##### Table of Contents



As filed with the Securities and Exchange Commission on
March 3, 2006








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, 2005                                                       
|  
|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(Translation of registrants
    name into English) |  | The Netherlands(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




894,424,279 common shares at December 31, 2005




þ o




o þ




þ o


12b-2


o o þ




o þ


12b-2


o þ










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##### 










TABLE OF CONTENTS


|                                                    |           |  |                                                                                  |      |  |     | 
|--------------------------------------------------- | --------- |  | -------------------------------------------------------------------------------- | ---- |  | --- | 
|                                                    |           |  |                                                                                  | Page
|                                                    |           |  |                                                                                  |     
|PRESENTATION OF FINANCIAL AND OTHER
    INFORMATION |           |  | 3                                                                                |     
|PART I                                              |           |  | 5                                                                                |     
|                                                    | Item 1.   |  | Identity of Directors,
    Senior Management and Advisers                        |      |  | 5   | 
|                                                    | Item 2.   |  | Offer Statistics and
    Expected Timetable                                      |      |  | 5   | 
|                                                    | Item 3.   |  | Key Information                                                                  |      |  | 5   | 
|                                                    | Item 4.   |  | Information on the
    Company                                                   |      |  | 22  | 
|                                                    | Item 5.   |  | Operating and Financial
    Review and Prospects                                 |      |  | 51  | 
|                                                    | Item 6.   |  | Directors, Senior
    Management and Employees                                   |      |  | 87  | 
|                                                    | Item 7.   |  | Major Shareholders and
    Related-Party Transactions                            |      |  | 109 | 
|                                                    | Item 8.   |  | Financial Information                                                            |      |  | 116 | 
|                                                    | Item 9.   |  | Listing                                                                          |      |  | 120 | 
|                                                    | Item 10.  |  | Additional Information                                                           |      |  | 126 | 
|                                                    | Item 11.  |  | Quantitative and
    Qualitative Disclosures About Market Risk                   |      |  | 143 | 
|                                                    | Item 12.  |  | Description of Securities
    Other Than Equity Securities                       |      |  | 145 | 
|PART II                                             |           |  | 146                                                                              |     
|                                                    | Item 13.  |  | Defaults, Dividend
    Arrearages and Delinquencies                              |      |  | 146 | 
|                                                    | Item 14.  |  | Material Modifications to
    the Rights of Security Holders and Use of Proceeds |      |  | 146 | 
|                                                    | Item 15.  |  | Controls and Procedures                                                          |      |  | 146 | 
|                                                    | Item 16A. |  | Audit Committee Financial
    Expert                                             |      |  | 146 | 
|                                                    | Item 16B. |  | Code of Ethics                                                                   |      |  | 146 | 
|                                                    | Item 16C. |  | Principal Accountant Fees
    and Services                                       |      |  | 146 | 
|                                                    | Item 16D. |  | Exemptions from the
    Listing Standards for Audit Committees                   |      |  | 147 | 
|                                                    | Item 16E. |  | Purchases of Equity
    Securities by the Issuer and Affiliated Purchasers       |      |  | 148 | 
|PART III                                            |           |  | 149                                                                              |     
|                                                    | Item 17.  |  | Financial Statements                                                             |      |  | 149 | 
|                                                    | Item 18.  |  | Financial Statements                                                             |      |  | 149 | 
|                                                    | Item 19.  |  | Exhibits                                                                         |      |  | 149 | 
|SIGNATURES                                          |           |  | 152                                                                              |     
|EX-1                                               
|EX-8.1                                             
|EX-12.1                                            
|EX-12.2                                            
|EX-13.1                                            
|EX-14.A                                            



2



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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;                                                                                                                                                                                                                                                                                                                  
|
| |  | the financial impact of inadequate 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 be successful in our strategic research and
    development initiatives to develop new products to meet
    anticipated market demand, as well as our ability to achieve our
    corporate performance roadmap by completing successfully and in
    a timely manner our other various announced initiatives to
    improve our overall efficiency and our financial performance;
|
| |  | the anticipated benefits of research and development alliances
    and cooperative activities and the continued pursuit of our
    various alliances, in the field of development of new advanced
    technologies or products;                                                                                                                                                                 
|
| |  | the ability of our suppliers to meet our demands for products
    and to offer competitive pricing;                                                                                                                                                                                                                                                                                             
|
| |  | changes in the economic, social or political environment, as
    well as natural events such as severe weather, health risks,
    epidemics or earthquakes in the countries in which we and our
    key customers operate;                                                                                                                                                                      
|
| |  | changes in our overall tax position as a result of changes in
    tax laws or the outcome of tax audits;                                                                                                                                                                                                                                                                                        

3



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##### Table of Contents





| |   |                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | product liability or warranty claims for a product containing
    one of our parts; and                                                                       
|
| |  | our ability to obtain required licenses on third-party
    intellectual property, the outcome of litigation and the results
    of actions by our competitors.

20-F 20-F




4



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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,                       |       
|                                                                  |                                                                   |                                               |       
|                                                                  |                                                                   | 2005(1)                                       |        |        | 2004(1) |   |        | 2003(1) |   |   | 2002(1) |        |   | 2001(1) |       
|                                                                  |                                                                   |                                               |        |        |         |   |        |         |   |   |         |        |   |         |       
|                                                                  |                                                                   | (In millions except per share and ratio data) |       
|Consolidated Statement of Income Data:                            |                                                                   |                                               |        |        |         |   |        |         |   |   |         |        |   |         |        |        |   |   |        |     
|Net sales                                                         |                                                                   | $                                             | 8,876  |        |         | $ | 8,756  |         |   | $ | 7,234   |        |   | $       | 6,270  |        |   | $ | 6,304  |     
|Other revenues                                                    |                                                                   |                                               | 6      |        |         |   | 4      |         |   |   | 4       |        |   |         | 48     |        |   |   | 53     |     
|                                                                  |                                                                   |                                               |        |        |         |   |        |         |   |   |         |        |   |         |       
|Net revenues                                                      |                                                                   |                                               | 8,882  |        |         |   | 8,760  |         |   |   | 7,238   |        |   |         | 6,318  |        |   |   | 6,357  |     
|Cost of sales                                                     |                                                                   |                                               | (5,845 | )      |         |   | (5,532 | )       |   |   | (4,672  | )      |   |         | (4,020 | )      |   |   | (4,047 | )   
|                                                                  |                                                                   |                                               |        |        |         |   |        |         |   |   |         |        |   |         |       
|Gross profit                                                      |                                                                   |                                               | 3,037  |        |         |   | 3,228  |         |   |   | 2,566   |        |   |         | 2,298  |        |   |   | 2,310  |     
|Operating expenses:                                               |                                                                   |                                               |        |        |         |   |        |         |   |   |         |        |   |         |        |        |   |   |        |     
|                                                                  | Selling, general and administrative                               |                                               |        | (1,026 | )       |   |        | (947    | ) |   |         | (785   | ) |         |        | (648   | ) |   |        | (641 | )
|                                                                  | Research and development(2)                                       |                                               |        | (1,630 | )       |   |        | (1,532  | ) |   |         | (1,238 | ) |         |        | (1,022 | ) |   |        | (978 | )
|                                                                  | Other income and expenses, net(2)                                 |                                               |        | (9     | )       |   |        | 10      |   |   |         | (4     | ) |         |        | 7      |   |   |        | (6   | )
|                                                                  | Impairment, restructuring charges and other related closure costs |                                               |        | (128   | )       |   |        | (76     | ) |   |         | (205   | ) |         |        | (34    | ) |   |        | (346 | )
|                                                                  |                                                                   |                                               |        |        |         |   |        |         |   |   |         |        |   |         |       
|Total operating expenses                                          |                                                                   |                                               | (2,793 | )      |         |   | (2,545 | )       |   |   | (2,232  | )      |   |         | (1,697 | )      |   |   | (1,971 | )   
|Operating income                                                  |                                                                   |                                               | 244    |        |         |   | 683    |         |   |   | 334     |        |   |         | 601    |        |   |   | 339    |     
|Interest income (expense), net                                    |                                                                   |                                               | 34     |        |         |   | (3     | )       |   |   | (52     | )      |   |         | (68    | )      |   |   | (13    | )   
|Loss on equity investments                                        |                                                                   |                                               | (3     | )      |         |   | (4     | )       |   |   | (1      | )      |   |         | (11    | )      |   |   | (5     | )   
|Loss on extinguishment of convertible debt                        |                                                                   |                                               |       |        |         |   | (4     | )       |   |   | (39     | )      |   |         |       |        |   |   |       |     
|Income before income taxes and minority interests                 |                                                                   |                                               | 275    |        |         |   | 672    |         |   |   | 242     |        |   |         | 522    |        |   |   | 321    |     
|Income tax benefit (expense)                                      |                                                                   |                                               | (8     | )      |         |   | (68    | )       |   |   | 14      |        |   |         | (89    | )      |   |   | (61    | )   
|                                                                  |                                                                   |                                               |        |        |         |   |        |         |   |   |         |        |   |         |       
|Income before minority interests                                  |                                                                   |                                               | 267    |        |         |   | 604    |         |   |   | 256     |        |   |         | 433    |        |   |   | 260    |     
|Minority interests                                                |                                                                   |                                               | (1     | )      |         |   | (3     | )       |   |   | (3      | )      |   |         | (4     | )      |   |   | (3     | )   
|                                                                  |                                                                   |                                               |        |        |         |   |        |         |   |   |         |        |   |         |       
|Net income                                                        |                                                                   | $                                             | 266    |        |         | $ | 601    |         |   | $ | 253     |        |   | $       | 429    |        |   | $ | 257    |     
|                                                                  |                                                                   |                                               |        |        |         |   |        |         |   |   |         |        |   |         |       
|Earnings per share (basic)                                        |                                                                   | $                                             | 0.30   |        |         | $ | 0.67   |         |   | $ | 0.29    |        |   | $       | 0.48   |        |   | $ | 0.29   |     
|Earnings per share (diluted)                                      |                                                                   | $                                             | 0.29   |        |         | $ | 0.65   |         |   | $ | 0.27    |        |   | $       | 0.48   |        |   | $ | 0.29   |     
|Number of shares used in calculating earnings per share (basic)   |                                                                   |                                               | 892.8  |        |         |   | 891.2  |         |   |   | 888.2   |        |   |         | 887.6  |        |   |   | 893.3  |     
|Number of shares used in calculating earnings per share (diluted) |                                                                   |                                               | 935.6  |        |         |   | 935.1  |         |   |   | 937.1   |        |   |         | 893.0  |        |   |   | 902.0  |     

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|                                                              |  |                                               |        |   |         |   |        |         |  |   |         |  |  |         |        |  |  |   |        | 
|------------------------------------------------------------- |  | --------------------------------------------- | ------ | - | ------- | - | ------ | ------- |  | - | ------- |  |  | ------- | ------ |  |  | - | ------ | 
|                                                              |  | Year Ended December 31,                       |       
|                                                              |  |                                               |       
|                                                              |  | 2005(1)                                       |        |   | 2004(1) |   |        | 2003(1) |  |   | 2002(1) |  |  | 2001(1) |       
|                                                              |  |                                               |        |   |         |   |        |         |  |   |         |  |  |         |       
|                                                              |  | (In millions except per share and ratio data) |       
|Consolidated Balance Sheet Data (end of period):              |  |                                               |        |   |         |   |        |         |  |   |         |  |  |         |        |  |  |   |        | 
|Cash and cash equivalents(1)                                  |  | $                                             | 2,027  |   |         | $ | 1,950  |         |  | $ | 2,998   |  |  | $       | 2,564  |  |  | $ | 2,444  | 
|Total assets                                                  |  |                                               | 12,439 |   |         |   | 13,800 |         |  |   | 13,477  |  |  |         | 12,004 |  |  |   | 10,798 | 
|Short-term debt (including current portion of long-term debt) |  |                                               | 1,533  |   |         |   | 191    |         |  |   | 151     |  |  |         | 165    |  |  |   | 130    | 
|Long-term debt (excluding current portion)(1)                 |  |                                               | 269    |   |         |   | 1,767  |         |  |   | 2,944   |  |  |         | 2,797  |  |  |   | 2,772  | 
|Shareholders equity(1)                                       |  |                                               | 8,480  |   |         |   | 9,110  |         |  |   | 8,100   |  |  |         | 6,994  |  |  |   | 6,075  | 
|Capital stock(3)                                              |  |                                               | 3,120  |   |         |   | 3,074  |         |  |   | 3,051   |  |  |         | 3,008  |  |  |   | 2,978  | 
|Other Data:                                                   |  |                                               |        |   |         |   |        |         |  |   |         |  |  |         |        |  |  |   |        | 
|Dividends per share                                           |  | $                                             | 0.12   |   |         | $ | 0.12   |         |  | $ | 0.08    |  |  | $       | 0.04   |  |  | $ | 0.04   | 
|Capital expenditures(4)                                       |  |                                               | 1,441  |   |         |   | 2,050  |         |  |   | 1,221   |  |  |         | 995    |  |  |   | 1,700  | 
|Net cash provided by operating activities                     |  |                                               | 1,798  |   |         |   | 2,342  |         |  |   | 1,920   |  |  |         | 1,713  |  |  |   | 2,057  | 
|Depreciation and amortization(4)                              |  |                                               | 1,944  |   |         |   | 1,837  |         |  |   | 1,608   |  |  |         | 1,382  |  |  |   | 1,320  | 
|Net debt (cash) to total shareholders equity ratio(5)        |  |                                               | (0.026 | ) |         |   | 0.001  |         |  |   | 0.012   |  |  |         | 0.057  |  |  |   | 0.075  | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | 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 August 2003, we issued $1,332 million
    principal amount at maturity of our 2013 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.
|   
|(2) | 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, the costs of certain activities relating to
    intellectual property and, for periods prior to 2002, goodwill
    amortization. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(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, this 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) 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 highly cyclical and periodic
    downturns in the semiconductor industry affect our business and
    results of operations.















| |                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.





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





In
many of the market segments in which we compete for business, we
depend on winning highly competitive selection processes to
design products and technologies for use in our customers
equipment and products, 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


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its product plans, which could cause us to generate no
sales from a product and materially adversely affect our results
of operations.








| |                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Semiconductor and other products we design and manufacture
    are characterized by rapidly changing technology, 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.





| |                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The competitive environment of the semiconductor industry
    may lead to conditions in which we may seek to acquire a
    competitor or become an acquisition target.



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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 in
    developing new process technologies in line with market
    requirements.







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





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



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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.







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| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may also need additional funding in the coming years to
    finance our investments, or 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;                                                                                                                
|
| |  | 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.                                    

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| |                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.              









| |                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



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





| |                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

just-in




| |                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



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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.

quarter-to




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





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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.





| |                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.





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| |                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are 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.







| |                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Certain accounting principles of U.S. GAAP are in
    flux and may lead to significant changes in the way we account
    for our convertible debt instruments. These changes may lead to
    significant changes in our financial statements.







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



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| |                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our common share price, operating results, net income, net
    income per share and net financial position may be negatively
    affected by potential acquisitions.







| |   |                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the diversion of managements attention;                                                                                                                                                                   
|
| |  | the integration of acquired company operations and personnel;                                                                                                                                              
|
| |  | the assumption of potential liabilities, disclosed or
    undisclosed, associated with the business acquired, which
    liabilities may exceed the amount of indemnification available
    from the seller;
|
| |  | the risk that the financial and accounting systems utilized by
    the business acquired will not meet our standards;                                                                                      
|
| |  | the risk 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;                                                                                                              
|
| |  | whether we are able to retain customers of the acquired
    entity; and                                                                                                                                    
|
| |  | the risk of goodwill and other intangible asset impairment, due
    to the inability of the business to meet managements
    expectations at the time of the acquisition.                                 





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





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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.



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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.







20



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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.



21



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|        |                           
|------- | --------------------------
|Item 4. | Information on the Company

History and Development of the Company






Business Overview










22



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System-on






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 products are
    comprised of the telecommunications and the audio divisions from
    the former Telecommunications, Peripherals and Automotive Groups
    combined with the consumer group from the former Consumer
    Microcontroller Groups. Our CPG products cover computer
    peripherals products, specifically disk drives and printers, and
    our APG products now comprise all of our major complex products
    related to automotive applications formerly within the
    automotive group of Telecommunications, Peripherals and
    Automotive Groups and in other product groups (notably from the
    former Discrete and Standard ICs Group and the Microcontroller
    Group);
|
| |  | the Memory Products Group (MPG) segment, comprised
    of our memories and Smart card businesses; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | the Micro, Linear and Discrete Product Group (MLD)
    segment, comprised of the greater part of our former Discrete
    and Standard ICs Group and our standard microcontroller and
    industrial devices (including the programmable systems memories
    (PSM) division previously forming part of MPG).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            





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Results of Operations




|                                                       |       |                                   |       |       |      |   |       |       |   |   |       |       |  
|------------------------------------------------------ | ----- | --------------------------------- | ----- | ----- | ---- | - | ----- | ----- | - | - | ----- | ----- | -
|                                                       |       | Year Ended December 31,           |      
|                                                       |       |                                   |      
|                                                       |       | 2005                              |       |       | 2004 |   |       | 2003  |  
|                                                       |       |                                   |       |       |      |   |       |       |  
|                                                       |       | (In millions, except percentages) |      
|Net Revenues by Product Segment                        |       |                                   |       |       |      |   |       |       |   |   |       |      
|Application Specific Product Group Segment (ASG)       |       | $                                 | 4,991 |       |      | $ | 4,902 |       |   | $ | 4,405 |      
|Memory Products Group Segment (MPG)                    |       |                                   | 1,948 |       |      |   | 1,887 |       |   |   | 1,294 |      
|Micro, Linear and Discrete Product Group Segment (MLD) |       |                                   | 1,882 |       |      |   | 1,902 |       |   |   | 1,469 |      
|Others(1)                                              |       |                                   | 61    |       |      |   | 69    |       |   |   | 70    |      
|                                                       |       |                                   |       |       |      |   |       |       |  
|                                                       | Total |                                   | $     | 8,882 |      |   | $     | 8,760 |   |   | $     | 7,238 |  
|                                                       |       |                                   |       |       |      |   |       |       |  
|Net Revenues by Location of Order Shipment(2)          |       |                                   |       |       |      |   |       |       |   |   |       |      
|Europe(3)                                              |       | $                                 | 2,789 |       |      | $ | 2,827 |       |   | $ | 2,306 |      
|North America                                          |       |                                   | 1,141 |       |      |   | 1,211 |       |   |   | 985   |      
|Asia Pacific                                           |       |                                   | 4,063 |       |      |   | 3,711 |       |   |   | 3,190 |      
|Japan                                                  |       |                                   | 307   |       |      |   | 403   |       |   |   | 337   |      
|Emerging Markets(3)(4)                                 |       |                                   | 582   |       |      |   | 608   |       |   |   | 420   |      
|                                                       |       |                                   |       |       |      |   |       |       |  
|                                                       | Total |                                   | $     | 8,882 |      |   | $     | 8,760 |   |   | $     | 7,238 |  
|                                                       |       |                                   |       |       |      |   |       |       |  
|Net Revenues by Product Segment                        |       |                                   |       |       |      |   |       |       |   |   |       |      
|Application Specific Product Group Segment (ASG)       |       |                                   | 56.2  | %     |      |   | 56.0  | %     |   |   | 60.9  | %    
|Memory Products Group Segment (MPG)                    |       |                                   | 21.9  |       |      |   | 21.5  |       |   |   | 17.9  |      
|Micro, Linear and Discrete Product Group Segment (MLD) |       |                                   | 21.2  |       |      |   | 21.7  |       |   |   | 20.3  |      
|Others(1)                                              |       |                                   | 0.7   |       |      |   | 0.8   |       |   |   | 0.9   |      
|                                                       |       |                                   |       |       |      |   |       |       |  
|                                                       | Total |                                   |       | 100.0 | %    |   |       | 100.0 | % |   |       | 100.0 | %
|                                                       |       |                                   |       |       |      |   |       |       |  
|Net Revenues by Location of Order Shipment(2)          |       |                                   |       |       |      |   |       |       |   |   |       |      
|Europe(3)                                              |       |                                   | 31.4  | %     |      |   | 32.3  | %     |   |   | 31.9  | %    
|North America                                          |       |                                   | 12.8  |       |      |   | 13.8  |       |   |   | 13.6  |      
|Asia Pacific                                           |       |                                   | 45.7  |       |      |   | 42.4  |       |   |   | 44.1  |      
|Japan                                                  |       |                                   | 3.5   |       |      |   | 4.6   |       |   |   | 4.6   |      
|Emerging Markets(3)(4)                                 |       |                                   | 6.6   |       |      |   | 6.9   |       |   |   | 5.8   |      
|                                                       |       |                                   |       |       |      |   |       |       |  
|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) | Emerging Markets in 2005 included markets such as India, Latin
    America, the Middle East and Africa, Europe (non-EU and
    non-EFTA) and Russia.                                                                                                                                                                                                                  

Strategy






| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the changing long-term structural growth of the overall market
    for semiconductor products;                                                                     
|
| |  | the strong development of new emerging applications in areas
    such as wireless communications, solid state storage, digital TV
    and video products and games;

24



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| |   |                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 for new
    system-level, turnkey solutions; and                                       
|
| |  | 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).



Broad, balanced market exposure.


Product strategy.


Alliances and customer base expansion. e-tools,


Global integrated manufacturing infrastructure. ramp-up


25



---



##### Table of Contents



Industry partnerships. state-of


Broad range of design and process technologies.


Integrated presence in key regional markets.


Product Quality Excellence.


Products and Technology




26



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##### Table of Contents







| |   |                                                  
| | - | -------------------------------------------------
| |  | Application Specific Product Group segment;      
|
| |  | Memory Products Group segment; and               
|
| |  | Micro, Linear and Discrete Product Group segment.



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
    function (CODEC) and radio frequency ICs. In
    February 2005, we decided to stop work on a reference design
    chipset for the GSM/ GPRS market. Research and development
    engineers dedicated to this program were redeployed to other
    wireless projects. We ship mobile phone energy-management
    devices in volume to two of the worlds top five OEMs. We
    are transitioning from ICs to modules in the field of radio
    frequency and energy management for 3G telephones, which results
    in a higher content of semiconductors expressed in
    U.S. dollars. In addition, we are currently developing ASIC
    solutions for use in 3G basebands for the OEM marketplace.
|
| | (b) Application Processor Division. We offer a
    family of products addressing the market for multimedia
    application processor chips, known as the Nomadik
    family of products. 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 phones for tier-one European and Asian customers for
    smart phones and feature phones.                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | (c) Imaging Division. Our Imaging Division focuses
    on the wireless handset image sensor market. We are in
    production of CMOS, camera modules and processors for video
    graphic arrays (VGA), 1 and 2 mega pixels. We have
    cumulatively shipped over 100 million CMOS camera phone
    solutions since entering this market in 2003. According to
    Prismark, we were the number one camera module manufacturer for
    2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | (d) Connectivity Division. To respond to the market
    need for increased functionality of handsets, we created the
    Connectivity Division to address wireless LAN, Bluetooth and
    connectivity requirements. Our product offerings include
    Wireless LAN and Bluetooth chips designed for low power
    consumption and a small form factor. We have multiple design
    wins and volume production for several customers in Asia and
    Europe for our bluetooth and wireless products. In particular,
    we have started to manufacture in volume our                                                                                                                                                                                                                                                                                                                                                                                               

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | single-chip STLC2500A Bluetooth IC for multiple cellular phones
    and our single-chip Enhanced-Data-Rate STLC2500C with V2.0
    capability has been adopted in more than 15 mobile-phone designs
    by several customers, including a tier-one cellphone
    manufacturer. Additionally, volume production has started on our
    compact STLC4370 IEEE802.11g wireless local area network
    (WLAN) module IC, which is being used in a new
    cellular phone from a tier-one manufacturer.

Home Entertainment Group. .




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) Home Video Division. This division aims at
    retail and satellite set-top box products and digital television
    offerings. We continued 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. We reinforced the
    market leadership of our 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 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.







ready-to




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) Cable and IP Division. We offer products
    designed specifically for the cable and IP set-top box markets
    that take advantage of our significant expertise, product
    know-how and years of experience in supplying operator supported
    video markets. Our latest products in standard definition and
    high definition are designed to serve the evolving requirements
    in the growing global cable segment and the emerging IP set-top
    box market and we have multiple design wins in these areas.
|
| | (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 that improve sound
    quality while reducing power consumption, size and cost aimed
    primarily at home, desktop and mobile applications.                                                                                

28



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##### Table of Contents



Communications Infrastructure and Displays
Group.




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) Wireless Infrastructure Division. We formed the
    Wireless Communications Infrastructure division to develop
    dedicated infrastructure chip solutions that will be focused on
    primarily the new third-generation telecom standards, but
    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.





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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. In January 2005, we announced that we
    would scale back our presence in the CPE ADSL modem market. This
    initiative resulted in an impairment charge of $61 million
    and was recorded in the first quarter of 2005.
|
| | (c) Display Division. We offer products for the
    monitor and television peripheral market, as well as plasma
    display drivers and small-scale displays. Our display drivers
    address a number of display solutions, including thin film
    transistors, liquid crystal displays and organic light emitting
    diodes.                                                                                                                                                                                                                    



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

Data Storage Division.




Printer Division.


Microfluidics Division. Lab-on




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



29



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##### Table of Contents



Powertrain and Safety Division.


Car Body Division.


Car, Radio and Multimedia Division.


Digital Broadcast Radio Division.




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







Wireless Flash Memories Division.




Standard Nonvolatile Memories Division.


30



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##### Table of Contents





Serial Nonvolatile Memories Division.


NAND Flash and Storage Media Division.


Smart card IC Division. pay-TV




Incard Division.






| |                                                 
| | ------------------------------------------------
| | Micro, Linear and Discrete Product Group Segment







31



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tm








tm point-of


32



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##### Table of Contents



Strategic Alliances with Customers and Industry
Partnerships












Customers and Applications




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##### Table of Contents







|                               |  |                                                                                                                                                                                                                |  |                                                                                                                   |  |                                                           |  |                 
|------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------- |  | ----------------
|Telecommunications            
|Customers:                     |  | 2Wire                                                                                                                                                                                                          |  | Finisar                                                                                                           |  | Nokia                                                     |  | Sagem           
|                               |  | Alcatel                                                                                                                                                                                                        |  | Huawei                                                                                                            |  | Nortel Networks                                           |  | Siemens         
|                               |  | Cellon                                                                                                                                                                                                         |  | LG Electronics                                                                                                    |  | Philips                                                   |  | Sony Ericsson   
|                               |  | Cisco                                                                                                                                                                                                          |  | Motorola                                                                                                          |  | Sanyo                                                     |  | TCL Corporation 
|                               |  |                                                                                                                                                                                                                |  |                                                                                                                   |  | Portable multimedia
    Telephone terminals (wireline and
|Applications:                  |  | Camera modules/ mobile imaging
    Central office switching systems
    Data transport (routing, switching for electronic and
    optical networks)
    Digital cellular telephones
    Internet access (XDSL) |  | wireless)
    Wireless connectivit WLAN, FM radio)
    Wireless infrastruct                                       |  | y (Bluetooth, ure                                        
|Computer Peripherals          
|Customers:                     |  | Agilent                                                                                                                                                                                                        |  | Delta                                                                                                             |  | Lexmark                                                   |  | Samsung         
|                               |  | BenQ                                                                                                                                                                                                           |  | Hewlett-Packard                                                                                                   |  | Logitech                                                  |  | Seagate         
|                               |  | Creative Technology                                                                                                                                                                                            |  | Intel                                                                                                             |  | Maxtor                                                    |  | Western Digital 
|                               |  | Dell                                                                                                                                                                                                           |  | Lenovo-IBM                                                                                                        |  | Microsoft                                                 |  | Xerox           
|Applications:                  |  | Data storage
    Monitors and displays                                                                                                                                                                         |  | Power management
    Printers
    Webcams                                                                        
|Automotive                    
|Customers:                     |  | Alpine                                                                                                                                                                                                         |  | Denso                                                                                                             |  | Marelli                                                   |  | Sirius          
|                               |  | Bosch                                                                                                                                                                                                          |  | Harman                                                                                                            |  | Motorola                                                  |  | Valeo           
|                               |  | Conti                                                                                                                                                                                                          |  | Hella                                                                                                             |  | Pioneer                                                   |  | Visteon         
|                               |  | Delphi                                                                                                                                                                                                         |  | Lear                                                                                                              |  | Siemens                                                   |  | 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:                     |  | Bose Corporation                                                                                                                                                                                               |  | LG Electronics                                                                                                    |  | Pace                                                      |  | Skardin         
|                               |  | Echostar                                                                                                                                                                                                       |  | Matsushita                                                                                                        |  | Philips                                                   |  | Sony            
|                               |  | Humax                                                                                                                                                                                                          |  | Microsoft                                                                                                         |  | Samsung                                                   |  | Thomson         
|                               |  | Kenwood                                                                                                                                                                                                        |  | Motorola                                                                                                          |  | Scientific Atlanta                                        |  | Tomen
    Vestel
|Applications:                  |  | Audio processing (CD, DVD, Hi-Fi)                                                                                                                                                                              |  |                                                                                                                   |  | DVDs
    Imaging                                          |  |                 
|                               |  | Analog/ digital TVs                                                                                                                                                                                            |  |                                                                                                                   |  | Set-top boxes                                             |  |                 
|                               |  | Digital cameras                                                                                                                                                                                                |  |                                                                                                                   |  | VCRs                                                      |  |                 
|                               |  | Digital music players                                                                                                                                                                                          |  |                                                                                                                   |  |                                                           |  |                 
|Industrial/ Other Applications
|Customers:                     |  | American Power Conversion                                                                                                                                                                                      |  | Delta                                                                                                             |  | Gillette                                                  |  | Philips         
|                               |  | Astec                                                                                                                                                                                                          |  | Echelon                                                                                                           |  | Hewlett-Packard                                           |  | Siemens         
|                               |  | Autostrade                                                                                                                                                                                                     |  | Enel                                                                                                              |  | Nagra                                                     |  | Toppan          
|                               |  | Axalto                                                                                                                                                                                                         |  | Gemplus                                                                                                           |  | Oberthur                                                  |  | Taiwan Liton    
|Applications:                  |  | Battery chargers
    Smart card ICs
    Industrial automation/ control systems
    Intelligent power switches                                                                                                  |  | Lighting systems (lamp ballasts)
    Motor controllers
    Power supplies
    Switch mode power supplies         



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Sales, Marketing and Distribution






just-in










35



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Research and Development












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|                                |  |                                   |       |   |      |   |       |      |  |   |       |  
|------------------------------- |  | --------------------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                |  | Year Ended December 31,           |      
|                                |  |                                   |      
|                                |  | 2005                              |       |   | 2004 |   |       | 2003 | 
|                                |  |                                   |       |   |      |   |       |      | 
|                                |  | (In millions, except percentages) |      
|Expenditures                    |  | $                                 | 1,630 |   |      | $ | 1,532 |      |  | $ | 1,238 |  
|As a percentage of net revenues |  |                                   | 18.3  | % |      |   | 17.5  | %    |  |   | 17.1  | %















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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 our semiconductor
    expertise.

system-on










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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
    re-configurable 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
    3-G base-stations.                                           

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)  |  | Dedicated 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     |  | Dedicated products and microcontrollers            |  | Fab: 200-mm CMOS, BiCMOS, BCD                                                                                                           

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|                      |  |                                                                                                                               |  |                                                                                                                                                                                                                                                               
|--------------------- |  | ----------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Location              |  | Products                                                                                                                      |  | Technologies                                                                                                                                                                                                                                                  
|                      |  |                                                                                                                               |  |                                                                                                                                                                                                                                                               
|Agrate, Italy         |  | Nonvolatile memories, microcontrollers and dedicated products                                                                 |  | Fab 1: 150-mm BCD, nonvolatile memories, MEMS. (converting to
    200-mm)
    Fab 2: 200-mm Flash, embedded Flash, research and development on
    nonvolatile memories and BCD technologies                                                                  
|Rousset, France       |  | Microcontrollers, nonvolatile memories and Smart card ICs and
    dedicated products                                          |  | Fab 1: 150-mm CMOS, Smart card (phase-out planned in 2006)
    Fab 2: 200-mm CMOS, Smart card, embedded Flash                                                                                                                                                 
|Catania, Italy        |  | Power transistors, Smart Power ICs and nonvolatile memories                                                                   |  | Fabs 1/2: 150-mm Power metal-on silicon oxide semiconductor
    process technology (MOS),
    VIPpowertm,
    MO-3 and Pilot Line RF
    Fab 3: 200-mm Flash, Smart card, EEPROM
    300-mm building constructed but not fully facilitized and
    equipped.
|Castelletto, Italy    |  | Smart power BCD                                                                                                               |  | Fab: 150-mm BCD and MEMS pilot line (closure planned for the end
    of Q2 2006)                                                                                                                                                                              
|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 |  | Dedicated products, microcontrollers, power transistors,
    commodity products, nonvolatile memories, and dedicated products |  | Fab 1: 125-mm, power MOS, bipolar transistor, bipolar ICs,
    standard linear
    Fab 2: 150-mm bipolar, power MOS and BCD, EEPROM, Smart card,
    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        |  | Dedicated 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                                                                          |  |                                                                                                                                                                                                                                                               






|    |                                                                            
|--- | ---------------------------------------------------------------------------
|(1) | Operated jointly with Philips and Freescale.                               
|   
|(2) | Jointly operated with SHIC, a subsidiary of Shenzhen Electronics
    Group.





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ramp-up ramp-up






41



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state-of


Intellectual Property






42



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Backlog






just-in






Competition




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Organizational Structure and History











Public Funding




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




Revenue Recognition






45



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Elements of Financial Statements






Suppliers






just-in




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Environmental Matters








2






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Industry Background




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







|                                |        |                                  |       |      |                                 |   |       |      |  |   |       |      |  |      |       |      |      |   |       |       |  |   |       |     |  |       |      |      |       |  |      |       |  |  |       |      |  |  |      |      |  |  |      |      |  |  |      |      |  
|------------------------------- | ------ | -------------------------------- | ----- | ---- | ------------------------------- | - | ----- | ---- |  | - | ----- | ---- |  | ---- | ----- | ---- | ---- | - | ----- | ----- |  | - | ----- | --- |  | ----- | ---- | ---- | ----- |  | ---- | ----- |  |  | ----- | ---- |  |  | ---- | ---- |  |  | ---- | ---- |  |  | ---- | ---- | -
|                                |        | Worldwide Semiconductor Sales(1) |       |      | Compound Annual Growth Rates(2) |  
|                                |        |                                  |       |      |                                 |  
|                                |        | 2005                             |       |      | 2004                            |   |       | 2003 |  |   | 2002  |      |  | 1997 |       |      | 1987 |   |       | 04-05 |  |   | 03-04 |     |  | 02-03 |      |      | 87-05 |  |      | 87-97 |  |  | 97-02 |     
|                                |        |                                  |       |      |                                 |   |       |      |  |   |       |      |  |      |       |      |      |   |       |       |  |   |       |     |  |       |      |      |       |  |      |       |  |  |       |     
|                                |        | (In billions)                    |       |      | (Expressed as percentages)      |  
|Integrated Circuits and Sensors |        | $                                | 197.3 |      |                                 | $ | 183.5 |      |  | $ | 143.5 |      |  | $    | 121.6 |      |      | $ | 119.5 |       |  | $ | 25.4  |     |  |       | 7.5  | %    |       |  | 27.9 | %     |  |  | 18.1  | %    |  |  | 12.1 | %    |  |  | 16.8 | %    |  |  | 0.3  | %   
|Analog, Sensors and Actuators   |        |                                  | 36.5  |      |                                 |   | 36.1  |      |  |   | 30.4  |      |  |      | 25.0  |      |      |   | 20.0  |       |  |   | 6.0   |     |  |       | 0.9  |      |       |  | 19.0 |       |  |  | 21.6  |      |  |  | 10.5 |      |  |  | 12.8 |      |  |  | 4.6  |     
|Digital Logic                   |        |                                  | 112.4 |      |                                 |   | 100.3 |      |  |   | 80.7  |      |  |      | 69.6  |      |      |   | 70.2  |       |  |   | 14.0  |     |  |       | 12.1 |      |       |  | 24.3 |       |  |  | 15.9  |      |  |  | 12.3 |      |  |  | 17.5 |      |  |  | 0.2  |     
|Memory:                         |        |                                  |       |      |                                 |   |       |      |  |   |       |      |  |      |       |      |      |   |       |       |  |   |       |     |  |       |      |      |       |  |      |       |  |  |       |      |  |  |      |      |  |  |      |      |  |  |      |     
|                                | DRAM   |                                  |       | 25.6 |                                 |   |       | 26.8 |  |   |       | 16.7 |  |      |       | 15.3 |      |   |       | 19.8  |  |   |       | 2.4 |  |       |      | (4.7 | )     |  |      | 60.9  |  |  |       | 9.4  |  |  |      | 14.1 |  |  |      | 23.5 |  |  |      | (5.1 | )
|                                | Others |                                  |       | 22.9 |                                 |   |       | 20.3 |  |   |       | 15.8 |  |      |       | 11.8 |      |   |       | 9.5   |  |   |       | 3.0 |  |       |      | 13.0 |       |  |      | 28.3  |  |  |       | 34.2 |  |  |      | 12.0 |  |  |      | 12.2 |  |  |      | 4.4  |  
|                                |        |                                  |       |      |                                 |   |       |      |  |   |       |      |  |      |       |      |      |   |       |       |  |   |       |     |  |       |      |      |       |  |      |       |  |  |       |     
|Total Memory                    |        |                                  | 48.5  |      |                                 |   | 47.1  |      |  |   | 32.5  |      |  |      | 27.0  |      |      |   | 29.3  |       |  |   | 5.4   |     |  |       | 2.9  |      |       |  | 45.0 |       |  |  | 20.2  |      |  |  | 13.0 |      |  |  | 18.4 |      |  |  | (1.6 | )   
|Total Digital                   |        |                                  | 160.9 |      |                                 |   | 147.4 |      |  |   | 113.2 |      |  |      | 96.6  |      |      |   | 99.6  |       |  |   | 19.4  |     |  |       | 9.1  |      |       |  | 30.3 |       |  |  | 17.1  |      |  |  | 12.5 |      |  |  | 17.8 |      |  |  | (0.6 | )   
|Discrete                        |        |                                  | 15.2  |      |                                 |   | 15.8  |      |  |   | 13.3  |      |  |      | 12.3  |      |      |   | 13.2  |       |  |   | 5.8   |     |  |       | (3.3 | )    |       |  | 18.1 |       |  |  | 8.1   |      |  |  | 5.5  |      |  |  | 8.5  |      |  |  | 0.3  |     
|Optoelectronics                 |        |                                  | 14.9  |      |                                 |   | 13.7  |      |  |   | 9.5   |      |  |      | 6.8   |      |      |   | 4.5   |       |  |   | 1.3   |     |  |       | 8.6  |      |       |  | 43.8 |       |  |  | 40.6  |      |  |  | 14.5 |      |  |  | 13.2 |      |  |  | 8.5  |     
|                                |        |                                  |       |      |                                 |   |       |      |  |   |       |      |  |      |       |      |      |   |       |       |  |   |       |     |  |       |      |      |       |  |      |       |  |  |       |     
|TAM                             |        | $                                | 227.5 |      |                                 | $ | 213.0 |      |  | $ | 166.4 |      |  | $    | 140.7 |      |      | $ | 137.2 |       |  | $ | 32.5  |     |  |       | 6.8  | %    |       |  | 28.0 | %     |  |  | 18.3  | %(3) |  |  | 11.4 | %    |  |  | 15.5 | %    |  |  | 0.5  | %   
|                                |        |                                  |       |      |                                 |   |       |      |  |   |       |      |  |      |       |      |      |   |       |       |  |   |       |     |  |       |      |      |       |  |      |       |  |  |       |     
|Europe                          |        |                                  | 39.3  |      |                                 |   | 39.4  |      |  |   | 32.3  |      |  |      | 27.8  |      |      |   | 29.1  |       |  |   | 6.2   |     |  |       | (0.4 | )    |       |  | 22.0 |       |  |  | 16.3  |      |  |  | 10.8 |      |  |  | 16.7 |      |  |  | (0.9 | )   
|Americas                        |        |                                  | 40.7  |      |                                 |   | 39.1  |      |  |   | 32.3  |      |  |      | 31.3  |      |      |   | 45.8  |       |  |   | 10.3  |     |  |       | 4.3  |      |       |  | 20.8 |       |  |  | 3.4   |      |  |  | 7.9  |      |  |  | 16.1 |      |  |  | (7.4 | )   
|Asia Pacific                    |        |                                  | 103.4 |      |                                 |   | 88.8  |      |  |   | 62.8  |      |  |      | 51.2  |      |      |   | 30.2  |       |  |   | 3.3   |     |  |       | 16.5 |      |       |  | 41.3 |       |  |  | 22.8  |      |  |  | 21.1 |      |  |  | 24.8 |      |  |  | 11.1 |     
|Japan                           |        |                                  | 44.1  |      |                                 |   | 45.8  |      |  |   | 38.9  |      |  |      | 30.5  |      |      |   | 32.1  |       |  |   | 12.7  |     |  |       | (3.7 | )    |       |  | 17.5 |       |  |  | 27.7  |      |  |  | 7.2  |      |  |  | 9.7  |      |  |  | (1.0 | )   
|                                |        |                                  |       |      |                                 |   |       |      |  |   |       |      |  |      |       |      |      |   |       |       |  |   |       |     |  |       |      |      |       |  |      |       |  |  |       |     
|TAM                             |        | $                                | 227.5 |      |                                 | $ | 213.0 |      |  | $ | 166.4 |      |  | $    | 140.7 |      |      | $ | 137.2 |       |  | $ | 32.5  |     |  |       | 6.8  | %    |       |  | 28.0 | %     |  |  | 18.3  | %(3) |  |  | 11.4 | %    |  |  | 15.5 | %    |  |  | 0.5  | %   
|                                |        |                                  |       |      |                                 |   |       |      |  |   |       |      |  |      |       |      |      |   |       |       |  |   |       |     |  |       |      |      |       |  |      |       |  |  |       |     






|    |                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Source: WSTS.                                                                                                                                                                  
|   
|(2) | Calculated using end points of the periods specified.                                                                                                                          
|   
|(3) | Calculated on a comparable basis, that is, without information
    with respect to actuators, which was not included in the
    indicator before 2003, the TAM increased 16.8%.

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





















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50



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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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | are not related to any technological obsolescence issues and are
    identified shortly after sale in customer 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 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 2005, we recorded specific provisions of $7 million
    related to bankrupt customers, in addition to our standard
    provision of 1% of total receivables based on the estimated
    historical collection trends. Although we have determined that
    our most significant customers are creditworthy, if the
    financial condition of our customers were to deteriorate,
    resulting in an impairment of their ability to make payments,
    additional allowances could be required.                                                            



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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, 2005, the value of goodwill
    amounted to $221 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
    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 2005, we had an
    impairment of goodwill of $39 million related to the
    elimination of the Customer Premises Equipment (CPE)
    product lines.
|
| |  | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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 2005, we registered
    an impairment charge of $25 million. At December 31,
    2005, the value of intangible assets subject to amortization
    amounted to $224 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
    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. Since a
    significant portion of our tangible assets are carried by our
    European affiliates and their cost of operations are mainly
    denominated in euros, while revenues primarily are denominated
    in U.S. dollars, the exchange rate dynamic may trigger
    impairment charges. 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 loss. In
    2005, we registered an impairment charge of $3 million
    related to the optimization of 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.

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Share-based compensation. We have in the past accounted
    for share-based compensation to employees in accordance with
    Accounting Principles Board Opinion No. 25,
    Accounting for Stock Issued to Employees, and
    as such generally recognized no compensation cost for employee
    stock options. In December 2004, the FASB issued revised
    FAS No. 123, Share-Based Payment, or
    FAS 123R, which requires companies to expense employee
    share- based compensation for financial reporting purposes. Pro
    forma disclosure of the income statement effects of share-based
    compensation is no longer an alternative. 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 are now required to value the current
    and any future employee share-based compensation pursuant to an
    option pricing model, and then amortize that value against our
    reported earnings over the vesting period in effect for those
    awards. Due to this change in accounting treatment of employee
    stock and other forms of share-based compensation, 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 are
    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, the
    forfeitures and the service period of our employees. As a
    result, we recorded in the fourth quarter of 2005 a total charge
    of $9 million and we are expecting to incur additional
    charges related to this plan during 2006. The impact is further
    detailed in Note 15.6 to our Consolidated Financial
    Statements Non-vested share awards.
|
| |  | 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 our existing activities or to
    dispose of our activities. We recognize the fair value of a
    liability for costs associated with an exit or disposal 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 continue to evaluate business conditions.
    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 2005, the amount of restructuring
    charges and other related closure costs amounted to
    $61 million before taxes. See Note 18 to our
    Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | 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. As of December 31,
    2005, 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 or in our
    estimates of the valuation allowance, or 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 record an additional charge                                                                                                                                                                                                                                                                                                                                                                        

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| |                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------
| | in our provision for taxes in the period in which we determine
    that the recorded provision is less than we expect the ultimate
    assessment to be.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 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 the end
    of 2005, based on our assessment there was no impact on our
    financial statements relating to the SanDisk litigation.
    However, if we are unsuccessful in resolving these proceedings,
    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 above assumptions can have an impact on our
    valuations. As of December 31, 2005, we have a total
    benefit obligation estimated at $323 million, and total
    plan assets estimated at $194 million resulting in an
    unfunded status of $129 million, of which $56 million
    was registered in our balance sheet at December 31, 2005.                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | 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 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 they need to be readjusted 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 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 2005



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| |                       
| | ----------------------
| | 2005 Business Overview











| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Application Specific Product Groups (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 new 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 now
    comprise all of our major complex products related to automotive
    applications.
|
| |  | the Memory Product Group (MPG) segment, comprised of
    our memories and Smart card businesses; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | the Micro, Linear and Discrete Product Group (MLD)
    segment, comprised of discrete and standard products plus
    standard microcontroller and industrial devices (including the
    programmable systems memories (PSM) division).                                                                                                                                                                                                                                                                                                                              














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


















| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  | higher sales volume and a more favorable product mix in our
    revenues, which contributed to an increase in our net revenues
    over 2004;
|
| |  | continuous improvement of our manufacturing performances;                                                                                    
|
| |  | net interest income; and                                                                                                                     
|
| |  | lower income tax expense.                                                                                                                    





| |   |                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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;                                                                                                                                                                                      
|
| |  | the impact of the effective U.S. dollar exchange rate
    against the euro and other currencies, which translated into an
    increase of our cost of sales and in our operating expenses
    being significantly higher than the favorable impact on our
    revenues;                                                                                                          
|
| |  | higher impairment, restructuring charges and other related
    closure costs due to the new restructuring and reorganization
    activities initiated in 2005; and                                                                                                                                                                                                               
|
| |  | the one-time compensation packages and special bonuses to our
    former CEO and to a limited number of retired senior executives,
    the new pension scheme charges for executive management and the
    share-based compensation charges for non-vested shares granted
    to employees and members and professionals of our Supervisory
    Board for a total of $37 million.



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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 in 2005







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 3 4 












59



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| |                    
| | -------------------
| | Recent Developments



Results of Operations




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









| |   |                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Application Specific Product Groups (ASG) segment,
    comprised of three product lines  Home, Personal and
    Communication Products (HPC), Computer Peripherals
    Products (CPG) and new Automotive Products
    (APG);
|
| |  | Memory Product Group (MPG) segment; and                                                                                                                                                                                            
|
| |  | Micro, Linear and Discrete Product Group (MLD)
    segment.                                                                                                                                                                        





Disclosures about Segments of an Enterprise and
Related Information


start-up


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start-up


|                                                       |  |                         |       |  |      |   |       |      |  |   |       | 
|------------------------------------------------------ |  | ----------------------- | ----- |  | ---- | - | ----- | ---- |  | - | ----- | 
|                                                       |  | Year Ended December 31, |      
|                                                       |  |                         |      
|                                                       |  | 2005                    |       |  | 2004 |   |       | 2003 | 
|                                                       |  |                         |       |  |      |   |       |      | 
|                                                       |  | (In millions)           |      
|Net revenues by product segment:                       |  |                         |       |  |      |   |       |      |  |   |       | 
|Application Specific Product Group Segment (ASG)       |  | $                       | 4,991 |  |      | $ | 4,902 |      |  | $ | 4,405 | 
|Memory Product Group Segment (MPG)                     |  |                         | 1,948 |  |      |   | 1,887 |      |  |   | 1,294 | 
|Micro, Linear and Discrete Product Group Segment (MLD) |  |                         | 1,882 |  |      |   | 1,902 |      |  |   | 1,469 | 
|Others(1)                                              |  |                         | 61    |  |      |   | 69    |      |  |   | 70    | 
|                                                       |  |                         |       |  |      |   |       |      | 
|Total consolidated net revenues                        |  | $                       | 8,882 |  |      | $ | 8,760 |      |  | $ | 7,238 | 
|                                                       |  |                         |       |  |      |   |       |      | 






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

|                                                       |  |                         |      |   |      |   |      |      |  |   |      |  
|------------------------------------------------------ |  | ----------------------- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                                       |  | Year Ended December 31, |     
|                                                       |  |                         |     
|                                                       |  | 2005                    |      |   | 2004 |   |      | 2003 | 
|                                                       |  |                         |      |   |      |   |      |      | 
|                                                       |  | (In millions)           |     
|Operating income (loss) by product segment:            |  |                         |      |   |      |   |      |      |  |   |      |  
|Application Specific Product Group Segment (ASG)       |  | $                       | 355  |   |      | $ | 530  |      |  | $ | 582  |  
|Memory Product Group Segment (MPG)                     |  |                         | (118 | ) |      |   | 42   |      |  |   | (65  | )
|Micro, Linear and Discrete Product Group Segment (MLD) |  |                         | 271  |   |      |   | 413  |      |  |   | 192  |  
|                                                       |  |                         |      |   |      |   |      |      | 
|Total operating income of product segments             |  |                         | 508  |   |      |   | 985  |      |  |   | 709  |  
|Others(1)                                              |  |                         | (264 | ) |      |   | (302 | )    |  |   | (375 | )
|                                                       |  |                         |      |   |      |   |      |      | 
|Total consolidated operating income                    |  | $                       | 244  |   |      | $ | 683  |      |  | $ | 334  |  
|                                                       |  |                         |      |   |      |   |      |      | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Operating income (loss) of Others includes items or
    parts of them, which are not allocated to product 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 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, are now being allocated to the
    segments; comparable amounts reported in this category have been
    reclassified accordingly in the above table.

|                                                          |  |                     |      |   |      |  |      |      |  |  |      |  
|--------------------------------------------------------- |  | ------------------- | ---- | - | ---- |  | ---- | ---- |  |  | ---- | -
|                                                          |  | Year Ended          |     
|                                                          |  | December 31,        |     
|                                                          |  |                     |     
|                                                          |  | 2005                |      |   | 2004 |  |      | 2003 | 
|                                                          |  |                     |      |   |      |  |      |      | 
|                                                          |  | (As a percentage of |     
|                                                          |  | total net revenues) |     
|Operating income (loss) by product segment:               |  |                     |      |   |      |  |      |      |  |  |      |  
|Application Specific Product Group Segment (ASG)(1)       |  |                     | 7.1  | % |      |  | 10.8 | %    |  |  | 13.2 | %
|Memory Product Group Segment (MPG)(1)                     |  |                     | (6.1 | ) |      |  | 2.2  |      |  |  | (5.0 | )
|Micro, Linear and Discrete Product Group Segment (MLD)(1) |  |                     | 14.4 |   |      |  | 21.7 |      |  |  | 13.1 |  
|Others(2)                                                 |  |                     | (3.0 | ) |      |  | (3.5 | )    |  |  | (5.2 | )
|Total consolidated operating income(3)                    |  |                     | 2.7  | % |      |  | 7.8  | %    |  |  | 4.6  | %






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 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 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, are now being allocated to the
    product segments; comparable amounts reported in this category
    have been reclassified accordingly in the above table.
|   
|(3) | As a percentage of total net revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

61



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|                                                 |                                                                   |                         |      |      |      |   |      |      |   |   |      |      |  
|------------------------------------------------ | ----------------------------------------------------------------- | ----------------------- | ---- | ---- | ---- | - | ---- | ---- | - | - | ---- | ---- | -
|                                                 |                                                                   | Year Ended December 31, |     
|                                                 |                                                                   |                         |     
|                                                 |                                                                   | 2005                    |      |      | 2004 |   |      | 2003 |  
|                                                 |                                                                   |                         |      |      |      |   |      |      |  
|                                                 |                                                                   | (In millions)           |     
|Reconciliation to consolidated operating income: |                                                                   |                         |      |      |      |   |      |      |   |   |      |     
|Total operating income of product segments       |                                                                   | $                       | 508  |      |      | $ | 985  |      |   | $ | 709  |     
|Operating Income of others(1)                    |                                                                   |                         |      |      |      |   |      |      |   |   |      |     
|                                                 | Strategic and other research and development programs             |                         |      | (49  | )    |   |      | (91  | ) |   |      | (52  | )
|                                                 | Start-up costs                                                    |                         |      | (56  | )    |   |      | (63  | ) |   |      | (54  | )
|                                                 | Impairment, restructuring charges and other related closure costs |                         |      | (128 | )    |   |      | (76  | ) |   |      | (205 | )
|                                                 | Subsystems                                                        |                         |      | 1    |      |   |      | (1   | ) |   |      | 2    |  
|                                                 | One-time compensation and special contributions(2)                |                         |      | (22  | )    |   |      |     |   |   |      |     |  
|                                                 | Patent claim costs                                                |                         |      |     |      |   |      | (4   | ) |   |      | (10  | )
|                                                 | Other non-allocated provisions(3)                                 |                         |      | (10  | )    |   |      | (67  | ) |   |      | (56  | )
|Total operating income (loss) of others          |                                                                   |                         | (264 | )    |      |   | (302 | )    |   |   | (375 | )   
|                                                 |                                                                   |                         |      |      |      |   |      |      |  
|Total consolidated operating income              |                                                                   | $                       | 244  |      |      | $ | 683  |      |   | $ | 334  |     
|                                                 |                                                                   |                         |      |      |      |   |      |      |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Operating income (loss) of Others includes items or
    parts of them, which are not allocated to product 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 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, are now being allocated to the
    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 segments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(3) | Includes unallocated expenses such as certain corporate level
    operating expenses and other costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           



| |                                                                     
| | --------------------------------------------------------------------
| | Net Revenues by Location of Order Shipment and by Market
    Segment



|                                               |  |                         |       |   |      |   |       |      |  |   |       |  
|---------------------------------------------- |  | ----------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                               |  | Year Ended December 31, |      
|                                               |  |                         |      
|                                               |  | 2005                    |       |   | 2004 |   |       | 2003 | 
|                                               |  |                         |       |   |      |   |       |      | 
|                                               |  | (In millions)           |      
|Net Revenues by Location of Order Shipment:(1) |  |                         |       |   |      |   |       |      |  |   |       |  
|Europe(2)                                      |  | $                       | 2,789 |   |      | $ | 2,827 |      |  | $ | 2,306 |  
|North America                                  |  |                         | 1,141 |   |      |   | 1,211 |      |  |   | 985   |  
|Asia/ Pacific                                  |  |                         | 4,063 |   |      |   | 3,711 |      |  |   | 3,190 |  
|Japan                                          |  |                         | 307   |   |      |   | 403   |      |  |   | 337   |  
|Emerging Markets(2)(3)                         |  |                         | 582   |   |      |   | 608   |      |  |   | 420   |  
|                                               |  |                         |       |   |      |   |       |      | 
|Total                                          |  | $                       | 8,882 |   |      | $ | 8,760 |      |  | $ | 7,238 |  
|                                               |  |                         |       |   |      |   |       |      | 
|Net Revenues by Location of Order Shipment:(1) |  |                         |       |   |      |   |       |      |  |   |       |  
|Europe(2)                                      |  |                         | 31.4  | % |      |   | 32.3  | %    |  |   | 31.9  | %
|North America                                  |  |                         | 12.8  |   |      |   | 13.8  |      |  |   | 13.6  |  
|Asia/Pacific                                   |  |                         | 45.7  |   |      |   | 42.4  |      |  |   | 44.1  |  
|Japan                                          |  |                         | 3.5   |   |      |   | 4.6   |      |  |   | 4.6   |  
|Emerging Markets(2)(3)                         |  |                         | 6.6   |   |      |   | 6.9   |      |  |   | 5.8   |  
|                                               |  |                         |       |   |      |   |       |      | 
|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.

62



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|    |                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | 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.
|   
|(3) | Emerging Markets in 2005 included markets such as India, Latin
    America, the Middle East and Africa, Europe (non-EU and
    non-EFTA) and Russia.                                                                                                                                                                                                                  



|                                |  |                     |     |   |      |  |     |      |  |  |     |  
|------------------------------- |  | ------------------- | --- | - | ---- |  | --- | ---- |  |  | --- | -
|                                |  | Year Ended          |    
|                                |  | December 31,        |    
|                                |  |                     |    
|                                |  | 2005                |     |   | 2004 |  |     | 2003 | 
|                                |  |                     |     |   |      |  |     |      | 
|                                |  | (As a percentage of |    
|                                |  | net revenues)       |    
|Net Revenues by Market Segment: |  |                     |     |   |      |  |     |      |  |  |     |  
|Automotive                      |  |                     | 16  | % |      |  | 15  | %    |  |  | 14  | %
|Consumer                        |  |                     | 18  |   |      |  | 21  |      |  |  | 20  |  
|Computer                        |  |                     | 17  |   |      |  | 16  |      |  |  | 18  |  
|Telecom                         |  |                     | 35  |   |      |  | 32  |      |  |  | 33  |  
|Industrial and Other            |  |                     | 14  |   |      |  | 16  |      |  |  | 15  |  
|                                |  |                     |     |   |      |  |     |      | 
|Total                           |  |                     | 100 | % |      |  | 100 | %    |  |  | 100 | %
|                                |  |                     |     |   |      |  |     |      | 



|                                                  |                                                                   |                         |       |       |      |  |       |       |   |  |       |       |  
|------------------------------------------------- | ----------------------------------------------------------------- | ----------------------- | ----- | ----- | ---- |  | ----- | ----- | - |  | ----- | ----- | -
|                                                  |                                                                   | Year Ended December 31, |      
|                                                  |                                                                   |                         |      
|                                                  |                                                                   | 2005                    |       |       | 2004 |  |       | 2003  |  
|                                                  |                                                                   |                         |       |       |      |  |       |       |  
|                                                  |                                                                   | (As a percentage of     |      
|                                                  |                                                                   | net revenues)           |      
|Net sales                                         |                                                                   |                         | 99.9  | %     |      |  | 100.0 | %     |   |  | 99.9  | %    
|Other revenues                                    |                                                                   |                         | 0.1   |       |      |  |      |       |   |  | 0.1   |      
|                                                  |                                                                   |                         |       |       |      |  |       |       |  
|Net revenues                                      |                                                                   |                         | 100.0 |       |      |  | 100.0 |       |   |  | 100.0 |      
|Cost of sales                                     |                                                                   |                         | (65.8 | )     |      |  | (63.2 | )     |   |  | (64.5 | )    
|                                                  |                                                                   |                         |       |       |      |  |       |       |  
|Gross profit                                      |                                                                   |                         | 34.2  |       |      |  | 36.8  |       |   |  | 35.5  |      
|                                                  | Selling, general and administrative                               |                         |       | (11.6 | )    |  |       | (10.8 | ) |  |       | (10.9 | )
|                                                  | Research and development                                          |                         |       | (18.3 | )    |  |       | (17.5 | ) |  |       | (17.1 | )
|                                                  | Other income and expenses, net                                    |                         |       | (0.1  | )    |  |       | 0.2   |   |  |       | (0.1  | )
|                                                  | Impairment, restructuring charges and other related closure costs |                         |       | (1.5  | )    |  |       | (0.9  | ) |  |       | (2.8  | )
|                                                  | Total operating expenses                                          |                         |       | (31.5 | )    |  |       | (29.0 | ) |  |       | (30.9 | )
|                                                  |                                                                   |                         |       |       |      |  |       |       |  
|Operating income                                  |                                                                   |                         | 2.7   |       |      |  | 7.8   |       |   |  | 4.6   |      
|Interest income (expense), net                    |                                                                   |                         | 0.4   |       |      |  |      |       |   |  | (0.7  | )    
|Loss on equity investment                         |                                                                   |                         |      |       |      |  |      |       |   |  |      |      
|Loss on extinguishment of convertible debt        |                                                                   |                         |      |       |      |  | (0.1  | )     |   |  | (0.6  | )    
|                                                  |                                                                   |                         |       |       |      |  |       |       |  
|Income before income taxes and minority interests |                                                                   |                         | 3.1   |       |      |  | 7.7   |       |   |  | 3.3   |      
|Income tax benefit (expense)                      |                                                                   |                         | (0.1  | )     |      |  | (0.8  | )     |   |  | 0.2   |      
|                                                  |                                                                   |                         |       |       |      |  |       |       |  
|Income before minority interests                  |                                                                   |                         | 3.0   |       |      |  | 6.9   |       |   |  | 3.5   |      
|Minority interests                                |                                                                   |                         |      |       |      |  |      |       |   |  |      |      
|                                                  |                                                                   |                         |       |       |      |  |       |       |  
|Net income                                        |                                                                   |                         | 3.0   | %     |      |  | 6.9   | %     |   |  | 3.5   | %    
|                                                  |                                                                   |                         |       |       |      |  |       |       |  

2005 vs. 2004




63



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##### Table of Contents





| |             
| | ------------
| | 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 | %
|               |  |               |       |  |      |   |       |             | 













| |             
| | ------------
| | 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 | )%          |  |  |     |   



64



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| |                                  
| | ---------------------------------
| | 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  | )%          |  |  |     |   





| |                               
| | ------------------------------
| | 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 head count 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;      

65



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our ongoing 2003 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 approximate
    $350 million in pre-tax charges in connection with this
    restructuring plan, 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 | %           |  |  |       |   







| |                               
| | ------------------------------
| | 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 | )



66



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

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





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

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



2004 vs. 2003






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

|               |  |               |       |  |      |   |       |             |  |  |      |  
|-------------- |  | ------------- | ----- |  | ---- | - | ----- | ----------- |  |  | ---- | -
|               |  | 2004          |       |  | 2003 |   |       | % Variation | 
|               |  |               |       |  |      |   |       |             | 
|               |  | (In millions) |      
|Net sales      |  | $             | 8,756 |  |      | $ | 7,234 |             |  |  | 21.0 | %
|Other revenues |  | $             | 4     |  |      | $ | 4     |             |  |  |     |  
|Net revenues   |  | $             | 8,760 |  |      | $ | 7,238 |             |  |  | 21.0 | %





67



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

|              |  |               |        |   |      |   |        |             |  |  |       |   
|------------- |  | ------------- | ------ | - | ---- | - | ------ | ----------- |  |  | ----- | --
|              |  | 2004          |        |   | 2003 |   |        | % Variation | 
|              |  |               |        |   |      |   |        |             | 
|              |  | (In millions) |       
|Cost of sales |  | $             | (5,532 | ) |      | $ | (4,672 | )           |  |  | (18.4 | %)
|Gross profit  |  | $             | 3,228  |   |      | $ | 2,566  |             |  |  | 25.8  | % 
|Gross margin  |  |               | 36.8   | % |      |   | 35.5   | %           |  |  |      |   





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

|                                             |  |               |       |    |      |   |       |             |  |  |       |   
|-------------------------------------------- |  | ------------- | ----- | -- | ---- | - | ----- | ----------- |  |  | ----- | --
|                                             |  | 2004          |       |    | 2003 |   |       | % Variation | 
|                                             |  |               |       |    |      |   |       |             | 
|                                             |  | (In millions) |      
|Selling, general and administrative expenses |  | $             | (947  | )  |      | $ | (785  | )           |  |  | (20.6 | %)
|As a percentage of net revenues              |  |               | (10.8 | )% |      |   | (10.9 | )%          |  |  |      |   





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

|                                  |  |               |        |    |      |   |        |             |  |  |       |   
|--------------------------------- |  | ------------- | ------ | -- | ---- | - | ------ | ----------- |  |  | ----- | --
|                                  |  | 2004          |        |    | 2003 |   |        | % Variation | 
|                                  |  |               |        |    |      |   |        |             | 
|                                  |  | (In millions) |       
|Research and development expenses |  | $             | (1,532 | )  |      | $ | (1,238 | )           |  |  | (23.8 | %)
|As a percentage of net revenues   |  |               | (17.5  | )% |      |   | (17.1  | )%          |  |  |      |   



68



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

|                                   |  |               |     |   |      |   |      |   
|---------------------------------- |  | ------------- | --- | - | ---- | - | ---- | --
|                                   |  | 2004          |     |   | 2003 |  
|                                   |  |               |     |   |      |  
|                                   |  | (In millions) |    
|Research and development funding   |  | $             | 84  |   |      | $ | 76   |   
|Start-up costs                     |  |               | (63 | ) |      |   | (55  | ) 
|Exchange gain, net                 |  |               | 33  |   |      |   | 5    |   
|Patent claim costs                 |  |               | (37 | ) |      |   | (29  | ) 
|Gain on sale of non-current assets |  |               | 6   |   |      |   | 17   |   
|Other, net                         |  |               | (13 | ) |      |   | (18  | ) 
|Other income and expenses, net     |  | $             | 10  |   |      | $ | (4   | ) 
|As a percentage of net revenues    |  |               | 0.2 | % |      |   | (0.1 | %)

Start-up start-up start-up build-up




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

|                                                                  |  |               |      |    |      |   |      |   
|----------------------------------------------------------------- |  | ------------- | ---- | -- | ---- | - | ---- | --
|                                                                  |  | 2004          |      |    | 2003 |  
|                                                                  |  |               |      |    |      |  
|                                                                  |  | (In millions) |     
|Impairment, restructuring charges and other related closure costs |  | $             | (76  | )  |      | $ | (205 | ) 
|As a percentage of net revenues                                   |  |               | (0.9 | )% |      |   | (2.8 | )%





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

|                                |  |               |     |   |      |   |     |             |  |  |       |  
|------------------------------- |  | ------------- | --- | - | ---- | - | --- | ----------- |  |  | ----- | -
|                                |  | 2004          |     |   | 2003 |   |     | % Variation | 
|                                |  |               |     |   |      |   |     |             | 
|                                |  | (In millions) |    
|Operating income                |  | $             | 683 |   |      | $ | 334 |             |  |  | 104.3 | %
|As a percentage of net revenues |  |               | 7.8 | % |      |   | 4.6 | %           |  |  |      |  



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| |                      
| | ---------------------
| | Interest expense, net

|                      |  |               |    |   |      |   |     |  
|--------------------- |  | ------------- | -- | - | ---- | - | --- | -
|                      |  | 2004          |    |   | 2003 |  
|                      |  |               |    |   |      |  
|                      |  | (In millions) |   
|Interest expense, net |  | $             | (3 | ) |      | $ | (52 | )





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

|                           |  |               |    |   |      |   |    |  
|-------------------------- |  | ------------- | -- | - | ---- | - | -- | -
|                           |  | 2004          |    |   | 2003 |  
|                           |  |               |    |   |      |  
|                           |  | (In millions) |   
|Loss on equity investments |  | $             | (4 | ) |      | $ | (1 | )





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

|                                           |  |               |    |   |      |   |     |  
|------------------------------------------ |  | ------------- | -- | - | ---- | - | --- | -
|                                           |  | 2004          |    |   | 2003 |  
|                                           |  |               |    |   |      |  
|                                           |  | (In millions) |   
|Loss on extinguishment of convertible debt |  | $             | (4 | ) |      | $ | (39 | )





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

|                             |  |               |     |   |      |   |    | 
|---------------------------- |  | ------------- | --- | - | ---- | - | -- | 
|                             |  | 2004          |     |   | 2003 |  
|                             |  |               |     |   |      |  
|                             |  | (In millions) |    
|Income tax benefit (expense) |  | $             | (68 | ) |      | $ | 14 | 



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

|                                |  |               |     |   |      |   |     |             |  |  |       |  
|------------------------------- |  | ------------- | --- | - | ---- | - | --- | ----------- |  |  | ----- | -
|                                |  | 2004          |     |   | 2003 |   |     | % Variation | 
|                                |  |               |     |   |      |   |     |             | 
|                                |  | (In millions) |    
|Net income                      |  | $             | 601 |   |      | $ | 253 |             |  |  | 137.3 | %
|As a percentage of net revenues |  |               | 6.9 | % |      |   | 3.5 | %           |  |  |      |  



Quarterly Results of Operations


period-to






71



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

|               |  |               |       |  |             |   |       |              |  |   |            |  |  |                |     |   |  |  |     |  
|-------------- |  | ------------- | ----- |  | ----------- | - | ----- | ------------ |  | - | ---------- |  |  | -------------- | --- | - |  |  | --- | -
|               |  | Quarter ended |       |  | % Variation |  
|               |  |               |       |  |             |  
|               |  | Dec 31, 2005  |       |  | Oct 1, 2005 |   |       | Dec 31, 2004 |  |   | Sequential |  |  | Year-over-year |    
|               |  |               |       |  |             |   |       |              |  |   |            |  |  |                |    
|               |  | (In millions) |       |  |             |   |      
|Net sales      |  | $             | 2,388 |  |             | $ | 2,246 |              |  | $ | 2,326      |  |  |                | 6.3 | % |  |  | 2.6 | %
|Other revenues |  |               | 1     |  |             |   | 1     |              |  |   | 2          |  |  |                |    |   |  |  |    |  
|               |  |               |       |  |             |   |       |              |  |   |            |  |  |                |    
|Net revenues   |  | $             | 2,389 |  |             | $ | 2,247 |              |  | $ | 2,328      |  |  |                | 6.3 | % |  |  | 2.6 | %
|               |  |               |       |  |             |   |       |              |  |   |            |  |  |                |    



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











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









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

|              |  |               |        |   |             |   |        |              |  |   |            |   |  |                |      |    |  |  |      |   
|------------- |  | ------------- | ------ | - | ----------- | - | ------ | ------------ |  | - | ---------- | - |  | -------------- | ---- | -- |  |  | ---- | --
|              |  | Quarter Ended |        |   | % Variation |  
|              |  |               |        |   |             |  
|              |  | Dec 31, 2005  |        |   | Oct 1, 2005 |   |        | Dec 31, 2004 |  |   | Sequential |   |  | Year-over-year |     
|              |  |               |        |   |             |   |        |              |  |   |            |   |  |                |     
|              |  | (In millions) |       
|Cost of sales |  | $             | (1,517 | ) |             | $ | (1,481 | )            |  | $ | (1,476     | ) |  |                | (2.4 | )% |  |  | (2.8 | )%
|Gross profit  |  | $             | 872    |   |             | $ | 766    |              |  | $ | 852        |   |  |                | 13.8 | %  |  |  | 2.3  | % 
|Gross margin  |  |               | 36.5   | % |             |   | 34.1   | %            |  |   | 36.6       | % |  |                |      |    |  |  |      |   








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

|                                             |  |               |       |    |             |   |       |              |  |   |            |    |  |                |      |    |  |  |      |   
|-------------------------------------------- |  | ------------- | ----- | -- | ----------- | - | ----- | ------------ |  | - | ---------- | -- |  | -------------- | ---- | -- |  |  | ---- | --
|                                             |  | Quarter Ended |       |    | % Variation |  
|                                             |  |               |       |    |             |  
|                                             |  | Dec 31, 2005  |       |    | Oct 1, 2005 |   |       | Dec 31, 2004 |  |   | Sequential |    |  | Year-over-year |     
|                                             |  |               |       |    |             |   |       |              |  |   |            |    |  |                |     
|                                             |  | (In millions) |      
|Selling, general and administrative expenses |  | $             | (259  | )  |             | $ | (248  | )            |  | $ | (245       | )  |  |                | (4.6 | )% |  |  | (6.0 | )%
|As percentage of net revenues                |  |               | (10.9 | )% |             |   | (11.0 | )%           |  |   | (10.5      | )% |  |                |      |    |  |  |      |   







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

|                                  |  |               |       |    |             |   |       |              |  |   |            |    |  |                |      |    |  |  |     |  
|--------------------------------- |  | ------------- | ----- | -- | ----------- | - | ----- | ------------ |  | - | ---------- | -- |  | -------------- | ---- | -- |  |  | --- | -
|                                  |  | Quarter Ended |       |    | % Variation |  
|                                  |  |               |       |    |             |  
|                                  |  | Dec 31, 2005  |       |    | Oct 1, 2005 |   |       | Dec 31, 2004 |  |   | Sequential |    |  | Year-over-year |     
|                                  |  |               |       |    |             |   |       |              |  |   |            |    |  |                |     
|                                  |  | (In millions) |      
|Research and development expenses |  | $             | (402  | )  |             | $ | (401  | )            |  | $ | (402       | )  |  |                | (0.1 | )% |  |  | 0.1 | %
|As percentage of net revenues     |  |               | (16.8 | )% |             |   | (17.9 | )%           |  |   | (17.3      | )% |  |                |      |    |  |  |     |  



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

|                                   |  |               |     |   |              |   |      |              |  |   |     |  
|---------------------------------- |  | ------------- | --- | - | ------------ | - | ---- | ------------ |  | - | --- | -
|                                   |  | Quarter Ended |    
|                                   |  |               |    
|                                   |  | Dec 31, 2005  |     |   | Oct. 1, 2005 |   |      | Dec 31, 2004 | 
|                                   |  |               |     |   |              |   |      |              | 
|                                   |  | (In millions) |    
|Research and development funding   |  | $             | 29  |   |              | $ | 20   |              |  | $ | 47  |  
|Start-up costs                     |  |               | (10 | ) |              |   | (12  | )            |  |   | (18 | )
|Exchange gain (loss) net           |  |               | (20 | ) |              |   | (5   | )            |  |   | 14  |  
|Patent claim costs                 |  |               | (6  | ) |              |   | (6   | )            |  |   | (16 | )
|Gain on sale of non-current assets |  |               | 8   |   |              |   | (2   | )            |  |   |    |  
|Other, net                         |  |               | 1   |   |              |   | 2    |              |  |   | (4  | )
|Other income and expenses, net     |  |               | 2   |   |              |   | (3   | )            |  |   | 23  |  
|As a percentage of net revenues    |  |               | 0.1 | % |              |   | (0.1 | )%           |  |   | 1.0 | %

start-up Start-up build-up




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

|                                                                  |  |               |      |    |             |   |      |              |  |   |      |   
|----------------------------------------------------------------- |  | ------------- | ---- | -- | ----------- | - | ---- | ------------ |  | - | ---- | --
|                                                                  |  | Quarter Ended |     
|                                                                  |  |               |     
|                                                                  |  | Dec 31, 2005  |      |    | Oct 1, 2005 |   |      | Dec 31, 2004 | 
|                                                                  |  |               |      |    |             |   |      |              | 
|                                                                  |  | (In millions) |     
|Impairment, restructuring charges and other related closure costs |  | $             | (16  | )  |             | $ | (12  | )            |  | $ | (18  | ) 
|As a percentage of net revenues                                   |  |               | (0.7 | )% |             |   | (0.5 | )%           |  |   | (0.8 | )%





| |   |                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our new headcount restructuring plan announced in May 2005,
    which resulted in charges of $17 million mainly for
    employee termination benefits;                                                                                                                                                  
|
| |  | Our restructuring and reorganization activities initiated in the
    first quarter of 2005, which generated an additional charge of
    $1 million; and                                                                                                                                                 
|
| |  | Our ongoing 2003 restructuring plan and related manufacturing
    initiatives, which generated a positive impact of approximately
    $2 million as a result of a reversal of a provision
    pursuant to our decision made in the fourth quarter 2005 to keep
    a back-end production line in France.





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

|                              |  |               |     |   |             |   |     |              |  |   |     |  
|----------------------------- |  | ------------- | --- | - | ----------- | - | --- | ------------ |  | - | --- | -
|                              |  | Quarter Ended |    
|                              |  |               |    
|                              |  | Dec 31, 2005  |     |   | Oct 1, 2005 |   |     | Dec 31, 2004 | 
|                              |  |               |     |   |             |   |     |              | 
|                              |  | (In millions) |    
|Operating income              |  | $             | 197 |   |             | $ | 102 |              |  | $ | 210 |  
|In percentage of net revenues |  |               | 8.2 | % |             |   | 4.5 | %            |  |   | 9.0 | %



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

|                     |  |               |    |  |             |   |   |              |  |   |   | 
|-------------------- |  | ------------- | -- |  | ----------- | - | - | ------------ |  | - | - | 
|                     |  | Quarter Ended |   
|                     |  |               |   
|                     |  | Dec 31, 2005  |    |  | Oct 1, 2005 |   |   | Dec 31, 2004 | 
|                     |  |               |    |  |             |   |   |              | 
|                     |  | (In millions) |   
|Interest income, net |  | $             | 11 |  |             | $ | 8 |              |  | $ | 5 | 





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

|                           |  |               |   |  |             |   |    |              |  |   |    |  
|-------------------------- |  | ------------- | - |  | ----------- | - | -- | ------------ |  | - | -- | -
|                           |  | Quarter Ended |  
|                           |  |               |  
|                           |  | Dec 31, 2005  |   |  | Oct 1, 2005 |   |    | Dec 31, 2004 | 
|                           |  |               |   |  |             |   |    |              | 
|                           |  | (In millions) |  
|Loss on equity investments |  |               |  |  |             | $ | (2 | )            |  | $ | (2 | )

start-up




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

|                   |  |               |     |   |             |   |     |              |  |   |     |  
|------------------ |  | ------------- | --- | - | ----------- | - | --- | ------------ |  | - | --- | -
|                   |  | Quarter Ended |    
|                   |  |               |    
|                   |  | Dec 31, 2005  |     |   | Oct 1, 2005 |   |     | Dec 31, 2004 | 
|                   |  |               |     |   |             |   |     |              | 
|                   |  | (In millions) |    
|Income tax expense |  | $             | (25 | ) |             | $ | (18 | )            |  | $ | (26 | )





75



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

|                              |  |               |     |   |             |   |     |              |  |   |     |  
|----------------------------- |  | ------------- | --- | - | ----------- | - | --- | ------------ |  | - | --- | -
|                              |  | Quarter Ended |    
|                              |  |               |    
|                              |  | Dec 31, 2005  |     |   | Oct 1, 2005 |   |     | Dec 31, 2004 | 
|                              |  |               |     |   |             |   |     |              | 
|                              |  | (In millions) |    
|Net income                    |  | $             | 183 |   |             | $ | 89  |              |  | $ | 187 |  
|As percentage of net revenues |  |               | 7.7 | % |             |   | 3.9 | %            |  |   | 8.0 | %



Impact of Changes in Exchange Rates








 


 


76



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Liquidity and Capital Resources








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



Net cash from operating activities.




77



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Net cash used in investing activities.






| |   |                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 an 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 Philips
    Semiconductor International B.V. and Freescale Semiconductor
    Inc., 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.   





| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | the expansion of our 200-mm and 150-mm front-end facilities in
    Singapore;
|
| |  | the upgrading of our 200-mm front-end plant in Agrate (Italy);               
|
| |  | the expansion of our 200-mm front-end facility in Rousset
    (France);      
|
| |  | the expansion of our 300-mm facility in Crolles2 (France);                   
|
| |  | the facilitization of our 300-mm facility in Catania
    (Italy); and        
|
| |  | the expansion of our back-end facilities in Muar (Malaysia).                 

Net operating cash flow.


78



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|                                                                              |  |                         |        |   |      |   |        |      |  |   |        |  
|----------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                              |  | Year Ended December 31, |       
|                                                                              |  |                         |       
|                                                                              |  | 2005                    |        |   | 2004 |   |        | 2003 | 
|                                                                              |  |                         |        |   |      |   |        |      | 
|                                                                              |  | (In millions)           |       
|Net cash from operating activities                                            |  |                         | 1,798  |   |      | $ | 2,342  |      |  | $ | 1,920  |  
|Net cash used in investing activities                                         |  |                         | (1,528 | ) |      |   | (2,134 | )    |  |   | (1,439 | )
|Payment for purchase and proceeds from sale of marketable
    securities, net |  |                         |       |   |      |   |       |      |  |   | (4     | )
|                                                                              |  |                         |        |   |      |   |        |      | 
|Net operating cash flow                                                       |  | $                       | 270    |   |      | $ | 208    |      |  | $ | 477    |  
|                                                                              |  |                         |        |   |      |   |        |      | 



Net cash used in financing activities.




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



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



|                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|--------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                  |  | Year Ended December 31, |       
|                                  |  |                         |       
|                                  |  | 2005                    |        |   | 2004 |   |        | 2003 | 
|                                  |  |                         |        |   |      |   |        |      | 
|                                  |  | (In millions)           |       
|Cash and cash equivalents         |  | $                       | 2,027  |   |      | $ | 1,950  |      |  | $ | 2,998  |  
|Marketable securities             |  |                         |       |   |      |   |       |      |  |   |       |  
|Total cash position               |  |                         | 2,027  |   |      |   | 1,950  |      |  |   | 2,998  |  
|                                  |  |                         |        |   |      |   |        |      | 
|Bank overdrafts                   |  |                         | (11    | ) |      |   | (58    | )    |  |   | (45    | )
|Current portion of long-term debt |  |                         | (1,522 | ) |      |   | (133   | )    |  |   | (106   | )
|Long-term debt                    |  |                         | (269   | ) |      |   | (1,767 | )    |  |   | (2,944 | )
|                                  |  |                         |        |   |      |   |        |      | 
|Total financial debt              |  |                         | (1,802 | ) |      |   | (1,958 | )    |  |   | (3,095 | )
|                                  |  |                         |        |   |      |   |        |      | 
|Net financial position            |  | $                       | 225    |   |      | $ | (8     | )    |  | $ | (97    | )
|                                  |  |                         |        |   |      |   |        |      | 





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|                                           |  |                        |       |  |      |  |       |      |  |  |      |  |  |      |    |  |      |  |    |            |  |  |    |  |  |  |    | 
|------------------------------------------ |  | ---------------------- | ----- |  | ---- |  | ----- | ---- |  |  | ---- |  |  | ---- | -- |  | ---- |  | -- | ---------- |  |  | -- |  |  |  | -- | 
|                                           |  | Payments Due by Period |      
|                                           |  |                        |      
|                                           |  | Total                  |       |  | 2006 |  |       | 2007 |  |  | 2008 |  |  | 2009 |    |  | 2010 |  |    | Thereafter | 
|                                           |  |                        |       |  |      |  |       |      |  |  |      |  |  |      |    |  |      |  |    |            | 
|                                           |  | (In millions)          |      
|Long-term debt (including current portion) |  |                        | 1,791 |  |      |  | 1,522 |      |  |  | 119  |  |  |      | 58 |  |      |  | 30 |            |  |  | 22 |  |  |  | 40 | 







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










80



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



|                                                            |                                          |               |       |     |      |   |       |      |  |   |      |    |  |      |     |    |      |   |    |            |  |   |    |   |  |   |     |   | 
|----------------------------------------------------------- | ---------------------------------------- | ------------- | ----- | --- | ---- | - | ----- | ---- |  | - | ---- | -- |  | ---- | --- | -- | ---- | - | -- | ---------- |  | - | -- | - |  | - | --- | - | 
|                                                            |                                          | Total         |       |     | 2006 |   |       | 2007 |  |   | 2008 |    |  | 2009 |     |    | 2010 |   |    | Thereafter | 
|                                                            |                                          |               |       |     |      |   |       |      |  |   |      |    |  |      |     |    |      |   |    |            | 
|                                                            |                                          | (In millions) |      
|Capital leases(3)                                           |                                          | $             | 26    |     |      | $ | 5     |      |  | $ | 5    |    |  | $    | 5   |    |      | $ | 5  |            |  | $ | 5  |   |  | $ | 1   |  
|Operating leases(2)                                         |                                          |               | 271   |     |      |   | 50    |      |  |   | 37   |    |  |      | 32  |    |      |   | 28 |            |  |   | 22 |   |  |   | 102 |  
|Purchase obligations(2)                                     |                                          |               | 1,053 |     |      |   | 940   |      |  |   | 79   |    |  |      | 34  |    |      |   |   |            |  |   |   |   |  |   |    |  
|of which:                                                   |                                          |               |       |     |      |   |       |      |  |   |      |    |  |      |     |    |      |   |    |            |  |   |    |   |  |   |     |  
|                                                            | Equipment purchase                       |               |       | 576 |      |   |       | 576  |  |   |      |   |  |      |     |   |      |   |    |           |  |   |    |  |  |   |     |  | 
|                                                            | Foundry purchase                         |               |       | 260 |      |   |       | 260  |  |   |      |   |  |      |     |   |      |   |    |           |  |   |    |  |  |   |     |  | 
|                                                            | Software, technology licenses and design |               |       | 217 |      |   |       | 104  |  |   |      | 79 |  |      |     | 34 |      |   |    |           |  |   |    |  |  |   |     |  | 
|Joint Venture Agreement with Hynix Semiconductor Inc.(2)(5) |                                          |               | 212   |     |      |   | 212   |      |  |   |     |    |  |      |    |    |      |   |   |            |  |   |   |   |  |   |    |  
|Other Obligations(2)                                        |                                          |               | 112   |     |      |   | 59    |      |  |   | 44   |    |  |      | 3   |    |      |   | 2  |            |  |   | 1  |   |  |   | 3   |  
|Long-term debt obligations (including                       |                                          |               |       |     |      |   |       |      |  |   |      |    |  |      |     |    |      |   |    |            |  |   |    |   |  |   |     |  
|current portion)(3)(4)                                      |                                          |               | 1,791 |     |      |   | 1,522 |      |  |   | 119  |    |  |      | 58  |    |      |   | 30 |            |  |   | 22 |   |  |   | 40  |  
|Pension obligations(3)                                      |                                          |               | 270   |     |      |   | 29    |      |  |   | 20   |    |  |      | 22  |    |      |   | 26 |            |  |   | 28 |   |  |   | 145 |  
|Other non-current liabilities(3)                            |                                          |               | 16    |     |      |   | 3     |      |  |   | 2    |    |  |      | 3   |    |      |   | 2  |            |  |   | 3  |   |  |   | 3   |  
|Total                                                       |                                          | $             | 3,751 |     |      | $ | 2,820 |      |  | $ | 306  |    |  | $    | 157 |    |      | $ | 93 |            |  | $ | 81 |   |  | $ | 294 |  






|    |                                                                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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, 2005.                                                                                                                                                                                                                               
|   
|(3) | Items reflected on the Consolidated Balance Sheet at
    December 31, 2005.                                                                                                                                                                                                                                   
|   
|(4) | See Note 14 to our Consolidated Financial Statements at
    December 31, 2005 for additional information related to
    long-term debt and redeemable convertible securities, in
    particular, in respect to the noteholders option to put
    our convertible bonds for earlier redemption in August 2006.
|   
|(5) | These amounts correspond to our capital commitments to the joint
    venture, but not the additional $250 million in loans that
    we have committed to provide.                                                                                                                                             









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Off-Balance Sheet
Arrangements










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







82



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Impact of Recently Issued U.S. Accounting Standards


Inventory Costs, an amendment of ARB No. 43,
Chapter 4


Exchanges of Nonmonetary Assets, an amendment of APB Opinion
No. 29


Share-Based Payment Accounting for
Stock-Based Compensation Accounting for Stock Issued to Employees


Accounting for Conditional Asset
Retirement Obligations Accounting for Asset Retirement Obligations


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Impairment, Restructuring Charges and Other Related Closure
Costs




ramp-ups








84



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|                                                            |  |                               |     |                   |         |  |               |               |  |               |               |   |  |  |      |  
|----------------------------------------------------------- |  | ----------------------------- | --- | ----------------- | ------- |  | ------------- | ------------- |  | ------------- | ------------- | - |  |  | ---- | -
|                                                            |  | Year Ended December 31, 2005  |    
|                                                            |  |                               |    
|                                                            |  |                               |     | Total Impairment, |        
|                                                            |  |                               |     | Restructuring     |        
|                                                            |  |                               |     | Charges and       |        
|                                                            |  |                               |     | Restructuring     |         |  | Other Related |               |  | Other Related |              
|                                                            |  | Impairment                    |     |                   | Charges |  |               | Closure Costs |  |               | Closure Costs |  
|                                                            |  |                               |     |                   |         |  |               |               |  |               |               |  
|                                                            |  | (In millions of U.S. dollars) |    
|150-mm fab plan                                             |  |                               |    |                   |         |  | (4            | )             |  |               | (9            | ) |  |  | (13  | )
|Restructuring initiatives decided in the first quarter 2005 |  |                               | (63 | )                 |         |  | (9            | )             |  |               | (1            | ) |  |  | (73  | )
|Restructuring plan decided in the second quarter 2005       |  |                               | (3  | )                 |         |  | (37           | )             |  |               | (1            | ) |  |  | (41  | )
|Other                                                       |  |                               | (1  | )                 |         |  |              |               |  |               |              |   |  |  | (1   | )
|                                                            |  |                               |     |                   |         |  |               |               |  |               |               |  
|Total                                                       |  |                               | (67 | )                 |         |  | (50           | )             |  |               | (11           | ) |  |  | (128 | )
|                                                            |  |                               |     |                   |         |  |               |               |  |               |               |  





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 |  |  |  | 57 | 
|Bruno Steve       |  |          | Vice Chairman |  |                   |  | 1989 |              |  |  | 2008 |  |  |  | 64 | 
|Matteo del Fante  |  |          | Member        |  |                   |  | 2005 |              |  |  | 2008 |  |  |  | 39 | 
|Tom de Waard      |  |          | Member        |  |                   |  | 1998 |              |  |  | 2008 |  |  |  | 59 | 
|Douglas Dunn      |  |          | Member        |  |                   |  | 2001 |              |  |  | 2006 |  |  |  | 61 | 
|Francis Gavois    |  |          | Member        |  |                   |  | 1998 |              |  |  | 2006 |  |  |  | 70 | 
|Didier Lombard    |  |          | Member        |  |                   |  | 2004 |              |  |  | 2008 |  |  |  | 64 | 
|Antonino Turicchi |  |          | Member        |  |                   |  | 2005 |              |  |  | 2008 |  |  |  | 40 | 
|Robert M. White   |  |          | Member        |  |                   |  | 1996 |              |  |  | 2006 |  |  |  | 67 | 






|    |                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Messrs. Riccardo Gallo and Alessandro Ovi, who were
    Supervisory Board Members throughout fiscal year 2004, were
    replaced by Messrs. Antonino Turicchi and Matteo del Fante
    at the annual general meeting on March 18, 2005.
|   
|(2) | As a member of the Supervisory Board.                                                                                                                                                                                                  









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









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 our strict policies, implemented since our
    1994 initial public offering, to comply with applicable
    regulatory requirements concerning financial reporting, insider
    trading and public disclosures.                                                                           
|
| |  | Our compliance with United States, French and Italian securities
    laws, because our shares are listed in these jurisdictions, and
    with Dutch securities laws, because we are a company
    incorporated under the laws of the Netherlands, as well as 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.                                                                                                                                                                                                                                 







90



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non-U.S.


20-F, 20-F 20-F.






91



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

Membership and Attendance.


|                                       |  |            |   |       |           |  |              |           |  |           |           |  |  |  |   | 
|-------------------------------------- |  | ---------- | - | ----- | --------- |  | ------------ | --------- |  | --------- | --------- |  |  |  | - | 
|                                       |  |            |   | Audit |           |  | Compensation |           |  | Strategic |          
|Number of Meetings Attended in 2005(1) |  | Full Board |   |       | Committee |  |              | Committee |  |           | Committee | 
|                                       |  |            |   |       |           |  |              |           |  |           |           | 
|Bruno Steve                            |  |            | 7 |       |           |  |             |           |  |           | 5         |  |  |  | 4 | 
|Gérald Arbola                          |  |            | 7 |       |           |  |             |           |  |           | 5         |  |  |  | 4 | 
|Tom de Waard                           |  |            | 7 |       |           |  | 11           |           |  |           | 5         |  |  |  |  | 
|Douglas Dunn                           |  |            | 7 |       |           |  | 9            |           |  |           |          |  |  |  |  | 
|Francis Gavois(2)(3)                   |  |            | 7 |       |           |  | 11           |           |  |           |          |  |  |  |  | 
|Antonino Turicchi                      |  |            | 5 |       |           |  |             |           |  |           | 3         |  |  |  | 3 | 
|Didier Lombard                         |  |            | 7 |       |           |  |             |           |  |           | 3         |  |  |  | 4 | 
|Matteo del Fante(2)(3)                 |  |            | 5 |       |           |  | 7            |           |  |           |          |  |  |  |  | 
|Robert M. White                        |  |            | 7 |       |           |  | 11           |           |  |           |          |  |  |  | 4 | 
|Riccardo Gallo(2)                      |  |            | 2 |       |           |  | 4            |           |  |           |          |  |  |  |  | 
|Alessandro Ovi(2)                      |  |            | 2 |       |           |  |             |           |  |           |          |  |  |  | 1 | 






|    |                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes meetings attended by way of conference call.                                                                                                                                                                                  
|   
|(2) | Messrs. Riccardo Gallo and Alessandro Ovi, who were
    Supervisory Board Members throughout fiscal year 2004, were
    replaced by Messrs. Antonino Turicchi and Matteo del Fante
    at the annual general meeting on March 18, 2005.
|   
|(3) | Appointed as non-voting observer to Audit Committee.                                                                                                                                                                                   

Audit Committee.


The Audit Committee met 11 times during 2005.




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20-F.










Compensation Committee.








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Strategic Committee.






Nominating and Corporate Governance Committee.


Secretariat and Controllers.








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



94



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95



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



|                     |  |                                                                                                                      |  |            |    |          |                |  |    |     |  |  |    | 
|-------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ---------- | -- | -------- | -------------- |  | -- | --- |  |  | -- | 
|                     |  |                                                                                                                      |  |            |    | Years in |                |  |   
|                     |  |                                                                                                                      |  | Years with |    |          | Semi-conductor |  |    |    
|Name                 |  | Position                                                                                                             |  | Company    |    |          | Industry       |  |    | Age | 
|                     |  |                                                                                                                      |  |            |    |          |                |  |    |     | 
|Executive Committee  |  |                                                                                                                      |  |            |    |          |                |  |    |     |  |  |    | 
|Carlo Bozotti        |  | President and Chief Executive Officer                                                                                |  |            | 29 |          |                |  | 29 |     |  |  | 53 | 
|Alain Dutheil        |  | Chief Operating Officer                                                                                              |  |            | 23 |          |                |  | 36 |     |  |  | 60 | 
|Laurent Bosson       |  | Executive Vice President, Front-end Technology and Manufacturing                                                     |  |            | 23 |          |                |  | 23 |     |  |  | 63 | 
|Andrea Cuomo         |  | Executive Vice President, Advanced System Technology and Chief
    Strategic Officer (and for other staff functions) |  |            | 23 |          |                |  | 23 |     |  |  | 51 | 
|Carlo Ferro          |  | Executive Vice President, Chief Financial Officer (and for
    Infrastructure and Services organization)             |  |            | 6  |          |                |  | 6  |     |  |  | 45 | 
|Philippe Geyres      |  | Executive Vice President, HPC (and for the other product
    segments)                                               |  |            | 22 |          |                |  | 29 |     |  |  | 53 | 
|Enrico Villa         |  | Executive Vice President, Europe Region (and for Sales and
    Marketing organizations)                              |  |            | 39 |          |                |  | 39 |     |  |  | 64 | 
|Executive Staff      |  |                                                                                                                      |  |            |    |          |                |  |    |     |  |  |    | 
|Georges Auguste      |  | Corporate Vice President, Total Quality and Environmental
    Management                                             |  |            | 19 |          |                |  | 32 |     |  |  | 56 | 
|Gian Luca Bertino    |  | Corporate Vice President, CPG                                                                                        |  |            | 9  |          |                |  | 20 |     |  |  | 46 | 
|Patrice Chastagner   |  | Corporate Vice President, Human Resources                                                                            |  |            | 20 |          |                |  | 20 |     |  |  | 58 | 
|Ugo Carena           |  | Corporate Vice President, APG                                                                                        |  |            | 9  |          |                |  | 28 |     |  |  | 62 | 
|Marco Luciano Cassis |  | Corporate Vice President, STMicroelectronics Japan                                                                   |  |            | 18 |          |                |  | 18 |     |  |  | 42 | 
|François Guibert     |  | Corporate Vice President, Emerging Markets Region                                                                    |  |            | 25 |          |                |  | 28 |     |  |  | 52 | 
|Reza Kazerounian     |  | Corporate Vice President, North America Region                                                                       |  |            | 6  |          |                |  | 21 |     |  |  | 48 | 
|Otto Kosgalwies      |  | Corporate Vice President, Infrastructure and Services                                                                |  |            | 22 |          |                |  | 22 |     |  |  | 50 | 
|Robert Krysiak       |  | Corporate Vice President and General Manager of our new
    Greater China sales region                             |  |            | 17 |          |                |  | 23 |     |  |  | 51 | 
|Mario Licciardello   |  | Corporate Vice President, MPG                                                                                        |  |            | 41 |          |                |  | 41 |     |  |  | 64 | 
|Jean-Claude Marquet  |  | Corporate Vice President, Asia Pacific Region                                                                        |  |            | 20 |          |                |  | 39 |     |  |  | 63 | 
|Piero Mosconi(1)     |  | Corporate Vice President, Treasurer                                                                                  |  |            | 42 |          |                |  | 42 |     |  |  | 66 | 
|Carlo Ottaviani      |  | Corporate Vice President, Communications                                                                             |  |            | 41 |          |                |  | 41 |     |  |  | 62 | 

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|                   |  |                                                                                    |  |            |    |          |                |  |    |     |  |  |    | 
|------------------ |  | ---------------------------------------------------------------------------------- |  | ---------- | -- | -------- | -------------- |  | -- | --- |  |  | -- | 
|                   |  |                                                                                    |  |            |    | Years in |                |  |   
|                   |  |                                                                                    |  | Years with |    |          | Semi-conductor |  |    |    
|Name               |  | Position                                                                           |  | Company    |    |          | Industry       |  |    | Age | 
|                   |  |                                                                                    |  |            |    |          |                |  |    |     | 
|Carmelo Papa       |  | Corporate Vice President, MLD (since January 2006 Micro, Power,
    Analog)        |  |            | 23 |          |                |  | 23 |     |  |  | 56 | 
|Giordano Seragnoli |  | Corporate Vice President, Back-end Manufacturing and Subsystems
    Products Group |  |            | 41 |          |                |  | 43 |     |  |  | 69 | 






|    |                                            
|--- | -------------------------------------------
|(1) | Mr. Piero Mosconi retired in December 2005.





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









97



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98



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99



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Compensation




100



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|                         |  |                 |           | 
|------------------------ |  | --------------- | --------- | 
|Supervisory Board Member |  | Directors Fees |          
|                         |  |                 |          
|Bruno Steve              |  | $               | 205,000   | 
|Gérald Arbola            |  |                 | 205,000   | 
|Tom de Waard(1)          |  |                 | 213,500   | 
|Douglas Dunn             |  |                 | 111,000   | 
|Antonino Turicchi(2)     |  |                 | 110,000   | 
|Francis Gavois           |  |                 | 120,500   | 
|Didier Lombard           |  |                 | 120,000   | 
|Matteo del Fante(2)      |  |                 | 111,500   | 
|Robert M. White          |  |                 | 125,500   | 
|Riccardo Gallo(2)        |  |                 | 9,000     | 
|Alessandro Ovi(2)        |  |                 | 6,000     | 
|                         |  |                 |          
|Total                    |  | $               | 1,336,500 | 
|                         |  |                 |          






|    |                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Compensation, including attendance fees of $2,000 per
    meeting of the Supervisory Board or committee thereof, was paid
    to Clifford Chance LLP.                                                                                  
|   
|(2) | Messrs. Riccardo Gallo and Alessandro Ovi, who were
    Supervisory Board Members throughout fiscal year 2004, were
    replaced by Messrs. Antonino Turicchi and Matteo del Fante
    at the annual general meeting on March 18, 2005.





|                                                |  |        |         |  |          |   |        |                   |  |   |          |   |  |   |         | 
|----------------------------------------------- |  | ------ | ------- |  | -------- | - | ------ | ----------------- |  | - | -------- | - |  | - | ------- | 
|Sole Member of Our Managing Board and President |  |        |         |  |          |   |        |                  
|and CEO                                         |  | Salary |         |  | Bonus(1) |   |        | Non-cash Benefits |  |   | Total    |  
|                                                |  |        |         |  |          |   |        |                   |  |   |          |  
|Carlo Bozotti                                   |  | $      | 695,585 |  |          | $ | 73,758 |                   |  | $ | 64,855(2 | ) |  | $ | 834,198 | 






|    |                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The bonus paid to the sole member of our Managing Board and
    President and CEO during the 2005 financial year was approved by
    the Compensation Committee and approved by the Supervisory Board
    in respect of the 2004 financial year, based on fulfillment of a
    number of pre-defined objectives for 2004.
|   
|(2) | Including employer social contributions, company car allowance
    and miscellaneous allowances.                                                                                                                                                                                                                         

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|                                             |  |        |         |  |          |   |           |                   |  |   |         |   |  |   |           | 
|-------------------------------------------- |  | ------ | ------- |  | -------- | - | --------- | ----------------- |  | - | ------- | - |  | - | --------- | 
|Former Sole Member of Our Managing Board and |  |        |         |  |          |   |           |                  
|President and CEO                            |  | Salary |         |  | Bonus(1) |   |           | Non-cash Benefits |  |   | Total   |  
|                                             |  |        |         |  |          |   |           |                   |  |   |         |  
|Pasquale Pistorio                            |  | $      | 372,501 |  |          | $ | 6,000,000 |                   |  | $ | 2,836(2 | ) |  | $ | 6,375,337 | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The bonus paid to the former sole member of our Managing Board
    and President and CEO during the 2005 financial year was
    approved by the Compensation Committee and approved by the
    Supervisory Board in respect of the 2004 financial year and in
    recognition of Mr. Pistorios career with the Company,
    based on fulfillment of a number of pre-defined objectives for
    2004.
|   
|(2) | Including employer social contributions and miscellaneous
    allowances.                                                                                                                                                                                                                                                                                                                            











Former sole member of our Managing Board and President and
CEO




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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;                                                                                                                                                                                                                                         
|
| |  | amended our 2001 Employee Stock Option Plan 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, the
    maximum number of which is four million, in addition to the up
    to 100,000 stock awards granted to our President and CEO, which
    were approved by separate resolution; and
|
| |  | accelerated the vesting of all of our outstanding stock options
    in July 2005 aimed at facilitating the transition to a new stock
    compensation policy with no charge to our interim consolidated
    statements of income.                                                                                                                                        





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

103



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|    |                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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, who were
    Supervisory Board Members throughout fiscal year 2004, were
    replaced by Messrs. Antonino Turicchi and Matteo del Fante
    at the annual general meeting on March 18, 2005.
|   
|(4) | Messrs. Antonino Turicchi and Matteo del Fante declined
    their grants of restricted shares.                                                                                                                                         





inter alia,




| |                   
| | ------------------
| | Stock Option Plans







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

1995 Stock Option Plan.


104



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1995 Plan (Employees)


October 20, 1995


Annual General Meeting of Shareholders


|                                                                                |  |                          |  |                          |  |                          |  |                         |  |                          |  |                          |  |                         |  |                         |  |                         
|------------------------------------------------------------------------------- |  | ------------------------ |  | ------------------------ |  | ------------------------ |  | ----------------------- |  | ------------------------ |  | ------------------------ |  | ----------------------- |  | ----------------------- |  | ------------------------
|                                                                                |  | Tranche 2                |  | Tranche 3                |  | Tranche 4                |  | Special grant           |  | Tranche 5                |  | Special grant            |  | Tranche 6               |  | Special grant           |  | Tranche 7               
|                                                                                |  |                          |  |                          |  |                          |  |                         |  |                          |  |                          |  |                         |  |                         |  |                         
|Date of Supervisory Board Meeting                                               |  | Sept 12, 1997            |  | 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                                   |  | 3,873,000                |  | 3,900,000                |  | 8,878,200                |  | 150,000                 |  | 5,331,250                |  | 70,000                   |  | 2,019,640               |  | 26,501                  |  | 113,350                 
|Vesting Date                                                                    |  | Sept 12, 2000            |  | 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                                                                 |  | Sept 12, 2005            |  | 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                                                                  |  | $14.23                   |  | $12.03                   |  | $24.88                   |  | $55.25                  |  | $62.01                   |  | $52.88                   |  | $50.69                  |  | $44.00                  |  | $31.65                  
|Terms of Exercise                                                               |  | 50% on
    Sept 12, 2000 |  | 50% on
    July 28, 2001 |  | 50% on
    Sept 16, 2002 |  | 50% on
    Jan 24, 2003 |  | 32% on
    June 16, 2002 |  | 32% on
    Sept 18, 2002 |  | 32% on
    Dec 11, 2002 |  | 32% on
    Dec 18, 2002 |  | 32% on
    March 1, 2003
|                                                                                |  | 50% on
    Sept 12, 2001 |  | 50% on
    July 28, 2002 |  | 50% on
    Sept 16, 2003 |  | 50% on
    Jan 24, 2004 |  | 32% on
    June 16, 2003 |  | 32% on
    Sept 18, 2003 |  | 32% on
    Dec 11, 2003 |  | 32% on
    Dec 18, 2003 |  | 32% on
    March 1, 2004
|                                                                                |  |                          |  |                          |  |                          |  |                         |  | 36% on
    June 16, 2004 |  | 36% on
    Sept 18, 2004 |  | 36% on
    Dec 11, 2004 |  | 36% on
    Dec 18, 2004 |  | 36% on
    March 1, 2005
|Number of Shares to be acquired with Outstanding Options as of
    Dec 31, 2005 |  |                         |  | 2,287,131                |  | 7,819,020                |  |                        |  | 4,672,795                |  | 40,435                   |  | 1,632,060               |  | 22,120                  |  | 50,470                  
|Held by Managing Board/ Executive Officers                                      |  |                         |  | 420,840                  |  | 1,352,400                |  |                        |  | 549,000                  |  |                         |  |                        |  |                        |  |                        



2001 Stock Option Plan.


105



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2001 Plan (Employees)


April 25, 2001


Annual General Meeting of Shareholders


|                                                                                     |  |           |                |  |           |  |              |           |  |  |             |  |  |           |             |  |           |  |              |           |  |  |                |  |  |  |               | 
|------------------------------------------------------------------------------------ |  | --------- | -------------- |  | --------- |  | ------------ | --------- |  |  | ----------- |  |  | --------- | ----------- |  | --------- |  | ------------ | --------- |  |  | -------------- |  |  |  | ------------- | 
|                                                                                     |  | 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, 2005 |  |           | 8,397,130      |  |           |  | 16,000       |           |  |  | 51,040      |  |  |           | 24,800      |  |           |  | 3,125,799    |           |  |  | 8,840,539      |  |  |  | 148,806       | 
|Held by Managing Board/ Executive Officers                                           |  |           | 771,000        |  |           |  |             |           |  |  |            |  |  |           |            |  |           |  | 274,500      |           |  |  | 801,000        |  |  |  |              | 

2001 Plan (Employees)


April 25, 2001


Annual General Meeting of Shareholders


|                                                                                |  |                        |  |                         |  |                           |  |                         |  |                         |  |                        |  |                           |  |                         |  |                         |  |                          
|------------------------------------------------------------------------------- |  | ---------------------- |  | ----------------------- |  | ------------------------- |  | ----------------------- |  | ----------------------- |  | ---------------------- |  | ------------------------- |  | ----------------------- |  | ----------------------- |  | -------------------------
|                                                                                |  | 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
    Aug 1, 2004 |  | 32% on
    Dec 17, 2004 |  | 32% on
    March 14, 2005 |  | 32% on
    June 3, 2005 |  | 32% on
    Oct 24, 2005 |  | 32% on
    Jan 2, 2006 |  | 32% on
    April 26, 2006 |  | 32% on
    Sept 1, 2006 |  | 32% on
    Jan 31, 2007 |  | 32% on
    March 17, 2007
|Terms of Exercise                                                               |  | 32% on
    Aug 1, 2005 |  | 32% on
    Dec 17, 2005 |  | 32% on
    March 14, 2006 |  | 32% on
    June 3, 2006 |  | 32% on
    Oct 24, 2006 |  | 32% on
    Jan 2, 2007 |  | 32% on
    April 26, 2007 |  | 32% on
    Sept 1, 2007 |  | 32% on
    Jan 31, 2008 |  | 32% on
    March 17, 2008
|                                                                                |  | 36% on
    Aug 1, 2006 |  | 36% on
    Dec 17, 2006 |  | 36% on
    March 14, 2007 |  | 36% on
    June 3, 2007 |  | 36% on
    Oct 24, 2007 |  | 36% on
    Jan 2, 2008 |  | 36% on
    March 14, 2008 |  | 36% on
    Sept 1, 2008 |  | 36% on
    Jan 31, 2009 |  | 36% on
    March 17, 2009
|Number of Shares to be acquired with Outstanding Options as of
    Dec 31, 2005 |  | 18,900                 |  | 14,400                  |  | 10,673,083                |  | 219,954                 |  | 128,950                 |  | 41,000                 |  | 11,383,755                |  | 159,180                 |  | 29,200                  |  | 13,000                   
|Held by Managing Board/ Executive Officers                                      |  |                       |  |                        |  | 1,077,00                  |  |                        |  | 31,000                  |  |                       |  | 1,190,000                 |  |                        |  |                        |  |                         







106



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| |                                     
| | ------------------------------------
| | 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.


1996, 1999, and 2002 Plans


(for Supervisory Board Members and Professionals)


|                                                                                     |  |                              |  |                              |  |                              |  |                              |  |                              |  |                              |  |                             
|------------------------------------------------------------------------------------ |  | ---------------------------- |  | ---------------------------- |  | ---------------------------- |  | ---------------------------- |  | ---------------------------- |  | ---------------------------- |  | ----------------------------
|Date of Annual                                                                       |  | June 24, 1996                |  | May 31, 1999                 |  | March 27, 2002              
|General Meeting of                                                                   |  |                              |  |                              |  |                             
|Shareholders                                                                         |  | Tranche 3                    |  | Tranche 1                    |  | Tranche 2                    |  | Tranche 3                    |  | Tranche 1                    |  | Tranche 2                    |  | Tranche 3                   
|                                                                                     |  |                              |  |                              |  |                              |  |                              |  |                              |  |                              |  |                             
|Date of the grant                                                                    |  | July 28, 1998                |  | September 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                |  | September 16, 2000           |  | June 16, 2001                |  | April 27, 2002               |  | May 25, 2002                 |  | April 14, 2003               |  | April 26, 2004              
|Expiration Date                                                                      |  | July 28, 2006                |  | September 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                      
|Terms of Exercise                                                                    |  | All exercisable after 1 year |  | All exercisable after 1 year |  | All exercisable after 1 year |  | All exercisable after 1 year |  | All exercisable after 1 year |  | All exercisable after 1 year |  | All exercisable after 1 year
|Number of Shares to be acquired with Outstanding Options as of
    December 31, 2005 |  | 36,000                       |  | 153,000                      |  | 90,000                       |  | 99,000                       |  | 120,000                      |  | 120,000                      |  | 132,000                     



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.                                                                                                                  

107



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Summary of Stock Options and Share Awards.


|                                          |  |           |            |  |                   |  |            |      |  |  |         |  |  |      |         |  |       |  |         |  |  |  |            | 
|----------------------------------------- |  | --------- | ---------- |  | ----------------- |  | ---------- | ---- |  |  | ------- |  |  | ---- | ------- |  | ----- |  | ------- |  |  |  | ---------- | 
|                                          |  | Employees |            |  | Supervisory Board | 
|                                          |  |           |            |  |                   | 
|                                          |  | 1995 Plan |            |  | 2001 Plan         |  |            | 1996 |  |  | 1999    |  |  | 2002 |         |  | Total | 
|                                          |  |           |            |  |                   |  |            |      |  |  |         |  |  |      |         |  |       | 
|Remaining amount authorized to be granted |  |           | 0          |  |                   |  | 12,265,817 |      |  |  | 0       |  |  |      | 0       |  |       |  | 0       |  |  |  | 12,265,817 | 
|Amount exercised                          |  |           | 12,255,102 |  |                   |  | 9,650      |      |  |  | 293,500 |  |  |      | 18,000  |  |       |  | 0       |  |  |  | 12,576,252 | 
|Amount cancelled                          |  |           | 2,782,808  |  |                   |  | 4,438,997  |      |  |  | 72,000  |  |  |      | 63,000  |  |       |  | 24,000  |  |  |  | 7,380,805  | 
|Amount outstanding                        |  |           | 16,524,031 |  |                   |  | 43,285,536 |      |  |  | 35,000  |  |  |      | 342,000 |  |       |  | 372,000 |  |  |  | 60,558,567 | 









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



|                  |  |                 |        |  |      |  |        |      |  |  |        | 
|----------------- |  | --------------- | ------ |  | ---- |  | ------ | ---- |  |  | ------ | 
|                  |  | At December 31, |       
|                  |  |                 |       
|                  |  | 2005            |        |  | 2004 |  |        | 2003 | 
|                  |  |                 |        |  |      |  |        |      | 
|France            |  |                 | 10,330 |  |      |  | 9,990  |      |  |  | 9,900  | 
|Italy             |  |                 | 10,500 |  |      |  | 10,940 |      |  |  | 10,400 | 
|Rest of Europe    |  |                 | 1,550  |  |      |  | 1,660  |      |  |  | 1,600  | 
|United States     |  |                 | 3,120  |  |      |  | 3,180  |      |  |  | 3,000  | 
|Malta and Morocco |  |                 | 6,900  |  |      |  | 7,200  |      |  |  | 7,000  | 
|Asia              |  |                 | 17,600 |  |      |  | 16,530 |      |  |  | 13,800 | 
|                  |  |                 |        |  |      |  |        |      | 
|Total             |  |                 | 50,000 |  |      |  | 49,500 |      |  |  | 45,700 | 
|                  |  |                 |        |  |      |  |        |      | 

|                                    |  |                 |        |  |      |  |        |      |  |  |        | 
|----------------------------------- |  | --------------- | ------ |  | ---- |  | ------ | ---- |  |  | ------ | 
|                                    |  | At December 31, |       
|                                    |  |                 |       
|                                    |  | 2005            |        |  | 2004 |  |        | 2003 | 
|                                    |  |                 |        |  |      |  |        |      | 
|Research and Development            |  |                 | 9,700  |  |      |  | 9,800  |      |  |  | 8,800  | 
|Marketing and Sales                 |  |                 | 2,880  |  |      |  | 2,850  |      |  |  | 2,700  | 
|Manufacturing                       |  |                 | 32,400 |  |      |  | 32,150 |      |  |  | 29,800 | 
|Administration and General Services |  |                 | 2,550  |  |      |  | 2,400  |      |  |  | 2,250  | 
|Divisional Functions                |  |                 | 2,470  |  |      |  | 2,300  |      |  |  | 2,150  | 
|                                    |  |                 |        |  |      |  |        |      | 
|Total                               |  |                 | 50,000 |  |      |  | 49,500 |      |  |  | 45,700 | 
|                                    |  |                 |        |  |      |  |        |      | 





108



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##### Table of Contents














|        |                                                  
|------- | -------------------------------------------------
|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 |  |   |  | 27.6% | 
|Public                                                   |  |                     | 580,787,153 |  |   |  | 63.9% | 
|Brandes Investment Partners                              |  |                     | 62,932,372  |  |   |  | 7%    | 
|Treasury shares                                          |  |                     | 13,400,000  |  |   |  | 1.5%  | 






|    |                                                                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | At the end of 2004, Capital Group International, Inc. owned more
    than 5% of our share capital. As of December 31, 2005,
    Capital Group International, Inc. had reduced its participation
    in our share capital below the 5% threshold and is,
    consequently, no longer one of our major shareholders.



Ministero
dellEconomia e delle Finanze




109



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|                  |  |                     |             |  |   |  |      | 
|----------------- |  | ------------------- | ----------- |  | - |  | ---- | 
|                  |  | Common Shares Owned |            
|                  |  |                     |            
|                  |  | Number              |             |  | % | 
|                  |  |                     |             |  |   | 
|December 31, 2005 |  |                     | 250,704,754 |  |   |  | 27.6 | 
|December 31, 2004 |  |                     | 278,483,280 |  |   |  | 30.8 | 
|December 31, 2003 |  |                     | 311,483,280 |  |   |  | 34.5 | 













|    |                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------
|(1) | CDP owns 30% of ST Holding, while Finmeccanica owns 20% of ST
    Holding.                                                        
|   
|(2) | Not a legal entity, purely for illustrative purposes.                                                                             
|   
|(3) | FT1CI owns 50% of ST Holding and indirectly holds 99,318,236 of
    our common shares.                                            
|   
|(4) | CDP and Finmeccanica own 50% of ST Holding and indirectly hold
    91,644,941 and 59,741,577 of our common shares, respectively.  
|   
|(5) | The 70.9% includes the 7% shareholding of Brandes Investment
    Partners.                                                        
|   
|(6) | ST Holding II owns 27.6% of our shares, the Public owns 70.9% of
    our shares and we hold the remaining 1.5% as Treasury Shares.




 


110



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##### Table of Contents



  











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



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







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





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



111



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##### Table of Contents







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











112



---



##### 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. However, the minority shareholder may not prevent
    the other shareholder from increasing the capital of the holding
    company in order to finance the acquisition of additional shares
    in our company as a defense against a hostile takeover bid for
    STMicroelectronics N.V.
|
| | (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 general 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.                                                                                                                                                                                                                                                                                                                                                                           





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



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







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







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





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



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









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



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







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

Commissaire
du Gouvernement Contrôleur dEtat Secrétariat
dEtat à lIndustrie décret




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(società per
azioni)


Related-Party Transactions












end-to







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

Financial Statements


20-F.


Legal Proceedings




116



---



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Risk Management and Insurance




117



---



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





Internal Controls














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










Dividend Policy














| |   |                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                                                                                                                              

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| |   |                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.
|
| |  | In 2001, we paid a cash dividend with respect to the year ended
    December 31, 2000 of $0.04 per share. This dividend
    was approximately 2% of our earnings for 2000. 








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

Trading History of the Companys Shares












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











2-to


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3-to


Euronext Paris S.A.(1)


|                                             |                                      |                       |  |           |              |  |     |            |  |     |       |       |  |  |       |       | 
|-------------------------------------------- | ------------------------------------ | --------------------- |  | --------- | ------------ |  | --- | ---------- |  | --- | ----- | ----- |  |  | ----- | ----- | 
|                                             |                                      | Average Daily Trading |  |           |              |  |    
|                                             |                                      | Volumes               |  |           |             
|                                             |                                      |                       |  |           | Price Ranges | 
|                                             |                                      | Number of             |  |           |              |  |     |           
|Calendar Period                              |                                      | Shares                |  |           | Capital      |  |     | High       |  |     | Low   |      
|                                             |                                      |                       |  |           |              |  |     |            |  |     |       |      
|                                             |                                      |                       |  | ()       |              |  | () |            |  | () |      
|Annual Information for the Past Five Years   |                                      |                       |  |           |              |  |     |            |  |     |       |       |  |  |       |      
|2001                                         |                                      |                       |  |           |              |  |     |            |  |     | 52.45 |       |  |  | 18.88 |      
|2002                                         |                                      |                       |  |           |              |  |     |            |  |     | 39.70 |       |  |  | 11.10 |      
|2003                                         |                                      |                       |  |           |              |  |     |            |  |     | 24.74 |       |  |  | 15.20 |      
|2004                                         |                                      |                       |  |           |              |  |     |            |  |     | 23.81 |       |  |  | 13.25 |      
|2005                                         |                                      |                       |  |           |              |  |     |            |  |     | 15.81 |       |  |  | 10.83 |      
|Quarterly Information for the Past Two Years |                                      |                       |  |           |              |  |     |            |  |     |       |       |  |  |       |      
|2004                                         |                                      |                       |  |           |              |  |     |            |  |     |       |       |  |  |       |      
|                                             | First quarter                        |                       |  |           |              |  |     |            |  |     |       | 23.81 |  |  |       | 18.12 | 
|                                             | Second quarter                       |                       |  |           |              |  |     |            |  |     |       | 20.50 |  |  |       | 16.92 | 
|                                             | Third quarter                        |                       |  |           |              |  |     |            |  |     |       | 18.32 |  |  |       | 13.25 | 
|                                             | Fourth quarter                       |                       |  |           |              |  |     |            |  |     |       | 16.36 |  |  |       | 13.76 | 
|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 | 
|Monthly Information for the Past 18 Months   |                                      |                       |  |           |              |  |     |            |  |     |       |       |  |  |       |      
|2004                                         |                                      |                       |  |           |              |  |     |            |  |     |       |       |  |  |       |      
|                                             | September                            |                       |  | 6,269,593 |              |  |     | 89,874,616 |  |     |       | 15.26 |  |  |       | 13.25 | 
|                                             | October                              |                       |  | 5,754,106 |              |  |     | 81,909,699 |  |     |       | 14.82 |  |  |       | 13.76 | 
|                                             | November                             |                       |  | 5,761,598 |              |  |     | 88,377,152 |  |     |       | 16.36 |  |  |       | 14.35 | 
|                                             | December                             |                       |  | 4,558,003 |              |  |     | 66,824,882 |  |     |       | 15.63 |  |  |       | 14.09 | 
|2005                                         |                                      |                       |  |           |              |  |     |            |  |     |       |       |  |  |       |      
|                                             | January                              |                       |  | 6,129,044 |              |  |     | 81,632,737 |  |     |       | 14.47 |  |  |       | 12.38 | 
|                                             | February                             |                       |  | 6,725,241 |              |  |     | 88,867,335 |  |     |       | 13.67 |  |  |       | 12.57 | 
|                                             | March                                |                       |  | 4,696,705 |              |  |     | 62,203,161 |  |     |       | 13.94 |  |  |       | 12.77 | 
|                                             | April                                |                       |  | 6,533,316 |              |  |     | 79,177,257 |  |     |       | 13.01 |  |  |       | 10.83 | 
|                                             | May                                  |                       |  | 6,231,000 |              |  |     | 72,049,053 |  |     |       | 12.75 |  |  |       | 10.87 | 
|                                             | June                                 |                       |  | 6,216,894 |              |  |     | 81,634,035 |  |     |       | 13.71 |  |  |       | 12.47 | 
|                                             | July                                 |                       |  | 6,528,148 |              |  |     | 92,771,511 |  |     |       | 15.17 |  |  |       | 12.58 | 
|                                             | August                               |                       |  | 3,780,604 |              |  |     | 51,998,427 |  |     |       | 14.51 |  |  |       | 13.17 | 
|                                             | 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 (through February 24, 2006) |                       |  | 5,354,222 |              |  |     | 79,445,946 |  |     |       | 15.43 |  |  |       | 14.22 | 






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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   |                                      |                       |  |            |              |  |     |             |  |     |       |       |  |  |       |      
|2001                                         |                                      |                       |  |            |              |  |     |             |  |     | 52.35 |       |  |  | 18.89 |      
|2002                                         |                                      |                       |  |            |              |  |     |             |  |     | 39.65 |       |  |  | 11.09 |      
|2003                                         |                                      |                       |  |            |              |  |     |             |  |     | 24.75 |       |  |  | 15.21 |      
|2004                                         |                                      |                       |  |            |              |  |     |             |  |     | 23.81 |       |  |  | 13.25 |      
|2005                                         |                                      |                       |  |            |              |  |     |             |  |     | 15.82 |       |  |  | 10.82 |      
|Quarterly Information for the past two years |                                      |                       |  |            |              |  |     |             |  |     |       |       |  |  |       |      
|2004                                         |                                      |                       |  |            |              |  |     |             |  |     |       |       |  |  |       |      
|                                             | First quarter                        |                       |  |            |              |  |     |             |  |     |       | 23.81 |  |  |       | 18.11 | 
|                                             | Second quarter                       |                       |  |            |              |  |     |             |  |     |       | 20.49 |  |  |       | 16.92 | 
|                                             | Third quarter                        |                       |  |            |              |  |     |             |  |     |       | 18.32 |  |  |       | 13.25 | 
|                                             | Fourth quarter                       |                       |  |            |              |  |     |             |  |     |       | 16.36 |  |  |       | 13.76 | 
|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 | 
|Monthly Information for the past 18 months   |                                      |                       |  |            |              |  |     |             |  |     |       |       |  |  |       |      
|2004                                         |                                      |                       |  |            |              |  |     |             |  |     |       |       |  |  |       |      
|                                             | September                            |                       |  | 21,017,508 |              |  |     | 301,222,925 |  |     |       | 15.24 |  |  |       | 13.25 | 
|                                             | October                              |                       |  | 17,188,824 |              |  |     | 244,665,721 |  |     |       | 14.82 |  |  |       | 13.76 | 
|                                             | November                             |                       |  | 20,580,173 |              |  |     | 315,679,274 |  |     |       | 16.36 |  |  |       | 14.35 | 
|                                             | December                             |                       |  | 13,637,919 |              |  |     | 200,313,754 |  |     |       | 15.59 |  |  |       | 14.09 | 
|2005                                         |                                      |                       |  |            |              |  |     |             |  |     |       |       |  |  |       |      
|                                             | January                              |                       |  | 18,697,793 |              |  |     | 248,979,812 |  |     |       | 14.48 |  |  |       | 12.37 | 
|                                             | February                             |                       |  | 24,831,743 |              |  |     | 327,903,166 |  |     |       | 13.66 |  |  |       | 12.56 | 
|                                             | March                                |                       |  | 16,635,361 |              |  |     | 220,368,627 |  |     |       | 13.95 |  |  |       | 12.78 | 
|                                             | April                                |                       |  | 16,799,805 |              |  |     | 203,613,637 |  |     |       | 13.02 |  |  |       | 10.82 | 
|                                             | May                                  |                       |  | 17,032,815 |              |  |     | 196,848,243 |  |     |       | 12.74 |  |  |       | 10.87 | 
|                                             | June                                 |                       |  | 15,437,703 |              |  |     | 202,774,229 |  |     |       | 13.71 |  |  |       | 12.46 | 
|                                             | July                                 |                       |  | 20,733,076 |              |  |     | 294,782,875 |  |     |       | 15.18 |  |  |       | 12.59 | 
|                                             | August                               |                       |  | 10,019,202 |              |  |     | 138,044,565 |  |     |       | 14.52 |  |  |       | 13.17 | 
|                                             | 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 (through February 24, 2006) |                       |  | 10,273,881 |              |  |     | 152,423,299 |  |     |       | 15.43 |  |  |       | 14.21 | 






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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   |                                      |                       |  |           |              |  |         |            |  |         |       |       |  |  |       |      
|2001                                         |                                      |                       |  |           |              |  |         |            |  |         | 48.70 |       |  |  | 17.89 |      
|2002                                         |                                      |                       |  |           |              |  |         |            |  |         | 35.81 |       |  |  | 11.00 |      
|2003                                         |                                      |                       |  |           |              |  |         |            |  |         | 28.67 |       |  |  | 16.67 |      
|2004                                         |                                      |                       |  |           |              |  |         |            |  |         | 29.90 |       |  |  | 16.36 |      
|2005                                         |                                      |                       |  |           |              |  |         |            |  |         | 19.47 |       |  |  | 13.96 |      
|Quarterly Information for the past two years |                                      |                       |  |           |              |  |         |            |  |         |       |       |  |  |       |      
|2004                                         |                                      |                       |  |           |              |  |         |            |  |         |       |       |  |  |       |      
|                                             | First quarter                        |                       |  |           |              |  |         |            |  |         |       | 29.90 |  |  |       | 22.27 | 
|                                             | Second quarter                       |                       |  |           |              |  |         |            |  |         |       | 24.82 |  |  |       | 20.32 | 
|                                             | Third quarter                        |                       |  |           |              |  |         |            |  |         |       | 22.14 |  |  |       | 16.36 | 
|                                             | Fourth quarter                       |                       |  |           |              |  |         |            |  |         |       | 21.16 |  |  |       | 17.01 | 
|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 | 
|Monthly Information for the past 18 months   |                                      |                       |  |           |              |  |         |            |  |         |       |       |  |  |       |      
|2004                                         |                                      |                       |  |           |              |  |         |            |  |         |       |       |  |  |       |      
|                                             | September                            |                       |  | 1,829,333 |              |  |         | 32,106,623 |  |         |       | 18.79 |  |  |       | 16.36 | 
|                                             | October                              |                       |  | 1,924,786 |              |  |         | 34,330,483 |  |         |       | 18.58 |  |  |       | 17.01 | 
|                                             | November                             |                       |  | 1,803,624 |              |  |         | 35,926,386 |  |         |       | 21.16 |  |  |       | 18.37 | 
|                                             | December                             |                       |  | 1,189,882 |              |  |         | 23,369,282 |  |         |       | 20.68 |  |  |       | 18.78 | 
|2005                                         |                                      |                       |  |           |              |  |         |            |  |         |       |       |  |  |       |      
|                                             | January                              |                       |  | 1,662,825 |              |  |         | 29,019,622 |  |         |       | 19.63 |  |  |       | 16.13 | 
|                                             | February                             |                       |  | 1,278,100 |              |  |         | 22,037,000 |  |         |       | 18.25 |  |  |       | 16.26 | 
|                                             | March                                |                       |  | 1,123,545 |              |  |         | 19,554,177 |  |         |       | 18.38 |  |  |       | 16.49 | 
|                                             | April                                |                       |  | 1,410,381 |              |  |         | 22,106,312 |  |         |       | 16.65 |  |  |       | 14.00 | 
|                                             | May                                  |                       |  | 1,086,629 |              |  |         | 15,950,627 |  |         |       | 15.74 |  |  |       | 13.96 | 
|                                             | June                                 |                       |  | 905,845   |              |  |         | 14,456,380 |  |         |       | 16.50 |  |  |       | 15.33 | 
|                                             | July                                 |                       |  | 1,379,140 |              |  |         | 23,816,369 |  |         |       | 18.34 |  |  |       | 15.58 | 
|                                             | August                               |                       |  | 693,352   |              |  |         | 11,726,662 |  |         |       | 17.76 |  |  |       | 16.21 | 
|                                             | 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 2006                         |                       |  | 1,121,390 |              |  |         | 21,417,428 |  |         |       | 19.90 |  |  |       | 18.23 | 
|                                             | February (through February 24, 2006) |                       |  | 739,224   |              |  |         | 13,122,704 |  |         |       | 18.58 |  |  |       | 16.91 | 








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Market Information




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



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

Premier Marché, Second Marché Nouveau
Marché.


Premier Marché






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





| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 Continu, Continu




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Continu 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 toezicht
effectenverkeer 1995)




126



---



##### Table of Contents









| |   |                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | file our annual accounts and the auditors report with the
    Registry of the Chamber of Commerce of Amsterdam with a copy to
    the Dutch Authority for the Financial Markets (Autoriteit
    Financiële Marktenor the AFM);                             
|
| |  | file our half-yearly accounts; and                                                                                                                                                                                                                            
|
| |  | publish any new information concerning our business that was not
    published in the Netherlands and could have a significant impact
    on our share price if it becomes public. The information is
    published as a press release with a copy to the AFM.







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



Premier Second Nouveau Marché










| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we are required to inform our shareholders of (a) the
    convening of general meetings of shareholders as well as the
    means provided to them to exercise their vote; (b) the
    payment of dividends; and (c) offering of new shares,
    subscription offerings, allocation of shares, waivers, and
    offerings to convert shares;                                                                                                                                                                                                                                                                                                                                     
|
| |  | we are also required to: (a) inform the public of any
    modification of the distribution of share capital in relation to
    information published earlier; (b) distribute through the
    intermediary of the French press any information related to our
    activity and the results for the first six months of each
    financial year within a four-month period as from the close of
    such financial year; (c) publish annual consolidated
    accounts and our management report within a six-month period as
    from the close of the financial year; and (d) inform the
    public of any changes to the rights attached to the different
    classes of shares;

127



---



##### Table of Contents





| |   |                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we are required to inform the AMF of any plans to modify our
    articles of association (statuts); and                                                   
|
| |  | furthermore, we must ensure that information diffused in France
    is identical and simultaneously communicated to that which is
    communicated abroad.



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









| |                        
| | -----------------------
| | 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.                                           



128



---



##### Table of Contents







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





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





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







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





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







| |                                                                      
| | ---------------------------------------------------------------------
| | Distribution of Profits (Articles 25, 35, 36, 37, 38,
    39, and 40)





129



---



##### Table of Contents











| |                                        
| | ---------------------------------------
| | Shareholders Meetings and Voting Rights





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










130



---



##### Table of Contents







| |                                       
| | --------------------------------------
| | Voting Rights (Articles 30, 31 and 33)













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



(dochtermaatschappij (dochtermaatschappij


131



---



##### Table of Contents







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







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



2 3






132



---



##### Table of Contents













| |                                      
| | -------------------------------------
| | Share Capital as of December 31, 2005

 












133



---



##### Table of Contents





| |                                                                
| | ---------------------------------------------------------------
| | Non-issued Authorized Share Capital as of December 31,
    2005





| |                                                                                
| | -------------------------------------------------------------------------------
| | Other Securities Giving Access to Our Share Capital as of
    December 31, 2005





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





| |                                                    
| | ---------------------------------------------------
| | Preemptive Rights and Preference Shares (Article 4)













134



---



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3-for-1










| |                                                     
| | ----------------------------------------------------
| | 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)        | 
|                   |  |                                                  |                     |           |           |         |             |            |           |         |        |            |               |        |              |              |             |       |             |        |              |               |               | 
|May 5, 2000        |  |                                                  | Exercise of options |           |           |         | 467,725     |            |           |         | 3.12   |            |               |        | 905,660,699  |              |             |       | 290,275,865 |        |              |               | 1,459,302     |  |            |  | 7,164,432   |  |               |  | 1,191,934,282 | 
|May 5, 2000        |  |                                                  | LYONs conversion    |           |           |         | 5,365,888   |            |           |         | 3.12   |            |               |        | 922,402,269  |              |             |       | 295,641,753 |        |              |               | 16,741,571    |  |            |  | 234,054,348 |  |               |  | 1,425,988,630 | 
|May 5, 2000        |  |                                                  | 3:1 Stock Split     |           |           |         | 591,283,506 |            |           |         | 1.04   |            |               |        | 922,402,269  |              |             |       | 886,925,259 |        |              |               | 1,425,988,630 |  |            |  |             |  |               |  |               | 
|July 1, 2000       |  |                                                  | Exercise of options |           |           |         | 248,275     |            |           |         | 1.04   |            |               |        | 922,660,475  |              |             |       | 887,173,534 |        |              |               | 258,206       |  |            |  | 2,018,275   |  |               |  | 1,428,006,905 | 
|July 1, 2000       |  |                                                  | LYONs conversion    |           |           |         | 346,518     |            |           |         | 1.04   |            |               |        | 923,020,854  |              |             |       | 887,520,052 |        |              |               | 360,379       |  |            |  | 5,653,989   |  |               |  | 1,433,660,894 | 
|December 31, 2000  |  |                                                  | Exercise of options |           |           |         | 896,674     |            |           |         | 1.04   |            |               |        | 923,953,395  |              |             |       | 888,416,726 |        |              |               | 932,541       |  |            |  | 27,418,268  |  |               |  | 1,461,079,162 | 
|December 31, 2000  |  |                                                  | LYONs conversion    |           |           |         | 1,464,561   |            |           |         | 1.04   |            |               |        | 925,476,538  |              |             |       | 889,881,287 |        |              |               | 1,523,143     |  |            |  | 23,332,858  |  |               |  | 1,484,412,020 | 
|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 | 
|September 28, 2002 |  | Exercise of options and employee stock purchases |                     |           | 601,284   |         |             |            | 1.04      |         |        |            | 935,835,540   |        |              |              | 899,841,865 |       |             |        | 625,335      |               |               |  | 10,830,842 |  |             |  | 1,660,111,835 | 
|December 31, 2002  |  | Exercise of options and employee stock 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 | 
|June 28, 2003      |  | Exercise of options and employee stock 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 | 



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



135



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

paid-up called-up








| |                                                                        
| | -----------------------------------------------------------------------
| | 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 | 



|                                          |  |           |            |  |                   |  |            |      |  |  |         |  |  |      |         |  |       |  |         |  |  |  |            | 
|----------------------------------------- |  | --------- | ---------- |  | ----------------- |  | ---------- | ---- |  |  | ------- |  |  | ---- | ------- |  | ----- |  | ------- |  |  |  | ---------- | 
|                                          |  | Employees |            |  | Supervisory Board | 
|                                          |  |           |            |  |                   | 
|                                          |  | 1995 Plan |            |  | 2001 Plan         |  |            | 1996 |  |  | 1999    |  |  | 2002 |         |  | Total | 
|                                          |  |           |            |  |                   |  |            |      |  |  |         |  |  |      |         |  |       | 
|Remaining amount authorized to be granted |  |           |           |  |                   |  | 12,265,817 |      |  |  |        |  |  |      |        |  |       |  |        |  |  |  | 12,265,817 | 
|Amount exercised                          |  |           | 12,255,102 |  |                   |  | 9,650      |      |  |  | 293,500 |  |  |      | 18,000  |  |       |  |        |  |  |  | 12,576,252 | 
|Amount cancelled                          |  |           | 2,782,808  |  |                   |  | 4,438,997  |      |  |  | 72,000  |  |  |      | 63,000  |  |       |  | 24,000  |  |  |  | 7,380,805  | 
|Amount outstanding                        |  |           | 16,524,031 |  |                   |  | 43,285,536 |      |  |  | 35,000  |  |  |      | 342,000 |  |       |  | 372,000 |  |  |  | 60,558,567 | 









| |   |                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | amended our 2001 Employee Stock Option Plan with the aim of
    enhancing our ability to retain key employees and motivate them
    to shareholder value creation;

136



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| |   |                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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, the
    maximum number of which will be 4.1 million; and
|
| |  | accelerated the vesting of all of our outstanding stock options
    in July 2005 with no charge to our interim consolidated
    statements of income.                                                                                    





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 in his particular circumstances.




20-F.


137



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







| |                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 income or capital gains derived
    therefrom have no connection with your past, present or future
    employment, if any; and                                                                                                                                             
|
| | 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
    (Wet inkomstenbelasting 2001), unless such interest forms
    part of the assets of an enterprise.              





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Such person alone or, if he is an individual, together
    with his partner (partner), if any, has, directly or
    indirectly, the ownership 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, that represent 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) that relate 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. If you derive profits from an enterprise, whether as an
    entrepreneur (ondernemer) or pursuant to a co-entitlement
    to the net value of such enterprise, other than as an
    entrepreneur or a shareholder, in the case of an individual, or
    other than as a holder of securities, in other cases, which
    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, as the case may be,
    your common shares are not attributable to such enterprise or,
    in case the common shares are attributable to such enterprise,
    the benefits therefrom are exempt under the participation
    exemption as laid down in the Dutch Corporation Tax Act 1969
    (Wet op de vennootschapsbelasting 1969).
|
| | 2. You do not derive benefits from common shares that are
    taxable as benefits from miscellaneous activities (resultaat
    uit overage werkzaamheden) in the Netherlands.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   





| |   |                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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;

138



---



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | liquidation proceeds and proceeds of 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 shareholder 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.

inter alia




| |   |                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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; or                            
|
| |  | you make or are deemed to make common shares available, legally
    or in fact, directly or indirectly, to a related party as
    described in articles 3.91 and 3.92 of the Dutch Income Tax Act
    2001 under circumstances described there.



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



(uiteindelijk gerechtigde)


(Belastingregeling voor het
Koninkrijk)




139



---



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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 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 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 after
    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;
|
| |  | 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;                                                                                                                                                                                                                                                                                                                                                                                                            

140



---



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| |   |                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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




141



---



##### 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. U.S.-related


Documents on Display


20-F 20-F 20-F.




142



---



##### Table of Contents





1-800-SEC-0330











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









143



---



##### Table of Contents













|                      |  |       |       |   |      |  |       |      |  |  |      |   |  |      |      |               |      |  |      |            |  |  |                   |   |  |  |      |   |  |  |       | 
|--------------------- |  | ----- | ----- | - | ---- |  | ----- | ---- |  |  | ---- | - |  | ---- | ---- | ------------- | ---- |  | ---- | ---------- |  |  | ----------------- | - |  |  | ---- | - |  |  | ----- | 
|                      |  |       |       |   |      |  |       |      |  |  |      |   |  |      |      | Fair Value at |     
|                      |  | Total |       |   | 2006 |  |       | 2007 |  |  | 2008 |   |  | 2009 |      |               | 2010 |  |      | Thereafter |  |  | December 31, 2005 |  
|                      |  |       |       |   |      |  |       |      |  |  |      |   |  |      |      |               |      |  |      |            |  |  |                   |  
|Assets:               |  |       |       |   |      |  |       |      |  |  |      |   |  |      |      |               |      |  |      |            |  |  |                   |   |  |  |      |   |  |  |       | 
|Cash equivalents      |  |       | 2,027 |   |      |  |       |      |  |  |      |   |  |      |      |               |      |  |      |            |  |  |                   |   |  |  |      |   |  |  | 2,027 | 
|Average interest rate |  |       | 4.1   | % |      |  |       |      |  |  |      |   |  |      |      |               |      |  |      |            |  |  |                   |   |  |  |      |   |  |  |       | 
|Long-term debt:       |  |       |       |   |      |  |       |      |  |  |      |   |  |      |      |               |      |  |      |            |  |  |                   |   |  |  |      |   |  |  |       | 
|Fixed rate            |  |       | 1,791 |   |      |  | 1,522 |      |  |  | 119  |   |  |      | 58   |               |      |  | 30   |            |  |  | 22                |   |  |  | 40   |   |  |  | 1,742 | 
|Average interest rate |  |       | 0.25  | % |      |  | (0.19 | )%   |  |  | 3.14 | % |  |      | 3.58 | %             |      |  | 2.49 | %          |  |  | 2.09              | % |  |  | 1.16 | % |  |  |       | 

|                                                    |                  |                     |       |     | 
|--------------------------------------------------- | ---------------- | ------------------- | ----- | --- | 
|                                                    |                  | 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 |    
|                                                    |                  |                     |      

|                                                    |                  |                     |       |     | 
|--------------------------------------------------- | ---------------- | ------------------- | ----- | --- | 
|                                                    |                  | Amounts in Millions |      
|                                                    |                  | of U.S. Dollars     |      
|                                                    |                  |                     |      
|Long-term debt by currency as of December 31, 2004: |                  |                     |       |    
|U.S. dollar                                         |                  |                     | 1,404 |    
|                                                    | Euro             |                     |       | 324 | 
|                                                    | Singapore dollar |                     |       | 153 | 
|Other currencies                                    |                  |                     | 19    |    
|                                                    |                  |                     |      
|Total in U.S. dollars                               |                  |                     | 1,900 |    
|                                                    |                  |                     |      

144



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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 | )
|     |  |  |     |  |  |  |      |                 |  |  |              |  |  |            |       |  |  | 



FORWARD CONTRACTS AS AT DECEMBER 31, 2004


|     |  |  |     |  |  |  |      |                 |  |  |              |  |  |            |       |  |  |  |       |  |  |  |     |  
|---- |  |  | --- |  |  |  | ---- | --------------- |  |  | ------------ |  |  | ---------- | ----- |  |  |  | ----- |  |  |  | --- | -
|     |  |  |     |  |  |  |      | Notional Amount |  |  | Average Rate |  |  | Fair Value |      
|     |  |  |     |  |  |  |      |                 |  |  |              |  |  |            |      
|Buy  |  |  | USD |  |  |  | Sell |                 |  |  | JPY          |  |  |            | 76    |  |  |  | 104.9 |  |  |  | (2  | )
|Sell |  |  | USD |  |  |  | Buy  |                 |  |  | JPY          |  |  |            | 30    |  |  |  | 102.4 |  |  |  | 0   |  
|Buy  |  |  | EUR |  |  |  | Sell |                 |  |  | USD          |  |  |            | 4,803 |  |  |  | 1.37  |  |  |  | 187 |  
|Sell |  |  | EUR |  |  |  | Buy  |                 |  |  | USD          |  |  |            | 2,388 |  |  |  | 1.37  |  |  |  | (91 | )
|Buy  |  |  | USD |  |  |  | Sell |                 |  |  | SGD          |  |  |            | 1,120 |  |  |  | 1.64  |  |  |  | (14 | )
|Buy  |  |  | USD |  |  |  | Sell |                 |  |  | CAD          |  |  |            | 70    |  |  |  | 1.20  |  |  |  | (1  | )
|Sell |  |  | USD |  |  |  | Buy  |                 |  |  | INR          |  |  |            | 9     |  |  |  | 43.5  |  |  |  | 0   |  
|Sell |  |  | USD |  |  |  | Buy  |                 |  |  | SEK          |  |  |            | 27    |  |  |  | 6.6   |  |  |  | 0   |  
|Buy  |  |  | MTL |  |  |  | Sell |                 |  |  | USD          |  |  |            | 197   |  |  |  | 3.14  |  |  |  | 11  |  
|Buy  |  |  | GBP |  |  |  | Sell |                 |  |  | USD          |  |  |            | 42    |  |  |  | 1.93  |  |  |  | 1   |  
|Sell |  |  | EUR |  |  |  | Buy  |                 |  |  | JPY          |  |  |            | 37    |  |  |  | 140.9 |  |  |  | 0   |  
|Buy  |  |  | EUR |  |  |  | Sell |                 |  |  | MYR          |  |  |            | 7     |  |  |  | 5.26  |  |  |  | 0   |  
|Buy  |  |  | EUR |  |  |  | Sell |                 |  |  | SGD          |  |  |            | 6     |  |  |  | 2.22  |  |  |  | 0   |  
|Buy  |  |  | JPY |  |  |  | Sell |                 |  |  | SGD          |  |  |            | 39    |  |  |  | 0.02  |  |  |  | 0   |  
|Buy  |  |  | JPY |  |  |  | Sell |                 |  |  | MYR          |  |  |            | 1     |  |  |  | 0.04  |  |  |  | 0   |  
|     |  |  |     |  |  |  |      |                 |  |  |              |  |  |            |       |  |  | 
|     |  |  |     |  |  |  |      |                 |  |  |              |  |  |            | 8,852 |  |  |  |       |  |  |  | (91 | )
|     |  |  |     |  |  |  |      |                 |  |  |              |  |  |            |       |  |  | 






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



145



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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

13a-15(e)) 20-F




Other Reviews


20-F







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

20-F







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

Code of Business Conduct and Ethics






http://www.st.com







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



146



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|                                                                                              |  |      |           |               |            |  |     |      |               |   |            |  |  |  |     |  
|--------------------------------------------------------------------------------------------- |  | ---- | --------- | ------------- | ---------- |  | --- | ---- | ------------- | - | ---------- |  |  |  | --- | -
|                                                                                              |  |      |           | Percentage of |            |  |     |      | Percentage of |  
|                                                                                              |  | 2005 |           |               | Total Fees |  |     | 2004 |               |   | Total Fees | 
|                                                                                              |  |      |           |               |            |  |     |      |               |   |            | 
|Audit Fees                                                                                    |  |      |           |               |            |  |     |      |               |   |            |  |  |  |     |  
|Statutory audit, certification, audit of individual and
    consolidated financial statements |  | $    | 2,494,626 |               |            |  | 94  | %    |               | $ | 2,079,857  |  |  |  | 93  | %
|Audit-related fees                                                                            |  |      | 138,312   |               |            |  | 5   | %    |               |   | 125,282    |  |  |  | 6   | %
|Non-audit Fees                                                                                |  |      |           |               |            |  |     |      |               |   |            |  |  |  |     |  
|Tax compliance fees                                                                           |  |      | 24,028    |               |            |  | 1   | %    |               |   | 25,668     |  |  |  | 1   | %
|Other fees                                                                                    |  |      |          |               |            |  |     |      |               |   |           |  |  |  |    |  
|                                                                                              |  |      |           |               |            |  |     |      |               |   |            | 
|Total                                                                                         |  | $    | 2,656,966 |               |            |  | 100 | %    |               | $ | 2,230,807  |  |  |  | 100 | %
|                                                                                              |  |      |           |               |            |  |     |      |               |   |            | 









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









S-X.







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



147



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|          |                                                                           
|--------- | --------------------------------------------------------------------------
|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    | 
|                         |  |                 |   |  |                    |                 |                      |                     |                    |            |                 | 
|2005-01-01 to 2005-01-31 |  |                 |  |  |                    |                 |                     |                     |                    |            |                |  |  |  |  | 
|2005-02-01 to 2005-02-28 |  |                 |  |  |                    |                 |                     |                     |                    |            |                |  |  |  |  | 
|2005-03-01 to 2005-03-31 |  |                 |  |  |                    |                 |                     |                     |                    |            |                |  |  |  |  | 
|2005-04-01 to 2005-04-30 |  |                 |  |  |                    |                 |                     |                     |                    |            |                |  |  |  |  | 
|2005-05-01 to 2005-05-31 |  |                 |  |  |                    |                 |                     |                     |                    |            |                |  |  |  |  | 
|2005-06-01 to 2005-06-30 |  |                 |  |  |                    |                 |                     |                     |                    |            |                |  |  |  |  | 
|2005-07-01 to 2005-07-31 |  |                 |  |  |                    |                 |                     |                     |                    |            |                |  |  |  |  | 
|2005-08-01 to 2005-08-31 |  |                 |  |  |                    |                 |                     |                     |                    |            |                |  |  |  |  | 
|2005-09-01 to 2005-09-30 |  |                 |  |  |                    |                 |                     |                     |                    |            |                |  |  |  |  | 
|2005-10-01 to 2005-10-31 |  |                 |  |  |                    |                 |                     |                     |                    |            |                |  |  |  |  | 
|2005-11-01 to 2005-11-30 |  |                 |  |  |                    |                 |                     |                     |                    |            |                |  |  |  |  | 
|2005-12-01 to 2005-12-31 |  |                 |  |  |                    |                 |                     |                     |                    |            |                |  |  |  |  | 





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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, 2005, 2004 and 2003        |  |      | F-2 | 
|Consolidated Statements of Income for the Years Ended
    December 31, 2005, 2004 and 2003                          |  |      | F-3 | 
|Consolidated Balance Sheets as at December 31, 2005 and 2004                                                        |  |      | F-4 | 
|Consolidated Statements of Cash Flows for the Years Ended
    December 31, 2005, 2004 and 2003                      |  |      | F-5 | 
|Consolidated Statements of Changes in Shareholders Equity
    for the Years Ended December 31, 2005, 2004 and 2003 |  |      | F-6 | 
|Notes to Consolidated Financial Statements                                                                          |  |      | F-7 | 
|Financial Statement Schedule:                                                                                       |  |      |     | 
|Report of Independent Registered Public Accounting Firm on
    Financial Statement Schedule                         |  |      | S-1 | 
|For each of the three years in the period ended
    December 31, Schedule II Valuation and Qualifying
    Accounts  |  |      | S-2 | 




Item 19. Exhibits


|      |  |                                                                                                                                                                                                                                                                                                                  
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.1   |  | Amended and Restated Articles of
    Association of STMicroelectronics N.V., dated April 4,
    2005, as approved by the annual general meeting of shareholders
    on March 18, 2005.                                                                                                                           
|8.1   |  | Subsidiaries 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.                                                                                                                                                                                                                                                    

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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                                                                                                                                                                

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|           |  |                                                                                                                                                                                                                                                                                       
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|OMAPI      |  | open mobile application processor interfaces, the name of the
    joint open standard for wireless application processor
    interfaces being developed with Texas Instruments to promote
    faster and broader deployment of multimedia-enhanced mobile
    devices and applications
|          
|OTP        |  | one-time programmable                                                                                                                                                                                                                                                                 
|          
|PDA        |  | personal digital assistant                                                                                                                                                                                                                                                            
|          
|PFC        |  | power factor corrector                                                                                                                                                                                                                                                                
|          
|PROM       |  | programmable read-only memory                                                                                                                                                                                                                                                         
|          
|PSM        |  | programmable system memories                                                                                                                                                                                                                                                          
|          
|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                                                                                                                                                                                                                                                               

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SIGNATURES


20-F




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



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

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

152



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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, 2005, 2004
    and 2003    |  |      | F-2 | 
|Consolidated Statements of Income for the
    Years Ended December 31, 2005, 2004 and 2003                              |  |      | F-3 | 
|Consolidated Balance Sheets as at
    December 31, 2005 and 2004                                                        |  |      | F-4 | 
|Consolidated Statements of Cash Flows for
    the Years Ended December 31, 2005, 2004 and 2003                          |  |      | F-5 | 
|Consolidated Statements of Changes in
    Shareholders Equity for the Years Ended December 31,
    2005, 2004 and 2003 |  |      | F-6 | 
|Notes to Consolidated Financial
    Statements                                                                          |  |      | F-7 | 

F-1



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##### Table of Contents









Report of Independent Registered Public Accounting Firm

















F-2



---



##### Table of Contents



STMicroelectronics N.V.





CONSOLIDATED STATEMENTS OF INCOME


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


|                                                                  |  |                     |        |   |              |  |        |              |  |  |        |  
|----------------------------------------------------------------- |  | ------------------- | ------ | - | ------------ |  | ------ | ------------ |  |  | ------ | -
|                                                                  |  | Twelve months ended |       
|                                                                  |  |                     |       
|                                                                  |  | December 31,        |        |   | December 31, |  |        | December 31, | 
|                                                                  |  | 2005                |        |   | 2004         |  |        | 2003         | 
|                                                                  |  |                     |        |   |              |  |        |              | 
|                                                                  |  | (audited)           |        |   | (audited)    |  |        | (audited)    | 
|Net sales                                                         |  |                     | 8,876  |   |              |  | 8,756  |              |  |  | 7,234  |  
|Other revenues                                                    |  |                     | 6      |   |              |  | 4      |              |  |  | 4      |  
|                                                                  |  |                     |        |   |              |  |        |              | 
|Net revenues                                                      |  |                     | 8,882  |   |              |  | 8,760  |              |  |  | 7,238  |  
|Cost of sales                                                     |  |                     | (5,845 | ) |              |  | (5,532 | )            |  |  | (4,672 | )
|                                                                  |  |                     |        |   |              |  |        |              | 
|Gross profit                                                      |  |                     | 3,037  |   |              |  | 3,228  |              |  |  | 2,566  |  
|Selling, general and administrative                               |  |                     | (1,026 | ) |              |  | (947   | )            |  |  | (785   | )
|Research and development                                          |  |                     | (1,630 | ) |              |  | (1,532 | )            |  |  | (1,238 | )
|Other income and expenses, net                                    |  |                     | (9     | ) |              |  | 10     |              |  |  | (4     | )
|Impairment, restructuring charges and other related closure costs |  |                     | (128   | ) |              |  | (76    | )            |  |  | (205   | )
|                                                                  |  |                     |        |   |              |  |        |              | 
|Operating income                                                  |  |                     | 244    |   |              |  | 683    |              |  |  | 334    |  
|Interest income (expense), net                                    |  |                     | 34     |   |              |  | (3     | )            |  |  | (52    | )
|Loss on equity investments                                        |  |                     | (3     | ) |              |  | (4     | )            |  |  | (1     | )
|Loss on extinguishment of convertible debt                        |  |                     | 0      |   |              |  | (4     | )            |  |  | (39    | )
|                                                                  |  |                     |        |   |              |  |        |              | 
|Income before income taxes and minority interests                 |  |                     | 275    |   |              |  | 672    |              |  |  | 242    |  
|Income tax benefit (expense)                                      |  |                     | (8     | ) |              |  | (68    | )            |  |  | 14     |  
|                                                                  |  |                     |        |   |              |  |        |              | 
|Income before minority interests                                  |  |                     | 267    |   |              |  | 604    |              |  |  | 256    |  
|Minority interests                                                |  |                     | (1     | ) |              |  | (3     | )            |  |  | (3     | )
|                                                                  |  |                     |        |   |              |  |        |              | 
|Net income                                                        |  |                     | 266    |   |              |  | 601    |              |  |  | 253    |  
|                                                                  |  |                     |        |   |              |  |        |              | 
|Earnings per share (Basic)                                        |  |                     | 0.30   |   |              |  | 0.67   |              |  |  | 0.29   |  
|                                                                  |  |                     |        |   |              |  |        |              | 
|Earnings per share (Diluted)                                      |  |                     | 0.29   |   |              |  | 0.65   |              |  |  | 0.27   |  
|                                                                  |  |                     |        |   |              |  |        |              | 

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


F-3



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##### Table of Contents



STMicroelectronics N.V.





CONSOLIDATED BALANCE SHEETS


In millions of U.S. dollars


|                                                                                                                                                                                                                         |  |              |        |   |              |  |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------ | - | ------------ |  | ------ | -
|                                                                                                                                                                                                                         |  | As at        |       
|                                                                                                                                                                                                                         |  |              |       
|                                                                                                                                                                                                                         |  | December 31, |        |   | December 31, | 
|                                                                                                                                                                                                                         |  | 2005         |        |   | 2004         | 
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|                                                                                                                                                                                                                         |  | (audited)    |        |   | (audited)    | 
|Assets                                                                                                                                                                                                                   |  |              |        |   |              |  |        |  
|Current assets:                                                                                                                                                                                                          |  |              |        |   |              |  |        |  
|Cash and cash equivalents                                                                                                                                                                                                |  |              | 2,027  |   |              |  | 1,950  |  
|Marketable securities                                                                                                                                                                                                    |  |              | 0      |   |              |  | 0      |  
|Trade accounts receivable, net                                                                                                                                                                                           |  |              | 1,490  |   |              |  | 1,408  |  
|Inventories, net                                                                                                                                                                                                         |  |              | 1,411  |   |              |  | 1,344  |  
|Deferred tax assets                                                                                                                                                                                                      |  |              | 152    |   |              |  | 140    |  
|Other receivables and assets                                                                                                                                                                                             |  |              | 531    |   |              |  | 785    |  
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|Total current assets                                                                                                                                                                                                     |  |              | 5,611  |   |              |  | 5,627  |  
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|Goodwill                                                                                                                                                                                                                 |  |              | 221    |   |              |  | 264    |  
|Other intangible assets, net                                                                                                                                                                                             |  |              | 224    |   |              |  | 291    |  
|Property, plant and equipment, net                                                                                                                                                                                       |  |              | 6,175  |   |              |  | 7,442  |  
|Long-term deferred tax assets                                                                                                                                                                                            |  |              | 55     |   |              |  | 59     |  
|Investments and other non-current assets                                                                                                                                                                                 |  |              | 153    |   |              |  | 117    |  
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|                                                                                                                                                                                                                         |  |              | 6,828  |   |              |  | 8,173  |  
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|Total assets                                                                                                                                                                                                             |  |              | 12,439 |   |              |  | 13,800 |  
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|Liabilities and shareholders equity                                                                                                                                                                                     |  |              |        |   |              |  |        |  
|Current liabilities:                                                                                                                                                                                                     |  |              |        |   |              |  |        |  
|Bank overdrafts                                                                                                                                                                                                          |  |              | 11     |   |              |  | 58     |  
|Current portion of long-term debt                                                                                                                                                                                        |  |              | 1,522  |   |              |  | 133    |  
|Trade accounts payable                                                                                                                                                                                                   |  |              | 965    |   |              |  | 1,352  |  
|Other payables and accrued liabilities                                                                                                                                                                                   |  |              | 642    |   |              |  | 776    |  
|Deferred tax liabilities                                                                                                                                                                                                 |  |              | 7      |   |              |  | 17     |  
|Accrued income tax                                                                                                                                                                                                       |  |              | 152    |   |              |  | 176    |  
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|Total current liabilities                                                                                                                                                                                                |  |              | 3,299  |   |              |  | 2,512  |  
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|Long-term debt                                                                                                                                                                                                           |  |              | 269    |   |              |  | 1,767  |  
|Reserve for pension and termination indemnities                                                                                                                                                                          |  |              | 270    |   |              |  | 285    |  
|Long-term deferred tax liabilities                                                                                                                                                                                       |  |              | 55     |   |              |  | 63     |  
|Other non-current liabilities                                                                                                                                                                                            |  |              | 16     |   |              |  | 15     |  
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|                                                                                                                                                                                                                         |  |              | 610    |   |              |  | 2,130  |  
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|Total liabilities                                                                                                                                                                                                        |  |              | 3,909  |   |              |  | 4,642  |  
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|Commitment and contingencies                                                                                                                                                                                             |  |              |        |   |              |  |        |  
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|Minority interests                                                                                                                                                                                                       |  |              | 50     |   |              |  | 48     |  
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|Common stock (preferred stock: 540,000,000 shares authorized,
    not issued; common stock: Euro 1.04 nominal value,
    1,200,000,000 shares authorized, 907,824,279 shares issued,
    894,424,279 shares outstanding) |  |              | 1,153  |   |              |  | 1,150  |  
|Capital surplus                                                                                                                                                                                                          |  |              | 1,967  |   |              |  | 1,924  |  
|Accumulated result                                                                                                                                                                                                       |  |              | 5,427  |   |              |  | 5,268  |  
|Accumulated other comprehensive income                                                                                                                                                                                   |  |              | 281    |   |              |  | 1,116  |  
|Treasury stock                                                                                                                                                                                                           |  |              | (348   | ) |              |  | (348   | )
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|Shareholders equity                                                                                                                                                                                                     |  |              | 8,480  |   |              |  | 9,110  |  
|                                                                                                                                                                                                                         |  |              |        |   |              | 
|Total liabilities and shareholders equity                                                                                                                                                                               |  |              | 12,439 |   |              |  | 13,800 |  
|                                                                                                                                                                                                                         |  |              |        |   |              | 

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


F-4



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##### Table of Contents



STMicroelectronics N.V.





CONSOLIDATED STATEMENTS OF CASH FLOWS


In millions of U.S. dollars


|                                                     |                                                                             |                                                                                             |        |        |              |   |        |              |       |   |        |        |       |  
|---------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ------ | ------ | ------------ | - | ------ | ------------ | ----- | - | ------ | ------ | ----- | -
|                                                     |                                                                             | Twelve Months Ended                                                                         |       
|                                                     |                                                                             |                                                                                             |       
|                                                     |                                                                             | December 31,                                                                                |        |        | December 31, |   |        | December 31, |      
|                                                     |                                                                             | 2005                                                                                        |        |        | 2004         |   |        | 2003         |      
|                                                     |                                                                             |                                                                                             |        |        |              |   |        |              |      
|                                                     |                                                                             | (audited)                                                                                   |        |        | (audited)    |   |        | (audited)    |      
|Cash flows from operating activities:                |                                                                             |                                                                                             |        |        |              |   |        |              |       |   |        |       
|                                                     | Net income                                                                  |                                                                                             |        | 266    |              |   |        | 601          |       |   |        | 253    |      
|                                                     | Items to reconcile net income and cash flows from operating
    activities: |                                                                                             |        |        |              |   |        |              |       |   |        |        |      
|                                                     |                                                                             | Depreciation and amortization                                                               |        |        | 1,944        |   |        |              | 1,837 |   |        |        | 1,608 |  
|                                                     |                                                                             | Amortization of discount on convertible debt                                                |        |        | 5            |   |        |              | 28    |   |        |        | 68    |  
|                                                     |                                                                             | Loss on extinguishment of convertible debt                                                  |        |        |             |   |        |              | 4     |   |        |        | 39    |  
|                                                     |                                                                             | Gain on the sale of marketable securities                                                   |        |        |             |   |        |              |      |   |        |        | (4    | )
|                                                     |                                                                             | Other non-cash items                                                                        |        |        | 10           |   |        |              | 5     |   |        |        | (53   | )
|                                                     |                                                                             | Minority interest in net income of subsidiaries                                             |        |        | 1            |   |        |              | 3     |   |        |        | 3     |  
|                                                     |                                                                             | Deferred income tax                                                                         |        |        | (31          | ) |        |              | (6    | ) |        |        | (131  | )
|                                                     |                                                                             | Loss on equity investments                                                                  |        |        | 3            |   |        |              | 4     |   |        |        | 1     |  
|                                                     |                                                                             | Impairment, restructuring charges and other related closure
    costs, net of cash payments |        |        | 72           |   |        |              | 8     |   |        |        | 197   |  
|                                                     | Changes in assets and liabilities:                                          |                                                                                             |        |        |              |   |        |              |       |   |        |        |      
|                                                     |                                                                             | Trade receivables, net                                                                      |        |        | (117         | ) |        |              | (119  | ) |        |        | (109  | )
|                                                     |                                                                             | Inventories, net                                                                            |        |        | (174         | ) |        |              | (144  | ) |        |        | (75   | )
|                                                     |                                                                             | Trade payables                                                                              |        |        | (71          | ) |        |              | 128   |   |        |        | (8    | )
|                                                     |                                                                             | Other assets and liabilities, net                                                           |        |        | (110         | ) |        |              | (7    | ) |        |        | 131   |  
|                                                     |                                                                             |                                                                                             |        |        |              |   |        |              |      
|Net cash from operating activities                   |                                                                             |                                                                                             | 1,798  |        |              |   | 2,342  |              |       |   | 1,920  |       
|                                                     |                                                                             |                                                                                             |        |        |              |   |        |              |      
|Cash flows from investing activities:                |                                                                             |                                                                                             |        |        |              |   |        |              |       |   |        |       
|                                                     | Payment for purchases of tangible assets                                    |                                                                                             |        | (1,441 | )            |   |        | (2,050       | )     |   |        | (1,221 | )    
|                                                     | Proceeds from sale of marketable securities                                 |                                                                                             |        |       |              |   |        |             |       |   |        | 4      |      
|                                                     | Investment in intangible and financial assets                               |                                                                                             |        | (49    | )            |   |        | (79          | )     |   |        | (31    | )    
|                                                     | Capital contributions to equity investments                                 |                                                                                             |        | (38    | )            |   |        | (2           | )     |   |        | (3     | )    
|                                                     | Payment for acquisitions, net of cash received                              |                                                                                             |        |       |              |   |        | (3           | )     |   |        | (188   | )    
|                                                     |                                                                             |                                                                                             |        |        |              |   |        |              |      
|Net cash used in investing activities                |                                                                             |                                                                                             | (1,528 | )      |              |   | (2,134 | )            |       |   | (1,439 | )     
|                                                     |                                                                             |                                                                                             |        |        |              |   |        |              |      
|Cash flows from financing activities:                |                                                                             |                                                                                             |        |        |              |   |        |              |       |   |        |       
|                                                     | Proceeds from issuance of long-term debt                                    |                                                                                             |        | 50     |              |   |        | 91           |       |   |        | 1,398  |      
|                                                     | Repayment of long-term debt                                                 |                                                                                             |        | (110   | )            |   |        | (1,288       | )     |   |        | (1,432 | )    
|                                                     | Increase (decrease) in short-term facilities                                |                                                                                             |        | (47    | )            |   |        | 10           |       |   |        | 25     |      
|                                                     | Capital increase                                                            |                                                                                             |        | 35     |              |   |        | 23           |       |   |        | 22     |      
|                                                     | Dividends paid                                                              |                                                                                             |        | (107   | )            |   |        | (107         | )     |   |        | (71    | )    
|                                                     | Other financing activities                                                  |                                                                                             |        | 1      |              |   |        |             |       |   |        | (1     | )    
|                                                     |                                                                             |                                                                                             |        |        |              |   |        |              |      
|Net cash used in financing activities                |                                                                             |                                                                                             | (178   | )      |              |   | (1,271 | )            |       |   | (59    | )     
|                                                     |                                                                             |                                                                                             |        |        |              |   |        |              |      
|                                                     | Effect of changes in exchange rates                                         |                                                                                             |        | (15    | )            |   |        | 15           |       |   |        | 14     |      
|                                                     |                                                                             |                                                                                             |        |        |              |   |        |              |      
|Net cash increase (decrease)                         |                                                                             |                                                                                             | 77     |        |              |   | (1,048 | )            |       |   | 436    |       
|                                                     |                                                                             |                                                                                             |        |        |              |   |        |              |      
|Cash and cash equivalents at beginning of the period |                                                                             |                                                                                             | 1,950  |        |              |   | 2,998  |              |       |   | 2,562  |       
|                                                     |                                                                             |                                                                                             |        |        |              |   |        |              |      
|Cash and cash equivalents at end of the period       |                                                                             |                                                                                             | 2,027  |        |              |   | 1,950  |              |       |   | 2,998  |       
|                                                     |                                                                             |                                                                                             |        |        |              |   |        |              |      
|Supplemental cash information:                       |                                                                             |                                                                                             |        |        |              |   |        |              |       |   |        |       
|Interest paid                                        |                                                                             |                                                                                             | 17     |        |              |   | 16     |              |       |   | 19     |       
|Income tax paid                                      |                                                                             |                                                                                             | 90     |        |              |   | 84     |              |       |   | 102    |       

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


F-5



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##### Table of Contents






CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY


In millions 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, 2002 (audited) |                                        |        | 1,144 |  |         |  | 1,864 |          |  |             | (348        | ) |  |               | 4,592 |     |               |  | (258  | )    |   |  | 6,994 |     
|                                          |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               | 
|Capital increase                          |                                        |        | 2     |  |         |  | 41    |          |  |             |             |   |  |               |       |     |               |  |       |      |   |  | 43    |     
|Comprehensive income:                     |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               |  |       |      |   |  |       |     
|                                          | Net Income                             |        |       |  |         |  |       |          |  |             |             |   |  |               |       | 253 |               |  |       |      |   |  |       | 253  |  
|                                          | Other comprehensive income, net of tax |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               |  |       | 881  |   |  |       | 881  |  
|                                          |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               | 
|Comprehensive income                      |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               |  |       |      |   |  | 1,134 |     
|Dividends, $0.08 per share                |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               | (71   | )   |               |  |       |      |   |  | (71   | )   
|                                          |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               | 
|Balance as of December 31, 2003 (audited) |                                        |        | 1,146 |  |         |  | 1,905 |          |  |             | (348        | ) |  |               | 4,774 |     |               |  | 623   |      |   |  | 8,100 |     
|                                          |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               | 
|Capital increase                          |                                        |        | 4     |  |         |  | 19    |          |  |             |             |   |  |               |       |     |               |  |       |      |   |  | 23    |     
|Comprehensive income:                     |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               |  |       |      |   |  |       |     
|                                          | 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 (audited) |                                        |        | 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 income (loss)               |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               |  |       |      |   |  | (569  | )   
|Dividends, $0.12 per share                |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               | (107  | )   |               |  |       |      |   |  | (107  | )   
|                                          |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               | 
|Balance as of December 31, 2005 (audited) |                                        |        | 1,153 |  |         |  | 1,967 |          |  |             | (348        | ) |  |               | 5,427 |     |               |  | 281   |      |   |  | 8,480 |     
|                                          |                                        |        |       |  |         |  |       |          |  |             |             |   |  |               |       |     |               | 

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


F-6



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##### Table of Contents






NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


1  THE COMPANY






2  ACCOUNTING POLICIES




2.1  Principles of consolidation


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


2.2  Use of estimates




2.3  Foreign currency




F-7



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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








2.4  Derivative instruments


Foreign
Currency Forward Contracts Not Designated as a Hedge


Accounting for Derivative Instruments
and Hedging Activities


Cash
Flow Hedges




F-8



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


2.5  Reclassifications




2.6  Revenue Recognition




Net
sales


Revenue
Recognition








Other
revenues




Fundings




F-9



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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










2.7  Advertising costs




2.8  Research and development




2.9  Start-up costs




2.10  Income taxes




F-10



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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




2.11  Earnings per share




2.12  Cash and cash equivalents




2.13  Marketable securities




2.14  Trade accounts receivable




2.15  Inventories






2.16  Intangible assets subject to amortization




F-11



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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




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





2.17  Goodwill




2.18  Property, plant and equipment






|                                    |  |  |            | 
|----------------------------------- |  |  | ---------- | 
|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  | 



F-12



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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










2.19  Investments






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


2.20  Employee benefits


(a) Pension
obligations




F-13



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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








(b) Other
post-employment obligations




(c) Termination
benefits






F-14



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


(d) Profit-sharing
and bonus plans




(e) Share-based
compensation


Stock
options


Accounting
for Stock Issued to Employees


Accounting for Stock-Based
Compensation


|                                                                                                                  |                      |              |      |      |              |  |      |              |  |  |      |      | 
|----------------------------------------------------------------------------------------------------------------- | -------------------- | ------------ | ---- | ---- | ------------ |  | ---- | ------------ |  |  | ---- | ---- | 
|                                                                                                                  |                      | Year ended   |      |      | Year ended   |  |      | Year ended   | 
|                                                                                                                  |                      | December 31, |      |      | December 31, |  |      | December 31, | 
|                                                                                                                  |                      | 2005         |      |      | 2004         |  |      | 2003         | 
|                                                                                                                  |                      |              |      |      |              |  |      |              | 
|Net income, as reported                                                                                           |                      |              | 266  |      |              |  | 601  |              |  |  | 253  |     
|of which compensation expense on nonvested shares, net of
    tax effect                                          |                      |              | (7   | )    |              |  |     |              |  |  |     |     
|Deduct: Total stock-option employee compensation expense
    determined under FAS 123, net of related tax effects |                      |              | (244 | )    |              |  | (166 | )            |  |  | (186 | )   
|Net income, pro forma                                                                                             |                      |              | 22   |      |              |  | 435  |              |  |  | 67   |     
|Earnings per share:                                                                                               |                      |              |      |      |              |  |      |              |  |  |      |     
|                                                                                                                  | Basic, as reported   |              |      | 0.30 |              |  |      | 0.67         |  |  |      | 0.29 | 
|                                                                                                                  | Basic, pro forma     |              |      | 0.02 |              |  |      | 0.49         |  |  |      | 0.08 | 
|                                                                                                                  | Diluted, as reported |              |      | 0.29 |              |  |      | 0.65         |  |  |      | 0.27 | 
|                                                                                                                  | Diluted, pro forma   |              |      | 0.02 |              |  |      | 0.47         |  |  |      | 0.07 | 





F-15



---



##### 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, | 
|                                          |  | 2005         |       |  | 2004         |  |       | 2003         | 
|                                          |  |              |       |  |              |  |       |              | 
|Expected life (years)                     |  |              | 6.1   |  |              |  | 6.1   |              |  |  | 5.9   | 
|Historical Company share price volatility |  |              | 52.9% |  |              |  | 56.4% |              |  |  | 59.6% | 
|Risk-free interest rate                   |  |              | 3.84% |  |              |  | 3.6%  |              |  |  | 2.7%  | 
|Dividend yield                            |  |              | 0.69% |  |              |  | 0.56% |              |  |  | 0.35% | 



Nonvested
shares






Share-Based Payment


2.21  Convertible debt








2.22  Share capital




F-16



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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




2.23  Comprehensive income (loss)




2.24  Recent accounting pronouncements


Inventory Costs, an amendment of ARB No. 43,
Chapter 4


Exchanges of Nonmonetary Assets, an amendment of APB Opinion
No. 29


Share-Based Payment Accounting for
Stock-Based Compensation Accounting for Stock Issued to Employees


F-17



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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




Accounting for Conditional
Asset Retirement Obligations Accounting for Asset Retirement
Obligations


3  EQUITY-METHOD INVESTMENTS


SuperH
Joint Venture






UPEK
Inc.






F-18



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


Hynix
ST Joint Venture






4  TRADE ACCOUNTS RECEIVABLE, NET




|                          |  |              |       |   |              |  |       |  
|------------------------- |  | ------------ | ----- | - | ------------ |  | ----- | -
|                          |  | December 31, |       |   | December 31, | 
|                          |  | 2005         |       |   | 2004         | 
|                          |  |              |       |   |              | 
|Trade accounts receivable |  |              | 1,517 |   |              |  | 1,429 |  
|Less valuation allowance  |  |              | (27   | ) |              |  | (21   | )
|                          |  |              |       |   |              | 
|Total                     |  |              | 1,490 |   |              |  | 1,408 |  
|                          |  |              |       |   |              | 



5  INVENTORIES, NET




|                  |  |              |       |  |              |  |       | 
|----------------- |  | ------------ | ----- |  | ------------ |  | ----- | 
|                  |  | December 31, |       |  | December 31, | 
|                  |  | 2005         |       |  | 2004         | 
|                  |  |              |       |  |              | 
|Raw materials     |  |              | 60    |  |              |  | 70    | 
|Work-in-process   |  |              | 880   |  |              |  | 874   | 
|Finished products |  |              | 471   |  |              |  | 400   | 
|                  |  |              |       |  |              | 
|Total             |  |              | 1,411 |  |              |  | 1,344 | 
|                  |  |              |       |  |              | 

6  OTHER RECEIVABLES AND ASSETS




|                                             |  |              |     |  |              |  |     | 
|-------------------------------------------- |  | ------------ | --- |  | ------------ |  | --- | 
|                                             |  | December 31, |     |  | December 31, | 
|                                             |  | 2005         |     |  | 2004         | 
|                                             |  |              |     |  |              | 
|Receivables from government agencies         |  |              | 168 |  |              |  | 212 | 
|Taxes and other government receivables       |  |              | 189 |  |              |  | 143 | 
|Advances to suppliers                        |  |              | 2   |  |              |  | 3   | 
|Advances to employees                        |  |              | 10  |  |              |  | 16  | 
|Prepaid expenses                             |  |              | 48  |  |              |  | 88  | 
|Sundry debtors within cooperation agreements |  |              | 67  |  |              |  | 85  | 
|Foreign exchange forward contracts           |  |              | 3   |  |              |  | 200 | 
|Other                                        |  |              | 44  |  |              |  | 38  | 
|                                             |  |              |     |  |              | 
|Total                                        |  |              | 531 |  |              |  | 785 | 
|                                             |  |              |     |  |              | 

F-19



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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




7  GOODWILL




|                             |                |             |     |   |          |  |    |       |  |  |       |    |   |  |     |    |  
|---------------------------- | -------------- | ----------- | --- | - | -------- |  | -- | ----- |  |  | ----- | -- | - |  | --- | -- | -
|                             |                | Application |     |   |          |  |    |       | 
|                             |                | Specific    |     |   | Memory   |  |    |       |  | 
|                             |                | Products    |     |   | Products |  |    | Other |  |  | Total |   
|                             |                |             |     |   |          |  |    |       |  |  |       |   
|December 31, 2003            |                |             | 176 |   |          |  | 85 |       |  |  | 6     |    |   |  | 267 |   
|                             | TouchChip sale |             |     |   |          |  |    |       |  |  |       | (3 | ) |  |     | (3 | )
|Foreign currency translation |                |             | (3  | ) |          |  | 3  |       |  |  |       |    |   |  |    |   
|                             |                |             |     |   |          |  |    |       |  |  |       |   
|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 |   
|                             |                |             |     |   |          |  |    |       |  |  |       |   

Goodwill and Other Intangible Assets


8  INTANGIBLE ASSETS




|                              |  |            |     |             |              |  |      |          |  |  |     | 
|----------------------------- |  | ---------- | --- | ----------- | ------------ |  | ---- | -------- |  |  | --- | 
|                              |  |            |     | 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 | 
|                              |  |            |     |             |              |  |      |          | 

|                              |  |       |     |  |              |  |      |      |  |  |     | 
|----------------------------- |  | ----- | --- |  | ------------ |  | ---- | ---- |  |  | --- | 
|                              |  | Gross |     |  | Accumulated  |  |      | Net  | 
|December 31, 2004             |  | Cost  |     |  | Amortization |  |      | Cost | 
|                              |  |       |     |  |              |  |      |      | 
|Technologies & licenses       |  |       | 409 |  |              |  | (233 | )    |  |  | 176 | 
|Purchased software            |  |       | 148 |  |              |  | (100 | )    |  |  | 48  | 
|Internally developed software |  |       | 104 |  |              |  | (37  | )    |  |  | 67  | 
|                              |  |       |     |  |              |  |      |      | 
|Total                         |  |       | 661 |  |              |  | (370 | )    |  |  | 291 | 
|                              |  |       |     |  |              |  |      |      | 



F-20



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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




|           |  |  |     | 
|---------- |  |  | --- | 
|Year       |  | 
|           |  | 
|2006       |  |  | 107 | 
|2007       |  |  | 68  | 
|2008       |  |  | 33  | 
|2009       |  |  | 11  | 
|2010       |  |  | 4   | 
|Thereafter |  |  | 1   | 
|           |  |  |    
|Total      |  |  | 224 | 
|           |  |  |    

9  PROPERTY, PLANT AND EQUIPMENT




|                                    |  |       |        |  |              |  |         |      |  |  |       | 
|----------------------------------- |  | ----- | ------ |  | ------------ |  | ------- | ---- |  |  | ----- | 
|                                    |  | 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 | 
|                                    |  |       |        |  |              |  |         |      | 

|                                    |  |       |        |  |              |  |         |      |  |  |       | 
|----------------------------------- |  | ----- | ------ |  | ------------ |  | ------- | ---- |  |  | ----- | 
|                                    |  | Gross |        |  | Accumulated  |  |         | Net  | 
|December 31, 2004                   |  | Cost  |        |  | Depreciation |  |         | Cost | 
|                                    |  |       |        |  |              |  |         |      | 
|Land                                |  |       | 93     |  |              |  |        |      |  |  | 93    | 
|Buildings                           |  |       | 1,021  |  |              |  | (250    | )    |  |  | 771   | 
|Capital leases                      |  |       | 66     |  |              |  | (31     | )    |  |  | 35    | 
|Facilities & leasehold improvements |  |       | 2,763  |  |              |  | (1,187  | )    |  |  | 1,576 | 
|Machinery and equipment             |  |       | 12,898 |  |              |  | (8,581  | )    |  |  | 4,317 | 
|Computer and R&D equipment          |  |       | 516    |  |              |  | (382    | )    |  |  | 134   | 
|Other tangible assets               |  |       | 125    |  |              |  | (108    | )    |  |  | 17    | 
|Construction in progress            |  |       | 499    |  |              |  |        |      |  |  | 499   | 
|                                    |  |       |        |  |              |  |         |      | 
|Total                               |  |       | 17,981 |  |              |  | (10,539 | )    |  |  | 7,442 | 
|                                    |  |       |        |  |              |  |         |      | 







10  AVAILABLE-FOR-SALE MARKETABLE SECURITIES




F-21



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


11  INVESTMENTS AND OTHER NON-CURRENT ASSETS




|                                         |  |              |     |  |              |  |     | 
|---------------------------------------- |  | ------------ | --- |  | ------------ |  | --- | 
|                                         |  | December 31, |     |  | December 31, | 
|                                         |  | 2005         |     |  | 2004         | 
|                                         |  |              |     |  |              | 
|Equity-method investments (see note 3)   |  |              | 35  |  |              |  | 6   | 
|Cost investments                         |  |              | 36  |  |              |  | 34  | 
|Long-term receivables related to funding |  |              | 33  |  |              |  | 33  | 
|Debt issuance costs, net                 |  |              | 3   |  |              |  | 8   | 
|Deposits and other long-term receivables |  |              | 46  |  |              |  | 36  | 
|                                         |  |              |     |  |              | 
|Total                                    |  |              | 153 |  |              |  | 117 | 
|                                         |  |              |     |  |              | 

 




12  OTHER PAYABLES AND ACCRUED LIABILITIES




|                                               |  |              |     |  |              |  |     | 
|---------------------------------------------- |  | ------------ | --- |  | ------------ |  | --- | 
|                                               |  | December 31, |     |  | December 31, | 
|                                               |  | 2005         |     |  | 2004         | 
|                                               |  |              |     |  |              | 
|Taxes other than income taxes                  |  |              | 77  |  |              |  | 68  | 
|Salaries and wages                             |  |              | 248 |  |              |  | 261 | 
|Social charges                                 |  |              | 110 |  |              |  | 120 | 
|Advances received on government fundings       |  |              | 24  |  |              |  | 25  | 
|Foreign exchange forward contracts             |  |              | 31  |  |              |  | 109 | 
|Current portion of provision for restructuring |  |              | 40  |  |              |  | 39  | 
|Pension and termination benefits               |  |              | 21  |  |              |  | 11  | 
|Other                                          |  |              | 91  |  |              |  | 143 | 
|                                               |  |              |     |  |              | 
|Total                                          |  |              | 642 |  |              |  | 776 | 
|                                               |  |              |     |  |              | 



13  RETIREMENT PLANS




F-22



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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




|                                                                           |  |              |      |   |              |  |      |  
|-------------------------------------------------------------------------- |  | ------------ | ---- | - | ------------ |  | ---- | -
|                                                                           |  | December 31, |      |   | December 31, | 
|                                                                           |  | 2005         |      |   | 2004         | 
|                                                                           |  |              |      |   |              | 
|Change in benefit obligation:                                              |  |              |      |   |              |  |      |  
|Benefit obligation at beginning of year                                    |  |              | 286  |   |              |  | 249  |  
|Service cost                                                               |  |              | 18   |   |              |  | 18   |  
|Interest cost                                                              |  |              | 14   |   |              |  | 13   |  
|Benefits paid                                                              |  |              | (10  | ) |              |  | (6   | )
|Actuarial losses                                                           |  |              | 34   |   |              |  |     |  
|Foreign currency translation adjustments                                   |  |              | (24  | ) |              |  | 15   |  
|Other                                                                      |  |              | 5    |   |              |  | (3   | )
|                                                                           |  |              |      |   |              | 
|Benefit obligation at end of year                                          |  |              | 323  |   |              |  | 286  |  
|                                                                           |  |              |      |   |              | 
|Change in plan assets:                                                     |  |              |      |   |              |  |      |  
|Plan assets at fair value at beginning of year                             |  |              | 181  |   |              |  | 150  |  
|Actual return on plan assets                                               |  |              | 11   |   |              |  | 11   |  
|Employer and participant contributions                                     |  |              | 16   |   |              |  | 19   |  
|Benefits paid                                                              |  |              | (10  | ) |              |  | (6   | )
|Actuarial gain (losses)                                                    |  |              | 10   |   |              |  | (2   | )
|Foreign currency translation adjustments                                   |  |              | (14  | ) |              |  | 9    |  
|                                                                           |  |              |      |   |              | 
|Plan assets at fair value at end of year                                   |  |              | 194  |   |              |  | 181  |  
|                                                                           |  |              |      |   |              | 
|Funded status                                                              |  |              | (129 | ) |              |  | (105 | )
|Unrecognized prior service cost                                            |  |              | (3   | ) |              |  | (3   | )
|Unrecognized transition obligation                                         |  |              | (1   | ) |              |  | (1   | )
|Unrecognized actuarial loss                                                |  |              | 77   |   |              |  | 60   |  
|                                                                           |  |              |      |   |              | 
|Net amount recognized                                                      |  |              | (56  | ) |              |  | (49  | )
|                                                                           |  |              |      |   |              | 
|Net amount recognized in the balance sheet consisted of the
    following: |  |              |      |   |              |  |      |  
|Prepaid benefit cost                                                       |  |              | 2    |   |              |  | 2    |  
|Accrued benefit liability                                                  |  |              | (93  | ) |              |  | (93  | )
|Intangible asset                                                           |  |              | 1    |   |              |  | 1    |  
|Accumulated other comprehensive income                                     |  |              | 34   |   |              |  | 41   |  
|                                                                           |  |              |      |   |              | 
|Net amount recognized                                                      |  |              | (56  | ) |              |  | (49  | )
|                                                                           |  |              |      |   |              | 





|                                                   |  |              |     |   |              |  |     |              |  |  |    |  
|-------------------------------------------------- |  | ------------ | --- | - | ------------ |  | --- | ------------ |  |  | -- | -
|                                                   |  | Year ended   |     |   | Year ended   |  |     | Year ended   | 
|                                                   |  | December 31, |     |   | December 31, |  |     | December 31, | 
|                                                   |  | 2005         |     |   | 2004         |  |     | 2003         | 
|                                                   |  |              |     |   |              |  |     |              | 
|Service cost                                       |  |              | 18  |   |              |  | 18  |              |  |  | 14 |  
|Interest cost                                      |  |              | 14  |   |              |  | 13  |              |  |  | 10 |  
|Expected return on plan assets                     |  |              | (11 | ) |              |  | (11 | )            |  |  | (7 | )
|Amortization of unrecognized transition obligation |  |              |    |   |              |  |    |              |  |  |   |  
|Amortization of net loss                           |  |              | 3   |   |              |  | 8   |              |  |  | 2  |  
|Amortization of prior service cost                 |  |              |    |   |              |  | 1   |              |  |  | 1  |  
|                                                   |  |              |     |   |              |  |     |              | 
|Net periodic benefit cost                          |  |              | 24  |   |              |  | 29  |              |  |  | 20 |  
|                                                   |  |              |     |   |              |  |     |              | 

F-23



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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




|                                                                                   |  |              |       |  |              |  |       |              |  |  |       | 
|---------------------------------------------------------------------------------- |  | ------------ | ----- |  | ------------ |  | ----- | ------------ |  |  | ----- | 
|                                                                                   |  | December 31, |       |  | December 31, |  |       | December 31, | 
|Assumptions                                                                        |  | 2005         |       |  | 2004         |  |       | 2003         | 
|                                                                                   |  |              |       |  |              |  |       |              | 
|Discount rate                                                                      |  |              | 4.54% |  |              |  | 5.02% |              |  |  | 5.25% | 
|Salary increase rate                                                               |  |              | 3.75% |  |              |  | 3.34% |              |  |  | 3.34% | 
|Expected long-term rate of return on funds for the pension
    expense of the year |  |              | 6.34% |  |              |  | 6.44% |              |  |  | 6.75% | 





|                        |  |                   |      |                |      |  |      |      |  |  |      | 
|----------------------- |  | ----------------- | ---- | -------------- | ---- |  | ---- | ---- |  |  | ---- | 
|                        |  |                   |      | Percentage of  |     
|                        |  |                   |      | Plan Assets at |     
|                        |  |                   |      | December       |     
|                        |  | Target allocation |      |                |      | 
|Asset Category          |  | 2005              |      |                | 2005 |  |      | 2004 | 
|                        |  |                   |      |                |      |  |      |      | 
|Equity securities       |  |                   | 57%  |                |      |  | 61%  |      |  |  | 57%  | 
|Fixed income securities |  |                   | 39%  |                |      |  | 37%  |      |  |  | 39%  | 
|Real estate             |  |                   | 2%   |                |      |  | 2%   |      |  |  | 2%   | 
|Other                   |  |                   | 2%   |                |      |  |     |      |  |  | 2%   | 
|                        |  |                   |      |                |      |  |      |      | 
|Total                   |  |                   | 100% |                |      |  | 100% |      |  |  | 100% | 
|                        |  |                   |      |                |      |  |      |      | 







|                  |  |                  |    | 
|----------------- |  | ---------------- | -- | 
|                  |  | Estimated future |   
|Years             |  | benefit payments |   
|                  |  |                  |   
|2006              |  |                  | 9  | 
|2007              |  |                  | 8  | 
|2008              |  |                  | 10 | 
|2009              |  |                  | 10 | 
|2010              |  |                  | 7  | 
|From 2011 to 2015 |  |                  | 66 | 





| |   |                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | For Italian termination indemnity plan (TFR), the
    Company calculates the vested benefits to which Italian
    employees are entitled if they separate immediately as of
    December 2005, in compliance with the Emerging Issues Task Force
    Issue No. 88-1,
    Determination of Vested Benefit Obligation for a Defined

F-24



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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




| |  |                                                                                                                                                                                                                                                       
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Benefit Pension Plan
    (EITF 88-1).
    The benefits accrued on a
    pro-rata basis during
    the employees employment period are based on the
    individuals salaries, adjusted for inflation. Movements in
    the reserve were as follows:

|                                         |  |  |     |  
|---------------------------------------- |  |  | --- | -
|Balance as of December 31, 2002          |  |  | 129 |  
|Provision for the year                   |  |  | 29  |  
|Indemnities paid during the year         |  |  | (19 | )
|Foreign currency translation adjustments |  |  | 31  |  
|Balance as of December 31, 2003          |  |  | 170 |  
|Provision for the year                   |  |  | 33  |  
|Indemnities paid during the year         |  |  | (25 | )
|Foreign currency translation adjustments |  |  | 14  |  
|Balance as of December 31, 2004          |  |  | 192 |  
|Provision for the year                   |  |  | 34  |  
|Indemnities paid during the year         |  |  | (18 | )
|Foreign currency translation adjustments |  |  | (26 | )
|Balance as of December 31, 2005          |  |  | 182 |  



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company has certain defined contribution plans, which
    accrued benefits for employees on a pro-rata basis during their
    employment period based on their individual salaries. The
    Company accrued benefits related to defined contribution pension
    plans of $21 million and $11 million, as of
    December 31, 2005 and 2004, respectively. The annual cost
    of these plans amounted to approximately $42 million,
    $29 million and $25 million in 2005, 2004 and 2003,
    respectively. The benefits accrued to the employees on a
    pro-rata basis, during their employment period are based on the
    individuals salaries.

14  LONG-TERM DEBT




|                                                                               |  |              |        |   |              |  |       |  
|------------------------------------------------------------------------------ |  | ------------ | ------ | - | ------------ |  | ----- | -
|                                                                               |  | December 31, |        |   | December 31, | 
|                                                                               |  | 2005         |        |   | 2004         | 
|                                                                               |  |              |        |   |              | 
|Bank loans:                                                                    |  |              |        |   |              |  |       |  
|2.62% (weighted average), due 2006, floating interest rate at
    Libor + 0.30 |  |              | 45     |   |              |  | 105   |  
|2.53% (weighted average), due 2007, fixed interest rate                        |  |              | 120    |   |              |  | 153   |  
|4.77% (weighted average rate), due 2007, variable interest rate                |  |              | 36     |   |              |  | 44    |  
|5.08% due 2008, floating interest rate at Libor + 0.40                         |  |              | 25     |   |              |  |      |  
|5.11% due 2010, floating interest rate at Libor + 0.40                         |  |              | 25     |   |              |  |      |  
|Funding program loans:                                                         |  |              |        |   |              |  |       |  
|5.35% (weighted average), due 2006, fixed interest rate                        |  |              | 4      |   |              |  | 13    |  
|1.07% (weighted average), due 2009, fixed interest rate                        |  |              | 72     |   |              |  | 102   |  
|3.10% (weighted average), due 2012, fixed interest rate                        |  |              | 12     |   |              |  | 14    |  
|0.83% (weighted average), due 2017, fixed interest rate                        |  |              | 47     |   |              |  | 55    |  
|Capital leases:                                                                |  |              |        |   |              |  |       |  
|4.78%, due 2011, fixed interest rate                                           |  |              | 26     |   |              |  | 35    |  
|Convertible debt:                                                              |  |              |        |   |              |  |       |  
|-0.50% convertible bonds due 2013                                              |  |              | 1,379  |   |              |  | 1,379 |  
|                                                                               |  |              |        |   |              | 
|Total long-term debt                                                           |  |              | 1,791  |   |              |  | 1,900 |  
|Less current portion                                                           |  |              | (1,522 | ) |              |  | (133  | )
|                                                                               |  |              |        |   |              | 
|Total long-term debt, less current portion                                     |  |              | 269    |   |              |  | 1,767 |  
|                                                                               |  |              |        |   |              | 

F-25



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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, | 
|                 |  | 2005         |       |  | 2004         | 
|                 |  |              |       |  |              | 
|U.S. dollar      |  |              | 1,454 |  |              |  | 1,404 | 
|Euro             |  |              | 206   |  |              |  | 324   | 
|Singapore dollar |  |              | 120   |  |              |  | 153   | 
|Other            |  |              | 11    |  |              |  | 19    | 
|                 |  |              |       |  |              | 
|Total            |  |              | 1,791 |  |              |  | 1,900 | 
|                 |  |              |       |  |              | 



|           |  |              |       | 
|---------- |  | ------------ | ----- | 
|           |  | December 31, |      
|           |  | 2005         |      
|           |  |              |      
|2006       |  |              | 1,522 | 
|2007       |  |              | 119   | 
|2008       |  |              | 58    | 
|2009       |  |              | 30    | 
|2010       |  |              | 22    | 
|Thereafter |  |              | 40    | 
|           |  |              |      
|Total      |  |              | 1,791 | 
|           |  |              |      



Credit facilities




15  SHAREHOLDERS EQUITY


15.1  Outstanding shares






15.2  Preference shares




F-26



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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




15.3  Treasury shares






15.4  Stock option plans












F-27



---



##### 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, 2002 |                        |                  | 46,817,761 |                 |       | $        | 6.04-$62.01  |              |  | $ | 32.01 |      
|Options granted:                 |                        |                  |            |                 |       |          |              |              |  |   |       |      
|                                 | 2001 Plan              |                  |            | 11,976,310      |       |          | $            | 19.18-$25.90 |  |   | $     | 19.35 | 
|                                 | Supervisory Board Plan |                  |            | 132,000         |       |          | $            | 19.18        |  |   | $     | 19.18 | 
|Options forfeited                |                        |                  | (898,456   | )               |       | $        | 6.04-$62.01  |              |  | $ | 37.09 |      
|Options exercised                |                        |                  | (1,258,318 | )               |       | $        | 6.04-$24.88  |              |  | $ | 10.04 |      
|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 |      
|                                 |                        |                  |            |                 |       |          |              |              | 



|                                |  |              |            |  |              |   |            |              |  |   |            | 
|------------------------------- |  | ------------ | ---------- |  | ------------ | - | ---------- | ------------ |  | - | ---------- | 
|                                |  | December 31, |            |  | December 31, |   |            | December 31, | 
|                                |  | 2005         |            |  | 2004         |   |            | 2003         | 
|                                |  |              |            |  |              |   |            |              | 
|Options exercisable             |  |              | 60,558,567 |  |              |   | 32,212,680 |              |  |   | 23,338,811 | 
|Weighted average exercise price |  | $            | 29.80      |  |              | $ | 33.84      |              |  | $ | 28.87      | 
|                                |  |              |            |  |              |   |            |              | 





|                 |            |              |              |              |                |          |         |                  |       |  |     |     |     | 
|---------------- | ---------- | ------------ | ------------ | ------------ | -------------- | -------- | ------- | ---------------- | ----- |  | --- | --- | --- | 
|                 |            |              |              |              |                | Weighted |        
|                 |            |              |              | Weighted     |                |          | average |                 
|                 |            | Option price |              |              | average        |          |         | remaining        |      
|Number of shares |            | range        |              |              | exercise price |          |         | contractual life |      
|                 |            |              |              |              |                |          |         |                  |      
|                 |            | 2,523,511    |              | $            | 12.03-$17.31   |          |         | $                | 12.43 |  |     |     | 1.2 | 
|                 | 30,682,918 |              | $            | 19.18-$24.88 |                |          | $       | 22.03            |       |  |     | 6.2 |    
|236,990          |            | $            | 25.90-$29.70 |              |                | $        | 27.18   |                  |       |  | 7.3 |    
|                 | 20,679,858 |              | $            | 31.09-$44.00 |                |          | $       | 34.37            |       |  |     | 5.9 |    
|                 |            | 6,435,290    |              | $            | 50.69-$62.01   |          |         | $                | 59.08 |  |     |     | 2.6 | 

F-28



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


15.5  Employee share purchase plans




|          |  |                  |     |  |                 |  |       |               |  |  |           |  |  |               |     |  |  |  |         | 
|--------- |  | ---------------- | --- |  | --------------- |  | ----- | ------------- |  |  | --------- |  |  | ------------- | --- |  |  |  | ------- | 
|          |  | Number of shares |     |  | Price per share |  |       | Discount from |  |  |          
|          |  | offered per      |     |  |                 |  |       | the market    |  |  | Number of | 
|          |  | employee         |     |  | In U.S. Dollars |  |       | In Euro       |  |  | price     |  |  | shares issued |    
|          |  |                  |     |  |                 |  |       |               |  |  |           |  |  |               |    
|June 2003 |  |                  | 309 |  |                 |  | 17.91 |               |  |  | 15.51     |  |  |               | 15% |  |  |  | 587,862 | 



15.6  Nonvested share awards









|                                 |                        |                  |           |           |       |   |         |      | 
|-------------------------------- | ---------------------- | ---------------- | --------- | --------- | ----- | - | ------- | ---- | 
|Nonvested Shares                 |                        | Number of Shares |           |           | Price |  
|                                 |                        |                  |           |           |       |  
|Outstanding at December 31, 2004 |                        |                  |          |           |       |   |        |     
|                                 |                        |                  |           |           |       |  
|Awards granted:                  |                        |                  |           |           |       |   |         |     
|                                 | Amended 2001 Plan      |                  |           | 3,940,065 |       |   | $       | 0    | 
|                                 | Supervisory Board Plan |                  |           | 66,000    |       |   |        | 1.04 | 
|Awards cancelled:                |                        |                  |           |           |       |   |         |     
|                                 | Amended 2001 Plan      |                  |           | (25,845   | )     |   | $       | 0    | 
|                                 | Supervisory Board Plan |                  |           | (15,000   | )     |   |        | 1.04 | 
|Awards exercised                 |                        |                  |          |           |       |   |        |     
|Outstanding at December 31, 2005 |                        |                  | 3,965,220 |           |       | $ | 0-1.04 |     
|                                 |                        |                  |           |           |       |  





|                                         |  |            |             | 
|---------------------------------------- |  | ---------- | ----------- | 
|                                         |  | 2005 grant |            
|                                         |  |            |            
|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% | 



F-29



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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




|                                       |  |   |            | 
|-------------------------------------- |  | - | ---------- | 
|Selling, general and administrative    |  | $ | 6 million  | 
|Research and development               |  | $ | 3 million  | 
|                                       |  |   |           
|Total stock-based compensation expense |  | $ | 9  million | 
|                                       |  |   |           









|                                                     |                              |                     |       |           |                   |  |       |      | 
|---------------------------------------------------- | ---------------------------- | ------------------- | ----- | --------- | ----------------- |  | ----- | ---- | 
|                                                     |                              | Twelve months ended |      
|                                                     |                              | December 31, 2005   |      
|                                                     |                              |                     |      
|                                                     |                              |                     |       | Pro forma |                  
|                                                     |                              | As reported         |       |           | (applying APB 25) | 
|                                                     |                              |                     |       |           |                   | 
|Operating income                                     |                              |                     | 244   |           |                   |  | 242   |     
|of which compensation expense before tax effect      |                              |                     | (9    | )         |                   |  | (11   | )   
|Income before income taxes and minority interests    |                              |                     | 275   |           |                   |  | 273   |     
|Net income                                           |                              |                     | 266   |           |                   |  | 265   |     
|of which tax benefit related to compensation expense |                              |                     | 2     |           |                   |  | 3     |     
|                                                     | Earnings per share (Basic)   |                     |       | 0.30      |                   |  |       | 0.30 | 
|                                                     | Earnings per share (Diluted) |                     |       | 0.29      |                   |  |       | 0.29 | 
|Net cash from operating activities                   |                              |                     | 1,798 |           |                   |  | 1,798 |     
|Net cash used in financing activities                |                              |                     | (178  | )         |                   |  | (178  | )   

F-30



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


15.7  Accumulated other comprehensive income
(loss)




|                                  |  |               |       |            |                    |  |    |                |  |  |                   |   |  |                   |     |   |  |  |       |  
|--------------------------------- |  | ------------- | ----- | ---------- | ------------------ |  | -- | -------------- |  |  | ----------------- | - |  | ----------------- | --- | - |  |  | ----- | -
|                                  |  |               |       | Unrealized |                    |  |    |                |  |  |                  
|                                  |  | Foreign       |       |            | gain (loss) on     |  |    | Unrealized     |  |  | Minimum           |   |  | Accumulated other |    
|                                  |  | currency      |       |            | available-for-sale |  |    | gain (loss) on |  |  | pension liability |   |  | comprehensive     |    
|                                  |  | translation   |       |            | securities,        |  |    | derivatives,   |  |  | adjustment,       |   |  | income (loss),    |    
|                                  |  | income (loss) |       |            | net of tax         |  |    | net of tax     |  |  | net of tax        |   |  | net of tax        |    
|                                  |  |               |       |            |                    |  |    |                |  |  |                   |   |  |                   |    
|Balance as of December 31, 2002   |  |               | (226  | )          |                    |  | 1  |                |  |  |                  |   |  |                   | (33 | ) |  |  | (258  | )
|Other comprehensive income (loss) |  |               | 883   |            |                    |  | 2  |                |  |  |                  |   |  |                   | (4  | ) |  |  | 881   |  
|                                  |  |               |       |            |                    |  |    |                |  |  |                   |   |  |                   |    
|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 |            |                    |  | 0  |                |  |  | 59                |   |  |                   | (41 | ) |  |  | 1,116 |  
|Other comprehensive income (loss) |  |               | (770  | )          |                    |  |   |                |  |  | (72               | ) |  |                   | 7   |   |  |  | (835  | )
|                                  |  |               |       |            |                    |  |    |                |  |  |                   |   |  |                   |    
|Balance as of December 31, 2005   |  |               | 328   |            |                    |  | 0  |                |  |  | (13               | ) |  |                   | (34 | ) |  |  | 281   |  
|                                  |  |               |       |            |                    |  |    |                |  |  |                   |   |  |                   |    

15.8  Dividends




16  EARNINGS PER SHARE




|                                                 |  |              |             |  |              |  |             |              |  |  |             | 
|------------------------------------------------ |  | ------------ | ----------- |  | ------------ |  | ----------- | ------------ |  |  | ----------- | 
|                                                 |  | Year ended   |             |  | Year ended   |  |             | Year ended   | 
|                                                 |  | December 31, |             |  | December 31, |  |             | December 31, | 
|                                                 |  | 2005         |             |  | 2004         |  |             | 2003         | 
|                                                 |  |              |             |  |              |  |             |              | 
|Basic EPS                                        |  |              |             |  |              |  |             |              |  |  |             | 
|Net income                                       |  |              | 266         |  |              |  | 601         |              |  |  | 253         | 
|Weighted average shares outstanding              |  |              | 892,760,520 |  |              |  | 891,192,542 |              |  |  | 888,152,244 | 
|Basic EPS                                        |  |              | 0.30        |  |              |  | 0.67        |              |  |  | 0.29        | 
|Diluted EPS                                      |  |              |             |  |              |  |             |              |  |  |             | 
|Net income                                       |  |              | 266         |  |              |  | 601         |              |  |  | 253         | 
|Convertible debt interest, net of tax            |  |              | 5           |  |              |  | 4           |              |  |  | 2           | 
|                                                 |  |              |             |  |              |  |             |              | 
|Net income adjusted                              |  |              | 271         |  |              |  | 605         |              |  |  | 255         | 
|Weighted average shares outstanding              |  |              | 892,760,520 |  |              |  | 891,192,542 |              |  |  | 888,152,244 | 
|Dilutive effect of stock options                 |  |              | 854,523     |  |              |  | 2,038,369   |              |  |  | 7,059,127   | 
|Dilutive effect of nonvested shares              |  |              | 116,233     |  |              |  |            |              |  |  |            | 
|Dilutive effect of convertible debt              |  |              | 41,880,104  |  |              |  | 41,880,160  |              |  |  | 41,880,160  | 
|                                                 |  |              |             |  |              |  |             |              | 
|Number of shares used in calculating diluted EPS |  |              | 935,611,380 |  |              |  | 935,111,071 |              |  |  | 937,091,531 | 
|Diluted EPS                                      |  |              | 0.29        |  |              |  | 0.65        |              |  |  | 0.27        | 



F-31



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


17  OTHER INCOME AND EXPENSES, NET




|                                     |  |              |     |   |              |  |     |              |  |  |     |  
|------------------------------------ |  | ------------ | --- | - | ------------ |  | --- | ------------ |  |  | --- | -
|                                     |  | Year ended   |     |   | Year ended   |  |     | Year ended   | 
|                                     |  | December 31, |     |   | December 31, |  |     | December 31, | 
|                                     |  | 2005         |     |   | 2004         |  |     | 2003         | 
|                                     |  |              |     |   |              |  |     |              | 
|Research and development funding     |  |              | 76  |   |              |  | 84  |              |  |  | 76  |  
|Start-up costs                       |  |              | (56 | ) |              |  | (63 | )            |  |  | (55 | )
|Exchange gain (loss), net            |  |              | (16 | ) |              |  | 33  |              |  |  | 5   |  
|Patent litigation costs              |  |              | (14 | ) |              |  | (31 | )            |  |  | (24 | )
|Patent pre-litigation costs          |  |              | (8  | ) |              |  | (6  | )            |  |  | (5  | )
|Gain on sale of non-current assets   |  |              | 12  |   |              |  | 6   |              |  |  | 17  |  
|Other, net                           |  |              | (3  | ) |              |  | (13 | )            |  |  | (18 | )
|                                     |  |              |     |   |              |  |     |              | 
|Total other income and expenses, net |  |              | (9  | ) |              |  | 10  |              |  |  | (4  | )
|                                     |  |              |     |   |              |  |     |              | 



18  IMPAIRMENT, RESTRUCTURING CHARGES AND OTHER
RELATED CLOSURE COSTS












F-32



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##### 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, 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 | )
|                                  |  |            |    |               |         |  |               |                       |  |                   |               |  

|                                  |  |            |      |               |         |  |               |                       |  |                   |               |   |  |  |      |  
|--------------------------------- |  | ---------- | ---- | ------------- | ------- |  | ------------- | --------------------- |  | ----------------- | ------------- | - |  |  | ---- | -
|                                  |  |            |      |               |         |  |               | Total impairment,     | 
|                                  |  |            |      |               |         |  |               | restructuring charges | 
|                                  |  |            |      | Restructuring |         |  | Other related |                       |  | and other related |              
|Year ended December 31, 2003      |  | Impairment |      |               | charges |  |               | closure costs         |  |                   | closure costs |  
|                                  |  |            |      |               |         |  |               |                       |  |                   |               |  
|150mm fab plan                    |  |            | (155 | )             |         |  | (34           | )                     |  |                   | (1            | ) |  |  | (190 | )
|Intangible assets and investments |  |            | (6   | )             |         |  |              |                       |  |                   |              |   |  |  | (6   | )
|Other                             |  |            |     |               |         |  | (9            | )                     |  |                   |              |   |  |  | (9   | )
|                                  |  |            |      |               |         |  |               |                       |  |                   |               |  
|Total                             |  |            | (161 | )             |         |  | (43           | )                     |  |                   | (1            | ) |  |  | (205 | )
|                                  |  |            |      |               |         |  |               |                       |  |                   |               |  







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $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, Goodwill and Other Intangible Assets, 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 center 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.                                                                                                                                                                                                                                                                                                               



F-33



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $133 million on certain property and equipment used in its
    150mm fab operations, based on the discounted expected future
    cash flows of the assets and market quotations for the
    facilities in Castelletto (Italy);                                                                                                                                                                                                                 
|
| |  | $7 million fair market adjustment on the Rancho Bernardo,
    California facility, based on market quotations under the
    held-for-sale model. This impairment charge was unrelated to the
    Companys plan to restructure its 150mm fab facilities, but
    was the consequence of a deterioration in real estate market
    conditions for this type of facility. The facility was sold in
    2004 for approximately its carrying value;
|
| |  | $15 million on the planned closure of a back-end building
    facility based on a market quotation;                                                                                                                                                                                                                                                                                                                                            
|
| |  | $3 million related to certain purchased technologies
    identified to be obsolete; and                                                                                                                                                                                                                                                                                                                                                        
|
| |  | $3 million for contractually committed future capital
    contributions to SuperH Inc., the joint venture formed with
    Renesas Technology Corp.                                                                                                                                                                                                                                                                                             

Accounting for the
impairment or disposal of long-term assets






|                                  |  |                |     |               |               |  |     |       |               |                 |             |   |  |               |     |   |               |  |    |   |  |  |     |  
|--------------------------------- |  | -------------- | --- | ------------- | ------------- |  | --- | ----- | ------------- | --------------- | ----------- | - |  | ------------- | --- | - | ------------- |  | -- | - |  |  | --- | -
|                                  |  | 150mm fab plan |     |               |               |  |     |       | Total         |                
|                                  |  |                |     |               | 2005          |  |     |       |               | restructuring & |            
|                                  |  |                |     | Other related |               |  |     |       | restructuring |                 |             |   |  | other related |    
|                                  |  | Restructuring  |     |               | closure costs |  |     | Total |               |                 | initiatives |   |  | Other         |     |   | closure costs | 
|                                  |  |                |     |               |               |  |     |       |               |                 |             |   |  |               |     |   |               | 
|Provision as at December 31, 2002 |  |                |    |               |               |  |    |       |               |                 |            |   |  |               |    |   |               |  |   |   |  |  |    |  
|Charges incurred in 2003          |  |                | 34  |               |               |  | 1   |       |               |                 | 35          |   |  |               |     |   |               |  | 9  |   |  |  | 44  |  
|Amounts paid                      |  |                | (2  | )             |               |  |    |       |               |                 | (2          | ) |  |               |     |   |               |  | (6 | ) |  |  | (8  | )
|Currency translation effect       |  |                | 2   |               |               |  |    |       |               |                 | 2           |   |  |               |     |   |               |  |   |   |  |  | 2   |  
|                                  |  |                |     |               |               |  |     |       |               |                 |             |   |  |               |     |   |               | 
|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  |  
|                                  |  |                |     |               |               |  |     |       |               |                 |             |   |  |               |     |   |               | 





F-34



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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












| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 $4 million of workforce termination
    benefits.                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | 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 $1 million of unused lease
    charges relating to the closure of these two sites.                                                                                                                                                                                                                                                                                                                             
|
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | The Company defined a plan of reorganization and optimization of
    its activities. This plan focuses on workforce reduction, mainly
    in Europe, but will, whenever possible, encourage voluntary
    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, 2005, the Company recorded a total
    restructuring charge for its new restructuring plan amounting to
    $38 million, mainly related to termination incentives for
    two of the Companys subsidiaries in Europe, who accepted
    special termination arrangements.















F-35



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


19  INTEREST INCOME (EXPENSE), NET




|        |  |              |     |   |              |  |     |              |  |  |     |  
|------- |  | ------------ | --- | - | ------------ |  | --- | ------------ |  |  | --- | -
|        |  | Year ended   |     |   | Year ended   |  |     | Year ended   | 
|        |  | December 31, |     |   | December 31, |  |     | December 31, | 
|        |  | 2005         |     |   | 2004         |  |     | 2003         | 
|        |  |              |     |   |              |  |     |              | 
|Income  |  |              | 53  |   |              |  | 41  |              |  |  | 37  |  
|Expense |  |              | (19 | ) |              |  | (44 | )            |  |  | (89 | )
|        |  |              |     |   |              |  |     |              | 
|Total   |  |              | 34  |   |              |  | (3  | )            |  |  | (52 | )
|        |  |              |     |   |              |  |     |              | 



20  LOSS ON EXTINGUISHMENT OF CONVERTIBLE DEBT






21  INCOME TAX




|                                          |  |              |     |   |              |  |     |              |  |  |     | 
|----------------------------------------- |  | ------------ | --- | - | ------------ |  | --- | ------------ |  |  | --- | 
|                                          |  | Year ended   |     |   | Year ended   |  |     | Year ended   | 
|                                          |  | December 31, |     |   | December 31, |  |     | December 31, | 
|                                          |  | 2005         |     |   | 2004         |  |     | 2003         | 
|                                          |  |              |     |   |              |  |     |              | 
|Income (loss) recorded in The Netherlands |  |              | (60 | ) |              |  | 12  |              |  |  | 15  | 
|Income from foreign operations            |  |              | 335 |   |              |  | 660 |              |  |  | 227 | 
|                                          |  |              |     |   |              |  |     |              | 
|Income before income tax expense          |  |              | 275 |   |              |  | 672 |              |  |  | 242 | 
|                                          |  |              |     |   |              |  |     |              | 





|                                |  |              |     |   |              |  |     |              |  |  |     |  
|------------------------------- |  | ------------ | --- | - | ------------ |  | --- | ------------ |  |  | --- | -
|                                |  | Year ended   |     |   | Year ended   |  |     | Year ended   | 
|                                |  | December 31, |     |   | December 31, |  |     | December 31, | 
|                                |  | 2005         |     |   | 2004         |  |     | 2003         | 
|                                |  |              |     |   |              |  |     |              | 
|The Netherlands taxes  current |  |              | (6  | ) |              |  | (6  | )            |  |  | (4  | )
|Foreign taxes  current         |  |              | (33 | ) |              |  | (52 | )            |  |  | (81 | )
|                                |  |              |     |   |              |  |     |              | 
|Current taxes                   |  |              | (39 | ) |              |  | (58 | )            |  |  | (85 | )
|Foreign deferred taxes          |  |              | 31  |   |              |  | (10 | )            |  |  | 99  |  
|                                |  |              |     |   |              |  |     |              | 
|Income tax benefit (expense)    |  |              | (8  | ) |              |  | (68 | )            |  |  | 14  |  
|                                |  |              |     |   |              |  |     |              | 

F-36



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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, | 
|                                                        |  | 2005         |     |   | 2004         |  |      | 2003         | 
|                                                        |  |              |     |   |              |  |      |              | 
|Income tax expense computed at statutory rate           |  |              | (95 | ) |              |  | (232 | )            |  |  | (83 | )
|Permanent and other differences                         |  |              | (26 | ) |              |  | (11  | )            |  |  | (3  | )
|Change in valuation allowances                          |  |              |    |   |              |  |     |              |  |  | (1  | )
|Impact of final tax assessments relating to prior years |  |              | 28  |   |              |  | 3    |              |  |  | 6   |  
|Effects of change in enacted tax on deferred taxes      |  |              |    |   |              |  | 18   |              |  |  |    |  
|Current year credits                                    |  |              | 20  |   |              |  | 28   |              |  |  | 12  |  
|Other tax and credits                                   |  |              | (2  | ) |              |  | (3   | )            |  |  | (5  | )
|Benefits from tax holidays                              |  |              | 48  |   |              |  | 77   |              |  |  | 67  |  
|Earnings of subsidiaries taxed at different rates       |  |              | 19  |   |              |  | 52   |              |  |  | 21  |  
|                                                        |  |              |     |   |              |  |      |              | 
|Income tax benefit (expense)                            |  |              | (8  | ) |              |  | (68  | )            |  |  | 14  |  
|                                                        |  |              |     |   |              |  |      |              | 





|                                                   |  |              |       |   |              |  |       |  
|-------------------------------------------------- |  | ------------ | ----- | - | ------------ |  | ----- | -
|                                                   |  | December 31, |       |   | December 31, | 
|                                                   |  | 2005         |       |   | 2004         | 
|                                                   |  |              |       |   |              | 
|Tax loss carryforwards and investment credits      |  |              | 150   |   |              |  | 162   |  
|Inventory valuation                                |  |              | 28    |   |              |  | 16    |  
|Impairment and restructuring charges               |  |              | 24    |   |              |  | 35    |  
|Fixed asset depreciation in arrears                |  |              | 73    |   |              |  | 72    |  
|Receivables for government funding                 |  |              | 66    |   |              |  | 69    |  
|Tax allowances granted on past capital investments |  |              | 761   |   |              |  | 765   |  
|Pension service costs                              |  |              | 13    |   |              |  | 13    |  
|Commercial accruals                                |  |              | 11    |   |              |  | 15    |  
|Other temporary differences                        |  |              | 45    |   |              |  | 45    |  
|                                                   |  |              |       |   |              | 
|Total deferred tax assets                          |  |              | 1,171 |   |              |  | 1,192 |  
|Valuation allowances                               |  |              | (854  | ) |              |  | (855  | )
|                                                   |  |              |       |   |              | 
|Deferred tax assets, net                           |  |              | 317   |   |              |  | 337   |  
|                                                   |  |              |       |   |              | 
|Accelerated fixed asset depreciation               |  |              | (116  | ) |              |  | (147  | )
|Acquired intangible assets                         |  |              | (7    | ) |              |  | (6    | )
|Advances of government funding                     |  |              | (31   | ) |              |  | (37   | )
|Other temporary differences                        |  |              | (18   | ) |              |  | (28   | )
|                                                   |  |              |       |   |              | 
|Deferred tax liabilities                           |  |              | (172  | ) |              |  | (218  | )
|Net deferred income tax asset                      |  |              | 145   |   |              |  | 119   |  
|                                                   |  |              |       |   |              | 

F-37



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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




|           |  |  |     | 
|---------- |  |  | --- | 
|Year       |  | 
|           |  | 
|2006       |  |  | 21  | 
|2007       |  |  | 1   | 
|2008       |  |  | 1   | 
|2009       |  |  | 1   | 
|Thereafter |  |  | 126 | 
|           |  |  |    
|Total      |  |  | 150 | 
|           |  |  |    







22  COMMITMENTS




|                       |                                          |               |       |     |      |   |       |      |  |   |      |    |  |      |    |    |      |   |    |            |  |   |    |   |  |   |     |   | 
|---------------------- | ---------------------------------------- | ------------- | ----- | --- | ---- | - | ----- | ---- |  | - | ---- | -- |  | ---- | -- | -- | ---- | - | -- | ---------- |  | - | -- | - |  | - | --- | - | 
|                       |                                          | Total         |       |     | 2006 |   |       | 2007 |  |   | 2008 |    |  | 2009 |    |    | 2010 |   |    | Thereafter | 
|                       |                                          |               |       |     |      |   |       |      |  |   |      |    |  |      |    |    |      |   |    |            | 
|                       |                                          | (in millions) |      
|Operating leases       |                                          | $             | 271   |     |      | $ | 50    |      |  | $ | 37   |    |  | $    | 32 |    |      | $ | 28 |            |  | $ | 22 |   |  | $ | 102 |  
|Purchase obligations   |                                          |               | 1,053 |     |      |   | 940   |      |  |   | 79   |    |  |      | 34 |    |      |   |   |            |  |   |   |   |  |   |    |  
|Of which:              |                                          |               |       |     |      |   |       |      |  |   |      |    |  |      |    |    |      |   |    |            |  |   |    |   |  |   |     |  
|                       | Equipment purchase                       |               |       | 576 |      |   |       | 576  |  |   |      |   |  |      |    |   |      |   |    |           |  |   |    |  |  |   |     |  | 
|                       | Foundry purchase                         |               |       | 260 |      |   |       | 260  |  |   |      |   |  |      |    |   |      |   |    |           |  |   |    |  |  |   |     |  | 
|                       | Software, technology licenses and design |               |       | 217 |      |   |       | 104  |  |   |      | 79 |  |      |    | 34 |      |   |    |           |  |   |    |  |  |   |     |  | 
|Hynix ST Joint Venture |                                          |               | 212   |     |      |   | 212   |      |  |   |     |    |  |      |   |    |      |   |   |            |  |   |   |   |  |   |    |  
|Other obligations      |                                          | $             | 112   |     |      | $ | 59    |      |  | $ | 44   |    |  | $    | 3  |    |      | $ | 2  |            |  | $ | 1  |   |  | $ | 3   |  
|                       |                                          |               |       |     |      |   |       |      |  |   |      |    |  |      |    |    |      |   |    |            | 
|Total                  |                                          |               | 1,648 |     |      |   | 1,261 |      |  |   | 160  |    |  |      | 69 |    |      |   | 30 |            |  |   | 23 |   |  |   | 105 |  
|                       |                                          |               |       |     |      |   |       |      |  |   |      |    |  |      |    |    |      |   |    |            | 





F-38



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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






Other commitments




23  CONTINGENCIES






24  CLAIMS AND LEGAL PROCEEDINGS










F-39



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


25  FINANCIAL INSTRUMENTS AND RISK MANAGEMENT






25.1  Foreign Currency Risk




Foreign
Currency Forward Contracts Not Designated as a Hedge










Cash
Flow Hedges










F-40



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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






25.2  Concentration of credit risk






25.3  Fair value of financial instruments




|                                         |  |          |       |  |            |  |       |          |  |  |            |  |  |  |       | 
|---------------------------------------- |  | -------- | ----- |  | ---------- |  | ----- | -------- |  |  | ---------- |  |  |  | ----- | 
|                                         |  | 2005     |       |  | 2004       | 
|                                         |  |          |       |  |            | 
|                                         |  | Carrying |       |  | Estimated  |  |       | Carrying |  |  | Estimated  | 
|                                         |  | Amount   |       |  | Fair Value |  |       | Amount   |  |  | Fair Value | 
|                                         |  |          |       |  |            |  |       |          |  |  |            | 
|Long-term debt                           |  |          |       |  |            |  |       |          |  |  |            |  |  |  |       | 
| Bank loans (including current portion) |  |          | 412   |  |            |  | 400   |          |  |  | 521        |  |  |  | 505   | 
| Convertible debt                       |  |          | 1,379 |  |            |  | 1,342 |          |  |  | 1,379      |  |  |  | 1,326 | 
|Other receivables and assets             |  |          |       |  |            |  |       |          |  |  |            |  |  |  |       | 
| Foreign exchange forward contracts     |  |          | 3     |  |            |  | 3     |          |  |  | 200        |  |  |  | 200   | 
|Other payables and accrued liabilities   |  |          |       |  |            |  |       |          |  |  |            |  |  |  |       | 
| Foreign exchange forward contracts     |  |          | 31    |  |            |  | 31    |          |  |  | 109        |  |  |  | 109   | 



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




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




Foreign exchange forward contracts




F-41



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


26  RELATED PARTY TRANSACTIONS




|                                  |  |              |     |   |              |  |     |              |  |  |     |  
|--------------------------------- |  | ------------ | --- | - | ------------ |  | --- | ------------ |  |  | --- | -
|                                  |  | December 31, |     |   | December 31, |  |     | December 31, | 
|                                  |  | 2005         |     |   | 2004         |  |     | 2003         | 
|                                  |  |              |     |   |              |  |     |              | 
|Sales & other services            |  |              | 158 |   |              |  | 9   |              |  |  | 10  |  
|Research and development expenses |  |              | (48 | ) |              |  | (46 | )            |  |  | (34 | )
|Other purchases                   |  |              | (16 | ) |              |  | (23 | )            |  |  | (9  | )
|Other income and expenses         |  |              | (12 | ) |              |  | (25 | )            |  |  | (8  | )
|Accounts receivable               |  |              | 29  |   |              |  | 6   |              |  |  | 2   |  
|Accounts payable                  |  |              | 12  |   |              |  | 18  |              |  |  | 22  |  
|Other assets                      |  |              | 11  |   |              |  | 2   |              |  |  |    |  









27  SEGMENT INFORMATION










| |   |                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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, Linear and Discrete Group (MLD) segment.                                                                                                                                                             



F-42



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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






Disclosures about Segments of an Enterprise and
Related Information




Net revenues by product group


|                                    |  |              |       |  |              |  |       |              |  |  |       | 
|----------------------------------- |  | ------------ | ----- |  | ------------ |  | ----- | ------------ |  |  | ----- | 
|                                    |  | December 31, |       |  | December 31, |  |       | December 31, | 
|                                    |  | 2005         |       |  | 2004         |  |       | 2003         | 
|                                    |  |              |       |  |              |  |       |              | 
|Application Specific Product Groups |  |              | 4,991 |  |              |  | 4,902 |              |  |  | 4,405 | 
|Memory Products Group               |  |              | 1,948 |  |              |  | 1,887 |              |  |  | 1,294 | 
|Micro, Linear and Discrete Group    |  |              | 1,882 |  |              |  | 1,902 |              |  |  | 1,469 | 
|Others(1)                           |  |              | 61    |  |              |  | 69    |              |  |  | 70    | 
|                                    |  |              |       |  |              |  |       |              | 
|Total consolidated net revenues     |  |              | 8,882 |  |              |  | 8,760 |              |  |  | 7,238 | 
|                                    |  |              |       |  |              |  |       |              | 






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

Operating Income by product group


|                                         |  |              |      |   |              |  |      |              |  |  |      |  
|---------------------------------------- |  | ------------ | ---- | - | ------------ |  | ---- | ------------ |  |  | ---- | -
|                                         |  | December 31, |      |   | December 31, |  |      | December 31, | 
|                                         |  | 2005         |      |   | 2004         |  |      | 2003         | 
|                                         |  |              |      |   |              |  |      |              | 
|Application Specific Product Groups      |  |              | 355  |   |              |  | 530  |              |  |  | 582  |  
|Memory Product Group                     |  |              | (118 | ) |              |  | 42   |              |  |  | (65  | )
|Micro, Linear and Discrete Group         |  |              | 271  |   |              |  | 413  |              |  |  | 192  |  
|                                         |  |              |      |   |              |  |      |              | 
|Total operating income of product groups |  |              | 508  |   |              |  | 985  |              |  |  | 709  |  
|Others(1)                                |  |              | (264 | ) |              |  | (302 | )            |  |  | (375 | )
|                                         |  |              |      |   |              |  |      |              | 
|Total consolidated operating income      |  |              | 244  |   |              |  | 683  |              |  |  | 334  |  
|                                         |  |              |      |   |              |  |      |              | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

F-43



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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, |  |      | December 31, | 
|                                                       |  | 2005         |      |   | 2004         |  |      | 2003         | 
|                                                       |  |              |      |   |              |  |      |              | 
|Total operating income of product groups               |  |              | 508  |   |              |  | 985  |              |  |  | 709  |  
|                                                       |  |              |      |   |              |  |      |              | 
|Strategic R&D and other R&D programs                   |  |              | (49  | ) |              |  | (91  | )            |  |  | (52  | )
|Start-up costs                                         |  |              | (56  | ) |              |  | (63  | )            |  |  | (54  | )
|Impairment & restructuring charges                     |  |              | (128 | ) |              |  | (76  | )            |  |  | (205 | )
|Subsystems                                             |  |              | 1    |   |              |  | (1   | )            |  |  | 2    |  
|One-time compensation and special
    contributions(1) |  |              | (22  | ) |              |  |     |              |  |  |     |  
|Patents claim costs                                    |  |              |     |   |              |  | (4   | )            |  |  | (10  | )
|Other non-allocated
    provisions(2)                  |  |              | (10  | ) |              |  | (67  | )            |  |  | (56  | )
|                                                       |  |              |      |   |              |  |      |              | 
|Total operating loss
    Others(3)                     |  |              | (264 | ) |              |  | (302 | )            |  |  | (375 | )
|Total consolidated operating income                    |  |              | 244  |   |              |  | 683  |              |  |  | 334  |  
|                                                       |  |              |      |   |              |  |      |              | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | One-time compensation and special contributions to the
    Companys former CEO and other executives 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, are now being allocated to the groups in 2005;
    comparable amounts reported in this category have been
    reclassified accordingly in the above table.



Net revenues


|                |  |              |       |  |              |  |       |              |  |  |       | 
|--------------- |  | ------------ | ----- |  | ------------ |  | ----- | ------------ |  |  | ----- | 
|                |  | December 31, |       |  | December 31, |  |       | December 31, | 
|                |  | 2005         |       |  | 2004         |  |       | 2003         | 
|                |  |              |       |  |              |  |       |              | 
|The Netherlands |  |              | 2,864 |  |              |  | 2,702 |              |  |  | 2,084 | 
|France          |  |              | 268   |  |              |  | 359   |              |  |  | 364   | 
|Italy           |  |              | 203   |  |              |  | 254   |              |  |  | 219   | 
|USA             |  |              | 1,066 |  |              |  | 1,262 |              |  |  | 992   | 
|Singapore       |  |              | 4,041 |  |              |  | 3,671 |              |  |  | 3,192 | 
|Japan           |  |              | 306   |  |              |  | 403   |              |  |  | 337   | 
|Other countries |  |              | 134   |  |              |  | 109   |              |  |  | 50    | 
|                |  |              |       |  |              |  |       |              | 
|Total           |  |              | 8,882 |  |              |  | 8,760 |              |  |  | 7,238 | 
|                |  |              |       |  |              |  |       |              | 

F-44



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


Long-lived assets


|                         |  |              |       |  |              |  |       |              |  |  |       | 
|------------------------ |  | ------------ | ----- |  | ------------ |  | ----- | ------------ |  |  | ----- | 
|                         |  | December 31, |       |  | December 31, |  |       | December 31, | 
|                         |  | 2005         |       |  | 2004         |  |       | 2003         | 
|                         |  |              |       |  |              |  |       |              | 
|The Netherlands          |  |              | 333   |  |              |  | 438   |              |  |  | 478   | 
|France                   |  |              | 1,618 |  |              |  | 2,206 |              |  |  | 2,205 | 
|Italy                    |  |              | 1,698 |  |              |  | 2,216 |              |  |  | 2,102 | 
|Other European countries |  |              | 176   |  |              |  | 209   |              |  |  | 219   | 
|USA                      |  |              | 458   |  |              |  | 414   |              |  |  | 413   | 
|Singapore                |  |              | 1,684 |  |              |  | 1,828 |              |  |  | 1,149 | 
|Malaysia                 |  |              | 321   |  |              |  | 367   |              |  |  | 389   | 
|Other countries          |  |              | 332   |  |              |  | 319   |              |  |  | 257   | 
|                         |  |              |       |  |              |  |       |              | 
|Total                    |  |              | 6,620 |  |              |  | 7,997 |              |  |  | 7,212 | 
|                         |  |              |       |  |              |  |       |              | 

27  SUBSEQUENT EVENTS




F-45



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##### Table of Contents






Report of Independent Registered Public Accounting Firm


on


Financial Statement Schedule

















S-1



---



##### Table of Contents



STMICROELECTRONICS N.V.


VALUATION AND QUALIFYING ACCOUNTS


|                                         |  |                                       |     |  |             |  |            |           |  |  |            |   |            |               |     |   |  |  |     | 
|---------------------------------------- |  | ------------------------------------- | --- |  | ----------- |  | ---------- | --------- |  |  | ---------- | - | ---------- | ------------- | --- | - |  |  | --- | 
|                                         |  | Balance at                            |     |  |             |  | Charged to |           |  |  |            |  
|Valuation and qualifying accounts        |  | beginning                             |     |  | Translation |  |            | costs and |  |  |            |   | Balance at |              
|deducted from the related asset accounts |  | of period                             |     |  | adjustment  |  |            | expenses  |  |  | Deductions |   |            | end of period |    
|                                         |  |                                       |     |  |             |  |            |           |  |  |            |   |            |               |    
|                                         |  | (Currency  millions of U.S. dollars) |    
|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 | 
|2003                                     |  |                                       |     |  |             |  |            |           |  |  |            |   |            |               |     |   |  |  |     | 
|Inventories                              |  |                                       | 42  |  |             |  |           |           |  |  | 32         |   |            |               | (44 | ) |  |  | 30  | 
|Accounts Receivable                      |  |                                       | 23  |  |             |  | (1         | )         |  |  | (9         | ) |            |               | 3   |   |  |  | 16  | 
|Deferred Tax Assets                      |  |                                       | 26  |  |             |  | 4          |           |  |  | 679        |   |            |               |     |   |  |  | 709 | 

S-2