        | 6.04-$62.01  |              |  | $ | 29.71 |      
|Options granted:                 |                        |                  |            |                 |       |          |              |              |  |   |       |      
|                                 | 2001 Plan              |                  |            | 12,365,280      |       |          | $            | 17.08-$27.21 |  |   | $     | 22.66 | 
|                                 | Supervisory Board Plan |                  |            | 132,000         |       |          | $            | 22.71        |  |   | $     | 22.71 | 
|Options forfeited                |                        |                  | (1,304,969 | )               |       | $        | 6.04-$62.01  |              |  | $ | 29.20 |      
|Options exercised                |                        |                  | (2,537,401 | )               |       | $        | 6.04-$24.88  |              |  | $ | 8.93  |      
|Outstanding at December 31, 2004 |                        |                  | 65,424,207 |                 |       | $        | 12.03-$62.01 |              |  | $ | 29.18 |      
|                                 |                        |                  |            |                 |       |          |              |              | 
|Options granted:                 |                        |                  |            |                 |       |          |              |              |  |   |       |      
|                                 | 2001 Plan              |                  |            | 42,200          |       |          | $            | 16.73-$17.31 |  |   | $     | 16.91 | 
|                                 | Supervisory Board Plan |                  |            |                |       |          |              |             |  |   |       |      | 
|Options forfeited                |                        |                  | (2,364,862 | )               |       | $        | 12.03-$62.01 |              |  | $ | 29.65 |      
|Options exercised                |                        |                  | (2,542,978 | )               |       | $        | 12.03-$14.23 |              |  | $ | 13.88 |      
|Outstanding at December 31, 2005 |                        |                  | 60,558,567 |                 |       | $        | 12.03-$62.01 |              |  | $ | 29.80 |      
|                                 |                        |                  |            |                 |       |          |              |              | 
|Options granted:                 |                        |                  |            |                 |       |          |              |              |  |   |       |      
|                                 | 2001 Plan              |                  |            |                |       |          |              |             |  |   |       |      | 
|                                 | Supervisory Board Plan |                  |            |                |       |          |              |             |  |   |       |      | 
|Options expired                  |                        |                  | (16,832    | )               |       | $        | 12.03        |              |  | $ | 12.03 |      
|Options forfeited                |                        |                  | (1,912,584 | )               |       | $        | 12.03-$62.01 |              |  | $ | 30.66 |      
|Options exercised                |                        |                  | (2,303,899 | )               |       | $        | 12.03-$17.08 |              |  | $ | 12.03 |      
|Outstanding at December 31, 2006 |                        |                  | 56,325,252 |                 |       | $        | 12.03-$62.01 |              |  | $ | 30.50 |      
|                                 |                        |                  |            |                 |       |          |              |              | 



|                                |  |              |            |  |              |   |            |              |  |   |            | 
|------------------------------- |  | ------------ | ---------- |  | ------------ | - | ---------- | ------------ |  | - | ---------- | 
|                                |  | December 31, |            |  | December 31, |   |            | December 31, | 
|                                |  | 2006         |            |  | 2005         |   |            | 2004         | 
|                                |  |              |            |  |              |   |            |              | 
|Options exercisable             |  |              | 56,325,252 |  |              |   | 60,558,567 |              |  |   | 32,212,680 | 
|Weighted average exercise price |  | $            | 30.50      |  |              | $ | 29.80      |              |  | $ | 33.84      | 
|                                |  |              |            |  |              |   |            |              | 





| |  |                  |            |              |       |          |                 |                |         |           |                  |  |  |  |     | 
| |  | ---------------- | ---------- | ------------ | ----- | -------- | --------------- | -------------- | ------- | --------- | ---------------- |  |  |  | --- | 
| |  |                  |            |              |       |          |                 | Weighted       |        
| |  |                  |            |              |       | Weighted |                 |                | average |          
| |  |                  |            | Option price |       |          | average         |                |         | remaining |                 
| |  | Number of shares |            |              | range |          |                 | exercise price |         |           | contractual life | 
| |  |                  |            |              |       |          |                 |                |         |           |                  | 
| |  |                  | 189,455    |              |       |          | $12.03  $17.31 |                |         | $         | 17.04            |  |  |  | 7.8 | 
| |  |                  | 29,716,135 |              |       |          | $19.18  $24.88 |                |         | $         | 22.04            |  |  |  | 5.2 | 
| |  |                  | 217,360    |              |       |          | $25.90  $29.70 |                |         | $         | 27.20            |  |  |  | 6.2 | 
| |  |                  | 19,990,687 |              |       |          | $31.09  $44.00 |                |         | $         | 34.37            |  |  |  | 4.9 | 
| |  |                  | 6,211,615  |              |       |          | $50.69  $62.01 |                |         | $         | 59.08            |  |  |  | 1.6 | 

16.5  Employee share purchase plans




16.6  Nonvested share awards




F-34



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)







stock-based 


two-year




F-35



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)






|                                    |                             |                  |           |            |                |   |         |       | 
|----------------------------------- | --------------------------- | ---------------- | --------- | ---------- | -------------- | - | ------- | ----- | 
|Nonvested Shares                    |                             | Number of Shares |           |            | Exercise price |  
|                                    |                             |                  |           |            |                |  
|Outstanding at December 31, 2004    |                             |                  |          |            |                |   |        |      
|                                    |                             |                  |           |            |                |  
|Awards granted:                     |                             |                  |           |            |                |   |         |      
|                                    | 2005 Employee Plan          |                  |           | 3,940,065  |                |   | $       | 0     | 
|                                    | 2005 Supervisory Board Plan |                  |           | 66,000     |                |   |         | 1.04 | 
|Awards forfeited:                   |                             |                  |           |            |                |   |         |      
|                                    | 2005 Employee Plan          |                  |           | (25,845    | )              |   | $       | 0     | 
|                                    | 2005 Supervisory Board Plan |                  |           | (15,000    | )              |   |         | 1.04 | 
|Awards vested                       |                             |                  |          |            |                |   |        |      
|Outstanding as at December 31, 2005 |                             |                  | 3,965,220 |            |                | $ | 0-1.04 |      
|                                    |                             |                  |           |            |                |  
|Awards granted:                     |                             |                  |           |            |                |   |         |      
|                                    | 2005 Employee Plan          |                  |           | 219,850    |                |   | $       | 0     | 
|                                    | 2006 Employee Plan          |                  |           | 4,916,640  |                |   | $       | 0     | 
|                                    | 2006 Supervisory Board Plan |                  |           | 66,000     |                |   |         | 1.04 | 
|Awards forfeited:                   |                             |                  |           |            |                |   |         |      
|                                    | 2005 Employee Plan          |                  |           | (138,615   | )              |   | $       | 0     | 
|                                    | 2006 Employee Plan          |                  |           | (118,430   | )              |   | $       | 0     | 
|                                    | 2006 Supervisory Board Plan |                  |           | (15,000    | )              |   |         | 1.04 | 
|Awards cancelled on failed vesting  |                             |                  |           |            |                |   |         |      
|conditions:                         |                             |                  |           |            |                |   |         |      
|                                    | 2005 Employee Plan          |                  |           | (1,364,902 | )              |   | $       | 0     | 
|Awards vested:                      |                             |                  |           |            |                |   |         |      
|                                    | 2005 Employee Plan          |                  |           | (637,109   | )              |   | $       | 0     | 
|                                    | 2005 Supervisory Board Plan |                  |           | (17,000    | )              |   |         | 1.04 | 
|Outstanding as at December 31, 2006 |                             |                  | 6,876,654 |            |                | $ | 0-1.04 |      
|                                    |                             |                  |           |            |                |  

path-dependent




|                                         |  |               |             | 
|---------------------------------------- |  | ------------- | ----------- | 
|                                         |  | 2005          |            
|                                         |  | Employee Plan |            
|                                         |  |               |            
|Historical share price volatility        |  |               | 27.74%      | 
|Historical volatility of reference index |  |               | 25.5%       | 
|Three-year average dividend yield        |  |               | 0.55%       | 
|Risk-free interest rates used            |  |               | 4.21%-4.33% | 
|                                         |  |               |            

grant-date


Share-Based
Payment


F-36



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)






stock-based


|                                    |  |              |    |  |              |  |    |              |  |  |   | 
|----------------------------------- |  | ------------ | -- |  | ------------ |  | -- | ------------ |  |  | - | 
|                                    |  | December 31, |    |  | December 31, |  |    | December 31, | 
|                                    |  | 2006         |    |  | 2005         |  |    | 2004         | 
|                                    |  |              |    |  |              |  |    |              | 
|Cost of sales                       |  |              | 6  |  |              |  | 2  |              |  |  |  | 
|Selling, general and administrative |  |              | 14 |  |              |  | 6  |              |  |  |  | 
|Research and development            |  |              | 8  |  |              |  | 3  |              |  |  |  | 
|                                    |  |              |    |  |              |  |    |              | 
|Total compensation                  |  |              | 28 |  |              |  | 11 |              |  |  |  | 
|                                    |  |              |    |  |              |  |    |              | 



share-based


F-37



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)


16.7  Accumulated other comprehensive income
(loss)




|                                    |  |               |       |            |                    |  |    |                |         |  |             |   |  |             |     |   |               |  |     |   |  |  |       |  
|----------------------------------- |  | ------------- | ----- | ---------- | ------------------ |  | -- | -------------- | ------- |  | ----------- | - |  | ----------- | --- | - | ------------- |  | --- | - |  |  | ----- | -
|                                    |  |               |       | Unrealized |                    |  |    |                | Minimum |  |             |   |  |            
|                                    |  | Foreign       |       |            | gain (loss) on     |  |    | Unrealized     |         |  | pension     |   |  | FAS 158     |     |   | Accumulated   | 
|                                    |  | currency      |       |            | available-for-sale |  |    | gain (loss) on |         |  | liability   |   |  | adoption    |     |   | other         | 
|                                    |  | translation   |       |            | financial assets,  |  |    | derivatives,   |         |  | adjustment, |   |  | adjustment, |     |   | comprehensive | 
|                                    |  | income (loss) |       |            | net of tax         |  |    | net of tax     |         |  | net of tax  |   |  | net of tax  |     |   | income (loss) | 
|                                    |  |               |       |            |                    |  |    |                |         |  |             |   |  |             |     |   |               | 
|Balance as of December 31,
    2003 |  |               | 657   |            |                    |  | 3  |                |         |  |            |   |  |             | (37 | ) |               |  |    |   |  |  | 623   |  
|Other comprehensive income (loss)   |  |               | 441   |            |                    |  | (3 | )              |         |  | 59          |   |  |             | (4  | ) |               |  |    |   |  |  | 493   |  
|                                    |  |               |       |            |                    |  |    |                |         |  |             |   |  |             |     |   |               | 
|Balance as of December 31,
    2004 |  |               | 1,098 |            |                    |  |   |                |         |  | 59          |   |  |             | (41 | ) |               |  |    |   |  |  | 1,116 |  
|Other comprehensive income (loss)   |  |               | (770  | )          |                    |  |   |                |         |  | (72         | ) |  |             | 7   |   |               |  |    |   |  |  | (835  | )
|                                    |  |               |       |            |                    |  |    |                |         |  |             |   |  |             |     |   |               | 
|Balance as of December 31,
    2005 |  |               | 328   |            |                    |  |   |                |         |  | (13         | ) |  |             | (34 | ) |               |  |    |   |  |  | 281   |  
|Other comprehensive income (loss)   |  |               | 532   |            |                    |  |   |                |         |  | 26          |   |  |             | 34  |   |               |  | (57 | ) |  |  | 535   |  
|                                    |  |               |       |            |                    |  |    |                |         |  |             |   |  |             |     |   |               | 
|Balance as of December 31,
    2006 |  |               | 860   |            |                    |  |   |                |         |  | 13          |   |  |             |    |   |               |  | (57 | ) |  |  | 816   |  
|                                    |  |               |       |            |                    |  |    |                |         |  |             |   |  |             |     |   |               | 

Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans  an amendment of FASB Statements No. 87,
88, 106 and 132(R)


16.8  Dividends




17  EARNINGS PER SHARE




|                                                 |  |              |             |  |              |  |             |              |  |  |             | 
|------------------------------------------------ |  | ------------ | ----------- |  | ------------ |  | ----------- | ------------ |  |  | ----------- | 
|                                                 |  | Year ended   |             |  | Year ended   |  |             | Year ended   | 
|                                                 |  | December 31, |             |  | December 31, |  |             | December 31, | 
|                                                 |  | 2006         |             |  | 2005         |  |             | 2004         | 
|                                                 |  |              |             |  |              |  |             |              | 
|Basic EPS                                        |  |              |             |  |              |  |             |              |  |  |             | 
|Net income                                       |  |              | 782         |  |              |  | 266         |              |  |  | 601         | 
|Weighted average shares outstanding              |  |              | 896,136,969 |  |              |  | 892,760,520 |              |  |  | 891,192,542 | 
|Basic EPS                                        |  |              | 0.87        |  |              |  | 0.30        |              |  |  | 0.67        | 
|Diluted EPS                                      |  |              |             |  |              |  |             |              |  |  |             | 
|Net income                                       |  |              | 782         |  |              |  | 266         |              |  |  | 601         | 
|Convertible debt interest, net of tax            |  |              | 17          |  |              |  | 5           |              |  |  | 4           | 
|                                                 |  |              |             |  |              |  |             |              | 
|Net income adjusted                              |  |              | 799         |  |              |  | 271         |              |  |  | 605         | 
|Weighted average shares outstanding              |  |              | 896,136,969 |  |              |  | 892,760,520 |              |  |  | 891,192,542 | 
|Dilutive effect of stock options                 |  |              | 211,770     |  |              |  | 854,523     |              |  |  | 2,038,369   | 
|Dilutive effect of nonvested shares              |  |              | 1,252,996   |  |              |  | 116,233     |              |  |  |            | 
|Dilutive effect of convertible debt              |  |              | 60,941,995  |  |              |  | 41,880,104  |              |  |  | 41,880,160  | 
|                                                 |  |              |             |  |              |  |             |              | 
|Number of shares used in calculating diluted EPS |  |              | 958,543,730 |  |              |  | 935,611,380 |              |  |  | 935,111,071 | 
|Diluted EPS                                      |  |              | 0.83        |  |              |  | 0.29        |              |  |  | 0.65        | 

F-38



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)




18  OTHER INCOME AND EXPENSES, NET




|                                        |  |              |     |   |              |  |     |              |  |  |     |  
|--------------------------------------- |  | ------------ | --- | - | ------------ |  | --- | ------------ |  |  | --- | -
|                                        |  | Year ended   |     |   | Year ended   |  |     | Year ended   | 
|                                        |  | December 31, |     |   | December 31, |  |     | December 31, | 
|                                        |  | 2006         |     |   | 2005         |  |     | 2004         | 
|                                        |  |              |     |   |              |  |     |              | 
|Research and development funding        |  |              | 54  |   |              |  | 76  |              |  |  | 84  |  
|Start-up costs                          |  |              | (57 | ) |              |  | (56 | )            |  |  | (63 | )
|Exchange gain (loss), net               |  |              | (9  | ) |              |  | (16 | )            |  |  | 33  |  
|Patent litigation costs                 |  |              | (22 | ) |              |  | (14 | )            |  |  | (31 | )
|Patent pre-litigation costs             |  |              | (7  | ) |              |  | (8  | )            |  |  | (6  | )
|Gain on sale of non-current assets, net |  |              | 8   |   |              |  | 12  |              |  |  | 6   |  
|Other, net                              |  |              | (2  | ) |              |  | (3  | )            |  |  | (13 | )
|                                        |  |              |     |   |              |  |     |              | 
|Total other income and expenses, net    |  |              | (35 | ) |              |  | (9  | )            |  |  | 10  |  
|                                        |  |              |     |   |              |  |     |              | 



pre-tax


19  IMPAIRMENT, RESTRUCTURING CHARGES AND OTHER
RELATED CLOSURE COSTS








F-39



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)










|                               |  |            |     |               |         |  |               |                       |  |                   |               |   |  |  |     |  
|------------------------------ |  | ---------- | --- | ------------- | ------- |  | ------------- | --------------------- |  | ----------------- | ------------- | - |  |  | --- | -
|                               |  |            |     |               |         |  |               | Total impairment,     | 
|                               |  |            |     |               |         |  |               | restructuring charges | 
|                               |  |            |     | Restructuring |         |  | Other related |                       |  | and other related |              
|Year ended December 31, 2006   |  | Impairment |     |               | charges |  |               | closure costs         |  |                   | closure costs |  
|                               |  |            |     |               |         |  |               |                       |  |                   |               |  
|150mm fab plan                 |  |            | (1  | )             |         |  | (7            | )                     |  |                   | (14           | ) |  |  | (22 | )
|2005 restructuring initiatives |  |            | (1  | )             |         |  | (36           | )                     |  |                   | (8            | ) |  |  | (45 | )
|Other                          |  |            | (10 | )             |         |  |              |                       |  |                   |              |   |  |  | (10 | )
|                               |  |            |     |               |         |  |               |                       |  |                   |               |  
|Total                          |  |            | (12 | )             |         |  | (43           | )                     |  |                   | (22           | ) |  |  | (77 | )
|                               |  |            |     |               |         |  |               |                       |  |                   |               |  

|                               |  |            |     |               |         |  |               |                       |  |                   |               |   |  |  |      |  
|------------------------------ |  | ---------- | --- | ------------- | ------- |  | ------------- | --------------------- |  | ----------------- | ------------- | - |  |  | ---- | -
|                               |  |            |     |               |         |  |               | Total impairment,     | 
|                               |  |            |     |               |         |  |               | restructuring charges | 
|                               |  |            |     | Restructuring |         |  | Other related |                       |  | and other related |              
|Year ended December 31, 2005   |  | Impairment |     |               | charges |  |               | closure costs         |  |                   | closure costs |  
|                               |  |            |     |               |         |  |               |                       |  |                   |               |  
|150mm fab plan                 |  |            |    |               |         |  | (4            | )                     |  |                   | (9            | ) |  |  | (13  | )
|2005 restructuring initiatives |  |            | (66 | )             |         |  | (46           | )                     |  |                   | (2            | ) |  |  | (114 | )
|Other                          |  |            | (1  | )             |         |  |              |                       |  |                   |              |   |  |  | (1   | )
|                               |  |            |     |               |         |  |               |                       |  |                   |               |  
|Total                          |  |            | (67 | )             |         |  | (50           | )                     |  |                   | (11           | ) |  |  | (128 | )
|                               |  |            |     |               |         |  |               |                       |  |                   |               |  

|                                  |  |            |    |               |         |  |               |                       |  |                   |               |   |  |  |     |  
|--------------------------------- |  | ---------- | -- | ------------- | ------- |  | ------------- | --------------------- |  | ----------------- | ------------- | - |  |  | --- | -
|                                  |  |            |    |               |         |  |               | Total impairment,     | 
|                                  |  |            |    |               |         |  |               | restructuring charges | 
|                                  |  |            |    | Restructuring |         |  | Other related |                       |  | and other related |              
|Year ended December 31, 2004      |  | Impairment |    |               | charges |  |               | closure costs         |  |                   | closure costs |  
|                                  |  |            |    |               |         |  |               |                       |  |                   |               |  
|150mm fab plan                    |  |            |   |               |         |  | (29           | )                     |  |                   | (35           | ) |  |  | (64 | )
|Intangible assets and investments |  |            | (8 | )             |         |  |              |                       |  |                   |              |   |  |  | (8  | )
|Other                             |  |            |   |               |         |  | (4            | )                     |  |                   |              |   |  |  | (4  | )
|                                  |  |            |    |               |         |  |               |                       |  |                   |               |  
|Total                             |  |            | (8 | )             |         |  | (33           | )                     |  |                   | (35           | ) |  |  | (76 | )
|                                  |  |            |    |               |         |  |               |                       |  |                   |               |  







| |   |                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $6 million impairment of goodwill pursuant to the decision
    of the Company to cease product development from technologies
    inherited from Tioga business acquisition. The Company reports
    Tioga business as part of the Application Specific Product
    Groups (ASG) product segment. Following this
    decision, the Company recorded the full write-off of Tioga
    goodwill carrying amount.
|
| |  | $4 million impairment on technologies purchased as part of
    Tioga business acquisition, which were determined to be without
    any alternative use;                                                                                                                                                                                                                                                       
|
| |  | $1 million impairment on equipment and machinery pursuant
    to the decision of the Company to discontinue a production line
    in one of its back-end sites;                                                                                                                                                                                                                                               
|
| |  | $1 million impairment on equipment and machinery identified
    without any alternative use in one of the Companys
    European 150 mm sites.                                                                                                                                                                                                                                                                

F-40



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $39 million impairment of goodwill pursuant to the decision
    of the Company to reduce its Access technology products for
    Customer Premises Equipment (CPE) modem products.
    The Company reports CPE business as part of the Access reporting
    unit, included in the Application Specific Products Group
    (ASG). Following the decision to discontinue a
    portion of this reporting unit, the Company, in compliance with
    FAS 142 reassessed the allocation of goodwill between the
    Access reporting unit and the business to be disposed of
    according to their relative fair values using market comparables;
|
| |  | $22 million of purchased technologies were identified
    without an alternative use following the discontinuation of CPE
    product lines;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | $6 million for technologies and other intangible assets
    pursuant to the decision of the Company to close its research
    and development design centre in Karlsruhe (Germany), the
    discontinuation of a development project in Singapore, the
    optimization of its EWS (wafer testing) in the United States and
    other intangibles determined to be obsolete.                                                                                                                                                                                                                                                                    



Accounting for the impairment or
disposal of long-term assets




F-41



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)




|                                  |  |                |     |               |               |  |     |       |               |                 |             |   |  |               |     |   |               |  |    |   |  |  |     |  
|--------------------------------- |  | -------------- | --- | ------------- | ------------- |  | --- | ----- | ------------- | --------------- | ----------- | - |  | ------------- | --- | - | ------------- |  | -- | - |  |  | --- | -
|                                  |  | 150mm fab plan |     |               |               |  |     |       | Total         |                
|                                  |  |                |     |               | 2005          |  |     |       |               | restructuring & |            
|                                  |  |                |     | Other related |               |  |     |       | restructuring |                 |             |   |  | other related |    
|                                  |  | Restructuring  |     |               | closure costs |  |     | Total |               |                 | initiatives |   |  | Other         |     |   | closure costs | 
|                                  |  |                |     |               |               |  |     |       |               |                 |             |   |  |               |     |   |               | 
|Provision as at December 31, 2003 |  |                | 34  |               |               |  | 1   |       |               |                 | 35          |   |  |               |    |   |               |  | 3  |   |  |  | 38  |  
|Charges incurred in 2004          |  |                | 32  |               |               |  | 32  |       |               |                 | 64          |   |  |               |    |   |               |  | 4  |   |  |  | 68  |  
|Amounts paid                      |  |                | (32 | )             |               |  | (32 | )     |               |                 | (64         | ) |  |               |    |   |               |  | (4 | ) |  |  | (68 | )
|Currency translation effect       |  |                | 2   |               |               |  |    |       |               |                 | 2           |   |  |               |    |   |               |  |   |   |  |  | 2   |  
|                                  |  |                |     |               |               |  |     |       |               |                 |             |   |  |               |     |   |               | 
|Provision as at December 31, 2004 |  |                | 36  |               |               |  | 1   |       |               |                 | 37          |   |  |               |    |   |               |  | 3  |   |  |  | 40  |  
|                                  |  |                |     |               |               |  |     |       |               |                 |             |   |  |               |     |   |               | 
|Charges incurred in 2005          |  |                | 10  |               |               |  | 9   |       |               |                 | 19          |   |  |               | 48  |   |               |  |   |   |  |  | 67  |  
|Reversal of provision             |  |                | (6  | )             |               |  |    |       |               |                 | (6          | ) |  |               |    |   |               |  |   |   |  |  | (6  | )
|Amounts paid                      |  |                | (23 | )             |               |  | (10 | )     |               |                 | (33         | ) |  |               | (21 | ) |               |  | (2 | ) |  |  | (56 | )
|Currency translation effect       |  |                | (4  | )             |               |  |    |       |               |                 | (4          | ) |  |               |    |   |               |  |   |   |  |  | (4  | )
|                                  |  |                |     |               |               |  |     |       |               |                 |             |   |  |               |     |   |               | 
|Provision as at December 31, 2005 |  |                | 13  |               |               |  |    |       |               |                 | 13          |   |  |               | 27  |   |               |  | 1  |   |  |  | 41  |  
|                                  |  |                |     |               |               |  |     |       |               |                 |             |   |  |               |     |   |               | 
|Charges incurred in 2006          |  |                | 7   |               |               |  | 14  |       |               |                 | 21          |   |  |               | 44  |   |               |  |   |   |  |  | 65  |  
|Amounts paid                      |  |                | (7  | )             |               |  | (14 | )     |               |                 | (21         | ) |  |               | (54 | ) |               |  | (1 | ) |  |  | (76 | )
|Currency translation effect       |  |                | 1   |               |               |  |    |       |               |                 | 1           |   |  |               | 1   |   |               |  |   |   |  |  | 2   |  
|                                  |  |                |     |               |               |  |     |       |               |                 |             |   |  |               |     |   |               | 
|Provision as at December 31, 2006 |  |                | 14  |               |               |  |    |       |               |                 | 14          |   |  |               | 18  |   |               |  |   |   |  |  | 32  |  
|                                  |  |                |     |               |               |  |     |       |               |                 |             |   |  |               |     |   |               | 















| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Pursuant to the decision of reducing its Access technology
    products for Customer Premises Equipment (CPE) modem
    products, the Company committed to an exit plan in Zaventem
    (Belgium) and recorded in 2005 $4 million of workforce
    termination benefits. No additional cost was incurred for these
    restructuring initiatives in 2006.                                                                                   
|
| |  | In order to streamline its research and development sites, the
    Company decided to cease its activities in two locations,
    Karlsruhe (Germany) and Malvern (USA). The Company incurred in
    2005 $1 million restructuring charges corresponding to
    employee termination costs and of $1 million of unused
    lease charges related to the closure of these two sites. These
    restructuring initiatives were completed in 2005.
|
| |  | In addition, charges totaling $2 million were paid in 2005
    by the Company for voluntary termination benefits for certain
    employees. The Company also incurred a $2 million charge in
    2005 related to additional restructuring initiatives, mainly in
    the United States and Mexico. No additional cost was incurred in
    2006.                                                                                               
|
| |  | The Company defined in 2005 a plan of reorganization and
    optimization of its activities. This plan focuses on workforce
    reduction, mainly in Europe, but will, whenever possible,
    encourage voluntary                                                                                                                                                                                                                             

F-42



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)




| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | redundancy such as early retirement measures and other special
    termination arrangements with the employees. The plan also
    includes the non-renewal of some temporary positions. For the
    year ended December 31, 2006 the Company recorded a total
    restructuring charge for its latest restructuring plan amounting
    to $44 million, of which $37 million corresponded to
    workforce reduction initiatives in Europe and $7 million
    were related to reorganization actions aiming at optimizing the
    Companys EWS activities. In 2005, the Company recorded a
    total restructuring charge amounting to $38 million related
    to termination incentives for two of the Companys
    subsidiaries in Europe, who accepted special termination
    arrangements.















20  INTEREST INCOME (EXPENSE), NET




|        |  |              |     |   |              |  |     |              |  |  |     |  
|------- |  | ------------ | --- | - | ------------ |  | --- | ------------ |  |  | --- | -
|        |  | Year ended   |     |   | Year ended   |  |     | Year ended   | 
|        |  | December 31, |     |   | December 31, |  |     | December 31, | 
|        |  | 2006         |     |   | 2005         |  |     | 2004         | 
|        |  |              |     |   |              |  |     |              | 
|Income  |  |              | 143 |   |              |  | 53  |              |  |  | 41  |  
|Expense |  |              | (50 | ) |              |  | (19 | )            |  |  | (44 | )
|        |  |              |     |   |              |  |     |              | 
|Total   |  |              | 93  |   |              |  | 34  |              |  |  | (3  | )
|        |  |              |     |   |              |  |     |              | 



21  LOSS ON EXTINGUISHMENT OF CONVERTIBLE DEBT




F-43



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)


22  INCOME TAX




|                                          |  |              |     |   |              |  |     |              |  |  |     | 
|----------------------------------------- |  | ------------ | --- | - | ------------ |  | --- | ------------ |  |  | --- | 
|                                          |  | Year ended   |     |   | Year ended   |  |     | Year ended   | 
|                                          |  | December 31, |     |   | December 31, |  |     | December 31, | 
|                                          |  | 2006         |     |   | 2005         |  |     | 2004         | 
|                                          |  |              |     |   |              |  |     |              | 
|Income (loss) recorded in The Netherlands |  |              | (12 | ) |              |  | (60 | )            |  |  | 12  | 
|Income from foreign operations            |  |              | 776 |   |              |  | 335 |              |  |  | 660 | 
|                                          |  |              |     |   |              |  |     |              | 
|Income before income tax expense          |  |              | 764 |   |              |  | 275 |              |  |  | 672 | 
|                                          |  |              |     |   |              |  |     |              | 





|                                |  |              |     |   |              |  |     |              |  |  |     |  
|------------------------------- |  | ------------ | --- | - | ------------ |  | --- | ------------ |  |  | --- | -
|                                |  | Year ended   |     |   | Year ended   |  |     | Year ended   | 
|                                |  | December 31, |     |   | December 31, |  |     | December 31, | 
|                                |  | 2006         |     |   | 2005         |  |     | 2004         | 
|                                |  |              |     |   |              |  |     |              | 
|The Netherlands taxes  current |  |              | (7  | ) |              |  | (6  | )            |  |  | (6  | )
|Foreign taxes  current         |  |              | (47 | ) |              |  | (33 | )            |  |  | (52 | )
|                                |  |              |     |   |              |  |     |              | 
|Current taxes                   |  |              | (54 | ) |              |  | (39 | )            |  |  | (58 | )
|Foreign deferred taxes          |  |              | 74  |   |              |  | 31  |              |  |  | (10 | )
|                                |  |              |     |   |              |  |     |              | 
|Income tax benefit (expense)    |  |              | 20  |   |              |  | (8  | )            |  |  | (68 | )
|                                |  |              |     |   |              |  |     |              | 



|                                                   |  |              |      |   |              |  |     |              |  |  |      |  
|-------------------------------------------------- |  | ------------ | ---- | - | ------------ |  | --- | ------------ |  |  | ---- | -
|                                                   |  | Year ended   |      |   | Year ended   |  |     | Year ended   | 
|                                                   |  | December 31, |      |   | December 31, |  |     | December 31, | 
|                                                   |  | 2006         |      |   | 2005         |  |     | 2004         | 
|                                                   |  |              |      |   |              |  |     |              | 
|Income tax expense computed at statutory rate      |  |              | (226 | ) |              |  | (95 | )            |  |  | (232 | )
|Permanent and other differences                    |  |              | (27  | ) |              |  | (26 | )            |  |  | (11  | )
|Valuation allowance adjustments                    |  |              | (8   | ) |              |  |    |              |  |  |     |  
|Impact of prior years adjustments                  |  |              | 63   |   |              |  | 28  |              |  |  | 3    |  
|Effects of change in enacted tax on deferred taxes |  |              |     |   |              |  |    |              |  |  | 18   |  
|Current year credits                               |  |              | 49   |   |              |  | 20  |              |  |  | 28   |  
|Other tax and credits                              |  |              | (1   | ) |              |  | (2  | )            |  |  | (3   | )
|Benefits from tax holidays                         |  |              | 134  |   |              |  | 48  |              |  |  | 77   |  
|Earnings of subsidiaries taxed at different rates  |  |              | 36   |   |              |  | 19  |              |  |  | 52   |  
|                                                   |  |              |      |   |              |  |     |              | 
|Income tax benefit (expense)                       |  |              | 20   |   |              |  | (8  | )            |  |  | (68  | )
|                                                   |  |              |      |   |              |  |     |              | 





F-44



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)




|                                                   |  |              |        |   |              |  |       |  
|-------------------------------------------------- |  | ------------ | ------ | - | ------------ |  | ----- | -
|                                                   |  | December 31, |        |   | December 31, | 
|                                                   |  | 2006         |        |   | 2005         | 
|                                                   |  |              |        |   |              | 
|Tax loss carryforwards and investment credits      |  |              | 159    |   |              |  | 150   |  
|Inventory valuation                                |  |              | 25     |   |              |  | 28    |  
|Impairment and restructuring charges               |  |              | 18     |   |              |  | 24    |  
|Fixed asset depreciation in arrears                |  |              | 81     |   |              |  | 73    |  
|Receivables for government funding                 |  |              | 116    |   |              |  | 66    |  
|Tax allowances granted on past capital investments |  |              | 975    |   |              |  | 761   |  
|Pension service costs                              |  |              | 29     |   |              |  | 13    |  
|Commercial accruals                                |  |              | 11     |   |              |  | 11    |  
|Other temporary differences                        |  |              | 52     |   |              |  | 45    |  
|                                                   |  |              |        |   |              | 
|Total deferred tax assets                          |  |              | 1,466  |   |              |  | 1,171 |  
|Valuation allowances                               |  |              | (1,039 | ) |              |  | (854  | )
|                                                   |  |              |        |   |              | 
|Deferred tax assets, net                           |  |              | 427    |   |              |  | 317   |  
|                                                   |  |              |        |   |              | 
|Accelerated fixed asset depreciation               |  |              | (118   | ) |              |  | (116  | )
|Acquired intangible assets                         |  |              | (8     | ) |              |  | (7    | )
|Advances of government funding                     |  |              | (25    | ) |              |  | (31   | )
|Other temporary differences                        |  |              | (30    | ) |              |  | (18   | )
|                                                   |  |              |        |   |              | 
|Deferred tax liabilities                           |  |              | (181   | ) |              |  | (172  | )
|                                                   |  |              |        |   |              | 
|Net deferred income tax asset                      |  |              | 246    |   |              |  | 145   |  
|                                                   |  |              |        |   |              | 



|           |  |  |     | 
|---------- |  |  | --- | 
|Year       |  | 
|           |  | 
|2007       |  |  | 50  | 
|2008       |  |  | 3   | 
|2009       |  |  |    | 
|2010       |  |  |    | 
|Thereafter |  |  | 106 | 
|           |  |  |    
|Total      |  |  | 159 | 
|           |  |  |    







F-45



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)


23  COMMITMENTS




|                       |                                          |       |       |     |      |   |       |      |  |   |      |    |  |      |    |    |      |   |    |            |  |   |    |  |  |   |     |  | 
|---------------------- | ---------------------------------------- | ----- | ----- | --- | ---- | - | ----- | ---- |  | - | ---- | -- |  | ---- | -- | -- | ---- | - | -- | ---------- |  | - | -- |  |  | - | --- |  | 
|                       |                                          | Total |       |     | 2007 |   |       | 2008 |  |   | 2009 |    |  | 2010 |    |    | 2011 |   |    | Thereafter | 
|                       |                                          |       |       |     |      |   |       |      |  |   |      |    |  |      |    |    |      |   |    |            | 
|Operating leases       |                                          | $     | 304   |     |      | $ | 54    |      |  | $ | 44   |    |  | $    | 40 |    |      | $ | 31 |            |  | $ | 28 |  |  | $ | 107 | 
|Purchase obligations   |                                          |       | 1,052 |     |      |   | 959   |      |  |   | 68   |    |  |      | 25 |    |      |   |    |            |  |   |    |  |  |   |     | 
|Of which:              |                                          |       |       |     |      |   |       |      |  |   |      |    |  |      |    |    |      |   |    |            |  |   |    |  |  |   |     | 
|                       | Equipment purchase                       |       |       | 467 |      |   |       | 467  |  |   |      |    |  |      |    |    |      |   |    |            |  |   |    |  |  |   |     |  | 
|                       | Foundry purchase                         |       |       | 373 |      |   |       | 373  |  |   |      |    |  |      |    |    |      |   |    |            |  |   |    |  |  |   |     |  | 
|                       | Software, technology licenses and design |       |       | 212 |      |   |       | 119  |  |   |      | 68 |  |      |    | 25 |      |   |    |            |  |   |    |  |  |   |     |  | 
|Hynix ST Joint Venture |                                          |       | 32    |     |      |   | 32    |      |  |   |      |    |  |      |    |    |      |   |    |            |  |   |    |  |  |   |     | 
|Other obligations      |                                          |       | 110   |     |      |   | 67    |      |  |   | 23   |    |  |      | 11 |    |      |   | 5  |            |  |   | 1  |  |  |   | 3   | 
|                       |                                          |       |       |     |      |   |       |      |  |   |      |    |  |      |    |    |      |   |    |            | 
|Total                  |                                          | $     | 1,498 |     |      | $ | 1,112 |      |  | $ | 135  |    |  | $    | 76 |    |      | $ | 36 |            |  | $ | 29 |  |  | $ | 110 | 
|                       |                                          |       |       |     |      |   |       |      |  |   |      |    |  |      |    |    |      |   |    |            | 



joint-venture front-end memory-manufacturing deal-related




Other commitments




24  CONTINGENCIES






25  CLAIMS AND LEGAL PROCEEDINGS




F-46



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)




third-party






26  FINANCIAL INSTRUMENTS AND RISK MANAGEMENT




26.1  Foreign Currency Risk




Foreign
Currency Forward Contracts Not Designated as a Hedge










F-47



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)


Derivative
Instruments Designated as a Hedge












26.2  Interest rate risk






26.3  Concentration of credit risk




A-from


F-48



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)






26.4  Fair value of financial instruments




|                                                          |  |          |     |  |            |  |       |          |  |  |            |  |  |  |       | 
|--------------------------------------------------------- |  | -------- | --- |  | ---------- |  | ----- | -------- |  |  | ---------- |  |  |  | ----- | 
|                                                          |  | 2006     |     |  | 2005       | 
|                                                          |  |          |     |  |            | 
|                                                          |  | Carrying |     |  | Estimated  |  |       | Carrying |  |  | Estimated  | 
|                                                          |  | Amount   |     |  | Fair Value |  |       | Amount   |  |  | Fair Value | 
|                                                          |  |          |     |  |            |  |       |          |  |  |            | 
|Long-term debt                                            |  |          |     |  |            |  |       |          |  |  |            |  |  |  |       | 
| Bank loans (including current portion)                  |  |          | 478 |  |            |  | 466   |          |  |  | 412        |  |  |  | 400   | 
| Senior Bonds                                            |  |          | 659 |  |            |  | 655   |          |  |  |           |  |  |  |      | 
| Convertible debt                                        |  |          | 993 |  |            |  | 1,010 |          |  |  | 1,379      |  |  |  | 1,342 | 
|Other receivables and assets                              |  |          |     |  |            |  |       |          |  |  |            |  |  |  |       | 
| Foreign exchange forward contracts and currency options |  |          | 14  |  |            |  | 14    |          |  |  | 3          |  |  |  | 3     | 
|Other investments and other non-current assets            |  |          |     |  |            |  |       |          |  |  |            |  |  |  |       | 
| Cancellable swaps designated as fair value hedge        |  |          | 4   |  |            |  | 4     |          |  |  |           |  |  |  |      | 
|Other payables and accrued liabilities                    |  |          |     |  |            |  |       |          |  |  |            |  |  |  |       | 
| Foreign exchange forward contracts and currency options |  |          | 1   |  |            |  | 1     |          |  |  | 31         |  |  |  | 31    | 



Cash and cash equivalents, accounts receivable, bank
overdrafts, short-term borrowings, accounts payable




Long-term debt and current portion of long-term debt


long-term borrowing-by-borrowing


Foreign exchange forward contracts and currency options




F-49



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)


Cancellable swaps




27  RELATED PARTY TRANSACTIONS




|                                  |  |              |     |   |              |  |     |              |  |  |     |  
|--------------------------------- |  | ------------ | --- | - | ------------ |  | --- | ------------ |  |  | --- | -
|                                  |  | December 31, |     |   | December 31, |  |     | December 31, | 
|                                  |  | 2006         |     |   | 2005         |  |     | 2004         | 
|                                  |  |              |     |   |              |  |     |              | 
|Sales & other services            |  |              | 118 |   |              |  | 158 |              |  |  | 9   |  
|Research and development expenses |  |              | (43 | ) |              |  | (48 | )            |  |  | (46 | )
|Other purchases                   |  |              | (70 | ) |              |  | (16 | )            |  |  | (23 | )
|Other income and expenses         |  |              | (21 | ) |              |  | (12 | )            |  |  | (25 | )
|Accounts receivable               |  |              | 20  |   |              |  | 29  |              |  |  | 6   |  
|Accounts payable                  |  |              | 20  |   |              |  | 12  |              |  |  | 18  |  
|Other assets                      |  |              |    |   |              |  | 11  |              |  |  | 2   |  









28  SEGMENT INFORMATION








F-50



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)






| |   |                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Application Specific Product Groups (ASG) segment,
    comprised of three product lines  Home, Personal and
    Communication (HPC), Computer Peripherals
    (CPG) and new Automotive Product (APG);



| |   |                                           
| | - | ------------------------------------------
| |  | Memory Products Group (MPG) segment; and
|
| |  | Micro, Power and Analog (MPA) segment.  





Disclosures about Segments of an Enterprise and
Related Information




Net revenues by product group


|                                    |  |              |       |  |              |  |       |              |  |  |       | 
|----------------------------------- |  | ------------ | ----- |  | ------------ |  | ----- | ------------ |  |  | ----- | 
|                                    |  | December 31, |       |  | December 31, |  |       | December 31, | 
|                                    |  | 2006         |       |  | 2005         |  |       | 2004         | 
|                                    |  |              |       |  |              |  |       |              | 
|Application Specific Product Groups |  |              | 5,396 |  |              |  | 4,991 |              |  |  | 4,902 | 
|Memory Products Group               |  |              | 2,137 |  |              |  | 1,948 |              |  |  | 1,887 | 
|Micro, Power and Analog             |  |              | 2,243 |  |              |  | 1,882 |              |  |  | 1,902 | 
|Others(1)                           |  |              | 78    |  |              |  | 61    |              |  |  | 69    | 
|                                    |  |              |       |  |              |  |       |              | 
|Total consolidated net revenues     |  |              | 9,854 |  |              |  | 8,882 |              |  |  | 8,760 | 
|                                    |  |              |       |  |              |  |       |              | 






|    |                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------
|(1) | Includes revenues from sales of subsystems mainly and other
    products not allocated to product groups.

F-51



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)


Operating Income by product group


|                                         |  |              |      |   |              |  |      |              |  |  |      |  
|---------------------------------------- |  | ------------ | ---- | - | ------------ |  | ---- | ------------ |  |  | ---- | -
|                                         |  | December 31, |      |   | December 31, |  |      | December 31, | 
|                                         |  | 2006         |      |   | 2005         |  |      | 2004         | 
|                                         |  |              |      |   |              |  |      |              | 
|Application Specific Product Groups      |  |              | 439  |   |              |  | 355  |              |  |  | 530  |  
|Memory Products Group                    |  |              | 34   |   |              |  | (118 | )            |  |  | 42   |  
|Micro, Power and Analog                  |  |              | 362  |   |              |  | 271  |              |  |  | 413  |  
|                                         |  |              |      |   |              |  |      |              | 
|Total operating income of product groups |  |              | 835  |   |              |  | 508  |              |  |  | 985  |  
|Others(1)                                |  |              | (158 | ) |              |  | (264 | )            |  |  | (302 | )
|                                         |  |              |      |   |              |  |      |              | 
|Total consolidated operating income      |  |              | 677  |   |              |  | 244  |              |  |  | 683  |  
|                                         |  |              |      |   |              |  |      |              | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Operating income (loss) of Others includes
    items such as impairment, restructuring charges and other
    related closure costs, start-up costs, and other unallocated
    expenses, such as: strategic or special research and development
    programs, certain corporate-level operating expenses, certain
    patent claims and litigations, and other costs that are not
    allocated to the product groups, as well as operating earnings
    or losses of the Subsystems and Other Products Group. Certain
    costs, mainly R&D, formerly in the Others
    category, are now being allocated to the groups; comparable
    amounts reported in this category have been reclassified
    accordingly in the above table.



|                                                       |  |              |      |   |              |  |      |              |  |  |      |  
|------------------------------------------------------ |  | ------------ | ---- | - | ------------ |  | ---- | ------------ |  |  | ---- | -
|                                                       |  | December 31, |      |   | December 31, |  |      | December 31, | 
|                                                       |  | 2006         |      |   | 2005         |  |      | 2004         | 
|                                                       |  |              |      |   |              |  |      |              | 
|Total operating income of product groups               |  |              | 835  |   |              |  | 508  |              |  |  | 985  |  
|                                                       |  |              |      |   |              |  |      |              | 
|Strategic R&D and other R&D programs                   |  |              | (8   | ) |              |  | (49  | )            |  |  | (91  | )
|Start-up costs                                         |  |              | (57  | ) |              |  | (56  | )            |  |  | (63  | )
|Impairment & restructuring charges                     |  |              | (77  | ) |              |  | (128 | )            |  |  | (76  | )
|Subsystems and Other Products Group                    |  |              | (9   | ) |              |  | 1    |              |  |  | (1   | )
|One-time compensation and special
    contributions(1) |  |              |     |   |              |  | (22  | )            |  |  |     |  
|Patents claim costs                                    |  |              |     |   |              |  |     |              |  |  | (4   | )
|Other non-allocated
    provisions(2)                  |  |              | (7   | ) |              |  | (10  | )            |  |  | (67  | )
|                                                       |  |              |      |   |              |  |      |              | 
|Total operating loss
    Others(3)                     |  |              | (158 | ) |              |  | (264 | )            |  |  | (302 | )
|Total consolidated operating income                    |  |              | 677  |   |              |  | 244  |              |  |  | 683  |  
|                                                       |  |              |      |   |              |  |      |              | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | One-time compensation and special contributions to the
    Companys former CEO and other executives were not
    allocated to product groups.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(2) | Includes unallocated expenses such as certain corporate level
    operating expenses and other costs. .                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(3) | Operating income (loss) of Others includes
    items such as impairment, restructuring charges and other
    related closure costs, start-up costs, and other unallocated
    expenses, such as: strategic or special research and development
    programs, certain corporate-level operating expenses, certain
    patent claims and litigations, and other costs that are not
    allocated to the product groups, as well as operating earnings
    or losses of the Subsystems and Other Products Group. Certain
    costs, mainly R&D, formerly in the Others
    category, have been allocated to the groups since 2005;
    comparable amounts reported in this category have been
    reclassified accordingly in the above table.



F-52



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in millions of U.S. dollars, except per share amounts)


Net revenues


|                |  |              |       |  |              |  |       |              |  |  |       | 
|--------------- |  | ------------ | ----- |  | ------------ |  | ----- | ------------ |  |  | ----- | 
|                |  | December 31, |       |  | December 31, |  |       | December 31, | 
|                |  | 2006         |       |  | 2005         |  |       | 2004         | 
|                |  |              |       |  |              |  |       |              | 
|The Netherlands |  |              | 3,114 |  |              |  | 2,864 |              |  |  | 2,702 | 
|France          |  |              | 240   |  |              |  | 268   |              |  |  | 359   | 
|Italy           |  |              | 230   |  |              |  | 203   |              |  |  | 254   | 
|USA             |  |              | 1,030 |  |              |  | 1,066 |              |  |  | 1,262 | 
|Singapore       |  |              | 4,698 |  |              |  | 4,041 |              |  |  | 3,671 | 
|Japan           |  |              | 400   |  |              |  | 306   |              |  |  | 403   | 
|Other countries |  |              | 142   |  |              |  | 134   |              |  |  | 109   | 
|                |  |              |       |  |              |  |       |              | 
|Total           |  |              | 9,854 |  |              |  | 8,882 |              |  |  | 8,760 | 
|                |  |              |       |  |              |  |       |              | 

Long-lived assets


|                         |  |              |       |  |              |  |       |              |  |  |       | 
|------------------------ |  | ------------ | ----- |  | ------------ |  | ----- | ------------ |  |  | ----- | 
|                         |  | December 31, |       |  | December 31, |  |       | December 31, | 
|                         |  | 2006         |       |  | 2005         |  |       | 2004         | 
|                         |  |              |       |  |              |  |       |              | 
|The Netherlands          |  |              | 318   |  |              |  | 333   |              |  |  | 438   | 
|France                   |  |              | 1,781 |  |              |  | 1,618 |              |  |  | 2,206 | 
|Italy                    |  |              | 1,745 |  |              |  | 1,698 |              |  |  | 2,216 | 
|Other European countries |  |              | 204   |  |              |  | 176   |              |  |  | 209   | 
|USA                      |  |              | 470   |  |              |  | 458   |              |  |  | 414   | 
|Singapore                |  |              | 1,642 |  |              |  | 1,684 |              |  |  | 1,828 | 
|Malaysia                 |  |              | 356   |  |              |  | 321   |              |  |  | 367   | 
|Other countries          |  |              | 344   |  |              |  | 332   |              |  |  | 319   | 
|                         |  |              |       |  |              |  |       |              | 
|Total                    |  |              | 6,860 |  |              |  | 6,620 |              |  |  | 7,997 | 
|                         |  |              |       |  |              |  |       |              | 

29  SUBSEQUENT EVENTS




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STMicroelectronics N.V.





VALUATION AND QUALIFYING ACCOUNTS


(Currency  millions of U.S. dollars)


|                    |  |              |     |  |             |  |      |                  |  |  |            |  |                   |        |     |   |  |  |       | 
|------------------- |  | ------------ | --- |  | ----------- |  | ---- | ---------------- |  |  | ---------- |  | ----------------- | ------ | --- | - |  |  | ----- | 
|Valuation and       |  |              |     |  |             |  |      |                  |  | 
|Qualifying Accounts |  |              |     |  |             |  |      |                  |  | 
|Deducted from the   |  | Balance at   |     |  |             |  |      |                  |  |  |           
|Related Asset       |  | Beginning of |     |  | Translation |  |      | Charged to Costs |  |  |            |  | Balance at End of |       
|Accounts            |  | Period       |     |  | Adjustment  |  |      | and Expenses     |  |  | Deductions |  |                   | Period |    
|                    |  |              |     |  |             |  |      |                  |  |  |            |  |                   |        |    
|2006                |  |              |     |  |             |  |      |                  |  |  |            |  |                   |        |     |   |  |  |       | 
|Inventories         |  |              | 51  |  |             |  |     |                  |  |  | 78         |  |                   |        | (82 | ) |  |  | 47    | 
|Accounts Receivable |  |              | 27  |  |             |  | 1    |                  |  |  | 7          |  |                   |        | (4  | ) |  |  | 31    | 
|Deferred Tax Assets |  |              | 854 |  |             |  | 101  |                  |  |  | 135        |  |                   |        | (51 | ) |  |  | 1,039 | 
|2005                |  |              |     |  |             |  |      |                  |  |  |            |  |                   |        |     |   |  |  |       | 
|Inventories         |  |              | 47  |  |             |  |     |                  |  |  | 73         |  |                   |        | (69 | ) |  |  | 51    | 
|Accounts Receivable |  |              | 21  |  |             |  | (1   | )                |  |  | 10         |  |                   |        | (3  | ) |  |  | 27    | 
|Deferred Tax Assets |  |              | 855 |  |             |  | (110 | )                |  |  | 109        |  |                   |        |    |   |  |  | 854   | 
|2004                |  |              |     |  |             |  |      |                  |  |  |            |  |                   |        |     |   |  |  |       | 
|Inventories         |  |              | 30  |  |             |  |     |                  |  |  | 85         |  |                   |        | (68 | ) |  |  | 47    | 
|Accounts Receivable |  |              | 16  |  |             |  | 1    |                  |  |  | 6          |  |                   |        | (2  | ) |  |  | 21    | 
|Deferred Tax Assets |  |              | 709 |  |             |  | 62   |                  |  |  | 84         |  |                   |        |    |   |  |  | 855   | 

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