**As filed with the Securities and Exchange Commission on April 18, 2007**

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION********Washington,D.C. 20549**

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**FORM 20-F**

| **o**  |   | **(REGISTRATION STATEMENT PURSUANT TO  SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------|--------|---------------------------------------------------------------------------------------------------------------------|
|   |   | **OR**                                                                                                              |
| **x**  |   | **(ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                |
|   |   | **For the  fiscal year ended December 31, 2006  OR**                                                           |
| **o**  |   | **(TRANSITION REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**            |
|   |   | **OR**                                                                                                              |
| **o**  |   | **(SHELL COMPANY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**         |

 

Commission file number: **001-16429**

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**ABB Ltd**

*(Exact**name ofregistrant as specified in its charter)*

**Switzerland**

*(Jurisdiction of incorporation ororganization)*

**Affolternstrasse 44**

**CH-8050 Zurich**

**Switzerland**

*(Address of principal executiveoffices)*

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

| **Title of each class**                 |   | **Name of  each exchange on which registered** |
|-----------------------------------------|--------|------------------------------------------------|
| American  Depositary Shares,            |   | New York Stock  Exchange                       |
| each representing  one Registered Share |   |                                           |
| Registered  Shares, par value CHF 2.50  |   | New  York Stock Exchange*                      |

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Securities registered or to be registered pursuant to Section 12(g) ofthe Act: None.

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

Indicate the number of outstanding shares of each of the issuer’sclasses of capital or common stock

as of the close ofthe period covered by the annual report: 2,187,756,317 Registered Shares

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Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act. Yes x       No o

If this is an annual ortransition report, indicate by check mark if the registrant is not required tofile reports pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934. Yes o       No x

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes x       No o

Indicate by checkmark whether the registrant is a largeaccelerated filer, an accelerated filer, or a non-accelerated filer.

| Large accelerated filer x             Accelerated  filer o             Non-accelerated  filer o |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Indicate by check markwhich financial statement item the registrant has elected to follow. tem17 o       tem18 x

Ifthis is an annual report, indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the ExchangeAct). Yes o        No x

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*                     Listed on the New York Stock Exchange notfor trading or quotation purposes, but only in connection with the registrationof American Depositary Shares pursuant to the requirements of the Securitiesand Exchange Commission.

 

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**TABLE OF CONTENTS**

|                                                                                        | ** ** | **Page** |
|----------------------------------------------------------------------------------------|------------|----------|
| PART I                                                                            |       | 4        |
| Item 1. Identity of Directors, Senior Management and  Advisers                         |       | 4        |
| Item 2. Officer Statistics and Expected Timetable                                      |       | 4        |
| Item  3. Key Information                                                               |       | 4        |
| Item 4. Information on the Company                                                     |       | 16       |
| Item 4A. Unresolved Staff Comments                                                     |       | 37       |
| Item 5. Operating and Financial Review and Prospects                                   |       | 37       |
| Item 6. Directors, Senior Management and Employees                                     |       | 97       |
| Item 7. Major Shareholders and Related Party  Transactions                             |       | 109      |
| Item  8. Financial Information                                                         |       | 113      |
| Item  9. The Offer and Listing                                                         |       | 117      |
| Item 10. Additional Information                                                        |       | 118      |
| Item 11. Quantitative and Qualitative Disclosures  About Market Risk                   |       | 132      |
| Item 12. Description of Securities Other than Equity  Securities                       |       | 134      |
| PART II                                                                           |       | 135      |
| Item 13. Defaults, Dividend Arrearages and  Delinquencies                              |       | 135      |
| Item 14. Material Modifications to the Rights of  Security Holders and Use of Proceeds |       | 135      |
| Item 15. Controls and Procedures                                                       |       | 135      |
| Item 15T. Controls and Procedures                                                      |       | 136      |
| Item 16A. Audit Committee Financial Expert                                             |       | 136      |
| Item  16B. Code of Ethics                                                              |       | 136      |
| Item 16C. Principal Accountant Fees and Services                                       |       | 136      |
| Item 16D. Exemptions from the Listing Standards for  Audit Committees.                 |       | 137      |
| Item 16E. Purchases of Equity Securities by the Issuer  and Affiliated Purchasers.     |       | 137      |
| PART III                                                                          |       | 138      |
| Item  17. Financial Statements                                                         |       | 138      |
| Item  18. Financial Statements                                                         |       | 138      |
| Item 19. Exhibits                                                                      |       | 138      |

 

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**INTRODUCTION**

ABB Ltd is a corporation organized under the laws ofSwitzerland. In this report, “the ABB Group,” “ABB,” “we,” “our” and “us” referto ABB Ltd and its consolidated subsidiaries (unless the context otherwiserequires). We also use these terms to refer to ABB Asea Brown Boveri Ltd andits subsidiaries prior to the establishment of ABB Ltd as the holding companyfor the entire ABB Group in 1999, as described in this report under “Item 4.Information on the Company—Introduction—History of the ABB Group.”  Our American Depositary Shares (eachrepresenting one registered share of ABB Ltd) are referred to as “ADSs.”  The registered shares of ABB Ltd are referredto as “shares.”

Our principal corporateoffices are located at Affolternstrasse 44, CH-8050 Zurich, Switzerland,telephone number +41-43-317-7111.

**FINANCIAL AND OTHERINFORMATION**

ABB Ltd has prepared its statutory unconsolidatedfinancial statements in accordance with the Swiss Federal Code of Obligations.The consolidated financial statements of ABB Ltd, including the notes thereto,as of December 31, 2006 and 2005 and for each of the three years in theperiod ended December 31, 2006 (our “Consolidated Financial Statements”)have been prepared in accordance with United States generally acceptedaccounting principles (“U.S. GAAP”).

In this report: (i) ”$,” “U.S. dollars” and “USD” refer to the lawful currency ofthe United States of America; (ii) ”CHF” and “Swiss francs” refer to thelawful currency of Switzerland; (iii) ”€”and “euro” refer to the lawful currency of the participating member states ofthe European Union (the “EU”); (iv) ”SEK” and “Swedish krona” refer to thelawful currency of Sweden; (v) ”£,” “sterling,” “pounds sterling” and “GBP”refer to the lawful currency of the United Kingdom; (vi) ”Indian rupee”refers to the lawful currency of India; (vii) ”Chinese renminbi” refers tothe lawful currency of the People’s Republic of China; and (ix) ”BrazilianReal” or “R$” refers to the lawful currency of the Federative Republic ofBrazil.

Except as otherwisestated, all monetary amounts in this report are presented in U.S. dollars.Where specifically indicated, amounts in Swiss francs have been translated intoU.S. dollars. These translations are provided for convenience only, and theyare not representations that the Swiss franc could be converted into U.S.dollars at the rate indicated. These translations have been made using thetwelve o’clock buying rate in the City of New York for cable transfers ascertified for customs purposes by the Federal Reserve Bank of New York as of December 29,2006, unless otherwise indicated. The twelve o’clock buying rate for Swissfrancs on December 29, 2006 was $1.00 = CHF 1.2195. The twelve o’clockbuying rate for Swiss francs on April 17, 2007 was $1.00 = CHF 1.2092.

**FORWARD-LOOKINGSTATEMENTS**

This report includes forward-looking statements. Theseforward-looking statements can be identified by the use of forward-lookingterminology, including the terms “believes,” “estimates,” “anticipates,” “expects,”“intends,” “may,” “will,” or “should” or, in each case, their negative, orother variations or comparable terminology. These forward-looking statementsinclude all matters that are not historical facts. They appear in a number ofplaces throughout this report and include statements regarding our intentions,beliefs or current expectations concerning, among other things, our results ofoperations, financial condition, liquidity, prospects, growth, dispositions,strategies and the countries and industry in which we operate.

Theseforward-looking statements include, but are not limited to the following:

·       statementsin “Item 3. Key Information—Dividends and Dividend Policy” regarding our policyon future dividend payments;

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·       statementsin “Item 3. Key Information—Risk Factors,” “Item 4. Information on the Company”and “Item 5. Operating and Financial Review and Prospects” regarding ourmanagement objectives and the timing of intended disposals and capitalexpenditures;

·       statementsin “Item 5. Operating and Financial Review and Prospects” regarding ourmanagement objectives, including our mid term outlook, as well as trends inresults, prices, volumes, operations, margins and overall market trends; and

·       statementsin “Item 8. Financial Information—Legal Proceedings” regarding the outcome ofcertain compliance matters under investigation.

By their nature,forward-looking statements involve risks and uncertainties because they relateto events and depend on circumstances that may or may not occur in the future.We caution you that forward-looking statements are not guarantees of futureperformance and that our actual results of operations, financial condition andliquidity, and the development of the countries and industries in which weoperate, may differ materially from those described in or suggested by theforward-looking statements contained in this report. In addition, even if ourresults of operations, financial condition and liquidity, and the developmentof the countries and industries in which we operate, are consistent with theforward-looking statements contained in this report, those results ordevelopments may not be indicative of results or developments in subsequentperiods. Important factors that could cause actual results to differ materiallyfrom our expectations are contained in cautionary statements in this report andinclude, without limitation, the following:

·       Ourreputation and our ability to do business may be impaired by improper behaviorby any of our employees or agents.

·       Ourbusiness is affected by the global economic and political climate.

·       Ouroperations in emerging markets expose us to risks associated with conditions inthose markets.

·       Undertakinglong-term fixed price projects exposes our businesses to risk of loss shouldour actual costs exceed our estimated or budgeted costs.

·       Ourinternational operations expose us to the risk of fluctuations in currencyexchange rates.

·       Ourhedging activities may not protect us against the consequences of significantfluctuations in exchange rates, interest rates or commodity prices on ourearnings and cash flows.

·       Theweakening or unavailability of our intellectual property rights could adverselyaffect our business.

·       Weoperate in very competitive markets and could be adversely affected if we failto keep pace with technological changes.

·       Industryconsolidation could result in more powerful competitors and fewer customers.

·       Weare subject to environmental laws and regulations in the countries in which weoperate. We incur costs to comply with such regulations, and our ongoingoperations may expose us to environmental liabilities.

·       Wemay be the subject of product liability claims.

·       Wemay encounter difficulty in managing our business due to the global nature ofour operations.

·       Increasesin the costs of our raw materials may adversely affect our financialperformance.

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·       Wehave retained liability for environmental remediation costs relating tobusinesses that we sold in 2000, and we could be required to make payments inrespect of these retained liabilities in excess of established reserves.

·       Ifwe fail to make the payments required under the Modified Plan of Reorganizationfor Combustion Engineering or under the Plan of Reorganization for Lummus wecould trigger an injunction default which would lead to the termination of thechanneling injunction under the CE Plan or the Lummus Plan, respectively.

·       Ifwe are not able to comply with the covenants contained in our $2 billion creditfacility, our financial position may be adversely affected.

·       Ourability to bid for large contracts depends on our ability to obtain performanceguarantees from financial institutions.

·       Wehave retained performance guarantees related to our divested power generationbusiness.

·       Ifwe are unable to successfully adapt our internal controls over financialreporting to changes in circumstance, our ability to report our financialresults on a timely and accurate basis may be adversely affected. As a result,investors could lose confidence in our financial reporting, which may harm ourbusiness and the trading price of our stock.

We urge you to read the sections of this reportentitled “Item 3. Key Information—Risk Factors,” “Item 4. Information on theCompany” and “Item 5. Operating and Financial Review and Prospects” for a morecomplete discussion of the factors that could affect our future performance andthe countries and industries in which we operate. In light of these risks,uncertainties and assumptions, the forward-looking circumstances described inthis report and the assumptions underlying them may not occur.

Except as required by lawor applicable stock exchange rules or regulations, we undertake noobligation to update or revise publicly any forward-looking statement, whetheras a result of new information, future events or otherwise. All subsequentwritten and oral forward-looking statements attributable to us or to personsacting on our behalf are expressly qualified in their entirety by thecautionary statements referred to above and contained elsewhere in this report.

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**PART I**

**Item1.**                        Identityof Directors, Senior Management and Advisers

Not applicable

**Item2.**                        OfficerStatistics and Expected Timetable

Not applicable

**Item3.**                        KeyInformation

**SELECTEDFINANCIAL DATA**

The following tablepresents our selected financial and operating information at the dates and foreach of the periods indicated. You should read the following informationtogether with the information contained in “Item 5. Operating and FinancialReview and Prospects,” as well as our Consolidated Financial Statements and thenotes thereto, included elsewhere in this report.

Our selected financialdata are presented in the following tables in accordance with U.S. GAAP andhave been derived from our published consolidated financial statements. Ourconsolidated financial statements as of and for each of the years ended December 31,2006, 2005, 2004, 2003 and 2002 were audited by Ernst & Young AG,except for the 2004, 2003 and 2002 financial statements of Jorf Lasfar EnergyCompany, a corporation in which we have a 50 percent interest, and the 2002consolidated financial statements of Swedish Export Credit Corporation, inwhich we had a 35 percent interest at December 31, 2002, which wereaudited by other independent auditors.

The Consolidated FinancialStatements as of December 31, 2003 and 2002, and for the year ended December 31,2002, have not been audited after the reclassifications of certain businessesbetween continuing operations and discontinued operations.

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**INCOME STATEMENT DATA**(1):

| ** **                                                                                                                   | ** ** | **Year ended December 31**                                                | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **2006**                                                                                 | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                                   | ** ** | **(U.S. dollars in millions, except per share data)** | ** ** |
| **Total revenues**                                                                                                           | ** ** | **24,412**                                                                               | ** ** | **22,012** | ** ** | **20,149** | ** ** | **19,814** | ** ** | **18,902** | ** ** |
| **Total cost of sales**                                                                                                      | ** ** | **(17,541**                                                                              | **)**      | **(16,405** | **)** | **(15,241** | **)** | **(15,362** | **)** | **(14,546** | **)** |
| **Gross profit**                                                                                                             | ** ** | **6,871**                                                                                | ** ** | **5,607** | ** ** | **4,908** | ** ** | **4,452** | ** ** | **4,356** | ** ** |
| Selling, general and  administrative expenses                                                                                |       | (4,434                                                                                   | )          | (3,883 | ) | (3,777 | ) | (3,896 | ) | (4,062 | ) |
| Other income (expense),  net(2)                                                                                              |       | **149**                                                                                  | ** ** | **54** | ** ** | **(40** | **)** | **(200** | **)** | **(65** | **)** |
| **Earnings before interest and  taxes**                                                                                      | ** ** | **2,586**                                                                                | ** ** | **1,778** | ** ** | **1,091** | ** ** | **356** |   | **229** |   |
| Interest and dividend  income                                                                                                |       | 151                                                                                      |       | 157 |   | 151 |   | 140 |   | 184 |   |
| Interest and other  finance expense                                                                                          |       | (304                                                                                     | )          | (403 | ) | (360 | ) | (542 | ) | (288 | ) |
| **Income (loss) from continuing  operations before taxes and minority interest and cumulative effect of  accounting change** |       | **2,433**                                                                                | ** ** | **1,532** | ** ** | **882** | ** ** | **(46** | **)** | **125** | ** ** |
| Provision for taxes                                                                                                          |       | (697                                                                                     | )          | (490 | ) | (338 | ) | (237 | ) | (79 | ) |
| Minority interest                                                                                                            |       | (179                                                                                     | )          | (131 | ) | (102 | ) | (67 | ) | (111 | ) |
| **Income (loss) from continuing  operations before cumulative effect of accounting change**                                  |       | **1,557**                                                                                | ** ** | **911** | ** ** | **442** | ** ** | **(350** | **)** | **(65** | **)** |
| Loss from discontinued  operations, net of tax(3)                                                                            |       | (167                                                                                     | )          | (171 | ) | (477 | ) | (429 | ) | (754 | ) |
| **Income (loss) before cumulative  effect of accounting change****(4)**                                                      | ** ** | **1,390**                                                                                | ** ** | **740** | ** ** | **(35** | **)** | **(779** | **)** | **(819** | **)** |
| Cumulative effect of accounting  change, net of tax                                                                          |       | —                                                                                   |       | (5 | ) | — |   | — |   | — |   |
| **Net income (loss)**                                                                                                        | ** ** | **1,390**                                                                                | ** ** | **735** | ** ** | **(35** | **)** | **(779** | **)** | **(819** | **)** |
| Basic earnings (loss)  per share from continuing operations before cumulative effect of accounting  change(5)                |       | $                                                                                        | 0.73       |   | $ | 0.45 |   | $ | 0.22 |   | $ | (0.29 | ) | $ | (0.06 | ) |
| Loss from discontinued  operations, net of tax                                                                               |       | (0.08                                                                                    | )          | (0.09 | ) | (0.24 | ) | (0.35 | ) | (0.68 | ) |
| Cumulative effect of  accounting change, net of tax                                                                          |       | —                                                                                   |       | — |   | — |   | — |   | — |   |
| Basic earnings (loss)  per share                                                                                             |       | $                                                                                        | 0.65       |   | $ | 0.36 |   | $ | (0.02 | ) | $ | (0.64 | ) | $ | (0.74 | ) |
| Diluted earnings (loss)  per share from continuing operations before cumulative effect of accounting  change(5)              |       | $                                                                                        | 0.71       |   | $ | 0.44 |   | $ | 0.22 |   | $ | (0.29 | ) | $ | (0.22 | ) |
| Loss from discontinued  operations, net of tax                                                                               |       | (0.08                                                                                    | )          | (0.08 | ) | (0.24 | ) | (0.35 | ) | (0.64 | ) |
| Cumulative effect of accounting  change, net of tax                                                                          |       | —                                                                                   |       | — |   | — |   | — |   | — |   |
| Diluted earnings (loss)  per share                                                                                           |       | $                                                                                        | 0.63       |   | $ | 0.36 |   | $ | (0.02 | ) | $ | (0.64 | ) | $ | (0.86 | ) |
| Weighted average number of shares outstanding:                                                                               |       |                                                                                     |       |   |   |   |   |   |   |   |   |
| Basic                                                                                                                        |       | 2,128                                                                                    |       | 2,029 |   | 2,028 |   | 1,220 |   | 1,113 |   |
| Diluted                                                                                                                      |       | 2,248                                                                                    |       | 2,138 |   | 2,029 |   | 1,220 |   | 1,166 |   |

 

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**BALANCE SHEET DATA**(1):

| ** **                                       | ** ** | **At December 31,**                 | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                       | ** ** | **(U.S. dollars in millions)** | ** ** |
| Cash and equivalents                             |       | 4,262                                         |       | 3,221 |   | 3,666 |   | 4,773 |   | 2,519 |   |
| Marketable securities and short-term investments |       | 528                                           |       | 368 |   | 524 |   | 473 |   | 589 |   |
| Total assets                                     |       | 25,142                                        |       | 22,276 |   | 24,677 |   | 30,401 |   | 29,522 |   |
| Long-term debt                                   |       | 3,160                                         |       | 3,933 |   | 4,717 |   | 6,064 |   | 5,153 |   |
| Total debt(6)                                    |       | 3,282                                         |       | 4,102 |   | 5,342 |   | 7,700 |   | 7,728 |   |
| Capital stock and additional paid-in capital     |       | 4,514                                         |       | 3,121 |   | 3,083 |   | 3,067 |   | 2,027 |   |
| Total stockholders’ equity                  |       | 6,038                                         |       | 3,483 |   | 2,824 |   | 2,917 |   | 931 |   |

 

**CASH FLOW DATA:**

| ** **                                           | ** ** | **Year ended December 31,**    | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                           | ** ** | **(U.S. dollars in millions)** | ** ** |
| Net cash provided  by (used in) operating activities |       | $                                             | 1,939      |   | $ | 1,012 |   | $ | 902 |   | $ | (152 | ) | $ | — |   |
| Net cash provided  by (used in) investing activities |       | (694                                          | )          | (316 | ) | 354 |   | 754 |   | 2,651 |   |
| Net cash provided by  (used in) financing activities |       | $                                             | (392       | ) | $ | (896 | ) | $ | (2,745 | ) | $ | 1,582 |   | $ | (2,793 | ) |

 

**OTHER FINANCIAL AND OPERATING DATA:**
|                                             | ** ** | **Year ended December 31,**    | ** ** |
|---------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                  | ** ** | **(U.S. dollars in millions)** | ** ** |
| Purchases of  property, plant and equipment |       | $                                             | 532        |   | $ | 454 |   | $ | 482 |   | $ | 547 |   | $ | 598 |   |
| Depreciation and  amortization              |       | 565                                           |       | 588 |   | 633 |   | 585 |   | 610 |   |
| Research and development                    |       | 772                                           |       | 679 |   | 650 |   | 635 |   | 572 |   |
| Order-related  development(7)               |       | $                                             | 840        |   | $ | 735 |   | $ | 727 |   | $ | 886 |   | $ | 719 |   |

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(1)             During 2006, Statement of Financial Accounting StandardNo. 123 (revised 2004), *Share-BasedPayment* (FAS 123R) and Statement of Financial Accounting StandardNo. 158, *Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans—an amendment of FASB Statements No. 87, 88, 106 and 123(R) *(FAS158) were adopted. For the impact of these standards, see Notes 20 and 21 toour Consolidated Financial Statements.

(2)             During 2005, 2004, 2003, and 2002, we recorded restructuringcharges and related asset write-downs of $51 million, $141 million,$303 million, and $240 million, respectively, in other income (expense),net, relating to a number of restructuring initiatives throughout the world. Thereduction of a restructuring liability, due to a change in estimate, led toincome of $3 million in 2006. The restructuring costs incurred in 2002were accrued in the respective periods pursuant to the requirements of EITF 94-3,*Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring).* The restructuring costs incurredin 2006, 2005, 2004 and 2003 were accrued pursuant to the requirements ofStatement of Financial Accounting Standards No. 146, *Accounting for Costs Associated with Exit or DisposalActivities*.

(3)             Loss from discontinued operations, net of tax includescosts related to the Company’s asbestos obligation of its U.S. subsidiaryCombustion Engineering Inc., of approximately $70 million, $133 million, $262million, and $142 million in 2006, 2005, 2004 and 2003 respectively. In 2004and 2003, we recorded net losses of $70 million and $44 million,respectively, and in 2002 we recorded net income of $14 million relating to theupstream part of our Oil, Gas and Petrochemicals businesses. The sale of thisbusiness was completed in July 2004. For additional information, see “Item5. Operating and Financial Review and Prospects” and Note 17 to theConsolidated Financial Statements. For additional information on discontinuedoperations, see Note 3 to the Consolidated Financial Statements.

(4)             We accounted for the adoption of Interpretation 47 ofFinancial Accounting Standards No. 143, *Accountingfor Asset Retirement Obligations* (FIN 47) as a change in accountingprinciple in 2005. Based on our outstanding obligations we recognized thecumulative effect of the accounting change in 2005 in the Consolidated IncomeStatement.

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(5)             Basic earnings (loss) per share is calculated bydividing income (loss) by the weighted-average number of shares outstandingduring the year. Diluted earnings (loss) per share is calculated by dividingincome (loss) by the weighted-average number of shares outstanding during theyear, assuming that all potentially dilutive securities were exercised, ifdilutive. Potentially dilutive securities comprise: outstanding written calloptions; outstanding options and shares conditionally granted under the Company’semployee incentive plans; and shares issuable in relation to outstandingconvertible bonds (see Notes 2, 14, 21 and 23 to the ConsolidatedFinancial Statements).

(6)    Total debtis equal to the sum of short-term debt and long-term debt.

(7)             Order-related development activitiesare customer- and project-specific development efforts that weundertake to develop or adapt equipment and systems to the unique needs of ourcustomers in connection with specific orders or projects. Order-relateddevelopment amounts are initially recorded in inventories as part of the workin progress of a contract and then are reflected in cost of sales at the timerevenue is recognized in accordance with our accounting policies.

**DIVIDENDS ANDDIVIDEND POLICY**

Payment of dividends is subject to general businessconditions, the ABB Group’s current and expected financial condition andperformance and other relevant factors including growth opportunities.

Dividends may be paid only if ABB Ltd has sufficientdistributable profits from previous fiscal years or sufficient free reserves toallow the distribution of a dividend. In addition, at least 5 percent of ABBLtd’s annual net profits must be retained and booked as legal reserves, unlessthese reserves already amount to 20 percent of ABB Ltd’s share capital. As aholding company, ABB Ltd’s main sources of income are dividend, interest anddebt payments from its subsidiaries. At December 31, 2006, of the CHF10,631 million of stockholders’ equity recorded in the unconsolidated statutoryfinancial statements of ABB Ltd prepared in accordance with Swiss law, CHF 5,469million was attributable to the share capital, CHF 2,735 million wasattributable to legal reserves, CHF 167 million was attributable to reservesfor treasury shares, CHF 1,511 million was attributable to other reserves andCHF 749 million represents net income and retained earnings available fordistribution.

ABB Ltd may only pay out a dividend if it has beenproposed by a shareholder or the board of directors of ABB Ltd and approved ata general meeting of shareholders, and the statutory auditors confirm that thedividend conforms to statutory law and the articles of incorporation of ABBLtd. In practice, the shareholders’ meeting usually approves dividends asproposed by the board of directors, if the board of directors’ proposal isconfirmed by the statutory auditors.

Dividends are usually due and payable no earlier thanthree trading days after the shareholders’ resolution. Dividends not collectedwithin five years after the due date accrue to ABB Ltd and are allocated to itsother reserves. For information about the deduction of withholding taxes fromdividend payments, see “Item 10. Additional Information—Taxation.”

We have established a dividend access facility forshareholders who are resident in Sweden under which these shareholders mayregister with VPC AB (Sweden) (“VPC”), as holder of up to 600,004,716 shares,and receive dividends in Swedish kronor equivalent to the dividend paid inSwiss francs without deduction of Swiss withholding tax. For furtherinformation, see “Item 10. Additional Information—Taxation.”

Because ABB Ltd pays cash dividends, if any, in Swissfrancs (subject to the exception for certain shareholders in Sweden describedabove), exchange rate fluctuations will affect the U.S. dollar amounts receivedby holders of ADSs upon conversion of those cash dividends by Citibank, N.A.,the depositary, in accordance with the Amended and Restated Deposit Agreementdated May 7, 2001.

ABB Ltd did not pay anydividends with respect to the years ended December 31, 2002 through December 31,2004. With respect to the year ended December 31, 2005 ABB Ltd paid adividend in May 2006 of CHF 0.12 per share. With respect to the year endedDecember 31, 2006 ABB Ltd’s board of directors has proposed a CHF 0.24 pershare dividend which is subject to approval by its shareholders at the May 2007Annual General Meeting.

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**RISK FACTORS**

*Youshould carefully consider all of the information set forth in this report andthe following description of risks and uncertainties that we currently believemay exist. Our business, financial condition or results of operations could beadversely affected by any of these risks. Additional risks of which we areunaware or that we currently deem immaterial may also impair our businessoperations. This annual report also contains forward-looking statementsthat involve risks and uncertainties. Our results could differ materially fromthose anticipated in these forward-looking statements as a result ofcertain factors, including those described below and elsewhere in this annual report.See “Forward-Looking Statements.”*

***Our reputation and our ability to do business may beimpaired by improper behavior by any of our employees or agents.***

Certain of our employees or agents have taken, and mayin the future take, actions that violate or are alleged to violate the U.S.Foreign Corrupt Practices Act of 1977 (FCPA), legislation promulgated pursuantto the 1997 Organisation for Economic Co-operation and Development (OECD)Convention on Combating Bribery of Foreign Public Officials in InternationalBusiness Transactions, applicable antitrust laws and other applicable laws orregulations. For more information regarding investigations of past actionstaken by certain of our employees, see “Item 8. Financial Information—LegalProceedings.” Such actions have resulted, and in the future could result, ingovernmental investigations, enforcement actions and civil and criminalpenalties, including monetary penalties or other sanctions. It is possible thatany governmental investigation or enforcement action arising from these matterscould conclude that a violation of applicable law has occurred and theconsequences of any such investigation or enforcement action may have amaterial adverse effect on our business and results of operations. In addition,such actions, whether actual or alleged, could damage our reputation andability to do business.

Further, detecting,investigating and resolving such actions could be expensive and could consumesignificant time and attention of our senior management. While we and oursubsidiaries are committed to conducting business in a legal and ethicalmanner, our internal control systems have not been, and in the future may notbe, completely effective to prevent and detect such improper activities by ouremployees and agents.

***Our business is affected by the global economic andpolitical climate.***

Adverse changes in economic conditions or thepolitical climate could have a material adverse effect on our business,financial condition, results of operations and liquidity. The businessenvironment is influenced by numerous political uncertainties, which willcontinue to affect the global economy and the international capital markets. Inperiods of slow economic growth or decline, our customers are more likely todecrease expenditures on the types of products and systems we supply and we aremore likely to experience decreased revenues as a result. Our Power Productsand Power Systems divisions are affected by the level of investments byutilities, and our other Process Automation, Automation Products, and Roboticsdivisions are affected by conditions in a broad range of industries, includingthe automotive, pharmaceutical, pulp and paper, metals and minerals andmanufacturing and consumer industries. Our Oil, Gas and Petrochemicals businessis affected by conditions in the oil, gas and petrochemicals industry,including the level of market growth in low hydrocarbon cost regions and higheconomic growth regions.

In addition, we are subject to the risks that our business operations in or with certain countries, includingthose identified as state sponsors of terrorism, may be adversely effected by trade or economic sanctions or other restrictions imposed on these countries and that actual or potentialinvestors that object to these business operations may adversely effect theprice of our shares by disposing of or deciding not to purchase our shares.

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***Our operations inemerging markets expose us to risks associated with conditions in thosemarkets.***

An increasingamount of our operations are conducted in the emerging markets of LatinAmerica, Asia, the Middle East and Africa. In 2006, approximately 38 percent ofour consolidated revenues were generated from these emerging markets.Operations in emerging markets can present risks that are not encountered incountries with well-established economic and political systems, including:

·       economicinstability, which could make it difficult for us to anticipate future businessconditions in these markets, cause delays in the placement of orders forprojects that we have been awarded and subject us to volatile markets;

·       politicalor social instability, which makes our customers less willing to makeinvestments in such regions and complicates our dealings with governmentsregarding permits or other regulatory matters, local businesses and workforces;

·       boycottsand embargoes that may be imposed by the international community on countriesin which we operate, which could adversely affect the ability of our operationsin those countries to obtain the materials necessary to fulfill contracts andour ability to pursue business or establish operations in those countries;

·       foreignstate takeovers of our facilities in these countries;

·       significantfluctuations in interest rates and currency exchange rates;

·       theimposition of unexpected taxes or other payments on our revenues in thesemarkets; and

·       theintroduction of exchange controls and other restrictions by foreigngovernments.

In addition, the legal andregulatory systems of most emerging market countries are less developed andless well-enforced than in industrialized countries. Therefore, our ability toprotect our contractual and other legal rights in these countries could belimited. Consequently, our exposure to the conditions in or affecting emergingmarkets may adversely affect our business, financial condition, results ofoperations and liquidity.

***Undertaking long-term fixed price projects exposes ourbusinesses to risk of loss should our actual costs exceed our estimated orbudgeted costs.***

We derive a portionof our revenues from long-term, fixed price or turnkey projects that areawarded on a competitive basis and can take many months, or even years, tocomplete. Such contracts involve substantial risks, including the possibilitythat we may underbid and the fact that we typically assume substantially all ofthe risks associated with completing the project and for projects thepost-completion warranty obligations. We also assume the project’s technicalrisk, meaning that we must tailor our products and systems to satisfy thetechnical requirements of a project even though, at the time we are awarded theproject, we may not have previously produced such a product or system. Therevenue, cost and gross profit realized on such contracts can vary, sometimessubstantially, from our original projections because of changes in conditions,including but not limited to:

·       unanticipatedtechnical problems with the equipment being supplied or developed by us whichmay require us to incur incremental expenses to remedy the problem;

·       changesin the cost of components, materials or labor;

·       difficultiesin obtaining required governmental permits or approvals;

·       projectmodifications which create unanticipated costs;

·       delayscaused by local weather conditions; and

·       suppliers’or subcontractors’ failure to perform.

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These risks areexacerbated if the duration of the project is extended because there is anincreased risk that the circumstances upon which we originally bid anddeveloped a price will change in a manner that increases our costs. Inaddition, we sometimes bear the risk of delays caused by unexpected conditionsor events. The contracts for our long-term, fixed-price projects oftenmake us subject to penalties if we cannot complete portions of the project inaccordance with agreed-upon time limits.

***Our internationaloperations expose us to the risk of fluctuations in currency exchange rates.***

Exchange rate fluctuationshave had, and could continue to have, a material impact on our operatingresults, the comparability of our results between periods, the value of assetsor liabilities as recorded on our consolidated balance sheet and the price ofour securities. Changes in exchange rates can unpredictably and adverselyaffect our consolidated operating results, and could result in exchange losses.

**Currency Translation Risk.****  **The results of operations and financialposition of most of our non-U.S. companies are initially recorded in thecurrency, which we call “local currency,” of the country in which therespective company resides. That financial information is then translated intoU.S. dollars at the applicable exchange rates for inclusion in our ConsolidatedFinancial Statements. The exchange rates between local currencies and the U.S.dollar fluctuate substantially, which has a significant translation effect onour reported consolidated results of operations and financial position.

Increases and decreases inthe value of the U.S dollar versus local currencies will affect the reportedvalue of our local currency assets, liabilities, revenues and costs in ourConsolidated Financial Statements, even if the value of these items has notchanged in local currency terms. These translations could significantly andadversely affect our results of operations and financial position from periodto period.

**Currency Transaction Risk.****  **Currency risk exposure also affects ouroperations when our sales are denominated in currencies that are different fromthose in which our manufacturing costs are incurred. In this case, if after theparties agree on a price, the value of the currency in which the purchase priceis to be paid were to weaken relative to the currency in which we incurmanufacturing costs, there would be a negative impact on the profit margin forany such transaction. This transaction risk may exist regardless of whether ornot there is also a translation risk as described above.

Currency exchange rate fluctuations in thosecurrencies in which we incur our principal manufacturing expenses may adverselyaffect our ability to compete with companies whose costs are incurred in othercurrencies. If our principal expense currencies appreciate in value againstsuch other currencies, our competitiveness may be weakened.

***Our hedging activities may not protect us against theconsequences of significant fluctuations in exchange rates, interest rates orcommodity prices on our earnings and cash flows.***

Our policy is to hedge material net currency exposuresby entering into offsetting transactions with third party financialinstitutions. Given our policy, and the effective horizons of our risk managementactivities and the anticipatory nature of the exposures intended to be hedged,there can be no assurance that our currency hedging activities will fullyoffset the adverse financial impact resulting from unfavorable movements inforeign exchange rates. In addition, the timing of the accounting for recognitionof gains and losses related to a hedging instrument may not coincide with thetiming of gains and losses related to the underlying economic exposures.

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As a resource-intensive operation, we are exposed to avariety of market and asset risks, including the effects of changes incommodity prices and interest rates. We monitor and manage these exposures asan integral part of our overall risk management program, which recognizes theunpredictability of markets and seeks to reduce the potentially adverse effectson our business. Nevertheless, changes in commodity prices and interest ratescannot always be predicted or hedged.

If we are unable tosuccessfully manage the risk of changes in exchange rates, interest rates orcommodity price fluctuations or if our hedging counterparties are unable toperform their obligations under our hedging agreements with them, thensubstantial changes in these rates and prices could have an adverse effect onour financial condition and results of operations.

***The weakening or unavailability of our intellectualproperty rights could adversely affect our business.***

The weakening orunavailability of our trademarks, trade dress, patents and other intellectualproperty rights could adversely affect our business. Our intellectual propertyrights are fundamental to all of our businesses. We generate, maintain, utilizeand enforce a substantial portfolio of trademarks, trade dress, patents andother intellectual property rights. We use our intellectual property rights toprotect the goodwill of our products, promote our product recognition, protectour proprietary technology and development activities, enhance ourcompetitiveness and otherwise support our business goals and objectives.However, there can be no assurance that the steps we take to obtain, maintainand protect our intellectual property rights will be adequate. Our intellectualproperty rights may fail to provide us with significant competitive advantages,particularly in foreign jurisdictions that do not have, or do not enforce,strong intellectual property rights.

***We operate in very competitive markets and could beadversely affected if we fail to keep pace with technological changes.***

We operate in very competitive environments in severalspecific respects, including product performance, developing integrated systemsand applications that address the business challenges faced by our customers,pricing, new product introduction time and customer service. The relativeimportance of these factors differs across the geographic markets and productareas that we serve. The markets for our products and services arecharacterized by evolving industry standards (particularly for our automationtechnology products and systems), rapidly changing technology and increasedcompetition as a result of privatization (particularly for our power productsand systems). For example, for a number of years power transmission anddistribution providers throughout the world have been undergoing substantialprivatization. This has increased their need for timely product and serviceinnovations that increase efficiency and allow them to compete in a deregulatedenvironment. Additionally, the continual development of advanced technologiesfor new products and product enhancements is an important way in which wemaintain acceptable pricing levels. If we fail to keep pace with technologicalchanges in the industrial sectors that we serve, we may experience priceerosion and lower margins.

The principal competitors for our automationtechnology products and services include Emerson Electric Co., HoneywellInternational, Inc., Invensys plc, Schneider Electric S.A. and Siemens AG.We primarily compete with Areva S.A., Schneider Electric SA and Siemens AG insales of our power technology products and systems to our utilities customers.The principal competitors with our Robotics business include Fanuc Robotics,Inc, Kuka Robot Group and Yaskawa. The principal competitors with our Oil, Gasand Petrochemicals business include Bechtel Group, Inc., UOP LLC, FluorCorporation, Halliburton Company and Technip-Coflexip S.A. All of ourcompetitors are sophisticated companies with significant resources that maydevelop products and services that are superior to our products and services ormay adapt more quickly than we do to new technologies, industry changes orevolving customer requirements. Our failure to anticipate or respond quickly totechnological developments or customer requirements could adversely affect ourbusiness, results of operations, financial condition and liquidity.

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***Industry consolidation could result in more powerfulcompetitors and fewer customers.***

Competitors in the industries in which our businessdivisions operate are consolidating. In particular, the automation industry isundergoing consolidation that is reducing the number but increasing the size ofcompanies that compete with us. As our competitors consolidate, they likelywill increase their market share, gain economies of scale that enhance theirability to compete with us and/or acquire additional products and technologiesthat could displace our product offerings.

Our customer base also isundergoing consolidation. Consolidation within our customers’ industries (suchas the marine and cruise industry, the automotive, aluminum, steel, pulp andpaper, pharmaceutical industries and the oil and gas industry) could affect ourcustomers and their relationships with us. If one of our competitors’ customersacquires any of our customers, we may lose its business. Additionally, as ourcustomers become larger and more concentrated, they could exert pricingpressure on all suppliers, including ABB. For example, in an industry such aspower transmission, which historically has consisted of large and concentratedcustomers such as utilities, price competition can be a factor in determiningwhich products and services will be selected by a customer.

***We are subject to environmental laws and regulationsin the countries in which we operate. We incur costs to comply with suchregulations, and our ongoing operations may expose us to environmentalliabilities.***

Our operations are subject to U.S., European and otherlaws and regulations governing the discharge of materials into the environmentor otherwise relating to environmental protection. Our manufacturing facilitiesuse and produce paint residues, solvents, metals, oils and related residues. Weuse petroleum-based insulation in transformers, PVC resin to manufacturePVC cable and chloroparafine as a flame retardant. We use inorganic lead as acounterweight in robots that we produce. These are considered to be hazardoussubstances in many jurisdictions in which we operate. We may be subject tosubstantial liabilities for environmental contamination arising from the use ofsuch substances. All of our manufacturing operations are subject to ongoingcompliance costs in respect of environmental matters and the associated capitalexpenditure requirements.

In addition, we may besubject to significant fines and penalties if we do not comply withenvironmental laws and regulations including those referred to above. Someenvironmental laws provide for joint and several strict liability forremediation of releases of hazardous substances, which could result in usincurring a liability for environmental damage without regard to our negligenceor fault. Such laws and regulations could expose us to liability arising out ofthe conduct of operations or conditions caused by others, or for our acts whichwere in compliance with all applicable laws at the time the acts wereperformed. Additionally, we may be subject to claims alleging personal injuryor property damage as a result of alleged exposure to hazardous substances.Changes in the environmental laws and regulations, or claims for damages topersons, property, natural resources or the environment, could result insubstantial costs and liabilities to us.

***We may be the subject of product liability claims.***

We may be required to pay for losses or injuriespurportedly caused by the design, manufacture or operation of our products andsystems. Additionally, we may be subject to product liability claims for theimproper installation of products and systems designed and manufactured by others.

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Product liabilityclaims brought against us may be based in tort or in contract, and typicallyinvolve claims seeking compensation for personal injury or property damage. Ifthe claimant runs a commercial business, claims are often made also for financiallosses arising from interruption of operations consequential to propertydamage. Based on the nature and application of many of the products wemanufacture, a defect or alleged defect in one of these products could haveserious consequences. For example:

·       Ifthe products produced by our Power Products and Power Systems divisions aredefective, there is a risk of fires, explosions and power surges andsignificant damage to electricity generating, transmission and distributionfacilities.

·       Ifthe products produced by our Automation Products and Process Automationdivisions are defective, our customers could suffer significant damage tofacilities that rely on these products and systems to properly monitor andcontrol their manufacturing processes.

If we were to incur a verylarge product liability claim, our insurance protection might not be adequateor sufficient to cover such a claim in terms of paying any awards orsettlements, and/or paying for our defense costs. Further, some claims may beoutside the scope of our insurance coverage. If a litigant were successfulagainst us, a lack or insufficiency of insurance coverage could result in anadverse effect on our business, financial condition, results of operations andliquidity. Additionally, a well-publicized actual or perceived problem couldadversely affect our market reputation which could result in a decline indemand for our products.

***We may encounter difficulty in managing our businessdue to the global nature of our operations.***

We operate in approximately100 countries around the world and, as of December 31, 2006, employedapproximately 108,000 people. As of December 31, 2006, approximately 56percent of our employees were located in Europe, approximately 17 percent inthe Americas, approximately 21 percent in Asia and approximately 6 percent inthe Middle East and Africa. In order to manage our day-to-day operations, wemust overcome cultural and language barriers and assimilate different businesspractices. In addition, we are required to create compensation programs,employment policies and other administrative programs that comply with the lawsof multiple countries. We also must communicate and monitor group-widestandards and directives across our global network. Our failure to successfullymanage our geographically diverse operations could impair our ability to reactquickly to changing business and market conditions and to enforce compliancewith group-wide standards and procedures.

***Increases in the costs of our raw materials mayadversely affect our financial performance.***

We purchase large amounts of commodity-based rawmaterials, including steel, copper, aluminum, and oil. Prevailing prices forsuch commodities are subject to fluctuations in response to changes in supplyand demand and a variety of additional factors beyond our control, such asglobal political and economic conditions. Historically, prices received forsome of these raw materials have been volatile and unpredictable, and suchvolatility is expected to continue. Therefore, commodity price changes mayresult in unexpected increases in raw material costs, and we may be unable toincrease our prices to offset these increased costs without suffering reducedvolumes, revenues or operating income. We do not fully hedge against changes incommodity prices and our hedging procedures may not work as planned.

We depend on third partiesto supply raw materials and other components and may not be able to obtainsufficient quantities of these materials, which could limit our ability tomanufacture products on a timely basis and could harm our profitability. Werely on a single supplier or a small number of suppliers to provide us withsome raw materials and components. If one of these suppliers were unable toprovide us with a raw material or component we need, our ability to manufacturesome of our products could be adversely affected until we are able to establisha new supply arrangement. We may be unable to find a 

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sufficientalternative supply channel in a reasonable time period or on commerciallyreasonable terms, if at all. If our suppliers are unable to deliver sufficientquantities of materials on a timely basis, the manufacture and sale of ourproducts may be disrupted and our sales and profitability could be materiallyadversely affected.

***We have retained liability for environmentalremediation costs relating to businesses that we sold in 2000, and we could berequired to make payments in respect of these retained liabilities in excess ofestablished reserves.***

We have retained liabilityfor environmental remediation costs at two sites in the United States that wereoperated by our nuclear technology business, which we sold in April 2000to British Nuclear Fuels plc (“BNFL”). We have retained all environmentalliabilities associated with our Combustion Engineering subsidiary’s Windsor,Connecticut facility and a portion of the liabilities associated with our ABBC-E Nuclear Power, Inc. subsidiary’s Hematite, Missouri facility. Theprimary environmental liabilities associated with these sites relate to thecosts of remediating radiological and chemical contamination upondecommissioning the facilities. Based on information that BNFL has madeavailable, we believe remediation may take until 2013 at the Hematite site anduntil 2012 at the Windsor site. At the Windsor site, we believe that asignificant portion of such remediation costs will be the responsibility of theU.S. government pursuant to U.S. federal law, although the exact amount of suchresponsibility cannot reasonably be estimated. In connection with the sale ofthe nuclear business in April 2000, we established a reserve of $300million in respect of estimated remediation costs related to these facilities.Expenditures charged to the remediation reserve were $4 million and $9 millionduring 2006 and 2005, respectively. The provision balance was $251 million and$255 million at December 31, 2006 and 2005, respectively. It is possiblethat we could be required to make expenditures in excess of the reserve, in arange of amounts that cannot reasonably be estimated. See “Item 5. Operatingand Financial Review and Prospects—Environmental Liabilities.”

***If we fail to make the payments required under theModified Plan of Reorganization for Combustion Engineering (CE Plan) or underthe Plan of Reorganization for Lummus (Lummus Plan) we could trigger aninjunction default which would lead to the termination of the channelinginjunction under the CE Plan or the Lummus Plan, respectively.***

Our Combustion Engineering, Inc. subsidiary (“CE”)had been a co-defendant in a large number of lawsuits claiming damage forpersonal injury resulting from exposure to asbestos. A smaller number of claimshad also been brought against our ABB Lummus Global Inc. subsidiary (“Lummus”)as well as against other entities. Since early 2003, we and our subsidiarieshave been seeking to resolve our asbestos-related personal injury liabilitiesrelated to CE and Lummus. During 2006, the CE Plan and the Lummus Plan becameeffective.

On the effective date of each of the CE Plan and theLummus Plan, the Bankruptcy Court issued injunctions, referred to as achanneling injunctions, pursuant to which all asbestos-related personal injuryclaims against ABB Ltd and certain entities in the ABB group (including CE andLummus) arising out of CE’s or Lummus’ business operations will be settled orotherwise satisfied from the proceeds of trusts established for such purposes.

Under the CE Plan and the Lummus Plan, ABB Ltd andcertain of its subsidiaries have payment obligations. Failure to satisfy thosepayment obligations could lead to an injunction default which would lead to thetermination of the channeling injunctions under the respective plan. In suchcase, all claims which were previously subject to the injunction would need tobe resolved through the tort system. This could also cause our credit ratingsto be downgraded, restrict our access to the capital markets or otherwise havea material adverse effect on our financial condition, results of operations,cash flows and liquidity.

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***If we are not ableto comply with the covenants contained in our $2 billion credit facility, ourfinancial position may be adversely affected.***

We are party to afive-year $2 billion credit facility that became available in July 2005.It contains certain financial covenants in respect of minimum interest coverageand maximum net leverage. In April 2006, our corporate credit ratingreached certain defined levels, therefore the minimum interest coveragecovenant is no longer applicable. If we are unable to comply with the remainingfinancial covenant in the credit facility, we may be required to renegotiatethe facility with our lenders or to replace it in order not to default underit. If this were to occur, we may not be able to renegotiate or replace the facilityon terms that are acceptable to us, if at all. At December 31, 2006 noamounts were drawn under this credit facility. See “Item 5. Operating andFinancial Review and Prospects—Liquidity and Capital Resources—CreditFacilities.”

***Our ability to bid for large contracts depends on ourability to obtain performance guarantees from financial institutions.***

In the normal course of our business and in accordancewith industry practice, we provide performance guarantees on large projects,including long-term operation and maintenance contracts, which guarantee ourown performance. These guarantees may include guarantees that a project will becompleted or that a project or particular equipment will achieve definedperformance criteria. If we fail to attain the defined criteria, we must makepayments in cash or in kind. Performance guarantees frequently are requested inrelation to bids for large projects, both in our core power and automationbusinesses and in our Oil, Gas and Petrochemicals business.

Some customers requirethat performance guarantees be issued by a financial institution in the form ofa letter of credit, surety bond or other financial guarantee. In consideringwhether to issue a guarantee on our behalf, financial institutions consider ourcredit ratings. Our credit rating and financial position have not prevented usfrom obtaining such guarantees from financial institutions, but they can makeand have made the process more difficult and expensive. If, in the future, wecannot obtain such a guarantee from a financial institution on reasonableterms, we could be prevented from bidding on or obtaining some contracts or ourcosts with respect to such contracts would be higher, which would reduce theprofitability of the contracts. If we cannot obtain guarantees on commerciallyreasonable terms from financial institutions in the future, there could be amaterial impact on our business, financial condition, results of operations orliquidity.

***We have retained performance guarantees related to ourdivested power generation business.***

We have retained performance guarantees related to thepower generation business that we contributed to the former ABB ALSTOM POWERjoint venture. The guarantees primarily consist of performance guarantees,advance payment guarantees, product warranty guarantees and other miscellaneousguarantees under certain contracts such as indemnification for personalinjuries and property damages, taxes and compliance with labor laws,environmental laws and patents. The guarantees are related to projects that areexpected to be completed by 2015 but in some cases the guarantees have nodefinite expiration. ALSTOM and its subsidiaries have primary responsibilityfor performing the obligations that are the subject of the guarantees. In connectionwith the sale to ALSTOM of our interest in the joint venture in May 2000,ALSTOM (the parent company) and ALSTOM POWER (the former joint venture entity)have undertaken jointly and severally to fully indemnify us and hold usharmless against any claims arising under these guarantees. Due to the natureof product warranty guarantees and certain other guarantees, we are unable todevelop an estimate of the maximum potential amount of future payments forthese guarantees. Our best estimate of the total maximum potential exposureunder all quantifiable guarantees we issued on behalf of our former powergeneration business was approximately $744 million as of December 31,2006. This maximum potential exposure, as required by Financial 

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Accounting Standards BoardInterpretation No. 45 (FIN 45) *Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others*,is based on the original guarantee or contract amount and does not reflect ourassessment of actual exposure under the guarantees.

As of December 31,2006, no losses have been recognized in connection with the guarantees relatingto the divested power generation business. We have not concluded that a loss isprobable under these guarantees and, therefore, we have not recorded aprovision as of December 31, 2006. However, if we are required to fundpayments under these guarantees following a failure of the divested powergeneration business to perform its obligations, and if ALSTOM does not tofulfill its undertaking to indemnify us, we could incur material losses. See “Item5. Operating and Financial Review and Prospects—Off Balance Sheet Arrangements—Guarantees.”

***If we are unable to successfully adapt our internalcontrols over financial reporting to changes in circumstance, our ability toreport our financial results on a timely and accurate basis may be adverselyaffected. As a result, investors could lose confidence in our financialreporting, which may harm our business and the trading price of our stock.***

We are required to include in this Annual Report on Form 20-Fa report by our management regarding the effectiveness of our internal controlover financial reporting. The report includes, among other things, anassessment of the effectiveness of our internal control over financialreporting as of the end of our fiscal year. This assessment must includedisclosure of any material weaknesses in our internal control over financialreporting identified by management.

If we are unable toconclude that our internal control over financial reporting is effective in anyfuture period (or if our auditors disagree with us or are unable to express anopinion on the effectiveness of our internal controls), we could lose investorconfidence in the accuracy and completeness of our financial reports, which mayhave an adverse effect on our stock price.

**Item 4.**                        Informationon the Company

**INTRODUCTION**

We are a global providerof power and automation technologies that enable utility and industry customersto improve performance while lowering environmental impact. We serve electric,gas and water utilities, as well as industrial and commercial customers, with abroad range of products, systems and services for power transmission,distribution and power plant automation. We also deliver automation systems formeasurement, control, motion, protection and plant optimization across a fullrange of industries. We apply our expertise to develop creative ways ofintegrating our products and systems with our customers’ business processes toenhance their productivity and efficiency.

**History of the ABBGroup**

The ABB Group was formed in 1988 through a mergerbetween Asea AB and BBC Brown Boveri AG. Initially founded in 1883, Asea AB wasa major participant in the introduction of electricity into Swedish homes andbusinesses and in the development of Sweden’s railway network. In the 1940s and1950s, Asea AB expanded into the power, mining and steel industries. BrownBoveri & Cie. (later renamed BBC Brown Boveri AG) was formed in Switzerlandin 1891 and initially specialized in power generation and turbines. In theearly to mid-1900s, it expanded its operations throughout Europe andbroadened its business operations to include a wide range of electricalengineering activities.

In January 1988, AseaAB and BBC Brown Boveri AG each contributed almost all of their businesses tonewly formed ABB Asea Brown Boveri Ltd, of which they each owned 50 percent. In1996, Asea AB 

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wasrenamed ABB AB and BBC Brown Boveri AG was renamed ABB AG. In February 1999,the ABB Group announced a group reconfiguration designed to establish a singleparent holding company and a single class of shares. ABB Ltd was incorporatedon March 5, 1999, under the laws of Switzerland. In June 1999, ABBLtd became the holding company for the entire ABB Group. This was accomplishedby having ABB Ltd issue shares to the shareholders of ABB AG and ABB AB, thetwo publicly traded companies that formerly owned the ABB Group. The ABB Ltdshares were exchanged for the shares of those two companies, which, as a resultof the share exchange and certain related transactions, became wholly ownedsubsidiaries of ABB Ltd, and are no longer publicly traded. ABB Ltd shares arecurrently listed on the SWX Swiss Exchange (traded on virt-x), the StockholmStock Exchange, and the New York Stock Exchange (in the form of AmericanDepositary Shares).

**OrganizationalStructure**

Our business is international in scope and we generaterevenues in numerous currencies. We operate in approximately 100 countries, andhave structured our global organization into four regions: Europe, the Americas,Asia and the Middle East and Africa (MEA). We are headquartered in Zurich,Switzerland.

We manage our business based on a divisionalstructure. In September 2005, we announced a change to our organizationalstructure by replacing two core divisions Power Technologies and AutomationTechnologies with a five-division structure effective as of January 1,2006. As of December 31, 2006, our core businesses comprised five divisions:Power Products, Power Systems, Automation Products, Process Automation andRobotics.

In addition, certain of our operations that are notintegral to our focus on power and automation technologies and that we areconsidering for sale, winding down or otherwise exiting but are notdiscontinued operations are classified as Non-core and Other activities.Effective January 1, 2006, our real estate business, which principallymanages the use of our real estate assets and facilities, was reclassified fromCorporate to Non-core and Other activities. Corporate comprises headquartersand stewardship, corporate research and development (R&D) and otheractivities.

Thebusinesses discussed below and the results of operations for our operatingdivisions in this report are presented under the organizational structure thatcame into effect as of January 1, 2006. Accordingly, previous yearperformance has been restated to facilitate proper comparison with the resultsof 2006.
|                                                                 | ** ** | **Revenues  Year ended December 31,**    | ** ** | **Percentage of Core division Revenues  Year ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                                      | ** ** | **2005**                                                               | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                      | ** ** | **(U.S. dollars in millions)** | ** ** | **(%)**                                                                | ** ** |
| Power Products                                                  |       | 7,422                                         |       | 6,307                                                                  |       | 5,621 |   |   | 29 |   |   |   | 27 |   |   |   | 27 |   |   |
| Power Systems                                                   |       | 4,544                                         |       | 4,085                                                                  |       | 3,744 |   |   | 18 |   |   |   | 18 |   |   |   | 18 |   |   |
| Automation Products                                             |       | 6,837                                         |       | 5,897                                                                  |       | 5,385 |   |   | 27 |   |   |   | 26 |   |   |   | 26 |   |   |
| Process Automation                                              |       | 5,448                                         |       | 4,996                                                                  |       | 4,635 |   |   | 21 |   |   |   | 22 |   |   |   | 22 |   |   |
| Robotics                                                        |       | 1,288                                         |       | 1,699                                                                  |       | 1,451 |   |   | 5 |   |   |   | 7 |   |   |   | 7 |   |   |
| Core divisions                                                  |       | 25,539                                        |       | 22,984                                                                 |       | 20,836 |   |   | 100 |   |   |   | 100 |   |   |   | 100 |   |   |
| Corporate, Non-core and Other Activities and Eliminations  |       | (1,127                                        | )          | (972                                                                   | )          | (687 | ) |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                                           |       | 24,412                                        |       | 22,012                                                                 |       | 20,149 |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

For a breakdown of our consolidated revenues derivedfrom each geographic region in which we operate, see “Item 5. Operating andFinancial Review and Prospects—Analysis of Results of Operations—Revenues.”

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Our principal corporateoffices are located at Affolternstrasse 44, CH-8050 Zurich, Switzerland,telephone number +41-43-317-7111. Our agent for U.S. federalsecurities law purposes is ABB Holdings Inc., located at 501 Merritt 7,Norwalk, Connecticut 06851.

**BUSINESS DIVISIONS**

**Industry Background**

Our five divisions operateacross two key industries, the power industry and the automation industry. OurPower Products and Power Systems divisions operate in the Power Industry. OurAutomation Products, Process Automation and Robotics divisions operate in theAutomation Industry.

***Power Industry***

The power industry provides products and systemsdesigned primarily to deliver electricity. Electricity is generated in powerstations and is then fed into an electricity grid, from where it is transmittedand distributed to consumers. The portions of an electricity grid that operateat the highest voltages are “transmission” systems, while those that operate atlower voltages are “distribution” systems. Transmission systems link powergeneration sources to distribution systems and then branch out over shorterdistances to carry electricity from the transmission system to end users. Theseelectricity networks incorporate sophisticated devices to control and monitoroperations and to prevent damage from failures or stresses.

Electricity is transformed at different stages in thedelivery process between the source and the ultimate end user. For example,electrical power is often generated in large power plants at 10 to 20kilovolts. Because this voltage is too low to be transmitted efficiently,transformers are used to increase the voltage (up to 800 kilovolts) for long-distancecommercial transmission. This reduces losses and increases the amount of powerthat can be carried per line.

Transformers are also used to decrease the voltage atthe local end for distribution to end users, such as residential, commercial orindustrial consumers. An electric utility distribution system comprisesdistribution substations and networks, both overhead and underground. Somelarge industrial and commercial facilities receive electricity at highervoltage levels from the transmission or distribution network, while mostindustrial, commercial and residential users receive electricity fromdistribution network feeders at lower voltages.

Market drivers in the power industry today vary byregion. In North America the focus is on replacing aged infrastructure which isbeing addressed by the U.S. Energy Policy Act of 2005. In Europe the focus ison increasing interconnections between countries to facilitate the market forenergy trading. In the Middle East, investments in infrastructure areincreasing due to high oil prices. In emerging markets, including parts ofAsia, there is a need for electricity grid increases to cope with rising energyneeds.

There is a global trendtoward deregulation and privatization of the power industry, which is creatinga more competitive environment for our customers. This trend is evident in theUnited States, parts of Latin America, and Western Europe, particularly in theUnited Kingdom and the Nordic countries. It is accelerating elsewhere in Europeand is developing in other regions. The creation of a free market forelectricity requires our customers to become more cost-efficient andreliable to compete as a lowest-cost provider among power suppliers. Gridoperators must be able to deliver power to customers that are hundreds orthousands of miles away within a few minutes. As more disturbance-sensitiveloads (such as computers and telecommunications systems) have been added tonetworks, demand for reliable, 

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high-qualityelectricity has increased. Power suppliers can achieve this efficiency andreliability in a number of ways, including the following:

·       Replacingand modernizing assets and investing in information technology-basedcontrol and monitoring equipment and communications networks to control andsupervise power networks based on instantaneous access to information.

·       Upgradingcurrent technologies and introducing new technologies to improve networkreliability, increase network power rating and enhance the control of powerflow through existing transmission and distribution assets.

·       Developingnew power transmission systems to link power generation sources with distantload centers, as is the case for example in China, or to link neighboring powergrids in order to optimize existing power generation capacity across borders.

·       Developing energy tradingsystems.

***Automation Industry***

Theautomation industry delivers products and systems designed primarily to improveproduct quality, productivity and consistency in industrial and manufacturingapplications. The automation market can be divided into three sectors:

·       Processautomation refers to control systems applied in processes where the mainobjective is continuous production, such as in the oil and gas, power,chemicals, minerals and pulp and paper industries. Product lines for thismarket include instrumentation, analytical measurement and control products andsystems, as well as motors and drives.

·       Factoryautomation refers to discrete operations that manufacture individual items suchas those in  automotive, packaging andconsumer goods industries. Product lines for this market include robots androbot cells, motors, drives, and low voltage products for control and powerapplications.

·       Building automationcomprises product lines and applications particularly targeted at the buildingindustry. Product lines for this market include a wide range of low-voltageproducts for control of climate, lighting and security for optimal managementof the energy cost of buildings.

**Power Products Division**

***Overview***

Our Power Productsdivision serves electric, gas and water utilities, as well as industrial andcommercial customers, with a broad range of products and services for powertransmission and distribution. Direct sales account for a majority of thedivision’s total product sales, and sales through external channel partners,such as wholesalers, distributors and original equipment manufacturers (OEMs),account for the remainder. Key technologies include high- and medium-voltageswitchgear and apparatus, circuit breakers for various current and voltagelevels, power and distribution transformers, and sensors and products toautomate and control electrical and other utility networks. The division hadapproximately 30,000 employees and 100 manufacturing plants as of December 31,2006 and generated $7.4 billion of revenues in 2006.

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***The Power Products Division***

Our Power Products division manufactures  three categories of products: High-voltageProducts, Medium-voltage Products and Transformers. The division sellsprimarily to utilities, distributors, wholesalers, installers and originalequipment manufacturers in the utilities and power generation industries. Someof the division’s products are integrated into the offering of the PowerSystems and Process Automation divisions or are sold through external channelpartners such as engineering, procurement and construction firms.

The division manufactures distribution transformers(up to 72.5 kilovolts) for use in industrial facilities, commercial buildingsand utility distribution networks to step down electrical voltage to the levelsneeded by end users. Industrial transformers are mainly delivered to the steeland aluminum industry, which need their own high-voltage transformers andsubstations on-site to service their heavy electricity requirements. Wemanufacture and sell a full range of distribution transformers including oil-type,dry-type and special application distribution transformers. Although oil-typetransformers are more commonly used, demand for dry-type transformers isgrowing because they minimize fire hazards and have applications in high-densityoffice buildings, windmills, offshore drilling platforms, marine vessels andhigh-volume industrial plants.

We also design and manufacture power transformers(72.5 to 1000 kilovolts) for utility, transportation and industrial customers,as well as transformer components such as bushings and tap changers. Generatortransformers are used in power generation when it is necessary to increasepower voltage from a power plant for long-distance transmission. Weproduce traction transformers used in electric locomotives and we provide awide range of transformer service and retrofit solutions for utilities andindustry customers. The division also produces insulation material.

In the medium-voltage area, the division developsproducts and systems that reduce outage times and improve power quality andcontrol, which are key to improving operational efficiency of both utility andindustrial customers. It supplies switching equipment both directly to endusers and through distributors and OEMs. Its products provide connectionsbetween higher voltage substations and lower voltage uses. It produces acomprehensive line of medium-voltage equipment (1 to 50 kilovolts),including products such as indoor and outdoor switch disconnectors, breakers,reclosers, fuses, contactors, instrument transformers and sensors as well asair- and gas-insulated switchgear, motor control centers, and ringmain units for primary and secondary distribution. It also produces indoor andoutdoor modular systems, compact substations and power distribution centers. Inaddition, a significant portion of its products are sold through externalchannel partners such as OEMs.

The Power Productsdivision also provides high-voltage transmission equipment to power utilitiesthat enables them to operate more efficiently and with lower environmentalimpact, both of which are significant business concerns in the market in whichour customers operate. We manufacture the principal components of powertransmission systems (50 to 800 kilovolts), including air- and gas-insulatedswitchgear, capacitors, high-voltage circuit breakers, grounding switchesand instrument transformers. The division also delivers the entire ABBportfolio of low-, medium- and high-voltage capacitors and surge arresters. Itsproducts and components also include circuit breaker drives and cableaccessories.

***Customers***

The Power Productsdivision’s principal customers are electric, gas and water utilities, ownersand operators of power transmission systems, utilities that own or operatenetworks and owners and operators of power generating plants. Other customersinclude gas transmission companies, local distribution companies and multi-utilities,which are involved in the transmission or distribution of more than onecommodity. The division also serves industrial and commercial customers, suchas operators of large commercial buildings and heavy industrial plants.

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***Sales and Marketing***

The Power Productsdivision sells its products individually and as parts of larger systems throughour Power Systems division. Direct sales account for a majority of thedivision’s total product sales, and sales through external channel partners,such as wholesalers, distributors and OEMs, account for the remainder. Becausethe Power Products and Power Systems divisions share many of the same customersand technologies, and are influenced by the same market drivers, the twodivisions share a common sales force in most regions and countries.

***Competition***

On a global basis, thePower Products division’s principal competitors are Siemens and Areva, and, inthe medium-voltage market, Schneider. We also compete regionally with companiessuch as Cooper Industries, Eaton Corp, Crompton Greaves and BHEL.

***Research andDevelopment***

Research and developmentexpenses that were not order-related for the Power Products division amountedto approximately $180 million and $130 million for 2006 and 2005, respectively.The division’s research and development activities in 2006 primarily related tostreamlining product portfolios. The aim is to increase product standardizationand thus improve the efficiency of our design, supply, manufacturing, sales anddistribution functions. Related research has focused on technologies thatenable faster production cycles, mainly in the areas of new materials anddesign.

Order related research anddevelopment expenses for the Power Products division amounted to approximately$70 million and $60 million during 2006 and 2005, respectively.

***CapitalExpenditures***

The Power Productsdivision’s capital expenditures for property, plant and equipment were $164million in 2006, compared to $119 million and $107 million in 2005 and 2004,respectively. Principal investments in 2006 included investments to replaceexisting equipment, particularly in Sweden, China, Germany and the UnitedStates. Geographically, in 2006, Europe accounted for 56 percent of our capitalexpenditures, followed by 29 percent in Asia, 12 percent in the Americas and 3percent in Middle East and Africa.

**Power Systems Division**

***Overview***

Our Power Systems divisionserves electric, gas and water utilities, as well as industrial and commercialcustomers, with a broad range of systems and services for power generation,transmission and distribution. Key technologies include substations,high-voltage power converters, advanced cables for underground and underseapower transmission, and systems to automate and control power plants,electrical and other utility networks. The division had approximately 13,300employees in 77 countries as of December 31, 2006 and generated $4.5billion of revenues in 2006.

***The Power SystemsDivision***

Our Power Systems divisiondelivers systems in four areas: grid systems, network management, powergeneration, and substations. The division sells primarily to utilities,Engineering, Procurement and 

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Constructionand power generation industries. Some of the Power Product division’s productsare integrated into the offering of the Power Systems and Process Automationdivisions.

For grid systems, weprovide power systems that are essential to grid reliability, includingflexible alternating current transmission systems (FACTS) and we also sellhigh-voltage direct current (HVDC) systems. Critical components in thesesystems are power semiconductors and cables which are also manufactured by thePower Systems division.

We are a leadingmanufacturer of HVDC technology, which is an advanced technology fortransporting electricity over long distances. It reduces power losses,increases system stability and provides a more controllable flow than high-voltagealternating current. An HVDC transmission system typically includes converters,which change alternating current to direct current and then back to alternatingcurrent when it reaches the terminal point, and transmission line cables,either above or below ground. Advances in converter and cable technology haveenabled us to introduce a system called HVDC LightÔ.Converter stations for HVDC LightÔ are approximatelyone-fifth the size of conventional HVDC technology for the same ratedpower. HVDC LightÔ extends the range of applications forunderground or submarine high-voltage direct current. Typicalapplications include interconnection of separate networks that operate ondifferent frequencies or provide variational power quality, such as wind parks.The system can also be used as a substitute for local power generation inremote areas, islands or oil platforms.

We also provide FACTSdevices to enhance power grid stability, improve power quality and thusincrease transmission capability. FACTS devices include series compensators,static VAR compensators (SVCs) and SVC LightÔ(based on the same unique technology as HVDC LightÔ).

HVDC, HVDC LightÔ,FACTS, and SVC LightÔ systems rely onadvanced power semiconductor components. Our power semiconductor businessdevelops and manufactures tailor-made components to maximize theperformance of these systems. The Power Systems division supplies powersemiconductor devices to other ABB businesses and to external customers in thepower transmission and distribution, drives, and transportation markets.

Our cable business isspecialized in sub-sea cable solutions and land-cables for bulk energy transferover long distances.

Our network systemsoffering includes high-end supervisory control and data acquisition(SCADA) systems for power and gas customers. SCADA systems are used to monitorand control energy transmission, distribution and power generation managementsystems. They are also used to operate market systems for power networks bytracking energy costs. These allow utilities to optimize their business byimproving the performance of their installed network equipment to meet changingcustomer requirements and new market conditions.

The division also provideswireless and fixed communication systems for power, water and gas utilities,including both operational and corporate communication networks. It offers fiberoptics, microwave radio and power line applications for data networking andbroadband network management, as well as teleprotection and substationcommunication networks and voice switching management systems.

In the area of powergeneration, the division offers complete system integration of instrumentation,control and electrical equipment for the power generation market. The servicesoffered include combustion management, plant performance optimization,condition monitoring and asset management. We also offer turnkey water pumpingstations including control systems.

Substations interconnect electricity grids operating on differentvoltage levels, sectionalize portions of the grid and protect the electricalsystem against damage from outside sources such as lightning and 

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overload.By sectionalizing the grid, power can be rerouted from portions of thetransmission system that are experiencing problems to sections that arefunctioning properly, thereby enhancing the overall reliability of the powersupply.

We deliver complete air-and gas-insulated substations for power transmission. Substations are alsonecessary in a power distribution network to sectionalize and reduce thevoltage of the main power lines and cables to the lower voltages required forefficient distribution and consumption. For power distribution, we selltraditional custom-engineered substations as well as compact, modularsubstations, which require less space than a conventional substation and thusare particularly well suited for urban settings.

This division offersservices and support for management of existing power transmission anddistribution assets, including both ABB products and those manufactured bythird parties.

In addition, the PowerSystems division offers a range of services aimed at reducing the in-houseoperational and maintenance requirements of utility customers. Our servicesrange from contracts for spare parts management, support agreements andretrofits, to service, consulting and training. The Power Systems division alsoundertakes analyses of the design of new transmission and distribution systemsas well as optimization that take into account technical, economic andenvironmental considerations.

***Customers***

The Power System division’sprincipal customers are electric, gas and water utilities, owners and operatorsof power transmission systems, utilities that own or operate networks andowners and operators of power generating plants. Other customers includetransmission companies, local distribution companies and multi-utilities,which are involved in the transmission or distribution of more than onecommodity. The division also serves industrial and commercial customers, suchas operators of large commercial buildings and heavy industrial plants.

***Sales and Marketing***

The Power Systems divisionsells its systems primarily through a direct sales force of specialized salesengineering teams. Some sales are also handled through third-party channels,such as OEMs and system integrators. Because the Power Systems and Power Productsdivisions share many of the same customers and technologies, and are influencedby the same market drivers, the two divisions share a common sales force inmost regions and countries.

***Competition***

On a global basis, thePower Systems division’s principal competitors are Siemens and Areva. In thepower generation area, the division’s principal competitors are Areva, Emerson,GE, Invensys and Siemens.

***Research andDevelopment***

In the Power Systemsdivision, research continued to focus on the standardization of controls andprotection systems, with the goal of reducing costs in the production ofsubstation automation systems, power plant controls and SCADA systems. Inaddition, order-related research and development expenses for the Power Systemsdivision amounted to****approximately **$**70million and $80 million during 2006 and 2005, respectively. Non-Order relatedresearch and development expenses for the Power Systems division amounted toapproximately $85 million and $60 million during 2006 and 2005 respectively.

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***CapitalExpenditures***

The Power System division’scapital expenditures for property, plant and equipment were $43 million in2006, compared to $22 million and $25 million in 2005 and 2004, respectively.Principal investments in 2006 included investments to replace existingequipment, particularly in Sweden, Germany, and Switzerland. Geographically, in2006, Europe accounted for 74 percent of our capital expenditures, followed by10 percent in Asia, 10 percent in the Americas and 6 percent in Middle East andAfrica.

**Automation Products Division**

***Overview***

The Automation Productsdivision provides products, with related services, that are used as componentsin machinery, switchboards, distribution panels, and building and automationsystems. The Automation Products offering covers a wide range of products andservices including low-voltage switchgear, breakers, switches, controlproducts, DIN-rail components, enclosures, wiring accessories, instrumentation,drives, motors, generators, and power electronics systems. These products helpcustomers to improve productivity, save energy and increase safety. Keyapplications include power distribution, protection and control, energyconversion, data acquisition and processing, and actuation. The majority ofthese applications are for industrial applications, with others provided forbuilding construction, rail transportation, and utilities.

The Automation Productsdivision is a global business that employs over 30,000 people worldwide andgenerated $6.8 billion revenues in 2006 through sales activities in more than100 countries. The division manufactures around 170,000 products and has morethan 100 manufacturing sites in 50 countries. Each day, the division deliversaround one million products.

A majority of the division’srevenues comes from sales through distributors, wholesalers, machine buildersand OEM’s, system integrators, and panel builders, although a portion of thedivision’s revenues come from direct sales to end-users.

***The AutomationProducts Division***

The Automation Productsdivision manufactures low-voltage circuit breakers, switches and controlproducts to protect people, installations and electronic equipment fromelectrical overloads. It also manufactures instrumentation products to measureand control the flow of fluids.

This division makes lineprotection products, wiring accessories and enclosures and cable systems thatare primarily used for control and protection in building installations. Italso produces European Installation Bus/Powernet systems, which integrate andautomate a building’s electrical installations, ventilation, security and datacommunication networks.

The processinstrumentation products manufactured by this division interact with the OpenControl System products from the Process Automation division and includeproducts for the measurement of process variables such as pressure,temperature, volume and flow. The increasing sophistication of many processautomation systems often requires thousands of measurement points for such variables.These instrumentation products are sold separately or in combination withcontrol systems. The various analytical measurement devices produced by thisdivision form an important part of instrumentation and control systems. Thesedevices measure chemical characteristics while process instrumentation productsmeasure physical characteristics.

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This division alsoprovides low-voltage and medium-voltage AC drive products andsystems for industrial, commercial and residential applications. Drives providemotion and torque while adding control and efficiency to equipment such asfans, pumps, compressors, conveyors, kilns, centrifuges, mixers, hoists,cranes, extruders, printing machinery and textile machines. Our drives are usedin the building automation, marine, power, transportation and manufacturingindustries, among others.

The Automation Productsdivision also produces a range of power electronics products. These includestatic excitation and synchronizing systems that provide stability for powerstations, as well as high power rectifiers that convert AC power to DC powerfor very high-amperage applications such as furnaces in zinc plants andaluminum and magnesium smelters. The division also manufactures frequencyconverters that use state-of-the-art semiconductor technologyto convert electrical power into the type and frequency required by individualcustomers.

In addition, this divisionsupplies a comprehensive range of electrical motors and generators, includinghigh-efficiency motors that conform to leading environmental andefficiency standards. Efficiency is an important criterion for selection bycustomers, because electric motors account for nearly two-thirds of theelectricity consumed by industrial plants. This division manufacturessynchronous motors for the most demanding applications and a full range of lowand high-voltage induction motors.

***Sales and Marketing***

Sales are made boththrough direct sales forces as well as through third-party channelpartners, such as distributors, wholesalers, installers, machine builders andOEMs, system integrators, and panel builders. The proportion of direct salescompared to channel partner sales varies among the different industries,product technologies and geographic markets. For the division as a whole, themajority of products are sold through channel partners, with the remainder soldthrough the division’s own direct sales channels.

***Competition***

The Automation Productsdivision’s principal competitors vary by product line but include Alstom,Baldor, Brush, Eaton, Emerson, Endress+Hauser, Legrand, Mitsubishi, Rockwell,Schneider, and Siemens.

***Research andDevelopment***

Research and developmentexpenses that were not order-related for the Automation Products divisionamounted to approximately $184 million and $171 million during 2006 and 2005, respectively. In addition, orderrelated research and development expenses for the Automation Products divisionamounted approximately to $47 million and $46 million during 2006 and 2005,respectively.

An important focus of thedivision’s research programs is the development of a range of global productsthat satisfies the need of global customers. Another focus of the division’sR&D is on increasingly intelligent connected devices that enable both newfunctions, e.g., for diagnosis and maintenance, as well as easy integrationinto systems and industry solutions. Customer benefits and competitivedifferentiation targeted with this R&D include increases in safety,reliability, lower operating and maintenance costs, as well as reductions inenvironmental impact.

***CapitalExpenditures***

The Automation Productsdivision’s capital expenditures for property, plant and equipment were $157million in 2006, compared to $140 million and $138 million in 2005 and in 2004,respectively. Principal 

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investmentsin 2006 were primarily related to ordinary course replacements of machinery andequipment mainly in Germany, Finland, Italy and China plus expansioninvestments in China, India and Estonia. Geographically, in 2006, Europeaccounted for 81 percent of the capital expenditure, followed by 16 percent inAsia, 2 percent in the Americas and 1 percent in the Middle East and Africa.

**Process Automation Division**

***Overview***

The Process Automationdivision provides products, systems, and services for the automation andoptimization of industrial processes. Our main offerings are processautomation, plant electrification and quality control systems, analyticalmeasurement devices, turbochargers and marine propulsion and control systems.Our key end markets are the oil and gas, pulp and paper, metals and minerals,chemicals and pharmaceuticals, turbocharging and marine industries. Thedivision had approximately 24,500 employees as of December 31, 2006, andgenerated revenues of $5.4 billion in 2006.

The Process Automationdivision offers its products both as separately sold devices and as part of atotal automation system. Our technologies are marketed both through directsales forces and third-party channels.

***The ProcessAutomation Division***

The Process Automationdivision offers integrated process control systems, plant electrificationsystems, information management systems and industry-specific applicationknowledge for a variety of industries, primarily pulp and paper, minerals andmining, metals, chemicals and pharmaceuticals, oil and gas, turbocharging,power and the marine industry. Some of the Automation Product and Power Productdivisions’ products are integrated into the offering of the Process Automationdivision.

Our control systems areused in such applications as batch management, asset optimization, energymanagement and safety control. They are the hubs that link instrumentation,devices and systems for control and supervision of an industrial process andenable customers to integrate their production systems with their enterprise,resource and planning systems, thereby providing a link to their ordering,billing and shipping processes. This link allows customers to manage theirentire manufacturing and business process based on real-time access toplant information. Additionally, it allows customers to increase productionefficiency, optimize their assets and reduce environmental waste.

This division emphasizesOpen Control Systems, including batch control systems, supervisory control anddata acquisition systems, and, to a lesser extent, programmable logic controlsand remote terminal units.

Batch control systemscontrol the production of a variety of products in shorter runs, such ascertain pharmaceuticals and food and beverage products. Supervisory control anddata acquisition systems are used to collect and manage data over wide areas orlong distances such as those involved in operating electric power networks.

In December 2003,this division commercially released the System 800xA process automationplatform. This system extends the capability of traditional process controlsystems, introducing advanced functions such as batch management, assetoptimization and field device integration which “plug in” to a common userenvironment. The same user interface may also be used to manage components ofexisting multiple ABB control systems that have been installed in the marketover the past approximately 20 years. In this way, System 800xA gives customersa way to migrate to new functions one step at a time, rather than having tomake a large-scale capital investment to replace their entire control system.By creating a 

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commonuser interface that can be used to manage multiple systems, the System 800xAalso reduces the research and development investment needed to achieve a “onesize fits all” solution across our large installed systems base.

The division’s productofferings for the pulp and paper industries include quality control systems forpulp and paper mills, control systems, drive systems, on-line sensors,actuators and field instruments. On-line sensors measure productproperties, such as weight, thickness, color, brightness, moisture content andadditive content. Actuators allow the customer to make automatic adjustmentsduring the production process to improve the quality and consistency of theproduct. Field instruments measure properties of the process, such as flowrate, chemical content and temperature.

We offer our customers inthe metals and minerals industries specialized products and services, as wellas total production systems. We design, plan, engineer, supply, erect andcommission electric equipment, drives, motors and equipment for automation andsupervisory control within a variety of areas including mining, mineralhandling, aluminum smelting, hot and cold steel applications and cementproduction.

In the oil and gas sector,we provide onshore, offshore and subsea production technology, gas gatheringand processing, refining, transportation and distribution applications. In thepharmaceuticals and fine chemicals areas, the business area provides solutionsfor applications including manufacturing, packaging, quality control andcompliance with regulatory agencies.

In the marine field, weprovide global shipbuilders with power and automation technologies for luxurycruise liners, ferries, tankers, offshore oil rigs and special purpose vessels.We design, engineer, build, supply and commission electrical systems for marinepower generation, power distribution and diesel electric propulsion, as well asturbochargers to improve efficiency for diesel and gasoline engines.

We also offer full-servicecontracts across all of our customer segments, in which we take over in-housemaintenance activities for customers and apply strategies to reduce overallmaintenance costs and helps optimize these investments. Demand for our processautomation services is increasing as our customers seek to increaseproductivity by improving the performance of existing assets.

***Customers***

The Process Automationdivision’s end customers are primarily companies in the pulp and paper,minerals and mining, metals, chemicals and pharmaceuticals, oil and gas,turbocharging, power and the marine industries. In each of these industries, wesell both through direct sales forces as well as through third-partychannels, such as distributors, wholesalers, installers, system integrators andOEMs.

***Sales and Marketing***

The Process Automationdivision uses a direct sales forces as well as third-party channelpartners, such as distributors, system integrators and OEMs. For thedivision as a whole, the majority of revenues are derived through the division’sown direct sales channels.

***Competition***

The Process Automationdivision’s principal competitors vary by industry or product line but includeAlstom, Emerson, Honeywell, Invensys, Metso Automation, Rockwell Automation,Schneider, Siemens AG, Voith AG, Aspen Technologies, and Yokogawa ElectricCorporation.

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***Research andDevelopment***

Research and developmentexpenses that were not order-related for the Process Automation divisionamounted to approximately $154 million and $142 million during 2006 and 2005,respectively. In addition, order related research and development expenses forthe Process Automation division amounted approximately to $79 million and $60million during 2006 and 2005, respectively.

An important focus of thedivision’s research programs is the commitment to the development of the System800xA control platform and related products and systems. As a result, thedivision’s research is heavily focused on intelligent, “information enabled”products and devices that may be integrated easily into existing platforms****toprovide better access to real-time information across the business enterprise.Another focus of the division’s R&D is on increasingly intelligentconnected devices that enable both new functions, e.g., for diagnosis andmaintenance, as well as easy integration into systems and industry solutions. Customer values and competitivedifferentiation targeted with this R&D include increases in safety,reliability, lower operating and maintenance costs, as well as reductions inenvironmental impact.

***CapitalExpenditures***

The Process Automation division’scapital expenditures for property, plant and equipment were $51 million in2006, compared to $31 million and $28 million in 2005 and in 2004,respectively. Principal investments in 2006 were primarily related to aproduction facility in Finland and ordinary course purchases of machinery andequipment mainly in Switzerland, Algeria, China and Sweden. Geographically, in2006, Europe accounted for 83 percent of the capital expenditure, followed by 9percent in Asia, 6 percent in the Americas and 2 percent in the Middle East andAfrica.

**Robotics Division**

***Overview***

Our Robotics division offers robot products, systemsand service for the automotive and manufacturing industries. The divisiondevelops standardized manufacturing cells for machine tending, welding,cutting, painting and finishing and provides packaged systems to automobilemanufacturers for press automation, paint process automation and power trainassembly. The division also provides a full range of robotics services, fromproduct maintenance to system design. The division had approximately 4,500employees as of December 31, 2006 and generated $1.3 billion of revenues in2006. The Robotics division’s manufacturing and research and developmentlocations are organized globally, with major centers in China, the UnitedStates, Sweden, Norway and France.

***The Robotics Division***

The Robotics division offers robot products, systemsand service for the automotive manufacturers and their sub-suppliers aswell as general manufacturing industries, to improve product quality,productivity and consistency in manufacturing applications. Robots are alsoused in inhospitable environments which may be hazardous to employee health andsafety, such as cold rooms or painting chambers.

In the automotive industry, the division’s productsand systems are used in such areas as press shop, body shop, paint shop, powertrain assembly, trim and final assembly. General industry segments in whichrobotics solutions are used range from metal fabrication, foundry, plastics,glass and consumer goods to pharma and the electronics industry. Typicalgeneral industry applications include welding, material handling, painting,picking, packing and palletizing.

Shortened product life cycles and rapidly changingconsumer preferences have brought new challenges to our robotics customers.They must be able to adapt their production lines to increasingly 

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frequent changes inproduct design. At the same time, they have to continuously deliver theirproducts faster and at higher quality standards. Furthermore, constant pricepressure requires them to decrease production costs by improving manufacturingprocesses. Robots and robotics systems continue to play a key role in ourcustomers’ ability to adapt to their rapidly-changing business environment.

Our services includedesign and project management, engineering, installation, training and life-cyclecare of the complete production line. We also deliver products manufactured byother ABB divisions, such as the Power Technologies division, to maximizeenergy efficiency and provide a secure power supply for manufacturing lines.

***Customers***

The Robotics division’send customers are primarily companies in the automotive and manufacturingindustries. We sell to these customers through direct sales forces as well asthird-party channels, such as distributors, system integrators and OEMs.

***Sales and Marketing***

Salesare made through both direct sales forces and third-party channelpartners, such as distributors, system integrators and OEMs. Theproportion of direct sales compared to channel partner sales varies among thedifferent industries, product technologies and geographic markets. Sales fromthe systems and service businesses are made entirely through direct salesforces.

***Competition***

The Robotics division’s principal competitors vary byproduct and system but major competitors include Fanuc, Kuka and Yaskawa aswell as a growing base of small and medium sized system integrators.

***Research and Development***

Research and development expenses for the Robotics divisionin 2006 that were not order-related amounted to approximately $60 million, or5% of revenues, as compared with approximately $65 million during 2005. Theorder related research and development amounted to approximately $53 millionduring 2006, as compared with $58 million during 2005.

***Capital Expenditures***

The Robotics division’s capital expenditures forproperty, plant and equipment were $15 million in 2006, compared to $14 millionand $12 million in 2005 and in 2004, respectively. Geographically, in 2006, Europe accountedfor 79 percent of the capital expenditure, followed by Asia with 16 percent,and the Americas with 5 percent.

**DISCONTINUEDOPERATIONS**

**Overview**

The followingbusinesses and costs are included in our Consolidated Financial Statements asdiscontinued operations at December 31, 2006, 2005 and 2004:

·                    Provisionsand other expenses incurred in connection with asbestos-related claims. Thestatus of our potential asbestos obligation is described in “Item 5. Operatingand Financial Review and Prospects—Asbestos Liabilities,” as well as in Note 17to the Consolidated Financial Statements.

·                    Our CableBusiness in Ireland, which was sold during 2006.

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·                    The remainingbuilding Systems business in Germany, formerly part of the Non-core and Otheractivities, was reclassified to discontinued operations during 2006 on thebasis that management expects to complete the sale in 2007.

·                    Our UpstreamOil, Gas and Petrochemicals business, the sale of which was completed in July 2004.The upstream oil and gas business is a global producer of equipment andservices for oil and gas exploration and production. The remaining portions ofour Oil, Gas and Petrochemicals business primarily consists of a full serviceengineering company which, in addition to having expertise in engineering,procurement and construction projects, also licenses process technologies inthe refining, chemical, petrochemical and polymer fields. As of March 31, 2007,this business meets the accounting criteria required to be classified indiscontinued operations.

·                    Our PowerLines businesses in Nigeria, Italy and Germany were sold in 2005. Theoperations in South Africa and Venezuela were sold in 2006. The remaining PowerLines businesses in Brazil and Mexico were reclassified to discontinuedoperations during 2005 and are expected to be sold in 2007.

·                    The Leaseportfolio business in Finland was sold in November 2005

·                    Our Foundryand Control Valves businesses were sold in 2005.

·                    OurReinsurance business, which was sold in April 2004.

·                    Legal,professional and other fees related to the above disposals.

See Notes 3 and 26 to theConsolidated Financial Statements for additional information.

**CAPITALEXPENDITURES**

Total capital expenditures for property, plant andequipment including intangible assets amounted to $532 million, $454 millionand $482 million in 2006, 2005 and 2004, respectively. Capital expenditures inwestern Europe and North America were aimed primarily at improving theproductivity of existing facilities, while investments in emerging marketsfocused on expanding new capacity to meet the demands of their rapid growth.Europe was the region with the largest amount of capital expenditures in 2006,reflecting the current geographic distribution of our production facilities. Inaddition, capital expenditures in emerging economies continue to grow fasterthan in other areas and, on a country basis, China had the largest amount ofcapital expenditure in 2006.

The carrying value of property, plant and equipmentsold amounted to $54 million, $81 million and $113 million in 2006, 2005 and2004, respectively. A significant portion of total sales of property, plant andequipment in 2006 related to real estate properties, primarily in Switzerlandand Germany. A significant portion of total sales of property, plant andequipment in 2005 related to real estate properties, primarily from TheNetherlands, Sweden, Switzerland and France. A significant portion of the totalsales of property, plant and equipment in 2004 related to sales of equipmentparticularly in Sweden, the United States, China and Germany.

Construction in progress for property, plant andequipment as of December 31, 2006, was $173 million, mainly in Germany,Finland, China, Sweden and Switzerland. We intend to finance our expendituresfor construction in progress internally. Construction in progress for property,plant and equipment as of December 31, 2005 was $132 million, mainly inGermany, Sweden, the United States, Spain and China.

In 2007, we intend toincrease our capital expenditures to an amount which is higher than ourexpected annual depreciation and amortization charge. We anticipate higherinvestments in the emerging markets of Asia and relatively lower capitalspending in Europe.

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**SUPPLIES AND RAWMATERIALS**

We purchase a variety of raw materials for use in ourproduction and project execution processes. The main materials used in ourproducts, by weight, are steel, copper, aluminum, mineral oil and variousplastics. We also purchase a variety of fabricated products and electroniccomponents.

We operate a worldwide supply chain management networkwith employees dedicated to this function in business units and key countries.The supply chain management network leverages the scale of the ABB Group tooptimize the efficiency of our supply networks. Our eBusiness activities haveexpanded in recent years, to include procurement for materials and services inmany of our production facilities. We made improvements in our collaborationwith supplier partners through initiatives such as ASCC, our supplier portal,and eSMART, our business intelligence system.

The price of raw materials is volatile, and may vary,perhaps substantially, from year to year. For many commodities we purchase,including steel, copper and aluminum products and products derived from crudeoil, continuing global economic growth, sustained high demand from China andother emerging economies and volatility in foreign exchange rates (particularlythe U.S. dollar and the euro) led to significant increases in raw materialcosts and volatility for several commodities since 2003. While some increaseswill be offset through use of multi-year contracts and, in the case ofcopper and aluminum, through hedging, we expect prices for some commodities, inparticular copper, to rise in future years.

Our costs for most of our electronic components,subassemblies and fabricated products remained stable or decreased slightly in2006 compared to 2005. Increasing global demand for lead-free components maylead to periodic shortages of replacement components as manufacturers of theseproducts shift their attention to the manufacture of new, lead-free components.

We hedge our exposure tocommodity risk arising from changes in prices of raw materials. We managecopper and aluminum price risk using swap and forward contracts based on LondonMetal Exchange prices or on New York Mercantile Exchange prices for thesecommodities. Our hedging policy is designed to minimize price volatility andcreate a stable cost base for the ABB Group. Hedging has the effect ofminimizing the unfavorable impact of price increases in commodities, but italso limits the favorable impact of decreasing prices. Certain gains and lossesderived from our commodity hedging transactions are deferred and reflected inthe cost of goods sold when the underlying physical transaction takes place. Inaddition to using hedging to reduce our exposure to fluctuations in rawmaterials prices, in some cases we can reduce this risk by incorporatingchanges in raw materials prices into the prices of our products.

**RESEARCH ANDDEVELOPMENT**

Each year, we invest significantly in research anddevelopment. Our research and development area focuses on developing andcommercializing the core technologies of our businesses that are of strategicimportance to our future growth. In 2006, 2005 and 2004, we invested $772million, $679 million and $650 million, respectively, or approximately 3.2percent, 3.1 percent, and 3.2 percent of annual consolidated revenues,respectively, on research and development activities. We also had expendituresof $840 million, $726 million and $723 million, respectively, or approximately3.4 percent, 3.3 percent and 3.6 percent, respectively, of annual consolidatedrevenues in 2006, 2005 and 2004, on order-related development activities.These are customer- and project-specific development efforts thatwe undertake to develop or adapt equipment and systems to the unique needs ofour customers in connection with specific orders or projects. Order-relateddevelopment amounts are initially recorded in inventories as part of the workin progress of a contract and then are reflected in cost of sales at the timerevenue is recognized in accordance with our accounting policies.

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In addition to continuous product development, andorder-related engineering work, we develop future technology platformsfor technology applications in our automation and power businesses in our Groupresearch and development labs, which operate on a global basis. Through activemanagement of our investment in research and development, we seek to maintain abalance between short-term and long-term research and development programsand optimize our return on investment.

Our research anddevelopment strategy focuses on three objectives:

·                    Tomonitor and develop emerging technologies and create a pioneering, sustainabletechnology base for the company;

·                    Todevelop technology platforms that enable efficient product design for our powerand automation customers; and

·                    Tocreate the next generation of power and automation products and systems that webelieve will be the engines of profitable growth.

Universities are the incubators of future technology,and a central task of our research and development team is to transformuniversity research into industry-ready technology platforms. We collaboratewith a number of universities and research institutions to build researchnetworks and foster new technologies. We believe these collaborations shortenthe amount of time required to turn basic ideas into viable products, and theyadditionally help us recruit and train new personnel. We have built more than50 university partnerships in the U.S., Europe and Asia, including long-term,strategic relationships with institutions such as Stanford University, theMassachusetts Institute of Technology, Carnegie Mellon University, CambridgeUniversity and Imperial College London. Our collaborative projects includeresearch on materials, sensors, micro-engineered mechanical systems, robotics,controls, manufacturing, distributed power and communication.

Common platforms for power and automation technologiesare developed around advanced materials, efficient manufacturing, informationtechnology and data communication, as well as sensor and actuator technology.Common applications of basic power and automation technologies can also befound in power electronics, electrical insulation, and control andoptimization. Our power technologies, including our insulation technologies,current interruption and limitation devices, power electronics, flow controland power protection processes, apply as much to large, reliable, blackout-freetransmission systems as they do to everyday household needs. Our automationtechnologies, including our control and optimization processes, powerelectronics, sensors and microelectronics, mechatronics and wirelesscommunication processes, are designed to improve efficiency in plants andfactories around the world—including our own.

Group research and development is carried out in twoglobal laboratories for power and automation technologies, combining researchunits in the U.S., Europe and Asia. The cultural diversity and closeness to ourcustomers and the world’s best universities creates a breeding ground forsuccess. We continue to expand our research and development activities inIndia, Singapore and China, reflecting our growth strategy in Asia. Ourcorporate research center in Bangalore, India was launched in early 2002. As afocal point for software research, it develops platforms for both automationand power technologies. In China, research and development activity is focusedon power transmission and distribution, manufacturing and robotics. It iscentered in new facilities in Beijing and Shanghai, where our researchers arein close contact with Chinese universities and customers.

Our researchers have been recognized in recent yearsfor contributions in areas like HCI (human-computer interface), safeguardingpower transmission systems, faster and more efficient automation systems,improved electrical insulation and industrial applications of nanotechnologyand wireless technology.

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Our currentresearch programs focus on:

·                    Powerdevice technology;

·                    Powertransmission and distribution applications;

·                    Powerelectronics;

·                    Mechatronicsand robotics applications;

·                    Controland optimization processes;

·                    Automationnetworks and devices;

·                    Softwarearchitecture and processes;

·                    Advancedmaterials; and

·                    Manufacturingtechnologies.

**PATENTS ANDTRADEMARKS**

We believe thatintellectual property has become as important as tangible assets for atechnology group such as ABB. Over the past ten years, we have almost doubledour total number of first patent filings, and we intend to continue ouraggressive approach to seeking patent protection. Currently, we have over14,000 patent applications and registrations, of which approximately 7,000 arepending applications. In 2006, we filed patent applications for more than 650new inventions. Based on our existing intellectual property strategy, webelieve that we have adequate control over our core technologies. The “ABB”trademarks and logo are protected in all of the countries in which we operate.We aggressively defend the reputation associated with the ABB brand.

**SUSTAINABILITYACTIVITIES**

Sustainability management is one of our highestbusiness priorities. We address sustainable issues in all our businessoperations. Our goal is to improve our social and environmental performancecontinuously, and improve the quality of life in the communities and countrieswhere we operate.

Our social andenvironmental efforts include:

·                    joininginitiatives that foster economic, environmental, social and educationaldevelopment;

·                    makingpositive contributions in the communities where we operate so they will welcomeus and consider ABB an attractive employer and a good investment;

·                    offeringour customers eco-efficient products that save energy and are safe touse, that optimize the use of natural resources, minimize waste and reduceenvironmental impact over their complete life cycles;

·                    applyingnon-financial risk assessment to projects in which we are involved;

·                    sharing ourlatest technologies with emerging markets by, for example, helping customers indeveloping countries implement environmentally sound processes and technologiesand providing environmental awareness training;

·                    ensuring thatour operations and processes comply with applicable environmental standards andlegislation. Specifically, every operating unit must implement an environmentalmanagement system that continuously improves its environmental performance;

·                    ensuring thatour social and environmental policies are communicated and implemented;

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·                    workingtowards achieving best practices in occupational health and safety, andensuring the health and safety of our employees, contractors and othersinvolved in or affected by our activities; and

·                    favoringsuppliers that have sustainability policies and systems similar to our own.

To continuously improvethe environmental performance of our own operations, we are implementingenvironmental management systems according to the ISO 14001 standard at all oursites. We have implemented the ISO 14001 in 97 percent of our manufacturingfacilities and service workshops (approximately 350 sites) and ourenvironmental management program now includes operations in approximately 50countries. We also require every operating unit within the ABB Group to implementan environmental management system that aims continuously to improve itsenvironmental performance. We are now implementing an adapted environmentalmanagement system in our non-manufacturing organizations.

We have introduced theconcept of Environmental Product Declarations to communicate the environmentalperformance of our core products. These describe the salient environmentalaspects and impacts of a product line, viewed over its complete life cycle.Declarations are based on Life Cycle Assessment studies, created according tothe international standard ISO/TR 14025. To date, approximately 80 declarationshave been produced for major product lines, some of which have been externallycertified by agencies such as Det Norske Veritas (DNV) of Norway and the RINAManagement System Certification Society in Italy.

We have expanded the scopeof our environmental reporting in recent years. In 2006, a total of 82 percentof our employees were covered by confirmed data gathered through ABB’s formalenvironmental reporting system that is verified by an independent verificationbody. The parts of our business that are not yet covered by our reportingsystem, mainly sales offices in countries where we do not performmanufacturing,  have very limitedenvironmental exposure. A total of 4 accidents were reported in 2006, none ofwhich had a material environmental impact.

For social performance, atotal of 92 percent of employees are covered by confirmed data gathered throughABB’s formal social reporting system that is verified by an independentverification body. The parts of our business that are not yet covered by ourreporting system, mainly sales offices in countries where we do not performmanufacturing, have very limited social exposure.

One of our corporate objectivesis to phase out the use of the hazardous substances that are recorded on ourlist of “restricted” substances. Priorities for replacement are set by eachbusiness using criteria such as the environmental aspects of alternatives, therisk of the substance escaping into the environment, how hazardous thesubstance is, whether we can use the substance under strict control and whetherthere are any technically acceptable alternatives.

We have retained liabilityfor environmental remediation costs at two sites in the United States that wereoperated by our former nuclear business, which we have sold to BNFL. Theprimary environmental liabilities associated with these sites relate to thecosts of remediating radiological contamination upon decommissioning thefacilities. See Note 17—Commitments and contingencies to our ConsolidatedFinancial Statements.

**REGULATION**

Our operations are subject to numerous governmentallaws and regulations including those governing antitrust and competition, theenvironment, securities transactions and disclosures, import and export ofproducts, currency conversions and repatriation, taxation of foreign earningsand earnings of expatriate personnel and use of local employees and suppliers.

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As a reporting company under Section 12 of theU.S. Securities Exchange Act of 1934, we are subject to the FCPAs antibriberyprovisions with respect to our conduct around the world.

Our operations are also subject to the 1997 OECDConvention on Combating Bribery of Foreign Public Officials in InternationalBusiness Transactions, as implemented by the 34 signatory countries. Theconvention obliges signatories to adopt national legislation that makes it acrime to bribe foreign public officials. As of December 31, 2006, thosecountries which have adopted implementing legislation and have ratified theconvention include the United States and several European nations in which wehave significant operations.

We conduct business incertain countries known to experience governmental corruption. While we arecommitted to conducting business in a legal and ethical manner, our employeesor agents have taken, and in the future may take, actions that violate the U.S.FCPA, legislation promulgated pursuant to the 1997 OECD Convention on CombatingBribery of Foreign Public Officials in International Business Transactions orother laws or regulations. These actions have resulted and could result inmonetary or other penalties against us and could damage our reputation and, therefore,our ability to do business. For more information, see “Item 8. FinancialInformation—Legal Proceedings.”

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**SIGNIFICANTSUBSIDIARIES**

ABBLtd, Zurich, Switzerland is the ultimate parent company of the ABB Group, whichis comprised of 329 consolidated operating and holding subsidiaries worldwide,as of March 31, 2007. In addition to ABB Ltd Zurich, the only other listedcompany in the ABB Group is ABB Ltd, India, which is listed on the Mumbai StockExchange, the National Stock Exchange and the Kolkata Stock Exchange in India.

Thefollowing table sets forth, as of March 31, 2007, the name, country ofincorporation and ownership interest of ABB Ltd of its significantsubsidiaries:
| Company Name                                            | ** ** | ** **         | ** ** | ** **        | **Country** | ** ** | ** ** | **ABB Group   Interest %** |
|---------------------------------------------------------|------------|--------------------|------------|-------------------|-------------|------------|------------|----------------------------|
| ABB S.A., Buenos Aires                                  |       | ARGENTINA          |       | 100.00            |
| ABB Australia Pty Limited, Sydney                       |       | AUSTRALIA          |       | 100.00            |
| ABB AG, Vienna                                          |       | AUSTRIA            |       | 100.00            |
| ABB Ltda., Osasco                                       |       | BRAZIL             |       | 100.00            |
| ABB Bulgaria EOOD, Sofia                                |       | BULGARIA           |       | 100.00            |
| ABB Inc., St. Laurent, Quebec                           |       | CANADA             |       | 100.00            |
| ABB (China) Ltd., Beijing                               |       | CHINA              |       | 100.00            |
| Asea Brown Boveri Ltda., Bogotá                    |       | COLOMBIA           |       |   99.99 |
| ABB Technology SA, Abidjan                              |       | COTE D’IVOIRE |       |   99.00 |
| ABB Ltd., Zagreb                                        |       | CROATIA            |       | 100.00            |
| ABB s.r.o., Prague                                      |       | CZECH REPUBLIC     |       | 100.00            |
| ABB A/S, Skovlunde                                      |       | DENMARK            |       | 100.00            |
| Asea Brown Boveri S.A., Quito                           |       | ECUADOR            |       |   96.87 |
| Asea Brown Boveri S.A.E., Cairo                         |       | EGYPT              |       | 100.00            |
| ABB AS, Tallinn                                         |       | ESTONIA            |       | 100.00            |
| ABB Oy, Helsinki                                        |       | FINLAND            |       | 100.00            |
| ABB S.A., Rueil-Malmaison                               |       | FRANCE             |       | 100.00            |
| ABB AG, Mannheim                                        |       | GERMANY            |       | 100.00            |
| ABB Automation Products GmbH, Ladenburg                 |       | GERMANY            |       | 100.00            |
| ABB Automation GmbH, Mannheim                           |       | GERMANY            |       | 100.00            |
| ABB Beteiligungs- und Verwaltungsges. mbH, Mannheim     |       | GERMANY            |       | 100.00            |
| ABB Gebäudetechnik GmbH, Mannheim                  |       | GERMANY            |       | 100.00            |
| Asea Brown Boveri S.A., Metamorphossis Attica           |       | GREECE             |       | 100.00            |
| ABB (Hong Kong) Ltd., Hong Kong                         |       | HONG KONG          |       | 100.00            |
| ABB Engineering Trading and Service Ltd., Budapest      |       | HUNGARY            |       | 100.00            |
| ABB Limited, Bangalore                                  |       | INDIA              |       | 52.11             |
| ABB Ltd, Dublin                                         |       | IRELAND            |       | 100.00            |
| ABB Technologies Ltd., Tirat Carmel                     |       | ISRAEL             |       |   99.99 |
| ABB Trasmissione & Distribuzione S.p.A., Milan |       | ITALY              |       | 100.00            |
| ABB S.p.A., Milan                                       |       | ITALY              |       | 100.00            |
| ABB SACE S.p.A., Sesto S. Giovanni (MI)                 |       | ITALY              |       | 100.00            |
| ABB K.K., Tokyo                                         |       | JAPAN              |       | 100.00            |
| ABB Ltd., Seoul                                         |       | KOREA, REPUBLIC OF |       | 100.00            |
| ABB Holdings Sdn. Bhd., Subang Jaya                     |       | MALAYSIA           |       | 100.00            |
| Asea Brown Boveri S.A. de C.V., Tlalnepantla            |       | MEXICO             |       | 100.00            |
| ABB BV, Rotterdam                                       |       | NETHERLANDS        |       | 100.00            |
| ABB Holdings BV, Amsterdam                              |       | NETHERLANDS        |       | 100.00            |
| ABB Limited, Auckland                                   |       | NEW ZEALAND        |       | 100.00            |
| ABB Holding AS, Billingstad                             |       | NORWAY             |       | 100.00            |
| Asea Brown Boveri S.A., Lima                            |       | PERU               |       |   88.12 |

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| Asea Brown Boveri Inc., Paranaque, Metro  Manila |   | PHILIPPINES        |   | 100.00            |
|--------------------------------------------------|--------|--------------------|--------|-------------------|
| ABB Sp. zo.o., Warsaw                            |   | POLAND             |   |   96.83 |
| ABB S.G.P.S, S.A., Amadora                       |   | PORTUGAL           |   | 100.00            |
| Asea Brown Boveri Ltd., Moscow                   |   | RUSSIAN FEDERATION |   | 100.00            |
| ABB Contracting Company Ltd., Riyadh             |   | SAUDI ARABIA       |   |   65.00 |
| ABB Holdings Pte. Ltd., Singapore                |   | SINGAPORE          |   | 100.00            |
| ABB Holdings (Pty) Ltd., Sunninghill             |   | SOUTH AFRICA       |   | 80.00             |
| Asea Brown Boveri S.A., Madrid                   |   | SPAIN              |   | 100.00            |
| ABB AB, Västerås                       |   | SWEDEN             |   | 100.00            |
| ABB Norden Holding AB, Stockholm                 |   | SWEDEN             |   | 100.00            |
| ABB Asea Brown Boveri Ltd., Zurich               |   | SWITZERLAND        |   | 100.00            |
| ABB Schweiz AG, Baden                            |   | SWITZERLAND        |   | 100.00            |
| ABB LIMITED, Bangkok                             |   | THAILAND           |   | 100.00            |
| ABB Holding A.S., Istanbul                       |   | TURKEY             |   |   99.95 |
| ABB Ltd., Kiev                                   |   | UKRAINE            |   | 100.00            |
| ABB Ltd., Warrington                             |   | UNITED KINGDOM     |   | 100.00            |
| ABB Holdings Ltd., Warrington                    |   | UNITED KINGDOM     |   | 100.00            |
| ABB Inc., Norwalk CT                             |   | UNITED STATES      |   | 100.00            |
| ABB Holdings Inc., Norwalk                       |   | UNITED STATES      |   | 100.00            |
| ABB Lummus Global Inc., Bloomfield, NJ           |   | UNITED STATES      |   | 100.00            |
| Asea Brown Boveri S.A., Caracas                  |   | VENEZUELA          |   | 100.00            |
| ABB (Private) Ltd.,  Harare                      |   | ZIMBABWE           |   | 100.00            |

 

**DESCRIPTIONOF PROPERTY**

As of December 31,2006, the ABB Group occupied real estate in approximately 100 countriesthroughout the world. The facilities consist mainly of manufacturing plants,office buildings, research centers and warehouses. A substantial portion of ourproduction and development facilities are situated in Germany, Sweden, theUnited States, Switzerland, China, Finland, India and Italy. We also own orlease other properties, including office buildings, warehouses, research anddevelopment facilities and sales offices in many countries. We own essentiallyall of the machinery and equipment used in our manufacturing operations.

From time to time, we havea surplus of space arising from acquisitions, production efficiencies and/orrestructuring of operations. Normally, we seek to sell such surplus space whichmay involve leasing property to third parties for an interim period.

The net book value of ourproperty, plant and equipment as of December 31, 2006 was $2,811 million,of which machinery and equipment represented $1,272 million, land and buildingsrepresented $1,366 million and construction in progress of $173 million. Webelieve that our current facilities are in good condition and are adequate tomeet the requirements of our present and foreseeable future industrialoperations.

**Item4A.**                Unresolved StaffComments

Not applicable.

**Item5.**                        Operatingand Financial Review and Prospects

*You should read the following discussion of ourfinancial condition and results of operations in conjunction with ourConsolidated Financial Statements and the related notes and other financialinformation contained elsewhere in this annual report. This discussion containsforward-looking statements that involve*

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*risks and uncertainties,including those discussed in “Item 3. Key Information—Risk Factors.”  See “Forward-looking statements” at thebeginning of this annual report*

**MANAGEMENTOVERVIEW**

We continued our focusduring 2006 on our core strengths: power and automation products, systems andservices that increase grid reliability and industrial productivity and resultin significant energy savings.

We have continued tobenefit from our leadership in markets where demand for our power andautomation technologies is robust, and also from the operational improvementswe continue to make in our businesses. Our strategy continues to focus onbusiness execution, cost and risk management and organic growth, which continueto enable improvements in operating performance with stronger financial resultsin our businesses.

Our goals for 2006 werecentered around three areas: Strategy, Execution and People.

**Strategy**

We believe our strategy in2006 was sound. Our businesses supported both growth and profitability as aresult of their leading market positions and competitive technologies.Furthermore, our global geographic scope has provided us with strong positionsin the high-growth regions of Asia—with particular focus on China and India—andthe Middle East, and we have continued to serve established, mature markets inEurope and North America where demand has also continued to grow.

**Execution**

Execution continued to beour top priority. We have maintained in 2006 attractive organic growth throughour range of technologies and superior service. We continued to drive ouroperating margins upward through cost control, productivity improvements andrisk control in all of our divisions except for Robotics, where we incurredcosts associated with improving the division’s operational performance coupledwith a downturn in the automotive industry. We achieved an EBIT margin of 10.6percent in 2006, versus 8.1 percent in 2005. In addition, during 2006, theplans of reorganization for our Combustion Engineering and Lummus subsidiariesbecame effective to resolve our Asbestos obligations. Our execution frameworkhas centered around our business processes, regular business and projectreviews, a flat organizational structure and a focus on compliance.

**People**

We continued during 2006 to build on our soundfoundation as an attractive, dynamic global employer. We focused on retainingand recruiting quality people for our growth areas. Our professional developmentprogram has continued to center around values, leadership and business ethics,and our corporate culture has continued to be grounded in compliance to ourpolicies and applicable laws. While we continue to deal with compliance issueswe believe that our zero tolerance policy has improved the compliance culture.

**Outlook**

The business environmentfor ABB in 2007 is expected to remain favorable. High demand for powertransmission and distribution infrastructure is expected to continue in Asia,the Middle East and the Americas. Equipment replacement and improved networkefficiency and reliability are forecast to be the drivers of higher demand inEurope and North America. Automation-related industrial investments areexpected to continue in most sectors. Overall, automation-related demand growthis expected to be strongest in Asia and the Americas in 2007, with more modestgrowth in Europe. In view of the extraordinarily high order growth ratesexperienced in 2006, order growth is expected to moderate in 2007.

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**APPLICATIONOF CRITICAL ACCOUNTING POLICIES**

**General**

We prepare ourConsolidated Financial Statements in accordance with United States generallyaccepted accounting principles (U.S. GAAP).

The preparation of ourfinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses, and therelated disclosure of contingent assets and liabilities. We evaluate ourestimates on an ongoing basis, including, but not limited to, those related to:costs expected to be incurred to complete projects; costs of product guaranteesand warranties; provisions for bad debts; recoverability of inventories,investments, fixed assets, goodwill and other intangible assets; income taxrelated expenses and accruals; provisions for restructuring; gross profitmargins on long-term construction-type contracts; pensions and otherpostretirement benefit assumptions; and contingencies and litigation. We baseour estimates on historical experience and on various other assumptions that webelieve to be reasonable under the circumstances, the results of which form thebasis for making judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other sources. Actual results may differfrom these estimates under different assumptions or conditions.

We deem an accountingpolicy to be critical if it requires an accounting estimate to be made based onassumptions about matters that are highly uncertain at the time the estimate ismade, and if different estimates that reasonably could have been used, or ifchanges in the accounting estimates that are reasonably likely to occurperiodically, could materially impact our Consolidated Financial Statements. Wealso deem an accounting policy to be critical when the application of suchpolicy is essential to our ongoing operations. We believe the followingcritical accounting policies reflect significant estimates and assumptions thatwe use in preparing our Consolidated Financial Statements. These policiesshould be considered when reading our Consolidated Financial Statements.

**Revenues and cost of sales recognition**

We recognize revenues whenpersuasive evidence of an arrangement exists to sell products and/or services,the price is fixed or determinable, collectibility is reasonably assured andupon transfer of title, including the risks and rewards of ownership, or uponthe rendering of services. When multiple elements, such as products andservices, are contained in a single arrangement or in a series of relatedarrangements with the same customer, we allocate revenue to each element basedon its relative fair value, provided that such element meets the criteria fortreatment as a separate unit of accounting. The allocation of the sales pricebetween delivered elements and undelivered elements might affect the amount ofrevenue recorded in certain periods, but would not change the total revenuerecognized on the contract. Revenues from short-term or non-customer specificcontracts to deliver products or services are recognized upon completion of thecontract. Revenues from these contracts that contain customer acceptanceprovisions are deferred, in whole or in part, until customer acceptance occurs,or we have demonstrated the customer specified objective criteria are satisfiedor the contractual acceptance provisions have lapsed.

These revenue recognitionmethods require the collectibility of the revenues recognized to be reasonablyassured. When recording the respective accounts receivable, allowances arecalculated to estimate those receivables that will not be collected. Thesereserves assume a level of default based on historical information, as well asknowledge about specific invoices and customers. The risk remains that adifferent number of defaults will occur than originally estimated. As such, theamount of revenues recognized might exceed or fall below that which will becollected, resulting in a change in earnings in the future. The risk ofdeterioration is likely to increase during periods of significant negativeindustry or economic trends.

Revenues under long-termcontracts are recognized using the percentage-of-completion method ofaccounting pursuant to Statement of Position 81-1, *Accounting for Performance of Construction-Type andCertain Production-Type Contracts*. We principally use thecost-to-cost or delivery events methods to measure progress towards completionon contracts. We determine the method to be used by type of 

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contractbased on our experience and judgment as to which method best measures actualprogress towards completion.

Thepercentage-of-completion method of accounting involves the use of assumptionsand projections, principally relating to future material, labor, and overheadcosts. As a consequence, there is a risk that total contract costs will exceedthose we originally estimated. This risk increases if the duration of acontract increases or if the project is a fixed-price turnkey project, becausethere is a higher probability that the circumstances upon which we originallydeveloped estimates will change, resulting in increased costs that we may notrecover. Factors that could cause costs to increase include:

·                    unanticipatedtechnical problems with equipment supplied or developed by us which may requirethat we incur additional costs for us to remedy;

·                    changes in thecost of components, materials or labor;

·                    difficultiesin obtaining required governmental permits or approvals;

·                    projectmodifications creating unanticipated costs;

·                    suppliers’ orsubcontractors’ failure to perform;

·                    penaltiesincurred as a result of not completing portions of the project in accordancewith agreed upon time limits; and

·                    delays causedby unexpected conditions or events.

Changes in our initialassumptions, which we review on a regular basis between balance sheet dates,may result in revisions to estimated costs, current earnings and anticipatedearnings. We recognize these changes in the period in which the changes inestimates are determined. By recognizing changes in estimates cumulatively,recorded revenue and costs to date reflect the current estimates of the stageof completion. Additionally, losses on long-term contracts are recognized inthe period when they are identified and are based upon the anticipated excessof contract costs over the related contract revenues.

We accrue anticipatedcosts for warranties when we recognize the revenue on the related contracts.Warranty costs include calculated costs arising from imperfections in design,material and workmanship in our products. Although we generally makeassessments on an overall, statistical basis, we make individual assessments oncontracts with risks resulting from order-specific conditions or guarantees.There is a risk that actual warranty costs may exceed the amounts provided for,which would result in a deterioration of earnings in the future when theseactual costs are determined.

Revenues undercost-reimbursement contracts are recognized as costs are incurred. Shipping andhandling costs are recorded as a component of cost of sales.

As a result of the abovepolicies, judgment in the selection and application of revenue recognitionmethods must be made.

**Accounting for discontinued operations**

In accordance with ourstrategy, we have sold and plan to sell certain businesses that are not part ofour core businesses. Statement of Financial Accounting Standards (SFAS) No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets* (SFAS 144), broadened the presentation ofdiscontinued operations to include disposal transactions involving less than anentire reporting segment, when certain criteria are met. The purpose of SFAS144 is to allow historically comparable data to be available to investorswithout the distortions created by divestments or the closure or abandonment ofbusinesses, thereby improving the predictive value of financial statements.SFAS 144 requires the revenues and results, net of taxes, of certaindivestments and abandonments, to be classified as discontinued operations belowincome from continuing operations in our Consolidated Income Statements andrequires the related assets and liabilities to be classified as assets orliabilities held for sale and in discontinued operations in our ConsolidatedBalance Sheets.

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In order to classify abusiness as a discontinued operation, SFAS 144 requires that certain criteriabe met. In certain cases, significant interpretation is required to determinethe appropriate classification. Changes in plans regarding the sale of abusiness may affect our interpretation as to whether a business should beclassified as a discontinued operation. Reclassification to or fromdiscontinuing operations may have a material impact on our income fromcontinuing operations and the individual components thereof.

In the ConsolidatedStatements of Cash Flows, we have included the businesses classified asdiscontinued operations together with continuing operations in the individualline items within cash from operating, investing and financing activities, aspermitted by U.S. GAAP.

For a more detaileddescription of our discontinued operations, see “Discontinued operations” andNote 3 Held for sale and discontinued operations to our Consolidated FinancialStatements.

**Goodwill and other intangible assets**

We review goodwill forimpairment annually on October 1 and additionally whenever events orchanges in circumstances indicate the carrying value of an asset may not berecoverable in accordance with SFAS No. 142, *Goodwill andOther Intangible Assets* (SFAS 142). SFAS 142 requires that atwo-step impairment test be performed on goodwill. In the first step, wecompare the fair value of each reporting unit to its carrying value. Ourreporting units represent the reportable segments identified in Note 25 to ourConsolidated Financial Statements. We use a discounted cash flow model todetermine the fair value of reporting units. If the fair value of the reportingunit exceeds the carrying value of the net assets assigned to that unit,goodwill is not impaired and no further testing is performed. If the carryingvalue of the net assets assigned to the reporting unit exceeds the fair valueof the reporting unit, then we must perform the second step to determine theimplied fair value of the reporting unit’s goodwill and compare it to thecarrying value of the reporting unit’s goodwill. If the carrying value of areporting unit’s goodwill exceeds its implied fair value, then we record animpairment loss equal to the difference.

We review intangibleassets in accordance with SFAS 144, and accordingly test for impairment uponthe occurrence of certain triggering events, such as a decision to divest abusiness or projected losses of an entity.

Cash flow models used inevaluating impairments are dependent on a number of factors including estimatesof future cash flows and other variables, and require that we make significantestimates and judgments involving variables such as sales volumes, salesprices, sales growth, production and operating costs, capital expenditures,market conditions and other economic factors. Further, discount rates used inthe discounted cash flow model to calculate the fair value require thedetermination of variables such as the risk free rate and the equity marketrisk premium. We base our fair value estimates on assumptions we believe to bereasonable, but which are unpredictable and inherently uncertain. Actual futureresults may differ from those estimates. Additionally, we also consider ourmarket capitalization on the date we perform the analysis.

We record any related impairmentcharge in other income (expense), net, in our Consolidated Income Statement,unless it is related to a discontinued operation, in which case the charge isrecorded in loss from discontinued operations, net of tax.

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**Pension andpostretirement benefits**

As more fully described in Note 20 to our ConsolidatedFinancial Statements, we operate pension plans that cover a large portion ofour employees. We use actuarial valuations to determine our pension andpostretirement benefit costs and credits. The amounts calculated depend on avariety of key assumptions, including discount rates and expected return onplan assets. We are required to consider current market conditions, includingchanges in interest rates, in selecting these assumptions. The discount ratesare reviewed regularly and considered for adjustment annually based on changesin long-term, highly rated corporate bond yields. Decreases in the discountrates result in an increase in the projected benefit obligation and in pensioncosts.

Under U.S. GAAP, we accumulate and amortize overfuture periods actual results that differ from the assumptions used. Therefore,actual results generally affect our recognized expense for pension and otherpostretirement benefit obligations in future periods.

The “unfunded” balance, which can increase or decreasebased on the performance of the financial markets or changes in our assumptionsregarding rates, does not represent a mandatory short-term cash obligation.Instead, the unfunded balance of a pension plan is the difference between theprojected benefit obligation to employees (PBO) and the fair value of the planassets. While we comply with appropriate statutory funding requirements, as of December 31,2006 and 2005, the unfunded balance of our pension plans were $173 million and$734 million. At December 31, 2006, in accordance with SFAS No. 158, *Employers’ Accounting for Defined Benefit Pension andOther Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106and 123(R) *(SFAS 158), we recorded in our Consolidated BalanceSheet a net liability of $418 million in relation to pension and other postretirement benefits. As of December 31, 2005, prior to the adoption ofSFAS 158, we recorded in our Consolidated Balance Sheet a net liability of $438million in relation to pension and other post retirement benefits. Theaccumulated other comprehensive loss, net of tax, includes $629 million and$214 million of pension and other postretirement benefit obligations at December 31,2006 and 2005, respectively. Our other postretirement plan liabilities exceededplan assets by $245 million and $270 million as of December 31, 2006 and2005, respectively.

The expected return on plan assets is reviewedregularly and considered for adjustment annually based on current and expectedasset allocations and represents the long-term return expected to be achieved.Decreases in the expected return on plan assets result in an increase topension costs. An increase or decrease of 0.5 percent in the expected long-termrate of asset return would have decreased or increased, respectively, the netperiodic benefit cost in 2006 by approximately $42 million.

Holding all other assumptions constant, a 25 basispoint decrease in the discount rate would have increased the PBO by $264million, while a 25 basis point increase in the discount rate would havedecreased the PBO by $254 million.

The determinations of pension expense and pensionfunding are based on a variety of rules and regulations. Changes in these rules andregulations could impact the calculation of pension plan liabilities and thevaluation of pension plan assets. They may also result in higher pension costs,additional financial statement disclosure and accelerate and increase the needto fund our pension plans. There are currently a number of legislativeproposals being considered that, if enacted, would change the current rules.Most of these proposals would accelerate the pension funding as compared to thefunding under existing rules.

We have multiplenon-pension postretirement benefit plans. Our health care plans are generallycontributory with participants’ contributions adjusted annually. For purposesof estimating our health care costs, we have assumed health care cost increasesper annum to be 11.76 percent for 2007, then gradually declining to 4.97percent per annum in 2014, and to remain at that level thereafter.

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**Taxes**

In preparing our Consolidated Financial Statements, weare required to estimate income taxes in each of the jurisdictions in which weoperate. We account for deferred taxes by using the asset and liability method.Under this method, we determine deferred tax assets and liabilities based ontemporary differences between the financial reporting and the tax bases of assetsand liabilities. The differences are measured using the enacted tax rates andlaws that are expected to be in effect when the differences are expected toreverse. We recognize a deferred tax asset when it is probable that the assetwill be realized. We regularly review our deferred tax assets forrecoverability and establish a valuation allowance based upon historicallosses, projected future taxable income and the expected timing of thereversals of existing temporary differences. To the extent we increase ordecrease this allowance in a period, we recognize the change in the allowancewithin provision for taxes in the Consolidated Income Statements unless thechange relates to discontinued operations, in which case the change is recordedin loss from discontinued operations, net of tax. Unforeseen changes in taxrates and tax laws as well as differences in the projected taxable income ascompared to the actual taxable income may affect these estimates.

We operate in numerous tax jurisdictions and, as a result,are regularly subject to audit by tax authorities. We provide for taxcontingencies, including potential tax audits, on the basis of the technicalmerits of the contingency, including applicable tax law, OECD guidelines andour best estimates of the facts and circumstances. Although we believe that ourtax estimates are reasonable and that appropriate tax reserves have been made,the final determination of tax audits and any related litigation could bedifferent than that which is reflected in our income tax provisions andaccruals.

Accounting for taxcontingencies requires that an estimated loss from a contingency be accrued asa charge to income if it is probable that an asset has been impaired or aliability has been incurred, and the amount of the loss can be reasonablyestimated. The required amount of provision for contingencies of any type maychange in the future due to new developments.

**Consolidation**

We evaluate our investments in operating companies,ventures and other types of investments for purposes of determining whetherconsolidation or the cost or equity method of accounting is appropriate. Thisdetermination is based upon our ability to retain and exercise control throughour decision-making powers and our ability to exercise significant influenceover the entity, as well as our ownership interests in the entity.

Material changes in our ability to retain control andexercise significant influence over an entity could change the accountingmethod between consolidations or the cost or equity methods, which could have amaterial impact on our Consolidated Financial Statements.

Additionally, pursuant to Financial AccountingStandards Board (FASB) Interpretation No. 46, *Consolidationof Variable Interest Entities—an interpretation of ARB No. 51*(FIN 46) and revised Interpretation No. 46 (FIN 46(R)), we consolidate ourinterest in variable interest entities (VIEs) when we are considered theprimary beneficiary. For those VIEs where we are not the primary beneficiary,we apply our existing consolidation policies in accordance with U.S. GAAP.

In determining the primarybeneficiary of a VIE, we are required to make projections of expected lossesand expected residual returns to be generated by that VIE. These projectionsrequire us to use assumptions, including assumptions regarding the probabilityof cash flows. Expected losses and expected residual returns materiallydifferent from those projected could identify another entity as the primarybeneficiary. A change in the contractual arrangements or ownership between theparties involved in the VIE could have an impact on our determination of theprimary beneficiary, which in turn could have a material impact on ourConsolidated Financial Statements.

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**Contingencies**

As more fully described inthe Section below entitled “Contingencies and retained liabilities” and inNote 17 to our Consolidated Financial Statements, we are subject toproceedings, lawsuits and other claims and inquiries related to asbestos,environmental, labor, product, regulatory and other matters. We are required toassess the likelihood of any adverse judgments or outcomes to these matters, aswell as potential ranges of probable losses. A determination of the amount ofprovision required, if any, for these contingencies is made after analysis ofeach individual issue, often with assistance from both internal and externallegal counsel and technical experts. The required amount of a provision for acontingency of any type may change in the future due to new developments in theparticular matter, including changes in the approach to its resolution.

**Restructuring**

Certain restructuringprovisions include estimates pertaining to employee termination costs and thesettlements of contractual obligations resulting from our actions. The actualcosts may differ from these estimates due to subsequent developments such asvoluntary retirement of employees and other business developments.Restructuring costs are recorded in various lines within the ConsolidatedIncome Statements depending on the nature of the charges. Employee terminationcosts are generally recorded in cost of sales or selling, general andadministrative expenses, depending on the function of the employee. Assetimpairments and sublease shortfall costs are recorded in other income (expense),net, in the Consolidated Income Statements.

**NEW ACCOUNTINGPRONOUNCEMENTS**

In June 2006, the FASB issued Interpretation No. 48,*Accounting for Uncertainty in Income Taxes*(FIN 48). Among other things, FIN 48 requires applying a two step approach to recognizingand measuring uncertain tax positions accounted for in accordance with SFAS No. 109,*Accounting for Income Taxes* (SFAS109). The first step is to evaluate the tax position for recognition bydetermining if the weight of available evidence indicates it is more likelythan not that the position will be sustained on audit, including resolution ofrelated appeals or litigation processes, if any. The second step is to measurethe tax benefit as the largest amount which is more than 50 percent likely tobe realized upon ultimate settlement. This new guidance will be effective forus on January 1, 2007. We expect the transition effects to consist ofreclassification of certain income tax-related liabilities in our ConsolidatedBalance Sheets. We expect a reclassification of approximately $350 million to$450 million primarily between certain current and non-current liabilities, andan immaterial adjustment to opening retained earnings. As required by FIN 48,prior periods will not be restated.

In September 2006, the FASB issued SFAS No. 157*, Fair Value Measurements* (SFAS 157). SFAS157 defines fair value, establishes a framework for measuring fair value andexpands disclosures about fair value measurements. SFAS 157 does not requireany new fair value measurements and eliminates inconsistencies in guidancefound in various prior accounting pronouncements. SFAS 157 provides a singledefinition for fair value that is to be applied consistently for all accountingapplications, and also generally describes and prioritizes according toreliability the methods and inputs used in valuations. SFAS 157 will beeffective for us on January 1, 2008. We are currently evaluating andassessing the impact of adopting SFAS 157 on our Consolidated FinancialStatements.

In June 2006, theFASB ratified Emerging Issues Task Force (EITF) Issue No. 06-3, *How Taxes Collected from Customers and Remitted to GovernmentalAuthorities Should Be Presented in the Income Statement (That Is, Gross VersusNet Presentation)* (EITF 06-3). EITF 06-3 allowscompanies to present in their income statement any taxes assessed by agovernmental authority that are directly imposed on revenue-producingtransactions between a seller and a customer, such as sales, use, value-addedand some 

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excisetaxes, on either a gross (included in revenues and costs) or a net (excludedfrom revenues) basis. EITF 06-3 will be effective for us in interimperiods and fiscal years beginning after December 15, 2006. We presentthese transactions on a net basis and intend to continue this presentation inthe future, therefore we do not expect the adoption of EITF 06-3 willhave any impact on our Consolidated Financial Statements.

**ACQUISITIONS,INVESTMENTS AND DIVESTITURES**

**Acquisitions andinvestments**

During 2006, 2005 and2004, we invested $3 million, $27 million and $24 million, respectively, in newbusinesses, joint ventures or affiliated companies.

**Divestitures ofbusinesses, joint ventures and affiliated companies**

In 2006, 2005 and 2004, wereceived (paid) cash, net of cash disposed, from sales of businesses, jointventures and affiliated companies of $27 million, $(97) million and $1,182million, respectively. In relation to these transactions, we recognized gainsin 2006, 2005 and 2004 within other income (expense), net, of $3 million,$21 million and $52 million, respectively. We also recognized losses related tothe sale of operations in 2006, 2005, and 2004 within loss from discontinuedoperations, net of tax, of $83 million, $16 million and $63 million,respectively.

**Divestitures in2006**

In December 2006, we sold our Cable business inIreland. The Cable business in Ireland had revenues of $95 million, $76million, and $79 million for the years ended December 31, 2006, 2005 and2004, respectively. Net losses reported for 2006, 2005 and 2004 were $48million, $15 million and $24 million, respectively and were recorded in lossesfrom discontinued operations, net of tax. The majority of the $48 millionloss reported in 2006 related to the sale of the business.

In 2006, we sold our PowerLines businesses in Venezuela and South Africa and we expect to complete thesale of our remaining Power Lines business in Brazil and Mexico in 2007. ThePower Lines businesses in Venezuela and South Africa had revenues of $8million, $18 million, and $29 million and net income (loss) of ($1) million, $0million and $1 million for the years ended December 31, 2006, 2005 and2004, respectively. The businesses in Brazil and Mexico had revenues of $80million, $84 million and $50 million and net income (loss) of ($4)million, $3 million and $2 million for the years ended December 31, 2006,2005 and 2004, respectively. Net income (loss) reported in each year wasrecorded in loss from discontinued operations, net of tax.

**Divestitures in2005**

In November 2005, we completed the sale of ourremaining Structured Finance business by divesting our Lease portfolio businessin Finland. At the time of sale, the Lease portfolio business held lease andloan financial receivables of approximately $300 million and was the lastremaining major entity of our Structured Finance business. In 2005, we recordeda loss of $28 million in loss from discontinued operations, net of tax,principally related to the loss on the sale of the business.

In 2005, we sold our Control Valves business in Japan.The Control Valves business had revenues of $26 million and $31 million as wellas net income of $15 million and $3 million recorded in discontinued operationsin 2005 and 2004, respectively. The net income recorded in 2005 includes $14million related to the gain on the sale of our Control Valves business,recorded in loss from discontinued operations, net of tax.

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In 2005, we completed the sale of our Foundrybusiness. The Foundry business had revenues of $41 million in both 2005and 2004, and net losses of $1 million and $17 million recorded in discontinuedoperations, net of tax in 2005 and 2004, respectively.

In 2005, we completed the sale of our Power Linesbusinesses in Nigeria, Italy and Germany. These businesses had revenues of $27million and $117 million and net losses of $12 million and $75 million in 2005and 2004 respectively, recorded in loss from discontinued operations, net oftax.

In 2005, we also sold ourequity interest in the Termobahia power project in Brazil for $46 million, andrecorded a loss in other income (expense), net, of $4 million in 2005 relatedto this investment.

**Divestitures in2004**

In 2004, we sold our Upstream Oil, Gas andPetrochemicals business for an initial sales price of $925 million. Netcash proceeds from the sale were approximately $800 million, reflecting theinitial sales price of $925 million adjusted for unfunded pension liabilitiesand changes in net working capital. The Upstream Oil, Gas and Petrochemicalsbusiness had revenues of $855 million and net losses of $70 million in 2004.

In 2004, we completed the sale of our Reinsurancebusiness, net cash proceeds of approximately $280 million. The Reinsurancebusiness recorded losses totaling $41 million in loss from discontinuedoperations, net of tax, and revenues of $139 million in 2004.

We sold the portion of our Building Systems businessoperating in Switzerland in 2004 for gross cash proceeds of approximately $39million, but retained a 10 percent ownership interest. In 2004, we recognized anet gain on disposal of $12 million, before tax, in other income (expense),net.

In addition, in 2004, we sold our entire 15.7 percentequity interest in IXYS Corporation for approximately $42 million and recordeda gain, before tax, of $20 million in other income (expense), net.

In 2004, we also sold abusiness in Sweden for $11 million, resulting in a gain on disposal of $7million, before tax, in other income (expense), net. Revenues and net incomefrom this business and investments were not significant in 2004.

**Other divestitures**

During 2006, 2005 and 2004, we sold several operatingunits and investments, excluding the divestments disclosed above, for totalproceeds of $9 million, $24 million and $39 million, respectively, andrecognized net gains on disposal of $3 million, $25 million and $13 million,respectively, which are included in other income (expense), net. Revenues andnet income from these businesses and investments were not significant in 2006,2005 and 2004.

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**EXCHANGE RATES**

We report ourfinancial results in U.S. dollars (USD). A significant amount of our revenues,expenses, assets and liabilities are denominated in other currencies due to ourglobal operations. As a consequence, movements in exchange rates betweencurrencies may affect:

·       ourprofitability;

·       thecomparability of our results between periods; and

·       thecarrying value of our assets and liabilities.

We must translate non-USD denominated results ofoperations, assets and liabilities to USD in our Consolidated FinancialStatements. Balance sheet items are translated to USD using year-end currencyexchange rates. Income statement and cash flow items are translated to USDusing the average currency exchange rate over the relevant period.

Increases and decreases in the value of the USDagainst other currencies will affect our reported results of operations in ourConsolidated Income Statement and the value of certain of our assets andliabilities in our Consolidated Balance Sheet, even if our results of operationsor the value of those assets and liabilities have not changed in their originalcurrency. Because of the impact foreign exchange rates have on our reportedresults of operations and the reported value of our assets and liabilities,changes in foreign exchange rates could significantly affect the comparabilityof our reported results of operations between periods and result in significantchanges to the reported value of our assets, liabilities and stockholders’equity, as has been the case during the period from 2004 through 2006.

While we operate globally and report our financialresults in USD, because of the location of our significant operations andbecause our headquarters are in Switzerland, exchange rate movements betweenthe USD and both the euro (EUR) and the Swiss franc (CHF) are of particularimportance to us.

Theexchange rates between the USD and the EUR and the USD and the CHF as of December 31,2006, 2005, and 2004, were as follows.
| Exchange rates into $ | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| EUR 1.00                        |       | 1.32       |       | 1.18     |       | 1.37     |       |
| CHF 1.00                        |       | 0.82       |       | 0.76     |       | 0.88     |       |

 

Theaverage exchange rates between the USD and the EUR and the USD and the CHF forthe years ended December 31, 2006, 2005 and 2004, were as follows.
| Exchange rates into $ | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| EUR 1.00                             |       | 1.25       |       | 1.25     |       | 1.25     |       |
| CHF 1.00                             |       | 0.80       |       | 0.81     |       | 0.81     |       |

 

When we incur expenses that are not denominated in thesame currency as the related revenues, foreign exchange rate fluctuations couldaffect our profitability. To mitigate the impact of exchange rate movements onour profitability, it is our policy to enter into forward foreign exchangecontracts to manage the foreign exchange risk of our operations.

In 2006,approximately 87 percent of our consolidated revenues were reported incurrencies other than USD. The following percentages of our consolidatedrevenues were reported in the following currencies:

·       Euro,approximately 31 percent,

·       Chineserenminbi, approximately 8 percent,

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·       Swedishkrona, approximately 7 percent,

·       Swissfranc, approximately 5 percent and

·       Indianrupee, approximately 4 percent.

In 2006,approximately 86 percent of our consolidated cost of sales and selling, generaland administrative expenses were reported in currencies other than USD. Thefollowing percentages of our consolidated cost of sales and selling, generaland administrative expenses were reported in the following currencies:

·       Euro,approximately 31 percent,

·       Chineserenminbi, approximately 7 percent,

·       Swedishkrona, approximately 6 percent,

·       Swissfranc, approximately 4 percent and

·       Indianrupee, approximately 4 percent.

We also incur expenses other than cost of sales andselling, general and administrative expenses in various currencies.

The results of operations and financial position ofmany of our non-United States subsidiaries are reported in the currencies ofthe countries in which those subsidiaries reside. We call these currencies “localcurrencies”. Local currency financial information is then translated into USDat applicable exchange rates for inclusion in our Consolidated FinancialStatements.

The discussion of our results of operations belowprovides certain information with respect to orders, revenues, earnings beforeinterest and taxes and other measures as reported in local currencies (as wellas in USD). We measure period-to-period variations in local currency results byusing a constant foreign exchange rate for all periods under comparison.Differences in our results of operations in local currencies as compared to ourresults of operations in USD are caused exclusively by changes in currencyexchange rates.

While we consider ourresults of operations as measured in local currencies to be a significantindicator of business performance, local currency information should not berelied upon to the exclusion of U.S. GAAP financial measures. Instead, localcurrencies reflect an additional measure of comparability and provide a meansof viewing aspects of our operations that, when viewed together with the U.S.GAAP results and our reconciliations, provide a more complete understanding offactors and trends affecting the business. Because local currency informationis not standardized, it may not be possible to compare our local currencyinformation to other companies’ financial measures that have the same or asimilar title. We strongly encourage investors to review our financialstatements and publicly-filed reports in their entirety, and not to rely on anysingle financial measure.

**ORDERS**

We book and report an order when a binding contractualagreement has been concluded with the customer covering, at a minimum, theprice and scope of products or services to be supplied, the delivery scheduleand the payment terms. The reported value of an order corresponds to theundiscounted value of revenues that we expect to recognize following deliveryof the goods or services subject to the order, less any trade discounts andexcluding any value added or sales tax. The value of orders received during agiven period of time represents the sum of the value of all orders receivedduring the period, adjusted to reflect the aggregate value of any changes tothe value of orders received during the period and orders existing at thebeginning of the period. These adjustments, which may in the aggregate increaseor decrease the 

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orders reported during theperiod, may include changes in the estimated order price up to the date ofcontractual performance, changes in the scope of products or services ordered,cancellations of orders and returns of delivered goods.

The undiscounted value of revenues we expect togenerate from our orders at any point in time is represented by our orderbacklog. Approximately 15 percent of the value of total orders we recorded in2006 were “large orders,” which we define as orders from third partiesinvolving at least $15 million of products or services. Approximately 75percent of the large orders of 2006 were recorded by our Power Systems andProcess Automation divisions. Non-core and Other activities account for 16percent of total large orders in 2006, representing the orders received by ourOil, Gas and Petrochemicals business. The Power Products, Automation Productsand Robotics divisions account for the remainder of the total large ordersduring 2006. The remaining portion of total orders recorded in 2006 was “baseorders”, which we define as orders from third parties for less than $15 millionof products or services.

The level of ordersfluctuates from year to year. Arrangements included in any particular order canbe complex and unique to that order. Portions of our business involve ordersfor long-term projects that can take months or years to complete and many largeorders result in revenues in periods after the order is booked. However, thelevel of large orders, and orders generally, cannot be used to accuratelypredict future revenues or operating performance. Orders that have been placedcan be cancelled, delayed or modified by the customer. These actions can reduceor delay any future revenues from the order, or may result in the eliminationof the order.

**PERFORMANCEMEASURES**

We evaluate theperformance of our divisions primarily based on orders received, revenues,earnings before interest and taxes (EBIT), and EBIT as a percentage of revenues(EBIT margin). The orders, revenues and EBIT of our divisions includeinterdivisional transactions. In 2006 and 2005, over 90 percent of our coredivisions’ orders and revenues were from third-party customers. EBIT is theamount resulting from the subtraction of our cost of sales, selling, generaland administrative expenses and other income (expense), net, from our revenues.

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**ANALYSIS OF RESULTSOF OPERATIONS**

Ourresults from operations were as follows:

| ** **                                                                       | ** ** | **Year ended December 31,**                                               | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
|                                                                                  | ** ** | **     2006     **                     | ** ** | **     2005     ** | ** ** | **     2004     ** | ** ** |
| ** **                                                                       | ** ** | **(U.S. dollars in millions, except per share data)** | ** ** |
| Orders                                                                           |       |                                                                                     | 28,401     |   |   |   | 23,194 |   |   |   | 21,185 |   |   |
| Order backlog(1)                                                                 |       |                                                                                     | 16,953     |   |   |   | 11,956 |   |   |   | 12,167 |   |   |
| Revenues                                                                         |       |                                                                                     | 24,412     |   |   |   | 22,012 |   |   |   | 20,149 |   |   |
| Cost of sales                                                                    |       |                                                                                     | (17,541    | ) |   |   | (16,405 | ) |   |   | (15,241 | ) |   |
| Gross profit                                                                     |       |                                                                                     | 6,871      |   |   |   | 5,607 |   |   |   | 4,908 |   |   |
| Selling, general  and administrative expenses                                    |       |                                                                                     | (4,434     | ) |   |   | (3,883 | ) |   |   | (3,777 | ) |   |
| Other income  (expense), net                                                     |       |                                                                                     | 149        |   |   |   | 54 |   |   |   | (40 | ) |   |
| EBIT                                                                             |       |                                                                                     | 2,586      |   |   |   | 1,778 |   |   |   | 1,091 |   |   |
| Net interest and  other finance expense                                          |       |                                                                                     | (153       | ) |   |   | (246 | ) |   |   | (209 | ) |   |
| Provision for  income taxes                                                      |       |                                                                                     | (697       | ) |   |   | (490 | ) |   |   | (338 | ) |   |
| Minority interest                                                                |       |                                                                                     | (179       | ) |   |   | (131 | ) |   |   | (102 | ) |   |
| Income from  continuing operations before cumulative effect of accounting change |       |                                                                                     | 1,557      |   |   |   | 911 |   |   |   | 442 |   |   |
| Loss from  discontinued operations, net of tax                                   |       |                                                                                     | (167       | ) |   |   | (171 | ) |   |   | (477 | ) |   |
| Cumulative effect  of accounting change, net of tax                              |       |                                                                                     | —     |   |   |   | (5 | ) |   |   | — |   |   |
| Net income (loss)                                                                |       |                                                                                     | 1,390      |   |   |   | 735 |   |   |   | (35 | ) |   |
| Basic earnings  (loss) per share:                                                |       |                                                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Income from continuing operations before cumulative  effect of accounting change |       |                                                                                     | 0.73       |   |   |   | 0.45 |   |   |   | 0.22 |   |   |
| Net income (loss)                                                                |       |                                                                                     | 0.65       |   |   |   | 0.36 |   |   |   | (0.02 | ) |   |
| Diluted earnings  (loss) per share:                                              |       |                                                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Income from continuing operations before cumulative  effect of accounting change |       |                                                                                     | 0.71       |   |   |   | 0.44 |   |   |   | 0.22 |   |   |
| Net income (loss)                                                                |       |                                                                                     | 0.63       |   |   |   | 0.36 |   |   |   | (0.02 | ) |   |

 

----

(1)             as of December 31

A more detailed discussion of the orders, revenues,and EBIT for our individual divisions and other businesses follows in thesections below entitled “Power Products”, “Power Systems”, “Automation Products”,“Process Automation”, “Robotics”, “Non-core and Other activities”, “Corporate”and “Discontinued operations”.

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**Orders**

| ** **                                       | ** ** | **Year ended December 31,**                                                                                       | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                  | ** ** | **          2006          ** | ** ** | **         2005         ** | ** ** | **         2004        ** | ** ** |
| ** **                                       | ** ** | **(U.S. dollars in millions, except per share data)**                                         | ** ** |
| Power Products                                   |       |                                                                                                                             | 8,743      |   |   |   | 6,879 |   |   |   | 5,888 |   |   |
| Power Systems                                    |       |                                                                                                                             | 5,733      |   |   |   | 4,468 |   |   |   | 4,108 |   |   |
| Automation  Products                             |       |                                                                                                                             | 7,706      |   |   |   | 6,210 |   |   |   | 5,487 |   |   |
| Process  Automation                              |       |                                                                                                                             | 6,550      |   |   |   | 5,400 |   |   |   | 4,695 |   |   |
| Robotics                                         |       |                                                                                                                             | 1,240      |   |   |   | 1,496 |   |   |   | 1,544 |   |   |
| Core divisions                                   |       |                                                                                                                             | 29,972     |   |   |   | 24,453 |   |   |   | 21,722 |   |   |
| Non-core and  Other activities                   |       |                                                                                                                             | 1,551      |   |   |   | 1,059 |   |   |   | 1,723 |   |   |
| Oil, Gas and  Petrochemicals                     |       |                                                                                                                             | 1,184      |   |   |   | 697 |   |   |   | 1,216 |   |   |
| Other Non-core  activities                       |       |                                                                                                                             | 367        |   |   |   | 362 |   |   |   | 507 |   |   |
| Corporate/Other  and inter-division eliminations |       |                                                                                                                             | (3,122     | ) |   |   | (2,318 | ) |   |   | (2,260 | ) |   |
| Total                                            |       |                                                                                                                             | 28,401     |   |   |   | 23,194 |   |   |   | 21,185 |   |   |

 

Our orders in 2006 increased by 22 percent (22 percentin local currencies) to $28,401 million. All core divisions, except Robotics,reported growth in the range of 21 percent to 28 percent in both USD and inlocal currencies. Our Power Systems division benefited from increasing customerinvestments in power grid expansion and refurbishment, reporting strong ordergrowth as it successfully pursued a number of large substation projects. Ordergrowth in our Process Automation division was recorded across the board in theoil and gas, marine, minerals, pulp and paper and turbochargers businesses. OurPower Products division reported significant growth, especially in thetransformers business. Orders in our Automation Products division benefitedfrom increasing demand from industrial end-customers, OEMs and systemintegrators in the industrial markets. In our Power Products and AutomationProducts divisions, volume growth was also driven by price increases to offsethigher raw material costs. Orders in our Robotics division further decreasedreflecting a continued slowdown in the automotive market. The increase oforders in Non-core and Other activities was the result of large orders receivedby our Oil, Gas and Petrochemicals business.

In 2005, our orders grew by 9 percent (9 percent inlocal currencies) and our Power Products, Power Systems, Automation Products,and Process Automation divisions all reported significant increases in theirrespective orders. We started to experience a slowdown of business in theautomotive sector in 2005, resulting in lower orders received as compared to2004 for our Robotics division. Orders in Non-core and Other activities in 2005decreased by 39 percent (38 percent in local currencies). This was mainly dueto changes in the bidding policy in our Oil, Gas, and Petrochemicals businessin order to reduce the number of projects performed under long-term fixed pricecontracts and to increase the number of projects providing for thereimbursement of expenses as incurred.

Large orders in 2006 increased by 77 percent (75percent in local currencies) to $4,326 million, compared to the 7 percent (7percent in local currencies) decrease reported in 2005. The relative share oflarge orders compared to the total orders increased from 11 percent in 2005 to 15percent in 2006.

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Wedetermine the geographic distribution of our orders based on the location ofthe customer, which may be different from the ultimate destination of theproducts’ end use. The geographic distribution of our consolidated orders in2006, 2005 and 2004 was approximately as follows:

| ** **              | ** ** | **Year ended December 31,**    | ** ** |
|-------------------------|------------|-----------------------------------------------|------------|
| ** **              | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **              | ** ** | **(U.S. dollars in millions)** | ** ** |
| Europe                  |       | 12,547                                        |       | 10,545 |   | 10,607 |   |
| The Americas            |       | 5,183                                         |       | 4,443 |   | 3,742 |   |
| Asia                    |       | 6,998                                         |       | 5,773 |   | 4,979 |   |
| Middle East and  Africa |       | 3,673                                         |       | 2,433 |   | 1,857 |   |
| Total                   |       | 28,401                                        |       | 23,194 |   | 21,185 |   |

 

In 2006, orders from Europe increased by 19 percent(18 percent in local currencies) as utilities customers in this regioncontinued to invest in power grid upgrades and interconnection to increase theefficiency and reliability of their networks. In particular, we experiencedsignificant increases in Russia, Germany, Italy, Sweden and Norway. Orders fromthe Americas increased by 17 percent (15 percent in local currencies), asdemand for refurbishing aging power equipment and upgrades in the industrialsector to achieve energy efficiency continued, particularly in Canada and theUnited States. The order development in South America increased by 10 percent(5 percent in local currencies) mainly driven by higher demand in Argentina andChile. Orders from Asia increased by 21 percent (21 percent in localcurrencies) as our business in this region continued to benefit from the rapidpace of development especially in China and India, where investment in newinfrastructure increased to support their economic growth. Orders from MEAincreased by 51 percent (52 percent in local currencies) due to growing demandfueled by the need for power infrastructure to support growth in the oil andgas sector. We experienced generally strong demand from industrial customers inall regions which was driven by the need to improve efficiency in the face ofhigh energy and raw material prices, and was supported by the current strengthin the global economy.

Orders in 2005 from Europewere unchanged in both reporting and local currencies as compared to 2004, asmoderate growth in western Europe offset a decrease in eastern Europe, causedmainly by a reduction in large projects. Orders from the Americas grew 19percent (16 percent in local currencies), driven by strong demand for powerinfrastructure and automation products in South America. Growth in orders fromthe Americas was also supported by demand in North America, specifically in theUnited States for power systems and equipment. Orders in Asia increased 16percent (14 percent in local currencies), reflecting investments in power andindustry infrastructure, predominantly in India. Orders from MEA rose 31percent (31 percent in local currencies), primarily as a result of several largeorders for power infrastructure projects.

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**Order backlog**

| ** **                                       | ** ** | **Year ended December 31,**    | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                       | ** ** | **(U.S. dollars in millions)** | ** ** |
| Power Products                                   |       | 4,947                                         |       | 3,499 |   | 3,192 |   |
| Power Systems                                    |       | 5,627                                         |       | 4,085 |   | 4,283 |   |
| Automation  Products                             |       | 2,439                                         |       | 1,417 |   | 1,200 |   |
| Process  Automation                              |       | 3,991                                         |       | 2,647 |   | 2,585 |   |
| Robotics                                         |       | 441                                           |       | 506 |   | 723 |   |
| Core divisions                                   |       | 17,445                                        |       | 12,154 |   | 11,983 |   |
| Non-core and  Other activities                   |       | 1,046                                         |       | 802 |   | 1,336 |   |
| Oil, Gas and  Petrochemicals                     |       | 1,022                                         |       | 774 |   | 1,251 |   |
| Other Non-core  activities                       |       | 24                                            |       | 28 |   | 85 |   |
| Corporate/Other  and inter-division eliminations |       | (1,538                                        | )          | (1,000 | ) | (1,152 | ) |
| Total                                            |       | 16,953                                        |       | 11,956 |   | 12,167 |   |

 

As a result of the strong growth in orders received,order backlog at the end of 2006 increased by $4,997 million, or 42 percent (33percent in local currencies) to $16,953 million, despite higher revenue growth.Growth in the order backlog was further supported by an increased volume oflarge orders with long delivery schedules, particularly in our Power Systemsdivision, Process Automation division and the Oil, Gas and Petrochemicalsbusiness.

The order backlog in 2005decreased by $211 million, or 2 percent (increased 8 percent in localcurrencies), to $11,956 million. The order backlog in our core divisionsincreased by 1 percent (11 percent in local currencies) which was more thanoffset by a 40 percent decline (34 percent in local currencies) in the orderbacklog in our Non-core and Other activities mainly due to lower orders in ourOil, Gas and Petrochemicals business.

**Revenues**

| ** **                                       | ** ** | **Year ended December 31,**    | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                       | ** ** | **(U.S. dollars in millions)** | ** ** |
| Power Products                                   |       | 7,422                                         |       | 6,307 |   | 5,621 |   |
| Power Systems                                    |       | 4,544                                         |       | 4,085 |   | 3,744 |   |
| Automation  Products                             |       | 6,837                                         |       | 5,897 |   | 5,385 |   |
| Process  Automation                              |       | 5,448                                         |       | 4,996 |   | 4,635 |   |
| Robotics                                         |       | 1,288                                         |       | 1,699 |   | 1,451 |   |
| Core divisions                                   |       | 25,539                                        |       | 22,984 |   | 20,836 |   |
| Non-core and  Other activities                   |       | 1,369                                         |       | 1,348 |   | 1,668 |   |
| Oil, Gas and  Petrochemicals                     |       | 988                                           |       | 933 |   | 1,079 |   |
| Other Non-core  activities                       |       | 381                                           |       | 415 |   | 589 |   |
| Corporate/Other  and inter-division eliminations |       | (2,496                                        | )          | (2,320 | ) | (2,355 | ) |
| Total                                            |       | 24,412                                        |       | 22,012 |   | 20,149 |   |

 

Revenues in 2006 increased by $2,400 million or 11percent (10 percent in local currencies), to $24,412 million. Revenues in PowerProducts and Automation Products increased by 18 percent (16 percent in localcurrencies) and 16 percent (15 percent in local currencies), respectively, as aresult of increased order intake, higher capacity utilization to execute theincreasing volume of orders received and price increases to compensate for thehigher cost of raw materials. The execution of system orders, particularlylarge orders from the order backlog at the beginning of the year and thosereceived in the first half of 2006, contributed to revenue growth in the PowerSystems and Process Automation divisions, which recorded 

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growth of 11 percent (10percent in local currencies) and 9 percent (8 percent in local currencies),respectively, in 2006. The slowdown in the automotive market during 2005 and2006 was reflected in our Robotics division revenues, which declined by 24percent (25 percent in local currencies). Non-core and Other activitiesreported slightly higher revenues resulting from large projects in the Oil, Gasand Petrochemicals business.

In 2005, revenues increased by $1,863 million, or 9percent (8 percent in local currencies), to $22,012 million from $20,149million in 2004. Also in 2005, revenue growth reflected a higher level ofexecution of orders from the order backlog and from new orders received during2005 in most of our core divisions. The revenue decrease in Non-core and Otheractivities was primarily due to lower order volume in the Oil, Gas, andPetrochemicals business following changes in its bidding policies to refrainfrom long-term fixed-price contracts.

Wedetermine the geographic distribution of our revenues based on the location ofthe customer, which may be different from the ultimate destination of theproducts’ end use. The geographic distribution of our consolidated revenuesover the three year period ending December 31, was approximately asfollows:

| ** **              | ** ** | **Year ended December 31,**    | ** ** |
|-------------------------|------------|-----------------------------------------------|------------|
|                         | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **              | ** ** | **(U.S. dollars in millions)** | ** ** |
| Europe                  |       | 11,435                                        |       | 10,709 |   | 10,289 |   |
| The Americas            |       | 4,526                                         |       | 4,231 |   | 3,557 |   |
| Asia                    |       | 6,103                                         |       | 5,127 |   | 4,261 |   |
| Middle East and  Africa |       | 2,348                                         |       | 1,945 |   | 2,042 |   |
| Total                   |       | 24,412                                        |       | 22,012 |   | 20,149 |   |

 

Revenues in Europe increased by 7 percent (6 percentin local currencies) in 2006. In particular we experienced significantincreases in revenues in Russia, Germany, Italy, Sweden and Norway. However, asa result of the rapid growth in other regions, the relative share of ordersfrom the European market decreased to 47 percent of our total orders in 2006,compared to 49 percent in 2005. Revenues from Asia, which increased by 19percent (18 percent in local currencies), derived mainly from China and India,and accounted for 25 percent of total revenues, compared to 23 percent a yearearlier. Revenues in the Americas increased by 7 percent (5 percent in localcurrencies), and by the end of 2006 represented 18 percent of the total grouprevenues, compared to 19 percent in the previous year. Revenues from MEAaccounted for a 10 percent share of total group revenues, compared to 9 percentin 2005, which represented an increase of 21 percent compared to 2005.

Revenues in Europeincreased by 4 percent (4 percent in local currencies) in 2005 compared to2004. The increased revenues from our core divisions in this region more thanoffset a reduction in revenues from our Non-core and Other activities. Revenuesfrom the Americas increased by 19 percent in 2005 (16 percent in localcurrencies) compared to 2004. The increase in 2005 primarily resulted from theexecution of large projects in Mexico, Canada, Brazil and the United States.Revenues from Asia increased 20 percent (18 percent in local currencies) in2005, as a result of market growth in China, India, Australia and South Korea.Revenues from MEA decreased 5 percent in 2005 (6 percent in local currencies)relative to 2004, following a lower volume of orders received during 2004.

**Cost of sales**

Cost of sales increased by $1,136 million, or 7percent (6 percent in local currencies), to $17,541 million in 2006, after anincrease in 2005 of $1,164 million, or 8 percent (7 percent in localcurrencies), primarily due to increased volume of revenues and purchase priceincreases in some raw materials.

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Cost of sales consists primarily of labor, rawmaterials and related components. Cost of sales also includes provisions forwarranty claims, contract losses and project penalties, employee severanceexpenses as well as order-related development expenses incurred in connectionwith projects for which corresponding revenues were recognized.

Order-related development expenses are recorded incost of sales, and amounted to $840 million, $726 million and $723 million in2006, 2005 and 2004, respectively. Order-related development expenses areinitially recorded in inventories as work-in-progress, and are reflected incost of sales at the time revenue is recognized.

The overall gross profitmargin continued to increase, from 24.4 percent in 2004, to 25.5 percent in2005 to 28.1 percent in 2006. Aside from higher capacity utilization fromincreasing volumes, margin improvements were attributable to internal processimprovement programs initiated in the last few years. Higher productivitylevels, savings from supply chain management, and improved project execution,including strict monitoring of risks, were the main factors contributing to themargin improvements in 2006 and 2005.

**Selling, generaland administrative expenses**

Thecomponents of selling, general and administrative expenses were as follows:

| ** **                                                                                                       | ** ** | **Year ended December 31,**    | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
|                                                                                                                  | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                       | ** ** | **(U.S. dollars in millions)** | ** ** |
| Selling expenses                                                                                                 |       | (2,238                                        | )          | (2,076 | ) | (1,863 | ) |
| Selling expenses  as a percentage of orders received                                                             |       | 7.9                                           | %          | 9.0 | % | 8.8 | % |
| General and  administrative expenses                                                                             |       | (2,196                                        | )          | (1,807 | ) | (1,914 | ) |
| General and  administrative expenses as a percentage of revenues                                                 |       | 9.0                                           | %          | 8.2 | % | 9.5 | % |
| Total selling,  general and administrative expenses                                                              |       | (4,434                                        | )          | (3,883 | ) | (3,777 | ) |
| Total selling, general  and administrative expenses as a percentage of the average orders received  and revenues |       | 16.8                                          | %          | 17.2 | % | 18.3 | % |

 

Selling, general and administrative expenses increasedby $551 million or 14 percent (13 percent in local currencies) to $4,434million in 2006, from $3,883 million in 2005. In 2005, selling, general andadministrative expenses increased by $106 million, or 3 percent (2 percent inlocal currencies), to $3,883 million from $3,777 million in 2004.

Selling expenses in 2006 increased by $162 million to$2,238 million from $2,076 million in 2005. In 2005, selling expenses increasedby $213 million, from $1,863 million reported in 2004. Higher selling expensesin the last two years reflected increased selling activities in line with thegrowing market demand, especially in high growth markets in Asia. Special salesprograms and selling costs associated with new joint ventures, especially inthe emerging markets, have further contributed to the increase in sellingexpenses. Expressed as a percentage of orders received, selling expensesdecreased by 1.1 percentage points in 2006, relative to 2005 after increasingby 0.2 percent in 2005 compared to 2004.

General and administrative expenses increased by $389million to $2,196 million in 2006, after decreasing by $107 million to $1,807million in 2005 from $1,914 million in 2004. General and administrativeexpenses included non-order related R&D which increased 14 percent in 2006,relative to 2005 after increasing 4 percent in 2005 compared to 2004. Expressedas a percentage of revenues, the total general and administrative expensesincreased by 0.8 percent in 2006, compared to 2005 after decreasing by 1.3percent in 2005 relative to 2004. Increased development activities, primarilyin our Power Systems and Power Products divisions and costs incurred toimplement incremental internal control measures to comply with the provisionsof the Sarbanes Oxley Act of 2002, were the main drivers for the increase inthe general and administrative expenses. In 2004, an increase in the generaland administrative expenses in the 

55

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core divisions was morethan offset by a reduction in expenses in Non-core and Other activities andCorporate driven by a lower level of business activity and lower corporatecosts.

Total selling, general and administrative expenses,which are related to both orders received and revenues, expressed as apercentage of the average of orders received and revenues, decreased in 2006 by0.4 percent to 16.8 percent from 17.2 percent in 2005 which was lower than the18.3 percent recorded in 2004 signifying the improvements in the overallrelative cost levels compared to the business volumes.

**Other income (expense), net**

| ** **                                                  | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------|------------|
|                                                             | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                  | ** ** | **(U.S  dollars.in millions)**             | ** ** |
| Restructuring  expenses                                     |       |                                       | 3          |   |   |   | (51 | ) |   | (141 | ) |
| Capital gains,  net                                         |       |                                       | 75         |   |   |   | 62 |   |   | 80 |   |
| Asset write-downs                                           |       |                                       | (12        | ) |   |   | (58 | ) |   | (93 | ) |
| Income from  licenses, equity accounted companies and other |       |                                       | 83         |   |   |   | 101 |   |   | 114 |   |
| Total                                                       |       |                                       | 149        |   |   |   | 54 |   |   | (40 | ) |

 

Other income (expense), net, typically consists ofrestructuring expenses, gains or losses from the sale of businesses, gains orlosses from the sale or disposal of property, plant and equipment, assetwrite-downs, our share of income or loss from equity accounted companies,principally from our Equity Ventures business, and license income.

Restructuring costs are recorded in various lineswithin the Consolidated Income Statements depending on the nature of thecharges. The reduction of a restructuring liability, due to a change inestimate, led to income of $3 million reported as restructuring expenses inother income (expense), net in 2006. Restructuring expenses in 2005 included $18million in our Automation Products division, $6 million in our Roboticsdivision, $11 million in our Power Products division, primarily related tofactory closings and streamlining operations in Europe, and $16 million inNon-core and Other activities, mainly in real estate. We implemented majorrestructuring programs in previous periods focused on increasing productivityand streamlining operations, particularly in Non-core and Other activities tohelp prepare the businesses for divestment. Restructuring expenses recorded in2004 were primarily from the execution of these restructuring programs.

In 2006 and 2005, respectively, the capital gains,net, included approximately $65 million and $45 million of gains from the saleof land and buildings in Europe. Capital gains, net, in 2005 also included $18million in gains on the sale of shares and participations in our EquityVentures business and other transactions. Capital gains, net, in 2004 includedgains of $33 million on the sale of land and buildings, $20 million on the saleof our shares of IXYS Corporation and lesser amounts from a number of smallertransactions.

Asset write-downs in 2006 included the impairment oflong-lived assets of $8 million, primarily in Europe, and a few minorwrite-downs on loans and investments. In 2005, asset write-downs amounted to$36 million on long-lived assets, mainly in Europe, and $22 million on loansand investments, primarily in our Equity Ventures business. Asset write-downsin 2004 included charges of $93 million in respect of goodwill, an e-businessinvestment, property, plant and equipment and notes receivable in our PowerProducts division.

License income in 2006 was $3 million, most of whichcame from Turbocharger licensing to third parties in Asia. In 2005 and 2004,license income was $9 million and $24 million, respectively, primarilyreflecting income from liquid crystal display licenses. The reduction inlicense income in 2005 and 2006 reflects the expiration of certain licenseagreements.

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Income from equity accounted companies mainlyrepresented our share of net income from our equity investments. In 2006, theseconsisted primarily of $67 million from Jorf Lasfar Energy Company, Casablanca(power project in Morocco, Africa) and relatively smaller amounts of incomefrom various other equity accounted companies in India and in the UnitedStates.

Income from equityaccounted companies was $109 million and $87 million in 2005 and 2004,respectively, which included income of $62 million and $68 million in 2005 and2004, respectively, from our investment in Jorf Lasfar, and income of $23million in 2005 from our investment in a power project in Neyveli, India.

**Earnings beforeinterest and taxes**

OurEBIT over the three year period was as follows:

| ** **                                       | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------|------------|
|                                                  | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                       | ** ** | **(U.S.  dollars in millions)**            | ** ** |
| Power Products                                   |       | 961                                        |       | 616 |   | 514 |   |
| Power Systems                                    |       | 279                                        |       | 187 |   | 119 |   |
| Automation  Products                             |       | 1,053                                      |       | 822 |   | 673 |   |
| Process  Automation                              |       | 541                                        |       | 398 |   | 271 |   |
| Robotics                                         |       | 1                                          |       | 91 |   | 80 |   |
| Core divisions                                   |       | 2,835                                      |       | 2,114 |   | 1,657 |   |
| Non-core and  Other activities                   |       | 72                                         |       | 65 |   | (26 | ) |
| Oil, Gas and  Petrochemicals                     |       | 1                                          |       | 48 |   | (4 | ) |
| Other Non-core  activities                       |       | 71                                         |       | 17 |   | (22 | ) |
| Corporate/Other  and inter-division eliminations |       | (321                                       | )          | (401 | ) | (540 | ) |
| Total                                            |       | 2,586                                      |       | 1,778 |   | 1,091 |   |

 

EBIT increased by $808 million, or 45 percent (44percent in local currencies), to $2,586 million in 2006, and by $687 million,or 63 percent (61 percent in local currencies), to $1,778 million in 2005.

TheEBIT margins for our core divisions and on a consolidated basis for the yearsended December 31, 2006, 2005 and 2004, are as follows:

| ** **           | ** ** | **Year ended December 31,** | ** ** |
|----------------------|------------|--------------------------------------------|------------|
|                      | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Power Products       |       | 12.9                                       | %          | 9.8 | % | 9.1 | % |
| Power Systems        |       | 6.1                                        | %          | 4.6 | % | 3.2 | % |
| Automation  Products |       | 15.4                                       | %          | 13.9 | % | 12.5 | % |
| Process  Automation  |       | 9.9                                        | %          | 8.0 | % | 5.8 | % |
| Robotics             |       | 0.1                                        | %          | 5.4 | % | 5.5 | % |
| Core divisions       |       | 11.1                                       | %          | 9.2 | % | 8.0 | % |
| Consolidated         |       | 10.6                                       | %          | 8.1 | % | 5.4 | % |

 

The higher group EBIT andEBIT margin were achieved through higher contribution from increased revenuesand increased factory loadings, better execution of large projects and sourcingof production capacity, components and materials from low cost countries.

57

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**Net interest andother finance expense**

Net interest and other finance expense consists ofinterest and dividend income offset by interest and other finance expense.Interest and other finance expense includes interest expense on our debt,securitization costs, the amortization of upfront costs associated with our creditfacility and our debt securities, commitment fees on our bank facility, gains(losses) on marketable securities, the accretion to par of our $968 millionconvertible bonds up until their conversion and, in 2004, expenses associatedwith the change in fair value of the embedded derivative that was in thesebonds.

| ** **                              | ** ** | **Year ended December 31,**    | ** ** |
|-----------------------------------------|------------|-----------------------------------------------|------------|
|                                         | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                              | ** ** | **(U.S. dollars in millions)** | ** ** |
| Interest and  dividend income           |       | 151                                           |       | 157 |   | 151 |   |
| Interest and  other finance expense     |       | (304                                          | )          | (403 | ) | (360 | ) |
| Net interest and other  finance expense |       | (153                                          | )          | (246 | ) | (209 | ) |

 

Interest and dividend income decreased slightly in2006 compared to 2005 despite an increase in interest rates and an overallincrease in the aggregate balance of cash and equivalents and marketablesecurities and short-term investments. The principal reason was that a higherproportion of the cash and equivalents, marketable securities and short-terminvestments balances during 2006 were invested in accumulating net asset value money-marketfunds where the income is not distributed but is reflected by an increase invalue of the funds’ shares and is realized upon the sale of such investments.Gains on the sale of such securities are recorded in interest and other financeexpense in the table above.

Interest and dividend income increased slightly in2005 compared to 2004 due to an increase in interest rates partially offset bya reduction in the average balance of cash and marketable securities.

Interest and other finance expense decreased in 2006to $304 million from $403 million in 2005. Although the induced conversion ofour $968 million convertible bonds during the second quarter of 2006 resultedin savings in interest expense in 2006, these were substantially offset by thecosts of the conversion and the accelerated amortization of deferred issuancecosts on these bonds. Our average debt level in 2006 was lower than in 2005 butthis benefit in terms of interest expense was offset by the continuing upwardtrend in interest rates and a charge of $19 million in 2006 relating to theaccretion to par of our discounted asbestos obligations. The higher incomegenerated from money market funds in 2006 compared to 2005, contributed tolower interest and finance expense in 2006 compared to 2005, as did thereduction in securitization expense associated with lower levels ofsecuritization in 2006 compared to 2005, and the non-recurrence in 2006 ofcertain items occurring in 2005, such as the $19 million loss on repurchase ofbonds and the write-off of $12 million of unamortized costs on a $1 billioncredit facility replaced prior to expiry.

Interest and other finance expense increased in 2005to $403 million compared to $360 million in 2004. Debt maturities and debtrepurchases during 2005 resulted in a lower average level of debt in 2005 thanin 2004 which, together with the interest rate swaps that we entered into in2005 to effectively convert the interest obligations on our 6.5% 650 millioneuro bonds and our 3.75% 500 million Swiss franc bonds from fixed to floatingrate, resulted in a lower total interest expense on debt in 2005 than in 2004,despite an increase in market interest rates during 2005. Interest and otherfinance expense in 2005 also includes $18 million expense in respect of ourgroup securitization programs, a loss on repurchase of our bonds of $19million, the write-off of $12 million of unamortized costs on our $1 billioncredit facility and $31 million expense relating to the accretion to par of our$968 million convertible bonds.

Interest and other financeexpense in 2004 included a $43 million non-cash gain on available for salemarketable securities contributed to our German pension funds, $20 millionexpense relating to our group securitization programs and $52 million relatedto the change in fair value of the embedded derivative and the amortization ofthe related discount on issuance from our $968 million convertible bonds.

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**Provision for income taxes**

| ** **                                                                                                          | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                          | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                          | ** ** | **(U.S.  dollars in millions)**            | ** ** |
| Income from  continuing operations, before taxes and minority   interest and cumulative effect of accounting change |       | 2,433                                      |       | 1,532 |   | 882 |   |
| Provision for  income taxes                                                                                         |       | (697                                       | )          | (490 | ) | (338 | ) |
| Effective tax rate for  the year                                                                                    |       | 28.6                                       | %          | 32.0 | % | 38.3 | % |

 

The provision for taxes in 2006 was $697 million,representing an effective tax rate for the year of 28.6 percent. The provisionfor taxes in 2006 includes an expense of approximately $35 million relating toitems that are deducted for accounting purposes but not for the purpose ofcomputing taxable income, such as interest expense, state and local taxes onproductive activities, and other non-deductible expenses. Furthermore, theprovision for taxes in 2006, also includes an expense of approximately $70 millionrelating to a net increase in tax accruals. The main driver of the positive taxrate development over the last three years is the increased earnings from lowertax jurisdictions.

The provision for taxes in 2005 was $490 million,representing an effective tax rate for the year of 32.0 percent. The provisionfor taxes in 2005 includes an expense of approximately $60 million relating toitems that are deducted for accounting purposes but not for the purpose ofcomputing taxable income, such as interest expense, state and local taxes onproductive activities, and other non-deductible expenses.

The provision for taxes in2004 was $338 million, representing an effective tax rate for the year of 38.3percent. The provision for taxes in 2004 includes an expense relating to avaluation allowance of $115 million, predominantly relating to our operationsin Canada and France, a benefit of approximately $45 million from lossesrelating to a post-divestment reorganization and a benefit of approximately $39million relating to the resolution of certain prior year tax matters.

**Income fromcontinuing operations before cumulative effect of accounting change**

Income from continuing operations before cumulativeeffect of accounting change increased by $646 million to $1,557 million in 2006as compared to $911 million in 2005, primarily reflecting increased EBIT andreduced net interest and other finance expenses partly offset by an increase inthe provision for taxes in 2006.

Income from continuingoperations before cumulative effect of accounting change increased by $469million to $911 million in 2005 as compared to $442 million in 2004. Theincrease reflects improved EBIT partly offset by increases in net interest andother finance expense and provision for taxes in 2004.

**Loss fromdiscontinued operations, net of tax**

For a detailed discussionof the loss from discontinued operations, net of tax, as well as a detaileddiscussion of the results of our discontinued operations, see “Discontinuedoperations”, and Note 3 Held for sale and discontinued operations to ourConsolidated Financial Statements.

**Net income (loss)**

As a result of the factorsdiscussed above, net income improved by $655 million to $1,390 million in 2006.In 2005, net income improved by $770 million to $735 million from a net loss of$35 million in 2004.

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**Earnings (loss) per share**

| ** **                                                                          | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
|                                                                                     | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                          | ** ** | **(U.S. dollars)**                         | ** ** |
| Income from continuing  operations before cumulative   effect of accounting change: |       |                                       |       |   |   |   |   |
| Basic                                                                               |       | 0.73                                       |       | 0.45 |   | 0.22 |   |
| Diluted                                                                             |       | 0.71                                       |       | 0.44 |   | 0.22 |   |
| Loss from discontinued  operations, net of tax:                                     |       |                                       |       |   |   |   |   |
| Basic                                                                               |       | (0.08                                      | )          | (0.09 | ) | (0.24 | ) |
| Diluted                                                                             |       | (0.08                                      | )          | (0.08 | ) | (0.24 | ) |
| Net income (loss):                                                                  |       |                                       |       |   |   |   |   |
| Basic                                                                               |       | 0.65                                       |       | 0.36 |   | (0.02 | ) |
| Diluted                                                                             |       | 0.63                                       |       | 0.36 |   | (0.02 | ) |

 

Basic earnings (loss) pershare is calculated by dividing income (loss) by the weighted-average number ofshares outstanding during the year. Diluted earnings (loss) per share iscalculated by dividing income (loss) by the weighted-average number of sharesoutstanding during the year, assuming that all potentially dilutive securitieswere exercised, if dilutive. Potentially dilutive securities comprise:outstanding written call options; outstanding options and shares conditionallygranted under our employee incentive plans; and shares issuable upon conversionof our outstanding convertible bonds. See Note 23 Earnings per share to ourConsolidated Financial Statements.

**Power Products**

Thefinancial results of our Power Products division were as follows:

| ** **    | ** ** | **Year ended December 31,** | ** ** |
|---------------|------------|--------------------------------------------|------------|
| ** **    | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **    | ** ** | **(U.S.  dollars in millions)**            | ** ** |
| Orders        |       | 8,743                                      |       | 6,879 |   | 5,888 |   |
| Order backlog |       | 4,947                                      |       | 3,499 |   | 3,192 |   |
| Revenues      |       | 7,422                                      |       | 6,307 |   | 5,621 |   |
| EBIT          |       | 961                                        |       | 616 |   | 514 |   |

 

**Orders**

Orders increased by $1,864 million, or 27 percent (26percent in local currencies), to $8,743 million in 2006, due to higher demandfor power infrastructure improvements in many markets. The increase in ordersreflected growth in all businesses, led by transformers. Base orders, whichgrew by 27 percent, made up the vast majority of orders in 2006. Priceincreases to cover the increase in the cost of raw materials also contributedto the orders increase in 2006. In 2005, orders increased by $991 million, or17 percent (15 percent in local currencies), from $5,888 million, reflectinggrowth in many market segments.

The geographicdistribution of orders as a percentage of total orders over the three yearperiod for our Power Products division was approximately as follows:

| ** **              | ** ** | **Year ended December 31,** | ** ** |
|-------------------------|------------|--------------------------------------------|------------|
| ** **              | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Europe                  |       |                                       | 35         | % |   |   | 35 | % |   |   | 38 | % |   |
| The Americas            |       |                                       | 25         | % |   |   | 25 | % |   |   | 23 | % |   |
| Asia                    |       |                                       | 30         | % |   |   | 32 | % |   |   | 30 | % |   |
| Middle East and  Africa |       |                                       | 10         | % |   |   | 8 | % |   |   | 9 | % |   |
| Total                   |       |                                       | 100        | % |   |   | 100 | % |   |   | 100 | % |   |

 

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The share of orders from Middle East and Africa (MEA)increased in 2006 reflecting strong demand, supported by high oil prices andincreased investment in infrastructure in the region. Orders in Asia, thoughaccounting for a slightly lower share of the total orders relative to 2005,continued to grow strongly as demand increased in many countries, particularlyin China and India due to increased investment in grid infrastructure. Ordergrowth in the Americas increased mainly due to orders from the United Statesdriven by the need to replace aging infrastructure and to meet existingmandated reliability standards and load growth. Growth in Europe, whichcontinued to be the largest regional source of orders, was driven by thereplacement of aging infrastructure and demand for new interconnections.

The share of orders inEurope and MEA of the total division orders decreased relative to 2004,reflecting a higher proportion of increases in the Americas and Asia. Orders in2005 grew significantly and were led by the Americas, in particular Brazil,where orders doubled due to several large orders, and further growth in theUnited States. Orders in 2005, also grew in Europe, which was the division’slargest regional source of orders, primarily as a result of increased demandfrom central and eastern Europe. Orders in Asia increased significantly due toincreased power infrastructure investments in China and India. Orders in MEAincreased primarily due to increased infrastructure investments supported byrising oil prices.

**Order backlog**

Order backlog increased by $1,448 million, or 41percent (34 percent in local currencies), to $4,947 million as of December 31,2006 from $3,499 million as of December 31, 2005, as a result ofincreased order intake, particularly due to an increase in orders with longerdelivery schedules.

Order backlog increased by$307 million, or 10 percent (16 percent in local currencies), to $3,499 millionas of December 31, 2005 from $3,192 million as of December 31,2004, reflecting primarily the increase in orders received.

**Revenues**

Revenues increased by $1,115 million, or 18 percent(16 percent in local currencies), to $7,422 million in 2006 from $6,307million in 2005. Revenues increased as a result of higher order intake andsales price increases to cover increased raw material costs. Revenues increasedby $686 million, or 12 percent (11 percent in local currencies), to$6,307 million in 2005 from $5,621 million in 2004 as a result of ordergrowth experienced in many market segments, particularly in transformers.

Thegeographic distribution of revenues in 2006, 2005 and 2004 for our Power Productsdivision was approximately as follows:

| ** **              | ** ** | **Year ended December 31,** | ** ** |
|-------------------------|------------|--------------------------------------------|------------|
| ** **              | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Europe                  |       |                                       | 36         | % |   |   | 36 | % |   |   | 40 | % |   |
| The Americas            |       |                                       | 24         | % |   |   | 25 | % |   |   | 23 | % |   |
| Asia                    |       |                                       | 31         | % |   |   | 30 | % |   |   | 28 | % |   |
| Middle East and  Africa |       |                                       | 9          | % |   |   | 9 | % |   |   | 9 | % |   |
| Total                   |       |                                       | 100        | % |   |   | 100 | % |   |   | 100 | % |   |

 

Regionally, revenue growth in 2006 was led by Asia,which slightly increased its share of total revenues, reflecting higherrevenues in China and India. Revenues increased in the Americas, thoughrepresenting a slightly lower share of total division revenues, particularly inthe United States, Brazil and Venezuela. However, as a result of the rapidgrowth in Asia, the relative share of total revenues from the Americasdecreased while Europe and MEA each maintained their share of revenues comparedto 2005. 

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Revenues grew in Europe,led by Russia and Germany. In MEA the increase in revenues was driven by SaudiArabia.

Regionally, revenues in2005 were lower in Europe contributing to a decrease in the share of totaldivision revenues as demand for power transmission and distribution productswas moderate in this region, particularly in the first half of the year. Growthin China and India were the main drivers for the revenue increase andconsequently the share of revenues in Asia. The Americas share of totaldivision revenues increased slightly due to revenue growth in the region,particularly in Canada and Brazil. MEA maintained its share of total revenueswith an increase in the value of revenues relative to 2004, primarily in SaudiArabia.

**Earnings beforeinterest and taxes**

EBIT grew by $345 million, or 56 percent (54 percentin local currencies), to $961 million in 2006 from $616 million in 2005. TheEBIT margin for the division was 12.9 percent in 2006, as compared to 9.8percent in 2005. EBIT and EBIT margin benefited from higher contribution fromincreased revenues, improved factory loading across all businesses, operationaland productivity improvements, supply chain savings and lower costs related tothe transformer consolidation program, which totaled $38 million in 2006.

EBIT grew by $102 million,or 20 percent (19 percent in local currencies), to $616 million in 2005. TheEBIT margin amounted to 9.8 percent in 2005 compared to 9.1 percent in 2004,reflecting higher contribution from the increased revenues, savings from supplychain management, sourcing from low cost countries and productivityimprovements, which more than offset the total charges of $123 million relatedto the transformer consolidation program recorded in 2005.

**Power Systems**

Thefinancial results of our Power Systems division were as follows:

| ** **    | ** ** | **Year ended December 31,** | ** ** |
|---------------|------------|--------------------------------------------|------------|
| ** **    | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **    | ** ** | **(U.S.  dollars in millions)**            | ** ** |
| Orders        |       | 5,733                                      |       | 4,468 |   | 4,108 |   |
| Order backlog |       | 5,627                                      |       | 4,085 |   | 4,283 |   |
| Revenues      |       | 4,544                                      |       | 4,085 |   | 3,744 |   |
| EBIT          |       | 279                                        |       | 187 |   | 119 |   |

 

**Orders**

Orders increased by $1,265 million, or 28 percent (28percent in local currencies), to $5,733 million in 2006. The increase in ordersreflected significant growth in the number of large orders as demand for powertransmission and distribution systems remained strong in most markets. Thelargest project secured in 2006 was a $450 million order to deliver substationsto a grid expansion project in Qatar. Orders in 2005 included a $220 millionorder to deliver substations to the Gulf Grid project, while orders in 2004contained a $390 million order related to the Three Gorges hydro power projectin China.

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Thegeographic distribution of orders in 2006, 2005 and 2004 for our Power Systemsdivision was approximately as follows:

| ** **              | ** ** | **Year ended December 31,** | ** ** |
|-------------------------|------------|--------------------------------------------|------------|
| ** **              | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Europe                  |       |                                       | 38         | % |   |   | 41 | % |   |   | 41 | % |   |
| The Americas            |       |                                       | 17         | % |   |   | 16 | % |   |   | 16 | % |   |
| Asia                    |       |                                       | 16         | % |   |   | 15 | % |   |   | 26 | % |   |
| Middle East and  Africa |       |                                       | 29         | % |   |   | 28 | % |   |   | 17 | % |   |
| Total                   |       |                                       | 100        | % |   |   | 100 | % |   |   | 100 | % |   |

 

Orders in 2006 remainedstrong in MEA, as the high demand for large system projects in the regioncontinued. Order growth in Europe was based on increases in both large projectsand base orders. The growth in orders in Europe was driven by the need forinterconnections and grid upgrades. Europe continued to be the largest regionalsource of orders. However, Europe’s percentage of the division’s ordersdecreased from 41 percent in 2005 to 38 percent in 2006, due to higherproportional increases in all other regions. Order growth in North America wasmainly due to a $180 million HVDC project in Canada. India, led the orderincrease in Asia.

Order growth in 2005 wasstrong in MEA, particularly in the Middle East, as energy demand and high fuelprices drove transmission and distribution investments. Orders increased inEurope as demand in western Europe recovered and orders from central andeastern Europe slightly exceeded those in 2004. There was a modest order growthin the Americas as higher orders in South America compensated for a decrease inNorth America. Orders were down in Asia, as the $390 million Three Gorgesproject in China in 2004 could not be matched.

**Order backlog**

The order backlogincreased by $1,542 million, or 38 percent (29 percent in local currencies), to$5,627 million as of December 31, 2006, from $4,085 million as of December 31,2005, particularly reflecting the increase in large orders during 2006.

The order backlogdecreased by $198 million, or 5 percent, to $4,085 million as of December 31,2005, from $4,283 million as of December 31, 2004. In local currencies theorder backlog however increased by 6 percent, mainly reflecting the growth inorders received.

**Revenues**

Revenues increased by $459million, or 11 percent (10 percent in local currencies), to $4,544 million in2006, from $4,085 million in 2005. The revenues grew primarily as a result ofincreased project execution from the strong order backlog.

Revenues increased by $341million, or 9 percent (8 percent in local currencies), to $4,085 million in2005 from $3,744 million in 2004, principally reflecting significant growth inour Grid Systems and Network Management businesses.

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Thegeographic distribution of revenues in 2006, 2005 and 2004 for our PowerSystems division was approximately as follows:

| ** **              | ** ** | **Year ended December 31,** | ** ** |
|-------------------------|------------|--------------------------------------------|------------|
| ** **              | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Europe                  |       |                                       | 44         | % |   |   | 43 | % |   |   | 42 | % |   |
| The Americas            |       |                                       | 16         | % |   |   | 16 | % |   |   | 17 | % |   |
| Asia                    |       |                                       | 20         | % |   |   | 22 | % |   |   | 20 | % |   |
| Middle East and  Africa |       |                                       | 20         | % |   |   | 19 | % |   |   | 21 | % |   |
| Total                   |       |                                       | 100        | % |   |   | 100 | % |   |   | 100 | % |   |

 

Regionally, revenue growthin 2006 was led by MEA and mainly related to project execution in the MiddleEast. The share of regional revenues to the total division revenues decreasedin Asia and remained at the same level in the Americas in 2006 relative to 2005due to higher proportion of increases from Europe and MEA. The revenue increasein Europe was led by central and eastern Europe, with strong growth in Russia.Higher revenues in South America more than compensated for a small decrease inNorth America. The revenue increase in Asia was largely attributable to India.

The share of revenuesincreased in Europe and Asia as a reflection of the strong growth in theseregions. Revenue growth in 2005 was led by Asia, reflecting higher revenues inChina and India. Revenues increased in Europe, as higher revenues in westernEurope compensated for a small decrease in revenues in central and easternEurope. Revenues were unchanged in MEA and were slightly down in the Americas,primarily due to a decrease in the United States.

**Earnings before interest and taxes**

EBIT for our Power Systemsdivision grew by $92 million, or 49 percent (46 percent in local currencies),to $279 million in 2006. The EBIT margin for the division was 6.1 percent in2006, compared to 4.6 percent in 2005. EBIT and EBIT margin increased as aresult of higher contribution from increased revenues, higher capacityutilization, particularly in our HVDC/FACTS and Power Cable businesses and thecontinued focus on project selection and execution.

EBIT improved in 2005 by$68 million, or 57 percent (52 percent in local currencies), to $187 million in2005 from $119 million in 2004. The EBIT margin for the division was 4.6 percentin 2005 as compared to 3.2 percent in 2004. EBIT and EBIT margin improved as aresult of higher contribution from increased revenues, better capacityutilization and improved project selection and execution.

**Automation Products**

Thefinancial results of our Automation Products division were as follows:

| ** **    | ** ** | **Year ended December 31,** | ** ** |
|---------------|------------|--------------------------------------------|------------|
| ** **    | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **    | ** ** | **(U.S.  dollars in millions)**            | ** ** |
| Orders        |       | 7,706                                      |       | 6,210 |   | 5,487 |   |
| Order backlog |       | 2,439                                      |       | 1,417 |   | 1,200 |   |
| Revenues      |       | 6,837                                      |       | 5,897 |   | 5,385 |   |
| EBIT          |       | 1,053                                      |       | 822 |   | 673 |   |

 

**Orders**

Orders increased by $1,496 million, or 24 percent (23percent in local currencies), to $7,706 million in 2006. The increase in ordersreflected favorable market conditions, which drove demand for our products andsystems from end-customers, as well as OEMs and system integrators who alsoserve our industrial 

64

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markets. The divisionexperienced increased orders for its standard products, led by low-voltagedrives (LV drives), breakers and switches and low-voltage motors (LV motors).High growth rates were achieved in systems and engineered products such aspower electronic systems, medium-voltage drives (MV drives), machines andlow-voltage systems (LV systems). Growth was further supported by some largerorders received in 2006, compared to 2005.

Orders in 2005 grew by $723 million, or 13 percent (12percent in local currencies), to $6,210 million. The industrial markets gainedmomentum during 2006, which led to strong growth in LV drives, breakers andswitches, power electronic systems, MV drives and machines. The constructionmarkets in western Europe were relatively flat year over year, which led tolower growth rates for low-voltage installation material, such as wiringaccessories and enclosures compared to the other businesses serving the industrialmarkets.

Thegeographic distribution of orders in 2006, 2005 and 2004 for our AutomationProducts division was approximately as follows:

| ** **              | ** ** | **Year ended December 31,** | ** ** |
|-------------------------|------------|--------------------------------------------|------------|
| ** **              | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Europe                  |       |                                       | 63         | % |   |   | 65 | % |   |   | 68 | % |   |
| The Americas            |       |                                       | 12         | % |   |   | 12 | % |   |   | 11 | % |   |
| Asia                    |       |                                       | 20         | % |   |   | 19 | % |   |   | 17 | % |   |
| Middle East and  Africa |       |                                       | 5          | % |   |   | 4 | % |   |   | 4 | % |   |
| Total                   |       |                                       | 100        | % |   |   | 100 | % |   |   | 100 | % |   |

 

The share of orders in Asia increased in 2006,reflecting high demand for automation and energy efficiency in the region,particularly in China and India. The MEA region also increased its share oforders due to high growth in 2006, as a result of investments in the oil andgas sector. Orders in the Americas grew in 2006, reflecting a favorable market,especially in the United States. Orders also increased in Europe driven bysolid growth in the oil and gas, marine, metals and transportation sectors.

In 2005, the share of total divisional orders in Asiaincreased with strong order growth mostly in India where orders almost doubled.A higher share of total divisional orders was reported in the Americas whereorders increased in both North and South America as a result of the continuedindustrial growth. The growing need for automation products and systems tosupport the expansion in the oil and gas sector led to the growth in MEA andhelped maintain its share of total orders compared to 2004. The European marketgrew modestly with increased demand for automation products partly offset bythe relatively weak construction market. The share of orders in Europe, howeverdecreased due to the higher proportion of increases in Asia and the Americas.

**Order backlog**

The order backlog increased by $1,022 million, or 72percent (60 percent in local currencies), to $2,439 million as ofDecember 31, 2006, from $1,417 million as of December 31, 2005. Theincrease relates mainly to growth in orders related to systems and engineeredproducts, which have longer delivery times compared to standard products.

The order backlog in 2005increased by $217 million, or 18 percent (29 percent in local currencies), to$1,417 million, primarily due to increased volume of orders for large motorsand generators which have longer delivery schedules.

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**Revenues**

Revenues increased by $940 million, or 16 percent (15percent in local currencies), to $6,837 million in 2006. The growth wasachieved through a combination of higher volumes and price increases. Thelatter were initiated because of higher costs in 2006 for raw materials, suchas copper and steel.

Revenues increased by $512 million, or 10 percent (9percent in local currencies), to $5,897 million in 2005. The greatest growthwas achieved in breakers and switches, LV drives and machines, following astrong order intake for these businesses, and price increases to compensate forhigher raw material costs.

Thegeographic distribution of revenues in 2006, 2005 and 2004 for our AutomationProducts division was approximately as follows:

| ** **              | **Year ended December 31,** | ** ** |
|-------------------------|--------------------------------------------|------------|
| ** **              | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Europe                  |                                       |       | 63 | % |   |   | 66 | % |   |   | 68 | % |   |
| The Americas            |                                       |       | 12 | % |   |   | 12 | % |   |   | 11 | % |   |
| Asia                    |                                       |       | 20 | % |   |   | 18 | % |   |   | 17 | % |   |
| Middle East and  Africa |                                       |       | 5 | % |   |   | 4 | % |   |   | 4 | % |   |
| Total                   |                                       |       | 100 | % |   |   | 100 | % |   |   | 100 | % |   |

 

Regionally, the share of revenues in Asia increased withdouble-digit revenue growth, reflecting higher revenues in China and Indiawhere additional production facilities were established to serve the localmarket. Most other countries in Asia also developed strongly. Revenues grew inthe Americas to help maintain its share of the growing total revenues,particularly in the United States, Canada and Argentina as a result offavorable market conditions. With rapid growth in all other regions, the shareof revenues in Europe decreased although overall revenues increased primarilyin Italy, the UK, Spain, Denmark and Norway. Revenues were also high in MEA,especially in the Gulf region from the oil and gas sector resulting in anincrease in its total share of revenues compared to 2005.

Revenues in 2005 were higherin all regions with strong growth in Asia led by India resulting in an increasein its total share of revenues. MEA maintained its share of revenues resultingfrom growth in the oil and gas sector. Growth in Europe was not sufficient tomaintain its share of revenues and was led by northern and eastern Europe whilewestern Europe was flat due to the relatively weak construction market forinstallation materials. The share of revenues in the Americas increased,particularly in South America where they reported higher revenues due to thedelivery of a large power electronics order in Brazil.

**Earnings beforeinterest and taxes**

In 2006, EBIT for the Automation Products divisiongrew $231 million, or 28 percent (27 percent in local currencies), to $1,053million in 2006. The EBIT margin for the division was 15.4 percent in 2006,compared to 13.9 percent in 2005. EBIT and EBIT margins benefited from improvedcapacity utilization in the production and engineering facilities around theworld. The largest improvements were made in standard products such as LVdrives, breakers and switches, LV motors and control products. EBIT included a$34 million gain on the sale of real estate which was more than offset bycharges for downsizing operations in western Europe and other operationalmeasures.

In 2005, EBIT for theAutomation Products division grew $149 million, or 22 percent (22 percent inlocal currencies), to $822 million in 2005. The EBIT margin for the divisionwas 13.9 percent in 2005 as compared to 12.5 percent in 2004. The increase inEBIT in 2005 came from higher volumes and productivity improvements as severalstreamlining initiatives were completed, which more than offset costs relatedto downsizing in Europe.

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**Process Automation**

Thefinancial results of our Process Automation division were as follows:

| ** **    | ** ** | **Year ended December 31,**    | ** ** |
|---------------|------------|-----------------------------------------------|------------|
| ** **    | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **    | ** ** | **(U.S. dollars in millions)** | ** ** |
| Orders        |       | 6,550                                         |       | 5,400 |   | 4,695 |   |
| Order backlog |       | 3,991                                         |       | 2,647 |   | 2,585 |   |
| Revenues      |       | 5,448                                         |       | 4,996 |   | 4,635 |   |
| EBIT          |       | 541                                           |       | 398 |   | 271 |   |

 

**Orders**

Orders increased by $1,150 million, or 21 percent (21percent in local currencies), from $5,400 million in 2005 to $6,550 million in2006. Both large and base orders increased in 2006 compared to 2005, drivenmainly by higher demand in the marine and minerals sectors, continuedinvestments in the oil and gas sector, and greenfield projects in the pulp andpaper industry. Orders in 2005 increased by $705 million, or 15 percent (14percent in local currencies), from $4,695 million in 2004, primarily due to increaseddemand from the oil and gas and marine sectors.

Thegeographic distribution of orders in 2006, 2005 and 2004 for our ProcessAutomation division was approximately as follows:

| ** **              | ** ** | **Year ended December 31,** | ** ** |
|-------------------------|------------|--------------------------------------------|------------|
| ** **              | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Europe                  |       |                                       | 46         | % |   |   | 46 | % |   |   | 53 | % |   |
| The Americas            |       |                                       | 16         | % |   |   | 18 | % |   |   | 16 | % |   |
| Asia                    |       |                                       | 25         | % |   |   | 30 | % |   |   | 23 | % |   |
| Middle East and  Africa |       |                                       | 13         | % |   |   | 6 | % |   |   | 8 | % |   |
| Total                   |       |                                       | 100        | % |   |   | 100 | % |   |   | 100 | % |   |

 

Orders in 2006 increasedin all regions except Asia, where higher base orders were offset by lower largeorders resulting in flat development and a lower share of total orders relativeto 2005. European orders, representing a share of 46 percent of the totaldivisional orders, as they did in 2005, increased reflecting higher demand inthe marine and the oil and gas sectors. Orders in the Americas, notwithstandinga reduction of 2 percent in the share of total orders increased due to strongerdemand in the United States, growth in the services and pulp and paper sectorsin South America and strong growth in the oil and gas sector in Canada. Ordersin MEA increased significantly with high demand in the oil and gas, minerals,metals and pulp and paper sectors, more than doubling its share of totalorders.

The share of orders inAsia significantly increased in 2005 compared to 2004 with a strong ordergrowth mainly from oil and gas, metals and marine industries. The share oforders in the Americas also increased primarily from order growth in NorthAmerica, driven by increased demand from metals and the oil and gas sectorsalong with a recovery of demand in the pulp and paper industries. Europe andMEA account for a decrease in their share of orders compared to 2005 with aflat order growth in Europe and a decline in MEA due to comparatively lowerorders from the oil and gas industry where a significant large order fromAlgeria was recorded in 2004.

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**Order backlog**

The order backlog rosesubstantially by $1,344 million, or by 51 percent (40 percent in localcurrencies), to $3,991 million as of December 31, 2006, from $2,647million as of December 31, 2005. This increase was primarily due toseveral large system orders received in the marine, minerals and oil and gassectors, which are scheduled for delivery in 2007 and 2008. The order backlogas of December 31, 2005 increased by $62 million, or 2 percent (14 percentin local currencies), from $2,585 million as of December 31, 2004,reflecting an increase in orders relative to revenues during 2005.

**Revenues**

Revenues increased by $452million, or 9 percent (8 percent in local currencies), to $5,448 million in2006, from $4,996 million in 2005. Revenues increased particularly in thesystem business and notably in minerals and marine, which have particularlyhigh order backlogs. Higher revenues were also reported in the productsbusiness. During 2005, revenues increased by $361 million, or 8 percent (6percent in local currencies), from $4,635 million in 2004, primarily supportedby the execution of large projects from the order backlog.

The geographicdistribution of revenues in 2006, 2005 and 2004 for our Process Automationdivision was approximately as follows:

| ** **              | ** ** | **Year ended December 31,** | ** ** |
|-------------------------|------------|--------------------------------------------|------------|
| ** **              | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Europe                  |       |                                       | 46         | % |   |   | 53 | % |   |   | 54 | % |   |
| The Americas            |       |                                       | 19         | % |   |   | 17 | % |   |   | 16 | % |   |
| Asia                    |       |                                       | 26         | % |   |   | 22 | % |   |   | 21 | % |   |
| Middle East and  Africa |       |                                       | 9          | % |   |   | 8 | % |   |   | 9 | % |   |
| Total                   |       |                                       | 100        | % |   |   | 100 | % |   |   | 100 | % |   |

 

The share of totalrevenues in 2006 decreased in Europe and increased in all other regionscompared to 2005 as revenues increased in all regions except Europe. Revenuesin western Europe were flat year over year while revenues in central andeastern Europe were lower, mainly reflecting the revenue impact in 2005 of alarge project in Poland. The share of total revenues decreased in Europe andincreased in all other regions. Increasing demand in the United States andSouth America, supported by a higher order backlog at the beginning of the yearhelped generate higher revenues in the Americas. Revenues in Asia increasedmostly as a result of large marine and oil and gas projects in India and SouthKorea. Revenues in MEA increased, mainly from the oil and gas sector inAlgeria. Revenues in other countries in the region remained stable year overyear.

In 2005, strong revenuegrowth was recorded in Asia and the Americas mainly in China, India and theUnited States which resulted in an increase in their respective share ofrevenues. Europe decreased its share slightly, recording a single digit growthin revenues, primarily from a large project execution in Poland. Share ofrevenues in MEA decreased with lower revenues in 2005, mainly in South Africa.

**Earnings before interest and taxes**

EBIT for our ProcessAutomation division grew $143 million, or 36 percent (35 percent in localcurrencies), from $398 million in 2005 to $ 541 million in 2006. EBIT increasedby $127 million in 2005 from $271 million in 2004. The EBIT margin increased to9.9 percent from 8.0 percent in 2005 after improving from 5.8 percent in 2004.Increased contribution from higher revenues in all businesses, better executionof large projects, improved capacity utilization and ongoing cost migrationprojects all contributed to improved margins.

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**Robotics**

Thefinancial results of our Robotics division were as follows:

| ** **    | ** ** | **Year ended December 31,**    | ** ** |
|---------------|------------|-----------------------------------------------|------------|
| ** **    | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **    | ** ** | **(U.S. dollars in millions)** | ** ** |
| Orders        |       | 1,240                                         |       | 1,496 |   | 1,544 |   |
| Order backlog |       | 441                                           |       | 506 |   | 723 |   |
| Revenues      |       | 1,288                                         |       | 1,699 |   | 1,451 |   |
| EBIT          |       | 1                                             |       | 91 |   | 80 |   |

 

**Orders**

Orders decreased by $256 million, or 17 percent (18percent in local currencies), from $1,496 million in 2005 to $1,240 million in2006. Lower demand in the automotive market and greater selectivity in projectorders resulted in a decrease in orders in all parts of the business exceptservice, which remained stable. Orders from general industry, such as packagingand consumer electronics, improved in 2006.

In 2005, orders decreased by $48 million, or 3 percent(3 percent in local currencies), from $1,544 million in 2004 to $1,496 million.This decrease was primarily due to the downturn in the automotive industry.

Thegeographic distribution of orders in 2006, 2005 and 2004 for our Roboticsdivision was approximately as follows:

| ** **              | ** ** | **Year ended December 31,** | ** ** |
|-------------------------|------------|--------------------------------------------|------------|
| ** **              | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Europe                  |       |                                       | 58         | % |   |   | 52 | % |   |   | 52 | % |   |
| The Americas            |       |                                       | 25         | % |   |   | 31 | % |   |   | 32 | % |   |
| Asia                    |       |                                       | 17         | % |   |   | 17 | % |   |   | 15 | % |   |
| Middle East and  Africa |       |                                       | 0          | % |   |   | 0 | % |   |   | 1 | % |   |
| Total                   |       |                                       | 100        | % |   |   | 100 | % |   |   | 100 | % |   |

 

In 2006, the share of orders in Asia in generalremained stable although we experienced a decrease in orders mainly in Japan.An increase in demand was seen in China while decisions on some large projectshave been delayed. Orders in the Americas decreased, driven mainly by the downturnin the automotive industry, resulting in a decline in its share of orders.European orders increased as a proportion of total division orders, however,the overall value of orders reduced slightly due to lower orders in westernEurope while demand in eastern Europe started to improve.

In 2005, orders from Asiaincreased as well as the share of total divisional orders, primarily due todevelopments in the general industry. The total value of orders in Europe,which continued to be the source of more than 50 percent of total divisionalorders, were slightly lower due to a considerable slow down in the automotivesegment. Orders in the Americas decreased slightly as a small increase in SouthAmerica was offset by lower orders in North America.

**Order backlog**

Order backlog decreased by $65 million, or 13 percent(19 percent in local currencies), to $441 million as of December 31, 2006,from $506 million as of December 31, 2005, reflecting primarily thereduced order intake from the automotive sector.

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Order backlog decreased by$217 million, or 30 percent (24 percent in local currencies), to $506 millionas of December 31, 2005 from $723 million as of December 31, 2004,primarily as a result of decreased order intake during 2005.

**Revenues**

Revenues decreased by $411 million, or 24 percent (25percent in local currencies), to $1,288 million in 2006, from $1,699 million in2005. This decrease was due both to the weak automotive sector as well asgreater project selectivity, with a focus on improved profitability.

Revenues increased by $248 million, or 17 percent (17percent in local currencies), to $1,699 million in 2005 from $1,451 million in2004, principally due to the execution of large orders in the order backlog.

Thegeographic distribution of revenues in 2006, 2005 and 2004 for our Roboticsdivision was approximately as follows:

| ** **              | ** ** | **Year ended December 31,** | ** ** |
|-------------------------|------------|--------------------------------------------|------------|
| ** **              | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Europe                  |       |                                       | 57         | % |   |   | 47 | % |   |   | 59 | % |   |
| The Americas            |       |                                       | 25         | % |   |   | 37 | % |   |   | 26 | % |   |
| Asia                    |       |                                       | 18         | % |   |   | 16 | % |   |   | 15 | % |   |
| Middle East and  Africa |       |                                       | 0          | % |   |   | 0 | % |   |   | 0 | % |   |
| Total                   |       |                                       | 100        | % |   |   | 100 | % |   |   | 100 | % |   |

 

In 2006, revenues declined in all regions reflectingthe lower order intake. The share of revenues in Asia continued to grow,gaining larger importance for the division, while the downturn in the NorthAmerican automotive industry is reflected in the reduced share of revenues fromthe Americas. Revenues in central and eastern Europe remained stable at lowlevels, whereas western Europe recorded slightly lower revenues as a result ofa slow down in the automotive sector partially offset by improvements ingeneral industry.

In 2005, the share ofdivisional revenues grew in Asia, with low double-digit revenue growth led byChina. Revenues in Europe decreased with a lower share of revenues as increasesin central and eastern Europe were more than offset by lower revenues inwestern Europe. The share of total divisional revenues in the Americasincreased significantly in 2005 following the execution of several large ordersreceived in 2004.

**Earnings beforeinterest and taxes**

EBIT for our Robotics division decreased to $1million, from $91 million in 2005. The EBIT margin for the division decreasedto 0.1 percent in 2006 from 5.4 percent in 2005. Both reflect not only lowerrevenues but also costs associated with the optimization of manufacturinglocations and costs related to improving the division’s operationalperformance, such as R&D expenses for new product development and costmigration efforts, as well as charges associated with a large project.

In 2005, EBIT for our Roboticsdivision grew $11 million, or 14 percent (14 percent in local currencies), to$91 million, primarily due to lower selling, general and administrativeexpenses. The EBIT margin remained almost unchanged at 5.4 percent in 2005 ascompared to 5.5 percent in 2004, reflecting a stable development of EBITmargins across all of the division’s businesses.

**Non-core and Otheractivities**

As of December 31,2006, Non-core and Other activities constituted primarily Oil, Gas andPetrochemicals. Also included in these activities are the remaining EquityVenture investments in two 

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power plants and corporate real estate activities. In2006, we reclassified our Building Systems business in Germany to discontinuedoperations in light of our decision to divest this business.

| ** **    | ** ** | **Year ended December 31,**    | ** ** |
|---------------|------------|-----------------------------------------------|------------|
| ** **    | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **    | ** ** | **(U.S. dollars in millions)** | ** ** |
| Orders        |       | 1,551                                         |       | 1,059 |   | 1,723 |   |
| Order backlog |       | 1,046                                         |       | 802 |   | 1,336 |   |
| Revenues      |       | 1,369                                         |       | 1,348 |   | 1,668 |   |
| EBIT          |       | 72                                            |       | 65 |   | (26 | ) |

 

**Orders**

Ordersreceived in Non-core and Other activities for the years ended December 31,2006, 2005 and 2004 were as follows:

| ** **                   | ** ** | **Year ended December 31,**    | ** ** |
|------------------------------|------------|-----------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                   | ** ** | **(U.S. dollars in millions)** | ** ** |
| Non-core  activities         |       | 1,551                                         |       | 1,059 |   | 1,723 |   |
| Oil, Gas and  Petrochemicals |       | 1,184                                         |       | 697 |   | 1,216 |   |
| Other Non-core  activities   |       | 367                                           |       | 362 |   | 507 |   |

 

Orders received in Oil, Gas and Petrochemicalsincreased by $487 million, or 70 percent (66 percent in local currencies), to$1,184 million in 2006 from $697 million in 2005. The growth was driven mainlyby large orders, which increased to $704 million in 2006 from $270 million in2005. Base orders increased by 13 percent in 2006 and 8 percent in 2005. Totalorders received in Oil, Gas and Petrochemicals in 2005 decreased by 43 percent(42 percent in local currencies) to $697 million from $1,216 million in 2004.This was mainly due to changes in the bidding policy affecting particularlylarge orders which in that year experienced a decline of 67 percent.

Orders in Other Non-coreactivities mainly represent rental agreements entered into by our subsidiarycompanies with our corporate real estate management entity. These are internalorders and are therefore eliminated during the calculation of consolidatedgroup orders.

**Revenues**

Revenuesin Non-core and Other activities for the years ended December 31, 2006,2005 and 2004 were as follows:

| ** **                   | ** ** | **Year ended December 31,**    | ** ** |
|------------------------------|------------|-----------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                   | ** ** | **(U.S. dollars in millions)** | ** ** |
| Non-core  activities         |       | 1,369                                         |       | 1,348 |   | 1,668 |   |
| Oil, Gas and  Petrochemicals |       | 988                                           |       | 933 |   | 1,079 |   |
| Other Non-core  activities   |       | 381                                           |       | 415 |   | 589 |   |

 

Revenues in Oil, Gas andPetrochemicals increased by 6 percent (5 percent in local currencies), to $988million in 2006, from $933 million in 2005. Revenues did not increase in linewith orders due to the low order backlog at the end of 2005 and longer deliverytimes associated with the execution of large orders during 2006.

Revenues in our Oil, Gasand Petrochemicals business decreased by 14 percent (14 percent in localcurrencies) in 2005, to $933 million, primarily as a result of the lower ordersin the EPC business following the change in bidding policy in 2005.

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Revenues from OtherNon-core activities comprised primarily the rental income from internal realestate agreements, which are eliminated in the calculation of our totalconsolidated revenues, plus revenues from the remaining Building Systems in theUnited States and Egypt and other businesses that are ceasing operations.

**Earnings before interest and taxes**

EBITin Non-core and Other activities for the years ended December 31, 2006,2005 and 2004 were as follows:

| ** **                   | ** ** | **Year ended December 31,**    | ** ** |
|------------------------------|------------|-----------------------------------------------|------------|
| ** **                   | ** ** | **  2006  **              | ** ** | **  2005  ** | ** ** | **  2004  ** | ** ** |
| ** **                   | ** ** | **(U.S. dollars in millions)** | ** ** |
| Non-core  activities         |       |                                          | 72         |   |   |   | 65 |   |   |   | (26 | ) |   |
| Oil, Gas and  Petrochemicals |       |                                          | 1          |   |   |   | 48 |   |   |   | (4 | ) |   |
| Other Non-core  activities   |       |                                          | 71         |   |   |   | 17 |   |   |   | (22 | ) |   |

 

EBIT for the Oil, Gas andPetrochemicals business decreased to $1 million in 2006, primarily due to costsrelated to outstanding claims in a large project. In 2005, EBIT improved to $49million, relative to an EBIT loss of $4 million in 2004, largely due toimproved order intake quality, improvements in project execution in the EPCbusiness and increased profitability in the technology licensing business.

EBIT in Other Non-coreactivities for 2006 included $34 million from real estate activities, mainlygains from the sale of real estate in Europe and $61 million from EquityVentures, representing primarily income from equity investments in Morocco andIndia. Other Non-core activities EBIT also included losses, mainly from oldprojects in the remaining Building Systems and other businesses. In 2005, EBITin Other Non-core activities was represented by $69 million from EquityVentures and $10 million from real estate operations. These earnings werepartly offset by EBIT losses associated with the closure of other businessactivities. In 2004, Other Non-core activities incurred an EBIT loss of $22million, primarily due to losses from the remaining Building Systems businessesin the United States and Egypt and some retained liabilities that were notfully offset by $69 million EBIT from Equity Ventures and $16 million EBIT fromreal estate activities.

**Corporate**

Corporatecomprises headquarters and stewardship, Research and Development (R&D) andother. EBIT for our corporate division was as follows:

| ** **                    | ** ** | **Year ended December 31,**    | ** ** |
|-------------------------------|------------|-----------------------------------------------|------------|
| ** **                    | ** ** | **  2006  **              | ** ** | **  2005  ** | ** ** | **  2004  ** | ** ** |
| ** **                    | ** ** | **(U.S. dollars in millions)** | ** ** |
| Headquarters and  Stewardship |       |                                          | (224       | ) |   |   | (303 | ) |   |   | (438 | ) |   |
| Research and  Development     |       |                                          | (89        | ) |   |   | (90 | ) |   |   | (91 | ) |   |
| Other                         |       |                                          | (8         | ) |   |   | (8 | ) |   |   | (11 | ) |   |
| Total Corporate               |       |                                          | (321       | ) |   |   | (401 | ) |   |   | (540 | ) |   |

 

Headquarters andstewardship operating costs decreased by $79 million in 2006, after decreasing$135 million in 2005 as compared to 2004. The reduction in 2006 and 2005,was due to the continued focus on reducing corporate costs in the countryholding operations and in the headquarters in Zurich. Corporate R&Dexpenses continued at a similar level while costs in other, representing GroupTreasury Operations, decreased as a result of lower general administrativeexpenses.

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**Discontinued operations**

Theloss from discontinued operations, net of tax is as set forth below.

| ** **                            | ** ** | **Year ended December 31,**    | ** ** |
|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                            | ** ** | **  2006  **              | ** ** | **  2005  ** | ** ** | **  2004  ** | ** ** |
| ** **                            | ** ** | **(U.S. dollars in millions)** | ** ** |
| Asbestos                              |       |                                          | (70        | ) |   |   | (133 | ) |   |   | (262 | ) |   |
| Upstream Oil, Gas  and Petrochemicals |       |                                          | 15         |   |   |   | (1 | ) |   |   | (70 | ) |   |
| Power Lines                           |       |                                          | (5         | ) |   |   | (9 | ) |   |   | (72 | ) |   |
| Building Systems  Germany             |       |                                          | (65        | ) |   |   | (20 | ) |   |   | (14 | ) |   |
| Cable business  Ireland               |       |                                          | (48        | ) |   |   | (15 | ) |   |   | (24 | ) |   |
| Others                                |       |                                          | 6          |   |   |   | 7 |   |   |   | (35 | ) |   |
| Total                                 |       |                                          | (167       | ) |   |   | (171 | ) |   |   | (477 | ) |   |

 

Tax expense, net, indiscontinued operations represented a benefit (loss) of $18 million, $17million and ($14) million in 2006, 2005 and 2004, respectively.

**Asbestos**

An overview of ourpotential asbestos-related obligations is included separately in “Contingenciesand retained liabilities” below, as well as in Note 17 to our ConsolidatedFinancial Statements.

**Upstream Oil, Gas and Petrochemicals business**

In 2004, we sold ourUpstream Oil, Gas and Petrochemicals business for an initial sales price of$925 million. Net cash proceeds from the sale were approximately $800million, reflecting adjustments to the initial sales price for unfunded pensionliabilities and changes in net working capital. The Upstream Oil, Gas andPetrochemicals business had revenues of $855 million and net losses of $70million in 2004. In 2006, we entered into an agreement to settle certain itemswhich were disputed by the buyer of the Upstream Oil, Gas and Petrochemicalsbusiness after the closing of the transaction. In 2006, the Company recorded again of approximately $15 million in loss from discontinued operations, net oftax, related to this agreement.

**Power Lines**

During 2004, wereclassified part of our Power Lines business. The businesses that werereclassified are the Power Lines businesses in Nigeria, Italy and Germany whosesales were completed in 2005. These reclassified businesses had revenues of $27million, and $117 million and net losses recorded in loss from discontinuedoperations, net of tax, of $12 million and $75 million for the years ended December 31,2005, and 2004, respectively.

During the fourth quarterof 2005, we reclassified the remaining Power Lines businesses in Brazil,Mexico, Venezuela and South Africa to discontinued operations, on the basis ofmanagement’s plan to sell these businesses. The Power Lines businesses inVenezuela and South Africa were sold in 2006. These businesses had revenues of$8 million, $18 million, and $29 million and net income (loss) of ($1) million,$0 million and $1 million for the years ended December 31, 2006, 2005 and2004, respectively. In 2007, the Company entered into an agreement to sell thePower Lines businesses in Brazil and Mexico and expects the sale to becompleted in 2007. These businesses had revenues of $80 million, $84 millionand $50 million and net income (loss) of ($4) million, $3 million and $2million for the years ended December 31, 2006, 2005 and 2004,respectively. Net income (loss) reported in each year was recorded in loss fromdiscontinued operations, net of tax.

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**Building Systems**

During 2006, wereclassified our remaining Building Systems business in Germany to discontinuedoperations, on the basis of management’s intention to sell the remainingBuilding Systems business. This Building Systems business had revenues of $286million, $354 million, and $381 million for the years ended December 31,2006, 2005 and 2004, respectively. Net losses reported for 2006, 2005 and 2004were $65 million, $20 million and $14 million. Of the net loss reportedfor 2006, $67 million was an impairment charge based upon the expected proceedsfrom the sale of the business. In 2007, the Company entered into an agreementto sell the business and expects to complete the sale in 2007.

**Cable business**

Upon the sale during 2006,we reclassified our Cable business in Ireland to discontinued operations,formerly part of the Power Products division. The Cable business in Ireland hadrevenues of $95 million, $76 million, and $79 million for the years ended December 31,2006, 2005 and 2004, respectively. Net losses reported for 2006, 2005 and 2004were $48 million, $15 million and $24 million, respectively, recorded in lossfrom discontinued operations, net of tax. The majority of the loss reported in2006 related to the sale of the business.

**Reinsurance business**

In 2004, we completed thesale of our Reinsurance business, receiving net cash proceeds of approximately$280 million. We recognized revenues of $139 million in 2004, and lossestotaling $41 million in loss from discontinued operations, net of tax,related to the Reinsurance business.

**Foundry business**

During 2004, wereclassified our Foundry business, part of the former Automation Technologiesdivision to discontinued operations. In 2005, we completed the sale of ourFoundry business. The Foundry business had revenues of $41 million in both 2005and 2004 and net losses of $1 million and $17 million in 2005 and 2004,respectively.

**Control Valves**

In 2005, we sold ourControl Valves business in Japan which was part of the former AutomationTechnologies division. The Control Valves business had revenues of $26 millionand $31 million and net income of $15 million and $3 million in 2005 and 2004,respectively. The net income recorded in 2005 includes $14 million related tothe gain on the sale of the Control Valves business.

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**LIQUIDITYAND CAPITAL RESOURCES**

**Principal sources of funding**

In 2006, 2005 and 2004, wemet our liquidity needs principally using cash from operations, bankborrowings, divestment proceeds (primarily in 2004), and the sale ofreceivables under our securitization programs (although at a lower level in2006 and 2005 than in prior years). We believe that the cash flows generatedfrom our business are sufficient to support business operations, capitalexpenditures and the payment of dividends to shareholders.

During 2006, 2005 and2004, our financial position was strengthened by the positive cash flow fromoperating activities of $1,939 million, $1,012 million and $902 million,respectively, and, in 2004, by the proceeds from sales of businesses (net ofcash disposed) of $1,182 million. The cash generated in 2006 and 2005 enabledus to reduce the level of our securitization programs (see “SecuritizationPrograms”), to restructure or repurchase debt (see “Bond conversions, exchange,repurchase and issuance”) and to make discretionary pension contributions,while in 2004, we used the cash to repay maturing debt and to repurchase debt.The debt reductions combined with net income of $1,390 million and $735 millionin 2006 and 2005 respectively, have been the main drivers in the reduction inour gearing from 63 percent at December 31, 2004 to 52 percent at December 31,2005 and 34 percent at December 31, 2006 (see “Financial position”). Gearingis calculated as total debt divided by total debt plus stockholders’ equity(including minority interest).

We believe that ourability to obtain funding from the sources described above will continue toprovide the cash flows necessary to satisfy our working capital and capitalexpenditure requirements, as well as meet our debt repayments and otherfinancial commitments for the next twelve months. Due to the nature of ouroperations, our cash flow from operations generally tends to be weaker in thefirst half of the year than in the second half of the year.

**Interest rates**

We have obtained financingin a range of currencies and maturities and on various interest rate terms. Weuse derivatives to reduce the interest rate and/or foreign exchange exposuresarising on our debt. For example, we use interest rate swaps to effectively convertfixed rate debt into floating rate liabilities and we use cross currency swapsto effectively convert foreign currency denominated bonds into U.S. dollarliabilities.

During 2005, we enteredinto interest rate swaps to hedge our interest obligations on the 6.5% EURInstruments, due 2011, and the 3.75% CHF bonds due 2009 (see “Bonds and notes”)and to reduce the proportion of fixed rate to floating rate debt. Afterconsidering the impact of these interest rate swaps, the 6.5% EUR Instrumentseffectively became a floating rate euro obligation, while the 3.75% CHF Bondseffectively became a floating rate Swiss franc obligation.

At December 31, 2006,after considering the effects of interest rate swaps, the effective averageinterest rate on our floating rate long-term debt (including currentmaturities) of $2,188 million and our fixed rate long-term debt (includingcurrent maturities) of $199 million was 5.8 percent and 6.0 percent,respectively. This compares with an effective rate of 7.0 percent for floatingrate long-term debt of $2,002 million and 5.4 percent for fixed-rate long-termdebt of $278 million as of December 31, 2005. These figures exclude ourconvertible bonds of $820 million and $1,680 million at December 31, 2006and 2005, respectively, which bore interest at an effective rate of 3.5 percentand 4.1 percent at December 31, 2006 and 2005, respectively.

For a discussion of ouruse of derivatives to modify the characteristics of our long-term debt see Note14 to the Consolidated Financial Statements.

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**Bond conversions, exchange, repurchase and issuance**

*Bondconversion:*

During the second quarterof 2006, as part of our strategy to reduce our debt levels and lower ourfinancing costs, we announced an offer to holders of our then outstanding4.625% USD Convertible Bonds, due 2007, that contained certain incentives toinduce the bondholders to convert their bonds into our American DepositaryShares (ADSs). Approximately 98 percent of the holders accepted the conversionoffer which resulted in the issuance of approximately 105 million shares out ofcontingent capital and the delivery of ADSs to the bondholders. As at least 85percent in aggregate principal amount of bonds originally issued had beenconverted, we then exercised our right under the terms of the bonds to call theremaining outstanding 4.625% USD Convertible Bonds, due 2007, resulting inthese being converted into approximately 2 million ADSs. We met this obligationby using treasury shares. As a result of the induced conversion and oursubsequent call, ADSs totaling 107,198,176 were delivered to bondholders.

In connection with theconversion offer, we incurred charges totaling approximately $55 million,representing primarily inducement payments to bondholders and the write-off ofunamortized debt issuance costs. These additional charges approximate theamount of interest expense that we saved as a result of the conversion. Totaldebt decreased by approximately $932 million as a result of the conversion ofthe bonds, while, the impact on equity (capital stock and additional paid-incapital and treasury stock) was an increase of approximately $928 million,after consideration of certain net charges in connection with the shareissuance. Cash payments upon conversion of the bonds amounted to $72 million,including the inducement payments to bondholders and transaction costs (whichare included in the $55 million noted above), as well as otherconversion-related payments.

During the first quarterof 2007, bondholders served conversion notices for an aggregate principalamount of approximately 790 million Swiss francs (representing approximately83 million shares) out of the total 1,000 million Swiss francs 3.5% CHFConvertible Bonds, due 2010, resulting in a decrease in our total debt byapproximately $650 million and increase in our stockholders’ equity ofapproximately the same amount.

*Bond exchange:*

Also during the secondquarter of 2006, as part of our strategy to extend the term of our outstandingdebt, we completed an exchange offering related to the 9.5% EUR Instruments,due 2008, and 10% GBP Instruments, due 2009, into 4.625% EUR Instruments, due2013. Bonds with a total face value of approximately 423 million euro, out ofthe total 500 million euro outstanding, and 180 million pounds sterling, out ofthe 200 million pounds sterling outstanding, were exchanged into 4.625% EURInstruments, due 2013, with an aggregate face value of 685 million euro. In connectionwith this exchange offering, we made cash payments totaling $111 million,reflected as cash used in financing activities in the Consolidated Statement ofCash Flows for 2006.

Bonds with a total facevalue of approximately 77 million euro, of the original 9.5% EUR Instruments,due 2008, and approximately 20 million pounds sterling of the original 10% GBPInstruments, due 2009, were not tendered as part of the exchange offering andremained outstanding at December 31, 2006.

*Bond repurchases:*

There were no significantbond repurchases during 2006.

During 2005, werepurchased a portion of our debt securities with a total face value of $307million, primarily 392 million of the 3.75% CHF Bonds, due 2009, and recognizeda loss on extinguishment of debt of $19 million on the repurchases.

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During 2004, through openmarket repurchases, we repurchased a portion of our public bonds with a totalequivalent face value of $513 million. These repurchases resulted in a gain onextinguishments of debt of approximately $6 million. In addition, in July 2004,we announced tender offers to repurchase all of the outstanding 300 millioneuro 5.375% bonds due 2005 and 475 million euro 5.125% bonds due 2006, beingapproximately 275 million euro and approximately 368 million euro,respectively. In conjunction with the tender offers, we convened bondholders’meetings at which the bonds were amended, to allow us to call and redeem thosebonds that were not tendered under the respective tender offer. In September 2004,bonds validly tendered and accepted under the tender offers were settled and weexercised our option to redeem early the remaining outstanding 2005 and 2006bonds that were not tendered. The open market repurchases, combined with thetender offers and calls, resulted in a decrease in total borrowings during 2004of $1,330 million and are included in the $2,913 million repayment ofborrowings in the Consolidated Statement of Cash Flows for 2004.

**Bonds and notes**

Concurrently, butindependently of the exchange offering described above, we issued bonds with aface value of approximately 15 million euro of the 4.625% EUR Instruments, due2013, or approximately $20 million at the time of issuance. Accordingly, at December 31,2006, bonds with a face value of 700 million euro of the 4.625% EURInstruments, due 2013, are outstanding.

In 2005 and 2004, we didnot issue any bonds.

Detailsof our outstanding bonds, which represent approximately 88% and 90% of ourtotal debt of $3,282 million and $4,102 million at December 31, 2006 and2005, respectively, are as follows:

| ** **                              | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **Nominal  outstanding**        | ** ** | **Carrying  value**(1)          | ** ** | **Nominal  outstanding** | ** ** | **Carrying  value**(1) | ** ** |
| ** **                              | ** ** | **(millions)**                  | ** ** | **(millions)**                  | ** ** |
| Public bonds:                           |       |                            |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| 4.625% USD  Convertible Bonds, due 2007 |       |                            |       |                            |       |   | $ | — |   |   | USD |   | 968 |   |   | $ | 921 |   |   |
| 3.5% CHF  Convertible Bonds, due 2010   |       | CHF                             |       | 1,000                           |       |   | 820 |   |   | CHF |   | 1,000 |   |   | 759 |   |   |
| 10% GBP  Instruments, due 2009          |       | GBP                             |       | 20                              |       |   | 39 |   |   | GBP |   | 200 |   |   | 353 |   |   |
| 9.5% EUR  Instruments, due 2008         |       | EUR                             |       | 77                              |       |   | 103 |   |   | EUR |   | 500 |   |   | 614 |   |   |
| 6.5% EUR  Instruments, due 2011         |       | EUR                             |       | 650                             |       |   | 821 |   |   | EUR |   | 650 |   |   | 764 |   |   |
| 3.75% CHF Bonds,  due 2009              |       | CHF                             |       | 108                             |       |   | 86 |   |   | CHF |   | 108 |   |   | 81 |   |   |
| 4.625% EUR  Instruments, due 2013       |       | EUR                             |       | 700                             |       |   | 824 |   |   |   |   |   |   |   | — |   |   |
| Private placements                      |       |                            |       |                            |       |   | 191 |   |   |   |   |   |   |   | 181 |   |   |
| Total outstanding bonds                 |       |                            |       |                            |       |   | $ | 2,884 |   |   |   |   |   |   |   | $ | 3,673 |   |   |

----

(1)             USD carrying value is net of bonddiscounts and adjustments for fair value hedge accounting, where appropriate.

The 3.5% CHF Convertible Bonds, due 2010, pay interestannually in arrears at a fixed annual rate of 3.5 percent. The conversion priceis subject to adjustment provisions to protect against dilution or change incontrol. Each 5,000 Swiss francs of principal amount of bonds is convertibleinto 524.65897 fully paid ABB shares at a conversion price of 9.53 Swissfrancs, representing a total of 104,931,794 fully paid ABB shares if the bondsare fully converted. The bonds are convertible at the option of the bondholdersat any time from October 21, 2003, up to and including the tenth businessday prior to September 10, 2010. We may at any time on or after September 10,2007, redeem the outstanding bonds at par plus accrued interest if, for acertain number of days during a specified period of time, the official closingprice of our ordinary shares on the relevant exchange has been at least 150percent of the conversion price of 9.53 Swiss francs. This means a closingprice of at least 14.30 Swiss francs. In addition, at any time prior tomaturity, we can 

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redeem the outstandingbonds at par plus accrued interest, if at least 85 percent in aggregate of theprincipal amount of bonds originally issued have been redeemed, converted orpurchased and cancelled. We have the option to redeem the bonds when due incash, ordinary shares or any combination thereof.

The 10% GBP Instruments, due 2009, and the 9.5% EURInstruments, due 2008, contain certain clauses linking the interest paid on thebonds to the credit rating assigned to the bonds. If the rating assigned tothese bonds by both Moody’s and Standard and Poor’s remains at or above Baa3and BBB-, respectively, then the interest rate on the bonds remains at thelevel at issuance, that is 10 percent and 9.5 percent, for thesterling-denominated and euro-denominated bonds, respectively. In October 2002,as the rating assigned by either Moody’s or Standard and Poor’s decreased belowBaa3 or BBB-, respectively, the annual interest rate on the bonds increased by1.5 percent per annum to 11.5 percent and 11 percent, for the 10% GBPInstruments, due 2009, and the 9.5% EUR Instruments, due 2008, respectively,resulting in additional interest costs for each of 2005 and 2004 ofapproximately $15 million. As the rating assigned by both Moody’s and Standardand Poor’s returned to a level at or above Baa3 and BBB-, respectively, in May 2006,the interest rates on the remaining bonds outstanding after the exchangeoffering described above returned to the interest level at issuance as of theinterest periods beginning May 2006 and January 2007, for the 10% GBPInstruments, due 2009, and the 9.5% EUR Instruments, due 2008, respectively. Inline with our policy of reducing our interest and currency exposure, across-currency swap has been used to modify the characteristics of thesterling-denominated bonds and an interest rate swap has been used to modifythe euro-denominated bonds. After considering the impact of the cross-currencyand interest rate swaps, the 10% GBP Instruments, due 2009, effectively becamea floating rate U.S. dollar obligation, while the 9.5% EUR Instruments, due 2008,became a floating rate euro obligation. In both cases, the floating rate resetsevery three months. Consequently, these bonds are considered as floating ratedebt at December 31, 2006 and 2005. See Note 14 Debt to our ConsolidatedFinancial Statements.

The 6.5% EUR Instruments, due 2011, pay interestsemi-annually in arrears at a fixed annual rate of 6.5 percent. In the event ofa change of control of ABB Ltd, the terms of the bonds require us to offer torepurchase the bonds at 101 percent of the principal amount thereof, plus anyaccrued interest.

During 2005, we entered into interest rate swaps tohedge our interest obligations on the 6.5% EUR Instruments, due 2011, and the3.75% CHF bonds, due 2009. After considering the impact of these interest rateswaps, the 6.5% EUR Instruments, due 2011, effectively became a floating rateeuro obligation, while the 3.75% CHF Bonds, due 2009, effectively became afloating rate Swiss franc obligation. Consequently, these bonds are consideredas floating rate debt at December 31, 2006 and 2005.

The 4.625% EUR Instruments, due 2013, pay interestannually in arrears at a fixed annual rate of 4.625%. We have the option toredeem the bonds early at any time from June 6, 2010, in accordance withthe terms of the bonds. In the event of a change of control, a bondholder canrequire us to repurchase or redeem the bonds, in accordance with the terms ofthe bonds. We have entered into interest rate swaps to hedge our interestobligations on the 4.625% EUR Instruments, due 2013. As a result of theseswaps, the 4.625% EUR Instruments, due 2013, effectively became a floating rateeuro obligation and are consequently considered as floating rate debt at December 31,2006. The interest rate resets every three months.

Almost all of our publiclytraded bonds contain cross-default clauses which would allow the bondholders todemand repayment if we were to default on certain borrowings at or above aspecified threshold amount. Furthermore, all such bonds constitute unsecuredand unsubordinated obligations of us and rank pari passu with our other debtobligations.

**Commercial paper**

In November 2005, wesigned a new commercial paper program allowing us to issue short-termcommercial paper in either Swedish krona or euro, up to a maximum equivalentnominal amount of 5 

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billionSwedish krona (equivalent to approximately $729 million, using December 31,2006 exchange rates). This program broadens our funding base and allows us anadditional source of short-term liquidity. No commercial paper was outstandingat December 31, 2006 and 2005.

**Credit facilities**

In July 2005, we signed a new five-year, $2 billionmulticurrency revolving credit facility and cancelled the three-year $1 billioncredit facility that was due to expire in November 2006.

No amount was drawn underthe facility, which is for general corporate purposes, at December 31,2006 and 2005. The facility contains cross-default clauses whereby an event ofdefault would occur if we were to default on indebtedness, as defined in thefacility, at or above a specified threshold.

**Securitizationprograms**

In addition to the aforementioned primary sources ofliquidity and capital resources, we also sell certain trade receivables inrevolving-period securitization programs. During 2005, we re-assessed ourneeds for such programs, terminated one program and reduced the size of theother program. During 2006, we further limited our sales of receivables underthe remaining program which was to a VIE, unrelated to us. In mid 2006, the VIEtransferred the outstanding receivables and retained interests to a qualifyingspecial purpose entity (QSPE), as part of the establishment of a newrevolving-period securitization program and the existing program with the VIEwas terminated.

For further discussion ofour securitization programs, including cash flows between (a) the VIE andus, and (b) the QSPE and us, during 2006, 2005 and 2004, see “Off-balancesheet arrangements”, Note 2 Significant accounting policies and Note 8Securitization and variable interest entities to our Consolidated FinancialStatements.

**Credit ratings**

Credit ratings are assessments by the rating agenciesof the credit risk associated with our company and are based on informationprovided by us or other sources that the rating agencies consider reliable.Higher ratings generally result in lower borrowing costs and increased accessto capital markets.

At December 31, 2006, our long-term companyratings were Baa1 and BBB+ (our long-term unsecured debt was rated Baa1 andBBB)  from Moody’s and Standard & Poor’s,respectively, compared to Ba2 and BB+ (our long-term unsecured debt was ratedBa2 and BB-) from Moody’s and Standard & Poor’s, respectively, at December 31,2005. A number of rating increases took place during 2006. In April 2006,Moody’s increased both our corporate and our long-term unsecured debt ratingsfrom Ba2 to Baa3 and then in December 2006, further increased theseratings from Baa3 to Baa1. Similarly, in April 2006, Standard & Poor’sincreased our corporate rating from BB+ to BBB-, and our long-term unsecureddebt from BB- to BB+, and then in May 2006, increased our corporate ratingto BBB+ and our long-term unsecured debt to BBB.

The increases in ourratings during 2006 mean that our ratings are again of “investment grade” thatwould be represented by Baa3 (or above) and BBB- (or above) from Moody’s andStandard & Poor’s, respectively.

**Limitations ontransfers of funds**

Currency and other localregulatory limitations exist related to the transfer of funds in a number ofcountries where we operate, including: Brazil, China, Egypt, India, Korea,Malaysia, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey andVenezuela. Funds, other than regular dividends, fees or loan repayments, cannotbe transferred offshore from these countries and are therefore deposited andused for 

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workingcapital needs locally. As a consequence, these funds are not available withinour Group Treasury Operations to meet short-term cash obligations outside therelevant country. These funds are reported as cash on our Consolidated BalanceSheets, but we do not consider these funds immediately available for therepayment of debt outside the respective countries where the cash is situated,including those described above. As of December 31, 2006 and 2005, thebalance of cash and equivalents and marketable securities and other short-terminvestments under such limitations totaled approximately $1,375 million and$900 million, respectively.

**FINANCIAL POSITION**

**Balance sheet**

During 2006 and 2005,divestments and the discontinuation of certain businesses were recorded asdiscontinued operations pursuant to SFAS 144, as discussed in detail under thesection above entitled “Application of critical accounting policies—Accountingfor discontinued operations”. Accordingly, the balance sheet data for allperiods presented have been restated to present the financial position andresults of operations of the businesses meeting the criteria of SFAS 144 asassets and liabilities held for sale and in discontinued operations.

**Current assets**

| ** **                                           | ** ** | **As of December 31,**                    | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                           | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** |
| ** **                                           | ** ** | **(U.S. dollars in millions)**            | ** ** |
| Cash and  equivalents                                |       |                                                     | 4,262      |   |   |   | 3,221 |   |   |
| Marketable  securities and short-term investments    |       |                                                     | 528        |   |   |   | 368 |   |   |
| Receivables, net                                     |       |                                                     | 7,276      |   |   |   | 6,405 |   |   |
| Inventories, net                                     |       |                                                     | 3,880      |   |   |   | 3,006 |   |   |
| Prepaid expenses                                     |       |                                                     | 252        |   |   |   | 250 |   |   |
| Deferred taxes                                       |       |                                                     | 577        |   |   |   | 473 |   |   |
| Other current  assets                                |       |                                                     | 238        |   |   |   | 187 |   |   |
| Assets held for  sale and in discontinued operations |       |                                                     | 164        |   |   |   | 262 |   |   |
| Total current assets                                 |       |                                                     | 17,177     |   |   |   | 14,172 |   |   |

 

Our total current assets as of December 31, 2006,increased by 21 percent, as compared to total current assets as of December 31,2005. See “Cash flows”.

As of December 31, 2006 and 2005, we had cash andequivalents and marketable securities and short-term investments totaling$4,790 million and $3,589 million, respectively. Approximately $2,715 millionand $1,960 million as of December 31, 2006 and 2005, respectively, wasinvested by our Group Treasury Operations, and was denominated primarily in USDand EUR. Further amounts, totaling approximately $1,375 million and $900million, as of December 31, 2006 and 2005, respectively, were depositedlocally in countries where currency or other local regulatory limitationsexist, as described above under “Liquidity and capital resources—Limitations ontransfers of funds”. Balances not remitted to Group Treasury Operations areprimarily denominated in the currency of the respective country holding thebalance.

We invest surplus cash available in time deposits andmarketable securities with varied maturities based on defined investmentguidelines and the liquidity requirements of the business. Investments whichhave maturities of three months or less at the time of acquisition areclassified as part of cash and equivalents, and those that have maturities ofmore than three months at the time of acquisition are classified as part ofmarketable securities and short term investments. The balance of marketablesecurities and short-term investments will fluctuate depending on the maturityof these investments and whether we choose to sell or hold available-for-sale securities.

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Receivables, net, as at the end of 2006, increasedfrom the end of 2005 by approximately 14 percent. More than 50 percent of thisincrease was related to the appreciation of the local currencies relative tothe USD. In addition, the increase in revenues during the year from all of thecore divisions except Robotics also contributed to the increase in thereceivables, net.

Inventories, net, alsoincreased primarily reflecting the increase in our order backlog as at the endof 2006. The increase in inventories was particularly high in our PowerProducts division due to a higher workload in our transformers factories andthe higher cost of raw materials.

**Current Liabilities**

| ** **                                                | ** ** | **As of December 31,**                    | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** |
| ** **                                                | ** ** | **(U.S. dollars in millions)**            | ** ** |
| Accounts payable,  trade                                  |       |                                                     | 3,936      |   |   |   | 3,203 |   |   |
| Accounts payable,  other                                  |       |                                                     | 1,184      |   |   |   | 1,171 |   |   |
| Short-term debt  and current maturities of long-term debt |       |                                                     | 122        |   |   |   | 169 |   |   |
| Advances from  customers                                  |       |                                                     | 1,526      |   |   |   | 987 |   |   |
| Deferred taxes                                            |       |                                                     | 227        |   |   |   | 183 |   |   |
| Provisions and  other                                     |       |                                                     | 3,003      |   |   |   | 2,635 |   |   |
| Accrued expenses                                          |       |                                                     | 1,941      |   |   |   | 1,876 |   |   |
| Asbestos  obligations                                     |       |                                                     | 154        |   |   |   | 1,128 |   |   |
| Liabilities held  for sale and in discontinued operations |       |                                                     | 283        |   |   |   | 370 |   |   |
| Total current  liabilities                                |       |                                                     | 12,376     |   |   |   | 11,722 |   |   |

 

Total current liabilities December 31, 2006,increased by 6 percent as compared to current liabilities as of December 31,2005, due to the appreciation of the local currencies relative to the USD.Excluding the currency impact, total current liabilities decreased by 2percent.

Total accounts payable asof December 31, 2006, increased compared to December 31, 2005, due toan increase in business volume in most of the core divisions. Advances fromcustomers also increased for the same comparable period reflecting theincreased volume of orders received during the year in 2006, particularly fromour Process Automation and Power Products divisions. These increases wereoffset by a decrease in asbestos obligations. See “Contingencies and retainedliabilities”. Additionally, liabilities held for sale and in discontinuedoperations decreased due to progress made in closing or selling some of ourNon-core activities. The majority of the increase in provisions and otherrelates to provisions for warranties and contract penalties as a result ofincreased business volume.

**Non-current assets**

| ** **                                   | ** ** | **As of December 31,**                                | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **     2006     ** | ** ** | **     2005     ** | ** ** |
| ** **                                   | ** ** | **(U.S. dollars in millions)**                        | ** ** |
| Financing  receivables, net                  |       |                                                                 | 555        |   |   |   | 645 |   |   |
| Property, plant  and equipment, net          |       |                                                                 | 2,811      |   |   |   | 2,547 |   |   |
| Goodwill                                     |       |                                                                 | 2,581      |   |   |   | 2,479 |   |   |
| Other intangible  assets, net                |       |                                                                 | 309        |   |   |   | 347 |   |   |
| Prepaid pension  and other employee benefits |       |                                                                 | 375        |   |   |   | 601 |   |   |
| Investments in equity  method companies      |       |                                                                 | 636        |   |   |   | 618 |   |   |
| Deferred taxes                               |       |                                                                 | 523        |   |   |   | 628 |   |   |
| Other non-current  assets                    |       |                                                                 | 175        |   |   |   | 239 |   |   |
| Total non-current assets                     |       |                                                                 | 7,965      |   |   |   | 8,104 |   |   |

 

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Financing receivables, net as of December 31,2006, which includes receivables from leases and loans receivable, changed ascompared to December 31, 2005, due to the sale of lease portfolios andcurrency impacts.

Of the total increase in the value of property, plantand equipment, net, between December 31, 2006, and December 31, 2005,approximately $220 million was related to the change in the value of the USDagainst local currencies. Both our Power Products and Automation Productsdivisions raised their investment levels to further improve productioncapacities, while capital spending in our Robotics division was lower due to aslowdown in the automotive industry. The major capital expenditures during 2006were investments in machinery and equipment in China, Germany, Sweden andFinland offset primarily by depreciation.

During 2006, goodwill increased principally due to thechange in the value of the USD against local currencies.

The reduction in other intangible assets, net, mainlyreflects a higher amortization on capitalized software and other intangibleassets as compared with the increase in gross carrying amount.

Prepaid pension and otheremployee benefit costs decreased by $226 million from December 31, 2005,to $375 million at December 31, 2006, primarily as a result of theadoption of SFAS 158. See “Application of critical accounting policies”.

**Non-current liabilities**

| ** **                           | ** ** | **As of December 31,**                                | ** ** |
|--------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                           | ** ** | **     2006     ** | ** ** | **     2005     ** | ** ** |
| ** **                           | ** ** | **(U.S. dollars in millions)**                        | ** ** |
| Long-term debt                       |       |                                                                 | 3,160      |   |   |   | 3,933 |   |   |
| Pension and other  employee benefits |       |                                                                 | 885        |   |   |   | 1,130 |   |   |
| Deferred taxes                       |       |                                                                 | 769        |   |   |   | 691 |   |   |
| Asbestos obligations                 |       |                                                                 | 307        |   |   |   | — |   |   |
| Other liabilities                    |       |                                                                 | 1,156      |   |   |   | 976 |   |   |
| Total non-current  liabilities       |       |                                                                 | 6,277      |   |   |   | 6,730 |   |   |

 

During 2006, our long-term debt was significantlyreduced through the induced conversion of bonds into equity. Our gearing ratio,excluding borrowings in discontinued operations, was 34 percent as ofDecember 31, 2006, as compared to 52 percent as of December 31, 2005,reflecting the reduction of our total debt and the increase in stockholders’equity during 2006, from the induced conversion and the net income result.

The reduction in the balance of pension and otheremployee benefits during 2006 was mainly due to discretionary pensioncontributions which were partially offset by the additional liabilitiesrecorded upon the adoption of SFAS 158. See “Application of critical accountingpolicies”.

During April 2006, subsequent to the confirmationby the U.S. District Court of the Plan of Reorganization for CombustionEngineering, we reclassified some of our obligations from current liabilitiesto non-current liabilities based on the due date of the obligations as per thePlan of Reorganization. See Note 17 Commitments and contingencies to ourConsolidated Financial Statements.

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Other liabilities includesnon-current deposit liabilities of $302 million and $309 million, deferredincome of $118 million and $120 million, non-current derivative liabilities of$113 million and $63 million and other non-current liabilities of $372 millionand $229 million as of December 31, 2006 and 2005, respectively. Otherliabilities also includes provisions for the estimated environmentalremediation costs related to our former Nuclear Technology business of $251million and $255 million as of December 31, 2006 and 2005,respectively.  See “EnvironmentalLiabilities”, Note 17 Commitments and contingencies and Note 19 Otherliabilities to our Consolidated Financial Statements.

**Cash flows**

In theConsolidated Statements of Cash Flows, the effects of the discontinuedoperations are not segregated, as permitted by SFAS No. 95, *Statement of Cash Flows* (SFAS 95). TheConsolidated Statements of Cash Flows can be summarized as follows:

| ** **                                                                                                     | ** ** | **Year ended December 31,**    | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                     | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                     | ** ** | **(U.S. dollars in millions)** | ** ** |
| Cash flows  provided by operating activities                                                                   |       | 1,939                                         |       | 1,012 |   | 902 |   |
| Cash flows  provided by (used in) investing activities                                                         |       | (694                                          | )          | (316 | ) | 354 |   |
| Cash flows used  in financing activities                                                                       |       | (392                                          | )          | (896 | ) | (2,745 | ) |
| Effects of  exchange rate changes on cash and equivalents                                                      |       | 184                                           |       | (259 | ) | 74 |   |
| Adjustment for  the net change in cash and equivalents in assets held for sale and in  discontinued operations |       | 4                                             |       | 14 |   | 298 |   |
| Net change in cash and  equivalents—continuing operations                                                 |       | 1,041                                         |       | (445 | ) | (1,117 | ) |

 

**Cash flows providedby operating activities**

Operating assets and liabilities include tradereceivables, inventories, trade payables and other assets and liabilities.

Cash flows provided by operating activities increasedby $927 million in 2006, as compared to 2005. Approximately 50 percent of thisincrease was attributable to the significant reduction in the amount ofreceivables securitized in 2005 (see “Off-balance sheet arrangements”), whichresulted in a reduction of our cash flow in our core divisions and Corporate during2005. In addition, the increased revenues and the high capacity utilization,mainly in our Power Products and Automation Products divisions, resulted inhigher cash outflows towards increased working capital levels. These increaseswere more than offset by the advances received from our customers, particularlyin our Process Automation division, and an increase in the cash effectiveearnings of most of our core divisions. Cash flows provided by operatingactivities increased in all our divisions relative to 2005. Cash flows providedby Non-core and Other activities increased, primarily reflecting the improvedoperational performance of Oil, Gas and Petrochemicals business.

In 2005, as compared to2004, cash from operations in our core divisions decreased, mainly due to thediscretionary pension contributions and the lower amount of receivablessecuritized, which more than offset the increases from higher advances andincreased operational earnings. Cash used in Non-core and Other activities washigher as compared to 2004 primarily caused by the Oil, Gas and Petrochemicalsbusiness using customer advances on several large projects. Cash used inCorporate was lower in 2005 as compared to 2004, influenced primarily by cashinflows from derivatives in the treasury area and also a positive cash impactfrom securitization. There were also lower asbestos related cash payments in2005. Cash inflows from operating activities improved by $110 million over2004.

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**Cash flows providedby (used in) investing activities**

Investingactivities include: accounts receivable from leases and third party loans(financing receivables); net investments in marketable securities that are notheld for trading purposes; asset purchases, net of disposals; and acquisitionsof, investments in and divestitures of businesses.

| ** **                                                    | ** ** | **Year ended December 31,**    | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                    | ** ** | **(U.S. dollars in millions)** | ** ** |
| Proceeds from  sale of businesses, net of acquisitions        |       | 24                                            |       | (124 | ) | 1,158 |   |
| Purchases of  property, plant and equipment, net of disposals |       | (408                                          | )          | (339 | ) | (420 | ) |
| Other investing  activities, net                              |       | (310                                          | )          | 147 |   | (384 | ) |
| Cash flows provided by  (used in) investing activities        |       | (694                                          | )          | (316 | ) | 354 |   |

 

Net cash used in investing activities during 2006,increased by $378 million to $694 million.

Acquisitions, investments, divestitures, net for theyear ended December 31, 2006, mainly included the proceeds received fromthe sale of our Power Lines businesses in Venezuela and South Africa as well asthe sale of our Cable business in Ireland. In 2005, we had a cash outflow fromacquisitions, investments and divestitures, net, primarily due to the cash soldwith our leasing portfolio business in Finland and cash payments in connectionwith settlements related to our upstream Oil, Gas and Petrochemicals business.Significant cash inflow during 2004 came from the sale of our Upstream Oil, Gasand Petrochemicals business ($800 million), the sale of our Reinsurancebusiness ($280 million) and the sale of our entire interest in IXYS Corporation($42 million).

As a natural consequence of the increase in the volumeof orders and continued high capacity utilization, cash outflow for thepurchase of property, plant, and equipment has increased. Total cash disbursedfor capital expenditures during 2006 was $536 million. Of this amount $308million was spent on machinery and equipment, $111 million on land andbuildings, $45 million on intangibles, mainly software, and $72 million onprojects which are under construction, the majority of which relates to machineryand equipment. In the same year, there were $108 million in cash inflows fromthe proceeds on the sales of land and buildings, primarily from Europe and $20million from the sale of machinery and equipment. The net cash outflows fromthe purchase and sale of property, plant and equipment were lower in 2005 ascompared to 2004, reflecting lower investment in 2005. Major capitalexpenditures on investment in machinery and equipment during 2005 occurred inEurope and Asia, and during 2004 mainly in Europe. In 2004, proceeds of $123million were received on the sale of property, plant and equipment. Significantasset sales during 2004 included the sale of real estate properties inSwitzerland, Germany and Italy.

Cash outflows from otherinvesting activities, net in 2006, were $310 million, including the purchase ofmarketable securities of $449 million which were contributed to the pensionfunds in Germany. These purchases were partially offset by the cash inflows andoutflows related to other marketable securities. During 2005, net cash providedby other investing activities was $147 million, which included the sale of ourlease portfolio and the release of restricted cash which were offset by thepurchase of marketable securities of $262 million which were contributed to ourpension funds in Germany. During 2004, we contributed $549 million ofavailable-for-sale debt securities to certain of our pension plans in Germany.A significant portion of these securities was purchased during 2004, whichsignificantly increased net cash used in other investing activities.

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**Cash flows used in financing activities**

| ** **                                                    | ** ** | **Year ended December 31,**    | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                    | ** ** | **(U.S. dollars in millions)** | ** ** |
| Change in debt,  net of repayments                            |       | (64                                           | )          | (832 | ) | (2,752 | ) |
| Payments made  upon induced bond conversion and bond exchange |       | (183                                          | )          | — |   | — |   |
| Treasury and  capital stock transactions                      |       | 47                                            |       | 35 |   | (36 | ) |
| Dividends paid                                                |       | (203                                          | )          | — |   | — |   |
| Other financing  activities                                   |       | 11                                            |       | (99 | ) | 43 |   |
| Cash flows used in  financing activities                      |       | (392                                          | )          | (896 | ) | (2,745 | ) |

 

Our financing activities primarily include debt, bothfrom the issuance of debt securities and directly from banks, and capital andtreasury stock transactions.

As there were no bond maturities or significantrepurchases of bonds in 2006, repayments of debt were significantly reducedcompared to 2005. During 2006, the capital increase resulting from the issuanceof shares under our employee share acquisition plan led to a net cash inflow of$47 million recorded under treasury and capital stock transactions. During2006, we paid a dividend of 0.12 Swiss francs per share which resulted in anoutflow of $203 million. Financing activities in 2006 also included $72 millionpayments made in relation to the induced conversion of our 4.625% USD ConvertibleBonds, due 2007, $111 million payments in connection with the exchange of our10% GBP Instruments, due 2009 and the 9.5% EUR Instruments, due 2009 and $91million of dividends paid to our minority shareholders which were partly offsetby cash inflows from certain financial derivative transactions.

Significant cash outflows from financing activitiesduring 2005 included the repayment of maturing bonds and the repurchase ofbonds. The cash inflow for the capital and treasury stock transactionsprimarily represented the capital increase resulting from our employee shareacquisition program.

Cash outflows fromfinancing activities during 2004 included the repayment of maturing bonds, openmarket repurchases of public bonds, tender offers for certain of our bonds andcalls of those bonds not tendered. The cash outflow for the capital andtreasury stock transactions represented payments made in 2004 in respect ofcertain tax and other liabilities incurred in connection with the rights issuecarried out during the fourth quarter of 2003.

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**Disclosures aboutcontractual obligations and commitments**

**Contractualobligations**

Thecontractual obligations presented in the table below represent our estimates offuture payments under fixed contractual obligations and commitments. As such,certain amounts in the table may differ from those reported on our ConsolidatedBalance Sheet as of December 31, 2006. Changes in our business needs,cancellation provisions and changes in interest rates, as well as actions bythird parties and other factors, may cause these estimates to change.Therefore, our actual payments in future periods may vary from those presentedin the table. The following table summarizes certain of our contractualobligations and principal and interest payments under our debt instruments,leases and purchase obligations as of December 31, 2006 including theimpact of the conversion during the first quarter of 2007:

| **Payments due by period**                 | ** ** | ** **                                    | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1–3  years** | ** ** | **3–5  years** | ** ** | **More than  5 years** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------|------------|-----------|------------|---------------------------------|------------|---------------------|------------|---------------------|------------|----------------------------------|------------|
| ** **                                                | ** ** | **(U.S. dollars in millions)** | ** ** |
| Long-term debt  obligations                               |       | 3,207                                         |       |      | 47         |                            |       | 520                 |       | 1,658               |       |                             | 982        |   |   |
| Interest payments  related to long-term debt obligations* |       | 935                                           |       |      | 146        |                            |       | 332                 |       | 227                 |       |                             | 230        |   |   |
| Operating lease  obligations                              |       | 1,913                                         |       |      | 349        |                            |       | 560                 |       | 439                 |       |                             | 565        |   |   |
| Purchase obligations                                      |       | 3,397                                         |       |      | 2,898      |                            |       | 443                 |       | 31                  |       |                             | 25         |   |   |
| Total                                                     |       | 9,452                                         |       |      | 3,440      |                            |       | 1,855               |       | 2,355               |       |                             | 1,802      |   |   |

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*                     During the first quarter of 2007, bondholders deliveredconversion notices for an aggregate principal amount of approximately 790 millionSwiss francs of the 3.5% CHF Convertible Bonds, due 2010.   Consequently, the interest payments reflectonly the payments due on the remaining approximately 210 million Swiss francsaggregate principal amount of the 3.5% CHF Convertible Bonds.

We have determined ourobligations in respect of our long-term debt obligations and interest paymentsrelated to long-term debt obligations by reference to the payments due underthe terms of our debt obligations at the time such obligations were incurred.However, we use interest rate swaps to modify the characteristics of certain ofour debt obligations. The net effect of these swaps may be to increase ordecrease the stated amount of our cash interest payment obligations included inthe above table. For further details on our debt obligations and the relatedhedges, please refer to Note 14 to our Consolidated Financial Statements.

**Off-balance sheetarrangements**

**Guarantees**

Certain guarantees issued or modified after December 31,2002 are accounted for in accordance with FASB Interpretation No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others (FIN 45). Upon issuance ofcertain guarantees, a liability, equal to the fair value of the guarantee, isrecorded.

FIN 45 requires that we disclose the “maximumpotential exposure” of certain guarantees, as well as possible recourseprovisions that may allow us to recover from third parties amounts paid outunder such guarantees. The “maximum potential exposure” as defined by FIN 45does not allow any discounting of our assessment of actual exposure under theguarantees. The information below reflects our maximum potential exposure underthe guarantees, which is higher than our assessment of the expected exposure.

The following table provides quantitative dataregarding our third-party guarantees. The maximum potential payments representa “worst-case scenario,” and do not reflect our expected results.

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Thecarrying amount of liabilities recorded in the Consolidated Balance Sheetsreflects our best estimate of future payments we may incur as part offulfilling our guarantee obligations.

| ** **                          | ** ** | **As of December 31,**         | ** ** |
|-------------------------------------|------------|-----------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **Maximum  potential  payments**              | ** ** | **Carrying  amount of  liabilities** | ** ** | **Maximum  potential  payments** | ** ** | **Carrying  amount of  liabilities** | ** ** |
| ** **                          | ** ** | **(U.S. dollars in millions)** | ** ** |
| Third-party  performance guarantees |       |                                          | 1,119      |   |   |   | 1 |   |   |   | 1,197 |   |   |   | 1 |   |   |
| Financial  guarantees               |       |                                          | 139        |   |   |   | — |   |   |   | 209 |   |   |   | — |   |   |
| Indemnification  guarantees         |       |                                          | 80         |   |   |   | — |   |   |   | 150 |   |   |   | 13 |   |   |
| Total                               |       |                                          | 1,338      |   |   |   | 1 |   |   |   | 1,556 |   |   |   | 14 |   |   |

 

**Guarantees relatedto third-party performance**

Performance guarantees represent obligations where weguarantee the performance of a third party’s product or service according tothe terms of a contract. Such guarantees may include guarantees that a projectwill be completed within a specified time. If the third party does not fulfillthe obligation, we will compensate the guaranteed party in cash or in kind.Performance guarantees include surety bonds, advance payment guarantees andperformance standby letters of credit.

We retained obligations for guarantees related to thePower Generation business contributed in 1999 to the former ABB ALSTOM POWER NVjoint venture. The guarantees primarily consist of performance guarantees,advance payment guarantees and other miscellaneous guarantees under certaincontracts such as indemnification for personal injuries and property damages,taxes, and compliance with labor laws, environmental laws and patents. Theguarantees are related to projects that are expected to be completed by 2015,but in some cases the guarantees have no definite expiration. In 2000, we soldour interest in the ABB ALSTOM POWER NV joint venture to ALSTOM SA (ALSTOM). Asa result, ALSTOM and its subsidiaries have primary responsibility forperforming the obligations that are the subject of the guarantees. Further,ALSTOM, the parent company, and ALSTOM POWER NV, formerly ABB ALSTOM POWER NV,have undertaken jointly and severally to fully indemnify and hold us harmlessagainst any claims arising under such guarantees. Our best estimate of thetotal maximum potential exposure of quantifiable guarantees issued by us onbehalf of the Power Generation business is approximately $744 million and $756million as of December 31, 2006 and 2005, respectively. We have notexperienced any losses related to guarantees issued on behalf of the PowerGeneration business.

We have retained obligations for guarantees related tothe Upstream Oil, Gas and Petrochemicals business sold in July 2004. Theguarantees primarily consist of third-party performance guarantees, advancepayment guarantees and other miscellaneous guarantees. The guarantees haveoriginal maturity dates ranging from one to five years. The maximum amountpayable under the guarantees was approximately $375 million and $440 million asof December 31, 2006 and 2005, respectively. We have the ability torecover potential payments under these guarantees through certain backstopguarantees. The maximum potential recovery under these backstop guarantees asof December 31, 2006, was approximately $21 million.

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**Guarantees relatingto financial obligations**

Financial guarantees represent irrevocable assurancesthat we will make payment to a beneficiary in the event that a third partyfails to fulfill its financial obligations and the beneficiary under theguarantee incurs a loss due to that failure.

As of December 31,2006 and 2005, we had $139 million and $209 million, respectively, of financialguarantees outstanding. Of those amounts, $80 million and $95 million,respectively, were issued on behalf of companies in which we currently have orformerly had an equity interest. The guarantees have original maturity datesranging from one to thirteen years.

**Guarantees relatingto indemnification**

We have indemnified certain purchasers of divestedbusinesses for potential claims arising from the operations of the divestedbusinesses. To the extent the maximum loss related to such indemnificationscould not be calculated, no amounts have been included under maximum potentialpayments in the table above. Indemnifications for which maximum losses couldnot be calculated include indemnifications for legal claims.

We delivered to thepurchasers of the Upstream Oil, Gas and Petrochemicals business and Reinsurancebusiness guarantees related to assets and liabilities divested in 2004. Themaximum liability as of December 31, 2006 and 2005, of approximately $80million and $150 million, respectively, relating to the Upstream Oil, Gas andPetrochemicals and Reinsurance businesses will reduce over time, pursuant tothe respective sales agreements. The fair value of these guarantees is notmaterial.

**Other commitments**

We have granted lines ofcredit and have committed to provide additional capital for certain equityaccounted companies. As of December 31, 2006, the total unused lines of creditamounted to $42 million and capital commitment guarantees amounted to $25million.

**Securitizationprograms**

In addition to the primary sources of liquidity andcapital resources described in the section entitled “Liquidity and CapitalResources,” we have sold certain trade receivables in revolving-periodsecuritization programs. During 2005, we re-assessed our need forrevolving-period securitization programs, and terminated one program andreduced the size of the other. During 2006, we further limited our sales ofreceivables under the remaining program which was with a VIE, unrelated to us.In mid 2006, the VIE transferred the outstanding receivables and retainedinterests to a QSPE, as part of the establishment of a new, revolving-periodsecuritization program (New Program) and the existing program with the VIE wasterminated.

During2006, 2005 and 2004, the net cash received from (paid to) VIEs was $(30)million, $(404) million and $130 million, respectively, as follows:

| ** **                                      | ** ** | **Year ended December 31,**    | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                      | ** ** | **(U.S. dollars in millions)** | ** ** |
| Gross trade  receivables sold to VIEs           |       | $                                             | 1,062      |   | $ | 4,925 |   | $ | 5,846 |   |
| Collections made  on behalf of and paid to VIEs |       | (1,156                                        | )          | (5,489 | ) | (5,713 | ) |
| Purchaser,  liquidity and program fees          |       | (4                                            | )          | (18 | ) | (20 | ) |
| Decrease in  retained interests                 |       | 68                                            |       | 178 |   | 17 |   |
| Net cash received from  (paid to) VIEs          |       | $                                             | (30        | ) | $ | (404 | ) | $ | 130 |   |

 

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During 2006, the cash flows between us and the QSPEunder the New Program were as follows:

| ** **                                      | ** ** | **December 31,**                         | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                      | ** ** |
| ** **                                      | ** ** | **(U.S. dollars in millions)** | ** ** |
| Gross trade  receivables sold to QSPE(1)        |       |                                          | $          | 939 |   |   |
| Collections made  on behalf of QSPE(1)          |       |                                          | (935       | ) |   |
| Discount,  liquidity and program fees           |       |                                          | (4         | ) |   |
| Decrease in  retained interests                 |       |                                          | 12         |   |   |
| Net cash paid to  QSPE during the year          |       |                                          | 1          |   |   |
| Receivable from QSPE as  of December 31(2) |       |                                          | $          | 13 |   |   |

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(1)            Gross receivables sold excludes $295 million of grossreceivables transferred directly to the QSPE by the VIE upon establishment ofthe QSPE. Collections includes collections by us of those receivables acquiredby the QSPE from the VIE.

(2)            The difference between the receivables sold in a monthand the collections made, adjusted for fees and any increase or decrease in theretained interests, is settled between us and the QSPE on a net basis in thefollowing month.

The decrease in the aggregate gross receivables soldin 2006 compared to 2005, and similarly 2005 compared to 2004, is due primarilyto the reduction in our securitization activities.

We pay discount and program fees on our securitizationprograms. Discounts are based on the amount of funding that we receive, whileprogram fees are based on the programs’ size. These costs, of $8 million, $18million and $20 million in 2006, 2005 and 2004, respectively, are included ininterest and other finance expense.

For the purpose of credit enhancement from theperspective of the purchasing entity, we retain an interest in the soldreceivables (retained interests) and pursuant to the requirements of therevolving-period securitization, we effectively bear the risk of potentialdelinquency or default associated with trade receivables sold or interestsretained. Ultimately, if the customer defaults, we will be responsible for theuncollected amount up to the amount of our retained interest. Included in otherreceivables as of December 31, 2006 and 2005, are retained interests of$116 million and $195 million, respectively. The decrease in the retainedinterests during 2006 was mainly due to a lower volume of receivables beingsold into the New Program than was sold under previous programs. The fair valueof retained interests as of December 31, 2006 and 2005, amounted to $106million and $185 million, respectively.

In addition, we transfer receivables outside of theabove described securitization programs. These transfers were sales, madewithout recourse, directly to banks and/or sales pursuant to factoring orsimilar type arrangements. Total sold receivables included in thesetransactions during 2006 and 2005, were approximately $538 million and $530million, respectively, of which, sales of $5 million in 2006 only, related toassets held for sale and in discontinued operations. During each of 2006 and2005, the related costs, including the associated gains and losses, were $5million.

For a further discussionof our securitization activities, see Notes 2 Significant accounting policies and8 Securitization and variable interest entities to our Consolidated FinancialStatements.

**Pension and otherpostretirement obligations**

During 2006 and 2005, we made non-cash contributionsof $449 million and $262 million, respectively, of available-for-sale debtsecurities to certain of our pension plans in Germany and cash contributions of$215 million and $296 million, respectively, to other pension plans and$22 million and $27 million, respectively, to other benefit plans.

As of December 31,2006 and 2005, our pension liabilities exceeded plan assets by $173 million and$734 million, respectively. Our other postretirement plan liabilities exceededplan assets by $245 million 

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and $270million as of December 31, 2006 and 2005, respectively, $16 million ofthis underfunding is a short-term obligation for us and the remaining portion along-term obligation for us as the settlement of the pension liability willtake place as the covered employees draw benefits from the plans in the future.We anticipate contributing a total of $186 million and $21 million to ourpension plans and our postretirement benefit plans, respectively, in 2007 tomeet minimum statutory requirements. We may make additional discretionarypension contributions during 2007.

**Variable interests**

We are a party to certainoff-balance sheet arrangements including variable interests in unconsolidatedentities. See Note 8 Securitization and variable interest entities to ourConsolidated Financial Statements.

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**ENVIRONMENTALLIABILITIES**

All of our operations, but particularly ourmanufacturing operations, are subject to comprehensive environmental laws andregulations. Violations of these laws could result in fines, injunctions(including orders to cease the violating operations) or other penalties(including orders to improve the condition of the environment in the affectedarea or to pay for such improvements). In addition, environmental permits arerequired for our manufacturing facilities (for example, with respect to airemissions and wastewater discharges). In most countries in which we operate,environmental permits must be renewed on a regular basis and we must submitreports to environmental authorities. These permits may be revoked, renewed ormodified by the issuing authorities at their discretion and in compliance withapplicable laws. We have implemented formal environmental management systems atnearly all of our manufacturing sites in accordance with the internationalenvironmental management standard ISO 14001, and we believe that we are insubstantial compliance with environmental laws, regulations and permitrequirements in the various jurisdictions in which we operate, except for suchinstances of non-compliance that, in the aggregate, are not reasonably likelyto be material.

We are a participant inseveral legal and regulatory actions, which result from various United Statesand other environmental protection legislation, as well as agreements withthird parties. While we cannot estimate the impact of future legislation,provisions are recorded when it is probable that losses will result from theseactions and the amounts of losses can be reasonably estimated. Estimated lossesfor environmental remediation obligations are not discounted to their presentvalue because timing of payments cannot be reasonably estimated. With respectto these matters, we may be able to recover a portion of the costs frominsurers or other third parties. Receivables are recorded when it is probablethat recoveries will be collected.

**Contingenciesrelated to former Nuclear Technology business**

We retained liabilities for certain specificenvironmental remediation costs at two sites in the United States that wereoperated by its former subsidiary, ABB CE-Nuclear Power Inc., which we sold toBritish Nuclear Fuels PLC (BNFL) in 2000. Pursuant to the sale agreement withBNFL, we have retained the environmental liabilities associated with itsCombustion Engineering subsidiary’s Windsor, Connecticut, facility and agreedto reimburse BNFL for a share of the costs that BNFL incurs for environmentalliabilities associated with its former Hematite, Missouri, facility. Theprimary environmental liabilities associated with these sites relate to thecosts of remediating radiological and chemical contamination. Such costs arenot incurred until a facility is taken out of use and generally are incurredover a number of years. Although it is difficult to predict with accuracy theamount of time it may take to remediate radiological and chemical contaminationat the Hematite site, based on information that BNFL has made available, webelieve that it may take until 2013 to remediate the Hematite site. Withrespect to the Windsor site, we believe the remediation may take until 2012.

At the Windsor site, a significant portion of thecontamination is related to activities that were formerly conducted by or forthe United States government. We believe that a significant portion of theremediation costs will be covered by the United States government’s FormerlyUtilized Sites Remedial Action Program.

Under the terms of the sale agreement, BNFL isresponsible to have the remediation of the Hematite site performed in a costefficient manner and pursue recovery of remediation costs from otherpotentially responsible parties as conditions for obtaining cost sharingcontributions from us. Westinghouse Electric Company LLC (“Westinghouse”), BNFL’sformer subsidiary, now oversees remediation activities at the Hematite site.Westinghouse was acquired during 2006 by a consortium lead by ToshibaCorporation, Japan. Westinghouse brought legal action against formerowner/operators of the Hematite site and the United States Government underComprehensive Environmental Response Compensation and Liability 

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Act (CERCLA) to recoverpast and future remediation costs. The defendants contested Westinghouse’sclaims. During 2006, an arbitration ruling related to indemnification of formerowner/operators contained in the Combustion Engineering purchase agreement forthe site was unfavorable to Westinghouse’s claims. Separately, based on thepublicly available Remedial Investigation Report and Decommissioning Planprepared by Westinghouse and other site related data we were able to re-estimateits share of the expected total remediation costs for the Hematite site. Theoutcome of the arbitration was largely offset by a lower site remediation costestimate. Thus, in 2006, we made no adjustment to the reserve for our share ofthe Hematite site remediation cost.

We established a reserveof $300 million in loss from discontinued operations in 2000 for theirestimated share of the remediation costs for these sites. As of December 31,2006 and 2005, we recorded, in other non-current liabilities, a reserve of $251million and $255 million, net of payments from inception of $47 million, and$43 million, respectively, and a reversal of $2 million to loss fromdiscontinued operations in 2005 reflecting realized cost savings. The reservebalance at December 31, 2006 represents our best estimate of the remainingremediation costs for these facilities. Expenditures charged to the remediationreserve were $4 million, $9 million and $10 million during 2006, 2005 and 2004,respectively. We have estimated expenditures to be approximately $3 millionduring 2007.

**Contingenciesrelated to other present and former facilities in the United States**

We are involved in theremediation of environmental contamination at present or former facilities,primarily in the United States. The clean up of the United States sitesinvolves primarily soil and groundwater contamination. As of December 31,2006 and 2005, we have recorded in other current liabilities and othernon-current liabilities reserves totaling $22 million and $17 million,respectively. Charges to earnings, including $6 million in loss fromdiscontinued operations in 2006, were $9 million, $4 million and $3 million forthe years ended December 31, 2006, 2005 and 2004, respectively.Expenditures for the years ended December 31, 2006, 2005 and 2004 were $4million, $2 million and $4 million, respectively. Expenditures during 2007 onthese projects are estimated to be approximately $4 million.

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**ASBESTOSLIABILITIES**

**History**

Our Combustion Engineering, Inc. subsidiary (“CE”)had been a co-defendant in a large number of lawsuits claiming damage forpersonal injury resulting from exposure to asbestos. A smaller number of claimshad also been brought against our ABB Lummus Global Inc. subsidiary (“Lummus”)as well as against other entities. In late 2002, taking into consideration thegrowing number and cost of asbestos-related claims, CE and ABB determined thatCE’s asbestos-related liability should be resolved by a comprehensivesettlement of all pending and future asbestos-related personal injury claims.That settlement involved (i) a prepackaged plan of reorganization for CEunder Chapter 11 of the U.S. Bankruptcy Code preceded by (ii) a MasterSettlement Agreement and the establishment of a separate trust funded by CE (the“CE Settlement Trust”) to resolve the asbestos related personal injury claimsof certain settling claimants who had lodged their claims before November 14,2002 and provide partial payment of those claims.

In January 2003, CE reached agreement with variouscreditors including representatives of the asbestos claimants who participatedin the Master Settlement Agreement and a representative for future asbestosclaimants on the terms of a proposed “Pre-Packaged Plan of Reorganization forCE”, as amended through June 4, 2003 (the “Initial CE Plan”). The InitialCE Plan provided for the issuance of a “channeling injunction” under whichasbestos related personal injury claims related to the operations of CE, Lummusand Basic Incorporated (“Basic”), another subsidiary of ours, could only bebrought against a future trust (separate from the CE Settlement Trust) to beestablished and funded by CE, ABB Ltd and other entities of ours (the “CEAsbestos PI Trust”). This channeling injunction was intended to free CE, ABBLtd and its affiliates as well as certain other entities, including ALSTOM andALSTOM POWER NV, from further liability for such claims.

The Initial CE Plan was filed with the U.S. BankruptcyCourt (the “Bankruptcy Court”) on February 17, 2003 and confirmed by theU.S. District Court (the “District Court”) on August 8, 2003. However, onDecember 2, 2004, the Court of Appeals for the Third Circuit effectivelyreversed the District Court’s confirmation order.

In March 2005, following extensive discussionswith certain representatives of various parties, including the CreditorsCommittee and Future Claimants Representatives appointed in the CE case andCertain Cancer Claimants who had opposed the Initial CE Plan, the partiesreached an agreement in principle (the “Agreement in Principle”) for(i) modifying the Initial CE Plan with a view to bringing it intoconformity with the Court of Appeals’ decision, and (ii) providing amechanism for resolving all pending and future asbestos-related personal injuryclaims against Lummus by the filing of a separate Chapter 11 case and aprepackaged plan of reorganization for Lummus (the “Lummus Plan”).

Following the Agreement in Principle, the partiesnegotiated the terms and provisions of the Lummus Plan and the modifications tothe Initial CE Plan. In August 2005, an amended version of the Initial CEPlan (the “Modified CE Plan”) was filed with the Bankruptcy Court. OnDecember 19, 2005, the Bankruptcy Court entered an Order confirming theModified CE Plan, and recommending that the District Court affirm theBankruptcy Court’s Order. On April 1, 2006, the District Court’s orderaffirming confirmation of the Modified CE Plan became final and the Modified CEPlan became effective on April 21, 2006 (the “Modified CE Plan EffectiveDate”).

The Lummus Plan was filed with the Bankruptcy Court inDelaware on April 21, 2006. On June 29, 2006, the Bankruptcy Courtissued its order confirming the Lummus Plan and recommending that the DistrictCourt affirm the Bankruptcy Court’s Order. On August 30, 2006, theDistrict Court’s order affirming confirmation of the Lummus Plan became finaland the Lummus Plan became effective on August 31, 2006 (the “Lummus PlanEffective Date”).

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The Modified CE Plan and Lummus Plan do not addressBasic. Basic’s asbestos-related liabilities will have to be resolved throughits own bankruptcy or U.S. state court liquidation proceeding, or through thetort system.

Other entities of ourshave sometimes been named as defendants in asbestos-related claims. At December 31,2006 and 2005, there were approximately 12,100 and 16,400, respectively,asbestos-related claims pending against entities of ours other than CE andLummus. These claims, which include approximately 4,300 claims against Basic,are unrelated to CE and Lummus and will not be resolved under the Modified CEPlan or the Lummus Plan. ABB entities that are subject to such claims willcontinue to resolve them in the tort system, or otherwise. We generally seekdismissals from claims where there is no apparent linkage between theplaintiffs and any entity of ours. To date, resolving claims against ABBentities other than CE and Lummus has not had a material impact on ourconsolidated financial position, results of operations or cash flows.

**The Modified CEPlan**

Pursuant to the Modified CE Plan a channelinginjunction (the “CE Channeling Injunction”) was issued and became effective asof April 21, 2006, pursuant to Sections 524(g) of the Bankruptcy Codeunder which all present and future asbestos-related personal injury claimsfiled against ABB Ltd and its affiliates and certain other entities that relateto the operations of CE are channeled to the CE Asbestos PI Trust.

On the Modified CE Plan Effective Date, ABB Inc.indemnified the CE estate against up to $5 million of liability on accountof certain contingent claims held by certain CE insurers. Further, on theModified CE Plan Effective Date, we indemnified CE, for nuclear andenvironmental liabilities in respect to sites where CE may have suchliabilities and specifically, CE’s Windsor, Connecticut, site.

The CE Settlement Trust and the CE Asbestos PI Trustwere separately funded as follows:

**The CE SettlementTrust**

·       Cash,note payable and assignment of payments on a note receivable including unpaidinterest totaling $417 million from CE; and

·       Acash payment of $30 million from ABB Inc.

All of the payments werecompleted by mid 2005.

**The CE Asbestos PITrust**

The Modified CEPlan provided that on the Modified CE Plan Effective Date, the CE Asbestos PITrust would be funded with the following:

·       A$20 million 5 percent term note (the “CE Convertible Note”) with a maximum termof ten years from the Modified CE Plan Effective Date, was issued by CE and securedby its Windsor, Connecticut, real estate and real estate leases (under certainspecified contingencies, the CE Asbestos PI Trust would have the right toconvert the term note into ownership of approximately 80 percent of the votingsecurities of the reorganized CE). On October 26, 2006, CE prepaid theoutstanding principal balance of the CE Convertible Note, together with allaccrued but unpaid interest thereon, in full to the CE Asbestos PI Trust. Suchpayment extinguished the CE Asbestos PI Trust’s lien and security interests andterminated its right to convert the CE Convertible Note into voting securitiesof CE;

·       Excesscash held by CE on the Modified CE Plan Effective Date;

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·       Anassignment of proceeds from certain insurance policies (including $32 millionof cash proceeds collected from certain insurance companies since February 17,2003);

·       30,298,913shares of ABB Ltd, which when delivered on the Modified CE Plan Effective Date,had a market value of $407 million;

·       Anon-interest bearing promissory note issued by ABB Inc. and ABB Ltd (the “ABBNote”) in an aggregate amount of up to $350 million payable in installments of$50 million in 2006, $100 million in 2007, $100 million in 2008, two paymentsof $25 million each that are contingent as to the timing of payment to be paidas early as June 2007, but no later than the end of 2012 and twoadditional contingent payments of $25 million each payable in 2010 and 2011 if,and only if, ABB Ltd attains an earnings before interest and taxes margin of 9%for 2009 (or 14% in 2010) and 9.5% for 2010. Payments under the ABB Note areguaranteed by ABB Asea Brown Boveri Ltd, ABB Turbo Systems Holding Ltd, ABBHoldings Inc. and ABB Participation AB; and

·       Anagreement providing for a cash contribution of $204 million on April 21,2008, subject to earlier payment from the proceeds of any sales of Lummusshares or assets prior to April 21, 2008 (the “Contribution Agreement”).Until the Company’s obligations under the Contribution Agreement are satisfiedcertain pre-Chapter 11 debt obligations between Lummus and other ABB entitiesare subordinated to the obligations under the Contribution Agreement, andpayments from Lummus to other ABB entities are restricted.

If ABB entities are foundby the Bankruptcy Court to have defaulted in their payment obligations underthe ABB Note or the Contribution Agreement, the CE Asbestos PI Trust maypetition the Bankruptcy Court to terminate the CE Channeling Injunction and theprotections afforded to the Company and other ABB entities by that injunctionas well as certain other entities, including ALSTOM and ALSTOM POWER NV by thatinjunction.

**The Lummus Plan**

The negotiations that led to the Lummus Plan wereconducted with representatives of asbestos claimants with pending claims againstLummus and an individual appointed by Lummus to represent the interests of itsfuture asbestos claimants (the “Lummus FCR”). These negotiations were held inparallel with the negotiations on the Modified CE Plan over approximately fivemonths.

Under the terms ofthe Lummus Plan:

·       Lummusexecuted an interest bearing note (6%) in the principal amount of $33 million(the “Lummus Note”) payable in annual installments over approximately 11 yearsto a trust created under the Lummus Plan (the “Lummus Asbestos PI Trust”). TheLummus Note is secured by a pledge of 51 percent of the capital stock ofLummus. Payments under the Lummus Note are guaranteed by ABB Ltd and ABBHoldings Inc. Until Lummus’ obligations under the Lummus Note are satisfied,pre-Chapter 11 debt obligations between Lummus and other ABB entities aresubordinated to the obligations under the ABB Note, and payments from Lummus toother ABB entities are restricted. In addition, in the event of a sale ofLummus, a prepayment of the obligation would be triggered;

·       TheLummus Asbestos PI Trust will also be entitled to be paid the first $7.5million in aggregate recoveries from Lummus insurers with the first $5 millionguaranteed. On the Lummus Plan Effective Date, $5 million comprised of $1.6million of insurer funding and $3.4 million of Lummus funding was paid to theLummus Asbestos PI Trust; and

·       Achanneling injunction pursuant to Section 524(g) of the BankruptcyCode (the “Lummus Channeling Injunction”) was issued pursuant to which allasbestos-related claims against Lummus 

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and other ABB entitiesrelating to the operations of Lummus are channeled to the Lummus Asbestos PITrust.

If ABB entities or Lummusare found by the Bankruptcy Court to have defaulted in their paymentobligations under the Lummus Note, the Lummus Asbestos PI Trust may petitionthe Bankruptcy Court to terminate the Lummus Channeling Injunction and theprotections afforded to ABB Ltd, Lummus and other ABB entities by thatinjunction.

**Effect on ourConsolidated Financial Statements**

Theamounts in the below table are reflected in loss from discontinued operations,net of tax.

| ** **                                                                                                   | ** ** | ** **                                    | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------|------------|
|                                                                                                              | ** ** | ** **                                    | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                   | ** ** | **(U.S. dollars in millions)** | ** ** |
| Expense, net of  tax:                                                                                        |       |                                          |       |                                       |       |   |   |   |   |   |   |   |   |
| Mark-to-market  adjustment on 30,298,913 ABB Ltd Shares                                                      |       |                                          | 114        |                                       |       |   | 123 |   |   |   | 17 |   |   |
| Cost related to  modification of Initial CE Plan                                                             |       |                                          | —     |                                       |       |   | — |   |   |   | 232 |   |   |
| Discount on  non-interest bearing liabilities under Modified CE Plan on the Modified CE  Plan Effective Date |       |                                          | (45        | )                                          |       |   | — |   |   |   | — |   |   |
| Other                                                                                                        |       |                                          | 1          |                                       |       |   | 10 |   |   |   | 13 |   |   |
|                                                                                                         |       |                                          | 70         |                                       |       |   | 133 |   |   |   | 262 |   |   |

 

| ** **                | ** ** | ** **                                    | ** ** | **Year ended December 31,** | ** ** |
|---------------------------|------------|-----------------------------------------------|------------|--------------------------------------------|------------|
|                           | ** ** | ** **                                    | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                | ** ** | **(U.S. dollars in millions)** | ** ** |
| Cash payments to:         |       |                                          |       |                                       |       |   |   |   |   |   |   |   |   |
| CE Settlement  Trust      |       |                                          | —     |                                       |       |   | 3 |   |   |   | 49 |   |   |
| CE Asbestos PI  Trust     |       |                                          | 70         |                                       |       |   | — |   |   |   | — |   |   |
| Lummus Asbestos  PI Trust |       |                                          | 9          |                                       |       |   | — |   |   |   | — |   |   |
| Fees and other  costs     |       |                                          | 20         |                                       |       |   | 25 |   |   |   | 7 |   |   |
|                      |       |                                          | 99         |                                       |       |   | 28 |   |   |   | 56 |   |   |

 

| ** **                                                             | ** ** | ** **                                    | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------|------------|
|                                                                        | ** ** | ** **                                    | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                             | ** ** | **(U.S. dollars in millions)** | ** ** |
| Asbestos Obligations:                                                  |       |                                          |       |                                       |       |   |   |   |   |
| Current—                                                          |       |                                          |       |                                       |       |   |   |   |   |
| Modified CE Plan  (Face Value $150 million at  December 31, 2006) |       |                                          | 146        |                                       |       | 1,080 |   | 985 |   |
| Lummus Plan                                                            |       |                                          | 2          |                                       |       | 43 |   | 33 |   |
| Other                                                                  |       |                                          | 6          |                                       |       | 5 |   | 5 |   |
|                                                                   |       |                                          | 154        |                                       |       | 1,128 |   | 1,023 |   |
| Non-Current—                                                      |       |                                          |       |                                       |       |   |   |   |   |
| Modified CE Plan  (Face Value $304 million at  December 31, 2006) |       |                                          | 282        |                                       |       | — |   | — |   |
| Lummus Plan                                                            |       |                                          | 25         |                                       |       | — |   | — |   |
|                                                                   |       |                                          | 307        |                                       |       | — |   | — |   |

 

Prior to 2006, asbestos obligations were recordedbased on the expected implementation of the Initial CE Plan or the Modified CEPlan and the Lummus Plan and classified as current liabilities in Provisionsand Other. During 2006, confirmation of the Modified CE Plan and the LummusPlan became final and 

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those Plans becameeffective. Asbestos liabilities at December 31, 2006, reflect the terms ofthe effective plans and are classified as current or non-current obligationsbased on the scheduled payment dates. Non-interest bearing liabilities underthe Modified CE Plan were discounted on the Modified CE Plan Effective Date atour incremental borrowing rate. Asbestos obligations not covered by theModified CE Plan or Lummus Plan have been estimated based on historical claimsstatistics, related settlement costs and a projection of such claims activityover the next several years.

Loss from discontinuedoperations, net of tax, also includes costs related to the Company’s asbestosobligations of approximately $70 million, $133 million and $262 million in2006, 2005, and 2004, respectively. See Note 17 Commitments and contingenciesto our Consolidated Financial Statements.

**Item 6.**                        Directors,Senior Management and Employees

**BOARD OF DIRECTORS**

Our board of directors oversees the management anddetermines the corporate strategy of ABB. It determines the organization of theABB Group and appoints, removes and supervises the persons entrusted with themanagement and representation of ABB. The regulations of our board of directorsset forth the organizational structure and responsibilities of the directors,including the responsibilities of our executive committee. We have been grantedan exception by the Federal Office of Justice of Switzerland (*Bundesamt für Justiz*) to therule that a majority of the members of the board of directors of ABB mustbe citizens of Switzerland with residence in Switzerland according toArticle 708 para 1 of the Swiss Code of Obligations.

Our articles of incorporation stipulate that the boardof directors must consist of not fewer than seven and no more than 13 membersat any time. Swiss law and our articles of incorporation also provide that eachdirector must be a shareholder of ABB Ltd. Directors are elected for terms ofone year by the shareholders in a shareholders’ meeting. Members of the boardof directors whose terms of office have expired are immediately eligible forre-election. Our articles of incorporation do not provide for the retirement ornon-retirement of directors under an age-limit requirement. Our internalregulations provide that a director shall resign at the annual general meetingof shareholders taking place in the year of their 70th birthday.

The board of directors appoints its Chairman and oneor more Vice Chairmen, as well as the members of our senior management. Atpresent, the position of Vice Chairman is vacant.

Thefollowing table sets forth the names and the years of birth of our directorsand their current positions with ABB.

| **Name**               | ** ** | ** ** | ** ** | **Born**              | ** ** | **Current Position** |
|------------------------|------------|------------|------------|-----------------------|------------|----------------------|
| Jürgen Dormann    |       | 1940       |       | Chairman of the Board |
| Roger Agnelli          |       | 1959       |       | Director              |
| Louis R. Hughes        |       | 1949       |       | Director              |
| Hans Ulrich Märki |       | 1946       |       | Director              |
| Michel de Rosen        |       | 1951       |       | Director              |
| Michael Treschow       |       | 1943       |       | Director              |
| Bernd W. Voss          |       | 1939       |       | Director              |
| Jacob Wallenberg       |       | 1956       |       | Director              |

 

ABB Ltd became the ultimate holding company of the ABBGroup on June 28, 1999. The biographies of Messrs. Dormann andWallenberg also note the years of service they provided to ABB Asea BrownBoveri Ltd, the former parent company of the ABB Group.

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*JürgenDormann* has been the Chairman of ABB’s board ofdirectors since November 2001 and served as ABB’s President and ChiefExecutive Officer from September 5, 2002 until December 31, 2004. Hehas been a member of ABB’s board of directors since June 28, 1999. From1998 to 1999, he served as a member of the board of directors of ABB Asea BrownBoveri Ltd. He is the vice-chairman of the board of directors of sanofi aventis(France) and of Adecco (Switzerland). He is a member of the board of directorsof IBM (U.S.) and BG Group (U.K.). Mr. Dormann is a German citizen.

*RogerAgnelli* was elected to ABB’s board of directors at theannual general meeting of shareholders on March 12, 2002. He is thePresident and Chief Executive Officer of Companhia Vale do Rio Doce (Brazil).He is also a member of the board of directors of Spectra Energy (U.S., as from January 2007),Petrobras (Brazil, as from April 2006) and Suzano Petroquimica (Brazil).He was a member of the Board of Duke Energy (U.S.) through December 2006. Mr. Agnelliis a Brazilian citizen.

*LouisR. Hughes*was elected to ABB’s board of directors atthe annual general meeting of shareholders on May 16, 2003. Mr. Hughesis the chairman of the board of directors of Maxager Technology and thechairman of the board of directors and chief executive officer of GBSLaboratories (both U.S.). He is also a member of the boards of directors ofAkzoNobel (The Netherlands, as from April 2006), MTU (Germany), Sulzer(Switzerland) and Electrolux (Sweden). He was also a member of the board ofdirectors of BT Group (U.K, through March 2006). He is an ExecutiveAdvisor to Windpoint (U.S.) and a member of the British Telecom U.S. advisoryboard. Mr. Hughes is a United States citizen.

*HansUlrich Märki***was elected to ABB’s board of directorsat the annual general meeting of shareholders on March 12, 2002. He ischairman of IBM Europe, Middle East and Africa (France) and a member of theboard of directors of Mettler-Toledo International and Menuhin Festival GstaadAG (both Switzerland). Mr. Märki is a Swiss citizen.

*Michelde Rosen***was elected to ABB’s board ofdirectors at the annual general meeting of shareholders on March 12, 2002.He is the chairman, president and chief executive officer of ViroPharma (U.S.).He is a member of the boards of directors of Ursinus College, PennsylvaniaBiotech, and, as from April 2006, of Endo Pharmaceutical Holdings Inc.(all U.S.). He is also a member of the advisory boards of Paul Capital PartnersRoyalty Fund and the Global Business Coalition on HIV/AIDS (both U.S.). Mr. deRosen is a French citizen.

*MichaelTreschow***was elected to ABB’s board ofdirectors at the annual general meeting of shareholders on May 16, 2003.He is the chairman of the boards of directors of Ericsson, Electrolux and theConfederation of Swedish Enterprise (all Sweden). Mr. Treschow is aSwedish citizen.

*BerndW. Voss***was elected to ABB’s board ofdirectors at the annual general meeting of shareholders on March 12, 2002.He is a member of the supervisory board of Dresdner Bank (Germany). He is alsoa member of the boards of directors of Allianz Leben, Continental, Hapag-Lloyd,Osram, Quelle (until March 2006), and Wacker Chemie (all Germany). Mr. Vossis a German citizen.

*Jacob Wallenberg***has been a member ofABB’s board of directors since June 28, 1999. From March 1999 to June 1999,he served as a member of the board of directors of ABB Asea Brown Boveri Ltd.He is the chairman of the board of directors of Investor AB (Sweden). He isvice-chairman of SEB Skandinaviska Enskilda Banken, Atlas Copco AB and SAS AB(all Sweden). He is also a member of the boards of directors of the Knut andAlice Wallenberg Foundation, Thisbe AB, the Nobel Foundation, and the StockholmSchool of Economics (all Sweden). Mr. Wallenberg is a Swedish citizen.

**SENIOR MANAGEMENT**

Our board of directors has delegated the executivemanagement of ABB to the chief executive officer and the other members of theexecutive committee. The chief executive officer, and under his direction theother members of the executive committee, are responsible for our overallbusiness and affairs and 

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day-to-daymanagement. The chief executive officer reports to the board regularly, andwhenever extraordinary circumstances so require, on the course of our businessand financial performance and on all organizational and personnel matters,transactions and other issues relevant to the group. Upon proposal by thegovernance, nomination and compensation committee, the executive committee isappointed and discharged by the board.

The followingtable sets forth the name and year of birth of each member of the executivecommittee as of December 31, 2006, the position of each member as of suchdate, and the date each member was appointed to such position.
| Name                  | ** ** | ** ** | ** ** | **Born**                                                                                    | ** ** | **Position as of  December 31, 2006** | ** ** | **Year of  Appointment** |
|-----------------------|------------|------------|------------|---------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------|
| Fred Kindle           |       | 1959       |       | President and Chief Executive Officer                                                       |       | 2005                                       |
| Michel Demaré    |       | 1956       |       | Chief Financial Officer                                                                     |       | 2005                                       |
| Dinesh C. Paliwal     |       | 1957       |       | President, Global Markets and Technology                                                    |       | 2003                                       |
| Ulrich Spiesshofer    |       | 1964       |       | Responsible for Corporate Development                                                       |       | 2005                                       |
| Gary Steel            |       | 1952       |       | Responsible for Human Resources                                                             |       | 2003                                       |
| Bernhard Jucker       |       | 1954       |       | Responsible for the Power Products division and  temporarily for the Power Systems division |       | 2006                                       |
| Tom Sjökvist     |       | 1947       |       | Responsible for the Automation Products division                                            |       | 2006                                       |
| Veli-Matti Reinikkala |       | 1957       |       | Responsible for the Process Automation division                                             |       | 2006                                       |
| Anders Jonsson        |       | 1950       |       | Responsible for  the Robotics division                                                      |       | 2006                                       |

 

*FredKindle***has been our Chief ExecutiveOfficer since January 2005, after joining ABB on September 1, 2004. Mr. Kindleis a member of the board of directors of VZ Holding Ltd. and of ZurichFinancial Services Ltd. (both Switzerland). Before joining ABB, he was thechief executive officer of Sulzer (Switzerland). Mr. Kindle was with theSulzer Group since 1992. In 2001, he became chief executive officer of Sulzerand from 2003 to 2004, he was also a member of Sulzer’s board of directors. Mr. Kindlehas dual Liechtenstein and Swiss citizenship.

*MichelDemaré***joined ABB as Chief FinancialOfficer on January 1, 2005. From 2002 until 2004 Mr. Demaré was vicepresident and chief financial officer of Baxter Europe. From 1984 until 2002,he held various positions within Dow Chemical (U.S.). Mr. Demaré is aBelgian citizen.

*Dinesh C.Paliwal***was appointed President, GlobalMarkets and Technology in January 2006. Mr. Paliwal is a member ofthe board of directors of EMBARQ (U.S.) and he is Chairman of the U.S. “NationalForeign Trade Council” (U.S.) He was the Head of our former AutomationTechnologies division from January 2003 through December 2005. From April 2002to January 2003, he was our Executive Vice President responsible for ourformer Industries division. Between January 1, 2001 and March 2002,he was our Executive Vice President responsible for our former ProcessIndustries division. From 1990 to 2001, he held various positions with ABB. Mr. Paliwalhas dual Indian and U.S. citizenship.

*UlrichSpiesshofer***joined ABB as Head of CorporateDevelopment in November 2005. From 2002 until he joined ABB, he was SeniorPartner, Global Head of Operations Practice at Roland Berger AG. Prior to 2002,he held various positions with A.T. Kearney International AG and itsaffiliates. Mr. Spiesshofer is a German citizen.

*GarySteel**joined ABB as*Head of HumanResources in January 2003. In 2002, he was the Human Resources Director,Group Finance at Royal Dutch Shell. Between 1976 and 2002, he held severalhuman resources and employee relations positions at Royal Dutch Shell. Mr. Steelis a British citizen.

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*BernhardJucker***was appointed executive committeemember responsible for our Power Products division in January 2006. From2003 to 2005, he was ABB’s country manager for Germany. From 1980 to 2003 heheld various positions in ABB. Mr. Jucker is a Swiss citizen.

*TomSjökvist***was appointed executive committeemember responsible for our Automation Products division in January 2006.From 2003 to 2005, he was the head of our Automation Products business area.From 1972 to 2003 he held several positions with ABB. Mr. Sjökvist is aSwedish citizen.

*Veli-MattiReinikkala***was appointed executive committeemember responsible for our Process Automation division in January 2006. In2005, he was the head of our Process Automation business area. From 1993 to2005 he held several positions with ABB. Mr. Reinikkala is a Finnishcitizen.

*AndersJonsson***was appointed executive committeemember responsible for our Robotics division in January 2006. In 2005, hewas the head of our former Automation Technologies division in China. From 1976to 2004, he held a range of positions with ABB. Mr. Jonsson is a Swedishcitizen.

As of January 1, 2007, the composition of theexecutive committee changed as follows: Peter Leupp joined the executive committee and became responsible forthe Power Systems division and Diane de Saint Victor joined the executivecommittee as General Counsel.

Thefollowing table sets forth the names and the years of birth of the individualswho became members of the executive committee on January 1, 2007, theirpositions with us and the dates of their initial appointment to thosepositions.
| Name                  | ** ** | ** ** | ** ** | **Born**                                | ** ** | **Current Position** | ** ** | **Year of  Appointment** |
|-----------------------|------------|------------|------------|-----------------------------------------|------------|----------------------|------------|--------------------------|
| Diane de Saint Victor |       | 1955       |       | General Counsel                         |       | 2007                 |
| Peter Leupp           |       | 1951       |       | Responsible for Power  Systems division |       | 2007                 |

 

*Dianede Saint Victor* joined ABB as General Counsel in January 2007.From 2004 to 2006, she was General Counsel of European Aeronautic Defence andSpace (France/Germany). From 2003 to 2004, she was General Counsel of SCAHygiene Products (Germany). From 1993 to 2003, she held various positions withHoneywell International (France/Belgium). Ms. de Saint Victor is a Frenchcitizen.

*Peter Leupp*wasappointed executive committee member responsible for our Power Systems divisionin January 2007. From 2005 to 2006, he was ABB’s region manager for NorthAsia and from 2001 to 2006, he was President of ABB Ltd China. From 1989 to2001, he held various positions in ABB. Mr. Leupp is a Swiss citizen.

**CORPORATEGOVERNANCE**

We are committed to the highest internationalstandards of corporate governance, and we support the general principles as setforth in the Swiss Code of Best Practice for Corporate Governance as well asthose of the capital markets where ABB shares are listed:  the SWX Swiss Exchange (traded on virt-x),the Stockholm Stock Exchange, and the New York Stock Exchange (where our sharesare traded in the form of ADSs).

As ABB Ltd is organized in Switzerland, we are subjectto the Swiss Code of Obligations. In addition, our principles and rules oncorporate governance are laid down in our articles of incorporation, our boardregulations, our standards for corporate governance, the regulations of ourboard committees and our Code of Conduct. It is the duty of our board ofdirectors to review and amend or propose amendments to those documents fromtime to time to reflect the most recent developments and practices as well asto ensure compliance with applicable laws and regulations.

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In November 2003, theSEC approved changes to the New York Stock Exchange’s listing standards relatedto the corporate governance practices of listed companies. Under these rules,listed foreign private issuers, such as ABB, must disclose any significant waysin which their corporate governance practices differ from those followed by U.S.domestic companies under the New York Stock Exchange listing standards. Thisdisclosure can be found on our web site under *www.abb.com/about*.

**Duties of Directorsand Officers**

The directors and officers of a Swiss corporation arebound, as specified in the Swiss Code of Obligations, to perform their dutieswith all due care, to safeguard the interests of the corporation in good faithand to extend equal treatment to shareholders in like circumstances.

The Swiss Code ofObligations does not specify what standard of due care is required of thedirectors of a corporate board. However, it is generally held by Swiss legalscholars and jurisprudence that the directors must have the requisitecapability and skill to fulfill their function, and must devote the necessarytime to the discharge of their duties. Moreover, the directors must exerciseall due care that a prudent and diligent director would have taken in likecircumstances. Finally, the directors are required to take actions in the bestinterests of the corporation and may not take any actions that may be harmfulto the corporation.

***Exercise of Powers***

Directors, as well asother persons authorized to act on behalf of a Swiss corporation, may performall legal acts on behalf of the corporation which the business purpose, as setforth in the articles of incorporation of the corporation, may entail. Pursuantto court practice, such directors and officers can take any action that is notexplicitly excluded by the business purpose of the corporation. In so doing,however, the directors and officers must still pursue the duty of due care andthe duty of loyalty described above and must extend equal treatment to thecorporation’s shareholders in like circumstances. Our articles of incorporationdo not contain provisions concerning a director’s power, in the absence of anindependent quorum, to vote on the compensation to themselves or any members oftheir body.

***Conflicts of Interest***

Swiss law does not have ageneral provision on conflicts of interest and our articles of incorporation donot limit our directors’ power to vote on a proposal, arrangement or contractin which the director or officer is materially interested. However, the SwissCode of Obligations requires directors and officers to safeguard the interestsof the corporation and, in this connection, imposes a duty of care and loyaltyon directors and officers. This rule is generally understood and sorecommended by the Swiss Code of Best Practice for Corporate Governance asdisqualifying directors and officers from participating in decisions, otherthan in the shareholders’ meeting, that directly affect them.

***Confidentiality***

Confidential information obtained by directors andofficers of a Swiss corporation acting in such capacity must be kept confidentialduring and after their term of office.

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***Sanctions***

If directors and officers transact business on behalfof the corporation with bona fide third parties in violation of their statutoryduties, the transaction is nevertheless valid as long as it is not explicitlyexcluded by the corporation’s business purpose as set forth in its articles ofincorporation. Directors and officers acting in violation of their statutoryduties—whether transacting business with *bonafide* third parties or performing any other acts on behalf of thecompany—may, however, become liable to the corporation, its shareholders andits creditors for damages. The liability is joint and several, but the courtsmay apportion the liability among the directors and officers in accordance withtheir degree of culpability.

In addition, Swiss law contains a provision underwhich payments made to a shareholder or a director or any person(s) associatedtherewith other than at arm’s length must be repaid to the company if theshareholder or director or any person associated therewith was acting in badfaith.

If the board of directorshas lawfully delegated the power to carry out day-to-day managementto a different corporate body, *e.g.*,the executive committee, it is not liable for the acts of the members of thatdifferent corporate body. Instead, the directors can only be held liable fortheir failure to properly select, instruct and supervise the members of thatdifferent corporate body.

**Board Practices**

Board meetings are convened by the chairman or uponrequest by a director or the chief executive officer. During 2006, five board meetings were held. Writtendocumentation covering the various items of the agenda for each board meetingis sent out in advance to each board member in order to allow each member timeto study the covered matters prior to the meetings. Decisions made at the boardmeetings are recorded in written minutes of the meetings. All board members arenon-executive directors and all, with the exception of Jürgen Dormann, arecurrently independent. This determination has been made in accordance with theSwiss Code of Best Practice and the independence criteria set forth in thecorporate governance rules of the New York Stock Exchange. Mr. Dormannheld also the position of president and chief executive officer from September 5,2002 until December 31, 2004, in addition to his ongoing role as chairman.

Our board of directors has appointed from among itsmembers two board committees, the finance, audit and compliance committee andthe governance, nomination and compensation committee. The duties andobjectives of the board committees are set forth in charters issued or approvedby the board of directors. These committees assist the board in its tasks andreport regularly to the board.

The finance, audit and compliance committee overseesthe financial reporting processes and accounting practices, evaluates theindependence, objectivity and effectiveness of external and internal auditors,reviews audit results, monitors compliance with the laws and regulationsgoverning the preparation of our financial statements and assesses theprocesses relating to our risk management and internal control systems. Thefinance, audit and audit committee is required to be composed of three or moreindependent directors who have a thorough understanding of finance andaccounting. The chief financial officer and, as determined by the committee’schairman for matters related to their respective functions, the head ofinternal audit, as well as the external auditors may participate in the financeand audit committee meetings. Mr. Voss is the chairman of the finance,audit and compliance committee, and Messrs. Hughes and Wallenberg aremembers. The committee met five times in 2006.

The governance, nominationand compensation committee determines the selection of candidates for the boardof directors and its committees, plans for the succession of directors andensures that newly elected directors receive the appropriate introduction andorientation and that all directors receive adequate continuing education andtraining to fulfill their obligations. The governance, nomination andcompensation committee proposes the remuneration of the members of theexecutive committee. The 

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governance,nomination and compensation committee is required to be composed of three ormore independent directors. Upon invitation by the committee’s chairman, thechief executive officer or other members of the executive committee mayparticipate in the committee meetings, provided that any potential conflict ofinterest is avoided and confidentiality of the discussions is maintained. Mr. Märkiis the chairman of the governance, nomination and compensation committee, and Messrs. Agnelliand de Rosen are members. The committee met eleven times in 2006.

**COMPENSATION**

**Board of Directors**

The compensationlevels of the board of directors in 2006 was as follows:

·                    Chairman:  CHF 1,500,000 (approximately $1,230,012 at December 31,2006);

·                    Member:  CHF 250,000 (approximately $205,002 at December 31,2006);

·                    Committeechairman:  CHF 50,000 (approximately$41,000 at December 31, 2006); and

·                    Committeemember:  CHF 20,000 (approximately$16,400 at December 31, 2006).

These amounts were paid to the directors insemi-annual installments in 2006, in July and November.

Board members receive at least 50 percent (and mayelect to receive a higher ratio) of their net compensation (i.e., after deduction of socialsecurity costs and withholding tax, where applicable), in ABB shares, whichthey are entitled to receive at a discount of 10 percent of the average sharetrading price during a 30-day reference period. During the term of boardmembership, the ABB shares are kept in a blocked account and may be disposed ofonly after the respective person has left the board of directors. The grosscompensation paid to board members in shares and cash with respect to 2006amounted to CHF 3,430,000 (approximately $2,812,628 at December 31, 2006).

Ourcurrent board members received the following compensation (denominated in SwissFrancs) with respect to 2006 (the calculation of the number of shares and thecash amount varies depending on whether the person is subject to taxation atsource):

| ** **             | ** ** | **Board Member  Compensation** | ** ** | **Committee Member  Compensation** | ** ** | **Total Annual  Compensation  (gross)** | ** ** | **Amount received  in cash (net)** | ** ** | **Number of  shares received** | ** ** |
|------------------------|------------|-------------------------------------|------------|-----------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------------|------------|------------------------------------------|------------|
| Jürgen Dormann    |       |                                | 1,500,000  |                                    |       |                                         | —     |                                              |       |                                     | 1,500,000  |   |   |   | 479,317 |   |   |   | 32,284 |   |   |
| Roger Agnelli          |       |                                | 250,000    |                                    |       |                                         | 20,000     |                                              |       |                                     | 270,000    |   |   |   | 46,953 |   |   |   | 9,540 |   |   |
| Louis R. Hughes        |       |                                | 250,000    |                                    |       |                                         | 20,000     |                                              |       |                                     | 270,000    |   |   |   | 93,912 |   |   |   | 6,324 |   |   |
| Hans Ulrich Märki |       |                                | 250,000    |                                    |       |                                         | 50,000     |                                              |       |                                     | 300,000    |   |   |   | — |   |   |   | 19,274 |   |   |
| Michel de Rosen        |       |                                | 250,000    |                                    |       |                                         | 20,000     |                                              |       |                                     | 270,000    |   |   |   | 93,912 |   |   |   | 6,324 |   |   |
| Michael Treschow       |       |                                | 250,000    |                                    |       |                                         | —     |                                              |       |                                     | 250,000    |   |   |   | 86,915 |   |   |   | 5,853 |   |   |
| Bernd W. Voss          |       |                                | 250,000    |                                    |       |                                         | 50,000     |                                              |       |                                     | 300,000    |   |   |   | — |   |   |   | 14,191 |   |   |
| Jacob Wallenberg       |       |                                | 250,000    |                                    |       |                                         | 20,000     |                                              |       |                                     | 270,000    |   |   |   | 93,912 |   |   |   | 6,324 |   |   |
| Total                  |       |                                | 3,250,000  |                                    |       |                                         | 180,000    |                                              |       |                                     | 3,430,000  |   |   |   | 894,921 |   |   |   | 100,114 |   |   |

 

With the exception of Mr. Dormann, for the periodduring which he served as both chairman of the board and chief executiveofficer, board members do not receive pension benefits and are not eligible toparticipate in any of our incentive programs.

No payments were made toformer board members in 2006.

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**Executive Committee**

Members of the executive committee receive annual basecompensation. They are further eligible for annual bonus compensation,determined in accordance with the principles explained below.

In addition to receiving annual base and bonuscompensation, members of the executive committee are entitled to participate inthe employee share acquisition plan and long-term incentive share plan. Somemembers of the executive committee have participated in the earlier launches ofour management incentive plan. Executive committee members receive customaryadditional benefits such as pension contributions, a company car, healthinsurance compensation and contributions to children’s education in some cases(see table below).

Thetable below shows the gross payments (i.e. compensation before deduction ofemployee social insurance and pension contributions) that were made to themembers of the executive committee with respect to 2006, as well as theemployer’s part of the ordinary pension contributions. All members of theexecutive committee are insured under the ABB Pension Fund, the ABBSupplementary Insurance Plan and the Tödi Foundation (the governing documentsfor each of these are available under www.abbvorsorge.ch), with the exceptionof Dinesh Paliwal, who is insured under the pension plan in the U.S., andVeli-Matti Reinkkala, who is insured under the pension plan in Finland. Membersof the executive committee based in Switzerland who are between the ages of 45and 60 also participated in the equalization plan, a defined benefits plancapped under Swiss law, within the Tödi Foundation which was established in2005. The table in the Share Ownership section below shows the share basedcompensation received by members of the executive committee. 
| Amounts in  Swiss francs | ** ** | ** ** | ** ** | **Salary** | ** ** | **Bonus**(5) | ** ** | **Additional  compensation** | ** ** | **Total annual  compensation**(6) | ** ** | **Employer’s  pension  contributions** | ** ** | **Costs of  company  car** | ** ** | **Costs of  health  insurance** | ** ** | **Costs of  children’s  education** | ** ** |
|------------------------------------|------------|------------|------------|------------|------------|--------------|------------|------------------------------|------------|----------------------------------------|------------|---------------------------------------------|------------|---------------------------------|------------|--------------------------------------|------------|-----------------------------------------------|------------|
| Fred Kindle(1)                     |       | 1,404,168  |       | 1,977,615  |       |         | 0          |                         |       |                                   | 3,381,783  |                                        |       |                            | 388,640    |                                 |       |                                          | 34,890     |   |   |   | 8,155 |   |   |   | 0 |   |   |
| Dinesh Paliwal(2)                  |       | 902,430    |       | 1,056,060  |       |         | 45,123     |                         |       |                                   | 2,003,613  |                                        |       |                            | 676,719    |                                 |       |                                          | 29,268     |   |   |   | 21,075 |   |   |   | 78,921 |   |   |
| Michel Demaré                 |       | 791,670    |       | 756,480    |       |         | 0          |                         |       |                                   | 1,548,150  |                                        |       |                            | 521,860    |                                 |       |                                          | 28,808     |   |   |   | 7,687 |   |   |   | 30,900 |   |   |
| Gary Steel                         |       | 716,668    |       | 654,264    |       |         | 0          |                         |       |                                   | 1,370,932  |                                        |       |                            | 581,100    |                                 |       |                                          | 26,574     |   |   |   | 8,828 |   |   |   | 68,690 |   |   |
| Ulrich Spiesshofer                 |       | 650,000    |       | 616,395    |       |         | 0          |                         |       |                                   | 1,266,395  |                                        |       |                            | 124,310    |                                 |       |                                          | 28,460     |   |   |   | 7,639 |   |   |   | 0 |   |   |
| Bernhard Jucker                    |       | 750,000    |       | 721,500    |       |         | 0          |                         |       |                                   | 1,471,500  |                                        |       |                            | 170,520    |                                 |       |                                          | 29,964     |   |   |   | 8,106 |   |   |   | 0 |   |   |
| Samir Brikho(3)                    |       | 525,000    |       | 457,281    |       |         | 0          |                         |       |                                   | 982,281    |                                        |       |                            | 113,067    |                                 |       |                                          | 21,934     |   |   |   | 5,429 |   |   |   | 0 |   |   |
| Tom Sjökvist                  |       | 700,000    |       | 689,150    |       |         | 0          |                         |       |                                   | 1,389,150  |                                        |       |                            | 517,660    |                                 |       |                                          | 29,368     |   |   |   | 8,237 |   |   |   | 0 |   |   |
| Veli-Matti Reinikkala(4)           |       | 621,945    |       | 600,488    |       |         | 8,739      |                         |       |                                   | 1,231,172  |                                        |       |                            | 136,905    |                                 |       |                                          | 13,171     |   |   |   | 2,862 |   |   |   | 0 |   |   |
| Anders Jonsson                     |       | 520,000    |       | 319,800    |       |         | 0          |                         |       |                                   | 839,800    |                                        |       |                            | 169,500    |                                 |       |                                          | 27,080     |   |   |   | 8,950 |   |   |   | 0 |   |   |
| Total                              |       | 7,581,881  |       | 7,849,033  |       |         | 53,862     |                         |       |                                   | 15,484,776 |                                        |       |                            | 3,400,281  |                                 |       |                                          | 269,517    |   |   |   | 86,968 |   |   |   | 178,511 |   |   |

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(1)              Fred Kindle received an additional CHF 1,500,000 in theform of 63,966 ABB shares as a special bonus for 2006. Half of these shareswere delivered in March 2007 and the other half will be delivered in March 2008.

(2)              Dinesh Paliwal received his compensation in U.S.dollars which has been converted into Swiss francs at the rate of 1.2195 perU.S. dollar. He received additional compensation for cost of livingadjustments, financial counseling, and term life insurance premiums.

(3)              Samir Brikho left ABB at the end of September 2006and therefore received a pro rata share of his salary for 2006. He alsoreceived his pro-rata bonus for 2006.

(4)              Veli-Matti Reinikkala received his compensation and carbenefits in U.S. dollars which have been converted into Swiss francs at therate of 1.2195 per U.S. dollar. He received his employer pension contributionsand health insurance benefits in euro which have been converted into Swissfrancs using a rate of 1.6094 per euro. His additional compensation was forfinancial counseling and term life insurance premiums.

(5)              The table above provides compensation amounts withrespect to 2006 on an accrual basis. Bonuses relating to 2006 were paid in 2007except with respect to Samir Brikho who received his bonus when he left in2006.

(6)              Excluding employer’s pensioncontributions, costs of company car, costs of health insurance, contributionsto children’s education, and share-based compensation.

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**Bonus determination**

ABB has implemented a bonus structure that we believealigns the performance expectations of ABB senior managers with the interestsof ABB shareholders.

The performance of executive committee members ismeasured at least 50 percent on ABB Group results. The performance of groupfunction heads, business unit managers and regional managers is measured atleast 25 percent on ABB Group results and in addition is also measured on theresults of the organizations to which they report.

Resulting bonuses are paidin March of the following year after full-year results are announced. TheCEO has a maximum bonus opportunity of 150 percent of his base salary. Allother executive committee members have a maximum bonus opportunity of 100percent of their base salary except for the President, Global Markets andTechnology, who has had a maximum bonus opportunity of 120 percent of his basesalary since 2006.

**Compensation toformer members of the executive committee**

In 2006, we did not makeany payments to former members of the executive committee.

**EmploymentContracts**

None of our board membersor executive committee members benefits from a “golden parachute” clause whichwould become effective upon a change of control. Employment contracts normallycontain notice periods of 12 months for executive committee members, duringwhich they are entitled to salaries and bonuses. In addition, executivecommittee members may be entitled to compensation for up to an additional 12months to the extent they cannot find comparable employment. No director has acontract with us providing for further benefits upon termination of his boardmembership, other than pursuant to applicable employment agreements in case ofsimultaneous termination of their employment.

**Additional fees andremuneration**

Other than as disclosedherein, none of the members of our board of directors, our executive committee,or persons closely linked to any of them received any additional fees andremunerations for services rendered to us. A closely linked person includes aspouse, children below the age of eighteen, legal or natural person acting as afiduciary and legal entities controlled by a member of the board of directorsor the executive committee.

**Loans andguarantees granted to the board of directors or executive committee.**

We have not granted any loans or guarantees to ourboard members or members of our executive committee in 2006.

105

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**EMPLOYEEPARTICIPATION PROGRAMS**

In order to align ouremployees’ interests with our business goals and financial results, we operatea number of incentive plans, linked to ABB Ltd shares, which are summarizedbelow (for a more detailed description of each incentive plan, please refer toNote 21 to the Consolidated Financial Statements).

**Employee shareacquisition plan (ESAP)**

The ESAP is an employee stock-option plan with asavings feature. Employees save over a 12-month savings period, by way ofmonthly salary deductions. The maximum monthly savings amount is the lower of10 percent of gross monthly salary or the local currency equivalent of 750Swiss francs. At the end of the savings period, employees choose whether toexercise their stock options to buy ABB Ltd shares (ADS in the case ofemployees in the United States) at the exercise price set at the grant date, orhave their savings returned with interest. The savings are accumulated in abank account held by a third-party trustee on behalf of the participants andearn interest.

The maximum number of shares that each employee canpurchase has been determined based on the exercise price and the aggregatesavings for the 12-month period, increased by 10 percent to allow forcurrency fluctuations. If, at the exercise date, the balance of savings plusinterest exceeds the maximum amount of cash the employee must pay to fullyexercise their stock options, the excess funds will be returned to theemployee. If the balance of savings and interest is insufficient to permit theemployee to fully exercise their stock options, the employee has the choice,but not the obligation, to make an additional payment so that they may fullyexercise their stock options.

If an employee ceases to be employed by us, theaccumulated savings as of the date of cessation of employment will be returnedto the employee and the employee’s right to exercise their stock options willbe forfeited. Employees can withdraw from the ESAP at any time during thesavings period and will be entitled to a refund of their accumulated savings.

The exercise price pershare and ADS of 18.55 Swiss francs and $14.75, respectively, for the 2006grant, were determined using the closing price of the ABB Ltd share on SWXSwiss Exchange (virt-x) and ADS on the New York Stock Exchange on the grantdate.

**Managementincentive plan (MIP)**

We maintain an MIP under which we offer stock warrantsand warrant appreciation rights (WARs) to key employees for no consideration.

Warrants granted under the MIP allow participants topurchase shares of ABB Ltd at predetermined prices. Participants may sell thewarrants rather than exercise the right to purchase shares. Equivalent warrantsare listed by a third-party bank on the SWX Swiss Exchange, which facilitatespricing and transferability of warrants granted under the MIP. If theparticipant elects to sell the warrant on the market rather than exercise theright to purchase shares, the warrant may then be held by a non-employee ofABB. Each WAR gives the participant the right to receive, in cash, the marketprice of a warrant on the date of exercise of the WAR. The WARs arenon-transferable.

Participants may exercise or sell warrants andexercise WARs after the vesting period, which is three years from the date ofgrant. Vesting restrictions can be waived in certain circumstances such asdeath or disability. All warrants and WARs expire six years from the date ofgrant.

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Thedetails of the various unexpired grants as of December 31, 2006, are asfollows:

| **Grant**          | ** ** | ** ** | ** ** | **Warrant exercise price in CHF** | ** ** | **Subscription ratio** | ** ** |
|--------------------|------------|------------|------------|-------------------------------------------------------|------------|-----------------------------|------------|
| December 2001 |       |       | 13.49      |                                                  |       |                        | 100:25.21  |   |   |
| December 2003 |       |       | 7.00       |                                                  |       |                        | 5:1        |   |   |
| December 2004 |       |       | 7.50       |                                                  |       |                        | 5:1        |   |   |
| February 2006 |       |       | 15.30      |                                                  |       |                        | 5:1        |   |   |

 

**Long-term incentiveplan (LTIP)**

We have an LTIP for members of our Group ExecutiveCommittee and certain other executives (each an eligible participant). The LTIPinvolves annual conditional grants of ABB Ltd’s stock and, as of the 2006launch, contains a co-investment component, in addition to the share-priceperformance component existing in the previous launches.

Under the share-price performance component, the valueof the number of shares conditionally granted equals a certain percentage ofthe eligible participant’s base salary at the date of grant. These percentageswere 150 percent in 2005 (prior to the introduction of the co-investmentcomponent) and 100 percent in 2006. For individuals who become eligibleparticipants after the initial grant date of any individual launch, the numberof shares conditionally granted is adjusted in accordance with the terms andconditions of the LTIP. The actual number of shares that each eligibleparticipant will receive free of charge at a future date is dependent on (1) theperformance of ABB Ltd shares during a defined period (evaluation period) comparedto those of a selected peer group of publicly listed multinational companiesand (2) the term of service of the respective eligible participants inthat capacity during the evaluation period. The actual number of sharesreceived after the evaluation period cannot exceed 100 percent of theconditional grant.

Our performance compared to our peers over theevaluation period will be measured as the sum, in percentage terms, of theaverage percentage price change of the ABB Ltd share price over the evaluationperiod and an average annual dividend yield percentage (our performance).

In order for shares to vest, our performance over theevaluation period must be positive and equal to or better than half of thedefined peers. The actual number of shares to be delivered will be dependent onour ranking in comparison with the defined peers. The full amount of theconditional grant will vest if our performance is better than three-quarters ofthe defined peers’ performance.

Under the co-investment component of the LTIP, eacheligible participant is invited to deposit a number of ABB Ltd shares, up to anindividually defined maximum number of shares. If at the end of the evaluationperiod the individual remains an eligible participant and the owner of suchshares, then we will deliver free-of-charge to the eligible participant amatching number of shares.

Thedetails of the various unexpired grants are as follows:

| **Launch year** | ** ** | ** **                                   | ** ** | **Evaluation period** | ** ** | **Reference price (in Swiss francs)** |
|-----------------|------------|----------------------------------------------|------------|-----------------------|------------|---------------------------------------|
| 2005            |       | March 15, 2005, to  March 15, 2008 |       | 7.15                  |
| 2006            |       | March 15, 2006, to March 15, 2009  |       | 15.48                 |

 

The exact number of sharesto be received for the 2005 and the 2006 launches will be known only in March 2008and March 2009 respectively.

**SHARE OWNERSHIP**

Under our management incentive plan, certain membersof the executive committee received in 2003 warrants and warrant appreciationrights that remain outstanding. For details of the various warrant launchesplease see “Item 6. Directors, Senior Management and Employees—ManagementIncentive Plan.”

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As of March 31,2007, the members of the board of directors and executive committee as at December 31,2006, held the following numbers of shares (or ADSs representing such shares),the conditional right to receive ABB shares granted under the share-priceperformance component of the LTIP, the conditional right to receive matchingABB shares in connection with share deposits under the co-investment componentof the LTIP, and warrants and warrant appreciation rights:
|                        | ** ** | **Total  number** | ** ** | **Number of  conditionally  granted shares  under the 2005** | ** **  | **Number of  conditionally  granted shares  under the 2006** | ** ** | **Number of  matching  shares  deliverable  under the 2006  co-investment** | ** **  | **Number of warrants/warrant  appreciation rights held  under the MIP** | ** ** |
|------------------------|------------|-------------------|------------|----------------------------------------------------------------------------------|-------------|----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|-------------|-------------------------------------------------------------------------------------------------------|------------|
| **Name**               | ** ** | ** **        | ** ** | **of shares  held**                                                         | ** **  | **launch of the  LTIP**                                                | ** ** | **launch of the  LTIP**                                                          | ** **  | **portion of the  LTIP**                                                                    | ** ** | **2003  Grant** | ** ** | **2004  Grant** | ** ** | **2006  Grant** | ** ** |
| Jürgen Dormann    |       | 578,160           |       |                                                                             | 0           |                                                                             |       |                                                                                       | 0           |                                                                                                  |       |   | 0 |   |   | 1,000,000 |   | 0 |   | 0 |   |
| Roger Agnelli          |       | 132,805           |       |                                                                             | 0           |                                                                             |       |                                                                                       | 0           |                                                                                                  |       |   | 0 |   |   | 0 |   | 0 |   | 0 |   |
| Louis R. Hughes        |       | 58,074            |       |                                                                             | 0           |                                                                             |       |                                                                                       | 0           |                                                                                                  |       |   | 0 |   |   | 0 |   | 0 |   | 0 |   |
| Hans Ulrich Märki |       | 297,902           |       |                                                                             | 0           |                                                                             |       |                                                                                       | 0           |                                                                                                  |       |   | 0 |   |   | 0 |   | 0 |   | 0 |   |
| Michel de Rosen        |       | 87,678            |       |                                                                             | 0           |                                                                             |       |                                                                                       | 0           |                                                                                                  |       |   | 0 |   |   | 0 |   | 0 |   | 0 |   |
| Michael Treschow       |       | 69,330            |       |                                                                             | 0           |                                                                             |       |                                                                                       | 0           |                                                                                                  |       |   | 0 |   |   | 0 |   | 0 |   | 0 |   |
| Bernd W. Voss          |       | 135,534           |       |                                                                             | 0           |                                                                             |       |                                                                                       | 0           |                                                                                                  |       |   | 0 |   |   | 0 |   | 0 |   | 0 |   |
| Jacob Wallenberg       |       | 143,370           |       |                                                                             | 0           |                                                                             |       |                                                                                       | 0           |                                                                                                  |       |   | 0 |   |   | 0 |   | 0 |   | 0 |   |
| Fred Kindle            |       | 164,963           |       |                                                                             | 272,728     |                                                                             |       |                                                                                       | 92,055      |                                                                                                  |       |   | 40,115 |   |   | 0 |   | 0 |   | 0 |   |
| Dinesh Paliwal(1)      |       | 35,505            |       |                                                                             | 174,960     |                                                                             |       |                                                                                       | 62,394      |                                                                                                  |       |   | 18,840 |   |   | 0 |   | 0 |   | 0 |   |
| Michel Demaré(2)  |       | 62,471            |       |                                                                             | 157,343     |                                                                             |       |                                                                                       | 51,680      |                                                                                                  |       |   | 15,014 |   |   | 0 |   | 0 |   | 0 |   |
| Gary Steel             |       | 50,630            |       |                                                                             | 146,854     |                                                                             |       |                                                                                       | 46,512      |                                                                                                  |       |   | 13,416 |   |   | 0 |   | 0 |   | 0 |   |
| Ulrich Spiesshofer     |       | 24,840            |       |                                                                             | 107,955     |                                                                             |       |                                                                                       | 41,990      |                                                                                                  |       |   | 13,372 |   |   | 0 |   | 0 |   | 0 |   |
| Bernhard Jucker        |       | 21,885            |       |                                                                             | 0           |                                                                             |       |                                                                                       | 48,450      |                                                                                                  |       |   | 8,595 |   |   | 375,000 |   | 375,000 |   | 375,000 |   |
| Tom Sjökvist(3)   |       | 39,521            |       |                                                                             | 0           |                                                                             |       |                                                                                       | 45,220      |                                                                                                  |       |   | 12,451 |   |   | 375,000 |   | 375,000 |   | 375,000 |   |
| Veli-Matti Reinikkala  |       | 17,030            |       |                                                                             | 0           |                                                                             |       |                                                                                       | 43,001      |                                                                                                  |       |   | 5,680 |   |   | 150,000 |   | 312,500 |   | 375,000 |   |
| Anders Jonsson(4)      |       | 66,311            |       |                                                                             | 0           |                                                                             |       |                                                                                       | 33,592      |                                                                                                  |       |   | 3,603 |   |   | 412,500 |   | 475,000 |   | 475,000 |   |
| **Total**              | ** ** | **1,986,009**     | ** ** | ** **                                                                       | **859,840** |                                                                             | ** ** | ** **                                                                                 | **464,894** |                                                                                                  | ** ** | ** ** | **131,086** |   | ** ** | **2,312,500** | ** ** | **1,537,500** | ** ** | **1,600,000** | ** ** |
|                        |            |                   |            |                                                                                  |             |                                                                                  |            |                                                                                            |             |                                                                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)           Total number of shares held includes 16,665 shares heldjointly with spouse.

(2)           Total number of shares held includes 500 shares heldjointly with spouse.

(3)           Total number of shares held includes 7,560 shares heldby his spouse and child.

(4)           Total number of shares held includes60,046 shares held by or jointly held with his spouse. The table also includes100,000 warrants/warrant appreciation rights held by his spouse under each ofthe 2003, 2004, and 2006 grants of the MIP. The grants to his spouse were inconnection with his spouse’s role as an ABB employee.

In addition, all members of the Group ExecutiveCommittee as of December 31, 2006, except for Dinesh Paliwal, participatedin the third launch of the ESAP with the maximum annual savings amount of CHF9,000.

The members of our board of directors and executivecommittee as at December 31, 2006, owned less than 1 percent of our totalshares outstanding as of March 31, 2007.

Other than as stated in the table above, no personclosely linked to any member of the executive committee holds any shares of ABBor options in ABB shares. A closely linked person includes a spouse, childrenbelow the age of eighteen, a legal or natural person acting as a fiduciary andlegal entities controlled by a member of the board of directors or theexecutive committee.

Share amounts provided in this section do not includethe shares beneficially owned by Investor AB, of which Mr. Wallenberg ischairman. See “Item 7. Major Shareholders and Related Party Transactions—MajorShareholders.”

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**EMPLOYEES**

Abreakdown of our employees by geographic region for the years ended December 31,2006, 2005 and 2004, is as follows:

| ** **              | ** ** | **At December 31,** | ** ** |
|-------------------------|------------|-------------------------------|------------|
| **Region**              | ** ** | ** **                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Europe                  |       | 60,700                        |       | 58,500 |   | 60,200 |   |
| The Americas            |       | 18,700                        |       | 18,500 |   | 16,300 |   |
| Asia                    |       | 22,300                        |       | 18,400 |   | 16,500 |   |
| Middle East and  Africa |       | 6,500                         |       | 8,100 |   | 9,500 |   |
| Total                   |       | 108,200                       |       | 103,500 |   | 102,500 |   |
|                         |            |                               |            |  |  |  |  |  |  |

 

The proportion of ouremployees that are represented by labor unions or are the subject of collectivebargaining agreements varies based on the labor practices of each country inwhich we operate. We estimate that approximately 58 percent of all ABB Groupemployees are covered by collective bargaining agreements. We believe that ouremployee relations are good.

**Item 7.**                        MajorShareholders and Related Party Transactions

**MAJOR SHAREHOLDERS**

To thebest of our knowledge, as of March 31, 2007, the following persons held 5percent or more of our total current issued share capital as registered withthe commercial register of the Canton of Zurich:

| **Name**           | ** ** | ** **  | ** ** | **Number of  Shares Owned** | ** ** | **Total Percentage  of Share Capital** | ** ** |
|--------------------|------------|-------------|------------|---------------------------------------|------------|-------------------------------------------------------|------------|
| Investor AB(1)(2)  |       | 166,330,142 |       |                                  | 7.6        | %                                                     |       |
| FMR Corporation(3) |       | 109,485,941 |       |                                  | 5.0        | %                                                     |       |

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(1)             Mr. Jacob Wallenberg, a member of our board ofdirectors, is the chairman of Investor AB. The number of shares indicated abovedoes not include the shares owned by Mr. Wallenberg as an individual. See “Item 6.Directors, Senior Management and Employees—Share Ownership.”

(2)             According to a Schedule 13D filed with the SEC on November 22,2002, Investor AB had beneficial ownership of 120,255,178 of our registeredshares as of November 4, 2002. On March 8, 2005, Investor AB amendedits Schedule 13D, stating that it had beneficial ownership of 187,374,142registered shares, a reduction in its holdings after accounting for the 7-for-10rights offering in connection with our 2003 share capital increase. On February 21,2006, Investor AB further amended its Schedule 13D, stating that it had reducedits holdings to 166,330,142 shares.

(3)             On April 14, 2005, pursuant to the rules ofthe Federal Act on Stock Exchanges and Securities Trading (the “Swiss StockExchange Act”), FMR Corp. and certain of its affiliates announced that, as of April 7,2005, it held a total of 103,744,180 of our registered shares, which at thattime constituted 5.01 percent of our total share capital. On August 18,2005, pursuant to the rules of the Swiss Stock Exchange Act, theseshareholders announced that as of August 12, 2005, they owned less thanfive percent of our registered shares. On December 1, 2006, pursuant tothe rules of the Swiss Stock Exchange Act, these shareholders announcedthat as of November 22, 2006, they held a total of 111,888,682 of ourregistered shares, which at that time constituted 5.13% of our total sharecapital. On December 29, 2006, pursuant to the rules of the SwissStock Exchange Act, these shareholders announced that as of December 20,2006, they owned less than five percent of our registered shares. On February 23,2007, pursuant to the rules of the Swiss Stock Exchange Act, theseshareholders announced that as of February 14, 2007, they held a total of109,485,941 of our registered shares, which constitutes 5% of our total sharecapital.

Under our articles of incorporation, each registeredshare represents one vote. Major shareholders do not have different votingrights.

To our knowledge, we are not directly or indirectlyowned or controlled by any government or by any other corporation or person.

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Under the Swiss Stock Exchange Act, shareholders andgroups of shareholders acting in concert who reach, exceed or fall below thethresholds of 5 percent, 10 percent, 20 percent, 331¤3 percent, 50percent or 662¤3percent of the voting rights of a Swiss listed corporation must notify thecorporation and the exchange(s) in Switzerland on which such shares are listedof such holdings in writing within four trading days, whether or not the votingrights can be exercised. Following receipt of such a notification, thecorporation must inform the public within two trading days.

An additional disclosure requirement exists under theSwiss Federal Code of Obligations, according to which we must discloseindividual shareholders and groups of shareholders and their shareholdings ifthey hold more than 5 percent of all voting rights and we know or have reasonto know of such major shareholders. Such disclosures must be made once a yearin the notes to the financial statements as published in our annual report.

At March 31, 2007, wehad approximately 290,000 shareholders. Approximately 48,000 were U.S. holders,of which approximately 700 were record holders. Based on the share register,U.S. holders (including holders of ADSs) held approximately 17 percent of thetotal number of shares issued, including treasury shares, at that date.

**RELATED PARTYTRANSACTIONS**

In the normal course of our business, we purchaseproducts from, sell products to and engage in other transactions with entitiesin which we hold an equity interest. The amounts involved in these transactionsare not material to ABB Ltd. Also, in the normal course of our business, weengage in transactions with businesses that we have divested. We believe thatthe terms of the transactions we conduct with these companies are negotiated onan arm’s length basis.

We have participations in joint ventures andaffiliated entities, which are accounted for using the equity method. Many ofthese entities have been established to perform specific functions, such asconstructing, operating and maintaining a power plant. In addition to ourinvestments, we may provide products to specific projects, may act as acontractor of such projects or may operate the finished products. We may alsogrant lines of credit to these entities or for specific projects and guaranteetheir obligations, as discussed under the section entitled “Off-balance sheetarrangements” above. These joint ventures, affiliated companies orproject-specific entities generally receive revenues either from the sale ofthe final product or from selling the output generated by the product. Therevenue usually is defined by a long-term contract with the end user of theoutput.

Our risk with respect to these entities issubstantially limited to the carrying value of the companies on ourConsolidated Balance Sheets. The carrying value at December 31, 2006 and2005, of the entities that we account for using the equity method, or equityaccounted investees, was $636 million and $618 million, respectively.

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Our2006 and 2005 Consolidated Financial Statements include the following aggregateamounts related to transactions with equity accounted investees and otherrelated parties, including related party transactions, which are recorded inloss from discontinued operations, net of tax, and assets and liabilities heldfor sale and in discontinued operations:

| ** **                                   | ** ** | **2006**                         | ** ** | **2005** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|----------|------------|
| ** **                                   | ** ** | **(U.S. dollars   in millions)** | ** ** |
| Revenues                                     |       |                             | $          | 89       |       |   |   | $ | 63 |   |   |
| Receivables                                  |       |                             | $          | 30       |       |   |   | $ | 17 |   |   |
| Other current  assets                        |       |                             | $          | 11       |       |   |   | $ | 2 |   |   |
| Financing  receivables, non-current          |       |                             | $          | 48       |       |   |   | $ | 53 |   |   |
| Current  liabilities                         |       |                             | $          | 3        |       |   |   | $ | — |   |   |
| Short-term debt and  non-current liabilities |       |                             | $          | 10       |       |   |   | $ | 2 |   |   |

 

This section describes important businessrelationships between ABB and its non-executive Board members, or companies andorganizations represented by them.

Dresdner Bank AG (Dresdner) acted as co-dealer manageron ABB’s offer to accelerate conversion of its previously outstanding U.S.dollar convertible bonds in April 2006. Bernd W. Voss is a member of Dresdner’sSupervisory Board.

Skandinaviska Enskilda Banken AB (publ) (SEB) acted asco-dealer manager for the bond exchange offers that ABB made in May 2006.Jacob Wallenberg is the Vice Chairman of SEB.

During the year 2006, ABB and its subsidiaries wereparty to several contracts with Companhia Vale do Rio Doce and its subsidiaries(CVRD), including contracts for engineering services and the supply ofelectrical equipment for generation and distribution of power. The largestcontract was for supply of electrical equipment with a value of approximately$7 million. There are also various purchase orders for spare parts andmachinery in general. The total value of such contracts and purchase orders isapproximately $33 million. In addition, CVRD and ABB are currently negotiatinga proposed framework agreement to establish general terms and conditions forthe supply of products, systems and services among their respective groupsubsidiaries. The exchange rate used to convert Brazilian reais into U.S.dollars was R$2.14 to US$1.00. Roger Agnelli is President and CEO of CVRD.

In 2006, ABB received orders of approximately $62million from Duke Energy Corporation (Duke Energy) and its subsidiaries forpower and automation products, systems and services for both capitalimprovements and operation and maintenance projects. Also in 2006, ABB receivedorders from Petróleo Brasileiro S/A and its subsidiaries (Petrobras) forapproximately $17.3 million for automation products and systems. Roger Agnelliis a member of the Board of Directors of Petrobras and he was a member of theBoard of Directors of Duke Energy through December 2006.

During 2006, ABB received approximately $110 millionof orders for various ABB products including motors, drives and control systemsfrom Sulzer AG (Sulzer). Louis R. Hughes is a member of Sulzer’s Board ofDirectors.

On July 4, 2005, ABB entered into an unsecuredsyndicated $2 billion, five-year revolving credit facility, which becameavailable in July 2005. As of December 31, 2006, SEB has committed to$120 million out of the $2 billion total and Dresdner has committed to $105million out of the $2 billion total. Jacob Wallenberg is the Vice Chairman ofSEB and Bernd W. Voss is a member of Dresdner’s Supervisory Board.

In 2003, ABB entered into a ten-year agreement withIBM pursuant to which IBM took over the operation and support of ABB’sinformation systems infrastructure. The total value of the infrastructure 

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and related operationalservices to be provided under this agreement is expected to approach $1.7billion. Hans Ulrich Märki is Chairman of IBM Europe, Middle East and Africa.Jürgen Dormann has been a member of IBM’s Board of Directors since February 22,2005.

After comparing the revenues (or expected revenues inthe case of orders) generated from ABB’s business with SEB, Dresdner, IBM,CVRD, Duke Energy, Petrobras and Sulzer including the business described above,to the total annual revenues of those companies, the Board has determined thatABB’s business relationships with those companies do not constitute materialbusiness relationships and that all members of the Board—with the exception ofJürgen Dormann as Chairman and former CEO (until December 31, 2004)—areconsidered to be independent directors. This determination was made in accordancewith the Swiss Code of Best Practice and the independence criteria set forth inthe corporate governance rules of the New York Stock Exchange.

ABB obtains a portion ofits insurance coverage from Zurich Financial Services. Fred Kindle, the CEO ofABB, is also a director of Zurich Financial Services. It is our view that ourbusiness with Zurich Financial Services is not material.

In February 2004, wecompleted the sale of Etavis AG, our Building Systems business located inSwitzerland, but retained a 10 percent ownership interest. In connection withthis transaction, Etavis AG and our wholly owned subsidiary ABB Switzerland Ltdentered into a loan agreement, pursuant to which we have extended a loan in theamount of CHF 1,858,974 to Etavis AG. In July 2006, the loan was repaid in fulland terminated. The loan accrued interest at the rate of 3.5 percent per annumwhich was capitalized until the loan was repaid. The largest amount of thisloan outstanding during the period covered by this report was CHF 2,014,073 (or$1,651,556 using December 31, 2006 exchange rates). In addition, we agreedto use our best efforts to grant Etavis AG “most-favored nation” treatment forour new building technology products in Switzerland until March 2006. Asper March 31, 2007 there are, other than our 10% share, no furthercontractual overlaps with Etavis AG.

There are no cross-shareholdings in excess of 5percent of the share capital or the voting rights between ABB and anothercompany.

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**Item 8.**                        FinancialInformation

**CONSOLIDATEDSTATEMENTS AND OTHER FINANCIAL INFORMATION**

See “Item 18. FinancialStatements” for a list of financial statements contained in this report.

**LEGAL PROCEEDINGS**

We are involved in legal proceedings from time to timeincidental to the ordinary conduct of our business. These proceedingsprincipally involve matters relating to warranties, personal injury, damage toproperty, environmental liabilities and intellectual property rights.

ABB Barranquilla Inc. (ABB Barranquilla), a subsidiaryof our ABB Equity Ventures Inc. (ABB Equity Ventures) subsidiary, is an equityinvestor in Termobarranquilla S.A., Empresa de Servicios Publicos (TEBSA),which owns a Colombian independent power generation project known asTermobarranquilla. One of the other shareholders of TEBSA is CorporaciónElectrica de la Costa Atlántica (CORELCA), a government-owned Colombianelectric utility. CORELCA also purchases the electricity produced from theTermobarranquilla project. In addition to our equity investment, our formerpower generation business was EPC contractor for Termobarranquilla. The projectwas awarded to us and another company, as joint bidders, after a competitivebidding process in 1994. The co-bidder manages the operation and maintenance ofthe facility. We entered into certain side agreements with the co-bidder for asharing and reallocation of a portion of the amounts paid to us and to theco-bidder under the EPC contracts and the operation and maintenance contract.These side agreements were not disclosed at the time they were entered into toTEBSA or CORELCA. They also were not disclosed to the lenders who providedfinancing to TEBSA for the project, including U.S. Overseas Private InvestmentCorporation and U.S. Export-Import Bank, at the time of the closing of suchfinancing, as required pursuant to the lending documents.

On June 28, 2002, ABB Barranquilla, ABB EquityVentures, the co-bidder, TEBSA and CORELCA settled all claims and potentialclaims by TEBSA and CORELCA arising out of the entry into or performance of theside agreements. CORELCA and TEBSA released and discharged ABB and itsaffiliates from any claims that TEBSA and CORELCA had, may have or maythereafter claim to have, arising on or before June 28, 2002 (the effectivedate of the settlement) and whether or not previously asserted, which in anyway may arise out of or relate to the entry into or the performance of any ofthe side agreements. As consideration, we terminated the side agreements, paid$13 million to CORELCA, and reimbursed CORELCA for its legal expenses. Wealso agreed to indemnify (i) TEBSA for any and all penalties, fines andinterest, if any, incurred by TEBSA arising out of or in connection with theentry into or performance of the side agreements and (ii) CORELCA forliabilities, costs or expenses related to certain taxes payable by CORELCA as aresult of the settlement. On June 28, 2002, TEBSA’s project lendersconsented to the terms of the settlement and waived all defaults under theproject lending documents arising out of the entry into or performance of theside agreements. As consideration for the lenders’ consent and waiver, ABBSwitzerland Holding Ltd. and the co-bidder agreed to indemnify the projectlenders from and against (i) any investigation, litigation or proceedingrelated to the entry into or performance of the side agreements and (ii) anyother exposure as a consequence of, or which might be asserted against any ofthe project lenders by virtue of, the failure of ABB or the co-bidder todisclose the side agreements. The indemnification obligation is joint but notseveral and is limited to the credit exposure of the project lenders. On December 31,2006, the outstanding balance owed by TEBSA to the project lenders wasapproximately $252 million.

On February 3, 2003, ABB Ltd, ABB Holdings Inc.and ABB Equity Ventures entered into a compliance agreement with U.S. Export-ImportBank. The compliance agreement, among other things, requires us to adopt andmaintain additional compliance procedures and allow U.S. Export-ImportBank to audit our compliance. In response to information provided by ouremployees, during 2002 and 2003 we 

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undertook an investigationof potentially improper business conduct within our Oil, Gas and Petrochemicaldivision. In such internal investigations, we uncovered a limited number ofimproper payments by some of our employees and agents in the upstream businessin Africa, Central Asia, and South America, which we have voluntarily disclosedto the DoJ and the SEC. The payments, which violated our internal policies onbusiness ethics, were made in order to obtain from local officials confidentialinformation and commercial advantages, including with respect to contracts onwhich we were bidding. For further information on the sale of the upstream partof the Oil, Gas and Petrochemicals business, see “Item 5. Operating andFinancial Review and Prospects—Acquisitions, Investments and Divestitures—Divestituresof businesses, joint ventures and affiliated companies—Divestitures in 2004”and “Item 10. Additional Information—Material Contracts—Sale Agreement for Part ofthe Oil, Gas and Petrochemicals Business.”

Subsequently, ABB Vetco Gray Inc. and ABB Vetco GrayUK Ltd., two of our subsidiaries that were sold as part of the Oil, Gas andPetrochemicals upstream business in July 2004, pleaded guilty on July 6,2004, to two counts of conduct in violation of the FCPA, relating to thepayment of bribes to officials of NAPIMS, a Nigerian government agency thatevaluates and approves potential bidders for contract work on oil explorationprojects in Nigeria, including bidders seeking subcontracts with foreign oiland gas companies. According to the stipulated statement of facts, the twoformer subsidiaries paid more than $1 million in exchange for obtainingconfidential bid information and favorable recommendations from Nigeriangovernment agencies in connection with seven oil and gas construction contractsin Nigeria from which the companies expected to realize profits of almost $12million. As part of the plea agreement, we paid a criminal fine of $10.5million to the DoJ.

In a separate, but related, action, the SEC filed acomplaint against us. The complaint alleges violations of anti-bribery, booksand records, and internal control provisions of the FCPA, arising from allegedpayments in Nigeria, Kazakhstan and Angola. ABB Ltd has agreed to a civilsettlement that includes (i) the hiring of an independent consultant toreview our policies and procedures as they relate to compliance with the booksand records, internal accounting controls and anti-bribery provisions of theFCPA, (ii) the disgorgement of profits and pre-judgment interest of $5.9million, and (iii) a civil penalty payment of $10.5 million, which is tobe deemed satisfied by payment of the criminal fine to the DoJ discussed above.

In May 2004, we announced that we had undertakenan internal investigation which uncovered that certain of our employees—togetherwith employees of other companies active in the gas insulated switchgearbusiness—were involved in anti-competitive practices. We have reported promptlysuch practices to the appropriate authorities including the EuropeanCommission. The European Commission announced its decision on January 24,2007 and granted ABB full immunity from fines under the European Commission’sleniency program. We continue to cooperate with other competition authoritiesin several locations globally which are investigating anti-competitivepractices relating to gas insulated switchgear.

In June 2004, we disclosed to the SEC and theItalian authorities the preliminary results of our inquiry conducted with theassistance of outside counsel and forensic accountants. Those results showedthat from the first quarter of 1998 through the first quarter of 2004, themedium voltage business of our Power Products division overstated its earningsbefore interest and taxes (operating income) and net income through the earlyrecognition of certain revenue from incomplete projects, impropercapitalization of costs on certain projects, unrecorded liabilities andborrowings, and other improper journal entries. As a result, the financialstatements and certain financial data were restated in September 2004. Theinquiry also uncovered improper payments to an employee of an Italian powergeneration company. The Italian authorities have initiated formal criminalproceedings and we are not currently in a position to predict the outcome.

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On April 19, 2005, we announced that we had madea voluntary disclosure to the DoJ and the SEC of certain suspect payments madeby employees of ABB network management, a specialized U.S.-based business unit.The suspect payments became apparent during an internal investigation followingthe dismissal of two managers from the company in mid-2004. The paymentswere made to intermediaries in Latin America and in the Middle East inconnection with the company’s business, which is control software for utilitycustomers. If any of these payments result in enforcement action, we could besubject to civil and criminal penalties. We are continuing our investigationand compliance review of this business. In April 2007, we received arequest for additional information from the SEC regarding this matter.

On October 27, 2005, the United Nations IndependentInquiry Committee issued its final report on the United Nations Oil-for-FoodProgram. This report alleges that certain ABB subsidiaries made illicitpayments to the Iraqi government under contracts for humanitarian goods. We arecooperating on a voluntary basis with the SEC in its ongoing investigation ofthe matters raised in the report.

On February 8, 2006, we announced that we haddisclosed to the DoJ and the SEC suspect payments made by employees of companysubsidiaries in a number of countries including a country in the Middle East.These payments were discovered by us as a result of our internal compliancereviews. The payments may be in violation of the FCPA or other applicable laws.If we are found to have violated any of these laws, we could be liable forpenalties and other costs and the violations could otherwise negatively impactour business. We are cooperating on these issues with the relevant authoritiesand are continuing our internal investigations and compliance reviews. InApril 2007, we received a request for additional information from the SECregarding this matter.

On March 21, 2006, we issued a statement thatseveral of our units are being investigated by Brazilian authorities, who arepursuing antitrust allegations against several international power companies inthe country. We have been granted a conditional leniency and are cooperatingwith the Brazilian authorities.

In February 2007, the European Commissionconducted dawn raids at the premises of an ABB unit in Bad Honnef, Germany aspart of its investigation into suspected anti-competitive practices of certainmanufacturers of power transformers. We cannot estimate, however, the amount ofany potential fine that could result from this investigation.

There can be no assurance that any investigation by usor any governmental authority of these matters will not conclude thatviolations of applicable laws have occurred or that the results of theseinvestigations will not result in civil or criminal penalties, includingmonetary penalties or other sanctions, or otherwise have a material adverseeffect on our business and results of operations.

For a description of ourinvolvement in asbestos litigation, see “Item 5. Operating and Financial Reviewand Prospects—Asbestos Liabilities.”

**DIVIDENDS ANDDIVIDEND POLICY**

See “Item 3. KeyInformation—Dividends and Dividend Policy.”

**SIGNIFICANT CHANGES**

Except as otherwise described in this report, therehas been no significant change in our financial position since December 31,2006.

During the first quarter of 2007, bondholders servedconversion notices for an aggregate principal amount of approximately 790million Swiss francs (representing approximately 83 million shares) out ofthe total 1,000 million Swiss francs 3.5% CHF Convertible Bonds, due 2010,resulting in a decrease in our total debt by approximately $650 million andincrease in our stockholders’ equity of approximately the same amount.

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At the end of the first quarter of 2007, the Lummusbusiness was reclassified to discontinued operations based upon managmenetsexpectation to successfully dispose of this business. This decision was madeafter the criteria under Statement of Financial Accounting Standards No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets*were met. More specifically, management believes,based upon the positive feedback received on the documents distributed topotential purchasers during March 2007, that the business can besuccessfully disposed of within approximately twelve months from the end of thefirst quarter. At the date of filing this Form 20-F the Company hasnot issued any subsequent financial statements reflecting the reclassificationof this business to discontinued operations, therefore, the ConsolidatedFinancial Statements in this Form 20-F do not reflect thisreclassification.

In February 2007, weentered into an agreement to sell our 50 percent stake in Jorf Lasfar EnergyCompany S.C.A. (JLEC) as well as our 50 percent stake in a power plant in Neyveli,India, to TAQA, the Abu Dhabi National Energy Company PJSC, for $490 million.

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**Item9.**         The Offer and Listing

**MARKETS**

The shares of ABB Ltd areprincipally traded on virt-x (under the symbol “ABBN”) and on theStockholm Stock Exchange (under the symbol “ABB”). ADSs of ABB Ltd have beentraded on the New York Stock Exchange under the symbol “ABB” since April 6,2001. ABB Ltd’s ADSs are issued under the Amended and Restated DepositAgreement, dated May 7, 2001, with Citibank, N.A. as depositary. Each ADSrepresents one share.

**TRADING HISTORY**

No suspension in the trading of our shares occurred inthe years ended December 31, 2004, 2005 and 2006.

The table below setsforth, for the periods indicated, the reported high and low closing sale pricesfor the shares on virt-x and the Stockholm Stock Exchange and for theADSs on the New York Stock Exchange. All share prices have been adjusted toreflect the share capital increase completed in December 2003. 

| ** **                                                                                                   | ** ** | **virt-x** | ** ** | **Stockholm  Stock Exchange** | ** ** | **New York  Stock Exchange** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                   | ** ** | **High**   | ** ** | **Low**                            | ** ** | **High**                               | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| ** **                                                                                                   | ** ** | **(CHF)**  | ** ** | **(SEK)**                          | ** ** | **($)**                                | ** ** |
| **Annual highs and lows**                                                                                    |       |       |       |                               |       |                                   |       |   |   |   |   |   |   |
| 2002                                                                                                         |       | 14.52      |       | 1.29                               |       | 91.44                                  |       | 8.30 |   | 11.11 |   | 1.14 |   |
| 2003                                                                                                         |       | 6.66       |       | 2.02                               |       | 39.88                                  |       | 12.81 |   | 6.24 |   | 1.95 |   |
| 2004                                                                                                         |       | 8.18       |       | 6.20                               |       | 48.00                                  |       | 36.10 |   | 6.70 |   | 4.93 |   |
| 2005                                                                                                         |       | 12.95      |       | 6.35                               |       | 77.75                                  |       | 37.30 |   | 9.79 |   | 5.42 |   |
| 2006                                                                                                         |       | 21.85      |       | 12.75                              |       | 122.75                                 |       | 77.00 |   | 17.98 |   | 9.72 |   |
| **Quarterly highs and lows**                                                                                 |       |       |       |                               |       |                                   |       |   |   |   |   |   |   |
| 2005                First Quarter |       | 7.64       |       | 6.35                               |       | 44.70                                  |       | 37.30 |   | 6.52 |   | 5.42 |   |
| Second Quarter                                                                                               |       | 8.98       |       | 7.22                               |       | 54.75                                  |       | 42.70 |   | 7.01 |   | 6.10 |   |
| Third Quarter                                                                                                |       | 9.53       |       | 8.20                               |       | 57.50                                  |       | 49.80 |   | 7.70 |   | 6.25 |   |
| Fourth Quarter                                                                                               |       | 12.95      |       | 8.93                               |       | 77.75                                  |       | 55.00 |   | 9.79 |   | 6.96 |   |
| 2006                First Quarter |       | 16.50      |       | 12.75                              |       | 99.25                                  |       | 77.00 |   | 12.63 |   | 9.72 |   |
| Second Quarter                                                                                               |       | 18.35      |       | 13.00                              |       | 108.50                                 |       | 77.75 |   | 14.74 |   | 10.29 |   |
| Third Quarter                                                                                                |       | 16.85      |       | 14.20                              |       | 99.00                                  |       | 84.00 |   | 13.70 |   | 11.49 |   |
| Fourth Quarter                                                                                               |       | 21.85      |       | 16.40                              |       | 122.75                                 |       | 96.00 |   | 17.98 |   | 13.16 |   |
| 2007                First Quarter |       | 23.45      |       | 19.65                              |       | 131.75                                 |       | 113.75 |   | 19.13 |   | 15.96 |   |
| **Monthly highs and lows**                                                                                   |       |       |       |                               |       |                                   |       |   |   |   |   |   |   |
| 2006                October       |       | 18.90      |       | 16.40                              |       | 109.00                                 |       | 96.00 |   | 15.01 |   | 13.16 |   |
| November                                                                                                     |       | 19.85      |       | 18.20                              |       | 113.50                                 |       | 105.25 |   | 16.28 |   | 14.64 |   |
| December                                                                                                     |       | 21.85      |       | 19.35                              |       | 122.75                                 |       | 109.50 |   | 17.98 |   | 16.31 |   |
| 2007                January       |       | 22.30      |       | 20.95                              |       | 126.00                                 |       | 118.25 |   | 17.98 |   | 16.93 |   |
| February                                                                                                     |       | 23.45      |       | 20.45                              |       | 131.75                                 |       | 117.50 |   | 19.13 |   | 16.38 |   |
| March                                                                                                        |       | 21.40      |       | 19.65                              |       | 122.75                                 |       | 113.75 |   | 17.60 |   | 15.96 |   |

 

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**Item 10.**                 AdditionalInformation

**DESCRIPTION OFSHARE CAPITAL AND ARTICLES OF INCORPORATION**

This section summarizesthe material provisions of ABB Ltd’s articles of incorporation and the SwissFederal Code of Obligations relating to the shares of ABB Ltd. The descriptionis only a summary and is qualified in its entirety by ABB Ltd’s articles ofincorporation, a copy of which has been filed as Exhibit 1.1 to thisreport, the commercial registry of the Canton of Zurich (Switzerland) and Swissstatutory law.

**Registration andBusiness Purpose**

ABB Ltd was registered as a corporation (*Aktiengesellschaft*) in the commercialregister of the Canton of Zurich (Switzerland) on March 5, 1999, under thename of “New ABB Ltd” and its name was subsequently changed to “ABB Ltd”. Itscommercial registry number is CH-020.3.021.615-2.

ABB Ltd’s purpose, as setforth in Article 2 of its articles of incorporation, is to hold interestsin business enterprises, particularly in enterprises active in the areas ofindustry, trade and services. It may acquire, encumber, exploit or sell realestate and intellectual property rights in Switzerland and abroad and may alsofinance other companies. It may engage in all types of transactions and maytake all measures that appear appropriate to promote, or that are related to,its purpose.

**Our Shares**

ABB Ltd’s shares are registered shares (*Namenaktien*) with a par value of CHF 2.50each. The shares are fully paid and non-assessable. The shares rank pari passuin all respects with each other, including in respect of entitlements todividends, to a share of the liquidation proceeds in the case of a liquidationof ABB Ltd, and to preemptive rights.

Each share carries one vote in ABB Ltd’s generalshareholders’ meeting. Voting rights may be exercised only after a shareholderhas been recorded in ABB Ltd’s share register (*Aktienbuch*)as a shareholder with voting rights, or with VPC in Sweden, which maintains asubregister of ABB Ltd’s share register.VPC is an authorized central securitiesdepository under the Swedish Act on Registration of Financial Instruments and carriesout, among other things, the duties of registrar for Swedish companies listedon the Stockholm Stock Exchange. Registration with voting rights is subject tothe restrictions described in “Transfer of Shares.”

The shares are not issuedin certificated form and are held in collective custody at SIS SegaInterSettleAG. Shareholders do not have the right to request printing and delivery ofshare certificates (*aufgehobener Titeldruck*),but may at any time request ABB Ltd to issue a confirmation of the number ofregistered shares held.

**Capital Structure**

***Issued Shares:***

As of December 31,2006 and March 31, 2007, the issued share capital of ABB Ltd (includingtreasury shares), as registered in the commercial register, was CHF5,469,390,792.50 divided into 2,187,756,317 fully paid registered shares, witha par value of CHF 2.50 per share. Asof December 31, 2006 and March 31, 2007, all shares issued were fullypaid.

***Contingent Share Capital***

ABB Ltd’s share capital may be increased in an amountnot to exceed CHF 287,329,485 through the issuance of fully paid shares with anaggregate par value of (a) up to the amount of CHF 262,329,485 (equivalentto 104,931,794 shares with a par value of CHF 2.50 per share) through theexercise of conversion rights and/or warrants granted in connection with theissuance on national or international 

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capital markets of newlyor already issued bonds or other financial market instruments by ABB Ltd or oneof its group companies and (b) up to the amount of CHF 25,000,000(equivalent to 10,000,000 shares with a par value of CHF 2.50 per share)through the exercise of warrant rights granted to its shareholders by ABB Ltdor by one of its subsidiaries. ABB Ltd’s board of directors may grant warrantrights not taken up by shareholders for other purposes in the interest of ABBLtd.

The preemptive rights of the shareholders are excludedin connection with the issuance of convertible or warrant-bearing bonds orother financial market instruments or the grant of warrant rights. Thethen-current owners of conversion rights and/or warrants will be entitled tosubscribe for the shares. The conditions of the conversion rights and/orwarrants will be determined by the board of directors of ABB Ltd.

The acquisition of shares through the exercise ofconversion rights and/or warrants and each subsequent transfer of the shareswill be subject to the transfer restrictions of ABB Ltd’s articles ofincorporation. See “—Transfer of Shares.”

In connection with the issuance of convertible orwarrant-bearing bonds or other financial market instruments, the board ofdirectors is authorized to restrict or deny the advance subscription rights ofshareholders if such bonds or other financial market instruments are for thepurpose of financing or refinancing the acquisition of an enterprise, parts ofan enterprise, participations or new investments or an issuance on national orinternational capital markets. If the board of directors denies advancesubscription rights, the convertible or warrant-bearing bonds or otherfinancial market instruments will be issued at the relevant market conditionsand the new shares will be issued pursuant to the relevant market conditionstaking into account the share price and/or other comparable instruments havinga market price. Conversion rights may be exercised during a maximum ten-yearperiod, and warrants may be exercised during a maximum seven-year period,in each case from the date of the respective issuance. The advance subscriptionrights of the shareholders may be granted indirectly.

ABB Ltd’s share capitalmay be increased by an amount not to exceed CHF 169,067,090 through theissuance of up to 67,626,836 fully paid new shares to employees of ABB Ltd andits group companies. The preemptive and advance subscription rights of ABB Ltd’sshareholders are excluded. The shares or rights to subscribe for shares will beissued to employees pursuant to one or more resolutions to be issued by theboard of directors, taking into account performance, functions, levels ofresponsibility and profitability criteria. ABB Ltd may issue shares orsubscription rights to employees at a price lower than that quoted on the stockexchange. The acquisition of shares within the context of employee share ownershipand each subsequent transfer of the shares will be subject to the transferrestrictions of ABB Ltd’s articles of incorporation. See “—Transfer of Shares.”

***Authorized Share Capital***

From time to time, ABB’sshareholders may authorize the board of directors to increase ABB’s sharecapital up to an agreed amount not exceeding half of ABB Ltd’s share capital asregistered in the commercial register and within an agreed period not exceedingtwo years. The last such authorization of share capital expired in May 2005.In February 2007, ABB announced that its board of directors will recommendthat shareholders approve new authorized capital in the amount of 200 millionshares at ABB’s annual general meeting in May 2007.

**Transfer of Shares**

The transfer of shares is effected by correspondingentry in the books of a bank or depository institution following an assignmentin writing by the selling shareholder and notification of such assignment toABB Ltd by the bank or depository institution. The transfer of shares alsorequires that the purchaser file a share registration form in order to beregistered in ABB Ltd’s share register (*Aktienbuch*)

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as a shareholder withvoting rights. Failing such registration, the purchaser will not be able toparticipate in or vote at shareholders’ meetings, but will be entitled todividends and liquidation proceeds. Shares and associated pecuniary rights mayonly be pledged to the depository institution that administers the book entriesof those shares for the account of the shareholder.

A purchaser of shares will be recorded in ABB Ltd’sshare register with voting rights upon disclosure of its name and address.However, ABB Ltd may decline a registration with voting rights if theshareholder does not declare that it has acquired the shares in its own nameand for its own account. If the shareholder refuses to make such declaration,it will be registered as a shareholder without voting rights. If persons failto expressly declare in their registration application that they hold the sharesfor their own accounts (“nominees”), the board of directors may still entersuch persons in the share register with the right to vote, provided that thenominee has entered into an agreement with the board of directors concerninghis status, and further provided the nominee is subject to recognized bank orfinancial market supervision.

After having given the registered shareholder ornominee the right to be heard, the board of directors may cancel registrationsin the share register retroactive to the date of registration if suchregistrations were made on the basis of incorrect information. The relevantshareholder or nominee will be informed promptly as to the cancellation. Theboard of directors will oversee the details and issue the instructions necessaryfor compliance with the preceding regulations. In special cases, it may grantexemptions from the rule concerning nominees.

Acquirors of registered shares who have chosen to havetheir shares registered in the share register with VPC do not have to presentany written assignment from the selling shareholder nor may they be requestedto file a share registration form or declare that they have acquired the sharesin their own name and for their own account in order to be registered as ashareholder with voting rights. However, in order to be entitled to vote at ashareholders’ meeting those acquirors need to be entered in the VPC shareregister in their own name no later than ten calendar days prior to theshareholders’ meeting. Uncertificated shares registered with VPC may be pledgedin accordance with Swedish law.

Except as described inthis subsection, neither the Swiss Code of Obligations nor our articles of incorporationlimit any right to own our shares, or any rights of non-resident or foreignshareholders to exercise voting rights of our shares.

**Shareholders’Meetings**

Under Swiss law, the annual general meeting ofshareholders must be held within six months after the end of ABB Ltd’s fiscalyear. Annual general meetings of shareholders are convened by the board ofdirectors, liquidators or representatives of bondholders or, if necessary, bythe statutory auditors. The board of directors is further required to convenean extraordinary general meeting of shareholders if so resolved by the shareholdersin a general meeting of shareholders or if so requested by one or moreshareholders holding in aggregate at least 10 percent of ABB Ltd’s nominalshare capital. A general meeting of shareholders is convened by publishing anotice in the Swiss Official Gazette of Commerce (*Schweizerisches Handelsamtsblatt*) at least 20 days prior tothe meeting date. Holders of VPC-registered shares are able to attendshareholders’ meetings in respect of such shares. Notices of shareholders’meetings are published in at least three national Swedish daily newspapers, aswell as on ABB Ltd’s Internet website. Such notices contain information as toprocedures to be followed by shareholders in order to participate and exercisevoting rights at the shareholders’ meetings.

One or more shareholders whose combined holdingsrepresent an aggregate par value of at least CHF 1,000,000 may request inwriting 40 calendar days prior to a general meeting of shareholders thatspecific items and proposals be included on the agenda and voted on at the nextgeneral meeting of shareholders.

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The followingpowers are vested exclusively in the general meeting of the shareholders:

·                    adoptionand amendment of the articles of incorporation;

·                    electionof members of the board of directors, the auditors, the group auditors and thespecial auditors referred to below;

·                    approvalof the annual report and the consolidated financial statements;

·                    approvalof the annual financial statements and decision on the allocation of profitsshown on the balance sheet, in particular with regard to dividends;

·                    grantingdischarge to the members of the board of directors and the persons entrustedwith management; and

·                    passingresolutions as to all matters reserved to the authority of the shareholders’meeting by law or under the articles of incorporation or that are submitted tothe shareholders’ meeting by the board of directors to the extent permitted bylaw.

There is no provision in ABB Ltd’s articles ofincorporation requiring a quorum for the holding of shareholders’ meetings.

Resolutions and elections usually require the approvalof an “absolute majority” of the shares represented at a shareholders’ meeting(*i.e.*, a majority of the sharesrepresented at the shareholders’ meeting with abstentions having the effect ofvotes against the resolution). If the first ballot fails to result in anelection and more than one candidate is standing for election, the presidingofficer will order a second ballot in which a relative majority (i.e. a majority of the votes) shall bedecisive.

A resolution passedwith a qualified majority (at least two-thirds) of the shares representedat a shareholders’ meeting is required for:

·                    amodification of the purpose of ABB Ltd;

·                    thecreation of shares with increased voting powers;

·                    restrictionson the transfer of registered shares and the removal of those restrictions;

·                    restrictionson the exercise of the right to vote and the removal of those restrictions;

·                    anauthorized or conditional increase in share capital;

·                    anincrease in share capital through the conversion of capital surplus, through anin-kind contribution or in exchange for an acquisition of property, and thegrant of special benefits;

·                    therestriction or denial of preemptive rights;

·                    atransfer of ABB Ltd’s place of incorporation; and

·                    ABB Ltd’sdissolution without liquidation.

In addition, the introduction or abolition of anyprovision in the articles of incorporation providing for a qualified majoritymust be resolved in accordance with such qualified majority votingrequirements.

At shareholders’ meetings,shareholders can be represented by proxy, but only by their legalrepresentative, another shareholder with the right to vote, a corporate body (*Organvertreter*), an independent proxy (*unabhängiger Stimmrechtsvertreter*) or adepository institution (*Depotvertreter*).All shares held by one shareholder may be represented by only onerepresentative. Votes are taken on a show of hands unless a secret ballot isrequired by the general meeting of shareholders or the presiding officer. Thepresiding officer may arrange for resolutions and elections to be carried outby electronic means. As a result, resolutions and elections carried out byelectronic means will be deemed to have the same effect as 

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secretballots. The presiding officer may at any time order that a resolution orelection decided by a show of hands be repeated through a secret ballot if, inhis view, the results of the vote are in doubt. In this case, the precedingdecision by a show of hands shall be deemed to have not occurred.

Only shareholdersregistered in ABB Ltd’s share register with the right to vote are entitled toparticipate at shareholders’ meetings. See “—Transfer of Shares.” For practicalreasons, shareholders must be registered in the share register with the rightto vote no later than ten calendar days prior to a shareholders’ meeting inorder to be entitled to participate and vote at such shareholders’ meeting.

Holders of VPC-registeredshares are provided with financial and other information on ABB Ltd in theSwedish language in accordance with regulatory requirements and marketpractice. For shares that are registered in the VPC system in the name of anominee, such information is to be provided by the nominee.

**Net Profits and Dividends**

Swiss law requires thatABB Ltd retain at least 5 percent of its annual net profits as legal reserves****for so long as these reserves amount toless than 20 percent of ABB Ltd’s nominal share capital. Any net profitsremaining in excess of those reserves are at the disposal of the shareholders’meeting.

Under Swiss law, ABB Ltdmay pay dividends only if it has sufficient distributable profits from previousfiscal years, or if its reserves are sufficient to allow distribution of adividend. In either event, dividends may be paid out only after approval at theshareholders’ meeting. The board of directors may propose that a dividend bepaid out, but cannot itself set the dividend. The statutory auditors mustconfirm that the dividend proposal of the board of directors conforms withstatutory law. In practice, the shareholders’ meeting usually approves thedividend proposal of the board of directors.

Dividends are usually dueand payable after the shareholders’ resolution relating to the allocation ofprofits has been passed by the shareholders’ meeting. Under Swiss law, thestatute of limitations to claim payment of an approved dividend is five years.Dividends not collected within five years after their due date accrue to ABBLtd and will be allocated to ABB Ltd’s other reserves.

Payment of dividends onVPC-registered shares is administered by VPC and paid out to the holder that isregistered with VPC on the record date. Through the dividend access facility,shareholders with tax residence in Sweden will be entitled to receive, throughthe VPC system, a dividend in Swedish kronor equivalent to the dividend paid inSwiss francs without deduction of Swiss withholding tax. For furtherinformation, see “—Taxation.”

**Preemptive Rights**

Shareholders of a Swisscorporation have certain preemptive rights to subscribe for new shares issuedin connection with capital increases in proportion to the nominal amount oftheir shares held. A resolution adopted at a shareholders’ meeting with asupermajority of two-thirds of the shares represented may, however,repeal, limit or suspend (or authorize the board of directors to repeal, limitor suspend) preemptive rights for cause. Cause includes an acquisition of abusiness or a part thereof, an acquisition of a participation in a company orthe grant of shares to employees. In addition, based on Article 4bis para.1 and para. 4 of the articles of incorporation of ABB Ltd, preemptive rights ofthe shareholders are excluded in connection with the issuance of convertible orwarrant-bearing bonds or other financial market instruments or the grant ofwarrant rights or may be restricted or denied by the board of directors of ABBLtd under certain circumstances. See “—Capital Structure—Contingent ShareCapital.”

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**Advance Subscription Rights**

Shareholders of a Swisscorporation may have an advance subscription right with respect to bonds andother instruments issued in connection with options or conversion rights forshares if such option or conversion rights are based on the corporation’sconditional capital. However, the shareholders’ meeting can, with asupermajority of two-thirds of the shares represented at the meeting,exclude or restrict (or authorize the board of directors to exclude orrestrict) such advance subscription rights for cause. See “—Capital Structure—ContingentShare Capital.”

**Borrowing Power**

Neither Swiss law nor ABBLtd’s articles of incorporation restrict in any way ABB Ltd’s power to borrowand raise funds. The decision to borrow funds is taken by or under thedirection of the board of directors or the executive committee, and noshareholders’ resolution is required. The articles of incorporation of ABB Ltddo not contain provisions concerning borrowing powers exercisable by itsdirectors or how such borrowings could be varied.

**Repurchase of Shares**

Swiss law limits acorporation’s ability to repurchase or hold its own shares. ABB Ltd and itssubsidiaries may only repurchase shares if ABB Ltd has sufficient freelydistributable reserves to pay the purchase price, and the aggregate par valueof such shares does not exceed 10 percent of ABB Ltd’s nominal share capital.Furthermore, ABB Ltd must create a special reserve on its balance sheet in theamount of the purchase price of the acquired shares. Such shares held by ABBLtd or its subsidiaries do not carry any rights to vote at shareholders’meetings, but are entitled to the economic benefits applicable to the sharesgenerally and are considered to be “outstanding” under Swiss law.

ABB Ltd may make additional repurchases of shares fortreasury from time to time in the future. Treasury shares are available forissuance to satisfy obligations under the management incentive plan and forother corporate purposes. As of December 31, 2006, ABB Ltd, directly andindirectly through its subsidiaries, held 8,782,721 shares, with a book valueof USD 104 million and a par value of CHF 21,956,802.50 as of such date. As of March 31,2007, ABB Ltd, directly and indirectly through its subsidiaries, itssubsidiaries held 8,750,738 shares, with a book value of approximately USD 103 millionand a par value of CHF 21,876,845 as of such date.

In October 2006, theCompany’s Board of Directors approved the repurchase of up to 10 million sharesof ABB Ltd during 2007 for use in connection with the employee incentive plans.

**Notices**

Written communication byABB Ltd to its shareholders will be sent by ordinary mail to the last addressof the shareholder or authorized recipient entered in the share register. Tothe extent that personal notification is not mandated by law, allcommunications to the shareholders are validly made by publication in the SwissOfficial Gazette of Commerce (*SchweizerischesHandelsamtsblatt*).

Notices required under theListing Rules of the SWX Swiss Exchange will be published in two Swissnewspapers in German and French. ABB Ltd or the SWX Swiss Exchange may alsodisseminate the relevant information on the online exchange informationsystems. Notices required under the listing rules of the Stockholm StockExchange will be published in three national daily Swedish newspapers, as wellas on ABB Ltd’s website.

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**Duration, Liquidation and Merger**

The duration of ABB Ltd asa legal entity is unlimited. It may be dissolved at any time by a shareholders’resolution which must be approved by (1) an absolute majority of theshares represented at the general meeting of shareholders in the event it is tobe dissolved by way of liquidation or (2) a supermajority of two-thirdsof the shares represented at the general meeting of shareholders in otherevents (e.g., in a merger whereit is not the surviving entity). Dissolution by court order is possible if itbecomes bankrupt or if holders of at least 10 percent of its share capitalregistered in the commercial register can establish cause for dissolution.

Under Swiss law, anysurplus arising out of a liquidation of a corporation (after the settlement ofall claims of all creditors) is distributed to the shareholders in proportionto the paid-up par value of shares held, but this surplus is subject to Swisswithholding tax of 35 percent (see “—Taxation”).

**Disclosure of Major Shareholders**

Under the Swiss StockExchange Act, shareholders and groups of shareholders acting in concert whodirectly or indirectly acquire or sell shares of a listed Swiss corporation andthereby reach, exceed or fall below the thresholds of 5 percent, 10 percent, 20percent, 331¤3percent, 50 percent or 662¤3percent of the voting rights of the corporation must notify the corporation andthe exchange(s) in Switzerland on which such shares are listed of suchholdings in writing within four trading days, whether or not the voting rightscan be exercised. Following receipt of such a notification, the corporationmust inform the public within two trading days.

An additional disclosurerequirement exists under the Swiss Federal Code of Obligations, according towhich ABB Ltd must disclose individual shareholders and groups of shareholdersacting in concert and their shareholdings if they hold more than 5 percent ofall voting rights and ABB Ltd knows or has reason to know of such majorshareholders. Such disclosures must be made once a year in the notes to thefinancial statements as published in its annual report. For a list of our majorshareholders, see “Item 7. Major Shareholders and Related Party Transactions—MajorShareholders.”

**Mandatory Offering Rules**

Under the Swiss StockExchange Act, shareholders and groups of shareholders acting in concert whoacquire more than 331¤3percent of the voting rights (whether exercisable or not) of a listed Swisscompany have to submit a takeover bid to all remaining shareholders unless thearticles of incorporation of the company provide for an alteration of thisobligation. ABB Ltd’s articles of incorporation do not provide for anyalterations of the bidder’s obligations under the Swiss Stock Exchange Act. Themandatory offer obligation may be waived under certain circumstances, forexample if another shareholder owns a higher percentage of voting rights thanthe acquiror. A waiver from the mandatory bid rules may be granted by theSwiss Takeover Board or the Swiss Federal Banking Commission. If no waiver isgranted, the mandatory takeover bid must be made pursuant to the procedural rules setforth in the Swiss Stock Exchange Act and the implementing ordinances.

Other than the rules discussedin this section and in the section above entitled “—Duration, Liquidation andMerger” (which reflect mandatory provisions of Swiss law), no provision of ABBLtd’s articles of incorporation would operate only with respect to a merger,acquisition or corporate restructuring of ABB (or any of our subsidiaries) andhave the effect of delaying, deferring or preventing a change in control ofABB.

**Cancellation of Remaining Equity Securities**

Under Swiss law, anyofferor who has made a tender offer for the shares of a Swiss target companyand who, as a result of such offer, holds more than 98 percent of the votingrights of the target company, 

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maypetition the court to cancel the remaining equity securities. The correspondingpetition must be filed against the target company within three months after thelapse of the offer period. The remaining shareholders may join in theproceedings. If the court orders cancellation of the remaining equity securities,the target company will reissue the equity securities and deliver suchsecurities to the offeror against performance of the offer for the benefit ofthe holders of the cancelled equity securities.

**Directors and Officers**

For further information regardingthe material provisions of ABB Ltd’s articles of incorporation and the SwissFederal Code of Obligations regarding directors and officers, see “Item 6.Directors, Senior Management and Employees—Corporate Governance—Duties ofDirectors and Officers.”

**Auditors**

The auditors are subjectto confirmation by the shareholders at the annual general meeting on an annualbasis. Ernst & Young AG, with its registered head office atBleicherweg 21, CH-8002 Zurich, Switzerland, has been the independentauditor of ABB Ltd and the ABB Group for the years ended December 31,2004, 2005 and 2006.

OBT AG, with itsregistered office at Hardturmstrasse 120, CH-8005 Zurich, Switzerland,has been the special auditor to issue special review reports required inconnection with capital increases (if any) for the years ended December 31,2004, 2005 and 2006. The special auditors are subject to confirmation by theshareholders at the annual general meeting on an annual basis.

Ernst & Young AGassumed the existing auditing mandate as auditor of the ABB Group in 1994. Thehead auditor responsible for the mandate, Mr. Charles Barone, beganserving in this function in May 2003.

Ernst & Young AGperiodically reads the approved minutes of meetings of our board of directors.Ernst & Young AG is present at the finance and audit committeemeetings where audit planning is discussed and the results of our internalaudit department’s audit procedures are presented. Ernst & Young AGalso periodically meets with the finance and audit committee to discuss theresults of its audit procedures.

See “Item 16C. PrincipalAccountant Fees and Services” for information regarding the fees paid to Ernst &Young AG.

**MATERIALCONTRACTS**

The following descriptionsof the material provisions of the referenced agreements do not purport to becomplete and are subject to, and qualified in their entirety by reference to,the agreements which have been filed as exhibits to this report.

**Revolving Credit Facility**

On July 4, 2005, weentered into a $2 billion revolving credit facility. For a description ofthe facility, see “Item 5. Operating and Financial Review and Prospects—Liquidityand Capital Resources—Credit Facilities” and Note 14 to the ConsolidatedFinancial Statements. See also Exhibit 4.3 to this report.

**Medium Term Note Program**

One of our subsidiaries,ABB International Finance Limited, has established a medium term note program (“MTNProgram”) under which it is authorized to issue up to $5,250 million in certaindebt instruments. The terms of the MTN Program do not obligate any third partyto extend credit to us, and the terms and availability of financings under theMTN Program are determined with respect to, and at the date of issuance of,each debt instrument. As a result, we may be unable to access capital throughthe MTN 

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Programon terms favorable to us, if at all. As at December 31, 2006, theaggregate amount outstanding under the MTN Program was approximately $1.9billion from eight separate issuances of debt instruments. See Exhibits 2.3,2.4, 2.5 and 2.6 to this report.

**ALSTOM Settlement**

Pursuant to a SharePurchase and Settlement Agreement, dated as of March 31, 2000, among ABBLtd, ALSTOM and ABB ALSTOM POWER, as amended by the Amendment to Share Purchaseand Settlement Agreement, dated as of May 11, 2000 (which we refer tocollectively as the Settlement Agreement), ALSTOM purchased our 50 percentinterest in the joint venture ABB ALSTOM POWER for a cash payment of €1.25 billion.The Settlement Agreement provided for the termination of various joint ventureagreements, the execution of various releases, the settlement of certaindisputed items in relation to the joint venture, the unwinding of variousfinancial arrangements between ABB ALSTOM POWER and the ABB Group, theprospective transfer to the joint venture of various assets and liabilitiesrequired to have been transferred to the joint venture under the original jointventure agreements, the transfer to us of certain subsidiaries of the jointventure, various payments among members of the ALSTOM group and the ABB Groupin connection with the foregoing transactions (separate from the purchase pricementioned above), indemnification and the execution of various ancillarydocuments. The transaction was consummated on May 11, 2000. See Exhibit 4.1to this report.

**Sale Agreement for Nuclear Business**

On December 21, 1999,our subsidiary, ABB Handels-und Verwaltungs AG, entered into an agreementto sell our nuclear business to BNFL for $485 million. Under theagreement, we have undertaken not to compete with the divested business duringa seven-year period ending April 28, 2007. We have agreed toindemnify BNFL against, among other things, certain environmental and otherliabilities arising from specific sites operated by the nuclear business andcertain tax liabilities of the nuclear business. These potential liabilitiesare described in “Item 3. Key Information—Risk Factors” and “Item 5.Operating and Financial Review and Prospects—Environmental Liabilities.” Thetransaction was consummated on April 28, 2000. See Exhibit 4.2 tothis report.

**Sale Agreement for Part of the Oil, Gas andPetrochemicals Business**

On January 16, 2004we announced that our subsidiary, ABB Handels-und Verwaltungs AG, hadentered into an agreement to sell the upstream part of our Oil, Gas andPetrochemicals business to Laradew Limited, a new company formed by a privateequity consortium consisting of Candover Partners, JP Morgan Partners and 3iGroup. The sale includes our U.S.-based Vetco Gray unit and our Norway-basedOffshore Systems business. In July 2004, the Company completed the sale ofthe Upstream business for an initial purchase price of $925 million. Net cashproceeds from the sale were approximately $800 million, reflecting theinitial purchase price adjusted for unfunded pension liabilities and changes innet working capital. On February 9, 2005, the purchasers and we enteredinto a Settlement Agreement and Amendment finalizing the sales price. As partof the sale, we have agreed, among other things, to terminate certainsecuritization programs and operational leases, to indemnify the purchaseragainst certain pre-existing environmental and tax liabilities, to reimbursethe purchaser against financial losses that may be incurred on certain ongoingprojects of the business. See Exhibits 4.4 and 4.5 to this report.

**Sale Agreement for the Sale of the Global Reinsuranceand Insurance Businesses**

On December 8, 2003,our subsidiary ABB Holding AG (which in December 2003 was merged into ABBAsea Brown Boveri Ltd) entered into an agreement to sell the global reinsuranceand insurance businesses which we have operated through the Sirius group ofcompanies to a subsidiary of White Mountains Insurance Group (WMI) for aninitial purchase consideration of SEK 3.22 billion 

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(approximately$425 million). The transaction closed in April 2004. As part of thesale we have undertaken to indemnify WMI, among other things, for potentiallosses in excess of reserves established in the 2003 financial accountsrelating to the future final settlement of certain disputes as well aspotential losses arising from certain guarantees issued by the Sirius business.See Exhibits 4.6 and 4.7 to this report.

**CE Asbestos Settlement**

OnApril 20, 2006 ABB Ltd and certain of its subsidiaries entered intocertain agreements relating to the settlement of its Combustion Engineeringsubsidiary’s asbestos liabilities. For further details regarding thissettlement see “Item 5. Operating and Financial Review and Prospects—AsbestosLiabilities.” and Exhibits 4.13 and 4.14 hereto.

**EXCHANGECONTROLS**

Other than in connectionwith government sanctions imposed on Belarus, Cote d’Ivoire, the DemocraticRepublic of the Congo, Iraq, Lebanon, Liberia, Myanmar, North Korea, SierraLeone, Sudan, Uzbekistan, Yugoslavia, Zimbabwe and persons and organizationswith connection to Osama bin Laden, the “al Qaeda” group or the Taliban andpersons connected with the assassination of Rafik Hariri, there are currentlyno laws, decrees or regulations in Switzerland that restrict the export orimport of capital, including, but not limited to, Swiss foreign exchangecontrols on payment of dividends, interest or liquidation proceeds, if any, tonon-Swiss resident holders of shares. In addition, there are no limitationsimposed by Swiss law or our articles of incorporation on the rights ofnon-Swiss residents or non-Swiss citizens to hold or vote our shares.

**TAXATION**

The following is a summaryof the material Swiss and United States federal income tax consequences of thepurchase, ownership and disposition of our shares or ADSs.

**Swiss Taxation**

***Withholding Tax onDividends and Distributions***

Dividends paid and similarcash or in-kind distributions that we make to a holder of shares or ADSs (includingdividends on liquidation proceeds and stock dividends) are subject to a Swissfederal withholding tax at a rate of 35 percent. We must withhold the tax fromthe gross distribution and pay it to the Swiss Federal Tax Administration.

***Obtaining a Refund ofSwiss Withholding Tax for U.S. Residents***

The Convention Between theUnited States of America and the Swiss Confederation for the Avoidance ofDouble Taxation with Respect to Taxes on Income, which entered into force on December 19,1997 and which we will refer to in the following discussion as the Treaty,allows U.S. resident individuals or U.S. corporations to seek a refund of theSwiss withholding tax paid on dividends in respect of our shares or ADSs. U.S.resident individuals and U.S. corporations holding less than 10 percent of thevoting rights in respect of our shares or ADSs are entitled to seek a refund ofwithholding tax to the extent the tax withheld exceeds 15 percent of the grossdividend. U.S. corporations holding 10 percent or more of the voting rights ofour shares or ADSs are entitled to seek a refund of withholding tax to theextent the tax withheld exceeds 5 percent of the gross dividend.

Claims for refunds must befiled with the Swiss Federal Tax Administration, Eigerstrasse 65, 3003 Bern,Switzerland. The form used for obtaining a refund is Swiss Tax Form 82(82C for companies; 82E for other entities; 82I for individuals). This form maybe obtained from any Swiss Consulate General in the United States or from theSwiss Federal Tax Administration at the address above. The form must be 

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filledout in triplicate with each copy duly completed and signed before a notarypublic in the United States. The form must be accompanied by evidence of thededuction of withholding tax withheld at the source.

***Stamp Duties uponTransfer of Securities***

The sale of shares orADSs, whether by Swiss resident or non-resident holders, may be subject to aSwiss securities transfer stamp duty of up to 0.15 percent calculated on thesale proceeds if it occurs through or with a Swiss bank or other Swisssecurities dealer as defined in the Swiss Federal Stamp Tax Act. In addition tothe stamp duty, the sale of shares or ADSs by or through a member of the SWXSwiss Exchange may be subject to a stock exchange levy.

**United States Taxes**

The following is a summaryof the material U.S. federal income tax consequences of the ownership of sharesor ADSs. This summary does not purport to address all of the tax considerationsthat may be relevant to a decision to purchase, own or dispose of shares orADSs. This summary assumes that holders hold shares or ADSs as capital assets.This summary does not address tax considerations applicable to holders that maybe subject to special tax rules, such as dealers or traders in securities orcurrencies, partnerships owning shares or ADSs, tax-exempt entities, banks,insurance companies, holders that own (or are deemed to own) at least 10percent or more (by voting power or value) of the stock of ABB, investors whosefunctional currency is not the U.S. dollar, and persons that will hold sharesor ADSs as part of a position in a straddle or as part of a hedging orconversion transaction for U.S. tax purposes. This discussion does not addressaspects of U.S. taxation other than U.S. federal income taxation, nor does itaddress state, local or foreign tax consequences of an investment in shares orADSs.

This summary is based (1) onthe Internal Revenue Code of 1986, as amended, U.S. Treasury Regulations andjudicial and administrative interpretations thereof, in each case as in effectand available on the date of this registration statement and (2) in part,on representations of the depositary and the assumption that each obligation inthe deposit agreement and any related agreement will be performed in accordancewith its terms. The U.S. tax laws and the interpretation thereof are subject tochange, which change could apply retroactively and could affect the taxconsequences described below.

Forpurposes of this summary, a U.S. holder is a beneficial owner of shares or ADSsthat, for U.S. federal income tax purposes, is:

·                    a citizen orresident of the United States;

·                    a corporation(or other entity treated as a corporation for U.S. federal income tax purposes)created or organized in or under the laws of the United States or any state,including the District of Columbia;

·                    an estate ifits income is subject to U.S. federal income taxation regardless of its source;or

·                    a trust ifsuch trust validly has elected to be treated as a U.S. person for U.S. federalincome tax purposes or if (1) a U.S. court can exercise primarysupervision over its administration and (2) one or more U.S. persons havethe authority to control all of its substantial decisions.

If a partnership(including any entity treated as a partnership for United States federal incometax purposes) is a beneficial owner of shares or ADSs the treatment of apartner in the partnership will generally depend on the status of the partnerand the activities of the partnership. If you are a partner in a partnershipthat holds shares or ADSs you should consult your tax advisor.

A non-U.S. holder is abeneficial owner of shares or ADSs that is not a U.S. holder.

Each prospective purchasershould consult the purchaser’s tax advisor with respect to the U.S. federal,state, local and foreign tax consequences of acquiring, owning or disposing ofshares or ADSs.

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***Ownership of ADSs in General***

For U.S. federal income tax purposes, a holder of ADSsgenerally will be treated as the owner of the shares represented by the ADSs.

The U.S. TreasuryDepartment has expressed concern that depositaries for American depositary receipts,or other intermediaries between the holders of shares of an issuer and theissuer, may be taking actions that are inconsistent with the claiming of U.S.foreign tax credits by U.S. holders of those receipts or shares. Accordingly,the analysis regarding the availability of a U.S. foreign tax credit for Swisstaxes and sourcing rules described below could be affected by futureactions that may be taken by the U.S. Treasury Department.

***Distributions***

Subject to the discussion below under “—Passive ForeignInvestment Company Considerations,” if you are a U.S. holder, for U.S. federalincome tax purposes, the gross amount of any distribution (other than certaindistributions, if any, of shares distributed to all shareholders of ABB,including holders of ADSs) made to you with respect to shares or ADSs,including the amount of any Swiss taxes withheld from the distribution,will constitute dividends to the extent of ABB’s current and accumulatedearnings and profits (as determined under U.S. federal income tax principles).Subject to the discussion below under “—Passive Foreign Investment CompanyConsiderations,” non-corporate U.S. Holders generally will be taxed on suchdistributions at the lower rates applicable to long-term capital gains (i.e.,gains from the sale of capital assets held for more than one year) with respectto taxable years beginning on or before December 31, 2008. These dividendswill not be eligible for the dividends received deduction generally allowed tocorporate U.S. holders. Subject to the discussion below under “—Passive ForeignInvestment Company Considerations,” if distributions with respect to shares orADSs exceed ABB’s current and accumulated earnings and profits as determinedunder U.S. federal income tax principles, the excess would be treated first asa tax-free return of capital to the extent of your adjusted tax basis in theshares or ADSs. Any amount in excess of the amount of the dividend and thereturn of capital would be treated as capital gain. ABB does not maintain calculationsof its earnings and profits under U.S. federal income tax principles.

If you are a U.S. holder, dividends paid in Swissfrancs, including the amount of any Swiss taxes withheld from the dividends,will be included in your gross income in an amount equal to the U.S. dollarvalue of the Swiss francs calculated by reference to the spot exchange rate ineffect on the day the dividends are includible in income. In the case of ADSs,dividends generally are includible in income on the date they are received bythe depositary, regardless of whether the payment is in fact converted intoU.S. dollars at that time. If dividends paid in Swiss francs are converted intoU.S. dollars on the day they are includible in income, you generally should notbe required to recognize foreign currency gain or loss with respect to theconversion, if you are a U.S. holder. However, any gains or losses resultingfrom the conversion of Swiss francs between the time of the receipt ofdividends paid in Swiss francs and the time the Swiss francs are converted intoU.S. dollars will be treated as ordinary income or loss to you, as the case maybe, if you are a U.S. holder. The amount of any distribution of property otherthan cash will be the fair market value of the property on the date ofdistribution.

If you are a U.S. holder, you will have a basis in anySwiss francs received as a refund of Swiss withholding taxes equal to a U.S.dollar amount calculated by reference to the exchange rate in effect on thedate of receipt of the dividend on which the tax was withheld. (See “—SwissTaxation—Obtaining a Refund of Swiss Withholding Tax for U.S. Residents”above.)

If you are a U.S. holder, dividends received by youwith respect to shares or ADSs will be treated as foreign source income, whichmay be relevant in calculating your foreign tax credit limitation. Subject tocertain conditions and limitations, Swiss tax withheld on dividends may bededucted from your taxable 

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income or credited againstyour United States federal income tax liability. However, to the extent thatyou are a U.S. holder and would be entitled to a refund of Swiss withholdingtaxes pursuant to the U.S.—Switzerland tax treaty, you may not be eligible fora United States foreign tax credit with respect to the amount of suchwithholding taxes which may be refunded, even if you fail to claim the refund.See “—Swiss Taxation—Obtaining a Refund of Swiss Withholding Tax for U.S.Residents.” The limitation on foreign taxes eligible for credit is calculatedseparately with respect to specific classes of income. For this purpose,dividends distributed by ABB generally will constitute passive income, or, inthe case of certain U.S. holders, financial services income. The rules relatingto the determination of the U.S. foreign tax credit are complex, and, if youare a U.S. holder, you should consult your tax advisor to determine whether andto what extent you would be entitled to this credit.

Subject to the discussionbelow under “—Backup Withholding and Information Reporting,” if you are anon-U.S. holder of shares or ADSs, you generally will not be subject to U.S.federal income or withholding tax on dividends received on shares or ADSs,unless the dividends are effectively connected with the conduct by you of atrade or business in the United States, or the dividends are attributable to apermanent establishment or fixed base that is maintained in the United Statesif that is required by an applicable income tax treaty as a condition forsubjecting a non-U.S. holder to U.S. taxation on a net income basis. In suchcases, you will be taxed in the same manner as a U.S. holder. Moreover, if youare a corporate non-U.S. holder, you may be subject, under certaincircumstances, to an additional branch profits tax on any effectively connecteddividends at a 30 percent rate, or at a lower rate if you are eligible for thebenefits of an income tax treaty that provides for a lower rate.

***Sale or Exchange of Shares or ADSs***

Subject to the discussion below under “—PassiveForeign Investment Company Considerations,” if you are a U.S. holder that holdsshares or ADSs as capital assets, you generally will recognize capital gain orloss for U.S. federal income tax purposes upon a sale or exchange of yourshares or ADSs in an amount equal to the difference between your adjusted taxbasis in the shares or ADSs and the amount realized on their disposition. Ifyou are a noncorporate U.S. holder, the maximum marginal U.S. federal incometax rate applicable to the gain will be lower than the maximum marginal U.S.federal income tax rate applicable to ordinary income (other than certaindividends) if your holding period for the shares or ADSs exceeds one year(i.e., long-term capital gains). If you are a U.S. holder, the gain or loss, ifany, recognized by you generally will be treated as U.S. source income or loss,as the case may be, for U.S. foreign tax credit purposes. Certain limitationsexist on the deductibility of capital losses for U.S. federal income taxpurposes.

If you are a U.S. holder and you receive any foreigncurrency on the sale of shares or ADSs, you may recognize U.S. source ordinaryincome or loss as a result of currency fluctuations between the date of thesale of the shares or ADS, as the case may be, and the date the sales proceedsare converted into U.S. dollars.

Subject to the discussionbelow under “—Backup Withholding and Information Reporting,” if you are anon-U.S. holder of shares or ADSs, you generally will not be subject to U.S.federal income or withholding tax on gain realized on the sale or exchange ofyour shares or ADSs unless (1) the gain is effectively connected with theconduct by you of a trade or business in the United States, or the gain isattributable to a permanent establishment or fixed base that is maintained inthe United States if that is required by an applicable income tax treaty as acondition for subjecting a non-U.S. holder to U.S. taxation on a net incomebasis, or (2) if you are an individual non-U.S. holder, you are present inthe United States for 183 days or more in the taxable year of the sale orexchange and certain other conditions are met. Moreover, if you are a corporatenon-U.S. holder, you may be subject, under certain circumstances, to anadditional branch profits tax on any effectively connected gains at a 30percent rate, or at a lower rate if you are eligible for the benefits of anincome tax treaty that provides for a lower rate.

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***Passive Foreign Investment Company Considerations***

A non-U.S.corporation will be classified as a “passive foreign investment company,” or aPFIC, for United States federal income tax purposes in any taxable year inwhich, after applying certain look-through rules, either

·       atleast 75 percent of its gross income is “passive income”; or

·       atleast 50 percent, on average, of the gross value of its assets is attributableto assets that produce “passive income” or are held for the production ofpassive income.

Passive income for this purpose generally includesdividends, interest, certain royalties, certain rents and gains fromcommodities and securities transactions.

Based on certain estimates of its gross income andgross assets and the nature of its business, ABB believes that it will not beclassified as a PFIC for the taxable year ending December 31, 2006. ABB’sstatus in future years will depend on its assets and activities in those years.ABB has no reason to believe that its assets or activities will change in amanner that would cause it to be classified as a PFIC. If ABB were a PFIC, andyou are a U.S. holder, you generally would be subject to imputed interestcharges and other disadvantageous tax treatment with respect to any gain fromthe sale or exchange of, and certain distributions with respect to, your sharesor ADSs, including the denial of the taxation of certain dividends at the lowerrates applicable to long-term capital gains (as discussed above in “—Distributions”).

If ABB were a PFIC, youmay be able to make a variety of elections which might alleviate certain of thetax consequences referred to above. However, it is expected that the conditionsnecessary for making such elections will not be present in the case of sharesor ADSs. You should consult your own tax advisor regarding the tax consequencesthat would arise if ABB were treated as a PFIC.

***Backup Withholding and Information Reporting***

U.S. backup withholding tax and information reportingrequirements generally apply to certain payments to certain noncorporateholders of stock. Information reporting generally will apply to payments ofdividends on, and to proceeds from the sale or redemption of, shares or ADSsmade within the United States to a holder of shares or ADSs (other than anexempt recipient, including a corporation, a payee that is a non-U.S. holderthat provides an appropriate certification, and certain other persons).

A payor will be required to withhold backupwithholding tax from any payments of dividends on, or the proceeds from thesale or redemption of, shares or ADSs within the United States to you, unlessyou are an exempt recipient, if you fail to furnish your correct taxpayeridentification number or otherwise fail to establish an exception from backupwithholding tax requirements or otherwise fail to establish an exception frombackup withholding. The amount of any backup withholding from a payment to youwill be allowed as a credit against your U.S. federal income tax liability andmay entitle you to a refund, provided that the required information isfurnished to the U.S. Internal Revenue Service. The backup withholding tax rateis 28 percent for years 2004 through 2010.

In the case of payments made within the United Statesto a foreign simple trust, foreign grantor trust, or foreign partnership (otherthan payments to a foreign simple trust, foreign grantor trust, or foreignpartnership that qualifies as a withholding foreign trust or withholdingforeign partnership within the meaning of the applicable U.S. TreasuryRegulations and payments to a foreign simple trust, foreign grantor trust, orforeign partnership that are effectively connected with the conduct of a tradeor business in the United States), the beneficiaries of the foreign simpletrust, the persons treated as the owners of the foreign grantor trust or thepartners of the foreign partnership, as the case may be, will be required toprovide the certification discussed above in order to establish an exemptionfrom backup withholding tax and information reporting requirements. Moreover,if you are a non-U.S. holder, a payor may rely on a 

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certification provided byyou only if the payor does not have actual knowledge or a reason to know thatany information or certification stated in the certificate is incorrect.

**THE ABOVE SUMMARIES ARE NOT INTENDED TO CONSTITUTE ACOMPLETE ANALYSIS OF ALL TAX CONSEQUENCES RELATING TO THE OWNERSHIP OF SHARESOR ADSs. PROSPECTIVE PURCHASERS OF SHARES OR ADSs SHOULD CONSULT THEIR TAXADVISORS CONCERNING THE TAX CONSEQUENCES OF THEIR PARTICULAR SITUATIONS.**

**DOCUMENTS ONDISPLAY**

We are subject to theinformational requirements of the Securities Exchange Act of 1934, as amended.In accordance with these requirements, we file reports and other informationwith the SEC. These materials, including this report and the exhibits thereto,may be inspected and copied at prescribed rates at the Commission’s public referenceroom at 450 Fifth Street, N.W., Washington, D.C. 20549. Further information onthe operation of the public reference room may be obtained by calling theCommission at 1-800-SEC-0330. The Commission also maintains aweb site at http://www.sec.gov that contains reports and other informationregarding registrants that file electronically with the Commission. Our annualreports and some of the other information we submit to the Commission may beaccessed through this web site. In addition, material that we file can beinspected at the offices of the New York Stock Exchange at 20 Broad Street, NewYork, New York 10005.

**Item 11.**                 Quantitativeand Qualitative Disclosures About Market Risk

**Market RiskDisclosure**

The continuously evolving financial markets and thedynamic business environment expose us to changes in foreign exchange, interestrate and other market price risks. We have developed and implementedcomprehensive policies, procedures, and controls to identify, mitigate, andmonitor financial risk on a firm-wide basis. To efficiently aggregate andmanage financial risk that could impact our financial performance, we operate aGroup Treasury function. Our Group Treasury function provides an efficientsource of liquidity, financing, risk management, and other global financialservices to our group companies. We do not permit proprietary tradingactivities. The market risk management activities are focused on mitigatingmaterial financial risks resulting from our global operating and financingactivities.

The Group Treasuryfunction maintains risk management control systems to monitor foreign exchangeand interest rate risks and exposures arising from our underlying business, aswell as the associated hedge positions. Such exposures are governed by writtenpolicies. Financial risks are monitored using a number of analytical techniquesincluding market value and sensitivity analysis. The following quantitativeanalyses are based on sensitivity analysis tests, which assume parallel shiftsof interest rate yield curves, and foreign exchange rates and equity prices.

**CurrencyFluctuations and Foreign Exchange Risk**

It is our policy to identify and manage alltransactional foreign exchange exposures to minimize risk. With the exception ofcertain financing subsidiaries, and to the extent certain operatingsubsidiaries are domiciled in high inflation environments, the functionalcurrency of each of our companies is considered to be its local currency. Ourpolicies require our subsidiaries to hedge all contracted foreign exchangeexposures, as well as a portion of their forecast exposures, against theirlocal currency. These transactions are undertaken mainly with our GroupTreasury function.

We have foreign exchange transaction exposures relatedto our global operating and financing activities in currencies other than thefunctional currency in which our entities operate. Specifically, we are exposedto foreign exchange risk related to future earnings, assets or liabilitiesdenominated in foreign currencies. The most significant currency exposuresrelate to operations in Sweden, Switzerland and 

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Germany. In addition, weare exposed to currency risk associated with translating our functionalcurrency financial statements into our reporting currency, which is theU.S. dollar.

Our operating companies are responsible foridentifying their foreign currency exposures and entering into intercompanyhedge contracts with the Group Treasury function, where legally possible, orexternal transactions to hedge this risk. The intercompany transactions havethe effect of transferring the operating companies’ currency risk to the GroupTreasury function, but create no additional market risk to our consolidatedresults. The Group Treasury function then manages this risk by entering intooffsetting transactions with third party financial institutions. According toour policy, material net currency exposures are hedged. Exposures are primarilyhedged with forward foreign exchange contracts. The majority of the foreignexchange hedge instruments have, on average, a maturity of less than twelvemonths. The Group Treasury function also hedges currency risks associated withtheir financing of other ABB companies. For certain non-U.S. dollar denominatedborrowings, we use cross currency swaps to hedge the currency risk andeffectively convert the borrowings into U.S. dollar obligations. These swapcontracts have maturity dates that exactly match the associated borrowings.

As of December 31,2006 and 2005, the net fair value of financial instruments with exposure toforeign currency rate movements was $278 million and $1,001 million,respectively. The potential loss in fair value of such financial instrumentsfrom a hypothetical 10 percent move in foreign exchange rates against ourposition would be approximately $135 million and $91 million for December 31,2006 and 2005, respectively. The analysis reflects the aggregate adverseforeign exchange impact associated with transaction exposures, as well astranslation exposures where appropriate. Our sensitivity analysis assumes asimultaneous shift in exchange rates against our positions exposed to foreignexchange risk and as such assumes an unlikely adverse case scenario. Exchangerates rarely move in the same direction. Therefore, the assumption of asimultaneous shift may overstate the impact of changing rates on assets andliabilities denominated in foreign currencies. The underlying trade-relatedtransaction exposures of the industrial companies are not included in thequantitative analysis. If these underlying transaction exposures were included,they would tend to have an offsetting effect on the potential loss in fairvalue detailed above.

**Interest Rate Risk**

We are exposed to interest rate risk due to ourfinancing, investing, and liquidity management activities. Our operatingcompanies primarily invest excess cash with and receive funding from our GroupTreasury function on an arm’s length basis. It is our policy that the primarythird-party funding and investing activities, as well as the monitoringand management of the resulting interest rate risk, are the responsibility ofthe Group Treasury function. The Group Treasury function adjusts the durationof the overall funding portfolio through derivative instruments in order tobetter match underlying assets and liabilities, as well as minimize the cost ofcapital. As of December 31, 2006 and 2005, the net fair value of interestrate instruments was $(388) million and $(2,085) million, respectively. Thepotential loss in fair value for such financial instruments from a hypothetical100 basis point parallel shift in interest rates against our position (or amultiple of 100 basis points where 100 basis points is less than 10 percent ofthe applicable interest rate) would be approximately $31 million and$86 million for December 31, 2006 and 2005, respectively.

Leases are not included aspart of the sensitivity analysis. This represents a limitation of the analysis.While sensitivity analysis includes the interest rate sensitivity of thefunding of the lease portfolio, a corresponding change in the lease portfoliowas not considered in the sensitivity model.

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**Equity Risk**

Certain of our entitieshave equity investments that expose us to equity price risk. As ofDecember 31, 2006 and 2005, the net fair value of equity risk sensitiveinstruments was $282 million and $165 million, respectively. The potential lossin fair value of such financial instruments from a hypothetical 10 percent movein equity prices against our position would be approximately $42 million and$17 million, for December 31, 2006 and 2005, respectively. Included in the netfair value and potential loss in fair value figures for equity risk arederivative instruments held by us as marketable securities designated as hedgesof warrant appreciation rights granted to employees under our managementincentive plans (see Note 21 Employee incentive plans to our ConsolidatedFinancial Statements). As of December 31, 2006 and 2005, the amount of suchinstruments included in net fair value was $176 million and $53 million,respectively, and the amount of potential loss in fair value was $32 millionand $5 million, respectively. The liabilities relating to the warrantappreciation rights are not included as part of the sensitivity analysis. If suchliabilities being hedged were included, they would tend to have an offsettingeffect on the potential loss in fair value.

**Commodity Risk**

We enter into commodityderivatives to hedge certain of our raw material exposures. As of December 31,2006 and 2005, the net fair value of commodity derivatives was $(12) millionand $23 million, respectively. The potential loss in fair value for suchcommodity hedging derivatives from a hypothetical adverse 10 percent moveagainst our position in commodity prices would be approximately $27 million and$11 million for December 31, 2006 and 2005, respectively. A significantproportion of our commodity derivatives are denominated in euros. The foreignexchange risk arising on such contracts has been excluded from the calculationof the potential loss in fair value from a hypothetical 10 percent move incommodity prices as disclosed above.

**Item 12.**                 Descriptionof Securities Other than Equity Securities

Not applicable.

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**PART II**

**Item 13.**                 Defaults,Dividend Arrearages and Delinquencies

Not applicable.

**Item 14.**                 MaterialModifications to the Rights of Security Holders and Use of Proceeds

Not applicable.

**Item 15.**                 Controlsand Procedures

(a)  DisclosureControls and Procedures.

We maintaincontrols and procedures designed to provide reasonable assurance that theinformation required to be disclosed in our filings under the SecuritiesExchange Act of 1934 (the Exchange Act, Rule 13a-15(e)) is recorded,processed, summarized and reported on a timely basis. Our Chief ExecutiveOfficer, Fred Kindle, and Chief Financial Officer, Michel Demaré, with theparticipation of key corporate senior management and management of keycorporate functions, performed an evaluation of our disclosure controls andprocedures as of December 31, 2006. Based on that evaluation, management,including the Chief Executive Officer and Chief Financial Officer, hasconcluded that, as of December 31, 2006, our disclosure controls andprocedures were effective to provide reasonable assurance that informationrequired to be disclosed in reports that we file or submit under the ExchangeAct has been recorded, processed, summarized and reported within the timeperiod specified in the rules and forms of the SEC and that suchinformation has been accumulated and communicated to our management, includingour Chief Executive Officer and Chief Financial Officer, as appropriate toallow timely decisions regarding required disclosures.

(b) Management’sannual report on internal control over financial reporting.

The Board of Directors and management of the Group areresponsible for establishing and maintaining adequate internal control overfinancial reporting. The Group’s internal control over financial reporting isdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation and fair presentation of the publishedconsolidated financial statements in accordance with accounting principlesgenerally accepted in the United States of America.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies and procedures maydeteriorate.

Management conducted an assessment of theeffectiveness of internal controls over financial reporting based on thecriteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organization of theTreadway Commission (COSO). Based on this assessment, management has concludedthat internal control over financial reporting was effective as of December 31,2006.

Management’s assessment of the effectiveness ofinternal control over financial reporting as of December 31, 2006, hasbeen audited by Ernst & Young AG, an independent registered publicaccounting firm, as stated in their report included in Item 18: FinancialStatements.

(c)  Changes ininternal control over financial reporting

During the year ended December 31, 2006, theGroup implemented a new IT-system for financial statement consolidation andenhanced the Group’s governance framework, referred to as the Group 

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Charter, which includesthe Group’s policies and Code of Conduct, strengthening the overall controlenvironment.

These improvement initiatives to strengthen theoverall design and operational effectiveness of the Group’s internal controlover financial reporting are a part of Group’s continuous improvement of theinternal control environment.

Further, while assessingthe effectiveness of internal control over financial reporting during theperiod covered by this report, management has improved process level controlswhich in aggregate represent a material change in internal control overfinancial reporting.

**Item 15T.**         Controlsand Procedures

Not applicable.

**Item 16A.**         AuditCommittee Financial Expert

Our board of directors hasdetermined that Bernd W. Voss, who serves on our audit committee, isindependent, as that term is defined in the listing standards promulgated bythe New York Stock Exchange, and is an audit committee financial expert.

**Item 16B.**        Codeof Ethics

Our chief executiveofficer, chief financial officer, principal accounting officer and personsperforming similar functions are bound to adhere to our Code of Conduct, whichapplies to all employees of all companies in the ABB Group. Our Code of Conductis available on our web site at www.abb.com/about.

**Item 16C.**        PrincipalAccountant Fees and Services

*Audit Fees*

Fees for audit servicesprovided by Ernst & Young totaled approximately $41 million and $32million in 2006 and 2005, respectively. Audit fees include the standard auditwork performed each fiscal year necessary to allow the auditor to issue anopinion on our consolidated financial statements and to issue an opinion on thelocal statutory financial statements of ABB Ltd and its subsidiaries. Auditfees also include services that can be provided only by the group auditor suchas assistance with the application of new accounting policies, pre-issuancereviews of quarterly financial results and comfort letters delivered tounderwriters in connection with debt and equity offerings. Included in the 2006audit fees were approximately $0.6 million related to the 2005 audit, whichfees were not agreed until after the Company had filed its annual report on Form 20-Fwith the SEC on April 20, 2006. Included in 2005 audit fees areapproximately $3 million related to the 2004 audit, which fees were not agreeduntil after the Company had filed its Annual Report on Form 20-Fwith the SEC on May 27, 2005.

*Audit-Related Fees*

Fees for audit-relatedservices provided by Ernst & Young totaled approximately $2 millionand $1 million in 2006 and 2005, respectively, consisting primarily ofaccounting consultations and audits in connection with divestments, audits ofpension and benefit plans and accounting advisory services.

*Tax Fees*

Fees for tax servicesprovided by Ernst & Young totaled approximately $1 million and $2million in 2006 and 2005, respectively, representing tax compliance fees aswell as tax advice and planning fees.

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*All Other Fees*

Fees for other servicesprovided not included in the above three categories by Ernst & Youngtotaled approximately $0 million and $0.3 million in 2006 and 2005,respectively.

*Pre-Approval Procedures and Policies*

In accordance with therequirements of the U.S. Sarbanes-Oxley Act of 2002 and rules issuedby the SEC, we utilize a procedure for the review and pre-approval of anyservices performed by Ernst & Young. The procedure requires that allproposed engagements of Ernst & Young for audit and permitted non-auditservices are submitted to the Finance & Audit Committee for approvalprior to the beginning of any such services. In accordance with this policy, all services performed by and fees paidto Ernst & Young in 2005 and 2006, as discussed above in this Item16C, were approved by the Finance & Audit Committee.

**Item16D.**       Exemptions from the ListingStandards for Audit Committees.

None.

**Item16E.**        Purchases of EquitySecurities by the Issuer and Affiliated Purchasers.

During the year ended December 31,2006, no purchases were made by or on behalf of ABB Ltd or any “affiliatedpurchaser”, as defined in Rule 10b-18(a)(3) under theSecurities Exchange Act of 1934.

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**PART III**

**Item17.**                 FinancialStatements

We have elected to providefinancial statements and the related information pursuant to Item 18.

**Item18.**                 FinancialStatements

Seepages F-1 to F-66 and pages S-1 to S-2, whichare incorporated herein by reference.

(a)          Reportof Independent Accountants and Reports of Independent Registered PublicAccounting Firms.

(b)         ConsolidatedIncome Statements for the years ended December 31, 2006, 2005 and 2004.

(c)          ConsolidatedBalance Sheets as of December 31, 2006 and 2005.

(d)         ConsolidatedStatements of Cash Flows for the years ended December 31, 2006, 2005 and2004.

(e)          ConsolidatedStatements of Changes in Stockholders’ Equity for the years endedDecember 31, 2006, 2005 and 2004.

(f)            Notesto Consolidated Financial Statements.

(g)          Reportof Independent Registered Public Accounting Firm on Financial StatementSchedule.

(h)         ScheduleII—Valuation and Qualifying Accounts.

**Item 19.**                 Exhibits
| 1.1    |   | Articles of  Incorporation of ABB Ltd as amended to date. Incorporated by reference to Exhibit 1.1  to the Annual Report on Form 20-F filed by ABB Ltd on April 9,  2004.                                                                                                                                                                                                                                                                                                |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1    |   | Form of  Amended and Restated Deposit Agreement, by and among ABB Ltd,  Citibank, N.A., as Depositary, and the holders and beneficial owners  from time to time of the American Depositary Shares issued thereunder  (including as an exhibit the form of American Depositary Receipt).  Incorporated by reference to Exhibit (a)(i) to Post-Effective  Amendment No. 1 on Form F-6 (File No. 333-13346)  filed by ABB Ltd on May 7, 2001. |
| 2.2    |   | Form of  American Depositary Receipt (included in Exhibit 2.1).                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.3    |   | EMTN Amended and  Restated Fiscal Agency Agreement, dated December 20, 2006 between ABB  International Finance Limited, Fortis Banque Luxembourg S.A. and Fortis  Banque (Suisse) S.A.                                                                                                                                                                                                                                                                                             |
| 2.4    |   | EMTN Amended and  Restated Dealership Agreement, dated December 20, 2006, between ABB  International Finance Limited, ABB Ltd and Morgan Stanley & Co.  International Limited.                                                                                                                                                                                                                                                                                                 |
| 2.5    |   | EMTN Deed of  Covenant, dated March 10, 1993, by ABB International Finance Limited  (formerly known as ABB International Finance N.V.). Incorporated by  reference to Exhibit 2.4 to the Annual Report on Form 20-F  filed by ABB Ltd on June 27, 2002.                                                                                                                                                                                                        |
| 2.6    |   | EMTN Deed of  Covenant, dated March 10, 1993, by ABB Capital B.V. Incorporated by  reference to Exhibit 2.6 to the Annual Report on Form 20-F  filed by ABB Ltd on June 27, 2002.                                                                                                                                                                                                                                                                              |
|   |   | The total amount  of long-term debt securities of ABB Ltd authorized under any other  instrument does not exceed 10 percent of the total assets of the ABB Group on  a consolidated basis. ABB Ltd hereby agrees to furnish to the  Commission, upon its request, a copy of any instrument defining the rights of  holders of long-term debt of ABB Ltd or of its subsidiaries for which  consolidated or unconsolidated financial statements are required to be filed.       |

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| 4.1  |   | Share Purchase  and Settlement Agreement dated as of March 31, 2000 among ABB Ltd,  ALSTOM and ABB ALSTOM POWER N.V., as amended. Incorporated by reference  to Exhibit 4.1 to the Annual Report on Form 20-F filed by  ABB Ltd on June 27, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.2  |   | Purchase  Agreement, dated as of December 21, 1999, between ABB Handels-und  Verwaltungs AG, as Seller, and British Nuclear Fuels plc, as  Purchaser, as amended. Incorporated by reference to Exhibit 4.2 to the  Annual Report on Form 20-F filed by ABB Ltd on June 27,  2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.3  |   | $2,000,000,000  Multicurrency Revolving Credit Agreement, dated as of July 4, 2005,  between ABB Ltd, certain subsidiaries of ABB Ltd as borrowers and guarantors,  Barclays Capital, Bayerische Hypo-und Vereinsbank AG, BNP Paribas, Citigroup  Global Markets Limited, Commerzbank Aktiengesellschaft, Credit Suisse,  Deutsche Bank AG, Dresdner Kleinwort Wasserstein, Handelsbanken Capital  Markets, Svenska Handelsbanken AB (publ), HSBC Bank plc, Nordea Bank (AB) and  SEB Merchant Banking, Skandinaviska Enskilda Banken, AB (publ), as mandated  lead arrangers, Credit Suisse, as facility agent, dollar swingline agent and  euro swingline agent, and SEB Merchant Banking, Skandinaviska Enskilda  Banken, AB (publ), as SEK swingline agent. Incorporated by reference to  Exhibit 4.3 to the Annual Report on Form 20-F filed by ABB on April 19, 2006. |
| 4.4  |   | Stock and Asset  Purchase Agreement, dated January 16, 2004, between ABB Handels-und  Verwaltungs AG and Laradew Limited. Incorporated by reference to Exhibit 4.6  to the Annual Report on Form 20-F filed by ABB on April 9,  2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.5  |   | Settlement Agreement and  Amendment, dated as of February 9, 2005, between ABB Handels-und  Verwaltungs AG and Vetco Limited (formerly known as Laradew Limited),  relating to the Stock and Asset Purchase Agreement dated as of January 16,  2004, between Handels-und Verwaltungs AG and Laradew Limited.  Incorporated by reference to Exhibit 4.8 to the Annual Report on Form 20-F  filed by ABB on May 27, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.6  |   | Purchase Agreement,  dated as of December 8, 2003, between ABB Holding AG, Zurich, and  Lagrummet December NR 919 AB (under change of name to “Fund  American Holdings AB”). Incorporated by reference to Exhibit 4.7 to  the Annual Report on Form 20-F filed by ABB on April 9, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.7  |   | Amendment and  Acknowledgement, dated April 14, 2004, to the Purchase Agreement, dated  as of December 8, 2003, between ABB Holding AG, Zurich, and  Lagrummet December NR 919 AB (under change of name to “Fund  American Holdings AB”). Incorporated by reference to Exhibit 4.10  to the Annual Report on Form 20-F filed by ABB on May 27,  2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.8  |   | Employment Agreement of  Dinesh Paliwal, dated as of February 21, 2003. Incorporated by reference  to Exhibit 4.9 to the Annual Report on Form 20-F filed by ABB  on June 30, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.9  |   | Employment Agreement of  Gary Steel, dated August 27, 2002. Incorporated by reference to Exhibit 4.11  to the Annual Report on Form 20-F filed by ABB on June 30,  2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.10 |   | Employment Agreement of  Fred Kindle, dated February 21, 2004. Incorporated by reference to Exhibit 4.16  to the Annual Report on Form 20-F filed by ABB on May 27,  2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.11 |   | Employment Agreement of  Michel Demaré, dated October 28, 2004. Incorporated by reference to Exhibit 4.17  to the Annual Report on Form 20-F filed by ABB on May 27,  2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.12 |   | Employment Agreement of  Ulrich Spiesshofer, dated September 5, 2005. Incorporated by reference  to Exhibit 4.15 to the annual report on Form 20-F filed by  ABB on April 19, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

139

----

 

| 4.13 |   | Contribution Agreement  dated as of April 20, 2006 by and among ABB Ltd, ABB Asea Brown Boveri  Ltd, ABB Holdings Inc., ABB Inc. and ABB Lummus Global Inc., Combustion  Engineering 524(g) Asbestos PI Trust and, solely for certain provisions  contained therein, ABB Treasury Center (USA) Inc. |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.14 |   | Promissory Note dated April 20,  2006 between ABB Inc. and ABB Ltd, as makers and Combustion Engineering 524(g) Asbestos  PI Trust, as payee, for the principal amount of up to $350,000,000.                                                                                                       |
| 8.1  |   | Subsidiaries of  ABB Ltd as of March 31, 2007.                                                                                                                                                                                                                                                      |
| 12.1 |   | Certification of the  chief executive officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                |
| 12.2 |   | Certification of the  chief financial officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                |
| 13.1 |   | Certification by the  chief executive officer of ABB Ltd pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*                                                                                                                      |
| 13.2 |   | Certification by the  chief financial officer of ABB Ltd pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*                                                                                                                      |
| 15.1 |   | Consent of Independent  Accountants                                                                                                                                                                                                                                                                           |
| 15.2 |   | Consent of Independent  Registered Public Accounting Firm                                                                                                                                                                                                                                                     |

----

*                    Thisdocument is being furnished in accordance with SEC Release Nos. 33-8212and 34-74551.

140

----

**SIGNATURES**

Theregistrant hereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersignedto sign this report on its behalf.
|        | ABB LTD |
|--------|---------|
|   | By:     |   | /s/ MICHEL DEMARÉ |
|   |    |   | Name: |   | Michel Demaré |
|   |    |   | Title: |   | Executive Vice President   and Chief Financial Officer |
|   | By:     |   | /s/ RICHARD A. BROWN |
|   |    |   | Name: |   | Richard A. Brown |
|   |    |   | Title: |   | Group Vice President   and Assistant General Counsel |

 

Date:  April 18,2007

141

----

**ABB LtdIndex to Consolidated Financial Statements and Schedules**
| **Consolidated Financial Statements:**                                                                                                                   | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| Report of management on internal control over  financial reporting                                                                                       |       | F-2        |       |
| Report of Independent Accountants                                                                                                                        |       | F-3        |       |
| Reports of Independent Registered Public Accounting  Firms                                                                                               |       | F-4        |       |
| Consolidated Income Statements for the years ended  December 31, 2006, 2005 and 2004                                                                |       | F-6        |       |
| Consolidated  Balance Sheets as of December 31, 2006 and 2005                                                                                       |       | F-7        |       |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2006, 2005 and 2004                                                         |       | F-8        |       |
| Consolidated Statements of Changes in Stockholders’  Equity for the years ended December 31, 2006, 2005 and 2004      |       | F-9        |       |
| Notes to  the Consolidated Financial Statements                                                                                                          |       | F-10       |       |
| **Financial  Statement Schedule:**                                                                                                                       | ** ** | ** ** | ** ** |
| Report of Independent Registered Public Accounting  Firm                                                                                                 |       | S-1        |       |
| Schedule II—Valuation and Qualifying Accounts                                                                                                  |       | S-2        |       |

 

F-1

----

**Report ofmanagement on internal control over financial reporting**

The Board of Directors and management of the Group areresponsible for establishing and maintaining adequate internal control overfinancial reporting. The Group’s internal control over financial reporting isdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation and fair presentation of the publishedconsolidated financial statements in accordance with accounting principlesgenerally accepted in the United States of America.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies and procedures maydeteriorate.

Management conducted an assessment of theeffectiveness of internal controls over financial reporting based on thecriteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO). Based on this assessment, management has concludedthat internal control over financial reporting was effective as of December 31,2006.

Management’s assessment ofthe effectiveness of internal control over financial reporting as of December 31,2006, has been audited by Ernst & Young AG, an independent registeredpublic accounting firm, as stated in their report which is included on page F-5of the Group’s Form 20-F.

/s/ Fred KindlePresident and Chief Executive Officer

/s/ Michel DemaréExecutive Committee Member and Chief Financial Officer

Zurich, March 9, 2007

F-2

----

**REPORT OFINDEPENDENT ACCOUNTANTS**

To the Management Committeeand Stockholders of Jorf LasfarEnergy Company S.C.A.B.P. 99 Side BouzidEl Jadida

We have audited the accompanying balance sheets ofJorf Lasfar Energy Company S.C.A. (the “Company”) as of December 31, 2004and 2003 and the related statements of income, of stockholders’ equity and ofcash flows for the years then ended. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Accounting Oversight Board (United States of America).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementspresentation. We believe that our audits provide a reasonable basis for ouropinion.

In our opinion, the financialstatements referred to above present fairly, in all material respects, thefinancial position of Jorf Lasfar Energy Company S.C.A at December 31,2004 and 2003 and the results of its operations and its cash flows for theyears then ended, in conformity with accounting principles generally acceptedin the United States of America.

/s/ PRICE WATERHOUSE

Casablanca, Morocco,February 11, 2005

F-3

----

**Report ofIndependent Registered Public Accounting Firm**

**The Boardof Directors and Stockholders of ABB Ltd:**

We have audited the accompanying consolidated balancesheets of ABB Ltd as of December 31, 2006 and 2005, and the relatedconsolidated income statements, statements of cash flows, and statements ofchanges in stockholders’ equity for each of the three years in the period endedDecember 31, 2006. These financial statements are the responsibility ofthe Company’s Board of Directors and management. Our responsibility is toexpress an opinion on these financial statements based on our audits. We didnot audit the 2004 financial statements of Jorf Lasfar Energy Company, acorporation in which the Company has a 50% interest (the Company’s equity inJorf Lasfar Energy Company’s net income is stated at $63 million in 2004).Those statements were audited by other auditors whose report has been furnishedto us. Our opinion, insofar as it relates to amounts included for Jorf LasfarEnergy Company, is based solely on the report of the other auditors.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audits to obtain reasonableassurance about whether the financial statements are free of material misstatement.An audit includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements. An audit also includes assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits and the report of the other auditors provide a reasonable basisfor our opinion.

In our opinion, based on our audits and report ofother auditors, the financial statements referred to above present fairly, inall material respects, the consolidated financial position of ABB Ltd at December 31,2006 and 2005, and the consolidated results of its operations and its cashflows for each of the three years in the period ended December 31, 2006,in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2 to the consolidated financialstatements, effective January 1, 2006, the Company adopted Statement ofFinancial Accounting Standards No. 123(R), “Share-Based Payment”, andeffective December 31, 2006, the Company adopted Statement of FinancialAccounting Standards No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Benefit Plans – an amendment of FASBStatements No. 87, 88, 106, and 132(R).” As also discussed in Note 2 tothe consolidated financial statements, in 2005 the Company changed its methodof accounting for conditional asset retirement obligations.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of ABB Ltd’s internal control over financialreporting as of December 31, 2006, based on criteria established inInternal Control – Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated March 9,2007, expressed an unqualified opinion thereon.

/s/ Ernst & YoungAG

Zurich, SwitzerlandMarch, 9 2007, except for Note 26, as to which the date is April 17,2007

F-4

----

**Report ofIndependent Registered Public Accounting Firm**

**The Boardof Directors and Stockholders of ABBLtd:**

We have audited management’s assessment, included inthe accompanying Report of management on internal control over financialreporting, that ABB Ltd maintained effective internal control over financialreporting as of December 31, 2006, based on criteria established in Internal Control – Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(the COSO criteria). ABB Ltd’s Board of Directors and management areresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

In our opinion, management’s assessment that ABB Ltdmaintained effective internal control over financial reporting as of December 31,2006, is fairly stated, in all material respects, based on the COSO criteria.Also, in our opinion, ABB Ltd****maintained,in all material respects, effective internal control over financial reportingas of December 31, 2006, based on****theCOSO criteria.

We alsohave audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the 2006 consolidated financial statements of ABB Ltd and our report dated March 9,2007, except for Note 26, as to which the date is April 17, 2007, expressedan unqualified opinion thereon.

/s/ Ernst & YoungAG

Zurich, SwitzerlandMarch 9, 2007

F-5

----

**ABB LtdConsolidated Income Statementsfor the years ended December 31, 2006, 2005 and 2004**

| ** **                                                                                                            | ** ** | **Year ended December 31,**                                           | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| ** **                                                                                                            | ** ** | **2006**                                                                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                            | ** ** | **(U.S. dollars in millions,  except per share data)** | ** ** |
| Sales of products                                                                                                     |       | $                                                                                    | 20,630     |   | $ | 18,664 |   | $ | 16,848 |   |
| Sales of services                                                                                                     |       | 3,782                                                                                |       | 3,348 |   | 3,301 |   |
| **Total  revenues**                                                                                                   | ** ** | **24,412**                                                                           | ** ** | **22,012** | ** ** | **20,149** | ** ** |
| Cost of products                                                                                                      |       | (14,968                                                                              | )          | (14,096 | ) | (12,925 | ) |
| Cost of services                                                                                                      |       | (2,573                                                                               | )          | (2,309 | ) | (2,316 | ) |
| Total cost of  sales                                                                                                  |       | (17,541                                                                              | )          | (16,405 | ) | (15,241 | ) |
| **Gross profit**                                                                                                      | ** ** | **6,871**                                                                            | ** ** | **5,607** | ** ** | **4,908** | ** ** |
| Selling, general and administrative expenses                                                                          |       | (4,434                                                                               | )          | (3,883 | ) | (3,777 | ) |
| Other income  (expense), net                                                                                          |       | 149                                                                                  |       | 54 |   | (40 | ) |
| **Earnings  before interest and taxes**                                                                               | ** ** | **2,586**                                                                            | ** ** | **1,778** | ** ** | **1,091** | ** ** |
| Interest and dividend income                                                                                          |       | 151                                                                                  |       | 157 |   | 151 |   |
| Interest and  other finance expense                                                                                   |       | (304                                                                                 | )          | (403 | ) | (360 | ) |
| **Income  from continuing operations before taxes and minority interest and cumulative  effect of accounting change** | ** ** | **2,433**                                                                            | ** ** | **1,532** | ** ** | **882** | ** ** |
| Provision for taxes                                                                                                   |       | (697                                                                                 | )          | (490 | ) | (338 | ) |
| Minority interest                                                                                                     |       | (179                                                                                 | )          | (131 | ) | (102 | ) |
| **Income from continuing operations before  cumulative effect of accounting change**                                  | ** ** | **1,557**                                                                            | ** ** | **911** | ** ** | **442** | ** ** |
| Loss from discontinued operations, net of tax                                                                         |       | (167                                                                                 | )          | (171 | ) | (477 | ) |
| Income (loss)  before cumulative effect of accounting change                                                          |       | 1,390                                                                                |       | 740 |   | (35 | ) |
| Cumulative effect of accounting change, net of tax                                                                    |       | —                                                                               |       | (5 | ) | — |   |
| **Net  income (loss)**                                                                                                | ** ** | **$**                                                                                | **1,390**  | ** ** | **$** | **735** | ** ** | **$** | **(35** | **)** |
| **Basic  earnings (loss) per share:**                                                                                 |       |                                                                                 |       |   |   |   |   |
| Income from continuing operations before cumulative  effect of accounting change                                      |       | $                                                                                    | 0.73       |   | $ | 0.45 |   | $ | 0.22 |   |
| Loss from discontinued operations, net of tax                                                                         |       | (0.08                                                                                | )          | (0.09 | ) | (0.24 | ) |
| Cumulative effect of accounting change, net of tax                                                                    |       | —                                                                               |       | — |   | — |   |
| **Net income (loss)**                                                                                                 |       | $                                                                                    | 0.65       |   | $ | 0.36 |   | $ | (0.02 | ) |
| **Diluted  earnings (loss) per share:**                                                                               |       |                                                                                 |       |   |   |   |   |
| Income from continuing operations before cumulative  effect of accounting change                                      |       | $                                                                                    | 0.71       |   | $ | 0.44 |   | $ | 0.22 |   |
| Loss from discontinued operations, net of tax                                                                         |       | (0.08                                                                                | )          | (0.08 | ) | (0.24 | ) |
| Cumulative effect of accounting change, net of tax                                                                    |       | —                                                                               |       | — |   | — |   |
| **Net  income (loss)**                                                                                                |       | $                                                                                    | 0.63       |   | $ | 0.36 |   | $ | (0.02 | ) |

 

See accompanying notes to the Consolidated Financial Statements.

F-6

----

**ABB LtdConsolidated Balance Sheetsat December 31, 2006 and 2005**

| ** **                                                                                                        | ** ** | **December 31,**                                                       | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                                                                                        | ** ** | **2006**                                                                    | ** ** | **2005** | ** ** |
| ** **                                                                                                        | ** ** | **(U.S. dollars in millions,  except share data)** | ** ** |
| Cash and equivalents                                                                                              |       | $                                                                           | 4,262      |   | $ | 3,221 |   |
| Marketable securities and short-term investments                                                                  |       | 528                                                                         |       | 368 |   |
| Receivables, net                                                                                                  |       | 7,276                                                                       |       | 6,405 |   |
| Inventories, net                                                                                                  |       | 3,880                                                                       |       | 3,006 |   |
| Prepaid expenses                                                                                                  |       | 252                                                                         |       | 250 |   |
| Deferred taxes                                                                                                    |       | 577                                                                         |       | 473 |   |
| Other current assets                                                                                              |       | 238                                                                         |       | 187 |   |
| Assets held for sale and in discontinued operations                                                               |       | 164                                                                         |       | 262 |   |
| **Total current assets**                                                                                          | ** ** | **17,177**                                                                  | ** ** | **14,172** |   |
| Financing receivables, net                                                                                        |       | 555                                                                         |       | 645 |   |
| Property, plant and equipment, net                                                                                |       | 2,811                                                                       |       | 2,547 |   |
| Goodwill                                                                                                          |       | 2,581                                                                       |       | 2,479 |   |
| Other intangible assets, net                                                                                      |       | 309                                                                         |       | 347 |   |
| Prepaid pension and other employee benefits                                                                       |       | 375                                                                         |       | 601 |   |
| Investments in equity method companies                                                                            |       | 636                                                                         |       | 618 |   |
| Deferred taxes                                                                                                    |       | 523                                                                         |       | 628 |   |
| Other non-current assets                                                                                          |       | 175                                                                         |       | 239 |   |
| **Total assets**                                                                                                  | ** ** | **$**                                                                       | **25,142** | ** ** | **$** | **22,276** |   |
| Accounts payable, trade                                                                                           |       | $                                                                           | 3,936      |   | $ | 3,203 |   |
| Accounts payable, other                                                                                           |       | 1,184                                                                       |       | 1,171 |   |
| Short-term debt and current maturities of long-term  debt                                                         |       | 122                                                                         |       | 169 |   |
| Advances from customers                                                                                           |       | 1,526                                                                       |       | 987 |   |
| Deferred taxes                                                                                                    |       | 227                                                                         |       | 183 |   |
| Provisions and other                                                                                              |       | 3,003                                                                       |       | 2,635 |   |
| Accrued expenses                                                                                                  |       | 1,941                                                                       |       | 1,876 |   |
| Asbestos obligations                                                                                              |       | 154                                                                         |       | 1,128 |   |
| Liabilities held for sale and in discontinued  operations                                                         |       | 283                                                                         |       | 370 |   |
| **Total current liabilities**                                                                                     | ** ** | **12,376**                                                                  | ** ** | **11,722** | ** ** |
| Long-term debt                                                                                                    |       | 3,160                                                                       |       | 3,933 |   |
| Pension and other employee benefits                                                                               |       | 885                                                                         |       | 1,130 |   |
| Deferred taxes                                                                                                    |       | 769                                                                         |       | 691 |   |
| Asbestos obligations                                                                                              |       | 307                                                                         |       | — |   |
| Other liabilities                                                                                                 |       | 1,156                                                                       |       | 976 |   |
| **Total liabilities**                                                                                             | ** ** | **18,653**                                                                  | ** ** | **18,452** | ** ** |
| Minority interest                                                                                                 |       | 451                                                                         |       | 341 |   |
| Stockholders’ equity:                                                                                        |       |                                                                        |       |   |   |
| Capital stock and additional paid-in capital                                                                      |       | 4,514                                                                       |       | 3,121 |   |
| Retained earnings                                                                                                 |       | 3,647                                                                       |       | 2,460 |   |
| Accumulated other comprehensive loss                                                                              |       | (2,019                                                                      | )          | (1,962 | ) |
| Less: Treasury stock, at cost (8,782,721 and  11,531,106 shares at December 31, 2006 and 2005, respectively) |       | (104                                                                        | )          | (136 | ) |
| **Total stockholders’ equity**                                                                               | ** ** | **6,038**                                                                   | ** ** | **3,483** |   |
| **Total  liabilities and stockholders’ equity**                                                              | ** ** | **$**                                                                       | **25,142** | ** ** | **$** | **22,276** |   |

 

See accompanying notes to the Consolidated Financial Statements.

F-7

----

**ABB LtdConsolidated Statements of Cash Flowsfor the years ended December 31, 2006, 2005 and 2004**

| ** **                                                                                                    | ** ** | **Year ended December 31,**    | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                    | ** ** | **(U.S. dollars in millions)** | ** ** |
| **Operating activities:**                                                                                     |       |                                          |       |   |   |   |   |
| Net income (loss)                                                                                             |       | **$**                                         | **1,390**  | ** ** | **$** | **735** | ** ** | **$** | **(35** | **)** |
| Adjustments to reconcile  net income (loss) to net cash provided by operating activities:                     |       |                                          |       |   |   |   |   |
| Depreciation and amortization                                                                                 |       | 570                                           |       | 597 |   | 633 |   |
| Provisions, net                                                                                               |       | 243                                           |       | 466 |   | 88 |   |
| Pension and postretirement benefits                                                                           |       | (4                                            | )          | (62 | ) | 55 |   |
| Deferred taxes                                                                                                |       | 113                                           |       | 38 |   | 3 |   |
| Net gain from sale of property, plant and equipment                                                           |       | (76                                           | )          | (44 | ) | (36 | ) |
| Income from equity accounted companies                                                                        |       | (95                                           | )          | (109 | ) | (87 | ) |
| Minority interest                                                                                             |       | 179                                           |       | 131 |   | 102 |   |
| Loss on sale of discontinued operations                                                                       |       | —                                        |       | 16 |   | 63 |   |
| Other                                                                                                         |       | 190                                           |       | 159 |   | 264 |   |
| Changes  in operating assets and liabilities:                                                                 |       |                                          |       |   |   |   |   |
| Marketable securities (trading)                                                                               |       | —                                        |       | 1 |   | 43 |   |
| Trade receivables                                                                                             |       | (594                                          | )          | (892 | ) | (160 | ) |
| Inventories                                                                                                   |       | (512                                          | )          | (328 | ) | (74 | ) |
| Trade payables                                                                                                |       | 388                                           |       | 26 |   | (63 | ) |
| Advances from customers                                                                                       |       | 461                                           |       | 161 |   | (22 | ) |
| Other assets and liabilities, net                                                                             |       | (314                                          | )          | 117 |   | 128 |   |
| **Net cash provided by operating activities**                                                                 | ** ** | **1,939**                                     | ** ** | **1,012** | ** ** | **902** |   |
| Investing  activities:                                                                                        |       |                                          |       |   |   |   |   |
| Changes in financing receivables                                                                              |       | 67                                            |       | 229 |   | 176 |   |
| Purchases of marketable securities and short-term  investments (other than trading)                           |       | (4,743                                        | )          | (1,915 | ) | (2,877 | ) |
| Purchases of property, plant and equipment and  intangible assets                                             |       | (536                                          | )          | (456 | ) | (543 | ) |
| Acquisitions of businesses (net of cash acquired)                                                             |       | (3                                            | )          | (27 | ) | (24 | ) |
| Proceeds from sales of marketable securities and short-term  investments (other than trading)                 |       | 4,366                                         |       | 1,833 |   | 2,317 |   |
| Proceeds from sales of property, plant and equipment                                                          |       | 128                                           |       | 117 |   | 123 |   |
| Proceeds from sales of businesses (net of cash  disposed)                                                     |       | 27                                            |       | (97 | ) | 1,182 |   |
| **Net cash provided by (used in) investing activities**                                                       | ** ** | **(694**                                      | **)**      | **(316** | **)** | **354** |   |
| **Financing  activities:**                                                                                    |       |                                          |       |   |   |   |   |
| Net changes in debt with maturities of 90 days or  less                                                       |       | (26                                           | )          | (9 | ) | (104 | ) |
| Increases in debt                                                                                             |       | 151                                           |       | 155 |   | 265 |   |
| Repayment of debt                                                                                             |       | (189                                          | )          | (978 | ) | (2,913 | ) |
| Payments made upon induced bond conversion                                                                    |       | (72                                           | )          | — |   | — |   |
| Payments made upon bond exchange                                                                              |       | (111                                          | )          | — |   | — |   |
| Treasury and capital stock transactions                                                                       |       | 47                                            |       | 35 |   | (36 | ) |
| Payment of dividends                                                                                          |       | (203                                          | )          | — |   | — |   |
| Other                                                                                                         |       | 11                                            |       | (99 | ) | 43 |   |
| **Net cash used in financing activities**                                                                     | ** ** | **(392**                                      | **)**      | **(896** | **)** | **(2,745** | **)** |
| Effects of exchange rate changes on cash and  equivalents                                                     |       | 184                                           |       | (259 | ) | 74 |   |
| Adjustment for the net change in cash and equivalents  in assets held for sale and in discontinued operations |       | 4                                             |       | 14 |   | 298 |   |
| **Net change in cash and equivalents—continuing  operations**                                            | ** ** | **1,041**                                     | ** ** | **(445** | **)** | **(1,117** | **)** |
| Cash and equivalents beginning of period                                                                      |       | 3,221                                         |       | 3,666 |   | 4,783 |   |
| **Cash and equivalents end of period**                                                                        | ** ** | **$**                                         | **4,262**  | ** ** | **$** | **3,221** | ** ** | **$** | **3,666** | ** ** |
| Interest paid                                                                                                 |       | $                                             | 274        |   | $ | 332 |   | $ | 382 |   |
| Taxes paid                                                                                                    |       | $                                             | 594        |   | $ | 325 |   | $ | 379 |   |

 

See accompanying notes to the Consolidated Financial Statements.

F-8

----

**ABB LtdConsolidated Statements of Changes in Stockholders’ EquityFor the years ended December 31, 2006, 2005 and 2004**

| ** ** | ** ** | ** **                                                        | ** ** | ** **             | ** ** | **Accumulated other comprehensive loss** | ** ** | ** **                                                               | ** ** | ** **                                  | ** ** |
|------------|------------|-------------------------------------------------------------------|------------|------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ****       | ** ** | **Capital stock  and additional  paid-in capital** | ** ** | **Retained  earnings** | ** ** | **Foreign  currency  translation  adjustment**          | ** ** | **Unrealized  gain (loss) on  available-for-sale  securities** | ** ** | **Minimum  pension  liability  adjustment** | ** ** | **Unrealized  gain (loss) of  cash flow  hedge  derivatives** | ** ** | **Total  accumulated  other  comprehensive  loss** | ** ** | **Treasury  stock** | ** ** | **Total  stockholders’  equity** | ** ** |
| ** ** | ** ** | **(U.S. dollars in  millions)**                                   | ** ** |
|            |            |                                                                   |            |                        |            |                                                         |            |                                                                          |            |                                             |            |  |  |  |  |  |  |  |  |

| **Balance at January 1, 2004**                                                          | ** ** | ** ** | **$**  | **3,067** | ** ** | ** ** | ** ** | **$**  | **1,760** | ** ** | ** ** | ** ** | **$**  | **(1,747** | **)**  | ** ** | ** ** | **$**  | **27** | ** ** | ** ** | ** ** | **$**  | **(137** | **)**  | ** ** | ** ** | **$**  | **85** | ** ** | ** ** | ** ** | **$**  | **(1,772** | **)**  | ** ** | ** ** | **$** | **(138** | **)** | ** ** | ** ** | **$** | **2,917** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------|--------|-----------|------------|------------|------------|--------|-----------|------------|------------|------------|--------|------------|--------|------------|------------|--------|--------|------------|------------|------------|--------|----------|--------|------------|------------|--------|--------|------------|------------|------------|--------|------------|--------|------------|------------|-------|----------|-------|------------|------------|-------|-----------|------------|------------|
| Comprehensive loss:                                                                          |       |       |   |      |       |       |       |   |      |       |       |       |   |       |   |       |       |   |   |       |       |       |   |     |   |       |       |   |   |       |       |       |   |       |   |       |       |
| Net loss                                                                                     |       |       |   |      |       |       | (35        | )      |      |       |       |       |   |       |   |       |       |   |   |       |       |       |   |     |   |       |       |   |   |       |       |       |   |       | (35    | )          |       |
| Foreign currency translation adjustments                                                     |       |       |   |      |       |       |       |   |      |       | 19         |       |   |       |   |       |       |   |   |       |       |       |   |     |   |       | 19         |   |   |       |       |       |   |       | 19     |       |       |
| Accumulated foreign currency translation adjustments  allocated to divestments of businesses |       |       |   |      |       |       |       |   |      |       | 20         |       |   |       |   |       |       |   |   |       |       |       |   |     |   |       | 20         |   |   |       |       |       |   |       | 20     |       |       |
| Effect of change in fair value of available-for-sale  securities (net of tax of $6)          |       |       |   |      |       |       |       |   |      |       |       |       |   |       | (15    | )          |       |   |   |       |       |       |   |     |   |       | (15        | )      |   |       |       |       |   |       | (15    | )          |       |
| Minimum pension liability adjustments (net of tax of  $37)                                   |       |       |   |      |       |       |       |   |      |       |       |       |   |       |   |       |       |   | (69    | )          |       |       |   |     |   |       | (69        | )      |   |       |       |       |   |       | (69    | )          |       |
| Change in derivatives qualifying as cash flow hedges  (net of tax of $16)                    |       |       |   |      |       |       |       |   |      |       |       |       |   |       |   |       |       |   |   |       |       |       | (29    | )        |   |       | (29        | )      |   |       |       |       |   |       | (29    | )          |       |
| Total comprehensive loss                                                                     |       |       |   |      |       |       |       |   |      |       |       |       |   |       |   |       |       |   |   |       |       |       |   |     |   |       |       |   |   |       |       |       |   |       | (109   | )          |       |
| Call options                                                                                 |       |       | 8      |      |       |       |       |   |      |       |       |       |   |       |   |       |       |   |   |       |       |       |   |     |   |       |       |   |   |       |       |       |   |       | 8      |       |       |
| Other                                                                                        |       |       | 8      |      |       |       |       |   |      |       |       |       |   |       |   |       |       |   |   |       |       |       |   |     |   |       |       |   |   |       |       |       |   |       | 8      |       |       |
| **Balance at December 31, 2004**                                                        | ** ** | ** ** | **$**  | **3,083** | ** ** | ** ** | ** ** | **$**  | **1,725** | ** ** | ** ** | ** ** | **$**  | **(1,708** | **)**  | ** ** | ** ** | **$**  | **12** | ** ** | ** ** | ** ** | **$**  | **(206** | **)**  | ** ** | ** ** | **$**  | **56** | ** ** | ** ** | ** ** | **$**  | **(1,846** | **)**  | ** ** | ** ** | **$** | **(138** | **)** | ** ** | ** ** | **$** | **2,824** | ** ** | ** ** |
| Comprehensive income:                                                                        |       |       |   |      |       |       |       |   |      |       |       |       |   |       |   |       |       |   |   |       |       |       |   |     |   |       |       |   |   |       |       |       |   |       |   |       |       |
| Net income                                                                                   |       |       |   |      |       |       | 735        |   |      |       |       |       |   |       |   |       |       |   |   |       |       |       |   |     |   |       |       |   |   |       |       |       |   |       | 735    |       |       |
| Foreign currency translation adjustments                                                     |       |       |   |      |       |       |       |   |      |       | (52        | )          |   |       |   |       |       |   |   |       |       |       |   |     |   |       | (52        | )      |   |       |       |       |   |       | (52    | )          |       |
| Accumulated foreign currency translation adjustments  allocated to divestments of businesses |       |       |   |      |       |       |       |   |      |       | 4          |       |   |       |   |       |       |   |   |       |       |       |   |     |   |       | 4          |   |   |       |       |       |   |       | 4      |       |       |
| Effect of change in fair value of available-for-sale  securities (net of tax of $2)          |       |       |   |      |       |       |       |   |      |       |       |       |   |       | (11    | )          |       |   |   |       |       |       |   |     |   |       | (11        | )      |   |       |       |       |   |       | (11    | )          |       |
| Minimum pension liability adjustments (net of tax of  $(18))                                 |       |       |   |      |       |       |       |   |      |       |       |       |   |       |   |       |       |   | (8     | )          |       |       |   |     |   |       | (8         | )      |   |       |       |       |   |       | (8     | )          |       |
| Change in derivatives qualifying as cash flow hedges  (net of tax of $24)                    |       |       |   |      |       |       |       |   |      |       |       |       |   |       |   |       |       |   |   |       |       |       | (49    | )        |   |       | (49        | )      |   |       |       |       |   |       | (49    | )          |       |
| Total comprehensive income                                                                   |       |       |   |      |       |       |       |   |      |       |       |       |   |       |   |       |       |   |   |       |       |       |   |     |   |       |       |   |   |       |       |       |   |       | 619    |       |       |
| Employee incentive plans including share issuances                                           |       |       | 39     |      |       |       |       |   |      |       |       |       |   |       |   |       |       |   |   |       |       |       |   |     |   |       |       |   |   |       |       |       |   |       | 39     |       |       |
| Treasury share transactions                                                                  |       |       | (1     | )         |       |       |       |   |      |       |       |       |   |       |   |       |       |   |   |       |       |       |   |     |   |       |       |   |   |       | 2          |       |   |       | 1      |       |       |
| **Balance at December 31, 2005**                                                        | ** ** | ** ** | **$**  | **3,121** | ** ** | ** ** | ** ** | **$**  | **2,460** | ** ** | ** ** | ** ** | **$**  | **(1,756** | **)**  | ** ** | ** ** | **$**  | **1**  | ** ** | ** ** | ** ** | **$**  | **(214** | **)**  | ** ** | ** ** | **$**  | **7**  | ** ** | ** ** | ** ** | **$**  | **(1,962** | **)**  | ** ** | ** ** | **$** | **(136** | **)** | ** ** | ** ** | **$** | **3,483** | ** ** | ** ** |
| Comprehensive income:                                                                        |       |       |   |      |       |       |       |   |      |       |       |       |   |       |   |       |       |   |   |       |       |       |   |     |   |       |       |   |   |       |       |       |   |       |   |       |       |
| Net income                                                                                   |       |       |   |      |       |       | 1,390      |   |      |       |       |       |   |       |   |       |       |   |   |       |       |       |   |     |   |       |       |   |   |       |       |       |   |       | 1,390  |       |       |
| Foreign currency translation adjustments                                                     |       |       |   |      |       |       |       |   |      |       | 294        |       |   |       |   |       |       |   |   |       |       |       |   |     |   |       | 294        |   |   |       |       |       |   |       | 294    |       |       |
| Effect of change in fair value of available-for-sale  securities (net of tax of $1)          |       |       |   |      |       |       |       |   |      |       |       |       |   |       | (3     | )          |       |   |   |       |       |       |   |     |   |       | (3         | )      |   |       |       |       |   |       | (3     | )          |       |
| Minimum pension liability adjustments (net of tax of  $(5))                                  |       |       |   |      |       |       |       |   |      |       |       |       |   |       |   |       |       |   | 11     |       |       |       |   |     |   |       | 11         |   |   |       |       |       |   |       | 11     |       |       |
| Adjustment upon adoption of SFAS 158 (net of tax of  $6)                                     |       |       |   |      |       |       |       |   |      |       |       |       |   |       |   |       |       |   | (426   | )          |       |       |   |     |   |       | (426       | )      |   |       |       |       |   |       | (426   | )          |       |
| Change in derivatives qualifying as cash flow hedges  (net of tax of $(21))                  |       |       |   |      |       |       |       |   |      |       |       |       |   |       |   |       |       |   |   |       |       |       | 67     |     |   |       | 67         |   |   |       |       |       |   |       | 67     |       |       |
| Total comprehensive income                                                                   |       |       |   |      |       |       |       |   |      |       |       |       |   |       |   |       |       |   |   |       |       |       |   |     |   |       |       |   |   |       |       |       |   |       | 1,333  |       |       |
| Treasury share transactions                                                                  |       |       | (1     | )         |       |       |       |   |      |       |       |       |   |       |   |       |       |   |   |       |       |       |   |     |   |       |       |   |   |       | 1          |       |   |       | — |       |       |
| Shares issued to Asbestos PI Trust (CE Settlement  Shares)                                   |       |       | 407    |      |       |       |       |   |      |       |       |       |   |       |   |       |       |   |   |       |       |       |   |     |   |       |       |   |   |       |       |       |   |       | 407    |       |       |
| Payment of dividends                                                                         |       |       |   |      |       |       | (203       | )      |      |       |       |       |   |       |   |       |       |   |   |       |       |       |   |     |   |       |       |   |   |       |       |       |   |       | (203   | )          |       |
| Conversion of convertible bonds                                                              |       |       | 903    |      |       |       |       |   |      |       |       |       |   |       |   |       |       |   |   |       |       |       |   |     |   |       |       |   |   |       | 25         |       |   |       | 928    |       |       |
| Employee incentive plans including share issuances                                           |       |       | 68     |      |       |       |       |   |      |       |       |       |   |       |   |       |       |   |   |       |       |       |   |     |   |       |       |   |   |       | 6          |       |   |       | 74     |       |       |
| Call options                                                                                 |       |       | 16     |      |       |       |       |   |      |       |       |       |   |       |   |       |       |   |   |       |       |       |   |     |   |       |       |   |   |       |       |       |   |       | 16     |       |       |
| **Balance  at December 31, 2006**                                                       | ** ** | ** ** | **$**  | **4,514** | ** ** | ** ** | ** ** | **$**  | **3,647** | ** ** | ** ** | ** ** | **$**  | **(1,462** | **)**  | ** ** | ** ** | **$**  | **(2** | **)**      | ** ** | ** ** | **$**  | **(629** | **)**  | ** ** | ** ** | **$**  | **74** | ** ** | ** ** | ** ** | **$**  | **(2,019** | **)**  | ** ** | ** ** | **$** | **(104** | **)** | ** ** | ** ** | **$** | **6,038** | ** ** | ** ** |

 

See accompanying notes to the Consolidated Financial Statements.

F-9

----

**Note 1The company**

ABB Ltd and itssubsidiaries (collectively, the “Company”) together form a leading globalcompany specializing in power and automation technologies that improve theperformance of utility and industry customers, while lowering environmentalimpact. The Company works with customers to engineer and install networks,facilities and plants with particular emphasis on enhancing efficiency,reliability and productivity for customers who generate, convert, transmit,distribute and consume energy.

**Note 2 Significantaccounting policies**

The following is a summaryof significant accounting policies followed in the preparation of theseConsolidated Financial Statements.

*Basis ofpresentation*

The Consolidated FinancialStatements are prepared in accordance with United States of America (UnitedStates or U.S.) generally accepted accounting principles (U.S. GAAP) and arepresented in United States dollars ($ or USD) unless otherwise stated. Parvalue of capital stock is denominated in Swiss francs.

*Scope ofconsolidation*

The Consolidated FinancialStatements include the accounts of ABB Ltd and companies which are directly orindirectly controlled. Additionally, the Company consolidates variable interestentities (VIEs) for which it is deemed to be the primary beneficiary.Intercompany accounts and transactions have been eliminated. Investments injoint ventures and affiliated companies in which ABB has the ability toexercise significant influence over operating and financial policies (generallythrough direct or indirect ownership of 20 percent to 50 percent ofthe voting rights), are recorded in the Consolidated Financial Statements usingthe equity method of accounting.

*Reclassifications*

Amounts reported for prioryears in the Consolidated Financial Statements and Notes have been reclassifiedto conform to the current year’s presentation, primarily related to theasbestos obligations and as a result of the application of Statement ofFinancial Accounting Standards No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets* (SFAS 144),in reflecting assets and liabilities held for sale and in discontinuedoperations.

*Operating cycle*

A portion of the Company’soperating cycle, including long-term construction activities, exceeds one year.For classification of current assets and liabilities related to these types ofconstruction activities, the Company elected to use the duration of thecontracts as its operating cycle.

*Use of estimates*

The preparation offinancial statements in conformity with U.S. GAAP requires management to makeassumptions and estimates that directly affect the amounts reported in theConsolidated Financial Statements. Significant estimates for which changes inthe near term are considered reasonably possible and that may have a materialimpact on the financial statements are addressed in these notes to theConsolidated Financial Statements.

F-10

----

*Cash andequivalents*

Cash and equivalentsinclude highly liquid investments with maturities of three months or less atthe date of acquisition.

*Marketablesecurities and short-term investments*

All current debt and equity securities are classifiedas “available-for-sale” at the time of purchase and are reported at fair value.Unrealized gains and losses on available-for-sale securities are excluded fromthe determination of earnings and are instead recognized in the accumulatedother comprehensive loss component of stockholders’ equity, net of tax(accumulated other comprehensive loss) until realized. Realized gains andlosses on available-for-sale securities are computed based upon the historicalcost of these securities applied using the specific identification method.

The Company analyzes itsavailable-for-sale securities for impairment during each reporting period toevaluate whether an event or change in circumstances has occurred in thatperiod that may have a significant adverse effect on the fair value of theinvestment. The Company records an impairment charge through current periodearnings and adjusts the cost basis for such other-than-temporary declines infair value when the fair value is not anticipated to recover above cost withina three-month period after the measurement date, unless there are mitigatingfactors that indicate an impairment charge through earnings may not be required.If an impairment charge is recorded, subsequent recoveries in fair value arenot reflected in earnings until sale of the security.

*Accounts receivableand allowance for doubtful accounts*

Accounts receivable arerecorded at the invoiced amount and do not bear interest. The allowance fordoubtful accounts is the Company’s best estimate of the amount of probablecredit losses in existing accounts receivable. The Company determines theallowance based on historical write-off experience and customer economic data.The Company reviews the allowance for doubtful accounts regularly and past duebalances are reviewed for collectibility. Account balances are charged offagainst the allowance when the Company believes that the receivable will not berecovered.

*Concentrations ofcredit risk*

The Company sells a broad range of products, systemsand services to a wide range of industrial, commercial and utility customers aswell as various government agencies throughout the world. Concentrations ofcredit risk with respect to trade receivables are limited, as the Company’scustomer base is comprised of a large number of individual customers. Ongoingcredit evaluations of customers’ financial positions are performed and,generally, no collateral is required. The Company maintains reserves forpotential credit losses and such losses, in the aggregate, are in line with theCompany’s expectations.

It is the Company’s policy to invest cash in depositswith banks throughout the world with certain minimum credit ratings and in highquality, low risk, liquid investments. The Company actively manages its creditrisk by routinely reviewing the creditworthiness of the banks and theinvestments held, as well as maintaining such investments in time deposits orother liquid investments. The Company has not incurred significant creditlosses related to such investments.

The Company’s exposure tocredit risk on derivative financial instruments is the risk that a counterpartywill fail to meet its obligations. To reduce this risk, the Company has creditpolicies that require the establishment and periodic review of credit limitsfor individual counterparties. In addition, the Company has entered intoclose-out netting agreements with most counterparties. Close-out nettingagreements provide for the termination, valuation and net settlement of some orall outstanding transactions between two counterparties on the occurrence ofone or more pre-defined trigger events.

F-11

----

*Revenue recognition*

The Company recognizes revenues when persuasiveevidence of an arrangement exists, the price is fixed or determinable,collectibility is reasonably assured and upon transfer of title, including therisks and rewards of ownership to the customer, or upon the rendering ofservices.

Revenues under long-term contracts are recognizedusing the percentage-of-completion method of accounting pursuant to Statementof Position 81-1, *Accounting for Performanceof Construction-Type and Certain Production-Type Contracts.* TheCompany principally uses the cost-to-cost or delivery events methods to measureprogress towards completion on contracts. Management determines the method tobe used by type of contract based on its judgment as to which method bestmeasures actual progress towards completion. Revenues under cost-reimbursementcontracts are recognized as costs are incurred.

Revenues from service transactions are recognized asservices are performed. Service revenues reflect revenues earned from theCompany’s activities involved in providing services to customers primarily subsequentto the sale and delivery of a product or complete system; such revenues consistprincipally of maintenance-type contracts.

In accordance withEmerging Issues Task Force (EITF) No. 00-21, *RevenueArrangements with Multiple Deliverables* (EITF 00-21),when multiple elements such as products and services are contained in a singlearrangement or in related arrangements with the same customer, the Companyallocates revenues to each element based on its relative fair value, providedthat such element meets the criteria for treatment as a separate unit ofaccounting. Revenues from contracts that contain customer acceptance provisionsare deferred until customer acceptance occurs, or the Company has demonstratedthe customer-specified objective criteria, or the contractual acceptance periodhas lapsed.

*Product-relatedexpenses and contract loss provisions*

Anticipated costs forwarranties are recorded when revenues are recognized. Losses on product andmaintenance-type contracts are recognized in the period when they areidentified and are based upon the anticipated excess of contract costs over therelated contract revenues. Shipping and handling costs are recorded as acomponent of cost of sales.

*Securitization ofreceivables*

The Company accounts for the securitization of tradereceivables in accordance with Statement of Financial Accounting Standards No. 140,*Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities* (SFAS 140). SFAS 140requires an entity to recognize the financial and servicing assets it controlsand the liabilities it has incurred and to derecognize financial assets whencontrol has been surrendered, as evaluated in accordance with the criteriaprovided in SFAS 140.

The Company accounts for the transfer of itsreceivables to VIEs or qualifying special purpose entities (QSPEs) as a sale ofthose receivables to the extent that consideration other than beneficialinterests in the transferred accounts receivable is received. The Company doesnot recognize the transfer as a sale unless the receivables have been putpresumptively beyond the reach of the Company and its creditors, even inbankruptcy or other receivership. In addition, the VIEs or QSPEs must obtainthe right to pledge or exchange the transferred receivables, and the Companycannot retain the ability or obligation to repurchase or redeem the transferredreceivables.

At the time the receivables are sold, the balances areremoved from trade receivables and a retained interest or deferred purchaseprice component is recorded in other receivables. Retained interests arerecorded in a manner similar to trading securities at fair value as permittedunder SFAS 140, and cash inflows from reductions of retained interests arerecorded as operating cash flows. Costs associated with the sale of receivablesare included in the determination of earnings.

F-12

----

The Company, in its normalcourse of business, sells receivables outside its securitization programswithout recourse (see Note 8). Sales or transfers that do not meet therequirements of SFAS 140 are accounted for as secured borrowings.

*Inventories*

Inventories are stated at the lower of cost(determined using either the first-in, first-out or the weighted-average costmethod) or market. Inventoried costs relating to percentage-of-completioncontracts are stated at actual production costs, including overhead incurred todate, reduced by amounts recognized in cost of sales. For inventory relating tolong-term contracts, inventoried costs include amounts relating to contractswith long production cycles, a portion of which is not expected to be realizedwithin one year.

Abnormal amounts of idlefacility expense, freight, handling costs, and wasted materials (spoilage) arerecognized as current-period charges in accordance with Statement of FinancialAccounting Standards No. 151, *Inventory Costs—anamendment of ARB No. 43, Chapter 4* (SFAS 151). Inaddition, the allocation of fixed production overheads to the costs ofmanufacturing of inventory are based on the normal capacity of the productionfacilities. The adoption of SFAS 151 did not have a material impact on theCompany’s Consolidated Financial Statements.

*Impairment oflong-lived assets and accounting for discontinued operations*

Long-lived assets that are “held and used” areassessed for impairment when events or circumstances indicate the carryingamount of the asset may not be recoverable. If the asset’s net carrying valueexceeds the asset’s net undiscounted cash flows expected to be generated overits remaining useful life including net proceeds expected from disposition ofthe asset, if any, the carrying amount of the asset is reduced to its estimatedfair value, pursuant to the measurement criteria of SFAS 144. Estimatedfair value is determined based on discounted cash flows or appraised valuesdepending on the nature of the assets.

In accordance with SFAS 144, the Company includesin assets and liabilities held for sale and in discontinued operations theassets and liabilities that meet certain criteria with respect to the Company’splans for their sale or abandonment. If (1) a planned or completeddisposal involves a component (disposal group) of the Company whose operationsand cash flows can be distinguished operationally and for financial reportingpurposes; (2) such operations and cash flows will be (or have been)eliminated from the Company’s ongoing operations; and (3) the Company willnot have any significant continuing involvement in the disposal group, then thedisposal group’s results of operations are presented as discontinued operationsfor all periods. Depreciation and amortization cease when the assets meet thecriteria to be classified as held for sale. Results from discontinuedoperations are recognized in the period in which they occur. Assets and liabilitiesclassified as held for sale, are measured at the lower of carrying amount orfair value less cost to sell. Assets and liabilities related to sold operationsthat are retained are recorded in continuing assets and liabilities; futureadjustments of such balances are recorded through discontinued operations inthe Consolidated Income Statements. In the Consolidated Statements of CashFlows, the amounts related to businesses with assets and liabilities held forsale and in discontinued operations are not segregated, as permitted byStatement of Financial Accounting Standards No. 95, *Statement ofCash Flows*.

In addition to theinterest expense contained within businesses classified as discontinuedoperations, a portion of the Company’s interest expense is reclassified frominterest and other finance expense to loss from discontinued operations, net oftax, in accordance with EITF No. 87-24, Allocation of Interest toDiscontinued Operations. Such amounts were not significant in 2006 and 2005 andwere $20 million in 2004.

F-13

----

*Goodwill and otherintangible assets*

In accordance with Statement of Financial AccountingStandards No. 142, *Goodwill and OtherIntangible Assets* (SFAS 142), goodwill is tested for impairmentannually or more frequently if impairment indicators arise. The Companyperforms its annual impairment assessment on October 1. A fair valueapproach is used to identify potential goodwill impairment and, when necessary,measure the amount of impairment. The Company uses a discounted cash flow modelto determine the fair value of reporting units, unless there is a readilydeterminable fair market value.

The cost of acquiredintangible assets is amortized on a straight-line basis over their estimateduseful lives, typically ranging from 3 to 10 years. Intangible assets aretested for impairment in accordance with SFAS 144 upon the occurrence ofcertain triggering events.

*Capitalizedsoftware costs*

Capitalized costs ofsoftware for internal use are accounted for in accordance with Statement of Position 98-1,*Accounting for the Costs of Computer SoftwareDeveloped or Obtained for Internal Use*, and are amortized on astraight-line basis over the estimated useful life of the software, typicallyranging from 3 to 5 years. Capitalized costs of a software product to besold are accounted for in accordance with Statement of Financial AccountingStandards No. 86, *Accounting for the Costsof Computer Software to Be Sold, Leased, or Otherwise Marketed*, andare amortized on a straight-line basis over the estimated life of the product.The Company periodically performs an evaluation to determine that theunamortized cost of software to be sold does not exceed the net realizablevalue. The Company expenses costs incurred prior to technological feasibility,and thereafter capitalizes costs incurred in developing or obtaining softwarefor internal use and for software products to be sold.

*Property, plant andequipment*

Property, plant and equipment is stated at cost, lessaccumulated depreciation, and is depreciated using the straight-line method.The estimated useful lives of the assets are generally as follows:

Factory and officebuildings: 30 to 40 yearsOther facilities: 15 yearsMachinery and equipment: 3 to 15 yearsFurniture and office equipment: 3 to 8 years

*Derivativefinancial instruments and hedging activities*

The Company uses derivative financial instruments tomanage interest rate risk, currency exposures and commodity exposures, arisingfrom its global operating, financing and investing activities. The Company’s policiesrequire that its industrial entities hedge their exposure from firm commitmentsdenominated in foreign currencies, as well as at least fifty percent of theanticipated foreign currency denominated sales volume of standard products overthe next twelve months.

The Company accounts for its derivative financialinstruments in accordance with Statement of Financial Accounting Standards No. 133,*Accounting for Derivative Instruments and HedgingActivities, as subsequently amended* (SFAS 133). SFAS 133requires the Company to recognize all derivatives, other than certainderivatives indexed to the Company’s own stock, on the Consolidated BalanceSheets at fair value. Derivatives that are not designated as hedges must beadjusted to fair value through earnings. If the derivatives are designated as ahedge, depending on the nature of the hedge, changes in the fair value of thederivatives will either be offset against the change in fair value of thehedged item through earnings or recognized in accumulated other comprehensiveloss until the hedged item is recognized in earnings. The 

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ineffective portion of aderivative’s change in fair value is immediately recognized in earningsconsistent with the classification of the hedged item.

Forward foreign exchange contracts are the primaryinstrument used to manage foreign exchange risk. Where forward foreign exchangecontracts are designated as cash flow hedges under SFAS 133, changes intheir fair value are recorded in accumulated other comprehensive loss until thehedged item is recognized in earnings. The Company also enters into forwardforeign exchange contracts that serve as economic hedges of existing assets andliabilities. These are not designated as accounting hedges under SFAS 133and, consequently, changes in their fair value are reported in earnings wherethey offset the translation gain or loss on the foreign currency denominatedasset or liability.

To reduce its interest rate and currency exposurearising from its borrowing activities, the Company uses interest rate andcurrency swaps. Where interest rate swaps are designated as fair value hedges,the changes in fair value of the swaps are recognized in earnings, as are thechanges in the fair value of the underlying liabilities. Where such interestrate swaps do not qualify for the short cut method as defined under SFAS 133,any ineffectiveness is included in earnings.

All other swaps, futures, options and forwards thatare designated as effective hedges of specific assets, liabilities or committedor forecasted transactions are recognized in earnings consistent with theeffects of the hedged transactions.

If an underlying hedged transaction is terminatedearly, the hedging derivative financial instrument is treated as if terminatedsimultaneously, with any gain or loss on termination of the derivativeimmediately recognized in earnings. Where derivative financial instruments havebeen designated as hedges of forecasted transactions, and such forecastedtransactions become probable of not occurring, hedge accounting ceases and anyderivative gain or loss previously included in accumulated other comprehensiveloss is reclassified into earnings.

Certain commercialcontracts may grant rights to the Company or other counterparties, or containother provisions considered to be derivatives under SFAS 133. Suchembedded derivatives are assessed at inception of the contract and depending ontheir characteristics accounted for as separate derivative instruments pursuantto SFAS 133.

*Sale-leasebacks*

The Company periodicallyenters into transactions accounted for as sale-leasebacks, in which fixedassets, generally real estate and/or equipment, are sold to a third party andthen leased for use by the Company. Under certain circumstances, the necessarycriteria to recognize a sale of the assets may not occur, and the transactionis reflected as a financing transaction, with the proceeds received from thetransaction reflected as a borrowing or as a deposit liability. When thenecessary criteria have been met to recognize a sale, gains or losses on thesale of the assets are generally deferred and amortized over the term of thetransaction, except in certain limited instances when a portion of the gain orloss may be recognized. The lease of the assets is accounted for as either anoperating lease or a capital lease depending upon its specific terms, asrequired by Statement of Financial Accounting Standards No. 13, *Accounting for Leases*.

*Translation offoreign currencies and foreign exchange transactions*

The functional currency for most of the Company’soperations is the applicable local currency. The translation from theapplicable functional currencies into the Company’s reporting currency isperformed for balance sheet accounts using exchange rates in effect at thebalance sheet date, and for income statement accounts using average rates ofexchange prevailing during the year. The resulting translation adjustments areexcluded from the determination of earnings and are recognized in accumulatedother 

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comprehensive loss untilthe entity is sold, substantially liquidated or evaluated for impairment inanticipation of disposal.

Foreign currency exchangegains and losses, such as those resulting from foreign currency denominatedreceivables or payables, are included in the determination of earnings, exceptas they relate to intra-Company loans that are equity-like in nature with noreasonable expectation of repayment, which are recognized in accumulated othercomprehensive loss.

*Taxes*

The Company uses the asset and liability method toaccount for deferred taxes. Under this method, deferred tax assets andliabilities are determined based on temporary differences between the financialreporting and the tax bases of assets and liabilities. Deferred tax assets andliabilities are measured using enacted tax rates and laws that are expected tobe in effect when the differences are expected to reverse. For financialstatement purposes, the Company records a deferred tax asset when it determinesthat it is probable that the deduction will be sustained based upon thededuction’s technical merit. Deferred tax assets are reduced by a valuationallowance to reflect the amount that is more likely than not to be realized.

Generally, deferred taxes are not provided on theunremitted earnings of subsidiaries to the extent it is expected that theseearnings are permanently reinvested. Such earnings may become taxable upon thesale or liquidation of these subsidiaries or upon the remittance of dividends.Deferred taxes are provided in situations where the Company’s subsidiaries planto make future dividend distributions.

The Company operates innumerous tax jurisdictions and, as a result, is regularly subject to audit bytax authorities. The Company provides for tax contingencies on the basis oftheir technical merits, including relative tax law and Organisation forEconomic Co-operation and Development (OECD) guidelines, as well as on itemsrelating to potential audits by tax authorities based upon its best estimate ofthe facts and circumstances as of each reporting period. Changes in the factsand circumstances could result in a material change to the tax accruals. TheCompany provides for contingencies whenever it is deemed probable that a taxasset has been impaired or a tax liability has been incurred for events such astax claims or changes in tax laws.

*Research anddevelopment*

Research and developmentexpense was $772 million, $679 million and $690 million in 2006,2005 and 2004, respectively. These costs are included in selling, general andadministrative expenses.

*Earnings per share*

Basic earnings (loss) pershare is calculated by dividing income (loss) by the weighted-average number ofshares outstanding during the year. Diluted earnings (loss) per share iscalculated by dividing income (loss) by the weighted-average number of sharesoutstanding during the year, assuming that all potentially dilutive securitieswere exercised, if dilutive. Potentially dilutive securities comprise:outstanding written call options; outstanding options and shares conditionallygranted under the Company’s employee incentive plans; and shares issuable inrelation to outstanding convertible bonds. See further discussion related toearnings per share in Note 23 and further discussion of the potentiallydilutive securities in Notes 14 and 21.

*Employee incentiveplans*

The Company has employeeincentive plans, which are described more fully in Note 21. Effective January 1,2006, the Company adopted the provisions of Statement of Financial AccountingStandard 

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No. 123(revised 2004), *Share-Based Payment* (SFAS 123R),using the modified-prospective transition method. SFAS 123R requiresemployee equity awards to be accounted for under the fair value method.Accordingly, share-based compensation is measured at the grant date, based onthe fair value of the award. Prior to January 1, 2006, the Companyaccounted for these plans in accordance with APB Opinion No. 25, *Accounting for Stock Issued to Employees* (APB 25), andrelated Interpretations, as permitted by Statement of Financial AccountingStandard No. 123, *Accounting for Stock-BasedCompensation* (SFAS 123). In connection with cash-settledwarrant appreciation rights granted under the management incentive plan (MIP),and the conditionally granted shares awarded free-of-charge under the long-termincentive plan (LTIP), compensation cost was recognized in the ConsolidatedIncome Statements in 2005 and 2004 in accordance with APB 25. No stock-basedcompensation was recognized prior to January 1, 2006, for the warrantsissued under the MIP and the stock options granted by the Company under theemployee share acquisition plan (ESAP), as all warrants or options grantedunder these plans had exercise prices equal to, or greater than, the marketvalue of the underlying shares on the date of grant.

*Asset retirementobligations*

The Company may have alegal obligation to perform an asset retirement activity in which the timingand/or method of settlement are conditional on a future event that may or maynot be within the control of the Company. In 2005, the Company recognized thecumulative effect of an accounting change of $5 million, net of tax, inthe Consolidated Income Statements as a result of the adoption of the FinancialAccounting Standards Board (FASB) Interpretation No. 47, *Accounting for Conditional Asset Retirement Obligations—aninterpretation of FASB Statement No. 143* (FIN 47). Inaccordance with FIN 47, the Company recognizes a liability for the fairvalue of a conditional asset retirement obligation when the fair value of theliability can be reasonably estimated.

*Pensions and otherpost retirement benefits*

The Company recognizes anasset for a plan’s overfunded status or a liability for a plan’s underfundedstatus in its Consolidated Balance Sheets in accordance with Statement of FinancialAccounting Standard No. 158, *Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans—an amendment of FASBStatements No. 87, 88, 106, and 132(R)* (SFAS 158).Additionally, the Company measures a plan’s assets and obligations thatdetermine its funded status as of the end of the year, and recognizes thechanges in the funded status of a defined benefit postretirement plan in theyear in which the changes occur. Those changes are reported in totalcomprehensive loss and as a separate component of stockholders’ equity. TheCompany adopted SFAS 158 in 2006. See Note 20 for further discussionof SFAS 158 and the Company’s employee benefit plans.

*New accountingpronouncements*

In June 2006, the FASB issued Interpretation No. 48,*Accounting for Uncertainty in Income Taxes*(FIN 48). Among other things, FIN 48 requires applying a two stepapproach to recognizing and measuring uncertain tax positions accounted for inaccordance with Statement of Financial Accounting Standards No. 109, *Accounting for Income Taxes*. The first step is to evaluatethe tax position for recognition by determining if the weight of availableevidence indicates it is more likely than not that the position will besustained on audit, including resolution of related appeals or litigationprocesses, if any. The second step is to measure the tax benefit as the largestamount which is more than 50 percent likely of being realized uponultimate settlement. This new guidance will be effective for the Company on January 1,2007. The Company expects the transition effects to consist of reclassificationof certain income tax-related liabilities in the Company’s Consolidated BalanceSheets. The Company expects a reclassification of approximately $350 millionto $450 million primarily between certain current and non-currentliabilities, and an 

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immaterial adjustment toopening retained earnings. As required by FIN 48, prior periods will notbe restated.

In September 2006, the FASB issued SFAS No. 157,*Fair Value Measurements* (SFAS 157).SFAS 157 defines fair value, establishes a framework for measuring fairvalue and expands disclosures about fair value measurements. SFAS 157 doesnot require any new fair value measurements and eliminates inconsistencies inguidance found in various prior accounting pronouncements. SFAS 157provides a single definition for fair value that is to be applied consistentlyfor all accounting applications, and also generally describes and prioritizesaccording to reliability the methods and inputs used in valuations. SFAS 157will be effective for the Company on January 1, 2008. The Company iscurrently evaluating and assessing the impact of adopting SFAS 157 on itsConsolidated Financial Statements.

In June 2006, theFASB ratified EITF No. 06-3, *How Taxes Collected fromCustomers and Remitted to Governmental Authorities Should Be Presented in theIncome Statement (That Is, Gross Versus Net Presentation)* (EITF 06-3).EITF 06-3 allows companies to present in their income statement anytaxes assessed by a governmental authority that are directly imposed onrevenue-producing transactions between a seller and a customer, such as sales,use, value-added and some excise taxes, on either a gross (included in revenuesand costs) or a net (excluded from revenues) basis. EITF 06-3 willbe effective for the Company in interim periods and fiscal years beginningafter December 15, 2006. The Company presents these transactions on a netbasis and intends to continue this presentation in the future, therefore theadoption of EITF 06-3 will have no impact on its ConsolidatedFinancial Statements.

**Note 3 Held for saleand discontinued operations**

The Company’s financialstatements for all periods presented were impacted by activities relating tothe divestitures of a number of businesses. The following planned or completeddisposals met the SFAS 144 criteria for held for sale and/or discontinuedoperations in the reporting periods.

*Structured Finance*

In 2002, the Companycompleted the sale of most of its Structured Finance business to GeneralElectric Capital Corporation (GE) for approximately $2.0 billion. InNovember 2005, the Company completed the sale of its remaining StructuredFinance business and divested the Lease portfolio business in Finland. Withlease and loan financial receivables of approximately $300 million, theLease portfolio business was the last remaining major entity of the StructuredFinance business. In 2005, the Company recorded a loss of approximately $28 millionin loss from discontinued operations, net of tax, principally related to theloss on sale of the business.

*Upstream Oil, Gasand Petrochemicals business*

In 2004, the Company sold its Upstream Oil, Gas andPetrochemicals business for an initial sales price of $925 million. Netcash proceeds from the sale were approximately $800 million, reflectingthe initial sales price adjusted for unfunded pension liabilities and changesin net working capital. The Upstream Oil, Gas and Petrochemicals business hadrevenues of $855 million and net losses of $70 million in 2004. In2006, the Company and the buyer of the Upstream Oil, Gas and Petrochemicalsbusiness entered into an agreement to settle certain items which were disputedby the buyer after the closing of the transaction. In 2006, the Companyreleased provisions of approximately $15 million in loss from discontinuedoperations, net of tax, related to this agreement.

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*Reinsurance business*

In 2004, the Companycompleted the sale of its Reinsurance business, receiving net cash proceeds ofapproximately $280 million. The Company recognized revenues of $139 millionin 2004, and losses totaling $41 million in loss from discontinuedoperations, net of tax, relating to the Reinsurance business.

*Power Lines business*

During 2004, the Companyreclassified part of its Power Lines business to discontinued operations. Thebusinesses that were reclassified are the Power Lines businesses in Nigeria,Italy and Germany whose sales were completed in 2005. These reclassifiedbusinesses had revenues of $27 million and $117 million and netlosses of $12 million and $75 million for the years ended December 31,2005, and 2004, respectively, recorded in loss from discontinued operations,net of tax.

During 2005, the Companyreclassified the remaining Power Lines businesses in Brazil, Mexico, Venezuelaand South Africa to discontinued operations, on the basis of management’s planto sell the remaining Power Lines businesses. The Power Lines businesses inVenezuela and South Africa were sold in 2006. These businesses had revenues of$8 million, $18 million, and $29 million and net income (loss)of ($1) million, $0 million and $1 million for the years ended December 31,2006, 2005 and 2004, respectively. In 2007, the Company entered into anagreement to sell the Power Lines businesses in Brazil and Mexico and expectsthe sale to be completed in 2007. The businesses in Brazil and Mexico hadrevenues of $80 million, $84 million and $50 million and netincome (loss) of ($4) million, $3 million and $2 million for theyears ended December 31, 2006, 2005 and 2004, respectively. Net income(loss) reported in each year was recorded in loss from discontinued operations,net of tax.

*Foundry business*

During 2004, the Companyreclassified its Foundry business to discontinued operations. In 2005, theCompany completed the sale of its Foundry business. The Foundry business hadrevenues of $41 million in both 2005 and 2004 and net losses of $1 millionand $17 million in 2005 and 2004, respectively, recorded in loss fromdiscontinued operations, net of tax.

*Control Valves*

In 2005, the Company soldits Control Valves business in Japan. The Control Valves business had revenuesof $26 million and $31 million and net income of $15 million and$3 million in 2005 and 2004, respectively. The net income reported in 2005includes $14 million related to the gain on sale of the Control Valvesbusiness, recorded in loss from discontinued operations, net of tax.

*Cable business*

Upon the sale during 2006,the Company reclassified its Cable business in Ireland to discontinuedoperations, formerly part of the Power Products division. The Cable business inIreland had revenues of $95 million, $76 million, and $79 millionfor the years ended December 31, 2006, 2005 and 2004, respectively. Netlosses reported for 2006, 2005 and 2004 were $48 million, $15 millionand $24 million, respectively, recorded in loss from discontinuedoperations, net of tax. The majority of the loss reported in 2006 related tothe sale of the business.

*Building Systems*

During 2006, the Companyreclassified its remaining Building Systems business in Germany, formerly partof Non-Core and Other, to discontinued operations, on the basis of management’splan to sell the business. This Building Systems business had revenues of $286 million,$354 million, and $381 million for the years ended December 31,2006, 2005 and 2004, respectively. Net losses reported for 2006, 2005 and 2004were $65 million, $20 million and $14 million, respectively,recorded in loss from discontinued 

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operations,net of tax. Of the net loss reported for 2006, $67 million was animpairment charge based upon the expected proceeds from the sale of the business.In 2007, the Company entered into an agreement to sell the business and expectsto complete the sale in 2007.

*Other*

In addition, the Companyhas also reflected other minor operations as held for sale and in discontinuedoperations, as appropriate.

Loss from discontinuedoperations, net of tax, also includes costs related to the Company’s asbestosobligations of approximately $70 million, $133 million and $262 millionin 2006, 2005, and 2004, respectively (see Note 17).

Operatingresults of the held for sale and discontinued operations are summarized asfollows:

| ** **                                         | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                                           |       | $                                          | 471        |   | $ | 630 |   | $ | 1,737 |   |
| Costs and  expenses, finance loss                  |       | (573                                       | )          | (799 | ) | (2,162 | ) |
| Operating loss  before taxes                       |       | (102                                       | )          | (169 | ) | (425 | ) |
| Tax benefit                                        |       | 18                                         |       | 14 |   | 11 |   |
| Operating loss  from discontinued operations       |       | (84                                        | )          | (155 | ) | (414 | ) |
| Loss from  dispositions, net of tax                |       | (83                                        | )          | (16 | ) | (63 | ) |
| **Loss from discontinued  operations, net of tax** | ** ** | **$**                                      | **(167**   | **)** | **$** | **(171** | **)** | **$** | **(477** | **)** |

 

Themajor components of assets and liabilities held for sale and in discontinuedoperations in the Company’s Consolidated Balance Sheets are summarized asfollows:

| ** **                                                              | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                              | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Cash and  equivalents, marketable securities and short-term investments |       | $                     | 1          |   | $ | 5 |   |
| Receivables, net                                                        |       | 111                   |       | 129 |   |
| Inventories, net                                                        |       | 44                    |       | 91 |   |
| Prepaid expenses  and other current assets                              |       | 1                     |       | 3 |   |
| Property, plant  and equipment                                          |       | 5                     |       | 26 |   |
| Goodwill and  other intangible assets                                   |       | 2                     |       | 2 |   |
| Prepaid pension                                                         |       | —                |       | 4 |   |
| Investments                                                             |       | —                |       | 2 |   |
| **Assets  held for sale and in discontinued operations**                | ** ** | **$**                 | **164**    | ** ** | **$** | **262** |   |
| Accounts payable                                                        |       | $                     | 93         |   | $ | 138 |   |
| Short-term debt  and current maturities of long-term debt               |       | 5                     |       | — |   |
| Advances from  customers                                                |       | 17                    |       | 21 |   |
| Provisions and  other                                                   |       | 16                    |       | 30 |   |
| Accrued  liabilities and other                                          |       | 30                    |       | 52 |   |
| Pensions and  other employee benefits                                   |       | 117                   |       | 124 |   |
| Other  liabilities, non-current                                         |       | 5                     |       | 5 |   |
| **Liabilities held for sale and  in discontinued operations**           | ** ** | **$**                 | **283**    | ** ** | **$** | **370** |   |

 

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**Note 4Business combinations and divestments**

*Acquisitions andinvestments*

During 2006, 2005, and2004, the Company invested $3 million, $27 million, $24 million,in 11, 22 and 24 new businesses, joint ventures or affiliated companies,respectively. The aggregate excess of the purchase price over the fair value ofthe net assets acquired of new businesses totaled $2 million, $6 millionand $15 million in 2006, 2005 and 2004, respectively, and has beenrecorded as goodwill. The Company has not presented the pro forma results ofoperations of the acquired businesses as the results are not material to theCompany’s Consolidated Financial Statements.

*Divestitures*

In addition to the soldbusinesses described under discontinued operations, the Company periodicallydivests businesses and investments not considered by management to be alignedwith its focus on power technologies and automation technologies as describedin Note 1 and which do not meet the requirements of SFAS 144. Theresults of operations of these divested businesses are included in the Company’sConsolidated Income Statements in the respective line items of income fromcontinuing operations, through the date of disposition.

*Divestment ofBuilding Systems businesses*

During 2005 and 2004, theCompany disposed of numerous Building Systems businesses and recorded gains ondisposal of $1 million and $12 million, respectively, which areincluded in other income (expense), net. Proceeds received from the divestmentof the Building Systems businesses were $0 million and $39 million in2005 and 2004, respectively. The disposal of these businesses contemplated thatthe Company would retain an involvement in the disposed operations through acombination of technology license agreements, supplier relationships, retentionof certain orders and participation on the Board of Directors of some of thedisposed of companies. As a result of these factors, the Company concluded thatclassification of these businesses as discontinued operations in accordancewith SFAS 144 was not appropriate.

*Other divestitures*

In 2004, the Company solda business in Sweden for $11 million, resulting in a gain on disposal of$7 million recorded in other income (expense), net. In 2004, the Companyalso sold its entire 15.7 percent interest in IXYS Corporation forapproximately $42 million and recorded a gain on disposal of $20 millionin other income (expense), net. During 2006, 2005 and 2004, the Company soldseveral operating units and investments, excluding the divestments disclosedabove, for total proceeds of $9 million, $24 million and $39 million,respectively, and recognized net gains on disposal of $3 million, $20 millionand $13 million, respectively, which are included in other income(expense), net. Revenues and net income from these businesses and investmentswere not significant in 2006, 2005 and 2004.

**Note 5Marketable securities and short-term investments**

Marketablesecurities and short-term investments consisted of the following:

| ** **                                                                                                 | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                 | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Available-for-sale  securities                                                                             |       | $                     | 314        |   | $ | 276 |   |
| Time deposits                                                                                              |       | 38                    |       | 39 |   |
| Securities  serving as hedges of the Company’s management incentive plan (see Note 21) |       | 176                   |       | 53 |   |
| Total                                                                                                      |       | $                     | 528        |   | $ | 368 |   |

 

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To hedge its exposure to fluctuations in fair value ofthe Company’s warrant appreciation rights (WARs) issued under the Company’smanagement incentive plan, the Company purchases cash-settled call options,which entitle the Company to receive amounts equivalent to its obligationsunder the outstanding WARs. In accordance with EITF No. 00-19, *Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock* (EITF 00-19),the cash-settled call options have been recorded as assets measured at fairvalue with subsequent changes in fair value recorded through earnings to theextent that they offset the compensation expense recorded in connection withthe WARs. Changes in the fair value of the cash settled call options includedin accumulated other comprehensive loss, were $38 million and $16 millionat December 31, 2006 and 2005, respectively.

Available-for-sale securities classified as marketablesecurities consisted of the following:

| ** **                      | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2006**              | ** ** | **2005** | ** ** |
| ** **                      | ** ** | **Cost**              | ** ** | **Fair value** | ** ** | **Cost** | ** ** | **Fair value** | ** ** |
| **Equity  securities**          | ** ** | **$**                 | **47**     | ** ** | ** ** | **$** | **50** | ** ** | ** ** | **$** | **80** | ** ** | ** ** | **$** | **84** | ** ** | ** ** |
| **Debt securities:**            |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| U.S. government obligations     |       | 78                    |       |   | 77 |   |   | 64 |   |   | 63 |   |   |
| European government obligations |       | 26                    |       |   | 25 |   |   | — |   |   | — |   |   |
| Corporate                       |       | 120                   |       |   | 118 |   |   | 98 |   |   | 96 |   |   |
| Other                           |       | 45                    |       |   | 44 |   |   | 34 |   |   | 33 |   |   |
| **Total  debt securities**      | ** ** | **269**               | ** ** | ** ** | **264** | ** ** | ** ** | **196** | ** ** | ** ** | **192** | ** ** | ** ** |
| **Total**                       | ** ** | **$**                 | **316**    | ** ** | ** ** | **$** | **314** | ** ** | ** ** | **$** | **276** | ** ** | ** ** | **$** | **276** | ** ** | ** ** |

 

At December 31, 2006 and 2005, unrealized gainsand losses on available-for-sale securities were not significant.

At December 31,2006, contractual maturities of the above available-for-sale debt securitiesconsisted of the following:

| ** **           | ** ** | **Cost** | ** ** | **Fair value** | ** ** |
|----------------------|------------|----------|------------|---------------------|------------|
| Less than one  year  |       | $        | 27         |                |       | $ | 26 |   |   |
| One to five years    |       | 134      |       |                | 132        |   |   |
| Six to ten years     |       | 72       |       |                | 71         |   |   |
| Due after ten  years |       | 36       |       |                | 35         |   |   |
| **Total**            | ** ** | **$**    | **269**    | ** **          | ** ** | **$** | **264** | ** ** | ** ** |

 

Gross realized gains onavailable-for-sale securities were $96 million, $18 million and $117 millionin 2006, 2005 and 2004, respectively. Gross realized losses onavailable-for-sale securities were $3 million, $34 million and $5 millionin 2006, 2005 and 2004, respectively. Such gains and losses are included ininterest and other finance expense.

Gross unrealized losses ofthose available for sale securities that have been in a continuous unrealizedloss position were not significant at December 31, 2006, 2005 and 2004.

At December 31, 2006and 2005, the Company pledged $58 million and $91 million,respectively, of marketable securities as collateral for issued letters ofcredit and other security arrangements.

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**Note 6 Financialinstruments**

*Cash flow hedges*

The Company enters into forward foreign exchangecontracts to manage the foreign exchange risk of its operations. The Companyalso uses commodity contracts to manage its commodity risks. Where suchinstruments are designated and qualify as cash flow hedges, the changes intheir fair value are recorded in accumulated other comprehensive loss, untilthe hedged item is recognized in earnings. At such time, the respective amountin accumulated other comprehensive loss is released to earnings and is shown ineither revenues or cost of sales consistent with the classification of theearnings impact of the underlying transaction being hedged.

The amount of derivative financial instrument netgains or losses reclassified from accumulated other comprehensive loss toearnings was a net gain of $95 million, $27 million and $31 millionin 2006, 2005 and 2004, respectively. The $31 million in 2004 excludes the$14 million loss described below. Of the $74 million included in thecomprehensive loss at December 31, 2006, $51 million is expected tobe reclassified to earnings in 2007 and $23 million is expected to bereclassified to earnings in 2008 through 2010.

During 2004, the Companyreclassified losses of $14 million from accumulated other comprehensiveloss to earnings as a result of the discontinuance of certain cash flow hedgesas it became probable that the original forecasted transactions related tothese hedges would not occur within the forecasted time period.

*Fair value hedges*

To reduce its interestrate and foreign currency exposures arising primarily from its borrowingactivities, the Company uses interest rate and cross-currency swaps. Where suchinstruments are designated as fair value hedges, the changes in fair value ofthese instruments, as well as the changes in fair value of the underlyingliabilities, are recorded as offsetting gains and losses in the determinationof earnings. The hedge ineffectiveness in 2006, 2005 and 2004, resulted in again (loss) of $3 million, ($16) million and $11 million,respectively.

*Disclosure aboutfair values of financial instruments*

The Company uses the following methods and assumptionsin estimating fair values for financial instruments:

*Cash and equivalents, receivables, accountspayable, short-term debt and current maturities of long-term debt*:The carrying amounts approximate the fair values as the items are short-term innature.

*Marketable securities and short-term investments*:Fair values of marketable securities are based on quoted market prices, whereavailable. If quoted market prices are not available, fair values are based onquoted market prices of comparable instruments. The carrying amounts ofshort-term investments approximate the fair values.

*Financing receivables and loans (non-currentportion)*: Fair values are determined using a discounted cashflow methodology based upon loan rates of similar instruments. The carryingvalues and estimated fair values of long-term loans granted at December 31,2006, were $158 million and $158 million, respectively, and at December 31,2005, were $201 million and $201 million, respectively.

*Long-term debt (non-current portion)*:Fair values of public bond issues are based on quoted market prices. The fairvalues of other debt are based on the present value of future cash flowsdiscounted at estimated borrowing rates for similar debt instruments, or in thecase of private placement bond or note issuances, using the relevant borrowingrates derived from interest rate swap curves. The carrying values and estimatedfair values of long-term borrowings at December 31, 2006, were $3,160 millionand 

F-23

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$4,448 million,respectively, and at December 31, 2005, were $3,933 million and$4,710 million, respectively.

*Derivativefinancial instruments*: Fair values are the amounts by whichthe contracts could be settled. These fair values were estimated by using adiscounted cash flow methodology based on available market data, option pricingmodels or by obtaining quotes from brokers. At December 31, 2006 and 2005,the carrying values equal fair values. Current derivative assets are recordedin other current assets, and non-current derivative assets are recorded inother non-current assets. Current derivative liabilities are recorded inprovisions and other, and non-current derivative liabilities are recorded inother liabilities. The fair values were:

| ** **                           | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Derivative  assets, current          |       | $                     | 190        |   | $ | 156 |   |
| Derivative  assets, non-current      |       | 121                   |       | 162 |   |
| **Total**                            | ** ** | **$**                 | **311**    | ** ** | **$** | **318** |   |
| Derivative  liabilities, current     |       | $                     | 146        |   | $ | 138 |   |
| Derivative  liabilities, non-current |       | 113                   |       | 63 |   |
| **Total**                            | ** ** | **$**                 | **259**    | ** ** | **$** | **201** | ** ** |

 

**Note 7 Receivables,net**

Receivables,net consisted of the following:

| ** **                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Trade receivables                                 |       | $                     | 5,370      |   | $ | 4,483 |   |
| Other receivables                                 |       | 684                   |       | 939 |   |
| Allowance                                         |       | (260                  | )          | (279 | ) |
|                                              |       | 5,794                 |       | 5,143 |   |
| Unbilled receivables,  net:                       |       |                  |       |   |   |
| Costs and estimated profits in excess of billings |       | 2,477                 |       | 2,127 |   |
| Advance payments received                         |       | (995                  | )          | (865 | ) |
|                                              |       | 1,482                 |       | 1,262 |   |
| **Total**                                         | ** ** | **$**                 | **7,276**  | ** ** | **$** | **6,405** | ** ** |

 

Trade receivables include contractual retentionamounts billed to customers of $175 million and $115 million at December 31,2006 and 2005, respectively. Management expects the majority of relatedcontracts will be completed and substantially all of the billed amountsretained by the customer will be collected within one year of the respectivebalance sheet date. Other receivables consist of value added tax, claims,employee and customer related advances and other non-trade receivables, includingthe retained interests on sold receivables under the Company’s securitizationprogram.

Costs and estimatedprofits in excess of billings represent sales earned and recognized under thepercentage-of-completion method. Amounts are expected to be collected withinone year of the respective balance sheet date.

**Note 8 Securitizationand variable interest entities**

***Securitization***

During 2005, the Company re-assessed its need forrevolving-period securitization programs, terminating one program and reducingthe size of the other. During the first half of 2006, the Company furtherlimited its sales of receivables under the remaining program which was with aVIE, unrelated to the 

F-24

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Company. The VIE was notrequired to be consolidated in accordance with FASB Interpretation No. 46 *(revised) Consolidation of Variable Interest Entities* (FIN 46(R)).In mid 2006, the VIE transferred the outstanding receivables and retainedinterests to a QSPE as part of the establishment of a new, revolving-periodsecuritization program (New Program) and the existing program with the VIE wasterminated.

During2006, 2005 and 2004, the following cash flows were received from and paid toVIEs:

| ** **                                                 | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                 | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Gross trade  receivables sold to VIEs                      |       | $                     | 1,062      |   | $ | 4,925 |   | $ | 5,846 |   |
| Collections made  on behalf of and paid to VIEs            |       | (1,156                | )          | (5,489 | ) | (5,713 | ) |
| Purchaser,  liquidity and program fees                     |       | (4                    | )          | (18 | ) | (20 | ) |
| Decrease in  retained interests                            |       | 68                    |       | 178 |   | 17 |   |
| **Net cash received from (paid  to) VIEs during the year** | ** ** | **$**                 | **(30**    | **)** | **$** | **(404** | **)** | **$** | **130** | ** ** |

 

Net cash settlements on the program with the VIE tookplace twice per month.

During2006, the following cash flows were received from and paid to the QSPE, underthe New Program:

| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2006**              | ** ** |
| Gross trade  receivables sold to QSPE(1)        |       |                  | $          | 939 |   |   |
| Collections made  on behalf of QSPE(1)          |       |                  | (935       | ) |   |
| Discount,  liquidity and program fees           |       |                  | (4         | ) |   |
| Decrease in  retained interests                 |       |                  | 12         |   |   |
| Net cash paid to  QSPE during the year          |       |                  | 1          |   |   |
| Receivable from QSPE as  of December 31(2) |       |                  | $          | 13 |   |   |

----

(1)             Gross receivables sold excludes $295 million ofgross receivables transferred directly to the QSPE by the VIE uponestablishment of the QSPE. Collections include collections by the Company ofthose receivables acquired by the QSPE from the VIE.

(2)             The difference between the receivablessold in a month and the collections made, adjusted for fees and any increase ordecrease in the retained interests, is settled between the Company and the QSPEon a net basis in the following month.

The total cost related to the securitization of tradereceivables of $8 million, $18 million and $20 million in 2006,2005 and 2004, respectively, is included in interest and other finance expense.

Under the terms of the New Program with the QSPE, the saleof receivables occurs daily upon creation of the receivables and the Companyretains collection responsibility relating to the sold receivables. For thepurpose of credit enhancement from the perspective of the QSPE, the Companyretains an interest in the sold receivables (retained interests). Theseretained interests are initially measured at estimated fair values, which theCompany believes approximate historical carrying values, and are subsequentlymeasured based on a periodic evaluation of collections and delinquencies. Giventhe short-term, lower-risk nature of the assets securitized, market movementsin interest rates would not significantly impact the carrying value of theCompany’s retained interests. Similarly, as the receivables sold are denominatedin the functional currency of the selling entities, an adverse movement inforeign currency rates would not have an impact on the carrying value of theseretained interests.

The Company routinely evaluates its portfolio of tradereceivables for risk of non-collection and records an allowance for doubtfulaccounts to reflect the carrying value of its trade receivables at estimatednet realizable value. Pursuant to the requirements of the revolving-periodsecuritization programs in place at December 31, 2006 and 2005, theCompany effectively bears the risk of potential delinquency or default 

F-25

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associated with tradereceivables sold or interests retained. At December 31, 2006 and 2005, thefair value of the retained interests was approximately $106 million and$185 million, respectively.

In accordance with SFAS 140, the Company has notrecorded a servicing asset or liability at December 31, 2006 and 2005.Given the limited activities undertaken by the Company in respect of the NewProgram, management has estimated that any incremental benefit or cost isinsignificant. At December 31, 2005, management believed it was notpracticable to estimate the value of a servicing asset or liability, given thatverifiable data as to the fair value of the compensation and/or cost related toservicing the types of the assets sold are not readily obtainable nor reliablyestimable in the various geographic markets in which the entities sellingreceivables operated.

Thefollowing table reconciles total gross receivables to the amounts in theConsolidated Balance Sheets after the effects of securitization at December 31,2006 and 2005:

| ** **                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Total trade  receivables                          |       | $                     | 5,669      |   | $ | 4,871 |   |
| Portion  derecognized                             |       | (183                  | )          | (193 | ) |
| Retained interests  included in other receivables |       | (116                  | )          | (195 | ) |
| **Trade receivables**                             | ** ** | **$**                 | **5,370**  | ** ** | **$** | **4,483** | ** ** |

 

At December 31, 2006 and 2005, of the gross tradereceivables sold, the total trade receivables for which cash has not beencollected at those dates amounted to $299 million and $388 million,respectively. At December 31, 2006, an amount of $18 million was morethan 60 days past due, while at December 31, 2005, an amount of $41 millionwas more than 90 days past due, the respective thresholds for classifyinga receivable as delinquent, pursuant to the terms of the programs existing atthe respective dates.

In addition, the Companytransfers receivables outside of the above described securitization programs.These transfers were sales, made without recourse, directly to banks and/orsales pursuant to factoring or similar type arrangements. Total soldreceivables included in these transactions during 2006 and 2005 wereapproximately $538 million and $530 million, respectively, of whichsales of $5 million in 2006 only, related to assets held for sale and indiscontinued operations. During each of 2006 and 2005, the related costs,including the associated gains and losses, were $5 million.

***Variable interest entities***

**The following VIE is consolidated, as the Companyis the primary beneficiary as defined by FIN 46(R).**

In March 2003, the Company sold itsaircraft-leasing portfolio in Sweden to a third party. Subsequent todivestment, the Company continued its involvement in this business by providingsignificant financial support in the form of mezzanine and subordinatedfinancing of approximately $90 million to the VIE formed by the buyer uponacquisition, exclusively for the purpose of servicing the aircraft leasingportfolio. As the primary beneficiary of the VIE, the Company retainedapproximately $10 million and $55 million of assets and acquiredapproximately $1 million and $9 million of third party long-termborrowings provided to the VIE at December 31, 2006 and 2005,respectively. All of the VIE’s assets serve as collateral for the senior debtprovided by third parties. The Company has no ownership interest and there isno recourse to the general credit of the Company.

**The following VIEs are not consolidated, as theCompany is not the primary beneficiary as defined by FIN 46(R).**

At December 31, 2006and 2005, the Company maintains a combined equity and financing interest ofapproximately $124 million and $85 million, respectively, in twoVIEs, that are accounted for using the equity method of accounting, and wereestablished as consortia to develop power plants in various 

F-26

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countries.The Company’s involvement with these VIEs began between 1995 and 2000 at thedates of inception of the VIEs. The purpose of the VIEs is to contract theengineering, procurement, commissioning and financing of the power plants. Asof and for the years ended December 31, 2006 and 2005, these VIEs havecombined total assets of approximately $719 million and $783 million,respectively, and reported combined total revenues of $132 million and$136 million, respectively, and earnings before interest and taxes of $31 millionand $39 million, respectively. The exposure to loss as a result ofinvolvement with the VIEs is limited to the Company’s combined equity andfinancing interests.

**Note 9 Inventories,net**

Inventories,net, including inventories related to long-term contracts, consisted of thefollowing:

| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Commercial inventories, net:                    |       |                  |       |   |   |
| Raw materials                                   |       | $                     | 1,490      |   | $ | 1,182 |   |
| Work in process                                 |       | 1,392                 |       | 1,233 |   |
| Finished goods                                  |       | 721                   |       | 442 |   |
|                                            |       | 3,603                 |       | 2,857 |   |
| Contract inventories, net:                      |       |                  |       |   |   |
| Inventoried costs                               |       | 637                   |       | 499 |   |
| Advance payments  received related to contracts |       | (360                  | )          | (350 | ) |
|                                            |       | 277                   |       | 149 |   |
| Total                                           |       | $                     | 3,880      |   | $ | 3,006 |   |

 

**Note 10 Financingreceivables, net**

Financingreceivables consisted of the following:

| ** **               | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Loans receivable         |       | $                     | 158        |   | $ | 201 |   |
| Pledged financial assets |       | 302                   |       | 309 |   |
| Other                    |       | 95                    |       | 135 |   |
| Total                    |       | $                     | 555        |   | $ | 645 |   |

 

Loans receivable primarilyrepresent financing arrangements provided to customers related to productsmanufactured by the Company.

The Company entered intotax-advantaged leasing transactions with U.S. investors prior to 1999. Theprepaid rents relating to these transactions are reflected as pledged financialassets, with an offsetting non-current deposit liability, which is included inother liabilities (see Note 19). Net gains on these transactions are beingrecognized over the lease terms.

**Note 11 Property,plant and equipment, net**

Property,plant and equipment, net, consisted of the following:

| ** **               | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Land and buildings       |       | $                     | 2,488      |   | $ | 2,284 |   |
| Machinery and equipment  |       | 4,963                 |       | 4,345 |   |
| Construction in progress |       | 173                   |       | 132 |   |
|                     |       | 7,624                 |       | 6,761 |   |
| Accumulated depreciation |       | (4,813                | )          | (4,214 | ) |
| Total                    |       | $                     | 2,811      |   | $ | 2,547 |   |

 

F-27

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In 2006, 2005 and 2004,depreciation expense was $407 million, $413 million and $431 million,respectively.

**Note 12 Goodwill andother intangible assets**

Thechanges in the carrying amount of goodwill for the year ended December 31,2005 and 2006 are as follows:

| ** ** | ** ** | **Power  Technologies** | ** ** | **Automation  Technologies** | ** ** | **Power  Products** | ** ** | **Power  Systems** | ** ** | **Automation  Products** | ** ** | **Process  Automation** | ** ** | **Robotics** | ** ** | **Non-core  activities** | ** ** | **Corporate/  Other** | ** ** | **Total** | ** ** |
|------------|------------|-------------------------|------------|------------------------------|------------|---------------------|------------|--------------------|------------|--------------------------|------------|-------------------------|------------|--------------|------------|--------------------------|------------|-----------------------|------------|-----------|------------|

| Balance at January 1,   2005                                                      |       |       | $           | 561     |       |       |       | $           | 1,795     |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       | $           | 225     |       |       |       | $           | 21     |       |       | $           | 2,602     |       |
|----------------------------------------------------------------------------------------|------------|------------|-------------|---------|------------|------------|------------|-------------|-----------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|-------------|---------|------------|------------|------------|-------------|--------|------------|------------|-------------|-----------|------------|
| Goodwill acquired during the year                                                      |       |       |        |    |       |       | 6          |        |      |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |        |    |       |       |       | 6           |   |
| Other                                                                                  |       |       | (3          | )       |       |       |       |        |      |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       | (2         | )          |        |    |       |       |       | (5          | )      |
| Foreign currency translation                                                           |       |       | (11         | )       |       |       | (93        | )           |      |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       | (19        | )          |        |    | (1         | )          |       | (124        | )      |
| **Balance at December 31, 2005**                                                  | ** ** | ** ** | **$ ** | **547** | ** ** | ** ** | ** ** | **$ ** | **1,708** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **$ ** | **204** | ** ** | ** ** | ** ** | **$ ** | **20** | ** ** | ** ** | **$ ** | **2,479** | ** ** |
| Allocation based on new organizational structure  effective as of January 1, 2006 |       |       | (547        | )       |       |       | (1,708     | )           |      |       | 122        |       |       |       | 425        |       |       |       | 674        |       |       |       | 933        |       |       |       | 101        |       |       |       |       |       |        |    |       |       |       | —      |   |
| Goodwill acquired during the year                                                      |       |       |        |    |       |       |       |        |      |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       | 2          |       |        |    |       |       |       | 2           |   |
| Other                                                                                  |       |       |        |    |       |       |       |        |      |       |       |       |       |       | 5          |       |       |       | (3         | )          |       |       |       |       |       |       |       |       |       |       |       |       |        |    |       |       |       | 2           |   |
| Foreign currency translation                                                           |       |       |        |    |       |       |       |        |      |       | 7          |       |       |       | 4          |       |       |       | 52         |       |       |       | 14         |       |       |       | 7          |       |       |       | 14         |       |        |    |       |       |       | 98          |   |

| **Balance  at December 31, 2006** | ** ** | ** ** | **$** | **—** | ** ** | ** ** | ** ** | **$** | **—** | ** ** | ** ** | ** ** | **$** | **129** | ** ** | ** ** | ** ** | **$** | **434** | ** ** | ** ** | ** ** | **$** | **723** | ** ** | ** ** | ** ** | **$** | **947** | ** ** | ** ** | ** ** | **$** | **108** | ** ** | ** ** | ** ** | **$** | **220** | ** ** | ** ** | ** ** | **$** | **20** | ** ** | ** ** | **$** | **2,581** | ** ** |
|----------------------------------------|------------|------------|-------|------------|------------|------------|------------|-------|------------|------------|------------|------------|-------|---------|------------|------------|------------|-------|---------|------------|------------|------------|-------|---------|------------|------------|------------|-------|---------|------------|------------|------------|-------|---------|------------|------------|------------|-------|---------|------------|------------|------------|-------|--------|------------|------------|-------|-----------|------------|

 

At December 31, 2006 and 2005, the $220 millionand $204 million goodwill, respectively, in Non-core and Other activitiesprincipally related to the Company’s remaining Oil, Gas and Petrochemicalsbusiness.

Otherintangible assets consisted of the following:

| ** **                             | ** ** | **December 31, 2006**  | ** ** | **December 31, 2005**    | ** ** |
|----------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                             | ** ** | **Gross  carrying  amount** | ** ** | **Accumulated  amortization** | ** ** | **Net  carrying  amount** | ** ** | **Gross  carrying  amount** | ** ** | **Accumulated  amortization** | ** ** | **Net  carrying  amount** | ** ** |
| Capitalized  software for internal use |       |                        | $          | 458                           |       |   |   | $ | (385 | ) |   |   | $ | 73 |   |   |   | $ | 408 |   |   |   | $ | (342 | ) |   |   | $ | 66 |   |   |
| Capitalized  software for sale         |       |                        | 372        |                          |       |   | (253 | ) |   |   | 119 |   |   |   | 287 |   |   |   | (166 | ) |   |   | 121 |   |   |
| Other intangible  assets               |       |                        | 553        |                          |       |   | (436 | ) |   |   | 117 |   |   |   | 548 |   |   |   | (388 | ) |   |   | 160 |   |   |
| **Total**                              | ** ** | ** **                  | **$**      | **1,383**                     | ** ** | ** ** | ** ** | **$** | **(1,074** | **)** | ** ** | ** ** | **$** | **309** | ** ** | ** ** | ** ** | **$** | **1,243** | ** ** | ** ** | ** ** | **$** | **(896** | **)** | ** ** | ** ** | **$** | **347** | ** ** | ** ** |

 

For the years ended December 31, 2006 and 2005,the Company capitalized intangible assets of $77 million ($42 million,$30 million and $5 million of software for internal use, software forsale and other intangible assets, respectively) and $54 million ($7 million,$30 million and $17 million of software for internal use, softwarefor sale and other intangible assets, respectively), respectively. Amortizationexpense is calculated using an estimated useful life of 4 years for capitalizedsoftware and 5 years for other intangible assets.

Amortization expense of capitalized software forinternal use for 2006 and 2005, recorded in selling, general and administrativeexpenses, amounted to $42 million and $55 million, respectively.Amortization expense of capitalized software for sale for 2006 and 2005,recorded in cost of sales, amounted to $51 million and $52 million,respectively. Amortization expense of other intangible assets for 2006 and2005, recorded in other income (expense), net amounted to $48 million and$51 million, respectively.

F-28

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The Company recorded insignificant impairment chargesto intangible assets in 2006, 2005 and 2004. These charges are included in otherincome (expense), net, in the Consolidated Income Statements.

Other intangible assets primarily include intangiblescreated through acquisitions, such as trademarks and patents.

Amortizationexpense of other intangible assets is estimated to be as follows:

| 2007       |       | $     | 113     |   |
|------------|------------|-------|---------|--------|
| 2008       |       | 98    |    |
| 2009       |       | 33    |    |
| 2010       |       | 16    |    |
| 2011       |       | 11    |    |
| Thereafter |       | 38    |    |
| **Total**  | ** ** | **$** | **309** |   |

 

**Note 13 Investmentsin equity method accounted companies**

TheCompany recorded pre-tax earnings of $95 million, $109 million and$87 million in 2006, 2005 and 2004, respectively, in other income(expense), net, representing the Company’s share of the pre-tax earnings ofinvestees accounted for under the equity method of accounting. The principalcompany accounted for using the equity method of accounting is Jorf LasfarEnergy Company S.C.A. (JLEC), a power plant based in Morocco, of which theCompany owns 50 percent. In February 2007, the Company entered intoan agreement to sell its 50 percent stake in JLEC, as well as its 50 percentstake in a power plant in Neyveli, India. This transaction is expected to becompleted during 2007.

| ** **                                                              | ** ** | **Investment  balance** | ** ** | **The Company’s share  of the pre-tax  earnings of equity-accounted investees** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                              | ** ** | **2006**                | ** ** | **2005**                                                                                                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| JLEC                                                                    |       | $                       | 382        |                                                                                                                    | $          | 364 |   | $ | 67 |   | $ | 62 |   |   | $ | 68 |   |   |
| Other                                                                   |       | 254                     |       | 254                                                                                                                     |       | 28 |   | 47 |   |   | 19 |   |   |
| **Total**                                                               | ** ** | **$**                   | **636**    | ** **                                                                                                              | **$**      | **618** | ** ** | **95** | ** ** | **109** | ** ** | ** ** | **87** |   |   |
| Less: Current  income tax expense                                       |       |                    |       |                                                                                                                    |       | (22 | ) | (16 | ) |   | (8 | ) |   |
| **The Company’s share of earnings  of equity-accounted investees** | ** ** | ** **              | ** ** | ** **                                                                                                              | ** ** | **$** | **73** | ** ** | **$** | **93** | ** ** | ** ** | **$** | **79** | ** ** |   |

 

Thefollowing table represents selected financial information for JLEC and not theCompany’s share in this equity accounted company.

| ** **                       | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Total current  assets            |       | $        | 255        |     | $          | 264      |       | $ | 296 |   |
| Total non-current  assets        |       | $        | 1,054      |     | $          | 1,037    |       | $ | 1,147 |   |
| Total current  liabilities       |       | $        | 277        |     | $          | 241      |       | $ | 254 |   |
| Total non-current  liabilities   |       | $        | 403        |     | $          | 441      |       | $ | 572 |   |
| Total  shareholders’ equity |       | $        | 629        |     | $          | 619      |       | $ | 617 |   |
| Revenues                         |       | $        | 483        |     | $          | 509      |       | $ | 462 |   |
| Income before  taxes             |       | $        | 134        |     | $          | 127      |       | $ | 133 |   |
| Net income                       |       | $        | 109        |     | $          | 112      |       | $ | 125 |   |

 

F-29

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As security for repayment by JLEC of certain of itsloans, the Company, JLEC and the other 50 percent shareholder in JLEC haveentered into various pledge agreements with several banks and other securedparties. The Company has pledged all of its shares, claims, rights and interestin JLEC in accordance with the pledge agreements. Such security shall continuein effect until the repayment in full of all outstanding principal and interestand other fees, which is scheduled to occur in February 2013.

The Company has entered into other similar pledgeagreements for certain other equity accounted companies. The Company has alsogranted lines of credit and has committed to provide guarantees for certainequity accounted companies. At December 31, 2006, the total unused linesof credit amounted to $42 million and the Company has issued $25 millionof capital commitment guarantees on behalf of equity accounted companies.

TheCompany’s Consolidated Financial Statements include the following aggregateamounts related to transactions with equity accounted companies and otherrelated parties:

| ** **                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Revenues                                     |       |     | $          | 89       |       |   |   | $ | 63 |   |   |
| Receivables                                  |       |     | $          | 30       |       |   |   | $ | 17 |   |   |
| Other current  assets                        |       |     | $          | 11       |       |   |   | $ | 2 |   |   |
| Financing  receivables, non-current          |       |     | $          | 48       |       |   |   | $ | 53 |   |   |
| Current liabilities                          |       |     | $          | 3        |       |   |   | $ | — |   |   |
| Short-term debt and  non-current liabilities |       |     | $          | 10       |       |   |   | $ | 2 |   |   |

 

**Note 14 Debt**

The Company’s total debtat December 31, 2006 and 2005 amounted to $3,282 million and $4,102 million,respectively.

**Short-term debt andcurrent maturities of long-term debt**

TheCompany’s short-term debt and current maturities of long-term debt consisted ofthe following:

| ** **                                                                              | ** ** | ** ** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------|------------|-----------------------|------------|
| ** **                                                                              | ** ** | ** ** | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Short-term debt  (weighted-average interest rate of 5.7% and 6.5%)                      |       | $          | 75         |                  | $          | 142 |   |
| Current maturities  of long-term debt (weighted-average interest rate of 4.5% and 3.9%) |       | 47         |       | 27                    |       |
| Total                                                                                   |       | **$**      | **122**    | ** **            | **$**      | **169** | ** ** |

 

Short-term debt primarily represents short-term loansfrom various banks.

In 2005, the Company signed a five-year, $2 billionmulticurrency revolving credit facility and canceled the three-year $1 billioncredit facility that was due to expire in November 2006. As a result ofcanceling the $1 billion facility prior to expiry, the Company recorded in2005, a charge of $12 million in interest and other finance expense towrite off unamortized costs related to this facility.

The $2 billion facility contains financialcovenants in respect of minimum interest coverage and maximum net leverage. In April 2006,the Company’s credit rating reached certain levels defined in the facility andconsequently the minimum interest coverage covenant is no longer required. TheCompany is required to meet the remaining maximum net leverage covenant on asemi-annual basis, at June and December. At December 31, 2006, the Companywas in compliance with this covenant.

No amount was drawn under the facility at December 31,2006 and 2005. The interest costs of borrowings under the facility are LIBOR,STIBOR or EURIBOR (depending on the currency of the drawings) plus a margin of0.25 percent to 0.70 percent, depending on the Company’s corporatecredit 

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rating. The commitmentfees paid on the unused portion of the facility amount to 35 percent perannum of the applicable margin, and are therefore also dependent upon thecorporate credit rating of the Company. A utilization fee is payable whenborrowings are greater than one-third of the facility and the level of thesefees is linked to the level of the amounts outstanding.

The facility containscross-default clauses whereby an event of default would occur if the Companywere to default on indebtedness, as defined in the facility, at or above aspecified threshold.

**Long-term debt**

The Company utilizes a variety of derivative productsto modify the characteristics of its long-term debt. The Company uses interestrate swaps to effectively convert certain fixed-rate long-term debt intofloating rate obligations. For certain non-U.S. dollar denominated debt, theCompany utilizes cross-currency swaps to effectively convert the debt into a U.S.dollar obligation. As required by SFAS 133, debt designated as being hedged byfair value hedges is stated at its fair value.

Thefollowing table summarizes the Company’s long-term debt considering the effectof interest rate and currency swaps. Consequently, a fixed rate debt subject toa fixed-to-floating interest rate swap is included as a floating rate debt inthe table below:

| ** **                         | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **Balance**                     | ** ** | **Nominal  rate**               | ** ** | **Effective  rate** | ** ** | **Balance** | ** ** | **Nominal  rate** | ** ** | **Effective  rate** | ** ** |
| Floating rate                      |       | $                               | 2,188      |                            |       | 5.8 | % |   |   | 5.8 | % |   | $ | 2,002 |   |   | 8.5 | % |   |   | 7.0 | % |   |
| Fixed rate                         |       | 199                             |       |                            | 2.5        | % |   |   | 6.0 | % |   | 278 |   |   | 3.4 | % |   |   | 5.4 | % |   |
| Convertible bonds                  |       | 820                             |       |                            | 3.5        | % |   |   | 3.5 | % |   | 1,680 |   |   | 4.1 | % |   |   | 4.1 | % |   |
|                               |       | 3,207                           |       |                            |       |   |   |   |   |   |   | 3,960 |   |   |   |   |   |   |   |   |   |
| Current portion  of long-term debt |       | (47                             | )          |                            | 4.5        | % |   |   | 4.5 | % |   | (27 | ) |   | 3.9 | % |   |   | 3.9 | % |   |
| **Total**                          | ** ** | **$**                           | **3,160**  | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **$** | **3,933** | ** ** |   |   |   |   |   |   |   |   |

 

AtDecember 31, 2006, maturities of long-term debt were as follows:

| Due in 2007 |       | $     | 47        |       |
|-------------|------------|-------|-----------|------------|
| Due in 2008 |       | 354   |      |
| Due in 2009 |       | 166   |      |
| Due in 2010 |       | 833   |      |
| Due in 2011 |       | 825   |      |
| Thereafter  |       | 982   |      |
| **Total**   | ** ** | **$** | **3,207** | ** ** |

 

*Bond conversion,exchange, repurchases and issuances*

Bond conversion:

During 2006, the Company announced an offer to holdersof its outstanding 4.625% USD Convertible Bonds, due 2007, that containedcertain incentives to induce the bondholders to convert their bonds into theCompany’s American Depositary Shares (ADSs). Approximately 98 percent ofthe holders accepted the conversion offer which resulted in the issuance ofapproximately 105 million shares of the Company out of contingent capitaland the delivery of ADSs to the bondholders. As at least 85 percent inaggregate principal amount of bonds originally issued had been converted, theCompany then exercised its right under the terms of the bonds to call theremaining outstanding 4.625% USD Convertible Bonds, due 2007, resulting in theremaining bonds being converted into approximately 2 million ADSs. Thisobligation was met by using treasury shares. As a result of the inducedconversion and the Company’s subsequent call, a total of 107,198,176 ADSs wereissued to bondholders.

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In connection with the conversion offer, the Companyincurred expenses, related to the write-off of unamortized debt issuance costs,inducement payments to bondholders and transaction costs, totalingapproximately $55 million, which are included in interest and otherfinance expense in accordance with Statement of Financial Accounting Standards No. 84,*Induced Conversions of Convertible Debt*.Total debt decreased by approximately $932 million as a result of theconversion of the bonds, while the impact on equity (capital stock andadditional paid-in capital and treasury stock) was an increase of approximately$928 million, after consideration of certain net charges in connectionwith the share issuance. Cash payments upon conversion of the bonds amounted to$72 million, including inducement payments to bondholders and transactionscosts which are included in the $55 million recorded in interest and otherfinance expense, as well as other conversion-related payments.

Bond exchange:

During 2006, the Company completed an exchangeoffering related to the 9.5% EUR Instruments, due 2008, and 10% GBPInstruments, due 2009, into 4.625% EUR Instruments, due 2013. Bonds with atotal face value of approximately 423 million euro, out of the total 500 millioneuro outstanding, and 180 million pounds sterling, out of the 200 millionpounds sterling outstanding, were exchanged into 4.625% EUR Instruments, due2013, with an aggregate face value of approximately 685 million euro. Thisexchange offering was accounted for in accordance with EITF No. 96-19,*Debtor’s Accounting for a Modification or Exchangeof Debt Instruments*. Consequently, the carrying value of the bondsexchanged formed the basis for the carrying value of the new bonds, consideringthe terms of the exchange offering, which included upfront cash payments tobondholders. The adjusted carrying value is being accreted to par over theperiod to maturity. Insignificant transaction costs, paid to third parties,were expensed as incurred.

Bonds with a total face value of approximately 77 millioneuro, of the original 9.5% EUR Instruments, due 2008, and approximately 20 millionpounds sterling of the original 10% GBP Instruments, due 2009, were nottendered as part of the exchange offering and remain outstanding at December 31,2006.

Bond repurchase:

There were no significant bond repurchases during2006. During 2005, the Company repurchased debt securities with a total facevalue of $307 million, primarily a portion of the Company’s 3.75% 500 millionSwiss franc bonds, due 2009, and recognized a loss on extinguishment of debt of$19 million on the repurchases.

Bond issuance:

Concurrently, but independently of the exchangeoffering described above, in 2006 the Company issued bonds with a face value ofapproximately 15 million euro of the 4.625% EUR Instruments, due 2013, orapproximately $20 million at the time of issuance.

The Company did not issue any bonds during 2005.

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Detailsof the Company’s outstanding bonds are as follows:

| ** **                              | ** ** | **December 31, 2006**      | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **Nominal  outstanding**             | ** ** | **Carrying  value**(1)          | ** ** | **Nominal  outstanding** | ** ** | **Carrying  value**(1) | ** ** |
| ** **                              | ** ** | **(in millions)**               | ** ** | **(in millions)**          | ** ** |
| Public bonds:                           |       |                                 |       |                            |       |   |   |   |   |   |   |   |   |
| 4.625% USD  Convertible Bonds, due 2007 |       |                                 |       |                            | $          | — |   |   | USD   968 |   |   | $ | 921 |   |   |
| 3.5% CHF  Convertible Bonds, due 2010   |       | CHF 1,000                            |       |                            | 820        |   |   | CHF 1,000 |   |   | 759 |   |   |
| 10% GBP  Instruments, due 2009          |       | GBP      20 |       |                            | 39         |   |   | GBP   200 |   |   | 353 |   |   |
| 9.5% EUR  Instruments, due 2008         |       | EUR     77       |       |                            | 103        |   |   | EUR   500 |   |   | 614 |   |   |
| 6.5% EUR  Instruments, due 2011         |       | EUR   650                  |       |                            | 821        |   |   | EUR   650 |   |   | 764 |   |   |
| 3.75% CHF Bonds,  due 2009              |       | CHF   108                  |       |                            | 86         |   |   | CHF   108 |   |   | 81 |   |   |
| 4.625% EUR  Instruments, due 2013       |       | EUR   700                  |       |                            | 824        |   |   |   |   |   | — |   |   |
| Private placements                      |       |                                 |       |                            | 191        |   |   |   |   |   | 181 |   |   |
| **Total  outstanding bonds**            | ** ** | ** **                           | ** ** | ** **                      | **$**      | **2,884** | ** ** | ** ** | ** ** | ** ** | ** ** | **$** | **3,673** |   |   |

----

(1)             USD carrying value is net of bonddiscounts and includes adjustments for fair value hedge accounting, whereappropriate.

The 3.5% CHF Convertible Bonds, due 2010, pay interestannually in arrears at a fixed annual rate of 3.5 percent. The conversionprice is subject to adjustment provisions to protect against dilution or changein control. Each 5,000 Swiss francs of principal amount of bonds is convertibleinto 524.65897 fully paid shares of the Company at a conversion price of 9.53Swiss francs, representing a total of 104,931,794 shares if the bonds werefully converted. The bonds are convertible at the option of the bondholder atany time from October 21, 2003, up to and including the tenth business dayprior to September 10, 2010. The Company may at any time on or after September 10,2007, redeem the outstanding bonds at par plus accrued interest if, for acertain number of days during a specified period of time, the official closingprice of the Company’s ordinary shares on the relevant exchange has been atleast 150 percent of the conversion price. In addition, at any time priorto maturity, the Company can redeem the outstanding bonds at par plus accruedinterest, if at least 85 percent in aggregate of the principal amount ofbonds originally issued have been redeemed, converted or purchased andcancelled. The Company has the option to redeem the bonds when due in cash,ordinary shares or any combination thereof.

The 10% GBP Instruments, due 2009, and the 9.5% EURInstruments, due 2008, contain certain clauses linking the interest paid on thebonds to the credit rating assigned to the bonds. If the rating assigned tothese bonds by both Moody’s and Standard & Poor’s remains at or aboveBaa3 and BBB-, respectively, then the interest rate on the bonds remains at thelevel at issuance, that is 10 percent and 9.5 percent for thesterling and euro bonds, respectively. In October 2002, as the ratingassigned by either Moody’s or Standard & Poor’s decreased below Baa3or BBB-, respectively, the annual interest rate on the bonds increased by 1.5 percentper annum to 11.5 percent and 11 percent for the 10% GBP Instruments,due 2009, and 9.5% EUR Instruments, due 2008, respectively. As the ratingassigned by both Moody’s and Standard & Poor’s returned to a level ator above Baa3 and BBB-, respectively, in May 2006, the interest rates onthe remaining bonds returned to the interest level at issuance as of theinterest periods beginning May 2006 and January 2007 for the 10% GBPInstruments, due 2009, and the 9.5% EUR Instruments, due 2008, respectively. Inline with the Company’s policy of reducing its interest and currency exposure,a cross-currency swap has been used to modify the characteristics of the 10%GBP Instruments, due 2009, and an interest rate swap has been used to modifythe 9.5% EUR Instruments, due 2008. After considering the impact of thecross-currency and interest rate swaps, the 10% GBP Instruments, due 2009,effectively became a floating rate U.S. dollar obligation, while the 9.5% EURInstruments, due 2008, became a floating rate euro obligation. Accordingly,both the 10% GBP Instruments, due 2009, and the 9.5% EUR Instruments, due 2008,are considered as floating rate debt in the table of long-term debt above.

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The 6.5% EUR Instruments, due 2011, pay interest semi-annuallyin arrears at a fixed annual rate of 6.5 percent. In the event of a changeof control of the Company, the terms of these bonds require the Company tooffer to repurchase the bonds at 101 percent of the principal amountthereof, plus any accrued interest.

The 3.75% CHF Bonds, due 2009, pay interest annuallyat a fixed annual rate of 3.75%.

During 2005, the Company entered into interest rateswaps to hedge its interest obligations on the 6.5% EUR Instruments, due 2011,and the 3.75% CHF bonds, due 2009. After considering the impact of theseinterest rate swaps, the 6.5% EUR Instruments, due 2011, effectively became afloating rate euro obligation, while the 3.75% CHF Bonds, due 2009, effectivelybecame a floating rate Swiss franc obligation. Consequently, these bonds areconsidered as floating rate debt at December 31, 2006 and 2005.

The 4.625% EUR Instruments, due 2013, pay interestannually in arrears at a fixed annual rate of 4.625%. The Company has theoption to redeem the bonds early at any time from June 6, 2010, inaccordance with the terms of the bonds. In the event of a change of control, abondholder can require the Company to repurchase or redeem the bonds, inaccordance with the terms of the bonds. The Company has entered into interestrate swaps to hedge its interest obligations on the 4.625% EUR Instruments, due2013. As a result of these swaps, the 4.625% EUR Instruments, due 2013,effectively became a floating rate euro obligation and are consequentlyconsidered as floating rate debt at December 31, 2006.

Substantially all of the Company’s publicly tradedbonds contain cross-default clauses which would allow the bondholders to demandrepayment if the Company were to default on any borrowing at or above aspecified threshold. Furthermore, all such bonds constitute unsecured andunsubordinated obligations of the Company and rank pari passu with other debtobligations.

In addition to the bondsdescribed above, included in long-term debt at December 31, 2006 and 2005,are lease obligations, bank borrowings of subsidiaries, and other long-termdebt, none of which is individually significant.

**Note 15 Provisionsand other**

Provisionsand other consisted of the following:

| ** **                                                           | ** ** | ** ** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------|------------|------------|------------|-----------------------|------------|
| ** **                                                           | ** ** | ** ** | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Contract related  reserves                                           |       | $          | 626        |                  | $          | 646 |   |
| Provisions for  warranties and contract penalties (see Note 17) |       | 1,109      |       | 775                   |       |
| Derivatives (see  Note 6)                                       |       | 146        |       | 138                   |       |
| Employee benefit  costs (see Note 20)                           |       | 74         |       | 78                    |       |
| Taxes payable                                                        |       | 377        |       | 369                   |       |
| Other                                                                |       | 671        |       | 629                   |       |
| **Total**                                                            | ** ** | **$**      | **3,003**  | ** **            | **$**      | **2,635** |   |

 

**Note 16 Leases**

*Lease obligations*

The Company’s lease obligations primarily relate toreal estate and office equipment. In the normal course of business, managementexpects most leases to be renewed or replaced by other leases. Rent expense was$380 million, $359 million and $371 million in 2006, 2005 and2004, respectively. Sublease income received on leased assets by the Companywas $41 million, $39 million and $33 million in 2006, 2005 and2004, respectively.

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AtDecember 31, 2006, future net minimum lease payments for operating leaseshaving initial or remaining non-cancelable lease terms in excess of one yearconsisted of the following:

| 2007            |   | $     | 349    |   |
|-----------------|--------|-------|--------|--------|
| 2008            |   | 304   |   |
| 2009            |   | 256   |   |
| 2010            |   | 233   |   |
| 2011            |   | 206   |   |
| Thereafter      |   | 565   |   |
|            |   | 1,913 |   |
| Sublease income |   | (145  | )      |
| Total           |   | $     | 1,768  |   |

 

**Note 17 Commitmentsand contingencies**

*Contingencies—general*

The Company is subject tovarious legal proceedings and other claims, including environmental mattersthat have arisen in the ordinary course of business that have not yet been resolved.It is not possible at this time for the Company to predict with any certaintythe outcome of such litigation and claims.

*AsbestosObligations*

*History*

The Company’s Combustion Engineering, Inc.subsidiary (“CE”) had been a co-defendant in a large number of lawsuitsclaiming damage for personal injury resulting from exposure to asbestos. Asmaller number of claims had also been brought against the Company’s ABB LummusGlobal Inc. subsidiary (“Lummus”) as well as against other entities of theCompany. In late 2002, taking into consideration the growing number and cost ofasbestos-related claims, CE and the Company determined that CE’sasbestos-related liability should be resolved by a comprehensive settlement ofall pending and future asbestos-related personal injury claims. That settlementinvolved (i) a prepackaged plan of reorganization for CE under Chapter 11of the U.S. Bankruptcy Code preceded by (ii) a Master Settlement Agreementand the establishment of a separate trust funded by CE (the “CE SettlementTrust”) to resolve the asbestos related personal injury claims of certainsettling claimants who had lodged their claims before November 14, 2002and provide partial payment of those claims.

In January 2003, CE reached agreement withvarious creditors including representatives of the asbestos claimants whoparticipated in the Master Settlement Agreement and a representative for futureasbestos claimants on the terms of a proposed “Pre-Packaged Plan ofReorganization for CE”, as amended through June 4, 2003 (the “Initial CEPlan”). The Initial CE Plan provided for the issuance of a “channelinginjunction” under which asbestos related personal injury claims related to theoperations of CE, Lummus and Basic Incorporated (“Basic”), another subsidiaryof the Company, could only be brought against a future trust (separate from theCE Settlement Trust) to be established and funded by CE, ABB Ltd and otherentities of the Company (the “CE Asbestos PI Trust”) This channeling injunctionwas intended to free CE, ABB Ltd and its affiliates as well as certain otherentities, including ALSTOM and ALSTOM POWER NV, from further liability for suchclaims.

The Initial CE Plan was filed with the U.S. BankruptcyCourt (the “Bankruptcy Court”) on February 17, 2003 and confirmed by theU.S. District Court (the “District Court”) on August 8, 2003. However, onDecember 2, 2004, the Court of Appeals for the Third Circuit effectivelyreversed the District Court’s confirmation order.

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In March 2005, following extensive discussionswith certain representatives of various parties, including the CreditorsCommittee and Future Claimants Representative appointed in the CE case andCertain Cancer Claimants who had opposed the Initial CE Plan, the partiesreached an agreement in principle (the “Agreement in Principle”) for (i) modifyingthe Initial CE Plan with a view to bringing it into conformity with the Courtof Appeals’ decision, and (ii) providing a mechanism for resolving allpending and future asbestos-related personal injury claims against Lummus bythe filing of a separate Chapter 11 case and a prepackaged plan ofreorganization for Lummus (the “Lummus Plan”).

Following the Agreement in Principle, the partiesnegotiated the terms and provisions of the Lummus Plan and the modifications tothe Initial CE Plan. In August 2005, an amended version of the Initial CEPlan (the “Modified CE Plan”) was filed with the Bankruptcy Court. On December 19,2005, the Bankruptcy Court entered an Order confirming the Modified CE Plan,and recommending that the District Court affirm the Bankruptcy Court’s Order.On April 1, 2006, the District Court’s order affirming confirmation of theModified CE Plan became final and the Modified CE Plan became effective on April 21,2006 (the “Modified CE Plan Effective Date”).

The Lummus Plan was filed with the Bankruptcy Court inDelaware on April 21, 2006. On June 29, 2006, the Bankruptcy Courtissued its order confirming the Lummus Plan and recommending that the DistrictCourt affirm the Bankruptcy Court’s Order. On August 30, 2006, theDistrict Court’s order affirming confirmation of the Lummus Plan became finaland the Lummus Plan became effective on August 31, 2006 (the “Lummus PlanEffective Date”).

The Modified CE Plan and Lummus Plan do not addressBasic. Basic’s asbestos-related liabilities will have to be resolved throughits own bankruptcy or U.S. state court liquidation proceeding, or through thetort system.

Other entities of theCompany have sometimes been named as defendants in asbestos-related claims. At December 31,2006 and 2005, there were approximately 12,100 and 16,400, respectively,asbestos-related claims pending against entities of the Company other than CEand Lummus. These claims, which include approximately 4,300 claims againstBasic, are unrelated to CE and Lummus and will not be resolved under theModified CE Plan or the Lummus Plan. ABB entities that are subject to suchclaims will continue to resolve them in the tort system, or otherwise. TheCompany generally seeks dismissals from claims where there is no apparentlinkage between the plaintiffs and any entity of the Company. To date,resolving claims against the Company’s entities other than CE and Lummus hasnot had a material impact on the Company’s consolidated financial position,results of operations or cash flows.

*The Modified CEPlan*

Pursuant to the Modified CE Plan a channelinginjunction (the “CE Channeling Injunction”) was issued and became effective asof April 21, 2006 pursuant to Section 524(g) of the BankruptcyCode under which all present and future asbestos-related personal injury claimsfiled against ABB Ltd and its affiliates and certain other entities that relateto the operations of CE are channeled to the CE Asbestos PI Trust.

On the Modified CE Plan Effective Date, ABB Inc.indemnified CE against up to $5 million of liability on account of certaincontingent claims held by certain CE insurers. Further, on the Modified CE PlanEffective Date, the Company indemnified CE, for nuclear and environmentalliabilities in respect to sites where CE may have such liabilities andspecifically, CE’s Windsor, Connecticut, site.

The CE Settlement Trustand the CE Asbestos PI Trust were separately funded as follows:

*The CE SettlementTrust*

·       Cash,note payable and assignment of payments on a note receivable including unpaidinterest totaling $417 million from CE; and

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·       Acash payment of $30 million from ABB Inc.

All of the payments werecompleted by mid 2005.

*The CE Asbestos PITrust*

The Modified CEPlan provided that on the Modified CE Plan Effective Date, the CE Asbestos PITrust would be funded with the following:

·       A$20 million 5 percent term note (the “CE Convertible Note”) with a maximumterm of ten years from the Modified CE Plan Effective Date, was issued by CEand secured by its Windsor, Connecticut, real estate and real estate leases(under certain specified contingencies, the CE Asbestos PI Trust would have theright to convert the term note into ownership of 80 percent of the votingsecurities of the reorganized CE). On October 26, 2006, CE prepaid theoutstanding principal balance of the CE Convertible Note, together with allaccrued but unpaid interest thereon, in full to the CE Asbestos PI Trust. Suchpayment extinguished the CE Asbestos PI Trust’s lien and security interests andterminated its right to convert the CE Convertible Note into voting securitiesof CE;

·       Excesscash held by CE on the Modified CE Plan Effective Date;

·       Anassignment of proceeds from certain insurance policies (including $32 millionof cash proceeds collected from certain insurance companies since February 17,2003);

·       30,298,913shares of ABB Ltd, which when delivered on the Modified CE Plan Effective Date,had a market value of $407 million;

·       Anon-interest bearing promissory note issued by ABB Inc. and ABB Ltd (the “ABBNote”) and guaranteed by certain ABB Ltd subsidiaries, in an aggregate amountof up to $350 million payable in installments of $50 million in 2006,$100 million in 2007, $100 million in 2008, two payments of $25 millioneach that are contingent as to the timing of payment to be paid as early as June 2007,but no later than the end of 2012 and two additional contingent payments of $25 millioneach payable in 2010 and 2011 if, and only if, ABB Ltd attains an earningsbefore interest and taxes margin of 9% for 2009 (or 14% in 2010) and 9.5% for2010. Payments under the ABB Note are guaranteed by ABB Asea Brown Boveri Ltd,ABB Turbo Systems Holding Ltd, ABB Holdings Inc. and ABB Participation AB; and

·       Anagreement providing for a cash contribution of $204 million on April 21,2008, subject to earlier payment from the proceeds of any sales of Lummusshares or assets prior to April 21, 2008 (the “Contribution Agreement”).Until the Company’s obligations under the Contribution Agreement are satisfied,pre-Chapter 11 debt obligations between Lummus and other ABB entities aresubordinated to the obligations under the Contribution Agreement, and paymentsfrom Lummus to other ABB entities are restricted.

If ABB entities are foundby the Bankruptcy Court to have defaulted in their payment obligations underthe ABB Note or the Contribution Agreement, the CE Asbestos PI Trust maypetition the Bankruptcy Court to terminate the CE Channeling Injunction and theprotections afforded to the Company and other ABB entities as well as certainother entities, including ALSTOM and ALSTOM POWER NV by that injunction.

*The Lummus Plan*

The negotiations that led to the Lummus Plan wereconducted with representatives of asbestos claimants with pending claimsagainst Lummus and an individual appointed by Lummus to represent the 

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interests of its futureasbestos claimants (the “Lummus FCR”). These negotiations were held in parallelwith the negotiations on the Modified CE Plan over approximately five months.

*Under the terms ofthe Lummus Plan:*

·       Lummusexecuted an interest bearing note (6%) in the principal amount of $33 million(the “Lummus Note”) payable in annual installments over 11 years to a trustcreated under the Lummus Plan (the “Lummus Asbestos PI Trust”). The Lummus Noteis secured by a pledge of 51 percent of the capital stock of Lummus. Paymentsunder the Lummus Note are guaranteed by ABB Ltd and ABB Holdings Inc. UntilLummus’ obligations under the Lummus Note are satisfied, pre-Chapter 11debt obligations between Lummus and other ABB entities are subordinated to theobligations under the ABB Note, and payments from Lummus to other ABB entitiesare restricted. In addition, in the event of a sale of Lummus, a prepayment ofthe obligation would be triggered;

·       TheLummus Asbestos PI Trust will also be entitled to be paid the first $7.5 millionin aggregate recoveries from Lummus insurers with the first $5 millionguaranteed. On the Lummus Plan Effective Date, $5 million, comprised of$1.6 million of insurer funding and $3.4 million of Lummus funding,was paid to the Lummus Asbestos PI Trust; and

·       Achanneling injunction pursuant to sections 524(g) of the Bankruptcy Code(the “Lummus Channeling Injunction”) was issued pursuant to which all asbestosrelated claims against Lummus and other ABB entities relating to the operationsof Lummus are channeled to the Lummus Asbestos PI Trust.

If ABB entities or Lummusare found by the Bankruptcy Court to have defaulted in their paymentobligations under the Lummus Note, the Lummus Asbestos PI Trust may petitionthe Bankruptcy Court to terminate the Lummus Channeling Injunction and theprotections afforded to the Company, Lummus and other ABB entities by thatinjunction.

*Effect on theCompany’s Consolidated Financial Statements*

Theamounts in the below table are reflected in loss from discontinued operations,net of tax.

| ** **                                                                                                   | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                   | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expense, net of  tax:                                                                                        |       |                                       |       |   |   |   |   |
| Mark-to-market  adjustment on 30,298,913 ABB Ltd Shares                                                      |       | $                                          | 114        |   | $ | 123 |   | $ | 17 |   |
| Cost related to  modification of Initial CE Plan                                                             |       | —                                     |       | — |   | 232 |   |
| Discount on  non-interest bearing liabilities under Modified CE Plan on the Modified CE  Plan Effective Date |       | (45                                        | )          | — |   | — |   |
| Other                                                                                                        |       | 1                                          |       | 10 |   | 13 |   |
|                                                                                                         |       | $                                          | 70         |   | $ | 133 |   | $ | 262 |   |

 

| ** **                | ** ** | **Year ended December 31,** | ** ** |
|---------------------------|------------|--------------------------------------------|------------|
| ** **                | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cash payments to:         |       |                                       |       |   |   |   |   |
| CE Settlement  Trust      |       | $                                          | —     |   | $ | 3 |   | $ | 49 |   |
| CE Asbestos PI  Trust     |       | 70                                         |       | — |   | — |   |
| Lummus Asbestos  PI Trust |       | 9                                          |       | — |   | — |   |
| Fees and other  costs     |       | 20                                         |       | 25 |   | 7 |   |
|                      |       | $                                          | 99         |   | $ | 28 |   | $ | 56 |   |

 

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| ** **                                                                 | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                 | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Asbestos Obligations:                                                      |       |                                       |       |   |   |   |   |
| Current—                                                              |       |                                       |       |   |   |   |   |
| Modified CE Plan  (Face Value $150 million at December 31, 2006) |       | $                                          | 146        |   | $ | 1,080 |   | $ | 985 |   |
| Lummus Plan                                                                |       | 2                                          |       | 43 |   | 33 |   |
| Other                                                                      |       | 6                                          |       | 5 |   | 5 |   |
|                                                                       |       | $                                          | 154        |   | $ | 1,128 |   | $ | 1,023 |   |
| Non-Current—                                                          |       |                                       |       |   |   |   |   |
| Modified CE Plan  (Face Value $304 million at December 31, 2006) |       | $                                          | 282        |   | $ | — |   | $ | — |   |
| Lummus Plan                                                                |       | 25                                         |       | — |   | — |   |
|                                                                       |       | $                                          | 307        |   | $ | — |   | $ | — |   |

 

Prior to 2006, asbestos obligations were recordedbased on the expected implementation of the Initial CE Plan or the Modified CEPlan and the Lummus Plan and classified as current liabilities in Provisionsand Other. During 2006, confirmation of the Modified CE Plan and the LummusPlan became final and those Plans became effective. Asbestos liabilities at December 31,2006 reflect the terms of the effective plans and are classified as current ornon-current obligations based on the scheduled payment dates. Non-interestbearing liabilities under the Modified CE Plan were discounted on the ModifiedCE Plan Effective Date at the Company’s incremental borrowing rate.

Asbestos obligations notcovered by the Modified CE Plan or Lummus Plan have been estimated based onhistorical claims statistics, related settlement costs and a projection of suchclaims activity over the next several years.

*Contingencies—Environmental*

The Company is aparticipant in several legal and regulatory actions, which result from variousUnited States and other environmental protection legislation, as well asagreements with third parties. While the Company cannot estimate the impact offuture legislation, provisions are recorded when it is probable that losseswill result from these actions and the amounts of losses can be reasonablyestimated. Estimated losses for environmental remediation obligations are notdiscounted to their present value because timing of payments cannot bereasonably estimated. In respect to these matters, the Company may be able torecover a portion of the costs from insurers or other third parties. Receivablesare recorded when it is probable that recoveries will be collected. Managementis of the opinion, based upon information presently available and on advice ofexternal counsel and other advisers, that any such liability would not have amaterial adverse effect on the Company’s Consolidated Financial Statements.

*Contingenciesrelated to former Nuclear Technology business*

The Company retained liabilities for certain specificenvironmental remediation costs at two sites in the United States that wereoperated by its former subsidiary, ABB CE-Nuclear Power Inc., which the Companysold to British Nuclear Fuels PLC (BNFL) in 2000. Pursuant to the saleagreement with BNFL, the Company has retained the environmental liabilitiesassociated with its Combustion Engineering subsidiary’s Windsor, Connecticut,facility and agreed to reimburse BNFL for a share of the costs that BNFL incursfor environmental liabilities associated with its former Hematite, Missouri,facility. The primary environmental liabilities associated with these sitesrelate to the costs of remediating radiological and chemical contamination.Such costs are not incurred until a facility is taken out of use and generallyare incurred over a number of years. Although it is difficult to predict withaccuracy the amount of time it may take to remediate radiological and chemicalcontamination at the Hematite site, based on information that BNFL has madeavailable, the Company believes that it may take until 2013 to remediate the 

F-39

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Hematite site. Withrespect to the Windsor site, the Company believes the remediation may takeuntil 2012.

At the Windsor site, a significant portion of thecontamination is related to activities that were formerly conducted by or forthe U.S. government. The Company believes that a significant portion of theremediation costs will be covered by the U.S. government’s Formerly UtilizedSites Remedial Action Program.

Under the terms of the sale agreement, BNFL isresponsible to have the remediation of the Hematite site performed in a cost efficientmanner and pursue recovery of remediation costs from other potentiallyresponsible parties as conditions for obtaining cost sharing contributions fromthe Company. Westinghouse Electric Company LLC (“Westinghouse”), BNFL’s formersubsidiary, now oversees remediation activities at the Hematite site.Westinghouse was acquired during 2006 by a consortium lead by ToshibaCorporation, Japan. Westinghouse brought legal action against formerowner/operators of the Hematite site and the U.S. Government underComprehensive Environmental Response Compensation and Liability Act (CERCLA) torecover past and future remediation costs. The defendants contestedWestinghouse’s claims. During 2006, an arbitration ruling related toindemnification of former owner/operators contained in the CombustionEngineering purchase agreement for the site was unfavorable to Westinghouse’sclaims. Separately, based on the publicly available Remedial InvestigationReport and Decommissioning Plan prepared by Westinghouse and other site relateddata the Company was able to re-estimate its share of the expected totalremediation costs for the Hematite site. The unfavorable outcome of thearbitration was largely offset by a lower site remediation cost estimate. Thus,in 2006, the Company made no adjustment to the reserve for its share of theHematite site remediation cost.

The Company established areserve of $300 million in loss from discontinued operations in 2000 forits estimated share of the remediation costs for these sites. As of December 31,2006 and 2005, the Company has recorded in other non-current liabilitiesreserves of $251 million and $255 million, net of payments frominception of $47 million and $43 million, respectively, and areversal of $2 million to loss from discontinued operations in 2005reflecting realized cost savings. The reserve balance at December 31, 2006represents the Company’s best estimate of its remaining remediation costs forthese facilities. Expenditures charged to the remediation reserve were $4 million,$9 million and $10 million during 2006, 2005 and 2004, respectively.The Company has estimated expenditures to be approximately $3 millionduring 2007.

*Contingenciesrelated to other present and former facilities in the United States*

The Company is involved inthe remediation of environmental contamination at present or former facilities,primarily in the United States. The clean up of the United States sitesinvolves primarily soil and groundwater contamination. As of December 31,2006 and 2005, the Company has recorded in other current liabilities and othernon-current liabilities reserves totaling $22 million and $17 million,respectively. Charges to earnings, including $6 million in loss fromdiscontinued operations in 2006, were $9 million, $4 million and $3 millionfor the years ended December 31, 2006, 2005 and 2004, respectively.Expenditures for the years ended December 31, 2006, 2005 and 2004 were $4 million,$2 million and $4 million, respectively. Expenditures during 2007 onthese projects are estimated to be approximately $4 million.

*Contingencies—Regulatoryand Compliance*

*Disclosures ofsuspect payments to the United States Securities and Exchange Commission (SEC)and the United States Department of Justice (DoJ)*

In April 2005, theCompany voluntarily disclosed to the DoJ and the SEC certain suspect paymentsin its network management unit in the United States. Subsequently, the Companymade additional voluntary 

F-40

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disclosuresto the DoJ and the SEC regarding suspect payments made by Company subsidiariesin a number of countries, including a country in the Middle East. Thesepayments were discovered by the Company as a result of the Company’s internalcompliance reviews. The payments may be in violation of the Foreign CorruptPractices Act (FCPA) or other applicable laws. The consequences for the Companycould include penalties, other costs and business-related impacts. The Companyis cooperating on these issues with the relevant authorities, and is continuingits internal investigations and compliance reviews.

*Earningsoverstatement in an Italian subsidiary*

In September 2004,the Company restated its financial statements for all prior periods as a resultof earnings overstatements by a business unit of the Company’s Power Productsdivision (part of the former Power Technologies division) in Italy. Therestatement followed an internal investigation by the Company which showed thatthe business unit had overstated earnings before interest and taxes and netincome, as well as that certain employees had participated in arrangingimproper payments to an employee of an Italian power generation company inorder to obtain a contract. The Company has reported this matter to the Italianauthorities, who have initiated formal criminal proceedings, as well as to theSEC. The Company cannot be certain as to the outcome of the criminalproceedings or as to the position of the SEC.

*Gas InsulatedSwitchgear business*

In May 2004, theCompany announced that it had undertaken an internal investigation whichuncovered that certain of its employees together with employees of othercompanies active in the gas insulated switchgear business were involved inanti-competitive practices. The Company has reported such practices uponidentification to the appropriate authorities including the EuropeanCommission. The European Commission announced its decision on January 24,2007, and granted ABB full immunity from fines under the European Commission’sleniency program. The Company continues to cooperate with otheranti-competition authorities in several locations globally which areinvestigating anti-competitive practices related to gas insulated switchgear.

*Power Transformersinvestigation in Germany*

In February 2007, theEuropean Commission conducted dawn raids at the premises of an ABB unit in BadHonnef, Germany as part of its investigation into suspected anti-competitivepractices of certain manufacturers of power transformers. Management iscooperating fully with the authorities in their investigation. The Companycannot however estimate the amount of any potential fine that could result fromthis investigation at this early stage.

*Vetco Gray (a partof the former Upstream Oil, Gas and Petrochemicals business)*

ABB Vetco Gray Inc. andABB Vetco Gray UK Ltd., two of the Company’s former subsidiaries that were soldin 2004 as part of the Upstream business, pleaded guilty in July 2004 toviolation of the FCPA and paid an aggregate fine to the DoJ totaling $10.5 million.In addition, in July 2004, in a related action the Company agreed with theSEC to resolve civil charges relating to violations of the FCPA, including thepayment of $5.9 million to disgorge allegedly unlawful profits earned bythe two subsidiaries and to retain an independent consultant to review theCompany’s FCPA compliance policies and procedures.

*Guarantees—general*

The following table provides quantitative dataregarding the Company’s third-party guarantees. The maximum potential paymentsrepresent a “worst-case scenario,” and do not reflect management’s expected results.

F-41

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Thecarrying amounts of liabilities recorded in the Consolidated Balance Sheetsreflect management’s best estimate of future payments it may incur as part offulfilling its guarantee obligations.

| ** **                          | ** ** | **December 31,**            | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **Maximum  potential  payments** | ** ** | **Carrying  amount of  liabilities** | ** ** | **Maximum  potential  payments** | ** ** | **Carrying  amount of  liabilities** | ** ** |
| Third-party  performance guarantees |       |                             | $          | 1,119 |   |   |   | $ | 1 |   |   |   | $ | 1,197 |   |   |   | $ | 1 |   |   |
| Financial  guarantees               |       |                             | 139        |   |   |   | — |   |   |   | 209 |   |   |   | — |   |   |
| Indemnification  guarantees         |       |                             | 80         |   |   |   | — |   |   |   | 150 |   |   |   | 13 |   |   |
| **Total**                           |       |                             | **$**      | **1,338** | ** ** | ** ** | ** ** | **$** | **1** | ** ** | ** ** | ** ** | **$** | **1,556** | ** ** | ** ** | ** ** | **$** | **14** | ** ** |   |

 

*Guarantees—third-partyperformance*

Performance guarantees represent obligations where theCompany guarantees the performance of a third party’s product or serviceaccording to the terms of a contract. Such guarantees may include guaranteesthat a project will be completed within a specified time. If the third partydoes not fulfill the obligation, the Company will compensate the guaranteedparty in cash or in kind. Performance guarantees include surety bonds, advancepayment guarantees, and performance standby letters of credit.

The Company retained obligations for guaranteesrelated to the Power Generation business contributed in mid-1999 to theformer ABB ALSTOM POWER NV joint venture. The guarantees primarily consist ofperformance guarantees, advance payment guarantees and other miscellaneousguarantees under certain contracts such as indemnification for personalinjuries and property damages, taxes, and compliance with labor laws, environmentallaws and patents. The guarantees are related to projects which are expected tobe completed by 2015 but in some cases have no definite expiration. In May 2000,the Company sold its interest in the ABB ALSTOM POWER NV joint venture toALSTOM SA (ALSTOM). As a result, ALSTOM and its subsidiaries have primaryresponsibility for performing the obligations that are the subject of theguarantees. Further, ALSTOM, the parent company, and ALSTOM POWER NV, formerlyABB ALSTOM POWER NV, have undertaken jointly and severally to fully indemnifyand hold harmless the Company against any claims arising under such guarantees.Management’s best estimate of the total maximum potential exposure ofquantifiable guarantees issued by the Company on behalf of its former PowerGeneration business is approximately $744 million and $756 million atDecember 31, 2006 and 2005, respectively. The Company has not experiencedany losses related to guarantees issued on behalf of the former PowerGeneration business.

The Company retainedobligations for guarantees related to the Upstream business sold in 2004. Theguarantees primarily consist of third-party performance guarantees, advancepayment guarantees and other miscellaneous guarantees. The guarantees haveoriginal maturity dates ranging from one to five years. The maximum amountpayable under the guarantees is approximately $375 million and $440 millionat December 31, 2006 and 2005, respectively. The Company has the abilityto recover potential payments under these guarantees through certain backstopguarantees. The maximum potential recovery under these backstop guarantees isapproximately $21 million and $108 million at December 31, 2006and 2005, respectively.

*Guarantees—financial*

Financial guarantees represent irrevocable assurancesthat the Company will make payment to a beneficiary in the event that a thirdparty fails to fulfill its financial obligations and the beneficiary under theguarantee incurs a loss due to that failure.

At December 31, 2006and 2005, the Company had $139 million and $209 million,respectively, of financial guarantees outstanding. Of those amounts, $80 millionand $95 million, respectively, were issued 

F-42

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onbehalf of companies in which the Company currently has or formerly had anequity interest. The guarantees have original maturity dates ranging from oneto thirteen years.

*Guarantees—indemnification*

The Company has indemnified certain purchasers ofdivested businesses for potential claims arising from the operations of thedivested businesses. To the extent the maximum loss related to suchindemnifications could not be calculated, no amounts have been included undermaximum potential payments in the table above. Indemnifications for whichmaximum losses could not be calculated include indemnifications for legalclaims.

The Company delivered tothe purchasers of the Upstream business and Reinsurance business guaranteesrelated to assets and liabilities divested in 2004. The maximum liability at December 31,2006 and 2005, of approximately $80 million and $150 million,respectively, relating to the Upstream and Reinsurance businesses will reduceover time, pursuant to the respective sales agreements.

*Product and orderrelated contingencies*

The Company calculates its provision for productwarranties based on historical claims experience and specific review of certaincontracts. The provision for warranties and contract penalties in Note 15includes penalties resulting from delays in contract fulfillment, which is notincluded in the amounts below.

Reconciliationof the provision for warranties, including guarantees of product performance isas follows:

| ** **                                                                                    | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                    | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Balance at the  beginning of year                                                             |       | $                     | 730        |   | $ | 677 |   |
| Claims paid in  cash or in kind                                                               |       | (164                  | )          | (119 | ) |
| Net increase to  provision for changes in estimates, warranties issued and warranties expired |       | 388                   |       | 237 |   |
| Exchange rate  differences                                                                    |       | 76                    |       | (65 | ) |
| **Balance at the end of year**                                                                |       | **$**                 | **1,030**  | ** ** | **$** | **730** |   |

 

*IBM OutsourcingAgreement*

In 2003, the Company entered into a 10-yearglobal framework agreement with International Business Machines Corporation(IBM) to outsource the Company’s information systems infrastructure services toIBM. The global framework agreement includes an obligation for IBM to lease newpersonal computers and other IT equipment to the Company as older equipment isretired. The Company accounts for these items as capital leases or operatingleases based on the terms of the leases.

Further, pursuant to theglobal framework agreement, IBM will receive monthly payments from the Company’ssubsidiaries in the respective countries related to information systemsinfrastructure services. Expected annual costs during the 10-year term ofthe global framework agreement approximate $230 million based on thecurrent level of usage of the services.

*Related partytransactions*

The IBM global framework agreement, referred to above,was negotiated between IBM and the Company. However, it should be noted thatJürgen Dormann, the Company’s Chairman, is a member of the Board of Directorsof IBM, and Hans-Ulrich Märki, a director on the Company’s Board of Directors,is Chairman of IBM Europe/Middle East/Africa.

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The Company maintains banking relationships withSkandinaviska Enskilda Banken AB (publ) (SEB) and Dresdner Bank AG.Specifically, SEB and Dresdner Bank AG, have a commitment to ABB of $120 millionand $105 million, respectively at December 31, 2006 and $120 millioneach at December 31, 2005, under the Company’s $2 billion multicurrencyrevolving credit facility of which no amounts were drawn at December 31,2006. In addition, SEB is an arranger and dealer of the Company’s 5 billionSwedish krona commercial paper program, initiated in November 2005. JacobWallenberg, a member of the Company’s Board of Directors, is the vice-chairmanof SEB. Dr. Bernd W. Voss, a member of the Company’s Board of Directors,is a member of the supervisory board of Dresdner Bank AG. In addition, during2005, the Company sold its Finnish Lease portfolio business to SEB (see Note 3).

The Company also conductsbusiness with other companies where members of the Company’s Board of Directorsact as directors or board members. After comparing the revenues (or expectedrevenues in the case of orders) generated from the Company’s business withother companies, including the businesses described above, to the total annualrevenues of those companies, the Company’s Board of Directors has determinedthat the Company’s business relationships with those companies do notconstitute material business relationships and that all members of theCompany’s Board of Directors, with the exception of Jürgen Dormann as Chairmanare considered to be independent directors. This determination was made inaccordance with the Swiss Code of Best Practice and the independence criteriaset forth in the corporate governance rules of the New York Stock Exchange.

**Note 18 Taxes**

Provisionfor taxes consists of the following:

| ** **                                          | ** ** | ** ** | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------|------------|------------|------------|--------------------------------------------|------------|
| ** **                                          | ** ** | ** ** | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current taxes on  income                            |       | $          | 584        |                                       | $          | 445 |   | $ | 333 |   |
| Deferred taxes                                      |       | 113        |       | 45                                         |       | 5 |   |
| **Tax  expense from continuing operations**         | ** ** | **697**    | ** ** | **490**                                    | ** ** | **338** | ** ** |
| Tax (benefit) expense  from discontinued operations |       | (18        | )          | (17                                        | )          | 14 |   |
|                                                     |            |            |            |                                            |            |  |  |  |  |  |  |  |

 

Theweighted-average tax rate is the tax rate that results from applying eachsubsidiary’s statutory income tax rate to the income from continuing operationsbefore taxes and minority interest. The Company operates in countries that havediffering tax laws and rates. Consequently, the consolidated weighted-averageeffective rate will vary from year to year according to the source of earningsor losses by country and the change in applicable tax rates.

| ** **                                                                                                        | ** ** | ** ** | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|------------|------------|--------------------------------------------|------------|
| ** **                                                                                                        | ** ** | ** ** | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Reconciliation of taxes:                                                                                          |       |       |       |                                       |       |   |   |
| Income from  continuing operations before taxes and minority interest and cumulative  effect of accounting change |       | $          | 2,433      |                                       | $          | 1,532 |   | $ | 882 |   |
| Weighted-average  tax rate                                                                                        |       | 29.6       | %          | 34.1                                       | %          | 37.5 | % |
| **Taxes  at weighted-average tax rate**                                                                           | ** ** | **721**    | ** ** | **522**                                    | ** ** | **331** | ** ** |
| Items taxed at  rates other than the weighted-average tax rate                                                    |       | (55        | )          | (39                                        | )          | (36 | ) |
| Changes in  valuation allowance                                                                                   |       | (54        | )          | (22                                        | )          | 116 |   |
| Changes in tax  laws and enacted tax rates                                                                        |       | (3         | )          | (22                                        | )          | 3 |   |
| Other, net                                                                                                        |       | 88         |       | 51                                         |       | (76 | ) |
| **Tax  expense from continuing operations**                                                                       | ** ** | **$**      | **697**    | ** **                                 | **$**      | **490** | ** ** | **$** | **338** | ** ** |
| **Effective tax rate for the year**                                                                               | ** ** | **28.6**   | **%**      | **32.0**                                   | **%**      | **38.3** | **%** |

 

F-44

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The reconciliation of taxes for 2006, 2005 and 2004included changes in the valuation allowance recorded in certain jurisdictionsin respect of deferred tax assets that were recognized for net operating lossesincurred in those jurisdictions. The change in valuation allowance was requiredas the Company determined it was more likely than not that such deferred taxassets would be realized. In 2006, the change in valuation allowance wasprimarily related to the Company’s operations in certain countries includingBrazil, Italy and the United States. In 2005, the change in valuation allowancewas predominately related to the Company’s operations in certain countriesincluding the United States. In 2004, the change in valuation allowance waspredominately related to the Company’s operations in certain countriesincluding Canada and France.

In 2006, the reconciling item “Other, net” included anexpense of approximately $70 million relating to a net increase in taxaccruals. The Company’s policy for such accruals is outlined in Note 2.Further, “Other, net” includes an expense of approximately $35 millionrelating to items that are deducted for accounting purposes, but are notincluded in the computation of taxable income such as interest expense, stateand local taxes on productive activities, disallowed meals and entertainmentexpenses and other similar items.

In 2005, the reconciling item “Other, net” included anexpense of approximately $60 million relating to items that are deductedfor accounting purposes, but are not included in the computation of taxableincome such as interest expense, state and local taxes on productiveactivities, disallowed meals and entertainment expenses and other similaritems.

In 2004, the reconciling item “Other, net” included abenefit of approximately $39 million relating to the favorable resolutionof certain prior year tax matters. Furthermore, 2004 included the one-timebenefit of approximately $45 million from the losses of a post divestmentreorganization.

Deferredincome tax assets and liabilities consist of the following:

| ** **                                          | ** ** | ** ** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------|------------|------------|------------|-----------------------|------------|
| ** **                                          | ** ** | ** ** | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Deferred tax  liabilities:                          |       |       |       |                  |       |
| Property, plant  and equipment                      |       | $          | (218       | )                     | $          | (164 | ) |
| Pension and other  accrued liabilities              |       | (598       | )          | (570                  | )          |
| Inventories                                         |       | (87        | )          | (59                   | )          |
| Other                                               |       | (93        | )          | (81                   | )          |
| **Total  deferred tax liability**                   | ** ** | **(996**   | **)**      | **(874**              | **)**      |
| Deferred tax  assets:                               |       |       |       |                  |       |
| Investments and  other                              |       | 11         |       | 28                    |       |
| Property, plant  and equipment                      |       | 85         |       | 53                    |       |
| Pension and other  accrued liabilities              |       | 990        |       | 1,057                 |       |
| Unused tax losses  and credits                      |       | 1,758      |       | 1,570                 |       |
| Inventories                                         |       | 124        |       | 116                   |       |
| Other                                               |       | 152        |       | 225                   |       |
| **Total  deferred tax asset**                       | ** ** | **3,120**  | ** ** | **3,049**             | ** ** |
| Valuation  allowance                                |       | (2,020     | )          | (1,948                | )          |
| **Deferred  tax asset, net of valuation allowance** | ** ** | **1,100**  | ** ** | **1,101**             | ** ** |
| **Net deferred tax asset**                          | ** ** | **$**      | **104**    | ** **            | **$**      | **227** | ** ** |

 

Certain entities have deferred tax assets related tonet operating loss carry-forwards and other items. Because recognition of theseassets does not meet the more likely than not standard as outlined in theapplicable accounting interpretation literature, valuation allowances of $2,020and $1,948 million have been established at December 31, 2006 and2005, respectively.

F-45

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At December 31, 2006, net operating losscarry-forwards of $4,740 million and tax credits of $97 million areavailable to reduce future taxes of certain subsidiaries, of which $2,622 millionloss carry-forwards and $93 million tax credits expire in varying amountsthrough 2026 and the remainder does not expire. These carry-forwards arepredominantly related to the Company’s U.S. and German operations.

At December 31, 2006, the reconciling item “Unusedtax losses and credits” included the one-time tax benefit of approximately $100 millionfrom the losses of a post acquisition reorganization. The Company determined itwas more likely than not that such deferred tax assets would not be realized.The Company has therefore established a full valuation allowance. To the extentthe valuation allowance is subsequently reversed, the offsetting credit isrecognized first as a reduction of goodwill. Furthermore, the “Unused taxlosses and credits” were increased due to the settlement of the asbestosobligation in the United States.

The Company operates innumerous tax jurisdictions and, as a result, is regularly subject to audit bytax authorities. The Company provides for tax contingencies on the basis oftheir technical merits, including relative tax law and OECD guidelines, as wellas on items relating to potential audits by tax authorities based upon its bestestimate of the facts and circumstances as of each reporting period. Changes inthe facts and circumstances could result in a material change to the taxaccruals. The Company provides for contingencies whenever it is deemed probablethat a tax asset has been impaired or a tax liability has been incurred forevents such as tax claims or changes in tax laws. A significant part of the taxcontingency provisions that have been accrued relate to pending court cases inNorthern Europe relating to certain sale and leaseback transactions, as well ascontingencies arising related to our interpretation of tax law and OECDguidelines.

**Note 19 Otherliabilities**

Other liabilitiesconsisted of the following:

| ** **                                                      | ** ** | ** ** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|-----------------------|------------|
| ** **                                                      | ** ** | ** ** | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Nuclear  technology environmental provisions (see Note 17) |       | $          | 251        |                  | $          | 255 |   |
| Non-current  deposit liabilities (see Note 10)             |       | 302        |       | 309                   |       |
| Deferred income                                                 |       | 118        |       | 120                   |       |
| Non-current  derivative liabilities (see Note 6)           |       | 113        |       | 63                    |       |
| Management  incentive plan provisions                           |       | 58         |       | 22                    |       |
| Other liabilities  non-current                                  |       | 314        |       | 207                   |       |
| **Total**                                                       | ** ** | **$**      | **1,156**  | ** **            | **$**      | **976** | ** ** |

 

 

**Note 20 Employeebenefits**

**Adoption of SFAS 158, *Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans—anamendment of FASB Statements No. 87, 88, 106, and 132(R)*.**

On December 31, 2006, the Company adopted therecognition, disclosure and measurement provisions of SFAS 158. SFAS 158requires the Company to recognize the funded status (the difference between thefair value of plan assets and the projected benefit obligations) of its pensionplans and other postretirement benefits in the December 31, 2006,Consolidated Balance Sheet, with a corresponding adjustment to accumulatedother comprehensive loss, net of tax. The adjustment to accumulated othercomprehensive loss at adoption represents the net unrecognized actuariallosses, unrecognized prior service costs, and unrecognized transitionobligation remaining from the initial adoption of Statement of FinancialAccounting Standards No. 87, *Employers’ Accounting forPensions* (SFAS 87), all of which were previously netted againstthe plans’ funded status in the Company’s Consolidated Balance Sheet pursuantto the provisions of SFAS 87. These amounts will be subsequentlyrecognized as net periodic pension cost 

F-46

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pursuant to the Company’saccounting policy for amortizing such amounts. Further, actuarial gains andlosses that arise in subsequent periods and are not recognized as net periodicpension cost in the same periods will be recognized as a component of othercomprehensive loss. Those amounts will be subsequently recognized as acomponent of net periodic pension cost on the same basis as the amountsrecognized in accumulated other comprehensive loss at adoption of SFAS 158.

Theadoption of SFAS 158 had no effect on the Company’s Consolidated IncomeStatement for the year ended December 31, 2006, or for any prior periodpresented, and it will not affect the Company’s operating results in futureperiods. Had the Company not been required to adopt SFAS 158 in 2006, itwould have recognized a reduction in the accumulated other comprehensive losspursuant to the provisions of SFAS 87 of approximately $11 million,net of tax. The incremental effects of adopting the provisions of Statement 158on the Company’s Consolidated Balance Sheet at December 31, 2006 arepresented in the following table.

| ** **                                        | ** ** | **December 31, 2006**                         | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                        | ** ** | **Before application  of SFAS 158** | ** ** | **Impact of  adoption** | ** ** | **After application  of SFAS 158** | ** ** |
| Intangible assets                                 |       |                                               | $          | (34 | ) |   |   | $ | 34 |   |   |   | $ | — |   |   |
| Prepaid pension  assets                           |       |                                               | (537       | ) |   |   | 163 |   |   |   | (374 | ) |   |
| Accrued pension  liability current                |       |                                               | —     |   |   |   | 36 |   |   |   | 36 |   |   |
| Accrued pension  liability non-current            |       |                                               | 561        |   |   |   | 195 |   |   |   | 756 |   |   |
| Accrued pension  liability held for sale          |       |                                               | 114        |   |   |   | 4 |   |   |   | 118 |   |   |
| Deferred income  taxes                            |       |                                               | 86         |   |   |   | 6 |   |   |   | 92 |   |   |
| Accumulated other  comprehensive loss (after tax) |       |                                               | $          | (203 | ) |   |   | $ | (426 | ) |   |   | $ | (629 | ) |   |

 

The Companyoperates pension plans, including defined benefit, defined contribution andtermination indemnity plans, in accordance with local regulations andpractices. These plans cover a large portion of the Company’s employees andprovide benefits to employees in the event of death, disability, retirement ortermination of employment. Certain of these plans are multi-employer plans. TheCompany also operates other postretirement benefit plans in some countries.

Some of these plans require employees to makecontributions and enable employees to earn matching or other contributions fromthe Company. The funding policies of the Company’s plans are consistent withthe local government and tax requirements. The Company has several pensionplans that are not required to be funded pursuant to local government and taxrequirements. The Company uses a December 31 measurement date for itsplans.

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*Obligations andfunded status*

Thefollowing tables set forth the change in benefit obligations, the change inplan assets and the funded status recognized in the Consolidated FinancialStatements at December 31, 2006 and 2005, for the Company’s benefit plans:

| ** **                                         | ** ** | **Pension benefits** | ** ** | **Other benefits** | ** ** |
|----------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                                         | ** ** | **2006**                  | ** ** | **2005**                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Benefit  obligation at the beginning of year       |       | $                         | 7,906      |                    | $          | 8,601 |   | $ | 270 |   | $ | 369 |   |
| Service cost                                       |       | 189                       |       | 188                     |       | 2 |   | 3 |   |
| Interest cost                                      |       | 344                       |       | 359                     |       | 14 |   | 18 |   |
| Contributions from plan participants               |       | 38                        |       | 39                      |       | — |   | 10 |   |
| Benefit payments                                   |       | (476                      | )          | (507                    | )          | (22 | ) | (37 | ) |
| Benefit obligations of businesses disposed         |       | (50                       | )          | (20                     | )          | — |   | — |   |
| Actuarial (gain) loss                              |       | (67                       | )          | 323                     |       | (21 | ) | 11 |   |
| Plan amendments and other                          |       | 52                        |       | —                  |       | 2 |   | (104 | ) |
| Exchange rate differences                          |       | 715                       |       | (1,077                  | )          | — |   | — |   |
| **Benefit  obligation at the end of year**         |       | **8,651**                 | ** ** | **7,906**               | ** ** | **245** | ** ** | **270** |   |
| Fair value of plan assets at the beginning of year |       | 7,172                     |       | 7,262                   |       | — |   | — |   |
| Actual return on plan assets                       |       | 483                       |       | 758                     |       | — |   | — |   |
| Contributions from employer                        |       | 659                       |       | 554                     |       | 22 |   | 27 |   |
| Contributions from plan participants               |       | 38                        |       | 39                      |       | — |   | 10 |   |
| Benefit payments                                   |       | (476                      | )          | (507                    | )          | (22 | ) | (37 | ) |
| Plan assets of businesses disposed                 |       | (52                       | )          | (1                      | )          | — |   | — |   |
| Plan amendments and other                          |       | (4                        | )          | —                  |       | — |   | — |   |
| Exchange rate differences                          |       | **658**                   | ** ** | **(933**                | **)**      | **—** | ** ** | **—** |   |
| **Fair  value of plan assets at the end of year**  |       | **8,478**                 | ** ** | **7,172**               | ** ** | **—** | ** ** | **—** |   |
| **Unfunded  amount**                               |       | **$**                     | **173**    | ** **              | **$**      | **734** | ** ** | **$** | **245** | ** ** | **$** | **270** |   |
| Unrecognized transition liability                  |       |                      |       | $                       | —     |   |   |   | $ | (8 | ) |
| Unrecognized  actuarial loss                       |       |                      |       | (798                    | )          |   |   | (144 | ) |
| Unrecognized  prior service cost                   |       |                      |       | (13                     | )          |   |   | 113 |   |
| **Net amount recognized**                          |       |                      |       | **$**                   | **(77**    | **)** | ** ** | ** ** | **$** | **231** |   |

 

Thepre-tax amounts recognized in accumulated other comprehensive loss related tocontinuing operations in 2006 consisted of:

| ** **                                                           | ** ** | **Pension benefits  2006** | ** ** | **Other benefits  2006** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| Transition  liability                                                |       |                            | $          | —                        |       |   |   | $ | (7 | ) |   |
| Net actuarial  loss                                                  |       |                            | (637       | )                             |       |   | (114 | ) |   |
| Prior service  cost                                                  |       |                            | (41        | )                             |       |   | 100 |   |   |
| **Amounts recognized in  accumulated other comprehensive loss** |       |                            | **$**      | **(678**                      | **)**      | ** ** | ** ** | **$** | **(21** | **)** |   |

 

The amount of pension liability at December 31,2006 recognized in other accumulated comprehensive loss, net of tax, is $629 millionof which $22 million relates to discontinued operations.

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Thefollowing amounts related to continuing operations have been recognized in theCompany’s Consolidated Balance Sheet at December 31, 2006:

| ** **                        | ** ** | **Pension benefits  2006** | ** ** | **Other benefits  2006** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| Overfunded plans                  |       |                            | $          | (374                          | )          |   |   | $ | — |   |   |
| Accrued pension  cost current     |       |                            | 16         |                          |       |   | 20 |   |   |
| Accrued pension  cost non-current |       |                            | 531        |                          |       |   | 225 |   |   |
| **Unfunded amount**               |       |                            | **$**      | **173**                       | ** ** | ** ** | ** ** | **$** | **245** |   |   |

 

Thefollowing amounts related to continuing operations have been recognized in theCompany’s Consolidated Balance Sheet at December 31, 2005:

| ** **                            | ** ** | **Pension benefits  2005** | ** ** | **Other benefits  2005** | ** ** |
|---------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| Prepaid pension  cost                 |       |                            | $          | (605                          | )          |   |   | $ | — |   |   |
| Accrued pension  cost                 |       |                            | 814        |                          |       |   | 231 |   |   |
| Intangible assets                     |       |                            | (2         | )                             |       |   | — |   |   |
| Accumulated other  comprehensive loss |       |                            | (284       | )                             |       |   | — |   |   |
| **Net amount recognized**             |       |                            | **$**      | **(77**                       | **)**      | ** ** | ** ** | **$** | **231** |   |   |

 

The amount of pension liability at December 31,2005 recognized in other accumulated comprehensive loss, net of tax, was $214 millionof which $21 million relates to discontinued operations.

The current portion of the accrued pension cost,determined on a plan-by-plan basis, is the amount by which the actuarialpresent value of benefits included in the benefit obligation payable in thenext 12 months, exceeds the fair value of the plan assets.

The $375 million of prepaid pension and otheremployee benefits liability in the Consolidated Balance Sheet at December 31,2006, included $1 million other employee related benefit assets notaccounted for under SFAS 87.

The $885 million and $1,130 million ofnon-current pension and other employee benefits liability in the ConsolidatedBalance Sheet at December 31, 2006 and 2005, included approximately $129 millionand $85 million of long-term employee-related obligations not accountedfor under SFAS 87 and SFAS 106, respectively.

Additionally, employee benefit costs (see Note 15),contained an accrual of $38 million and $78 million at December 31,2006 and 2005, respectively, for short-term employee benefits that do not meetthe criteria of SFAS 87.

Thefunded status, calculated by the projected benefit obligation (PBO) and fairvalue of plan assets, for pension plans with a PBO in excess of fair value ofplan assets or fair value of plan assets in excess of PBO, respectively, was:

| ** **        | ** ** | **December 31,** | ** ** |
|-------------------|------------|-----------------------|------------|
| ** **        | ** ** | **2006**              | ** ** | **2005** | ** ** |
| ** **        | ** ** | **PBO**               | ** ** | **Assets** | ** ** | **Difference** | ** ** | **PBO** | ** ** | **Assets** | ** ** | **Difference** | ** ** |
| Underfunded plans |       | $                     | 4,344      |   | $ | 3,797 |   |   | $ | 547 |   |   | $ | 5,056 |   | $ | 4,116 |   |   | $ | 940 |   |   |
| Overfunded plans  |       | 4,307                 |       | 4,681 |   |   | (374 | ) |   | 2,850 |   | 3,056 |   |   | (206 | ) |   |
| **Total**         |       | **$**                 | **8,651**  | ** ** | **$** | **8,478** | ** ** | ** ** | **$** | **173** | ** ** | ** ** | **$** | **7,906** | ** ** | **$** | **7,172** | ** ** | ** ** | **$** | **734** |   |   |

 

The current portion of the underfunded plans was $16 millionand the non-current portion was $531 million. The current portion,determined on a plan-by-plan basis, was the amount by which the 

F-49

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actuarial present value ofbenefits included in the benefit obligation payable in the next 12 months,exceeded the fair value of the plan assets.

Theaccumulated benefit obligation (ABO) for all defined benefit pension plans was$8,315 million and $7,498 million at December 31, 2006 and 2005,respectively. The funded status, calculated by the ABO and fair value of planassets for pension plans with ABO in excess of fair value of plan assets orfair value of plan assets in excess of ABO, respectively was:

| ** **          | ** ** | **December 31,** | ** ** |
|---------------------|------------|-----------------------|------------|
| ** **          | ** ** | **2006**              | ** ** | **2005** | ** ** |
| ** **          | ** ** | **ABO**               | ** ** | **Assets** | ** ** | **Difference** | ** ** | **ABO** | ** ** | **Assets** | ** ** | **Difference** | ** ** |
| ABO exceeds  assets |       | $                     | 1,878      |   | $ | 1,438 |   |   | $ | 440 |   |   | $ | 1,603 |   | $ | 930 |   |   | $ | 673 |   |   |
| Assets exceed ABO   |       | 6,437                 |       | 7,040 |   |   | (603 | ) |   | 5,895 |   | 6,242 |   |   | (347 | ) |   |
| **Total**           |       | **$**                 | **8,315**  | ** ** | **$** | **8,478** | ** ** | ** ** | **$** | **(163** | **)** | ** ** | **$** | **7,498** | ** ** | **$** | **7,172** | ** ** | ** ** | **$** | **326** | ** ** |   |

 

All ABB’s postretirement benefit plans are unfunded.

**Components of net periodic benefit cost and otheramounts recognized in other comprehensive loss** For the yearsended December 31, 2006, 2005 and 2004, net periodic benefit costconsisted of the following:

| ** **                          | ** ** | **Pension benefits** | ** ** | **Other benefits** | ** ** |
|-------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                          | ** ** | **2006**                  | ** ** | **2005**                | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                        |       | $                         | 189        |                    | $          | 188 |   | $ | 189 |   | $ | 2 |   |   | $ | 3 |   |   |   | $ | 3 |   |   |
| Interest cost                       |       | 344                       |       | 359                     |       | 370 |   | 14 |   |   | 18 |   |   |   | 23 |   |   |
| Expected return  on plan assets     |       | (367                      | )          | (357                    | )          | (330 | ) | — |   |   | — |   |   |   | — |   |   |
| Amortization  transition liability  |       | —                    |       | —                  |       | 5 |   | 1 |   |   | — |   |   |   | 2 |   |   |
| Amortization  prior service cost    |       | 3                         |       | 4                       |       | 4 |   | (11 | ) |   | (4 | ) |   |   | (2 | ) |   |
| Amortization of  net actuarial loss |       | 42                        |       | 45                      |       | 37 |   | 9 |   |   | 7 |   |   |   | 9 |   |   |
| Other                               |       | 10                        |       | 2                       |       | 4 |   | — |   |   | 1 |   |   |   | 2 |   |   |
| **Net periodic benefit cost**       |       | **$**                     | **221**    | ** **              | **$**      | **241** | ** ** | **$** | **279** | ** ** | **$** | **15** | ** ** | ** ** | **$** | **25** | ** ** | ** ** | ** ** | **$** | **37** | ** ** |   |

 

The net actuarial loss andprior service cost for the defined benefit pension plans that is estimated tobe amortized from accumulated other comprehensive loss into net periodicbenefit cost over the next year are $37 million and $4 million,respectively. The estimated net actuarial loss, transition cost and priorservice cost for the defined benefit non-pension postretirement plans that willbe amortized from accumulated other comprehensive loss into net periodicbenefit cost over the next year are $7 million, $1 million and ($11) million,respectively.

*Assumptions*

Thefollowing weighted-average assumptions were used to determine benefitobligations at December 31, 2006 and 2005:

| ** **                     | ** ** | **Pension benefits** | ** ** | **Other benefits** | ** ** |
|--------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                     | ** ** | **2006**                  | ** ** | **2005**                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Discount rate                  |       | 4.39                      | %          | 4.29                    | %          | 5.71 | % | 5.50 | % |
| Rate of compensation  increase |       | 2.39                      | %          | 2.41                    | %          | — |   | — |   |

 

The discount rate assumption is derived from rates ofhigh quality fixed income investments of appropriate durations for therespective plans.

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The followingweighted-average assumptions were used to determine net periodic benefit costfor years ended December 31, 2006, 2005 and 2004:

| ** **                                | ** ** | **Pension benefits** | ** ** | **Other benefits** | ** ** |
|-------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                                | ** ** | **2006**                  | ** ** | **2005**                | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Discount rate                             |       | 4.29                      | %          | 4.60                    | %          | 4.97 | % | 5.50 | % | 5.75 | % | 6.25 | % |
| Expected  long-term return on plan assets |       | 4.92                      | %          | 5.45                    | %          | 5.57 | % | — |   | — |   | — |   |
| Rate of compensation  increase            |       | 2.41                      | %          | 2.23                    | %          | 2.28 | % | — |   | — |   | — |   |

 

The expected long-term rate of return on assetsassumption is derived from the current and projected asset allocation, thecurrent and projected types of investments in each asset category and thelong-term historical returns for each investment type.

TheCompany maintains non-pension postretirement benefit plans, which are generallycontributory with participants’ contributions adjusted annually.

| ** **                                                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Health care cost  trend rate assumed for next year                                 |       | 11.76    | %          | 10.38    | %          |
| Rate to which the  cost trend rate is assumed to decline (the ultimate trend rate) |       | 4.97     | %          | 6.02     | %          |
| Year that the rate  reaches the ultimate trend rate                                |       | 2014     |       | 2013     |       |

 

Aone-percentage-point change in assumed health care cost trend rates would havethe following effects at December 31, 2006:

| ** **                                    | ** ** | **1-percentage-point  increase** | ** ** | **1-percentage-point  decrease** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| Effect on total  of service and interest cost |       |                             | $          | 1                                |       |   |   | $ | (1 | ) |   |
| Effect on postretirement  benefit obligation  |       |                             | $          | 17                               |       |   |   | $ | (15 | ) |   |

 

*Plan assets*

TheCompany’s pension plan weighted-average asset allocations at December 31,2006 and 2005, and approximate long-term target allocations are as follows:

| ** **        | ** ** | **Plan assets** | ** ** | **Long-term** | ** ** |
|-------------------|------------|----------------------|------------|---------------|------------|
| ** **        | ** ** | **2006**             | ** ** | **2005**      | ** ** | **target allocation** | ** ** |
| Asset category:   |       |                 |       |          |       |   |   |   |   |   |   |   |   |
| Equity securities |       |                 | 33         | %             |       |   | 34 | % |   |   | 20%–40 | % |   |
| Debt securities   |       |                 | 56         | %             |       |   | 54 | % |   |   | 50%–70 | % |   |
| Real estate       |       |                 | 7          | %             |       |   | 7 | % |   |   | 0%–15 | % |   |
| Other             |       |                 | 4          | %             |       |   | 5 | % |   |   | 0%–15 | % |   |
| **Total**         |       |                 | **100**    | **%**         | ** ** | ** ** | **100** | **%** |   |   |   |   |   |

 

The pension plan assets for each individual plan areinvested in accordance with statutory regulations, pension plan rules, anddecisions of the pension fund trustees. The investment allocation strategy isexpected to remain consistent with historical averages.

The Company periodically reviews the asset allocationin light of the duration of its pension liabilities and analysis trends andevents that may affect assets values in order to initiate appropriate measuresat an early stage.

The Company does not expect any plan assets to bereturned to the employer during the 12-month period ending December 31,2007.

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At December 31, 2006and 2005, the plan assets included approximately 630,000 shares and 800,000shares of the Company’s capital stock with a total value of $11 millionand $8 million, respectively.

*Contributions*

The Company made non-cash contributions of $449 millionand $262 million of available-for-sale debt securities to certain of theCompany’s pension plans in Germany in 2006 and 2005, respectively. The Companyalso made cash contributions of $215 million and $296 million toother pension plans and $22 million and $27 million to other benefitplans, during 2006 and 2005, respectively.

The Company expects to contribute approximately $186 millionto its pension plans and $21 million to its other postretirement benefitplans in 2007.

The Company also maintainsseveral defined contribution plans. The expense for these plans was $111 million,$101 million and $71 million in 2006, 2005 and 2004, respectively.The Company also contributed $19 million, $61 million and $74 millionto multi-employer plans in 2006, 2005 and 2004, respectively.

*Estimated futurebenefit payments*

Theexpected future cash flows to be paid by the Company in respect of pension andother postretirement benefit plans at December 31, 2006 are as follows:

| ** **           | ** ** | ** **            | ** ** | **Other postretirement  benefits** | ** ** |
|----------------------|------------|-----------------------|------------|-----------------------------------------|------------|
| ** **           | ** ** | **Pension  benefits** | ** ** | **Benefit  payments**                   | ** ** | **Medicare  subsidies** | ** ** |
| 2007                 |       | $                     | 492        |                                    |       | $ | 22 |   |   |   | $ | (1 | ) |   |
| 2008                 |       | 521                   |       |                                    | 22         |   |   |   | (1 | ) |   |
| 2009                 |       | 526                   |       |                                    | 23         |   |   |   | (1 | ) |   |
| 2010                 |       | 528                   |       |                                    | 23         |   |   |   | (1 | ) |   |
| 2011                 |       | 533                   |       |                                    | 23         |   |   |   | (2 | ) |   |
| Years 2012–2016 |       | $                     | 2,764      |                                    |       | $ | 110 |   |   |   | $ | (8 | ) |   |

 

Additionally, the Medicaresubsidies column represents payments estimated to be received from the UnitedStates government as part of the Medicare Prescription Drug, Improvement andModernization Act of 2003. As of July 1, 2004, the Company adopted FASBStaff Position (FSP) No. FAS 106-2, Accounting and DisclosureRequirements Related to the Medicare Prescription Drug, Improvement and ModernizationAct of 2003 (FSP 106-2, which superseded FAS FSP No. 106-1).The United States government began making the subsidy payments for employers in2006.

**Note 21 Employeeincentive plans**

The Company has three stock-based employee incentiveplans, as more fully described in the respective sections below. Prior toJanuary 1, 2006, the Company accounted for these plans in accordance with APB 25,and related Interpretations, as permitted by SFAS 123. In connection withcash-settled warrant appreciation rights granted under the MIP, and theconditionally granted shares awarded free-of-charge under the LTIP,compensation cost was recognized in the Consolidated Income Statements in 2005and 2004 in accordance with APB 25. No stock-based compensation was recognizedprior to January 1, 2006, for the warrants issued under the MIP and thestock options granted by the Company under the ESAP, as all warrants or optionsgranted under these plans had exercise prices equal to, or greater than, themarket value of the underlying shares on the date of grant. As ofDecember 31, 2006, the Company’s articles of incorporation permitted theissuance of up to approximately 68 million new shares out of contingentcapital in connection with the employee incentive plans mentioned above. InOctober 2006, the 

F-52

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Company’s Board ofDirectors approved the repurchase of up to 10 million shares of ABB Ltdduring 2007 for use in connection with the employee incentive plans.

Effective January 1, 2006, the Company adoptedthe fair value recognition provisions of SFAS 123R, using themodified-prospective transition method. Under that transition method,compensation cost recognized in 2006 includes a) compensation cost for allshare-based payments granted prior to, but not yet vested, as of January 1,2006, based on the grant date fair value estimated in accordance with theoriginal provisions of SFAS 123, and b) compensation cost for allshare-based payments granted subsequent to January 1, 2006, based on thegrant date fair value estimated in accordance with the provisions of SFAS 123R.Results for prior periods have not been restated.

As a result of adopting SFAS 123R onJanuary 1, 2006, the Company recorded a total charge of $18 millionin respect of equity awards granted under the employee incentive plans. Of thischarge, $2 million and $16 million were recorded in cost of sales andselling, general and administrative expenses, respectively. As a result of the$18 million charge from the adoption of SFAS 123R, a) income fromcontinuing operations before taxes and minority interest and cumulative effectof accounting change, b) income from continuing operations before cumulativeeffect of accounting change and c) net income were reduced by $18 million,$16 million and $16 million, respectively. The impact of this chargeon basic and diluted earnings per share was less than one cent per share. Theimpact of the excess tax benefit from stock-based compensation on net cashprovided by operating activities and on net cash used in financing activities was$9 million in 2006. The effect of the change from the original provisionsof SFAS 123 was insignificant to the Company’s Consolidated FinancialStatements.

Thefollowing table illustrates the effect on net income (loss) and on income(loss) per share if the Company had applied the fair value recognitionprovisions of SFAS 123 to stock-based employee compensation in all periodspresented prior to the adoption of SFAS 123R. Fair value of thesesecurities offered to employees was determined on the date of grant using alattice model.

| ** **                                                                                                                                    | ** ** | **2005** | ** ** | **2004**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|
| Net income  (loss), as reported                                                                                                               |       | $        | 735        |       | $          | (35 | ) |
| Add: Stock-based  employee compensation expense included in reported net income (loss), net of  related tax effects                           |       | 31       |       | 3          |       |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | (39      | )          | (11        | )          |
| **Pro  forma net income (loss)**                                                                                                              |       | **$**    | **727**    | ** ** | **$**      | **(43** | **)** |
| Income (loss) per share:                                                                                                                      |       |     |       |       |       |
| Basic—as reported                                                                                                                        |       | $        | 0.36       |       | $          | (0.02 | ) |
| Basic—pro forma                                                                                                                          |       | $        | 0.36       |       | $          | (0.02 | ) |
| Diluted—as  reported                                                                                                                     |       | $        | 0.36       |       | $          | (0.02 | ) |
| Diluted—pro forma                                                                                                                        |       | $        | 0.35       |       | $          | (0.02 | ) |

 

***MIP***

Under the MIP the Company offers stock warrants andwarrant appreciation rights (WARs) to key employees for no consideration. Eachlaunch of the MIP is approved by the Company’s Board of Directors.

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Warrants granted under the MIP allow participants topurchase shares of the Company at predetermined prices. Participants may sellthe warrants rather than exercise the right to purchase shares. Equivalentwarrants are listed by a third-party bank on the SWX Swiss Exchange, whichfacilitates pricing and transferability of warrants granted under this plan. Ifthe participant elects to sell the warrant on the market rather than exercisethe right to purchase shares, the warrant may then be held by a non-employee ofthe Company. Each WAR gives the participant the right to receive, in cash, themarket price of a warrant on the date of exercise of the WAR. The WARs arenon-transferable.

Participants may exerciseor sell warrants and exercise WARs after the vesting period, which is threeyears from the date of grant. Vesting restrictions can be waived in certaincircumstances such as death or disability. All warrants and WARs expire sixyears from the date of grant. As the primary trading market for shares of ABB Ltdis the SWX Swiss Exchange (virt-x), the exercise prices of warrants and thetrading prices of equivalent warrants listed on the SWX Swiss Exchange aredenominated in Swiss francs. Accordingly, exercise prices are presented belowin Swiss francs.

*Warrants*

All warrants were issued with exercise prices greaterthan the market prices of the stock on the dates of grant. Accordingly, priorto January 1, 2006, the Company generally recorded no compensation expenserelated to the warrants.

Thefair value of each warrant is estimated on the date of grant using a latticemodel that uses the assumptions noted in the table below. There were no grantsunder the MIP in 2005. Expected volatilities are based on implied volatilitiesfrom traded warrants on the Company’s shares. The expected term of the warrantsgranted has been assumed to be the contractual six year life of each warrant,based on the fact that after the vesting period, a participant can elect tosell the warrant on the market rather than exercise the right to purchaseshares, thereby realizing the time value of the warrants. The risk-free rate isbased on a six-year Swiss franc interest rate, reflecting the six yearcontractual life of the options. In estimating forfeitures, the Company hasused the data from previous comparable MIP launches.

| ** **              | ** ** | **2006 grant** | ** **   | **2004 grant** | ** ** |
|-------------------------|------------|---------------------|--------------|---------------------|------------|
| Expected  volatility    |       |                | 28           | %                   |       |   | 29 | % |   |
| Dividend yield          |       |                | 1.06         | %                   |       |   | 1.53 | % |   |
| Expected term           |       |                | 6 years |                |       | 6 years |   |
| Risk-free interest rate |       |                | 2.30         | %                   |       |   | 1.98 | % |   |

 

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Presentedbelow is a summary of warrant activity for the year ended December 31,2006:

| ** **                                                 | ** ** | **Number of  warrants** | ** ** | **Number of  shares**(1) | ** ** | **Weighted-  average  exercise price  (in Swiss francs)**(2)(3) | ** ** | **Weighted-  average  remaining  contractual  term  (in years)**(3) | ** ** | **Aggregate  intrinsic value  (in millions of  Swiss francs)**(4) | ** ** |
|------------------------------------------------------------|------------|------------------------------|------------|-------------------------------|------------|--------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| **Outstanding  at January 1, 2006**                   |       | **74,734,250**               |       | **16,823,224**                |       |                                                                           | **18.99**  |                                                                     |       |                                                                                  |       |   |   |   |   |   |   |
| Granted                                                    |       | 12,130,000                   |       | 2,426,000                     |       |                                                                           | 15.30      |                                                                     |       |                                                                                  |       |   |   |   |   |   |   |
| Forfeited                                                  |       | (900,000                     | )          | (180,000                      | )          |                                                                           | 7.17       |                                                                     |       |                                                                                  |       |   |   |   |   |   |   |
| Expired                                                    |       | (19,630,000                  | )          | (4,948,648                    | )          |                                                                           | 42.05      |                                                                     |       |                                                                                  |       |   |   |   |   |   |   |
| **Outstanding  at December 31, 2006**                 |       | **66,334,250**               | ** ** | **14,120,576**                |       |                                                                           | **10.42**  |                                                                     |       |                                                                                  | 2.9        |   |   |   | 161 |   |   |
| **Vested and expected to vest at December 31,  2006** |       | **64,029,830**               | ** ** | **13,659,690**                | ** ** | ** **                                                                     | **10.38**  |                                                                     |       |                                                                                  | 2.9        |   |   |   | 157 |   |   |
| **Exercisable  at December 31, 2006**                 |       | **42,104,250**               | ** ** | **9,274,574**                 | ** ** | ** **                                                                     | **9.99**   |                                                                     |       |                                                                                  | 2.1        |   |   |   | 110 |   |   |

----

(1)             The information in the table above aggregates warrantswith different conversion ratios. Warrants granted in 2000 and 2001 require theexercise of 100 warrants for 25.21 shares of ABB Ltd. Warrantsgranted in 2003, 2004 and 2006 required the exercise of five warrants for oneshare of ABB Ltd. No warrants were granted in 2002 and 2005. Informationpresented reflects the number of shares of ABB Ltd that warrant holders canreceive upon exercise.

(2)             Information presented reflects the exercise price pershare of ABB Ltd.

(3)             Information presented is weighted on the number ofshares.

(4)             Computed using the closing price, in Swissfrancs, of ABB Ltd shares on the SWX Swiss Exchange (virt-x) and the exerciseprice per share of ABB Ltd.

Of the outstanding warrants at December 31, 2006,2005 and 2004, 14.4 million, 9.9 million and 7.3 millionwarrants, respectively, have been sold on the market by participants,representing 3.5 million, 2.5 million and 1.8 million shares,respectively.

At December 31, 2006, there was $5 millionof total unrecognized compensation cost related to non-vested warrants grantedunder the MIP. That cost is expected to be recognized over a weighted-averageperiod of 1.9 years. The weighted-average grant-date fair value ofwarrants granted during 2006 and 2004 was 0.73 Swiss francs and 0.30 Swissfrancs, respectively. No warrants were exercised in 2006, 2005 and 2004.

Presentedbelow is a summary, by launch, of warrants outstanding at December 31,2006:

| **Exercice price  (in Swiss francs)**(1) | ** ** | ** **     | ** ** | **Number of  warrants** | ** ** | **Number of  shares**(2) | ** ** | **Weighted-average  remaining contractual  term (in years)**(3) | ** ** |
|---------------------------------------------------------|------------|----------------|------------|------------------------------|------------|-------------------------------|------------|--------------------------------------------------------------------------------|------------|
| 13.49                                                   |       | 16,387,500     |       | 4,131,226                    |       |                          | 0.9        |                                                                           |       |
| 7.00                                                    |       | 23,804,250     |       | 4,760,850                    |       |                          | 2.9        |                                                                           |       |
| 7.50                                                    |       | 14,012,500     |       | 2,802,500                    |       |                          | 3.9        |                                                                           |       |
| 15.30                                                   |       | 12,130,000     |       | 2,426,000                    |       |                          | 5.1        |                                                                           |       |
| **Total number of warrants and  shares**                | ** ** | **66,334,250** | ** ** | **14,120,576**               |       |                          | 2.9        |                                                                           |       |

----

(1)             Information presented reflects the exercise price pershare of ABB Ltd.

(2)             Information presented reflects the number of shares ofABB Ltd that warrant holders can receive upon exercise of warrants.

(3)             Information presented is weighted on thenumber of shares.

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*WARs*

As each WAR gives the holder the right to receive cashequal to the market price of a warrant on date of exercise, the Company recordsa liability based upon the fair value of outstanding WARs at each period end,accreted on a straight-line basis over the three-year vesting period. Inselling, general and administrative expenses, the Company recorded expense of$106 million and $31 million for 2006 and 2005, respectively, andincome of $4 million for 2004, as a result of changes in both the fairvalue and vested portion of the outstanding WARs. To hedge its exposure tofluctuations in the fair value of outstanding WARs, the Company purchasedcash-settled call options, which entitle the Company to receive amountsequivalent to its obligations under the outstanding WARs. In accordance with EITF 00-19,the cash-settled call options have been recorded as assets measured at fair value(see Note 5), with subsequent changes in fair value recorded throughearnings to the extent they offset the compensation expense recorded inconnection with the WARs. In 2006 and 2005, the Company recognized income of$97 million and $26 million, respectively, and expense of $15 millionfor 2004, in selling, general and administrative expenses related to thecash-settled call options.

The aggregate fair value of outstanding WARs was $176 millionand $53 million at December 31, 2006 and 2005, respectively. The fairvalue of WARs was determined based upon the trading price of equivalentwarrants listed on the SWX Swiss Exchange.

Presentedbelow is a summary of WAR activity for the year ended December 31, 2006:

| ** **                                 | ** ** | **Number of WARs** | ** **      |
|--------------------------------------------|------------|------------------------------|-----------------|
| **Outstanding  at January 1, 2006**   | ** ** | ** **                   | **105,997,000** | ** ** | ** ** |
| Granted                                    |       |                         | 34,172,500      |   |   |
| Exercised                                  |       |                         | (17,980,000     | ) |   |
| Forfeited                                  |       |                         | (2,287,500      | ) |   |
| Expired                                    |       |                         | (30,335,000     | ) |   |
| **Outstanding  at December 31, 2006** | ** ** | ** **                   | **89,567,000**  | ** ** | ** ** |
| **Exercisable  at December 31, 2006** | ** ** | ** **                   | **30,242,000**  | ** ** | ** ** |

 

The aggregate fair valueat date of grant of WARs granted in 2006 and 2004 was $19 million and $8 million,respectively. No WARs were granted in 2005. In 2006 and 2005, share-basedliabilities of $18 million and $1 million, respectively, were paidupon exercise of WARs by participants. The amount paid in 2004 wasinsignificant.

***ESAP***

The ESAP is an employee stock option plan with asavings feature. Employees save over a twelve-month period, by way of monthlysalary deductions. At the end of the savings period, employees choose whetherto exercise their stock options using their savings plus interest to buy ABBLtd shares (American Depositary Shares (ADS) in the case of employees in theUnited States—each ADS representing one registered share of the Company) at theexercise price set at the grant date, or have their savings returned withinterest. The savings are accumulated in a bank account held by a third partytrustee on behalf of the participants and earn interest. Employees can withdrawfrom the ESAP at any time during the savings period and will be entitled to arefund of their accumulated savings.

Thefair value of each option is estimated on the date of grant using the sameoption valuation model as described under the MIP, using the assumptions notedin the table below. The expected term of the option granted has been determinedto be the contractual one-year life of each option, at the end of which theoptions vest and the participants are required to decide whether to exercisetheir options or have their savings returned with interest. The risk-free rateis based on one-year Swiss franc interest rates, reflecting 

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the one year contractual life of the options. Inestimating forfeitures, the Company has used the data from previous ESAPlaunches.

| ** **              | ** ** | **2006 grant** | ** **  | **2005 grant** | ** ** | **2004 grant** | ** ** |
|-------------------------|------------|---------------------|-------------|---------------------|------------|---------------------|------------|
| Expected  volatility    |       |                | 30          | %                   |       |                | 27         | % |   |   | 28 | % |   |
| Dividend yield          |       |                | 0.81        | %                   |       |                | 0.97       | % |   |   | 0 | % |   |
| Expected term           |       |                | 1 year |                |       | 1 year         |       |   | 1 year |   |
| Risk-free interest rate |       |                | 2.13        | %                   |       |                | 1.40       | % |   |   | 0.97 | % |   |

 

Presentedbelow is a summary of activity under the ESAP during the year ended December 31,2006:

| ** **                                                 | ** ** | **Number of   shares**(1) | ** ** | **Weighted-  average   exercise price  (in Swiss francs)**(2) | ** ** | **Weighted-  average  remaining  contractual  term (in years)** | ** ** | **Aggregate  intrinsic value  (in millions of  Swiss francs)**(2)(3) | ** ** |
|------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| **Outstanding  at January 1, 2006**                   |       | **6,220,600**                       |       |                                                                              | **10.30**  |                                                                      |       |                                                                                     |       |   |   |   |   |   |   |
| Granted                                                    |       | 4,028,190                           |       |                                                                              | 18.55      |                                                                      |       |                                                                                     |       |   |   |   |   |   |   |
| Forfeited                                                  |       | (228,450                            | )          |                                                                              | 10.51      |                                                                      |       |                                                                                     |       |   |   |   |   |   |   |
| Exercised(4)                                               |       | (5,746,614                          | )          |                                                                              | 10.30      |                                                                      |       |                                                                                     |       |   |   |   |   |   |   |
| Not exercised  (savings returned plus interest)            |       | (251,416                            | )          |                                                                              | 10.30      |                                                                      |       |                                                                                     |       |   |   |   |   |   |   |
| **Outstanding  at December 31, 2006**                 |       | **4,022,310**                       |       |                                                                              | **18.55**  |                                                                      |       |                                                                                     | 0.8        |   |   |   | 13 |   |   |
| **Vested and expected to vest at December 31,  2006** |       | **3,867,062**                       |       |                                                                              | **18.55**  |                                                                      |       |                                                                                     | 0.8        |   |   |   | 13 |   |   |
| **Exercisable at  December 31, 2006**                 |       | **—**                          |       |                                                                              | **—** |                                                                      |       |                                                                                     | —     |   |   |   | — |   |   |

----

(1)             Includes shares represented by ADS.

(2)             Information presented for ADS is based on equivalentSwiss franc denominated awards.

(3)             Computed using the closing price, in Swiss francs, ofABB Ltd shares on the SWX Swiss Exchange (virt-x) and the exercise price ofeach warrant in Swiss francs.

(4)             The cash received upon exercise amounted to $47 millionand the corresponding tax benefit was $9 million. The shares were issuedout of contingent capital.

The exercise price per share and ADS of 18.55 Swissfrancs and $14.75, respectively, for the 2006 grant, 10.30 Swiss francs and$7.88, respectively for the 2005 grant, and 6.95 Swiss francs and $5.90,respectively, for the 2004 grant, were determined using the closing price ofthe ABB Ltd share on SWX Swiss Exchange (virt-x) and ADS on the New York StockExchange on the respective grant dates.

At December 31, 2006,there was $6 million of total unrecognized compensation cost related tonon-vested options granted under the ESAP. That cost will be recognized overthe first 10 months of 2007. The weighted-average grant-date fair value ofoptions granted during 2006, 2005 and 2004, was 2.32 Swiss francs, 1.12 Swissfrancs and 0.81 Swiss francs, respectively. The total intrinsic value ofoptions exercised in 2006 and 2005 was 50 million Swiss francs and 22 millionSwiss francs, respectively, the first ESAP being exercised in 2005.

***LTIP***

The Company has an LTIP for members of its ExecutiveCommittee and other executives (Eligible Participants), as defined in the termsof the LTIP and determined by the Company’s Governance, Nomination andCompensation Committee. The LTIP involves annual conditional grants of the 

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Company’s stock and, as ofthe 2006 launch, contains a co-investment component, in addition to the shareprice performance component existing in the previous launches.

Under the share price performance component, thenumber of shares conditionally granted is dependent upon the base salary of theEligible Participant. The actual number of shares that each EligibleParticipant will receive free-of-charge at a future date is dependent on a) theperformance of ABB Ltd shares during a defined period (Evaluation Period)compared to those of a selected peer group of publicly-listed multinationalcompanies and b) the term of service of the respective Eligible Participant intheir capacity as an Eligible Participant during the Evaluation Period. Theactual number of shares received after the Evaluation Period cannot exceed 100 percentof the conditional grant.

The performance of the Company compared to its peersover the Evaluation Period will be measured as the sum, in percentage terms, ofthe average percentage price development of the ABB Ltd share price over theEvaluation Period and an average annual dividend yield percentage (the Company’sPerformance).

In order for shares to vest, the Company’s Performanceover the Evaluation Period must be positive and equal to or better than half ofthe defined peers. The actual number of shares to be delivered by the Company,after the end of the Evaluation Period, will be dependent on the Company’sranking in comparison with the defined peers. The full amount of theconditional grant will vest if the Company’s Performance is better thanthree-quarters of the defined peers.

Under the co-investment component of the LTIP, eachEligible Participant is invited to invest in the Company’s shares, up to anindividually defined maximum number of shares. If the Eligible Participantremains the owner of such shares until the end of the Evaluation Period, theCompany will deliver free-of-charge to the Eligible Participant a matchingnumber of shares.

In September 2006, 733,173 shares wereconditionally granted to Eligible Participants under the 2006 launch of theLTIP, representing the total of the share price performance and co-investmentcomponents.

In December 2005, 1,044,456 shares wereconditionally granted to Eligible Participants under the 2005 launch of theLTIP.

In 2004, 443,430 shares were conditionallygranted to Eligible Participants. In January 2005, and December 2005,a further 59,001 and 15,870 shares, respectively, were conditionallygranted under the 2004 launch to new Eligible Participants, resulting in atotal conditional grant under the 2004 launch of 518,301 shares. In 2006,at the end of the Evaluation Period, the Company’s Performance was determinedto be better than three-quarters of the defined peers and consequently, 518,301 shareswere delivered free-of-charge to Eligible Participants out of the Company’streasury shares.

Presentedbelow is a summary of launches of the LTIP:

| **Launch year** | ** ** | ** **                                   | ** ** | **Evaluation Period** | ** ** | **Total number of shares  conditionally granted** | ** ** | **Reference price  (Swiss francs)**(1) | ** ** |
|----------------------|------------|----------------------------------------------|------------|----------------------------|------------|-----------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| 2004                 |       | March 15,  2004, to March 15, 2006 |       |                       | 518,301    | (2)                                                                   |       |                                             | 7.68       |   |   |
| 2005                 |       | March 15,  2005, to March 15, 2008 |       |                       | 1,044,456  |                                                                  |       |                                             | 7.15       |   |   |
| 2006                 |       | March 15, 2006, to  March 15, 2009 |       |                       | 733,173    | (3)                                                                   |       |                                             | 15.48      |   |   |

----

(1)             For the purpose of comparison with the peers, thereference price is calculated as the average of the closing prices of the ABBLtd share on SWX Swiss Exchange (virt-x) over the 20 trading days preceding March 15of the respective launch year.

(2)             Includes shares conditionally granted in 2005 under the2004 launch of the LTIP.

(3)             3,997 of the shares conditionally granted wereforfeited prior to December 31, 2006.

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Presentedbelow is a summary of activity under the LTIP for the year ended December 31,2006:

| ** **                                   | ** ** | **Number of  shares** | ** ** | **Weighted-average  grant-date fair value  per share (Swiss francs)** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| **Nonvested  at January 1, 2006**       | ** ** | **1,562,757**              | ** ** | ** **                                                                                     | 10.06      |   |   |
| Granted                                      |       | 733,173                    |       |                                                                                           | 16.75      |   |   |
| Forfeited                                    |       | (3,997                     | )          |                                                                                           | 16.75      |   |   |
| Vested (delivered  to Eligible Participants) |       | (518,301                   | )          |                                                                                           | 6.55       |   |   |
| **Nonvested at December 31,  2006**     | ** ** | **1,773,632**              | ** ** | ** **                                                                                     | 13.84      |   |   |

 

Effective January 1, 2006, the Company accountsfor the LTIP in accordance with SFAS 123R. The charge recorded in selling,general and administrative expenses for 2006, has been calculated based on themarket price of the ABB Ltd share on grant date, assuming 100% vesting of theconditional awards and a vesting period equal to the period from grant date tothe end of the Evaluation period. Prior to January 1, 2006, the Companyaccounted for awards under the LTIP using the intrinsic value method of APB 25.The LTIP was deemed to be a variable plan in accordance with APB 25.Accordingly, changes in the fair value of the Company’s stock and the number ofshares anticipated to vest resulted in a change in the intrinsic value andamount of the awards and a corresponding change to compensation expense overthe vesting period.

The aggregate fair value of the 2006, 2005 and 2004launches at their grant dates was approximately $10 million, $9 millionand $3 million, respectively, assuming vesting of the maximum award in March 2009,2008 and 2006, respectively.

At December 31, 2006,there was $14 million of total unrecognized compensation cost related tonon-vested shares conditionally granted under the LTIP. That cost is expectedto be recognized over a weighted-average period of 1.8 years. The totalgrant-date fair value of shares that vested during 2006 was 3 millionSwiss francs, the first LTIP having vested in 2006. The weighted-averagegrant-date fair value of shares conditionally granted during 2006, 2005 and2004, was 16.75 Swiss francs, 11.53 Swiss francs and 6.34 Swiss francs,respectively.

**Note 22 Stockholders’equity**

At December 31, 2006, the Company had2,370,314,947 authorized shares, of which 2,187,756,317 shares wereregistered and issued. At December 31, 2005, the Company had 2,370,314,947authorized shares, of which 2,076,941,497 were registered and issued, including30,298,913 CE Settlement Shares that were reserved for use in connection withthe Modified CE Plan.

The 30,298,913 ABB shares reserved to cover part ofABB’s asbestos liabilities were contributed to the CE Asbestos PI Trust on April 21,2006, and resulted in a reduction in asbestos obligations by $407 million,the fair value of the shares on the date of contribution. This amount wasoffset by a corresponding increase in capital stock and additional paid-incapital in the Consolidated Balance Sheets.

In November 2006 and 2005, the Company issued5,746,614 and 6,626,550 shares, respectively, from contingent capitalstock for the purposes of fulfilling the Company’s obligations under the ESAP(see Note 21).

At December 31, 2006, the Company had outstandingobligations to deliver approximately 43 million shares at exercise pricesranging from 7.00 to 18.55 Swiss francs for securities issued under employeeincentive plans and call options sold to a bank at fair value during 2001,2003, 2004 and 2006. These financial instruments expire in periods ranging fromNovember 2007 to February 2012 and were recorded as equityinstruments in accordance with EITF 00-19. Also, at December 31,2006, the Company had 

F-59

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obligations to deliverapproximately 105 million shares at a conversion price of 9.53 Swissfrancs as a result of the issuance of convertible bonds in September 2003.In addition, at December 31, 2006, the Company had outstanding contingentobligations to deliver up to a maximum of 1,773,632 shares free of chargeto Eligible Participants under the 2005 and 2006 launches of the LTIP.

Dividends are payable to the Company’s stockholdersbased on the requirements of Swiss law, ABB Ltd’s Articles of Incorporation andstockholders’ equity as reflected in the unconsolidated financial statements ofABB Ltd prepared in compliance with Swiss law. At December 31, 2006, ofthe 10,631 million Swiss francs stockholders’ equity reflected in suchunconsolidated financial statements, 5,469 million Swiss francs is sharecapital, 2,902 million Swiss francs is restricted, 1,212 millionSwiss francs is unrestricted and 1,048 million Swiss francs is availablefor distribution. At December 31, 2005, of the 9,017 million Swissfrancs stockholders’ equity reflected in such unconsolidated financialstatements, 5,192 million Swiss francs was share capital, 2,219 millionSwiss francs was restricted, 1,235 million Swiss francs was unrestrictedand 371 million Swiss francs was available for distribution. In May 2006,the Board of Directors proposed to the Shareholders at the Annual GeneralMeeting a dividend of 0.12 Swiss francs per share, totaling approximately $203 million,which was approved at the Annual General Meeting and paid on May 9, 2006.

In May 2006, approximately 98 percent of theholders of the Company’s previously outstanding $968 million, 4.625% USDConvertible Bonds, due 2007, accepted the Company’s offer to convert the bonds.The Company then exercised its right under the terms of the bonds to callremaining outstanding bonds, resulting in these bonds being converted. In totalapproximately 105 million shares of the Company were issued out ofcontingent capital and approximately 2 million ADSs were delivered out oftreasury stock. As a result of the transaction, the Company’s equity (capitalstock and additional paid-in capital and treasury stock) increasedapproximately $928 million, after consideration of certain charges inconnection with the share issuance.

During 2006, the Company adopted SFAS 158, whichresulted in a charge to accumulated other comprehensive loss, net of tax, ofapproximately $426 million (see Note 20).

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**Note 23Earnings per share**

Basic earnings (loss) per share is calculated bydividing income (loss) by the weighted-average number of shares outstandingduring the year. Diluted earnings (loss) per share is calculated by dividingincome (loss) by the weighted-average number of shares outstanding during theyear, assuming that all potentially dilutive securities were exercised, ifdilutive. Potentially dilutive securities comprise: outstanding written calloptions; outstanding options and shares conditionally granted under the Company’semployee incentive plans; and shares issuable in relation to outstandingconvertible bonds. In 2006, 2005 and 2004, outstanding securities representinga maximum of 4 million, 133 million and 265 million shares,respectively, were excluded from the calculation of diluted earnings (loss) pershare as their inclusion would have been anti-dilutive.

| ** **                                                                            | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                            | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Income from continuing operations before cumulative  effect of accounting change |       | $                                          | 1,557      |   | $ | 911 |   | $ | 442 |   |
| Loss from discontinued operations, net of tax                                         |       | (167                                       | )          | (171 | ) | (477 | ) |
| Cumulative effect of accounting change, net of tax                                    |       | —                                     |       | (5 | ) | — |   |
| **Net income (loss)**                                                                 |       | **$**                                      | **1,390**  | ** ** | **$** | **735** | ** ** | **$** | **(35** | **)** |
| Weighted-average number of shares outstanding (in  millions)                          | ** ** | 2,128                                      |       | 2,029 |   | 2,028 | ** ** |
| Basic earnings  (loss) per share:                                                     |       |                                       |       |   |   |   |   |
| Income from continuing operations before cumulative  effect of accounting change |       | $                                          | 0.73       |   | $ | 0.45 |   | $ | 0.22 |   |
| Loss from discontinued operations, net of tax                                         |       | (0.08                                      | )          | (0.09 | ) | (0.24 | ) |
| Cumulative effect of accounting change, net of tax                                    |       | —                                     |       | — |   | — |   |
| **Net income (loss)**                                                                 | ** ** | **$**                                      | **0.65**   | ** ** | **$** | **0.36** | ** ** | **$** | **(0.02** | **)** |

 

| ** **                                                                                          | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Income from continuing operations before cumulative  effect of accounting change               |       | $                                          | 1,557      |   | $ | 911 |   | $ | 442 |   |
| Effect of  dilution:                                                                                |       |                                       |       |   |   |   |   |
| Interest on convertible bonds, net of tax                                                           |       | 29                                         |       | 26 |   | — |   |
| **Income from continuing operations before  cumulative effect of accounting change, adjusted** | ** ** | **1,586**                                  | ** ** | **937** | ** ** | **442** | ** ** |
| Loss from discontinued operations, net of tax                                                       |       | (167                                       | )          | (171 | ) | (477 | ) |
| Cumulative effect of accounting change, net of tax                                                  |       | —                                     |       | (5 | ) | — |   |
| **Net income (loss), adjusted**                                                                     | ** ** | **$**                                      | **1,419**  | ** ** | **$** | **761** | ** ** | **$** | **(35** | **)** |
| Weighted-average number of shares outstanding (in  millions)                                        |       | 2,128                                      |       | 2,029 |   | 2,028 |   |
| Effect of  dilutive securities:                                                                     |       |                                       |       |   |   |   |   |
| Call options and shares conditionally granted                                                       |       | 15                                         |       | 4 |   | 1 |   |
| Convertible bonds                                                                                   |       | 105                                        |       | 105 |   | — |   |
| **Diluted weighted-average number of shares  outstanding (in millions)**                            | ** ** | **2,248**                                  | ** ** | **2,138** | ** ** | **2,029** | ** ** |
| Diluted earnings  (loss) per share:                                                                 |       |                                       |       |   |   |   |   |
| Income from continuing operations before cumulative  effect of accounting change               |       | $                                          | 0.71       |   | $ | 0.44 |   | $ | 0.22 |   |
| Loss from discontinued operations, net of tax                                                       |       | (0.08                                      | )          | (0.08 | ) | (0.24 | ) |
| Cumulative effect of accounting change, net of tax                                                  |       | —                                     |       | — |   | — |   |
| **Net income (loss), adjusted**                                                                     | ** ** | **$**                                      | **0.63**   | ** ** | **$** | **0.36** | ** ** | **$** | **(0.02** | **)** |

 

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**Note 24 Transformerbusiness and other restructuring charges**

In 2005, the Company announced its decision toconsolidate its global transformer business in the Power Products division(formerly a component of the Power Technologies division), including closingcertain plants and employment reductions, as a result of overcapacity,increasing raw material costs and a regional shift in demand experienced by thetransformer business. This consolidation program is expected to be completed bythe end of 2008 and will result in approximately $240 million of totalcharges.

During 2006, the Company recorded an expense of $38 million;$26 million was recorded in cost of sales, $9 million in selling,general and administrative expenses and $3 million in other income(expense) net. This expense consisted of $47 million of estimated contractsettlement and loss order costs, $3 million charges related to employeeseverance costs, and $1 million related to inventory and long-lived assetimpairments and costs. These expenses were offset by a change in estimate of$13 million related to employee severance costs.

Liabilitiesassociated with these expenses are expected to be settled primarily by the endof 2007 and consisted of the following:

| ** **                               | ** ** | **Employee  severance costs** | ** ** | **Contractual  settlement/(loss)  order costs** | ** ** | **Total**  | ** ** |
|------------------------------------------|------------|------------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **                               | ** ** | **(U.S. dollars in millions)**     | ** ** |
| Expenses                                 |       |                               | $          | 58                                                   |       |       |       | $ | 41 |   |   | $ | 99 |   |
| Cash payments                            |       |                               | (7         | )                                                    |       |       | (10        | ) |   | (17 | ) |
| **Liability  at December 31, 2005** | ** ** | ** **                         | **$**      | **51**                                               | ** ** | ** ** | ** ** | **$** | **31** | ** ** | ** ** | **$** | **82** | ** ** |
| Expenses                                 |       |                               | 3          |                                                 |       |       | 47         |   |   | 50 |   |
| Cash payments                            |       |                               | (19        | )                                                    |       |       | (44        | ) |   | (63 | ) |
| Exchange rate  differences               |       |                               | 4          |                                                 |       |       | 3          |   |   | 7 |   |
| Change in  estimates                     |       |                               | (13        | )                                                    |       |       | —     |   |   | (13 | ) |
| **Liability at December 31,  2006** | ** ** | ** **                         | **$**      | **26**                                               | ** ** | ** ** | ** ** | **$** | **37** | ** ** | ** ** | **$** | **63** | ** ** |

 

The Company will continue to assess other potentiallosses and costs it might incur in relation to the transformer businessconsolidation program. These future costs are not yet accruable; however, theCompany expects that total costs incurred throughout the duration of thetransformer business consolidation program will be in accordance with theCompany’s original estimate.

In addition to the transformer business consolidationdescribed above, the Company continues to restructure individual facilities andfactories to increase efficiencies by reducing headcount and streamliningoperations. At December 31, 2006, liabilities related to these otherprograms consist of $17 million for workforce reductions and $17 millionfor lease termination and other exit costs. These lease termination and otherexit costs will be paid over approximately ten years as lease shortfallpayments are made.

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**Note 25 Operatingsegment and geographic data**

Statement ofFinancial Accounting Standards No. 131, *Disclosuresabout Segments of an Enterprise and Related Information* (SFAS 131),establishes standards for reporting information about operating segments. TheChief Operating Decision Maker (CODM), as defined by SFAS 131, is theCompany’s Executive Committee. The CODM allocates resources to and assesses theperformance of each operating segment using the information outlined below. On September 6,2005, the Company announced a realignment of its business divisions and achange in the composition of its Executive Committee, which was effective on January 1,2006. The realignment strengthens the Company’s focus on customer relationshipsand profitable growth. Effective January 1, 2006, the Company’s operatingsegments, included the Power Products division, Power Systems division,Automation Products division, Process Automation division, and Roboticsdivision. The remaining operations of the Company are included in Non-core andOther. All periods presented have been restated to reflect the Company’scurrent organizational structure.

·       ThePower Products division manufactures and sells high- and medium-voltageswitchgear and apparatus, circuit breakers for all current and voltage levels,power and distribution transformers, and sensors for electric, gas and waterutilities for industrial and commercial customers.

·       ThePower Systems division installs and upgrades transmission and distributionsystems and power plant automation and electrification solutions, incorporatingcomponents manufactured by both the Company and by third parties.

·       TheAutomation Products division produces low-voltage switchgear, breakers,switches, control products, DIN-rail components, enclosures, wiringaccessories, instrumentation, drives, motors, generators, power electronicssystems, and services related to these products that help customers to increaseproductivity, save energy, and increase safety.

·       TheProcess Automation division develops and sells control, plant optimization,automation products and solutions, industry specific application knowledge andservices for the pulp and paper, metals and minerals, chemicals andpharmaceuticals, oil and gas, utility automation, marine and turbochargingindustries.

·       TheRobotics division offers robot products, systems and service for the automotiveand other manufacturing industries.

·       Non-core activities includethe following:

·        TheCompany’s remaining Oil, Gas and Petrochemicals business is principally a fullservice engineering company that serves the downstream oil, gas andpetrochemicals markets. The downstream markets typically relate to theprocessing and transportation of hydrocarbon raw materials in and throughrefineries, petrochemicals and chemical plants and pipelines. In addition tohaving expertise in engineering, procurement and construction (EPC) projects,this division also licenses process technologies to the refining,petrochemicals and polymer industries.

·        Other non-core activitiesinclude:

–      The Company’s Real Estateactivities which principally manage the use of the majority of its real estateassets and facilities which was reclassified from the Company’s Corporate/Otherdivisions to Non-core activities effective January 1, 2006;

–      The remaining EquityVentures business consisting primarily of the Company’s investment in JorfLasfar Energy Company S.C.A. (see Note 13);

–      The remaining DistributedEnergy business and some minor businesses; and

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–       Activities that areconsidered for sale or winding down.

·       Corporate/Otherincludes Headquarters, Central Research and Development and Group TreasuryOperations.

The Company evaluates performance of its segmentsbased on earnings before interest and taxes, which excludes interest and dividendincome, interest and other finance expense, provision for taxes, minorityinterest, and loss from discontinued operations, net of tax. In accordance withSFAS 131, the Company presents division revenues, depreciation andamortization, earnings before interest and taxes, net operating assets andcapital expenditures, all of which have been restated to reflect the changes tothe Company’s internal structure, including the effect of inter-divisiontransactions. The Company accounts for inter-division sales and transfers as ifthe sales and transfers were to third parties, at current market prices.

Thefollowing tables summarize information for each segment:

| **2006**                    | ** ** | ** ** | ** ** | **Revenues** | ** ** | **Depreciation  and  amortization** | ** ** | **Earnings  before  interest  and taxes** | ** ** | **Total  assets** | ** ** | **Capital  expenditures**(1) | ** ** |
|-----------------------------|------------|------------|------------|--------------|------------|-------------------------------------|------------|------------------------------------------------|------------|-------------------|------------|------------------------------|------------|
| Power Products              |       | $          | 7,422      |         |       | $                                   | 117        |                                           |       |              | $          | 961                          |       |   | $ | 4,414 |   |   | $ | 151 |   |   |
| Power Systems               |       | 4,544      |       |         | 57         |                                |       |                                           | 279        |              |       | 3,345                        |       |   | 30 |   |   |
| Automation  Products        |       | 6,837      |       |         | 138        |                                |       |                                           | 1,053      |              |       | 4,554                        |       |   | 148 |   |   |
| Process  Automation         |       | 5,448      |       |         | 114        |                                |       |                                           | 541        |              |       | 3,644                        |       |   | 70 |   |   |
| Robotics                    |       | 1,288      |       |         | 23         |                                |       |                                           | 1          |              |       | 750                          |       |   | 14 |   |   |
| Non-core  activities:       |       |       |       |         |       |                                |       |                                           |       |              |       |                         |       |   |   |   |   |
| Oil, Gas and Petrochemicals |       | 988        |       |         | 11         |                                |       |                                           | 1          |              |       | 1,141                        |       |   | 2 |   |   |
| Other Non-core activities   |       | 381        |       |         | 74         |                                |       |                                           | 71         |              |       | 2,264                        |       |   | 71 |   |   |
| Total Non-core  activities  |       | 1,369      |       |         | 85         |                                |       |                                           | 72         |              |       | 3,405                        |       |   | 73 |   |   |
| Corporate/Other             |       | 925        |       |         | 31         |                                |       |                                           | (321       | )                 |       | 4,866                        |       |   | 46 |   |   |
| Inter-division  elimination |       | (3,421     | )          |         | —     |                                |       |                                           | —     |              |       | —                       |       |   | — |   |   |
| **Consolidated**            | ** ** | **$**      | **24,412** | ** **   | ** ** | **$**                               | **565**    | ** **                                     | ** ** | ** **        | **$**      | **2,586**                    | ** ** | ** ** | **$** | **24,978** | ** ** | ** ** | **$** | **532** | ** ** |   |

 

| **2005**                    | ** ** | ** ** | ** ** | **Revenues** | ** ** | **Depreciation  and  amortization** | ** ** | **Earnings  before  interest  and taxes** | ** ** | **Total  assets** | ** ** | **Capital  expenditures**(1) | ** ** |
|-----------------------------|------------|------------|------------|--------------|------------|-------------------------------------|------------|------------------------------------------------|------------|-------------------|------------|------------------------------|------------|
| Power Products              |       | $          | 6,307      |         |       | $                                   | 134        |                                           |       |              | $          | 616                          |       |   | $ | 3,449 |   |   | $ | 134 |   |   |
| Power Systems               |       | 4,085      |       |         | 57         |                                |       |                                           | 187        |              |       | 2,787                        |       |   | 26 |   |   |
| Automation  Products        |       | 5,897      |       |         | 151        |                                |       |                                           | 822        |              |       | 3,782                        |       |   | 158 |   |   |
| Process  Automation         |       | 4,996      |       |         | 117        |                                |       |                                           | 398        |              |       | 3,214                        |       |   | 37 |   |   |
| Robotics                    |       | 1,699      |       |         | 28         |                                |       |                                           | 91         |              |       | 933                          |       |   | 16 |   |   |
| Non-core  activities:       |       |       |       |         |       |                                |       |                                           |       |              |       |                         |       |   |   |   |   |
| Oil, Gas and Petrochemicals |       | 933        |       |         | 12         |                                |       |                                           | 48         |              |       | 1,182                        |       |   | 1 |   |   |
| Other Non-core activities   |       | 415        |       |         | 73         |                                |       |                                           | 17         |              |       | 2,294                        |       |   | 69 |   |   |
| Total Non-core  activities  |       | 1,348      |       |         | 85         |                                |       |                                           | 65         |              |       | 3,476                        |       |   | 70 |   |   |
| Corporate/Other             |       | 436        |       |         | 16         |                                |       |                                           | (401       | )                 |       | 4,373                        |       |   | 13 |   |   |
| Inter-division  elimination |       | (2,756     | )          |         | —     |                                |       |                                           | —     |              |       | —                       |       |   | — |   |   |
| **Consolidated**            | ** ** | **$**      | **22,012** | ** **   | ** ** | **$**                               | **588**    | ** **                                     | ** ** | ** **        | **$**      | **1,778**                    | ** ** | ** ** | **$** | **22,014** | ** ** | ** ** | **$** | **454** | ** ** |   |

 

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| **2004**                    | ** ** | ** ** | ** ** | **Revenues** | ** ** | **Depreciation  and  amortization** | ** ** | **Earnings  before  interest  and taxes** | ** ** | **Total  assets** | ** ** | **Capital  expenditures**(1) | ** ** |
|-----------------------------|------------|------------|------------|--------------|------------|-------------------------------------|------------|------------------------------------------------|------------|-------------------|------------|------------------------------|------------|
| Power Products              |       | $          | 5,621      |         |       | $                                   | 139        |                                           |       |              | $          | 514                          |       |   | $ | 3,241 |   |   | $ | 117 |   |   |
| Power Systems               |       | 3,744      |       |         | 75         |                                |       |                                           | 119        |              |       | 2,717                        |       |   | 46 |   |   |
| Automation  Products        |       | 5,385      |       |         | 151        |                                |       |                                           | 673        |              |       | 3,746                        |       |   | 147 |   |   |
| Process Automation          |       | 4,635      |       |         | 112        |                                |       |                                           | 271        |              |       | 3,526                        |       |   | 64 |   |   |
| Robotics                    |       | 1,451      |       |         | 29         |                                |       |                                           | 80         |              |       | 900                          |       |   | 26 |   |   |
| Non-core activities:        |       |       |       |         |       |                                |       |                                           |       |              |       |                         |       |   |   |   |   |
| Oil, Gas and Petrochemicals |       | 1,079      |       |         | 13         |                                |       |                                           | (4         | )                 |       | 1,219                        |       |   | 3 |   |   |
| Other Non-core activities   |       | 589        |       |         | 94         |                                |       |                                           | (22        | )                 |       | 3,290                        |       |   | 62 |   |   |
| Total Non-core  activities  |       | 1,668      |       |         | 107        |                                |       |                                           | (26        | )                 |       | 4,509                        |       |   | 65 |   |   |
| Corporate/Other             |       | 507        |       |         | 20         |                                |       |                                           | (540       | )                 |       | 5,190                        |       |   | 17 |   |   |
| Inter-division  elimination |       | (2,862     | )          |         | —     |                                |       |                                           | —     |              |       | —                       |       |   | — |   |   |
| **Consolidated**            | ** ** | **$**      | **20,149** | ** **   | ** ** | **$**                               | **633**    | ** **                                     | ** ** | ** **        | **$**      | **1,091**                    | ** ** | ** ** | **$** | **23,829** | ** ** | ** ** | **$** | **482** |   |   |

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(1)          Capitalexpenditures reflect cash outflow towards purchases of tangible and intangiblefixed assets.

*Geographic information*

| ** **              | ** ** | **Revenues Year ended  December 31,** | ** ** | **Long-lived assets at  December 31,** | ** ** |
|-------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **              | ** ** | **2006**                                             | ** ** | **2005**                                              | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Europe                  |       | $                                                    | 11,435     |                                                  | $          | 10,709 |   | $ | 10,289 |   | $ | 2,088 |   | $ | 1,884 |   |
| The Americas            |       | 4,526                                                |       | 4,231                                                 |       | 3,557 |   | 215 |   | 237 |   |
| Asia                    |       | 6,103                                                |       | 5,127                                                 |       | 4,261 |   | 406 |   | 317 |   |
| Middle East and  Africa |       | 2,348                                                |       | 1,945                                                 |       | 2,042 |   | 102 |   | 109 |   |
|                    |       | $                                                    | 24,412     |                                                  | $          | 22,012 |   | $ | 20,149 |   | $ | 2,811 |   | $ | 2,547 |   |

 

Revenues have been reflected in the regions based on thelocation of the customer. China generated approximately 12 percent, 11 percentand 10 percent of the Company’s total revenues in 2006, 2005 and 2004respectively. The United States generated approximately 11 percent, 12 percent,and 12 percent of the Company’s total revenues in 2006, 2005 and 2004,respectively. Germany generated approximately 8 percent, 8 percent,and 10 percent of the Company’s total revenues in 2006, 2005 and 2004,respectively. More than 95 percent of the Company’s total revenues weregenerated outside Switzerland in 2006, 2005 and 2004. Long-lived assetsrepresent property, plant and equipment, net, and are shown by location of theassets. Switzerland and Germany represented approximately 20 percent and15 percent, respectively, of the Company’s long-lived assets atDecember 31, 2006 and approximately 22 percent and 15 percent atDecember 31, 2005.

The Company does not segregate revenues derived fromtransactions with external customers for each type or group of products andservices. Accordingly, it is not practicable for the Company to presentrevenues from external customers by product and service type.

Management estimates thatapproximately 58 percent of the Company’s employees are subject tocollective bargaining agreements in various countries. These agreements aresubject to various regulatory requirements and are renegotiated on a regularbasis in the normal course of business.

**Note 26 Subsequentevents**

During the first quarter of 2007, bondholders servedconversion notices for an aggregate principal amount of approximately 790 millionSwiss francs (representing approximately 83 million shares) out of 

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the total1,000 million Swiss francs 3.5% CHF Convertible Bonds, due 2010, resultingin a decrease in our total debt by approximately $650 million and increasein our stockholders’ equity of approximately the same amount.

At the end of the first quarter of 2007, the Lummusbusiness was reclassified to discontinued operations based upon managementsexpectation to successfully dispose of this business. This decision was madeafter the criteria under Statement of Financial Accounting StandardsNo. 144, *Accounting for the Impairment or Disposal of**Long-Lived Assets* were met. Morespecifically, management believes, based upon the positive feedback received onthe documents distributed to potential purchasers during March 2007, thatthe business can be successfully disposed of within approximately twelve monthsfrom the end of the first quarter. At the date of filing this Form 20-Fthe Company has not issued any subsequent financial statements reflecting the reclassificationof this business to discontinued operations; therefore, the Consolidated FinancialStatements in this Form 20-F do not reflect this reclassification.

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board ofDirectors and Stockholders of ABB Ltd:

We have audited the consolidated financial statementsof ABB Ltd as of December 31, 2006 and 2005, and for each of the threeyears in the period ended December 31, 2006, and have issued our reportthereon dated March 9, 2007 except for Note 26 as to which the dateis April 17, 2007 (included elsewhere in this Annual Report on Form 20-F).Our audits also included the financial statement schedules listed in Item 18 (h) ofthis Annual Report on Form 20-F. This financial statement scheduleis the responsibility of the Company’s Board of Directors and management. Ourresponsibility is to express an opinion on this financial statement schedulebased on our audits. We did not audit the 2004 financial statements of JorfLasfar Energy Company, a corporation in which the Company has a 50% interest(the Company’s equity in Jorf Lasfar Energy Company’s net income is stated at$63 million in 2004 and $60 million in 2003). Those statements were audited byother auditors whose report has been furnished to us. Our opinion, insofar asit relates to amounts included for Jorf Lasfar Energy Company, is based solelyon the report of the other auditors.

In our opinion, based onour audits and the report of other auditors, the financial statement schedulereferred to above, when considered in relation to the basic consolidatedfinancial statements taken as a whole, presents fairly in all material respectsthe information set forth therein.

/s/ Ernst & YoungAG

Zurich, SwitzerlandMarch 9, 2007

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**Schedule II—Valuationand Qualifying Accounts**

| **Description**                                            | ** ** | ** **                                   | ** ** | **Balance at the  beginning of year** | ** ** | **Additions** | ** ** | **Deductions** | ** ** | **Balance at the  end of year** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------------------------|------------|---------------|------------|----------------|------------|-----------------------------------------------------|------------|
| ** **                                                 | ** ** | **(U.S dollars in millions)** | ** ** |
| Accounts  Receivable—allowance for doubtful accounts: |       |                                         |       |                                                      |       |          |       |           |       |                                                |       |   |   |   |   |   |   |
| Year ending  December 31,                             |       |                                         |       |                                                      |       |          |       |           |       |                                                |       |   |   |   |   |   |   |
| 2006                                                       |       |                                         | 279        |                                                      |       |          | 109        |           |       |                                                | 127        |   |   |   | 260 |   |   |
| 2005                                                       |       |                                         | 309        |                                                      |       |          | 108        |           |       |                                                | 138        |   |   |   | 279 |   |   |
| 2004                                                       |       |                                         | 264        |                                                      |       |          | 136        |           |       |                                                | 91         |   |   |   | 309 |   |   |

 

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