As filed with the Securities and Exchange Commission on March 3, 200810, 2010
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
 
   
o
 REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
þ
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
  For the fiscal year ended December 31, 20072009
OR
o
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from          to
o
 SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
  Date of event requiring this shell company report
 
Commission file number: 1-13546
STMicroelectronics N.V.
(Exact name of registrant as specified in its charter)
 
   
Not Applicable
 The Netherlands
(Translation of registrant’s
 (Jurisdiction of incorporation
name into English)English)
 or organization)organization)
39, Chemin du Champ des Filles

1228 Plan-Les-Ouates

Geneva

Switzerland
(Address of principal executive offices)
Carlo Bozotti
39, Chemin du Champ des Filles
1228 Plan-Les-Ouates
Geneva
Switzerland
Tel: +41 22 929 29 29
Fax: +41 22 929 29 88
(Name, Telephone,E-mail and/or Facsimile number and Address of Company Contact Person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
   
Title of Each Class:
 
Name of Each Exchange on Which Registered:
 
Common shares, nominal value €1.04 per share New York Stock Exchange
 
Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
 
899,760,539878,333,566 common shares at December 31, 20072009
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ     Noo
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
Yes o    Noþ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
Yes þ     Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ     Noo
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitionsdefinition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” inRule12b-2 of the Exchange Act. (Check one):
Large accelerated filer þAccelerated filer oNon-accelerated filer oSmaller reporting company o
(Do not check if a smaller reporting company)
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
     
Large accelerated filerU.S. GAAP þ
 Accelerated filerInternational Financial Reporting Standards as issued o Non-accelerated filerOther o
(Do not check if a smaller reporting company)
 Smaller reporting company oby the International Accounting Standards Board
 
IndicateIf “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:follow.
 
Item 17 o    Item 18þo
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).
 
Yes o    Noþ
 

 

 
TABLE OF CONTENTS
 
         
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
  2 
PART I
  4 
 
Item 1.
  Identity of Directors, Senior Management and Advisers  4 
 
Item 2.
  Offer Statistics and Expected Timetable  4 
 
Item 3.
  Key Information  4 
 
Item 4.
  Information on the Company  20 
 
Item 5.
  Operating and Financial Review and Prospects  4742 
 
Item 6.
  Directors, Senior Management and Employees  8981 
 
Item 7.
  Major Shareholders and Related-PartyRelated Party Transactions  113100 
 
Item 8.
  Financial Information  120106 
 
Item 9.
  Listing  124109 
 
Item 10.
  Additional Information  130115 
 
Item 11.
  Quantitative and Qualitative Disclosures About Market Risk  148130 
 
Item 12.
  Description of Securities Other Than Equity Securities  150133 
PART II
  151134 
 
Item 13.
  Defaults, Dividend Arrearages and Delinquencies  151134 
 
Item 14.
  Material Modifications to the Rights of Security Holders and Use of Proceeds  151134 
 
Item 15.
  Controls and Procedures  151134 
 
Item 16A.
  Audit Committee Financial Expert  152135 
 
Item 16B.
  Code of Ethics  152135 
 
Item 16C.
  Principal Accountant Fees and Services  152135 
 
Item 16D.
  Exemptions from the Listing Standards for Audit Committees  153137 
 
Item 16E.16F.
  Purchases of Equity Securities by the Issuer and Affiliated PurchasersChange in Registrant’s Certifying Accountant  154137 
 
Item 16G.
  
PART IIICorporate Governance  155137
PART III
140 
 
Item 17.
  Financial Statements  155140 
 
Item 18.
  Financial Statements  155140 
 
Item 19.
  Exhibits  155140 
 EX-1.1:Amended and Related Articles of Associations of STMicroelectronics N.V.EX-1.1
 EX-8.1:SUBSIDIARIESEX-8.1
 EX-12.1:CERTIFICATIONEX-12.1
 EX-12.2:CERTIFICATIONEX-12.2
 EX-13.1:CERTIFICATIONEX-13.1
 EX-14.(a): CONSENT OF INDEPENDENT REGISTERED ACCOUNTING FIRMEX-15.1
EX-15.2


1

PRESENTATION OF FINANCIAL AND OTHER INFORMATION
 
In this annual report orForm 20-F (the“Form 20-F”), references to “we,”“we”, “us” and “Company” are to STMicroelectronics N.V. together with its consolidated subsidiaries, references to “EU” are to the European Union, references to “€” and the “Euro” are to the Euro currency of the EU, references to the “United States” and “U.S.” are to the United States of America and references to “$” or to “U.S. dollars” are to United States dollars. References to “mm” are to millimeters and references to “nm” are to nanometers.
 
We have compiled the market share, market size and competitive rankingST market share data in this annual report using statistics and other information obtained from several third-party sources. Except as otherwise disclosed herein, all references to our competitive positions in this annual report are based on 2007 revenues according to provisional industry data published by iSuppli Corporation and 2006 revenues according to industry data published by iSuppli and Gartner, Inc., and references to trade association data are references to World Semiconductor Trade Statistics (“WSTS”). Certain terms used in this annual report are defined in “Certain Terms.”
 
We report our financial statements in U.S. dollars and prepare our Consolidated Financial Statements in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). We also report certainnon-U.S. GAAP financial measures (net operating cash flow and net financial position), which are derived from amounts presented in the financial statements prepared under U.S. GAAP. Furthermore, since 2005, we have been required by Dutch law to report our statutoryStatutory and Consolidated Financial Statements, previously reported using generally accepted accounting principles in the Netherlands, in accordance with International Financial Reporting Standards (“IFRS”). The financial statements reported in IFRS can differ materially from the statements reported in U.S. GAAP.
 
Various amounts and percentages used in thisForm 20-F have been rounded and, accordingly, they may not total 100%.
 
We and our affiliates own or otherwise have rights to the trademarks and trade names, including those mentioned in this annual report, used in conjunction with the marketing and sale of our products.
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Some of the statements contained in thisForm 20-F that are not historical facts, particularly in “Item 3. Key Information — Risk Factors”, “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects” and “— Business Outlook”, are statements of future expectations and other forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 or Section 21E of the Securities Exchange Act of 1934, each as amended) that are based on management’s current views and assumptions, and are conditioned upon and also involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those in such statements due to, among other factors:
 
 • significant changes in demand in the closingkey application markets and from key customers served by our products make it extremely difficult to accurately forecast and plan our future business activities. In particular, following a period of significant order cancellations, we recently experienced a strong surge in customer demand, which has led to capacity constraints in certain applications;
• significant differences in the transactiongross margins we achieve compared to expectations, based on changes in revenue levels, product mix and pricing, capacity utilization and unused capacity charges, excess or obsolete inventory, manufacturing yields, changes in unit costs, impairments of long-lived assets (including manufacturing, assembly/test and intangible assets), and the timing, execution and associated costs for the announced in May 2007 with Inteltransfer of manufacturing from facilities designated for closure, including phase-out and Francisco Partners concerning the creation of a new independent Flash memory company, which was later named “Numonyx,” within the timeframe and pursuant to the terms currently planned; as well as any future losses that may be incurred once Numonyx begins operations, which would affect us in proportion to our equity holding in this company;start-up costs;
 
 • our ability to address changesutilize and operate our manufacturing facilities at sufficient levels to cover fixed operating costs in periods of reduced customer demand, as well as our ability to ramp up production efficiently and rapidly to respond to increased customer demand, and the financial impact of obsolete or excess inventories if actual demand differs from our expectations;
• the impact of intellectual property (“IP”) claims by our competitors or other third parties, and our ability to obtain required licenses on reasonable terms and conditions;
• the outcome of ongoing litigation as well as any new litigation to which we may become a defendant;
• volatility in the financial markets and overall economic uncertainty increases the risk that the actual amounts potentially realized upon a future sale of our debt and equity investments could differ significantly from the fair values currently assigned to them;


2

• our ability to successfully integrate the acquisitions we pursue, in particular the successful integration and operation of the ST-Ericsson joint venture;
• ST-Ericsson is a new wireless joint venture, representing a significant investment and risk for our business. The joint venture is currently engaged in restructuring initiatives and further declines in the wireless market, as well as the inability of ST-Ericsson to complete its ongoing restructuring plans or to successfully compete, could result in additional significant impairment and restructuring charges;
• we currently also hold a significant non-marketable equity investment in Numonyx and are a guarantor of $225 million of its debts. On February 10, 2010, we announced that, together with our partners Intel Corporation and Francisco Partners, we have entered into a definitive agreement with Micron Technology Inc. (“Micron”), pursuant to which Micron will acquire Numonyx in an all-stock transaction. Upon the closing of the transaction, which is subject to regulatory review and other customary closing conditions, and based on Micron’s closing stock price on February 9, 2010 of $9.08 per share, we will receive — in exchange rates betweenfor our 48.6% stake in Numonyx and the cancellation of the30-year note due to us by Numonyx — approximately 66.6 million shares of Micron common stock (taking into account a payable of $77.8 million due by us to Francisco Partners). There is no guaranty as to when, or if, the transaction will close, or whether the transaction will close pursuant to the terms currently planned. Furthermore, our shares in Micron are subject to certain resale restrictions and, consequently, there is no guaranty as to when we will be able to sell them and at what price;
• our ability to compete in our industry since a high percentage of our costs are fixed and are incurred in currencies other than U.S. dollars, especially in light of the volatility in the foreign exchange markets and, more particularly, in the U.S. dollar andexchange rate as compared to the Euro,other major currencies we use for our operations;
• the effects of hedging, which we practice in particular withorder to minimize the further weakeningimpact of the U.S. dollar which impacts our gross margin since our fixed costs are incurred in Euros, when our selling prices are mainly in U.S. dollars as well as changes in the exchange ratesvariations between the U.S. dollar and the currencies of the other major countries in which we have our operating infrastructure;infrastructure, especially the Euro, in the currently very volatile currency environment;
 
 • the attainment of anticipated benefits of cooperative research and development alliances and our ability to secureexecute our restructuring initiatives in accordance with our plans if unforeseen events require adjustments or delays in implementation or require new process technologies in a timely and cost effective manner so that the resultant products can be commercially viable and acceptable in the marketplace;plans;
 
 • our ability in an intensively competitive environment and cyclical industry, to design competitive products, to secure timelycustomer acceptance of our products by our customers, to adequately operate our manufacturing facilities at sufficient levels to cover fixed operating costs, and to achieve our pricing expectations for high-volume supplies of new products in whose development we have been, or are currently, investing;
 
 • the results of actions by our competitors, including new product offerings and our ability to react thereto;maintain solid, viable relationships with our suppliers and customers in the event they are unable to maintain a competitive market presence due, in particular, to the effects of the current economic environment;
 
 • pricing pressures, losseschanges in the political, social or curtailmentseconomic environment, including as a result of purchases frommilitary conflict, social unrestand/or terrorist activities, economic turmoil, as well as natural events such as severe weather, health risks, epidemics or earthquakes in the countries in which we, our key customers all of which are highly variable and difficult to predict;
• the ability ofor our suppliers, to meet our demands for suppliesoperate; and materials and to offer competitive pricing;


2

• significant differences in the gross margins we achieve compared to expectations, based on changes in revenue levels, product mix and pricing, capacity utilization, variations in inventory valuation, excess or obsolete inventory, manufacturing yields, changes in unit costs, impairments of long-lived assets (including manufacturing, assembly/test and intangible assets), and the timing and execution of our manufacturing investment plans and associated costs, includingstart-up costs;
• the financial impact of obsolete or excess inventories if actual demand differs from our manufacturing plans;
• future developments of the world semiconductor market, in particular the future demand for semiconductor products in the key application markets and from key customers served by our products;
 
 • changes in our overall tax position as a result of changes in tax laws or pursuant tothe outcome of tax audits, and our ability to accurately estimate tax credits, benefits, deductions and provisions and to realize deferred tax assets;
• the outcome of litigation;
• the impact of intellectual property claims by our competitors or other third parties, and our ability to obtain required licenses on reasonable terms and conditions; and
• changes in the economic, social or political environment, including military conflictand/or terrorist activities, as well as natural events such as severe weather, health risks, epidemics or earthquakes in the countries in which we, our key customers and our suppliers, operate.assets.
 
Such forward-looking statements are subject to various risks and uncertainties, which may cause actual results and performance of our business to differ materially and adversely from the forward-looking statements. Certain forward-looking statements can be identified by the use of forward-looking terminology, such as “believes”, “expects”, “may”, “are expected to”, “will”, “will continue”, “should”, “would be”, “seeks” or “anticipates” or similar expressions or the negative thereof or other variations thereof or comparable terminology, or by discussions of strategy, plans or intentions. Some of these risk factors are set forth and are discussed in more detail in “Item 3. Key Information — Risk Factors.” Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in thisForm 20-F as anticipated, believed or expected. We do not intend, and do not assume any obligation, to update any industry information or forward-looking statements set forth in thisForm 20-F to reflect subsequent events or circumstances.
 
Unfavorable changes in the above or other factors listed under “Item 3. Key Information — Risk Factors” from time to time in our Securities and Exchange Commission (“SEC”) filings, could have a material adverse effect on our businessand/or financial condition.


3

 
PART I
 
Item 1.  Identity of Directors, Senior Management and Advisers
 
Not applicable.
 
Item 2.  Offer Statistics and Expected Timetable
 
Not applicable.
 
Item 3.  Key Information
 
Selected Financial Data
 
The table below sets forth our selected consolidated financial data for each of the years in the five-year period ended December 31, 2007.2009. Such data have been derived from our audited Consolidated Financial Statements. Consolidated audited financial statements for each of the years in the three-year periodsperiod ended December 31, 2007,2009, including the Notes thereto (collectively, the “Consolidated Financial Statements”), are included elsewhere in thisForm 20-F, while data for prior periods have been derived from our audited Consolidated Financial Statements used in such periods.
 
The following information should be read in conjunction with “Item 5. Operating and Financial Review and Prospects”, and the audited Consolidated Financial Statements and the related Notes thereto included in “Item 8. Financial Information —18. Financial Statements” in thisForm 20-F.
 
                                        
 Year Ended December 31,  Year Ended December 31, 
 2007 2006 2005 2004 2003  2009 2008 2007 2006 2005 
 (In millions except per share and ratio data)  (In millions except per share and ratio data) 
Consolidated Statements of Income Data:
                                        
Net sales $9,966  $9,838  $8,876  $8,756  $7,234  $8,465  $9,792  $9,966  $9,838  $8,876 
Other revenues  35   16   6   4   4   45   50   35   16   6 
                      
Net revenues  10,001   9,854   8,882   8,760   7,238   8,510   9,842   10,001   9,854   8,882 
Cost of sales  (6,465)  (6,331)  (5,845)  (5,532)  (4,672)  (5,884)  (6,282)  (6,465)  (6,331)  (5,845)
                      
Gross profit  3,536   3,523   3,037   3,228   2,566   2,626   3,560   3,536   3,523   3,037 
Operating expenses:                                        
Selling, general and administrative  (1,099)  (1,067)  (1,026)  (947)  (785)  (1,159)  (1,187)  (1,099)  (1,067)  (1,026)
Research and development(1)  (1,802)  (1,667)  (1,630)  (1,532)  (1,238)  (2,365)  (2,152)  (1,802)  (1,667)  (1,630)
Other income and expenses, net(1)(2)  48   (35)  (9)  10   (4)  166   62   48   (35)  (9)
Impairment, restructuring charges and other related closure costs  (1,228)  (77)  (128)  (76)  (205)  (291)  (481)  (1,228)  (77)  (128)
                      
Total operating expenses  (4,081)  (2,846)  (2,793)  (2,545)  (2,232)  (3,649)  (3,758)  (4,081)  (2,846)  (2,793)
           
Operating income (loss)  (545)  677   244   683   334   (1,023)  (198)  (545)  677   244 
Other-than-temporary impairment charge on financial assets  (46)  —   —   —   — 
Interest income (expense), net  83   93   34   (3)  (52)
Other-than-temporary impairment charge and realized losses on financial assets
  (140)  (138)  (46)  —   — 
Interest income, net  9   51   83   93   34 
Earnings (loss) on equity investments  14   (6)  (3)  (4)  (1)  (337)  (553)  14   (6)  (3)
Loss on extinguishment of convertible debt  —   —   —   (4)  (39)
Income (loss) before income taxes and minority interests  (494)  764   275   672   242 
Gain (loss) on financial assets  (8)  15   —   —   — 
Gain on convertible debt buyback  3   —   —   —   — 
           
Income (loss) before income taxes and noncontrolling interest  (1,496)  (823)  (494)  764   275 
Income tax benefit (expense)  23   20   (8)  (68)  14   95   43   23   20   (8)
                      
Income (loss) before minority interests  (471)  784   267   604   256 
Minority interests  (6)  (2)  (1)  (3)  (3)
Income (loss) before noncontrolling interest  (1,401)  (780)  (471)  784   267 
Net loss (income) attributable to noncontrolling interest  270   (6)  (6)  (2)  (1)
                      
Net income (loss) $(477) $782  $266  $601  $253 
Net income (loss) attributable to parent company $(1,131) $(786) $(477) $782  $266 
                      
Earnings (loss) per share (basic) $(0.53) $0.87  $0.30  $0.67  $0.29 
Earnings (loss) per share (diluted) $(0.53) $0.83  $0.29  $0.65  $0.27 
Number of shares used in calculating earnings per share (basic)  898.7   896.1   892.8   891.2   888.2 
Number of shares used in calculating earnings per share (diluted)  898.7   958.5   935.6   935.1   937.1 


4

                     
  Year Ended December 31, 
  2007  2006  2005  2004  2003 
  (In millions except per share and ratio data) 
 
Consolidated Balance Sheet Data (end of period):
                    
Cash and cash equivalents(2) $1,855  $1,659  $2,027  $1,950  $2,998 
Marketable securities  1,014   764   —   —   — 
Short-term deposits  —   250   —   —   — 
Restricted cash for equity investments  250   218   —   —   — 
Non-current marketable securities  369   —   —   —   — 
Total assets  14,272   14,198   12,439   13,800   13,477 
Short-term debt (including current portion of long-term debt)  103   136   1,533   191   151 
Long-term debt (excluding current portion)(2)  2,117   1,994   269   1,767   2,944 
Shareholders’ equity(2)  9,573   9,747   8,480   9,110   8,100 
Capital stock(3)  3,253   3,177   3,120   3,074   3,051 
Other Data:
                    
Dividends per share $0.30  $0.12  $0.12  $0.12  $0.08 
Capital expenditures(4)  1,140   1,533   1,441   2,050   1,221 
Net cash provided by operating activities  2,188   2,491   1,798   2,342   1,920 
Depreciation and amortization(4)  1,413   1,766   1,944   1,837   1,608 
Debt-to-equity ratio(5)  0.23   0.22   0.21   0.21   0.38 
Net debt (cash) to total shareholders’ equity ratio(5)  (0.132)  (0.078)  (0.026)  0.001   0.012 
                     
  Year Ended December 31, 
  2009  2008  2007  2006  2005 
  (In millions except per share and ratio data) 
 
Earnings (loss) per share (basic) attributable to parent company shareholders $(1.29) $(0.88) $(0.53) $0.87  $0.30 
Earnings (loss) per share (diluted) attributable to parent company shareholders $(1.29) $(0.88) $(0.53) $0.83  $0.29 
Number of shares used in calculating earnings per share (basic)  876.9   892.0   898.7   896.1   892.8 
Number of shares used in calculating earnings per share (diluted)  876.9   892.0   898.7   958.5   935.6 
Consolidated Balance Sheet Data (end of period):
                    
Cash and cash equivalents $1,588  $1,009  $1,855  $1,659  $2,027 
Marketable securities  1,032   651   1,014   764   — 
Short-term deposits  —   —   —   250   — 
Restricted cash  250   250   250   218   — 
Non-current marketable securities  42   242   369   —   — 
Total assets  13,655   13,913   14,272   14,198   12,439 
Short-term debt (including current portion of long-term debt)  176   143   103   136   1,533 
Long-term debt (excluding current portion)  2,316   2,554   2,117   1,994   269 
Total parent company shareholders’ equity(3)  7,147   8,156   9,573   9,747   8,480 
Common stock and capital surplus  3,637   3,480   3,253   3,177   3,120 
Other Data:
                    
Dividends per share(4) $0.12  $0.36  $0.30  $0.12  $0.12 
Capital expenditures(5)  451   983   1,140   1,533   1,441 
Net cash provided by operating activities  816   1,722   2,188   2,491   1,798 
Depreciation and amortization  1,367   1,366   1,413   1,766   1,944 
Debt-to-equity ratio(6)
  0.35   0.33   0.23   0.22   0.21 
Net financial position: resources (debt)(6) $420  $(545) $1,268  $761  $225 
Net financial position to total shareholders’ equity ratio(6)  0.06   (0.07)  0.13   0.08   0.03 
 
 
(1)“Other income and expenses, net” includes, among other things, funds received through government agencies for research and development expenses, the cost of new production facilitiesstart-ups, foreign currency gains and losses, gains on sales of marketable securities and non-current assets and the costs of certain activities relating to intellectual property. Our reported research and development expenses (R&D) are mainly in the areas of product design and technology and development, anddevelopment. They do not include marketing design center costs, which are accounted for as selling expenses, or process engineering, pre-production and process-transfer costs, which are accounted for as cost of sales. As of 2009 and 2008, our R&D expenses are net of certain tax credits.
 
(2)On November 16, 2000, we issued $2,146 million initial aggregate principal amount“Other income and expenses, net” includes, among other things: funds received through government agencies for research and development programs; costs incurred for newstart-up and phase-out activities not involving saleable production; foreign currency gains and losses; gains on sales of Zero-Coupon Senior Convertible Bonds due 2010 (the “2010 Bonds”), for net proceedstangible assets and non-current assets; and the costs of $1,458 million; in 2003,certain activities relating to IP.
(3)In 2008, we repurchased on the market approximately $1,674 million aggregate principal amount at maturity of 2010 Bonds. During 2004, we completed the repurchase29,520,220 of our 2010 Bonds and repurchased on the market approximately $472 million aggregate principal amount at maturityshares, for a total amount paidcost of $375 million. In 2001, we redeemed the remaining $52 million of our outstanding Liquid Yield Option Notes due 2008 (our “2008 LYONs”) and converted them into common shares in May and June 2001. In 2001, we repurchased 9,400,000 common shares for $233 million, and in 2002, we repurchased an additional 4,000,000 shares for $115$313 million. We reflected these purchasesthis purchase at cost as a reduction of shareholders’ equity. The repurchased shares have been designated for allocation under our share-based compensation programs on non-vestedas nonvested shares, including the plans as approved by the 2005, 2006, 2007, 2008 and 20072009 annual general shareholders’ meetings, and those which may be attributed in the future. As of December 31, 2007, 2,867,1192009, 10,934,481 shares werehad been transferred to employees upon the vesting of such stock awards. In August 2003,As of December 31, 2009, we issued $1,332 million principal amount at issuance of our convertible bonds due 2013 (our “2013 Convertible Bonds”) with a negative yield of 0.5% that resulted in a higher principal amount of $1,400 million and net proceeds of $1,386 million. During 2004, we repurchased all of our outstanding Liquid Yield Option Notes due 2009 (our “2009 LYONs”) for a total amount of cash paid of $813 million. In February 2006, we issued Zero Coupon Senior Convertible Bonds due 2016 (our “2016 Convertible Bonds”) representing total gross proceeds of $974 million. In March 2006, we issued €500 million Floating Rate Senior Bonds due 2013 (our “2013 Senior Bonds”). In August 2006, as a result of almost all of the holders of our 2013 Convertible Bonds exercising their August 4, 2006 put option, we repurchased $1,397 million aggregate principal amount of the outstanding convertible bonds at a conversion ratio of $985.09 per $1,000 aggregate principal amount at issuance resulting in a cash disbursement of $1,377 million.
(3)Capital stock consists of common stock and capital surplus.owned 31,985,739 treasury shares.
 
(4)Dividend per share represents the yearly dividend as approved by our annual general meeting of shareholders, which relates to the prior year’s accounts.
(5)Capital expenditures are net of certain funds received through government agencies, the effect of which is to reduce our cash used in investing activities and to decrease depreciation.
(6)Net financial position: resources (debt) represents the balance between our total financial resources and our total financial debt. Our total financial resources include cash and cash equivalents, current and non-current marketable securities, short-term deposits and restricted cash, and our total financial debt include bank

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(5)Netoverdrafts, current portion of long-term debt (cash)and long-term debt, as represented in our consolidated balance sheet. Our net financial position to total shareholders’ equity ratio is anon-U.S. GAAP financial measure. The most directly comparable U.S. GAAP financial measure is considered to be “Debt-to-Equity Ratio.”“Debt-to-Equity Ratio”. However, theDebt-to-Equity Ratio measures gross debt relative to equity, and does not reflect theour current cash position of the Company.position. We believe that our net debt (cash)financial position to total shareholders’ equity ratio is useful to investors as a measure of our financial position and leverage. The ratio is computed on the basis of our net financial position divided by total parent company shareholders’ equity. Our net financial position is the difference between our total cash position (cash and cash equivalents, current and non-current marketable securities, short-term deposits and restricted cash) net of total financial debt (bank overdrafts, current portion of long-term debt and long-term debt). For more information on our net financial position, see “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources — Capital Resources — Net financial position.”position”. Our computation of net debt (cash) to total shareholders’ equity ratio may not be consistent with that of other companies, which could make comparability difficult.
 
Risk Factors
 
Risks Related to the Semiconductor Industry which Impact Us
 
The semiconductor industry is cyclical and downturns in the semiconductor industry can negatively affect our results of operations and financial condition.
 
The semiconductor industry is cyclical and has been subject to significant economic downturns at various times. Downturns are typically characterized by diminished demand giving rise to production overcapacity, accelerated erosion of average selling prices, high inventory levels and reduced revenues. Downturns may be the result of industry-specific factors, such as excess capacity, product obsolescence, price erosion, evolving standards, changes in end-customer demand,and/or macroeconomic trends impacting global economies. Such macroeconomic trends relate to the semiconductor industry as a whole and not necessarily to the individual semiconductor markets to which we sell our products. The negative effects on our business from industry downturns may also be increased to the extent that such downturns are concurrent with the timing of new increases in production capacity in our industry.
We have experienced revenue volatility and market downturns in the past and expect to experience them in the future, which could have a material adverse impact on our results of operations and financial condition.
 
The recent financial market crisis spread into a global economic recession impacting business and consumer confidence, which resulted in a precipitous decline in the demand for semiconductor products. As a result, our business, financial conditions and results of operations have been affected. To the extent that the current economic environment worsens, our business, financial condition and results of operations could be more significantly and adversely affected.
In particular, economic downturns affecting the semiconductor industry may result in a variety of risks to our business, including:
• significant declines in sales;
• significant reductions in selling prices;
• the resulting significant impact on our gross margins, profitability and net cash flow;
• increased volatilityand/or declines in our share price;
• increased volatility or adverse movements in foreign currency exchange rates;
• delays in, or curtailment of, purchasing decisions by our customers or potential customers either as a result of overall economic uncertainty or as a result of their inability to access the liquidity necessary to engage in purchasing initiatives or new product development;
• closure or underloading of wafer fabrication plants (“fabs”);
• decreased valuations of our equity investments;
• increased credit risk associated with our customers or potential customers, particularly those that may operate in industries most affected by the economic downturn; and
• impairment of goodwill or other assets.
Reduction in demand or increase inWe may not be able to match our production capacity for semiconductor products may lead to overcapacity, which in turn may require plant closures, asset impairments, restructuring charges and inventory write-offs.demand.
 
Capital investments for semiconductor manufacturing equipment are made both by integrated semiconductor companies like us and by specialist semiconductor foundry companies, which are subcontractors that manufacture semiconductor products designed by others.
According to data published by industry sources, investments in worldwide semiconductor fabrication capacity totaled approximately $29.5 billion in 2003, $45.7 billion in 2004, $46.1 billion in 2005, $54.8 billion in 2006 and an estimated $57.2 billion in 2007, or approximately 18%, 22%, 20%, 22% and 22%, respectively,As a result of the total available market (the “TAM”)cyclicality and volatility of the semiconductor industry, it is difficult to predict future developments in the markets we serve, making it hard to estimate requirements for these years. production capacity. If markets do not grow as we have anticipated, or shrink faster than we have anticipated, we risk under-utilization of our facilities or having insufficient capacity to meet customer demand.


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The net increase of manufacturing capacity, defined as the difference between capacity additions and capacity reductions, may exceed demand requirements, leading to overcapacity and price erosion.
If the semiconductor market does not grow as we anticipated when making investments in production capacity, we risk overcapacity. In addition, if demand for our products is lower than expected, this may result in write-offs of inventories and losses on products, and could require us to undertake restructuring measures that may involve significant charges to our earnings. In recent years, overcapacity and cost optimization have led us to close manufacturing facilities that used more mature process technologies and, as a result, to incur significant impairment and restructuring charges and related closure costs. In 2007 we announced closures of our Phoenix, Carrollton, and Ain Sebaa manufacturing facilities and recorded impairment, restructuring charges and related closure costs of $73 million. Previously announced restructuring and cost reduction plans were substantially completed as of December 31, 2007 and resulted in total charges of approximately $38 million. See “Item 5. Operating and Financial Review and Prospects — Impairment, Restructuring Charges and Other Related Closure Costs.”
 
There can be no assurance that future changes in the market demand for our productsand/or the need to mitigate overcapacity or obsolescence in our manufacturing facilities may not require us to lower the prices we charge for our products,and/or that market downturns, or overcapacity or obsolescence may not lead us to incur additional impairment and restructuring charges, which may have a material adverse effect on our business, financial condition and results of operations.


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Competition in the semiconductor industry is intense, and we may not be able to compete successfully if our product design technologies, process technologies and products do not meet market requirements.requirements or if we are unable to acquire the necessary IP.
 
We compete in different product lines to various degrees on the following characteristics:
 
 • price;
 
 • technical performance;
 
 • product features;
 
 • product system compatibility;
 
 • product design and technology;
 
 • timely introduction of new products;
 
 • product availability;
 
 • manufacturing yields; and
 
 • sales and technical support.
 
Given the intense competition in the semiconductor industry, if our products are not selected based on any of the above factors, our business, financial condition and results of operations will be materially adversely affected.
We face significant competition in each of our product lines. Similarly, many of our competitors also offer a large variety of products. Some of our competitors may have greater financialand/or more focused research and development (“R&D”) resources than we do. If these competitors substantially increase the resources they devote to developing and marketing products that compete with ours, we may not be able to compete successfully. Any consolidation among our competitors could also enhance their product offerings, manufacturing efficiency and financial resources, further strengthening their competitive position.
 
GivenAs we are a supplier of a broad range of products, we are required to make significant investments in R&D across our product portfolio in order to remain competitive. Many of the intense competitionresulting products that we market, in turn, have short life cycles, with some being approximately one year. Current economic conditions may impair our ability to maintain our current level of R&D investments and, therefore, we may need to become more focused in our R&D investments across our broad range of product lines. This could significantly impair our ability to remain a viable competitor in the semiconductor industry, ifproduct areas where our productscompetitors’ R&D investments are not selected based on any of the above factors, our business, financial condition and results of operations could be materially adversely affected.higher than ours.
 
We regularly devote substantial resources to winning competitive bid selection processes, known as “product design wins”, to develop products for use in our customers’ equipment and products. These selection processes can be lengthy and can require us to incur significant design and development expenditures, with no guarantee of winning or generating revenue. Delays in developing new products with anticipated technological advances and failure to win new design projects for customers or in commencing volume shipments of new products may have an adverse effect on our business. In addition, there can be no assurance that new products, if introduced, will gain market acceptance or will not be adversely affected by new technological changes or new product announcements from other competitors that may have greater resources or are more focused than we are. Because we typically focus on only a few customers in a product area, the loss of a design win can sometimes result in our failure to offer a generation of a product. This can result in lost sales and could hurt our position in future competitive selection processes because we may be perceived as not being a technology or industry leader.
 
Even after obtaining a product design win from one of our customers, we may still experience delays in generating revenue from our products as a result of our customerscustomers’ or our lengthy development and design cycle. In addition, a delay or cancellation of a customer’s plans could significantly adversely affect our financial results, as


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we may have incurred significant expense and generated no revenue at the time of such delay or cancellation. Finally, if our customers fail to successfully market and sell their own products, it could materially adversely affect our business, financial condition and results of operations as the demand for our products falls.
 
Semiconductor and other products that we design and manufacture are characterized by rapidly changing technology and new product introductions, and our success depends on our ability to develop and manufacture complex products cost- effectively and to scale.
Semiconductor design and process technologies are subject to constant technological improvements and may require large expenditures for capital investments, advanced research and technology development. Many of the resulting products that we market, in turn, have short life cycles, with some being less than one year.
If we experience substantial delays or are unable to develop new design or process technologies, our results of operations or financial condition could be adversely affected.
We also regularly incur costs to develop IP internally or acquire technologyit from third parties without any guarantee of realizing the anticipated value of such expenditures due to betterif our competitors develop technologies that are more accepted than ours, or if market acceptance of technologies developed by competitors or market demand. We charged $47 milliondemand does not materialize as annual amortization expense on our consolidated statement of income in 2007 related to technologies and licenses acquired from third parties. In 2007 we signed a major technology


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development agreement with IBM to develop 32-nm and 22-nm complementary metal-oxide-semiconductor (“CMOS”) process technology for300-mm silicon wafers in order to pursue ongoing core CMOS technology development following the termination of the R&D Crolles 2 Alliance with Freescale Semiconductor and NXP Semiconductors starting this year. We also signed an agreement with IBM to license a derivative technology to implement in our proprietary process for the manufacture of 45-nm integrated circuits. As of December 31, 2007, the residual value, net of amortization, registered in our consolidated balance sheet for these technologies and licenses was $128 million.anticipated. In addition to amortization expenses relating to purchased IP, the value of these assets may be subject to impairment with associated charges being made to our Consolidated Financial Statements.
In November 2007 we closed a business acquisition, which included intellectual property See “Item 5. Operating and design engineers, in the wireless market for approximately $92 million. In December 2007 we announced,Financial Review and in January 2008 completed the acquisition of Genesis Microchip Inc. (“Genesis Microchip”) for intellectual property related to the digital consumer marketplace and design engineers for $342 million.Prospects”. There is no assurance that suchour IP purchases will be successful and will not lead to impairments and associated charges.
 
The competitive environment of the semiconductor industry may lead to further measureserosion of our market share, impacting our capacity to improve our competitive position and cost structure, which in turn may result in loss of revenues, asset impairments and/or capital losses.compete.
 
We are continuously considering various measures to improve our competitive position and cost structure in the semiconductor industry.
 
In 2007 we also made the decision to divest our Flash Memory activities by combining our business with that of Intel and announcing the planned creation of a new independent semiconductor company in the area of Flash memories, which was named Numonyx. The intent is that such new company will benefit from critical size to be competitive in this market. The transaction concerning the creation of Numonyx is planned to close in the first quarter of 2008. There is no assurance that such transaction will close within the timeframe and pursuant to the terms currently planned.
Recently,past, our sales have, at times, increased at a slower pace than the semiconductor industry as a whole and our market share has declined, even in relation to the markets we serve. Although we recovered in 2006 with an increase in our sales of 11% compared to an increase of 9% for the industry overall, in 2007, our sales increased 1.5% while the industry increased by approximately 3%.served. There is no assurance that we will be able to maintain or to grow our market share if we are not ableunable to accelerate product innovation, identify new applications for our products, extend our customer base, realize manufacturing improvementsand/or otherwise control our costs. In addition, in recent years the semiconductor industry has continued to increase manufacturing capacity in Asia in order to access lower-cost production and to benefit from higher overall efficiency, which has led to a strongermore competitive environment. We may also in the future, if market conditions so require, consider additional measures to improve our cost structure and competitiveness in the semiconductor market, such as increasing ourseeking more competitive sources of production, capacity in Asia, discontinuing certain product families or addingperforming additional restructurings, which in turn may result in loss of revenues, asset impairmentsand/or capital losses.
 
The semiconductor industry may also be impacted by changes in the political, social or economic environment, including as a result of military conflict, social unrest and/or terrorist activities, as well as natural events such as severe weather, health risks, epidemics or earthquakes in the countries in which we, our key customers and our suppliers, operate.
We may face greater risks due to the international nature of our business, including in the countries where we, our customers or our suppliers operate, such as:
• negative economic developments in foreign economies and instability of foreign governments, including the threat of war, terrorist attacks or civil unrest;
• epidemics such as disease outbreaks, pandemics and other health related issues;
• changes in laws and policies affecting trade and investment, including through the imposition of new constraints on investment and trade; and
• varying practices of the regulatory, tax, judicial and administrative bodies.
Risks Related to Our Operations
 
StrategicMarket dynamics are driving us to a strategic repositioning, may be required, in light of market dynamics,which has led us to improve our business performance.enter into significant joint ventures.
 
As a result of a strategic review of our product portfolio, we decided in 2007We have recently undertaken several new initiatives to divest our Flash Memory activities by combiningreposition our business, with that of Intelboth through divestitures and announcing the planned creation of a new independent semiconductor company in the area of Flash memories, which was named Numonyx. The intent is that such new company will benefit from critical size to be competitive in this market. The transaction concerning the creation of Numonyx is planned to close in the first quarter of 2008. In 2007 we incurred a loss of $1,106 million in connection with this planned transaction. The amount of the loss may increase pending the final evaluation report being prepared by an independent firm, as well as the impact of any further deterioration in the market conditions of the Flash memory business and the credit markets generally. Further, if the transaction is postponed or not consummated as planned, we may incur additional charges. Once Numonyx begins operations, we may also incur losses proportionate to our equity holding in this company.
Additionally, we are constantly monitoring our product portfolio and cannot exclude that additional steps in this repositioning process may be required; further, we cannot assure that the strategic repositioning of our business will be successful and produce the planned operational and strategic benefits and may not result in further impairment and associated charges.


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Future acquisitions or divestitures may adversely affect our business.
investments. Our strategies to improve our results of operations and financial condition may lead us to make significant acquisitions of businesses that we believe to be complementary to our own, or to divest ourselves of activities that we believe do not serve our longer term business plans. In addition, certain regulatory approvals for potential acquisitions may require the divestiture of business activities.
Our potential acquisition strategies depend in part on our ability to identify suitable acquisition targets, finance their acquisition and obtain required regulatory and other approvals. Our potential divestiture strategies depend in part on our ability to define the activities in which we should no longer engage, and then determine and execute appropriate methods to divest of them.
 
In 2008, we divested our Flash Memory activities by combining our business with that of Intel and creating Numonyx, an independent semiconductor company in the area of Flash memories. On February 10, 2010, we announced that, together with our partners Intel Corporation and Francisco Partners, we have entered into a definitive agreement with Micron, pursuant to which it will acquire Numonyx in an all-stock transaction. See Note


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28 to our Consolidated Financial Statements and “Item 5. Operating and Financial Review and Prospects — Other Developments”. There is no assurance when, or if, this transaction will close. Furthermore, there is no guaranty that the transaction will close pursuant to the terms currently planned.
In addition, in 2008, we completed the acquisition of Genesis Microchip Inc. (“Genesis Microchip”) and the acquisition of NXP’s wireless business, creating the joint venture ST-NXP Wireless, with us having an 80% ownership stake. Furthermore, in 2009, we purchased the outstanding 20% held by NXP in ST-NXP Wireless and simultaneously merged ST-NXP Wireless with Ericsson Mobile Platforms (“EMP”), thereby forming ST-Ericsson. The wireless activities run through ST-Ericsson represent a significant portion of our business. The integration process may be long and complex due to the fact that we are merging three different companies, and may trigger a significant amount of costs. See Note 7 to our Consolidated Financial Statements. We may not be able to exercise the same control over management as we did when the business was operated by us. There is no assurance that we will be successful or that the joint venture will produce the planned operational and strategic benefits.
We also may consider from time to time entering into joint ventures that may operate in our existing facilities but whose businesses may not be specific to the semiconductor industry. We have announced plans to establish, at an existing M6 facility located in Catania, Italy to be contributed by us, a joint venture with Enel Green Power (“Enel”) and Sharp to manufacture Photovoltaic panels, which will be sold to Enel and Sharp as well as on the open market.
We are constantly monitoring our product portfolio and cannot exclude that additional steps in this repositioning process may be required; further, we cannot assure that any strategic repositioning of our business, including possible future acquisitions, dispositions or joint ventures, will be successful and may not result in further impairment and associated charges.
Acquisitions and divestitures involve a number of risks that could adversely affect our operating results, including:including the risk that we may be unable to successfully integrate businesses or teams we acquire with our culture and strategies on a timely basis or at all, and the risk that we may be required to record charges related to the goodwill or other long-term assets associated with the acquired businesses. Changes in our expectations due to changes in market developments that we cannot foresee have in the past resulted in our writing off amounts associated with the goodwill of acquired companies, and future changes may require similar further write-offs in future periods. We cannot be certain that we will be able to achieve the full scope of the benefits we expect from a particular acquisition, divestiture or investment. Our business, financial condition and results of operations may suffer if we fail to coordinate our resources effectively to manage both our existing businesses and any acquired businesses. In addition, the financing of future acquisitions may negatively impact our financial condition and could require us to need additional funding from the capital markets.
Other risks associated with acquisitions and the activities of our joint ventures include:
 
 • diversion of management’s attention;
 
 • difficult integration of acquired company operations and personnel;
• loss of activities and technologies that may have complemented our remaining businesses;
• insufficient intellectual propertyIP rights or potential inaccuracies in the ownership of key IP;
 
 • assumption of potential liabilities, disclosed or undisclosed, associated with the business acquired, which liabilities may exceed the amount of indemnification available from the seller;
 
 • potential inaccuracies in the financial and accounting systems utilized byfinancials of the business acquired;
 
 • that the businesses acquired will not maintain the quality of products and services that we have historically provided;
 
 • whether we are able to attract and retain qualified management for the acquired business;
 
 • loss of important services provided by key employees that are assigned to divested activities;
• whether we are able to retain customers of the acquired entity; and
 
 • goodwillmanagement, reporting and other intangible asset impairment, dueforecasting related to the inabilitya50-50 joint venture that is fully consolidated in our results.
Other risks associated with our divestiture activities include:
• diversion of the businessmanagement’s attention;
• loss of activities and technologies that may have complemented our remaining businesses or operations;
• loss of important services provided by key employees that are assigned to meet management’s expectations at the time of the acquisition.divested activities; and
• social issues or restructuring costs linked to divestitures and closures.


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These and other factors may cause a materially adverse effect on our results of operations and financial condition.
 
In difficult market conditions, our high fixed costs adversely impact our results.
 
In less favorable industry environments, we are driven to reduce prices in response to competitive pressures and we are also faced with a decline in the utilization rates of our manufacturing facilities due to decreases in product demand. Reduced average selling prices and demand for our products adversely affect our results of operations. Since the semiconductor industry is characterized by high fixed costs, we are not always able to reducecut our total costs in line with revenue declines. Furthermore, in periods of reducedlower customer demand for our products, our wafer fabrication plants (“fabs”)fabs do not operate at full capacity and the costs associated with the excess capacity are charged directly to cost of sales as unused capacity charges. Additionally, a significant number of our manufacturing facilities are located in France and Italy and their cost of operation have been significantly affected by the rise of the Euro against the U.S. dollar, our reporting currency over the last few years. In 2007 the U.S. dollar was $1.35 to €1.00 compared to $1.24 in 2006See “Item 5. Operating and may weaken further in the future. Over the last five years, our gross profit margin has varied from a high of 37.9% in the third quarter of 2004 to a low of 32.9% in the first quarter of 2005. We cannot guarantee thatFinancial Review and Prospects.” The difficult market conditions will not adverselyexperienced in 2008 and 2009 have had a significant affect on the capacity utilization and related manufacturing efficiencies of our fabs and, consequently, our future gross margins. We cannot guarantee that such market conditions, and increased competition in our core product markets, will not lead to further price erosion, lower revenue growth rates and lower margins.
 
The competitive environment of the semiconductor industry has led to industry consolidation and we may face even more intense competition from newly merged competitors or we may seek to acquire a competitor or become an acquisition target.in order to improve our market share.
 
The intensely competitive environment of the semiconductor industry and the high costs associated with developing marketable products and manufacturing technologies as well as investing in production capabilities may lead to further consolidation in the industry. Such consolidation can allow a company to further benefit from economies of scale, provide improved or more


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diverse product portfolios and increase the size of its serviceable market. Consequently, we may seek to acquire a competitor to improve our market position and the applications and products we can market. WeSome of our competitors, however, may also becometry to take advantage of such a target for a company lookingconsolidation process and may have greater financial resources to improve its competitive position. Such an occurrence may take place at any time with consequences that may not be predictable and which can have a materially adverse effect on our results of operations and financial condition.do so.
 
Our financial results can be adversely affected by fluctuations in exchange rates, principally in the value of the U.S. dollar.
 
A significant variation of the value of the U.S. dollar against the principal currencies whichthat have a material impact on us (primarily the Euro, but also certain other currencies of countries where we have operations) could result in a favorable impact on our net income in the case of an appreciation of the U.S. dollar, or a negative impact on our net income if the U.S. dollar depreciates relative to these currencies. Currency exchange rate fluctuations affect our results of operations because our reporting currency is the U.S. dollar, in which we receive the major part of our revenues, while, more importantly, we incur a significant portion of our costs in currencies other than the U.S. dollar. Certain significant costs incurred by us, such as manufacturing labor costs and depreciation charges, selling, general and administrative expenses, and research and developmentR&D expenses, are incurred in the currencies of the jurisdictions in which our operations are located.located, which mainly includes the euro zone. Our effective average exchange rate, which reflects actual exchange rate levels combined with the impact of cash flow hedging programs, was $1.35$1.37 to €1.00 in 2007,2009, compared to $1.24$1.49 to €1.00 in 2006.2008.
 
A decline of the U.S. dollar compared to the other major currencies that affect our operations negatively impacts our expenses, margins and profitability, especially if we are unable to balance or shift ourEuro-denominated costs to other currency areas or to U.S. dollars. Any such actions may not be immediately effective, could prove costly, and their implementation could prove demanding on our management resources.profitability.
 
In order to reduce the exposure of our financial results to the fluctuations in exchange rates, our principal strategy has been to balance as much as possible the proportion of sales to our customers denominated in U.S. dollars with the amount of purchases from our suppliers denominated in U.S. dollars and to reduce the weight of the other costs, including labor costs and depreciation, denominated in Euros and in other currencies. In order to further reduce our exposure to U.S. dollar exchange rate fluctuations, we have hedged certain line items on our consolidated statements of income, in particular with respect to a portion of the cost of goods sold, most of the research and developmentR&D expenses and certain selling and general and administrative expenses located in the Euro zone. No assurance can be given that the value of the U.S. dollar will not actually appreciate withour hedging transactions potentially preventingwill prevent us from benefiting from lowerincurring higher Euro-denominated manufacturing costs when translated into our U.S. dollar-based accounts or that we will not suffer fromin the event of a weakening of the U.S. dollar compared to the Euro on the non-hedged portion of our costs and expenses.dollar. See “Item 5. Operating and Financial Review and Prospects — Impact of Changes in Exchange Rates” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk.”


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Because we have our own manufacturing facilities, our capital needs are high compared to those competitors who do not produce their own products.
 
As a result of our choice to maintain control of a certain portion of our advanced proprietary manufacturing technologies to better serve our customer base and to develop our strategic alliances, significant amounts of capital to maintain or upgrade our facilities could be required in the future. OurWe monitor our capital expenditures taking into consideration factors such as trends in the semiconductor market and capacity utilization. In the last three years our overall capital expenditures, as expressed in terms of percentage to sales, have been significant in recent yearssignificantly decreased, and we spent $1.1 billionare planning for them to be in 2007.the range of 5% to about 7% of our revenues, what we consider to be a sustainable ratio for the foreseeable future. However, there is no assurance that we will not over-invest in terms of capital expenditures if future market demand does not meet our expectations when making the decision to invest, or under-invest in capital expenditures to address future increases and /or changes in the products required by our customers. Failure to invest appropriately or in a timely manner could have a material adverse effect on our business, and results of operations See “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources.” We have evolved our strategy towards a less capital intensive model and as such we expect our capital expenditures to be in the range of 10% of our 2008 revenues. Our costs may also increase as the complexity of the individual manufacturing equipment increases. We have the flexibility to modulate our investments up or down in response to changes in market conditions, and we are prepared to accelerate investments in leading-edge technologies if market conditions require.
To stay competitive in the semiconductor industry, we must transition towards300-mm manufacturing technology, which is much more expensive than150-mm or200-mm technologies. We operated a300-mm facility with Freescale Semiconductor, Inc. (formerly a division of Motorola Inc.) (“Freescale Semiconductor”) and NXP Semiconductors B.V. (formerly Philips Semiconductor International B.V.) (“NXP Semiconductors”) until December 31, 2007 in Crolles, France (“Crolles2”). This relationship has since expired and we have chosen to take full ownership of the fab and acquire our former partners’ equipment. This choice may lead to an increase in our manufacturing costs. Following the announced closures in 2007 of our200-mm facility in Phoenix and our


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150-mm facility in Carrollton, we are in the process of transferring production primarily to other facilities, which involves certain risks as customers are required to requalify these facilities.
 
We may also need additional funding in the coming years to finance our investments, to pursue other business combinations or to purchase other companies or technologies developed by third parties.parties or to refinance our maturing indebtedness.
 
In an increasingly complex and competitive environment, we may need to invest in other companiesand/or in technology developed either by us or by third parties to maintain or improve our position in the market. We may also consider acquisitions to complement or expand our existing business. In addition, we may be required to refinance maturing indebtedness. Any of the foregoing may also require us to issue additional debt, equity, or both; the timing and the size of any new share or bond offering would depend upon market conditions as well as a variety of factors, and any such transaction or any announcement concerning such a transaction could materially impact the market price of our common shares. If we are unable to access such capital on acceptable terms, this may adversely affect our business and results of operations.
 
Our research and developmentR&D efforts are increasingly expensive and dependent on alliances, and our business, results of operations and prospects could be materially adversely affected by the failure or termination of such alliances, or failure to find new partners in such alliance and/or in developing new process technologies in line with market requirements.
 
We are dependent on alliances to develop or access new technologies, due toparticularly in light of the increasing levels of investment required investments,for R&D activities, and there can be no assurance that these alliances will be successful. For example, we had been cooperating with Freescale Semiconductor and NXP Semiconductors for the joint research and development of CMOS process technology to provide 90-nm to 45-nm chip technologies on300-mm wafers, as well as the operation ofWe are a300-mm wafer pilot line fab in Crolles, France. We had first formed the Crolles2 alliance with NXP Semiconductors in 2000 and renewed the partnership in 2002 when Freescale Semiconductor joined the alliance (“Crolles2 Alliance”). The Crolles2 Alliance was strengthened in 2002 through a joint development program with TSMC for process technology alignment, in 2004 by the Nanotec-300 research program with CEA-LETI for the development member of the 45-nmInternational Semiconductor Development Alliance (“ISDA”), a technology alliance led by IBM with GlobalFoundries, Freescale, Infineon, NEC, Samsung and 32-nmToshiba to develop complementary metal-on silicon oxide semiconductor (“CMOS”) process technology nodes, and again in 2005 by including300-mm wafer testing and packaging, as well as the development and licensing of core libraries and intellectual property (“IP”). The Crolles2 Alliance expired on December 31, 2007, as a result of the decision of both NXP Semiconductors and Freescale Semiconductors to terminate their participation at the end of the initial term.
We signed an agreement with IBM effective January 1, 2008 to collaborate on the development of advanced CMOS process technology that is used in semiconductor development and manufacturing. The agreementmanufacturing for 32/28-nm and 22/20-nm nodes. This alliance also includes 32-nm and 22-nm CMOS process-technology development, design enablement and advanced research adapted to the manufacturing of300-mm silicon wafers. In addition, it includes both the core bulk CMOS technology and value-added derivativeSystem-on-Chip (“SoC”) technologies. The new agreement between IBM and us will also include collaboration on IP development and platforms to speed the design of SoCSystem-on-Chip (“SoC”) devices in theseCMOS process technologies. WeIn 2009, we also signedentered into an agreement with IBM to licensedevelop value-added derivative SoC technologies in Crolles France.
In February 2009, we completed the merger of ST-NXP Wireless and EMP into ST-Ericsson, a derivative technologyjoint venture with Ericsson. We plan to implement indeliver the benefits of our proprietary processinnovation to our customers and we also expect ST-Ericsson to execute on its plan to transition to the new portfolio strategy they have devised for the manufacture of 45nm integrated circuits.their next generation offering.
 
We continue to believe that we can maintain proprietary R&D for derivative technology investments and share R&D business models, which are based on cooperation and alliances, for core R&D process technology if we receive adequate support from state funding, as in the shared researchcase of the Crolles Nano 2012 frame agreement signed by us with the French government in 2009, which includes certain conditions of employment and development (“R&D”) business modelmanufacturing capacity to be met by 2012. This, coupled with manufacturing and foundry partnerships, provides us with a number of important benefits, including the sharing of risks and costs, reductions in our own capital requirements, acquisitions of technical know-how and access to additional production capacities. In addition, it contributes to the fast acceleration of semiconductor process technology development while allowing us to lower our development and manufacturing costs. However, there can be no assurance that alliances will be successful and allow us to develop and access new technologies in due time, in a cost-effective mannerand/or to meet customer demands. Certain companies develop their own process technologies, which may be more advanced than the technologies we develop through our cooperative alliances. Furthermore, if these alliances terminate before our intended goals are accomplished we may lose our investment, or incur additional unforeseen costs, and our business, results of operations and prospects could be materially adversely affected. In addition, if we are unable to develop or otherwise access new technologies independently, we may fail to keep pace with the rapid technology advances in


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the semiconductor industry, our participation in the overall semiconductor industry may decrease and we may also lose market share in the market addressed by our products.
 
Our operating results may vary significantly from quarter to quarter and annually and may differ significantly from our expectations or guidance.
 
Our operating results are affected by a wide variety of factors that could materially and adversely affect revenues and profitability or lead to significant variability of operating results. These factors include, among others, the cyclicality of the semiconductor and electronic systems industries, capital requirements, inventory management, availability of funding, competition, new product developments, technological changes and manufacturing problems. Furthermore,For example, if anticipated sales or shipments do not occur when expected, expenses and inventory levels in a given quarter can be disproportionately high, and our results of operations for that quarter, and potentially for future quarters, may be adversely affected. In addition, our effective tax rate currently takes into consideration certain favorable tax rates and


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incentives, which, in the future, may not be available to us. See Note 2321 to our Consolidated Financial Statements. In addition, a
A number of other factors could lead to fluctuations in quarterly and annual operating results, including:
 
 • performance of our key customers in the markets they serve;
 
 • order cancellations or reschedulings by customers;
 
 • excess inventory held by customers leading to reduced bookings or product returns by key customers;
 
 • manufacturing capacity and utilization rates;
 
 • restructuring and impairment charges;
 
 • losses on equity investments;
• fluctuations in currency exchange rates, particularly between the U.S. dollar and other currencies in jurisdictions where we have activities;
 
 • intellectual propertyIP developments;
 
 • changes in distribution and sales arrangements;
 
 • failure to win new design projects;
 
 • manufacturing performance and yields;
 
 • product liability or warranty claims;
 
 • litigation;
 
 • acquisitions or divestitures;
 
 • problems in obtaining adequate raw materials or production equipment on a timely basis;
 
 • property loss or damage or interruptions to our business, interruption losses resulting fromincluding as a catastrophic event not covered by insurance;result of fire, natural disasters or other disturbances at our facilities or those of our customers and suppliers that may exceed the amounts recoverable under our insurance policies;
 
 • changes in the market value or yield of the financial instruments in which we invest our liquidity.liquidity; and
• a substantial part of our business is run through joint ventures whose management acts independently pursuant to the joint ventures’ rule of governance.
 
Unfavorable changes in any of the above factors have in the past and may in the future adversely affect our operating results. Furthermore, in periods of industry overcapacity or when our key customers encounter difficulties in their end markets, orders are more exposed to cancellations, reductions, price renegotiation or postponements, which in turn reduce our management’s ability to forecast the next quarter or full year production levels, revenues and margins. For these reasons and others that we may not yet have identified, our revenues and operating results may differ materially from our expectations or guidance as visibility is reduced. See “Item 4. Information on the Company — Backlog.”


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Our business is dependent in large part on continued growth in the industries and segments into which our products are sold and inon our ability to attract and retain new customers. A market decline in any of these industries or our inability to attract new customers could have a material adverse effect on our results of operations.
 
We derive and expect to continue to derive significant sales from the telecommunications, equipment,consumer, computer and communication infrastructure, automotive and industrial and automotive industries, as well as the home, personal and consumer segments generally.markets. Growth of demand in the telecommunications equipment, industrial and automotive industries as well as the home, personal and consumerthese market segments hashave fluctuated in the past, fluctuated, and may in the future, fluctuate, significantly based on numerous factors, including:
 
 • spending levels of telecommunications equipment, industrialthe market segment participants;
• reduced demand resulting from a drop in consumer confidenceand/or automotive providers;a deterioration of general economic conditions;
 
 • development of new consumer products or applications requiring high semiconductor content;
 
 • evolving industry standards; and
 
 • the rate of adoption of new or alternative technologies; and
• demand for automobiles, consumer confidence and general economic conditions.technologies.
 
We cannot guaranteepredict the rate, or the extent to which, the telecommunications, equipment orconsumer, computer and communication infrastructure, automotive industries or the home, personal or consumer segmentsand industrial markets will grow. AnyIn 2009, the decline in these industries or segments could resultmarkets resulted in slower growth orand a decline in demand for our products, which could havehad a material adverse effect on our business, financial condition and results of operations.


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In addition, spending on process and product development well ahead of market acceptance could have a material adverse effect on our business, financial condition and results of operations if projected industry growth rates do not materialize as forecasted.
 
Our business is dependent upon our ability to attract and retain new customers. The competition for such new customers is intense. There can be no assurance that we will be successful in attracting and retaining new customers. Our failure to do so could materially adversely affect our business, financial position and results of operations.
 
Disruptions in our relationships with any one of our key customers, and/or material changes in their financial condition, could adversely affect our results of operations.
 
A substantial portion of our sales is derived from several large customers, some of whom have entered into strategic alliances with us. As of December 31, 2007,2009, our largest customer, wasthe Nokia whichgroup of companies, accounted for 21.1%approximately 16.1% of our 20072009 net revenues, compared to 21.8%17.5% in 20062008 and 22.4%21.1% in 2005. In 2007, our top ten original equipment manufacturers (“OEM”) customers accounted for approximately 49% of our net revenues, compared to approximately 51% of our 2006 net revenues and approximately 50% of our 2005 net revenues.2007. We cannot guarantee that our largest customers will continue to book the same level of sales with us that they have in the past and will not solicit alternative suppliers. Many of our key customers operate in cyclical businesses that are also highly competitive, and their own demands and market positions may vary considerably. In recent years, certain customers of the semiconductor industry have experienced consolidation. Such consolidations may impact our business in the sense that our relationships with the new entities could be either reinforced or jeopardized pursuant thereto. Our customers have in the past, and may in the future, vary order levels significantly from period to period, request postponements to scheduled delivery dates or modify their bookings. Approximately 20% of our net revenues were made through distributors in 2007, compared to approximately 19% in 2006 and approximately 18% in 2005. We cannot guarantee that we will be able to maintain or enhance our market share with our key customers or distributors. If we were to lose one or moreimportant design wins for our products with our key customers, or if any key customer or distributors were to reduce or change its bookings, seek alternate suppliers, increase its product returns or become unable or fail to meet its payment obligations, our business financial condition and results of operations could be materially adversely affected. Some of our customers have recently faced financial difficulties and liquidity constraints, which have made them unable to fulfill their contractual obligations, or could make them unable to fulfill such obligations in the future. If customers do not purchase products made specifically for them, we may not be able to resell such products to other customers or require the customers who have ordered these products to pay a cancellation fee. Furthermore, developing industry trends, including customers’ use of outsourcing and new and revised supply chain models, may reduce our ability to forecast the purchase date for our products and evolving customer demand, thereby affecting our revenues and working capital requirements. For example, pursuant to industry developments, some of our products are required to be delivered on consignment to customer sites with recognition of revenue delayed until such moment, which must occur within a defined period of time, when the customer chooses to take delivery of our products from our consignment stock.


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Our operating results can also vary significantly due to impairment of goodwill and other intangible assets incurred in the course of acquisitions, as well as to impairment of tangible assets due to changes in the business environment.
 
Our operating results can also vary significantly due to impairment of goodwill booked pursuant to acquisitions and to the purchase of technologies and licenses from third parties. As of December 31, 2007, the value registered on our audited consolidated balance sheet for goodwill was $290 million and the value for technologies and licenses acquired from third parties, was $128 million, net of amortization.which has increased significantly since 2008 due to M&A transactions. Because the market for our products is characterized by rapidly changing technologies, and because of significant changes in the semiconductor industry, our future cash flows may not support the value of goodwill and other intangibles registered in our consolidated balance sheet. Furthermore, the ability to generate revenues for our fixed assets located in Europe may be impaired by an increase in the value of the Euro with respect to the U.S. dollar, as the revenues from the use of such assets are generated in U.S. dollars. We are required to annually test goodwill and to assess the carrying values of intangible and tangible assets when impairment indicators exist. As a result of such tests, we could be required to book impairment in our statement of income if the carrying value in our consolidated balance sheet is in excess of the fair value. The amount of any potential impairment is not predictable as it depends on our estimates of projected market trends, results of operations and cash flows. In addition, the introduction of new accounting standards can lead to a different assessment of goodwill carrying value, which could lead to a potential impairment of the goodwill amount. Any potential impairment, if required, could have a material adverse impact on our results of operations.


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We last performed our annual impairment testing in the third quarter of 2009, while the value generated by all of our product segments exceeded the carrying value of their assets. While we recorded specific impairment charges related to the carrying value of certain marketable securities and equity investments during the period, a minor impairment charge was indicated by such analyses on the net value of our assets subject to testing. However, many of the factors used in assessing fair values for such assets are outside of our control and the estimates used in such analyses are subject to change. Due to the ongoing uncertainty of the current market conditions, which may continue to negatively impact our market value, we will continue to monitor the carrying value of our assets. If market and economic conditions further deteriorate, this could result in future non-cash impairment charges against income. Further impairment charges could also result from new valuations triggered by changes in our product portfolio or strategic transactions, including ST-Ericsson, especially if it is unable to complete its ongoing restructuring plans or successfully compete, and possible further impairment charges relating to our investment in Numonyx, particularly, in the event of a downward shift in expected revenues or operating cash flow.
Because we depend on a limited number of suppliers for raw materials and certain equipment, we may experience supply disruptions if suppliers interrupt supply, increase prices or increase prices.experience material adverse changes in their financial condition.
 
Our ability to meet our customers’ demand to manufacture our products depends upon obtaining adequate supplies of quality raw materials on a timely basis. A number of materials are available only from a limited number of suppliers, or only from a limited number of suppliers in a particular region. In addition, we purchase raw materials such as silicon wafers, lead frames, mold compounds, ceramic packages and chemicals and gases from a number of suppliers on ajust-in-time basis, as well as other materials such as copper and gold whose prices on the world markets have fluctuated significantly during recent periods. Although supplies for the raw materials we currently use are adequate, shortages could occur in various essential materials due to interruption of supply or increased demand in the industry. In addition, the costs of certain materials, such as copper and gold, may increasehave increased due to market pressures and we may not be able to pass on such cost increases to the prices we charge to our customers. We also purchase semiconductor manufacturing equipment from a limited number of suppliers and because such equipment is complex it is difficult to replace one supplier with another or to substitute one piece of equipment for another. In addition, suppliers may extend lead times, limit our supply or increase prices due to capacity constraints or other factors. Furthermore, suppliers tend to focus their investments on providing the most technologically advanced equipment and materials and may not be in a position to address our requirements for equipment or materials of older generations. Shortages of supplies have in the past impacted and may in the future impact the semiconductor industry, in particular with respect to silicon wafers due to increased demand and decreased production. Although we work closely with our suppliers to avoid these types of shortages, there can be no assurances that we will not encounter these problems in the future. Our quarterly or annual results of operations would be adversely affected if we were unable to obtain adequate supplies of raw materials or equipment in a timely manner or if there were significant increases in the costs of raw materials or problems with the quality of these raw materials.


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If our outside contractors fail to perform, this could adversely affect our ability to exploit growth opportunities.
We currently use outside contractors, both for foundries and back-end activities, and it is likely that we will increasingly rely on foundries for a growing portion of our needs. The foundries we contract with are primarily manufacturers of high-speed complementary metal-on silicon oxide semiconductor (“HCMOS”) wafers and nonvolatile memory technology, while our back-end subcontractors engage in the assembly and testing of a wide variety of packaged devices. If our outside suppliers are unable to satisfy our demand, or experience manufacturing difficulties, delays or reduced yields, our results of operations and ability to satisfy customer demand could suffer. Our internal manufacturing costs include depreciation and other fixed costs, while costs for products outsourced are based on market conditions. Prices for these services also vary depending on capacity utilization rates at our suppliers, quantities demanded, product technology and geometry. Furthermore, these outsourcing costs can vary materially from quarter to quarter and, in cases of industry shortages, they can increase significantly further, negatively impacting our gross margin.
 
Our manufacturing processes are highly complex, costly and potentially vulnerable to impurities, disruptions or inefficient implementation of production changes that can significantly increase our costs and delay product shipments to our customers.
 
Our manufacturing processes are highly complex, require advanced and increasingly costly equipment and are continuously being modified or maintained in an effort to improve yields and product performance. Impurities or other difficulties in the manufacturing process can lower yields, interrupt production or result in losses of products in process. As system complexity and production changes have increased andsub-micron technology has become more advanced, manufacturing tolerances have been reduced and requirements for precision have become even more demanding. Although in the past few years we have significantly enhanced our manufacturing capability in terms of efficiency, precision and capacity, we have from time to time experienced bottlenecks and production difficulties that have caused delivery delays and quality control problems, as is common in the semiconductor industry. We cannot guarantee that we will not experience bottlenecks, production or transition difficulties in the future. In addition, during past periods of high demand for our products, our manufacturing facilities have operated at high capacity, which has led to production constraints. Furthermore, if production at a manufacturing facility is interrupted, we may not be able to shift production to other facilities on a timely basis, or customers may purchase products from other suppliers. In either case, the loss of revenue and damage to the relationship with our customer could be significant. Furthermore, we periodically transfer production equipment between production facilities and must ramp up and test such equipment once installed in the new facility before it can reach its optimal production level.
 
As is common in the semiconductor industry, we have, from time to time, experienced and may in the future experience difficulties in transferring equipment between our sites, ramping up production at new facilities or effecting transitions to new manufacturing processes. Our operating results may be adversely affected by an increase in fixed costs and operating expenses linked to production if revenues do not increase commensurately with such fixed costs and operating expenses.
 
We may be faced with product liability or warranty claims.
Despite our corporate quality programs and commitment, our products may not in each case comply with specifications or customer requirements. Although our practice, in line with industry standards, is to contractually limit our liability to the repair, replacement or refund of defective products, warranty or product liability claims could result in significant expenses relating to compensation payments or other indemnification to maintain good customer relationships if a customer threatens to terminate or suspend our relationship pursuant to a defective product supplied by us. Furthermore, we could incur significant costs and liabilities if litigation occurs to defend against such claims and if damages are awarded against us. In addition, it is possible for one of our customers to


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recall a product containing one of our parts. Costs or payments we may make in connection with warranty claims or product recalls may adversely affect our results of operations. There is no guarantee that our insurance policies will be available or adequate to protect against such claims.
If our outside contractors fail to perform, this could adversely affect our ability to exploit growth opportunities.
We currently use outside contractors, both for foundries and back-end activities. Our foundries are primarily manufacturers of high-speed complementary metal-on silicon oxide semiconductor (“HCMOS”) wafers and nonvolatile memory technology, while our back-end subcontractors engage in the assembly and testing of a wide variety of packaged devices. If our outside suppliers are unable to satisfy our demand, or experience manufacturing difficulties, delays or reduced yields, our results of operations and ability to satisfy customer demand could suffer. In addition, purchasing rather than manufacturing these products may adversely affect our gross profit margin if the purchase costs of these products are higher than our own manufacturing costs. Our internal manufacturing costs include depreciation and other fixed costs, while costs for products outsourced are based on market conditions. Prices for these services also vary depending on capacity utilization rates at our suppliers, quantities demanded, product technology and geometry. Furthermore, these outsourcing costs can vary materially from quarter to quarter and, in cases of industry shortages, they can increase significantly further, negatively impacting our gross margin.
We depend on patents to protect our rights to our technology.technology and may face claims of infringing the IP rights of others.
 
We depend on our ability to obtain patents and other intellectual propertyIP rights covering our products and their design and manufacturing processes. We intend to continue to seek patents on our inventions relating to product designs and manufacturing processes. However, the process of seeking patent protection can be long and expensive, and we cannot guarantee that we will receive patents from currently pending or future applications. Even if patents are issued, they may not be of sufficient scope or strength to provide meaningful protection or any commercial advantage. In addition, effective patent, copyright and trade secret protection may be unavailable or limited in some countries. Competitors may also develop technologies that are protected by patents and other intellectual propertyIP and therefore either be unavailable to us or be made available to us subject to adverse terms and conditions. We have in the past used our patent portfolio to negotiate broad patent cross-licenses with many of our competitors enabling us to design, manufacture and sell semiconductor products, without fear of infringing patents held by such competitors. We may not, however, in the future be able to obtain such licenses or other rights to protect necessary intellectual propertyIP on favorable terms for the conduct of our business, and such failure may adversely impact our results of operations.
 
We have from time to time received, and may in the future receive, communications alleging possible infringement of patents and other intellectual propertyIP rights. Furthermore,Competitors with whom we do not have patent cross license agreements may also develop technologies that are protected by patents and other IP rights and which may be unavailable to us or only made available on unfavorable terms and conditions. We may therefore become involved in costly litigation


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brought against us regarding patents, mask works, copyrights, trademarks or trade secrets. We are currently involved in patentseveral lawsuits, including litigation with SanDisk Corporation with respect to our Flash memory products and in litigation with Tessera, Inc. regarding packaging technologies.before the U.S. International Trade Commission. See “Item 8. Financial Information — Legal Proceedings.” In the event that the outcome of any litigation would be unfavorable to us, weSuch lawsuits may be required to obtain a license to the underlying intellectual property rights upon economically unfavorable terms and conditions, possibly pay damages for prior useand/or face an injunction, all of which, singly or in the aggregate, could have a material adverse effect on our resultsbusiness if we do not prevail. We may be forced to stop producing substantially all or some of operationsour products or to license the underlying technology upon economically unfavorable terms and abilityconditions or we may be required to compete.pay damages for the prior use of third party IPand/or face an injunction.
 
Finally, litigation could cost us financial and management resources necessary to enforce our patents and other intellectual propertyIP rights or to defend against third party intellectual property claims when we believe that the amounts requested for a license are unreasonable.
 
We may be faced with product liability or warranty claims.
Despite our corporate quality programs and commitment, our products may not in each case comply with specifications or customer requirements. Although our practice, in line with industry standards, is to contractually limit our liability to the repair, replacement or refund of defective products, warranty or product liability claims could result in significant expenses relating to compensation payments or other indemnification to maintain good customer relationships if a customer threatens to terminate or suspend our relationship pursuant to a defective product supplied by us. No assurance can be made that we will be successful in maintaining our relationships with customers with whom we incur quality problems, which could have a material adverse affect on our business. Furthermore, we could incur significant costs and liabilities if litigation occurs to defend against such claims and if damages are awarded against us. In addition, it is possible for one of our customers to recall a product containing one of our parts. Costs or payments we may make in connection with warranty claims or product recalls may adversely affect our results of operations. There is no guarantee that our insurance policies will be available or adequate to protect against such claims.
Some of our production processes and materials are environmentally sensitive, which could leadexpose us to increasedliability and increase our costs due to environmental regulations and laws or tobecause of damage to the environment.
 
We are subject to a variety ofmany environmental laws and regulations relating,wherever we operate that govern, among other things, to the use, storage, discharge and disposal of chemicals, gases and other hazardous substances used in our manufacturing processes, air emissions, waste water discharges, waste disposal, as well as the investigation and remediation of soil and ground water contamination. European Directive 2002/96/EC (“WEEE” Directive) imposes a “take back” obligation on manufacturers for the financing
A number of the collection, recovery and disposal of electrical and electronic equipment. Additionally, European Directive 2002/95/EC (“ROHS” Directive) banned the use of lead and some flame retardants in electronic components as of July 2006. Our activitiesenvironmental requirements in the EUEuropean Union, including some that have only recently come into force, affect our business. See “Item 4. Information on the Company — Environmental Matters.” These requirements are also subject topartly under revision by the European Directive 2003/87/EC establishing a scheme for greenhouse gas allowance trading,Union and to the applicable national implementing legislation. In addition, Regulation 1907/2006 of December 18, 2006 requires the registration,


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evaluation, authorization and restriction of a large number of chemicals (“REACH”). The REACH process started on June 1, 2007. The implementation of any such legislationtheir potential impacts cannot currently be determined in detail. Such regulations, however, could adversely affect our manufacturing costs or product sales by requiring us to acquire costly equipment, materials or greenhouse gas allowances, or to incur other significant expenses in adapting our manufacturing processes or waste and emission disposal processes. We are not in a position to quantify specific costs, in part because these costs are part of our business process. Furthermore, environmental claims or our failure to comply with present or future regulations could result in the assessment of damages or imposition of fines against us, suspension of production or a cessation of operations. As with other companies engaged in similar activities, any failure by us to control the use of, or adequately restrict the discharge of, chemicals or hazardous substances could subject us to future liabilities. Any specific liabilities we identify as probable would be reflected in our consolidated balance sheet. To date, we have not identified any such specific liabilities. Weliabilities and have therefore have not booked specific reserves for any specific environmental risks. See “Item 4. Information on the Company — Environmental Matters.”
 
Loss of key employees could hurt our competitive position.
 
As is common in the semiconductor industry, success depends to a significant extent upon our key senior executives and research and development,R&D, engineering, marketing, sales, manufacturing, support and other personnel. Our success also depends upon our ability to continue to attract, retain and motivate qualified personnel. The competition for such employees is intense, and the loss of the services of any of these key personnel without adequate replacement or the inability to attract new qualified personnel could have a material adverse effect on us.
 
We operate in many jurisdictions with highly complex and varied tax regimes. Changes in tax rules or the outcome of tax assessments and audits could cause a material adverse effect on our results.
 
We operate in many jurisdictions with highly complex and varied tax regimes. Changes in tax rules or the outcome of tax assessments and audits could have a material adverse effect on our results in any particular quarter. For example, in 2007, we had a tax benefit of $23 million, as compared to a tax benefit of $20 million in 2006. In 2007, it included $72 million of benefit related to the impairment on assets to be contributed into the planned disposal of the Flash Memories Group’s (“FMG”) assets held for sale. In 2006, we benefited from a favorable assessment of our tax assets and liabilities mainly due to a favorable outcome of a tax litigation in one of the jurisdictions in which we operate.


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Our tax rate is variable and depends on changes in the level of operating profits within various local jurisdictions and on changes in the applicable taxation rates of these jurisdictions, as well as changes in estimated tax provisions due to new events. We currently receive certain tax benefits in some countries, and these benefits may not be available in the future due to changes in the local jurisdictions. As a result, our effective tax rate could increase in the coming years.
 
In line with our strategic repositioning of our product portfolio, the purchaseacquisition or divestiture of businesses in different jurisdictions could materially affect our effective tax rate in future periods.
We evaluate our deferred tax asset position and the need for a valuation allowance on a regular basis. This assessment requires the exercise of judgment on the part of our management with respect to, among other things, benefits that could be realized from available tax strategies and future taxable income, as well as other positive and negative factors. The ultimate realization of deferred tax assets is dependent upon, among other things, our ability to generate future taxable income that is sufficient to utilize loss carry-forwards or tax credits before their expiration. The recorded amount of total deferred tax assets could be reduced, resulting in a decrease in our total assets and, consequently, in our shareholders’ equity, if our estimates of projected future taxable income and benefits from available tax strategies are reduced as a result of a change in management’s assessment or due to other factors, or if changes in current tax regulations are enacted that impose restrictions on the timing or extent of our ability to utilize tax loss and credit carry-forwards in the future. A change in the estimated amounts and the character of the future result may require additional valuation allowances, resulting in a negative impact on our income statement.
 
We are subject to the possibility of loss contingencies arising out of tax claims, assessment of uncertain tax positions and provisions for specifically identified income tax exposures. There are currently tax audits ongoing in certain of our jurisdictions. There can be no assurance that we will be successful in resolving suchpotential tax claims.claims that can arise from these audits. We have booked provisions on the basis of the best current understanding; however, we could be required to book additional provisions in future periods for amounts that cannot be assessed at this stage. Our failure to do soand/or the need to increase our provisions for such claims could have a material adverse effect on our financial position.
 
We are required to prepare Consolidated Financial Statements using both International Financial Reporting Standards (“IFRS”)IFRS in addition to our Consolidated Financial Statements prepared pursuant to Generally Accepted Accounting Principles in the United States (“U.S. GAAP”)GAAP and dual reporting may impair the clarity of our financial reporting.
 
We are incorporated in the Netherlands and our shares are listed on Euronext Paris and on the Borsa Italiana, and, consequently, we are subject to an EU regulation issued on September 29, 2003 requiring us to report our results of operations and Consolidated Financial Statements using IFRS (previously known as International Accounting Standards or “IAS”).IFRS. As fromof January 1, 20082009, we are also required to prepare a semi-annual set of accounts using IFRS reporting standards. We use U.S. GAAP as our primary set of reporting standards, as U.S. GAAP has been our reporting standard since our creation in 1987.standards. Applying U.S. GAAP in our financial reporting is designed to ensure the comparability of our results to those of our competitors, as well as the continuity of our reporting, thereby providing our investors with a clear understanding of our financial performance.
 
TheAs a result of the obligation to report our Consolidated Financial Statements under IFRS, requires us towe prepare our results of operations using two different sets of reporting standards, U.S. GAAP and IFRS, which are currently not consistent. Such dual reporting materially increases the complexity of our investor communications. The main potential areas of discrepancy concern capitalization and amortization of development expenses required under IFRS and the


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accounting for compound financial instruments. Our financial condition and results of operations reported in accordance with IFRS will differ from our financial condition and results of operations reported in accordance with U.S. GAAP, which could adversely affectgive rise to confusion in the market price of our common shares.marketplace.
 
Our reporting under two different accounting standards filed with the relevant regulatory authorities, also now in interim periods, could result in confusion if recipients of the information do not properly distinguish between the information reported using U.S. GAAP and the information reported using IFRS, particularly when viewing our profitability and operating margins under one or the other set of accounting standards. Given this risk, and the complexity of maintaining and reviewing two sets of accounts, we may considerare considering reporting primarily under IFRS at some point in the future to report primarily in IFRS.future.
 
If our internal control over financial reporting fails to meet the requirements of Section 404 of theSarbanes-Oxley Act, it may have a materially adverse effect on our stock price.
 
The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules that require us to include a management report assessing the effectiveness of our internal control over financial reporting in our annual report onForm 20-F. In addition, we must also include an attestation by our independent registered public accounting firm regarding the effectiveness of our internal control over financial reporting. We have successfully completed our Section 404 assessment and received the auditors’ attestation as of December 31, 2007.2009. However, in


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the future, if we fail to complete a favorable assessment from our management or to obtain ouran “unqualified” auditors’ attestation, we may be subject to regulatory sanctions or may suffer a loss of investor confidence in the reliability of our financial statements, which could lead to an adverse effect on our stock price.
 
Reduction in the amountThe lack of public funding available to us, changes in existing public funding programs or demands for repayment may increase our costs and impact our results of operations.
 
Like many other manufacturers operating in Europe, we benefit from governmental funding for research and developmentR&D expenses and industrialization costs (which include some of the costs incurred to bring prototype products to the production stage), as well as from incentive programs for the economic development of underdeveloped regions. Public funding may also be characterized by grantsand/or low-interest financing for capital investmentand/or tax credit investments. See “Item 4. Information on the Company — Public Funding.” We have entered into public funding agreements in France and Italy, which set forth the parameters for state support to us under selected programs. These funding agreements may require compliance with EU regulations and approval by EU authorities. We have also entered into the Nano 2012 funding program. See “Item 4. Information on the Company — Public Funding.”
Furthermore, we receive a material amount of R&D tax credits in France, which is directly linked to the amount spent for our R&D activities. In 2009, we booked $146 million, which reflected amounts relating to yearly activities.
 
We rely on receiving funds on a timely basis pursuant to the terms of the funding agreements. However, the funding of programs in France and Italy is subject to the annual appropriation of available resources and compatibility with the fiscal provisions of their annual budgets, which we do not control, as well as to our continuing compliance with all eligibility requirements. If we are unable to receive anticipated funding on a timely basis, or if existing government-funded programs were curtailed or discontinued, or if we were unable to fulfill our eligibility requirements, this could have a material adverse effect on our business, operating results and financial condition. There is no assurance that any alternative funding would be available, or that, if available, it could be provided in sufficient amounts or on similar terms.
 
The application for and implementation of such grants often involves compliance with extensive regulatory requirements including, in the case of subsidies to be granted within the EU, notification to the European Commission by the member state making the contemplated grant prior to disbursement and receipt of required EU approval. In addition, compliance with project-related ceilings on aggregate subsidies defined under EU law often involves highly complex economic evaluations. Furthermore, public funding arrangements are generally subject to annual andproject-by-project reviews and approvals. If we fail to meet applicable formal or other requirements, we may not be able to receive the relevant subsidies, which could have a material adverse effect on our results of operations. If we do not receive anticipated fundings,funding, this may lead us to curtail or discontinue existing projects, which may lead to further impairments. In addition, if we do not complete projects for which public funding has been approved, we may be required to repay any advances received for completed milestones, which may lead to a material adverse effect on our results of operations.
 
The interests of our controlling shareholders, which are in turn controlled respectively by the French and Italian governments, may conflict with investors’ interests.
 
We have been informed that as of December 31, 2007,2009, STMicroelectronics Holding II B.V. (“ST Holding II”), a wholly-owned subsidiary of STMicroelectronics Holding N.V. (“ST Holding”), owned 250,704,754 shares, or approximately 27.5%, of our issued common shares. ST Holding is therefore effectively in a position to control


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actions that require shareholder approval, including corporate actions, the election of our Supervisory Board and our Managing Board and the issuance of new shares or other securities.
 
We have also been informed that the shareholders’ agreement among ST Holding’s shareholders (the “STH Shareholders’ Agreement”), to which we are not a party, governs relations between our current indirect shareholders Areva Group (“Areva”), Cassa Depositi e Prestiti S.p.A. (“CDP”) and Finmeccanica S.p.A.Commissariat à l’Energie Atomique (“Finmeccanica”CEA”), each of which is ultimately controlled by the French or Italian government, seegovernment. See “Item 7. Major Shareholders and Related-PartyRelated Party Transactions — Major Shareholders.” The STH Shareholders’ Agreement includes provisions requiring the unanimous approval by shareholders of ST Holding before ST Holding can make any decision with respect to certain actions to be taken by us. Furthermore, as permitted by our Articles of Association, the Supervisory Board has specified selected actions by the Managing Board that require the approval of the Supervisory Board. See “Item 7. Major Shareholders and Related-PartyRelated Party Transactions — Major Shareholders.” These requirements for the prior approval of various actions to be taken by us and our subsidiaries may give rise to a conflict of interest between our interests and investors’ interests, on the one hand, and the interests of the individual shareholders approving such actions, on the other, and may affect the ability of our Managing Board to respond as


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may be necessary in the rapidly changing environment of the semiconductor industry. Our ability to issue new shares or other securities may be limited by the existing shareholders’ desire to maintain their proportionate shareholding at a certain minimum level and our ability to buy back shares may be limited by our existing shareholders due to a recently enacted Dutch law that may require shareholders that own more than 30% of our voting rights to launch a tender offer for our outstanding shares. Dutch law, however, requires members of our Supervisory Board to act independently in supervising our management and to comply with applicable Dutch and non-Dutch corporate governance standards.
 
Our shareholder structure and our preference shares may deter a change of control.
 
On November 27, 2006, our Supervisory Board decided to authorize us to enter intoWe have an option agreement with an independent foundation, Stichting ContinuïteitContinuiteit ST (the “Stichting”), and to terminate a substantially similar option agreement dated May 31, 1999, as amended, between us and ST Holding II. Our Managing Board and our Supervisory Board, along with the board of the Stichting, have declared that they are jointly of the opinion that the Stichting is independent of our Company and our major shareholders. Our Supervisory Board approved the new option agreement to reflect changes in Dutch legal requirements, not in response to any hostile takeover attempt. On February 7, 2007, the May 31, 1999 option agreement, as amended, was terminated by mutual consent by ST Holding II and us and the new option agreementwhereby we concluded with the Stichting became effective on the same date. The new option agreement provides for the issuance of up tocould issue a maximum of 540,000,000 preference shares the same number as the May 31, 1999 option agreement, as amended. The Stichting would have the option, which it shall exercise in its sole discretion, to take up the preference shares. The preference shares would be issuable in the event of actions considered hostile by our Managing Board and Supervisory Board, such as a creeping acquisition or an unsolicited offer for our common shares, which are unsupported by our Managing Board and Supervisory Board and which the board of the Stichting determines would be contrary to the interests of our Company, our shareholders and our other stakeholders. If the Stichting exercises its call optionSee “Item 7. Major Shareholders and acquires preference shares, it must pay at least 25% of the par value of such preference shares. The preference shares may remain outstanding for no longer than two years.Related Party Transactions — Major Shareholders — Shareholders’ Agreements — Preference Shares.”
 
No preference shares have been issued to date. The effect of the preference shares may be to deter potential acquirers from effecting an unsolicited acquisition resulting in a change of control or otherwise taking actions considered hostile by our Managing Board and Supervisory Board. In addition, any issuance of additional capital within the limits of our authorized share capital, as approved by our shareholders, is subject to the requirements of our Articles of Association, see “Item 10. Additional Information — Memorandum and Articles of Association — Share Capital as of December 31, 20072009 — Issuance of Shares, Preemption Rights and Preference Shares (Article 4).”
 
Our direct or indirect shareholders may sell our existing common shares or issue financial instruments exchangeable into our common shares at any time. In addition, substantial sales by us of new common shares or convertible bonds could cause our common share price to drop significantly.
 
The STH Shareholders’ Agreement, to which we are not a party, between respectively FT1CI, our French Shareholder controlled by Areva and Cassa Depositi e PrestitiCEA, and Finmeccanica,CDP, our Italian shareholder, permits our respective French and Italian indirect shareholders to cause ST Holding to dispose of its stake in us at its sole discretion at any time from their current level, and to reduce the current level of their respective indirect interests in our common shares. We have recently been informed that FT1CI, Areva, Cassa Depositi e Prestiti have agreed to modify the STH Shareholders’ Agreement. The details of the STH Shareholders’ Agreement, as declaredreported by ST Holding II, are further explained in “Item 7. Major Shareholders and Related-PartyRelated Party Transactions — Major Shareholders.” Disposals of our shares by the parties to the STH Shareholders’ Agreement can be made by


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way of the issuance of financial instruments exchangeable for our shares, equity swaps, structured finance transactions or sales of our shares. An announcement with respect to one or more of such dispositions could be made at any time without our advance knowledge.
 
In 2008, Finmeccanica sold approximately 26 million of our shares representing approximately 2.85% of our share capital to FT1CI, and, hence, CEA became a shareholder of FT1CI and is a party to the STH Shareholders’ Agreement. In addition, in December 2009, Finmeccanica sold all of its remaining 33,707,436 of our shares, held indirectly through ST Holding, to CDP and, as a result, is no longer a party to the STH Shareholders’ Agreement.
Finmeccanica Finance S.A. (“Finmeccanica Finance”), a subsidiary of Finmeccanica, has issued €501 million aggregate principal amount of exchangeable notes, exchangeable into up to 20 million of our existing common shares due 2010 (the “Finmeccanica Notes”). The Finmeccanica Notes have been exchangeable at thehas entered into a call option of the holder into our existing common shares since January 2, 2004. In September 2005, France Telecom caused the sale of approximately 26 million of our common shares pursuant to the terms ofarrangement with Deutsche Bank for a convertible bond issued by France Telecom. In December 2005, Finmeccanica caused the sale of approximately 1.5 million of our common shares. On February 27, 2008 Finmeccanica announced that it would sell approximately 26 millioncorresponding amount of our shares representing approximately 2,85%in the event the notes become exchangeable. As of December 31, 2009, none of the Finmeccanica Notes had been exchanged for our share capital to FT1CI.common shares.
 
Further sales of our common shares or issue of bonds exchangeable into our common shares or any announcements concerning a potential sale by ST Holding, FT1CI, Areva, CDPCEA or Finmeccanica,CDP, could materially impact the market price of our common shares. The timing and size of any future share or exchangeable bond offering by ST Holding, FT1CI, Areva, CDPCEA or FinmeccanicaCDP would depend upon market conditions as well as a variety of factors.
 
Because we are a Dutch company subject to the corporate law of the Netherlands, U.S. investors might have more difficulty protecting their interests in a court of law or otherwise than if we were a U.S. company.
 
Our corporate affairs are governed by our Articles of Association and by the laws governing corporations incorporated in the Netherlands. The corporate affairs of each of our consolidated subsidiaries are governed by the Articles of Association and by the laws governing such corporations in the jurisdiction in which such consolidated subsidiary is incorporated. The rights of the investors and the responsibilities of members of our Supervisory Board


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and Managing Board under Dutch law are not as clearly established as under the rules of some U.S. jurisdictions. Therefore, U.S. investors may have more difficulty in protecting their interests in the face of actions by our management, members of our Supervisory Board or our controlling shareholders than U.S. investors would have if we were incorporated in the United States.
 
Our executive offices and a substantial portion of our assets are located outside the United States. In addition, ST Holding II and most members of our Managing and Supervisory Boards are residents of jurisdictions other than the United States and Canada. As a result, it may be difficult or impossible for shareholders to effect service within the United States or Canada upon us, ST Holding II, or members of our Managing or Supervisory Boards. It may also be difficult or impossible for shareholders to enforce outside the United States or Canada judgments obtained against such persons in U.S. or Canadian courts, or to enforce in U.S. or Canadian courts judgments obtained against such persons in courts in jurisdictions outside the United States or Canada. This could be true in any legal action, including actions predicated upon the civil liability provisions of U.S. securities laws. In addition, it may be difficult or impossible for shareholders to enforce, in original actions brought in courts in jurisdictions located outside the United States, rights predicated upon U.S. securities laws.
 
We have been advised by our Dutch counsel, De Brauw Blackstone Westbroek N.V., that the United States and the Netherlands do not currently have a treaty providing for reciprocal recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters. As a consequence, a final judgment for the payment of money rendered by any federal or state court in the United States based on civil liability, whether or not predicated solely upon the federal securities laws of the United States, will not be enforceable in the Netherlands. However, if the party in whose favor such final judgment is rendered brings a new suit in a competent court in the Netherlands, such party may submit to the Netherlands court the final judgment that has been rendered in the United States. If the Netherlands court finds that the jurisdiction of the federal or state court in the United States has been based on grounds that are internationally acceptable and that proper legal procedures have been observed, the court in the Netherlands would, under current practice, give binding effect to the final judgment that has been rendered in the United States unless such judgment contravenescontradicts the Netherlands’ public policy.
 
Removal of our common shares from the CAC 40 on Euronext, Paris, the S&P/FTSE MIB on the Borsa Italiana or the Philadelphia Stock ExchangePHLX Semiconductor Sector Index (“SOX”) could cause the market price of our common shares to drop significantly.
 
Our common shares have been included in the CAC 40 index on Euronext Paris since November 12, 1997; the FTSE MIB index (which replaced the S&P/MIB on the Borsa Italiana,June 1, 2009), or Italian Stock Exchange, since March 18, 2002; and the Philadelphia Stock Exchange Semiconductor Index (“SOX”)SOX since June 23, 2003. However, our common shares could be removed from the CAC 40, the S&P/FTSE MIB or the SOX at any time if, for a sustained period of time, our market capitalization were to fall below the required thresholds for the respective indices or our shares were to trade below a certain price, or in the case of a delisting of our shares from one or more of the stock exchanges where we are currently listed or if we were to decide to pursue a delisting on one of the three stock exchanges on which we maintain a listing as part of the measures we may from time to time consider to simplify our administrative and anyoverhead expenses. Certain investors will only invest funds in companies that are included in one of these indexes. Any such removal or the announcement thereof could cause the market price of our common shares to drop significantly.


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Item 4.  Information on the Company
 
History and Development of the Company
 
STMicroelectronics N.V. was formed and incorporated in 1987 and resulted from the combination of the semiconductor business of SGS Microelettronica (then owned by Società Finanziaria Telefonica (S.T.E.T.), an Italian corporation) and the non-military business of Thomson Semiconducteurs (then owned by the former Thomson-CSF, now Thales, a French corporation). We completed our initial public offering in December 1994 with simultaneous listings on Euronext and the New York Stock Exchange (“NYSE”). In 1998, we listed our shares on the Borsa Italiana. Until 1998, we operated as SGS-Thomson Microelectronics N.V. Our length of life is indefinite. We are organized under the laws of the Netherlands. We have our corporate legal seat in Amsterdam, the Netherlands, and our head offices at WTC Schiphol Airport, Schiphol Boulevard 265, 1118 BH Schiphol Airport, Amsterdam, the Netherlands. Our telephone number there is +31-20-654-3210. Our headquarters and operational offices are located at 39 Chemin du Champ des Filles, 1228 Plan-Les-Ouates, Geneva, Switzerland. Our main telephone number there is +41-22-929-2929. Our agent for service of process in the United States related to our registration under the U.S. Securities Exchange Act of 1934, as amended, is STMicroelectronics, Inc.Corporation Service Company (CSC), 1310 Electronics Drive, Carrollton, Texas,75006-5039 and the main telephone number there is +1-972-466-6000.80 State Street, Albany, New York, 12207. Our operations are also conducted through our various subsidiaries, which are


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organized and operated according to the laws of their country of incorporation, and consolidated by STMicroelectronics N.V.
 
We completed our initial public offering in December 1994 with simultaneous listings on Euronext Paris and the New York Stock Exchange (“NYSE”). In 1998, we listed our shares on the Borsa Italiana.
Business Overview
 
We are a global independent semiconductor company that designs, develops, manufactures and markets a broad range of semiconductor products used in a wide variety of microelectronic applications, including automotive products, computer peripherals, telecommunications systems, consumer products, industrial automation and control systems. According to provisional industry data published by iSuppli, we have been ranked the world’s fifth largest semiconductor company based on forecasted 2007 total market sales and we held leading positions in sales of Analog Products and Application Specific Integrated Circuits (or “ASICs”). Based on provisional 2007 results published by iSuppli, we believe we were number one in industrial products, number two in analog products, number three in wireless and automotive electronics, and number four in NOR Flash. Based on most recent industry results, we also believe we ranked as a leading supplier of semiconductors in 2007 for set-top boxes, power management devices and for the inkjet printer market. Our top 20major customers include Alcatel-Lucent,Apple, Bosch, Cisco, Conti, Delphi,Continental, Delta, Denso, Ericsson, Hewlett-Packard, Huawei, LG Electronics, Marelli, Motorola, Nintendo, Nokia, Pace, Philips, Pioneer,Research in Motion, Samsung, Seagate, Sharp, Siemens, ThomsonSony Ericsson, Technicolor and Western Digital. We also sell our products through global distributors and retailers, including Arrow Electronics, Avnet, BSI Semiconductor, Future Electronics,Willas-Array, Wintech and Yosun.
 
The semiconductor industry has historically been a cyclical one and we have responded through emphasizing balance in our product portfolio, in the applications we serve, and in the regional markets we address. Consequently, from 1994 through 2007, our revenues grew at a compounded annual growth rate of 10.8% compared to 7.3% for the industry as a whole.
 
We offer a broad and diversified product portfolio and develop products for a wide range of market applications to reduce our dependence on any single product, application or end market. Within our diversified portfolio, we have focused on developing products that leverage our technological strengths in creating customized, system-level solutions with high-growth digital and mixed-signal content. Our product families includeare comprised of differentiated application-specific products (which we define as being our dedicated analog, mixed-signal and digital ASICapplication-specific standard products (“ASICs”) and Application Specific Standard Productsapplication-specific standard products (“ASSP”) offerings and semicustomsemi-custom devices) that we organized in 2009 under our Application Specific Product GroupsAutomotive, Consumer, Computer and Communication Infrastructure (“ASG”ACCI”); and Wireless segment (“Wireless”) and power devices, microcontrollers, discrete products, special nonvolatile memory and Smartcard products organized under our Industrial and MultisegmentMulti-segment Sector (“IMS”) and Flash Memories Group (“FMG”). Our ASG products, which are generally less vulnerable to market cycles than standard commodity products, accounted for 54.4% of our net revenues in 2007. Our IMS product accounted for 31.4% of our net revenues in 2007, while sales of our FMG products accounted for 13.6% of our net revenues in 2007.
 
Our products are manufactured and designed using a broad range of manufacturing processes and proprietary design methods. We use all of the prevalent function-oriented process technologies, including CMOS, bipolar and nonvolatile memory technologies. In addition, by combining basic processes, we have developed advanced systems-oriented technologies that enable us to produce differentiated and application-specific products, including bipolar CMOS technologies (“BiCMOS”) for mixed-signal applications, and diffused metalmetal-on silicon oxide semiconductor (“DMOS”) technology and Bipolar,bipolar, CMOS and DMOS (“BCD technologies”) for intelligent power applications


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and embedded memory technologies. This broad technology portfolio, a cornerstone of our strategy for many years, enables us to meet the increasing demand for SoC andSystem-in-Package (“SiP”) solutions. Complementing this depth and diversity of process and design technology is our broad intellectual propertyIP portfolio that we also use to enter into importantbroad patent cross-licensing agreements with other major semiconductor companies.
Effective January 1, 2007, to meet the evolving requirements of the market together with the pursuit of a strategic repositioning in Flash memory, we reorganized our product segment groups into ASG, IMS and FMG. Since this date, we report our sales and operating income in three segments:
• ASG is comprised of the Mobile, Multimedia & Communications Group (“MMC”), the Home Entertainment & Displays Group (“HED”), the Automotive Product Group (“APG”) and the Computer Peripherals Group (“CPG”);
• IMS is comprised of the Analog, Micro-Electronic-Mechanical Systems (“MEMS”), and Power Group (“AMP”) and the Microcontrollers, Memories and Smartcards Group (“MMS”); and
• the FMG incorporates all of the Flash memory operations (both NOR and NAND), including technology R&D, all product related activities, front-end and back-end manufacturing, marketing and sales worldwide.
 
Our principal investment and resource allocation decisions in the semiconductor business area are for expenditures on technology research and developmentR&D as well as capital investments in front-end and back-end manufacturing facilities, which are planned at the corporate level; therefore, our product segments share common research and developmentR&D for process technology and manufacturing capacity for most of their products. However, in view of the contemplated FMG business disposal, FMG has incorporated since January 1, 2007 all of the Flash memory operations (both NOR and NAND), including technology R&D, all product related activities, front-end and back-end manufacturing, marketing and sales worldwide.
 
InFor information on our segments and product lines, see “Item 5. Operating and Financial Review and Prospects — Results of Operations — Segment Information.”
Results of Operations
For our 2009 Results of Operations, see “Item 5. Operating and Financial Review and Prospects — Results of Operations — Segment Information.”
Strategy
We aim to become the past three years,undisputed leader in multimedia convergence and power applications, dedicating significant resources to product innovation and increasingly becoming a solution provider in order to drive higher value and increase our market share in the markets we have pursued various initiativesserve. As a worldwide semiconductor leader, we are well positioned to reshapeimplement our company by (i) establishingstrategy after having accomplished two major strategic transformations, namely a less capital-intensive business model; (ii) repositioningrefocus of our product portfolio in orderand our move towards being an asset lighter company. In addition, our strategy to improve financial returns; (iii) improving our manufacturing competitiveness through the restructuring of our production capacity with a view to increased overall efficiencies; (iv) improving our research and development effectiveness through a program focusing on our keyenhance market share by developing innovative products and redeploymenttargeting new key customers is gaining momentum. Our strong capital structure enables us to operate as a long-term, viable supplier of certain resources with the aim to improve time-to-market; (v) promoting sales expansion for mass market applications and new major key accounts with a special focus on the Chinese and Japanese markets; and (vi) changing and reorganizing our management team.semiconductor products.


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Results of Operations
The tables below set forth information on our net revenues by product group segment and by geographic region:
             
  Year Ended December 31, 
  2007  2006  2005 
  (In millions, except percentages) 
 
Net Revenues by Product Segment
            
Application Specific Groups (ASG) $5,439  $5,395  $4,991 
Industrial and Multisegment Sector (IMS)  3,138   2,842   2,482 
Flash Memories Group (FMG)  1,364   1,570   1,351 
Others(1)  60   47   58 
             
Total $10,001  $9,854  $8,882 
             
Net Revenues by Location of Order Shipment(2)
            
Europe $3,159  $3,073  $2,789 
North America(3)  1,176   1,232   1,281 
Asia Pacific(4)  1,874   2,084   1,860 
Greater China(4)  2,750   2,552   2,203 
Japan  475   400   307 
Emerging Markets(3)(5)  567   513   442 
             
Total $10,001  $9,854  $8,882 
             
Percentage of Net Revenues by Product Segment
            
Application Specific Groups (ASG)  54.4%  54.8%  56.2%
Industrial and Multisegment Sector (IMS)  31.4   28.8   27.9 
Flash Memories Group (FMG)  13.6   15.9   15.2 
Others(1)  0.6   0.5   0.7 
             
Total  100%  100.0%  100.0%
             
Percentage of Net Revenues by Location of Order Shipment(2)
            
Europe  31.6%  31.2%  31.4%
North America(3)  11.8   12.5   14.4 
Asia Pacific(4)  18.7   21.1   20.9 
Greater China(4)  27.5   25.9   24.8 
Japan  4.7   4.1   3.5 
Emerging Markets(3)(5)  5.7   5.2   5.0 
             
Total
  100.0%  100.0%  100.0%
             
(1)Includes revenues from sales of Subsystems and other revenues not allocated to product segments.
(2)Net revenues by location of order shipment are classified by location of customer invoiced. For example, products ordered byU.S.-based companies to be invoiced to Asia Pacific affiliates are classified as Asia Pacific revenues.
(3)As of July 2, 2006, the region “North America” includes Mexico which was part of Emerging Markets in prior periods. Amounts have been reclassified to reflect this change.
(4)As of January 1, 2006, we created a new region, “Greater China” to focus exclusively on our operations in China, Hong Kong and Taiwan. Net revenues for Asia Pacific for prior periods were restated according to the new perimeter.
(5)Emerging Markets includes markets such as India, Latin America (excluding Mexico), the Middle East and Africa, Europe (non-EU excluding Bulgaria and Romania and non-EFTA) and Russia.


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Strategy
The semiconductor industry, is undergoingsteadily recovering from the difficult market conditions experienced from 2008 through the second half of 2009, continues to undergo several significant structural changes characterized by:
 
 • the changing long-term structural growth of the overall market for semiconductor products, which has moved from double-digit average growth rate to single-digit average growth rate over the last several years;
 
 • the strong development of new emerging applications in areas such as wireless communications, solid-state storage, digital TV, and video products and games;games as well as for energy saving and medical applications;
 
 • the increasing importance of the Asia Pacific region, particularly in China, Taiwan and other emerging countries, which representsrepresent the fastest growing regional markets;
 
 • the importance of convergence between wireless, consumer and computer applications, which drives customer demand to seek new system-level, turnkey solutions from semiconductor suppliers;
 
 • the evolution of the customer base from original equipment manufacturers (“OEM”) to a mix of OEM, electronic manufacturing service providers (“EMS”) and original design manufacturers (“ODM”);
 
 • the expansion of available manufacturing capacity through third-party providers;
• the evolution of advanced process development R&D partnerships; and
 
 • the recent consolidation process, and increased participation of private equity firms, which may lead to further strategic repositioningsrepositioning and reorganization amongst industry players.
 
Our strategy within this challenging environment is designed to focus on the following complementary key elements:
 
Broad, balanced market exposure.  We offer a diversified product portfolio and develop products for a wide range of market applications using a variety of technologies, thereby reducing our dependence on any single product, application or end market. Within our diversified portfolio, we have focused on developing products that leverage our technological strengths in creating customized, system-level solutions for high-growth digital, advanced analog and mixed-signal applications. We target five key markets comprised of: (i) communications, primarily wireless and portable multimedia;multi-media; (ii) computer peripherals, including data storage and printers; (iii) digital consumer, including set-top boxes, DVDs, digital TVs digital cameras and digital audio; (iv) automotive, including engine, body and safety, car radio, car multimedia and telematics;infotainment; and (v) industrial and multisegmentmulti-segment products, including MEMS, microcontrollers, power supply, motor-control, lighting, metering, banking and Smartcard.
 
Product innovation.  We aim to be leaders in multimediamulti-media convergence and power applications. In order to serve these segments, our plan is to maintain and further establish existing leadership positions for (i) platforms and chipset solutions for digital consumer, mobile handsets and car navigation;multimedia applications; and (ii) power applications, which are driving system solutions for customer specific applications, as well as a wide client base in the field of industrial applications, motor control, factory automation, lighting, power supply and automotive, all of which require less research and development effort and manufacturing capital intensity than more advanced and complex application-specific devices.
We also dedicate significant resources to new product development.applications. We have identified our key product offerings in each of the targeted market segmentsknowledge, partners and have concentrated our R&Dfinancial resources to develop leading-edgenew, leading edge products, for each. Examples include: digital-base bandsuch as cellular modems and multi-mediaapplication processor solutions for wireless, MEMS, digital consumer products focused on set-top boxes and digital TVs, SoC offerings in data storage and system-oriented products for the multisegmentmulti-segment sector. We are also targeting new end markets, such as medical and energy saving applications.
Finally, we have decided to strategically reposition our participation in the Flash memory business in order to achieve the appropriate economies of scale which are demanded in this competitive segment, which will also result in reducing our exposure to the capital intensity of the industry.
 
Customer-based initiatives.  There are threeWe have a strategy based on four tenets, to our sales strategy.which we believe will help us gain market share. First, we work with our key customers to identify evolving needs and new applications andin order to develop innovative products and product features. We have formal alliances with certain strategic customers that allow us and our customers (with whom we jointly share certain product developments) to exchange information and which give our customers access to our process technologies and manufacturing infrastructure. We have formed alliances with customers including Alcatel-Lucent, Bosch, Hewlett-Packard, Marelli, Nokia, Nortel, Pioneer, Seagate, Continental AG, Thomson and Western Digital. Our strategic alliances have been historically a major growth driver for us. In 2005, 2006 and 2007, revenues from strategic customer alliances accounted for approximately 44%, 41% and 40% respectively of our net revenues. Secondly, we are targeting new major key accounts, where we can leverage our position as a supplier of application-specific products with a broad range product portfolio to better address the requirements of large users of semiconductor products with whom our penetrationmarket share has been historically been quite low. Finally,Thirdly, we have


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targeted the mass market, or those customers outside of our traditional top 50 customers, who require system-level solutions for multiple market segments. In addition,Finally, we have focused on two regions as key ingredients in our future sales growth,growth. The first is Greater China and South Asia and the second is Japan where weand Korea. We have recently launched newimportant marketing initiatives.initiatives in both regions.
 
Global integrated manufacturing infrastructure.  We have a diversified, leading-edge manufacturing infrastructure, comprising front-end and back-end facilities, capable of producing silicon wafers using our broad process technology portfolio, including our CMOS, BiCMOS and BCD technologies as well as our discretesdiscrete technologies. Assembling, testing and packaging of our semiconductor products take place in our large and modern back-end facilities, which generally are located in low-cost areas. WeIn order to have also developedadequate flexibility, we continue to maintain relationships with outside contractors for foundry and back-end services.services and plan to, over time, increase our outsourcing levels.


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Reduced asset intensity.  While confirming our mission to remain an integrated device manufacturing company, and in conjunction with our decision to pursue the strategic repositioning of our Flash memories to meet the requirements of the market,product portfolio, we have recently decided to reduce our capital intensity in order to optimize opportunities between internal and external front-end production, reduce our dependence on market cycles that impact the loading of our fabs, and decrease the burdenimpact of depreciation on our financial performance. We have been able to reduce thecapex-to-sales ratio from a historic average of 26% of sales during the period of 1995 through 2004, to 11.4%approximately 5.3% of sales in 2007, with a target at about 10% of sales in 2008.2009.
 
Research and development partnerships.(“R&D”) leadership.  The semiconductor industry is increasingly characterized by higher costs and technological risks involved in the research and developmentR&D of state-of-the-art processes.leading edge CMOS process development. These higher costs and technological risks have driven us to enter into cooperative partnerships, in particular for the development of basic CMOS technology: specifically, following the decisiontechnology. We are a member of ISDA, a technology alliance led by IBM with GlobalFoundries, Freescale, SemiconductorInfineon, NEC, Samsung and NXP SemiconductorsToshiba to terminate their participation in the Crolles2 Alliance for the development ofdevelop the CMOS process technology at the end of December 2007, we reached an agreement with IBMfor32/28-nm and 22/20-nm nodes. Furthermore, in order to collaborate on the development of CMOSmaintain our differentiation capabilities through process technology for 32-nm and 22-nm nodes. We remain convinced that the shared R&D business development model contributes to the fast acceleration of semiconductor process technology development, and we therefore remain committed to our strategy of our alliances to reinforce cooperation in the area of technology development. Additionally, we maintain our commitment to develop proprietary derivatives from advanced CMOS technology. Furthermore,leadership, we are continuing our development in theof proprietary derivatives of CMOS process technologies in order to maintain our leadership inand of Smart Power, analog, discretes, MEMS and mixed signal processes.processes, for which R&D costs are significantly lower than for CMOS.
 
Integrated presence in key regional markets.  We have sought to develop a competitive advantage by building an integrated presence in each of the world’s economic zones that we target: Europe, Asia, China and America. An integrated presence means having design andproduct development, sales and marketing capabilities in each region, in order to ensure that we are well positioned to anticipate and respond to our customers’ business requirements. We also have major front-end manufacturing facilities in the U.S., Europe and Asia. Our more labor-intensive back-end facilities are located in Malaysia, Malta,China, Philippines, Singapore, Morocco Singapore and China,Malta, enabling us to take advantage of more favorable production cost structures, particularly lower labor costs. Major design centers and local sales and marketing groups are within close proximity of key customers in each region, which we believe enhances our ability to maintain strong relationships with our customers.
 
Product quality excellence.  We aim to develop the quality excellence of our products and in the various applications we serve and we have launched a company-wide Product Quality Awareness program built around a three-pronged approach: (i) the improvement of our full product cycle involving robust design and manufacturing, improved detection of potential defects, and better anticipation of failures through improved risk assessment, particularly in the areas of product and process changes; (ii) improved responsiveness to customer demands; and (iii) ever increasing focus on quality and discipline in execution.
 
Sustainable Excellence and Compliance.  In 2007, we launched a program focusing onWe are committed to sustainable excellence and compliance. Ethics training deployed through all levels ofWe conduct our organizations arebusiness based on our “Principles for Sustainable Excellence” (“PSE”) which require us to integrate and executeare focused on following the highest ethical standards, empowering our people and striving for quality and customer satisfaction, while creating value for all of our business activities, focusing on our employees, customers, shareholders and global business partners. Further, we introduced a process to enable our employees to report matters relating to ethics violations through a confidential reporting line and we formed an Ethics Committee, whose mandate is to provide advice to management and employees about our Principles for Sustainable Excellence and other ethical issues. We also created the position of Chief Compliance Officer in December 2007.
 
Return on capital employed.Creating Shareholder Value.  We remain focused on providingcreating value for our shareholders, with value creation, specifically measuredwhich we measure in terms of return on net assets in excess of our weighted average cost of capital.


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Products and Technology
 
We design, develop, manufacture and market a broad range of products used in a wide variety of microelectronic applications, including telecommunications systems, computer systems, consumer goods, automotive products and industrial automation and control systems. Our products include discretes, memories andmicrocontrollers, Smartcard products, standard commodity components, ASICs (full custom devices and semicustomsemi-custom devices) and ASSPs for analog, digital, and mixed-signal applications. Historically, we have not produced dynamic random access memory (“DRAMs”) or x86 microprocessors, despite seeking to develop or acquire the necessary IP to use them as components in our SoC solutions.
 
In 2007,2009, we ran our business along product lines and managed our revenues and internal operating income performance based on the following product segments:
 
 • ASG;Automotive, Consumer, Computer and Communication Infrastructure (“ACCI”);
 
 • IMS;Industrial and Multi segment Sector (“IMS”); and
 
 • FMG.Wireless.
 
We also design, develop, manufacture and market subsystems and modules for a wide variety of products in the telecommunications, automotive and industrial markets in our Subsystems division. Based on its immateriality, we do not report information separately for Subsystems. For a description of the main categories of products soldand/or services performed for each of the last three fiscal years, see Note 27 to our Consolidated Financial Statements.


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Application Specific Product GroupsACCI
 
The Application Specific Product Groups (“ASG”)ACCI is responsible for the design, development and manufacture of application-specific products as well as mixed analog/digital semicustom-devices, using advanced bipolar, CMOS, BiCMOS mixed-signal andsmart power technologies. The businesses in the ASGACCI offer complete system solutions to customers in several application markets. All products are ASSPs, full-custom or semicustomsemi-custom devices that may also include digital signal processor (“DSP”) and microcontroller cores. The businesses in the ASGACCI particularly emphasize dedicated Integrated Circuits (“ICs”) for automotive, consumer, computer peripherals, consumertelecommunications infrastructure and certain industrial application segments, as well as for mobile and fixed communication, computing and networking application segments.
 
Our businesses in the ASGACCI work closely with customers to develop application-specific products using our technologies, intellectual property,IP, and manufacturing capabilities. The breadth of our customer and application base provides us with a better source of stability in the cyclical semiconductor market.
 
The ASGACCI is comprised of fourthree major product lines — Mobile, Multimedia & Communications Group (“MMC’) Home Entertainment and Displays Group (“HED”), Computer Peripherals Group (“CPG”), and our Automotive Products Group (“APG”); Computer and Communication Infrastructure (“CCI”); and Home Entertainment & Displays (“HED”). Furthermore, we also operate an imaging business with a product line called Imaging.
 
Mobile, Multimedia and Communications Group
This product line encompasses our largest application segment: telecommunications, and contains four divisions, serving telecommunications products.
(i) Wireless Multimedia Division.  We focus our product offerings on mobile handsets serving several major OEMs, with a combination of application specific ICs as well as a growing capability in our platform offering. In this market we are strategically positioned in energy management, audio coding and decoding functions (“CODEC”) and radio frequency ICs. We estimate that we ship over 30%, by volume, of the mobile-phone industry’s primary energy-management devices and audio ICs. We are transitioning from ICs to modular solutions in the field of radio frequency and energy management for 3G handsets. In December 2006, we announced a major design win for an ASIC solution for use in 3G/3.5G digital basebands at Ericsson Mobile Platforms. This award represents a significant new product category for us. Furthering our presence in the digital baseband field, in November 2007 we acquired 185 design engineers and certain intellectual property in the wireless field from Nokia, as part of our multifaceted agreement related to 3G chipset development for production beginning in 2010. We also have developed a product offering in the application processor segment known as the “Nomadik” family, addressing the market for multimedia application processor chips. These products are designed for smart- and feature-based mobile phones, portable wireless products and other applications including automotive entertainment and navigation, and digital consumer products, and the chips are being sampled by a wide range of potential customers. We have design wins at Nokia, Samsung and LG.
(ii) Imaging Division.  We focus on the wireless handset image-sensor market. We are in production of CMOS-based camera modules and processors forlow-and-high density pixel resolutions, which also meet the auto


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focus, advanced fixed focus and miniaturization requirements of this market. In certain situations, we will also sell leading-edge sensors. We have cumulatively shipped hundreds of millions of CMOS camera-phone solutions since entering this market in 2003. We believe that we are one of the leading camera module providers in 2007.
(iii) Connectivity Division.  To respond to the market need for increased functionality of handsets, we created the Connectivity Division to address wireless LAN (“WLAN”), Bluetooth and connectivity requirements. Our product offerings include WLAN and Bluetooth and Bluetooth/FM radio combination chips designed for low power consumption and a small form factor. We have multiple design wins and are in volume production for several customers in Asia and Europe for our products. In particular, we are manufacturing in volume our single-chip WLAN, Bluetooth and combination ICs for several customers, including a tier-one cell phone manufacturer. Our next generation of ICs increase combination chip offerings with single-die multi-function capability in 65-nm.
(iv) Communications Infrastructure Division.  This division provides solutions for the wireless and wireline infrastructure segments Our wireline telecommunications products, both ASIC and ASSP, are used in telephone sets, modems, subscriber line interface cards (“SLICs”) for digital central office switching equipment and the high-speed electronic and optical communications networks. In the wireless field we focus on ASIC market due to our many years of experience in the fields of digital baseband chip, radio frequency and mixed-signal products, having recently closed our design activity in the wireless infrastructure ASSP market.
Home Entertainment and Displays Group
Our Home Entertainment Group (“HED”) addresses product requirements for the digital consumer application market and has four divisions.
(i) Home Video Division.  This division focuses on products for digital retail, satellite, cable and IPTV set-top box products and digital television offerings. We continue to expand our product offerings and customer base by introducing solutions for the set-top box market with features such as web-browsing, digital video recording and time-shifting capabilities. In 2007, we further reinforced our historical market leadership in set-top box back-end decoders with the introduction of the STi710x series of products, the latest member of our OMEGA family of set-top box decoder solutions. This 90-nm family of single-chip SoC devices address the fast growing high-definition market, performs at an advanced speed and has enhanced graphics and security features as well as integrated DVR capability, while retaining compatibility with our earlier products. We continue to strengthen our product offerings by addressing software solutions supporting multiple codes, including DVB-MHP (Java) and Microsoft Windows Media based systems.
Our latest product, the STi7109, is our second-generation H.264 high-definition TV (“HDTV”) AVC and VC-1 decoder. Building on the success of the STi710x, the world’s first single-chip AVC and MPEG-2 decoder, the STi7109 adds VC-1 decoding, improved security, connectivity features, and support for emerging DVD formats and security standards. These products are being deployed for satellite, IPTV, and terrestrial broadcast by several operators, including Canal+, France Telecom and Telecom Italia. The successor products, the STi7111 and the STi7200, both single-chip dual-decode devices in 65-nm technology, are now being sampled by customers.
We address the digital television markets with a wide range of highly integrated ASSPs and application-specific microcontrollers. Significant numbers of televisions integrating digital terrestrial capability using the STi55xx family as digital plug-in solutions have been sold, primarily in Europe. We acquired Genesis Microchip on January 17, 2008 and will integrate the company’s intellectual property, products and personnel into this division and the Home Display Division in 2008. We expect to significantly improve our integrated television product offering as a result of this integration.
(ii) Interactive System Solutions Division.  We offer customers and partners the capability to jointly develop highly integrated solutions for their consumer products. We utilize a broad and proven base of expertise, advanced technologies and hardware/software intellectual property to providebest-in-class differentiated products for a select base of customers and markets.
(iii) Home Display Division.  This division offers products aimed at the analog TV market, switches and sound processors as well as CRT monitors. Our products cover driver chips for the flat-panel industry and CRT applications. Our product development is focused mainly on driver chips for various kinds of flat-panel display technologies used in small and large LCDs, having curtailed our efforts in drivers for Plasma and small screen applications in 2007. These products use proprietary technologies fitting the various electrical parameters required by those market segments, ranging from low to very high voltages and currents and from junction to oxide isolation (SOI).


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(iv) Audio Division.  We design and manufacture a wide variety of components for use in audio applications. Our audio products include audio power amplifiers, audio processors and graphic-equalizer ICs. We recently introduced a family of class ‘D’ audio amplifier offerings aimed primarily at home, desktop and mobile applications with digital-to-digital complete system solution capability that improve sound quality while reducing power consumption, size and cost.
Computer Peripherals Group
(i) Data Storage Division.  We produce SoCs and analog ASICs for several data storage applications, specializing in disk drives with advanced solutions for read/write-channels, disk controllers, host interfaces, digital power processing, motor controllers and micromachinery. We believe that based on sales, we are, and have been for many years, one of the largest semiconductor companies supplying the hard disk drive market.
Complementing our strong position in SoCs, we believe we are the market leader in motor controllers and we are providing solutions for all market segments, including enterprise, desktop and mobile applications. We are currently providing SoC solutions based on proprietary IP in production at 130-nm and 90-nm for desktop, mobile and server applications. We also supply a kit including a SoC disk controller and a motion-control power combo to a leading maker of drives for mobile applications. A market leader in the data storage market selected our latest 65-nm SoC for its next generation of drives, which we expect to begin shipping in volume in 2009. This SoC includes a rich variety of our own IP including our proprietary read/write channel, Serial ATA controller and microcomputer core.
(ii) Printer Division.  We are focusing on inkjet and multifunction printer components and are an important supplier of pen chips, motor drivers, and head drivers, digital engines, including those in high performance photo-quality applications and digital color copiers. We are also expanding our offerings to include a reconfigurable ASSP product family, known as SPEAr (Structured Processor Enhanced Architecture), designed for flexibility and ease-of-use by printer manufacturers. We have successfully validated and released our SPEAr Head, a new member of our SPEAr family of configurable SoCs that address various applications, including digital engines for printers, scanners, and other embedded-control applications. Additionally in this area, our partnership with one of our major customers expanded with two new digital engine designs wins in next-generation printer and MultiFunction platforms.
(iii) Microfluidics Division.  This division builds on the years of our success in microfluidic product design, developed primarily for the inkjet print-head product line, and expands our offering into related fields, such as molecular and health diagnostics. As a result, we announced an agreement with MobiDiag to create a complete system for genomic-based detection of infectious diseases based on our silicon MEMSLab-on-Chip technology and with Veredus for the detection of Avian Flu.
Automotive Products Group
 
Our automotive products include alternator regulators, airbag controls, anti-skid braking systems, vehicle stability control, ignition circuits,and injection circuits, multiplex wiring kits and products for body and chassis electronics, engine management, instrumentation systems and car radio and multimedia, as well as car satellite and navigation systems.infotainment. We hold a leading position in the IC market for automotive products. We have developed a joint initiativeIn addition, we work with Freescale Semiconductor for the development of 90-nmon 90nm and 55nm embedded Flash technologyTechnology and other common products based on cost-effective 32-bit32 bit microcontrollers for use in all automotive applications.
 
(i)Powertrain and Safety Division.  From engine and transmission control to mechanical-electronic solutions, microelectronics are steadily pervading all sectors of the automotive industry. Our robust family of automotive products, including MEMS accelerometers, complete standard solutions for DC-motor control and automotive grade 16-bit microcontrollers with embedded Flash memory provide a broad range of features that enhance performance, safety and comfort while reducing the environmental impact of the automobile.
(ii) Car Body Division.  We manufacture products for the body and chassis electronics requirements of the car. These products range from microcontrollers used in lighting, door and window/wiper applications to junction boxes, power solutions, dashboards and climate-control needs.
 
(iii)(ii) Car Radio and MultimediaMulti-media Division.We provide auto manufacturersour customers with full solutions for analog and digital car radio solutions for tolling, navigation and other telematic applications. The increasingly complex requirements of the car/driver interface have opened a market for us in the area of car multimediamulti-media to include products based on our Nomadik platform of multimediamulti-media processors. We have the know-how and experience to offer to the market complete telematics solutions, which include circuits for GPSglobal positioning system (“GPS”) navigation, voice recognition, audio amplification and audio signal processing.


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(iv)(iii) Digital Broadcast Radio Division.  Our products are used by the fast-growing satellite radio segment.  We provide a number of components to this application,the satellite radio market, including base-band products for the reception of signals by the market leaders.
(iv) Powertrain and Safety Division.  From engine and transmission control to mechanical-electronic solutions, microelectronics are steadily pervading all sectors of the automotive industry. Our penetrationrobust family of automotive products provide a broad range of features that enhance performance, safety and comfort while reducing the environmental impact of the automobile. The devices support advanced functions, enable improved vehicle performance and economy, and deliver development savings by promoting hardware and software reuse.
In the course of 2009, these divisions were combined into two business units: Automotive Electronics Division and the Automotive Infotainment Division.
Computer and Communications Infrastructure
(i) BCD Power Division.  This organization serves the markets of hard disk drive (“HDD”) and Printers with products developed on our BCD technology. Main applications are motor controllers for HDD and motor drivers and head drivers for printers.
(ii) Communication Infrastructure Division.  This division provides solutions for the wireless and wireline infrastructure segments. Our wireline telecommunications products, mainly digital and mixed signal ASICs, are used for various application in the high-speed electronic and optical communications market. In the wireless field, we focus on the ASIC market due to our many years of experience in the fields of digital satellite broadcast market is growingbaseband, radio frequency and mixed-signal products.
(iii) Computer System Division.  We are focusing on inkjet and laser printer components and are an important supplier of digital engines including those in high-performance photo-quality applications and multifunction printers. We are also expanding our offerings to include a reconfigurable ASSP product family, known as SPEArtm (Structured Processor Enhanced Architecture), designed for flexibility andease-of-use by printer manufacturers.


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(iv) Data Storage Division. We produce digital ASICs for data storage applications, with the successadvanced solutions for read/write-channels, disk controllers and host interfaces. We believe that based on sales, we are, and have been for many years, one of the two American providers.largest semiconductor companies supplying the HDD market.
(v) Microfluidics Division.  This division builds on the years of our success in microfluidic product design, developed primarily for the inkjet print-head product line, and expands our offering into related fields, such as molecular and health diagnostics. In the field of medical diagnostic, we have developed specific Lab On Chip technology and products. In 2008, we acquired a 41.2% stake in Veredus Laboratories Pte Ltd (“Veredus”) to combine forces to address this emerging market.
Home Entertainment and Displays Group
Our HED addresses product requirements for the digital consumer application market and has five divisions.
(i) Audio Division.  We design and manufacture a wide variety of components for use in audio applications. Our audio products include audio power amplifiers, audio processors and graphic-equalizer ICs.
(ii) Home Video Division.  This division focuses on products for digital retail, satellite, cable and IPTV set-top box products. We continue to expand our product offerings and customer base by introducing innovative platform solutions offering advanced technologies and a wide range of consumer services.
(iii) Interactive System Solutions Division.  We offer customers and partners the capability to jointly develop highly integrated solutions for their consumer products. We utilize our expertise and knowledge of the digital consumer ecosystem, advanced technologies and hardware/software IP to providebest-in-class differentiated products for a select base of customers and markets.
(iv) TV & Monitor Division.  We address the digital television markets with a range of highly integrated ASSPs and application-specific microcontrollers. Following the acquisition of Genesis in 2008, we have worked to develop our integrated digital television product portfolio. We recently demonstrated our integrated Freeman product offering for next generation digital TV at the 2010 Consumer Electronics Show.
Imaging Division
We focus on the wireless handset image-sensor market. We are in production of CMOS-based camera modules and processors forlow-and-high density pixel resolutions, which also meet the auto focus, advanced fixed focus and miniaturization requirements of this market. In certain situations, we will also sell leading-edge sensors.
 
Industrial and Multisegment SectorIMS
 
The IndustrialIMS is comprised of two product groups: Analog, Power and Multisegment SectorMicro-Electro-Mechanical Systems (“IMS”APM”) and Microcontrollers, non-Flash, non-volatile Memory and Smart Card products (“MMS”). APM is responsible for the design, development and manufacturemanufacturing of discrete powerDiscrete Power devices (power(such as MOSFET, insulated gate bipolar transistors (“IGBT”), ASD and other discrete power devices)IPAD), standard linearStandard Analog devices (such as Op Amps, Voltage Regulators and logic ICs,Timers), and radio frequency products. In addition, this segment spearheads our ongoing efforts to maintainSensors (such as MEMS). Those are the devices upon which we are positioning IMS for growth in the High End Analog world that comprises Temperature Sensors, Interfaces and develop high-end analog productsHigh Voltage Controllers for main industrial applications (such metering and of consolidating our world leadership position in power applications, with full solutions centered around microcontroller applications. This segment is organized into two groups: Analog Power and MEMSlighting). MMS includes microcontrollers, erasable programmable read-only memory (“APM”EPROM”), electrically erasable programmable read-only memory (“EEPROM”) and Microcontrollers, Memories and Smartcards (“MMS”).for a wide range of applications.
 
The variety and range of IMS’ product portfolio is among the best in the semiconductor environment, allowing IMS to pursue a kit approach strategy by application that few of our peers can match.
APM
 
(i) Power MOSFETAdvanced Analog and Mixed Signal Division.  We design, manufacturedevelop innovative, differentiated and sell Power MOSFETs (Metal-Oxide-Silicon Field Effect Transistors) ranging from 20 to 1000 voltsvalue-added analog products for mosta number of the “switching”markets and applications on the market today. Our products are particularly well suited for high voltage switch-modeincludingpoint-of-sales terminals, power suppliesmeters and lighting applications, where we hold a leadership position from low-power, high-volume consumer to high-power industrial applications.white goods.
 
(ii)Power Bipolar, IGBT and RF Division.  Our bipolar power transistors are used in a variety of voltage applications, including television/monitor horizontal deflection circuits, lighting systems and high power supplies. Our family of ESBT (Emitter Switch Bipolar Transistor) is suitable for very high current — very high voltage applications, such as welding machines and PFC (Power Factor Corrector) devices. The IGBT transistors are well suited for automotive applications, such as motor control and high-voltage electronic-ignition actuators. Within this Division we also supply RF transistors used in television broadcasting transmission systems, radars, telecommunications systems and avionic equipment.
(iii) ASD and IPAD Division.  This division offers a full range of rectifiers, protection devices, thyristors (silicon controlled rectifiers or “SCRs” and three-terminal semiconductors or “Triacs” for controlling current in either direction)Integrated Passive and other protection devices.Active Devices (“IPADTM”). These components are used in various applications, including telecommunications systems (telephone sets, modems and line cards), household appliances and industrial systems (motor-control and power-control devices). More specifically, rectifiers are used in voltage converters and regulators, and protection devices, while thyristors varycontrol current flows through a variety of electrical devices, including lamps and household appliances.


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(iii) Industrial and Power Conversion Division.  We design and manufacture products for industrial applications including lighting and power-line communication; power supply and power management ICs for computer, industrial, consumer, and telecom applications along with power over Ethernet powered devices. In the industrial market segment, our key products are leaders inpower ICs for motor control, including monolithic DMOS solutions and high-voltage gate drivers, for a highly successfulbroad range of new products built with our proprietary Application Specific Discrete (“ASD”tm) technology, which allows a variety of discrete components (diodes, rectifiers, thyristors) to be merged into a single device optimizedsystems; intelligent power switches for specific applications such as electromagnetic interference filtering for cellular phones. Additionally, we are leaders in electronic devices integrating both passivethe factory automation and active components on the same chip, also known as Integrated Passive and Active Devices (“IPAD”), which are widely used in the wireless handset market.process control.
 
(iv) Linear and Interface Division.  We offer a broad product portfolio of linear and switching voltage regulators, along with operational amplifiers, comparators,addressing various applications, from general purpose “point of load”, for most of the market segments (consumer, computer and serialdata storage, mobile phones, industrial, medical, automotive, aerospace), to specific functions such as camera flash LED, LCD backlighting and parallel interfaces covering a variety of applications like decoders,organic LED power supply, for the mobile handset and other portable device markets; low noise block supply and control for set top box; and multiple channels DC-DC converters and mobile phones.for micro storage are also featured.
 
(vi)(v) IndustrialMEMS and Power ConversionSensors, Transceivers and Healthcare Division.  We design and manufacture products for industrial automation systems, lighting applications (lamp ballast), battery chargers and Switched Mode Power Supplies (“SMPS”). Our key products are power ICs for motor controllers and read/write amplifiers, intelligent power ICs for spindle motor control and head positioning in hard disk drives and battery chargers for portable electronic systems, including mobile handsets.
(vii) Advanced Analog and Logic Division.  We develop innovative, differentiated and value-added analog products for a number of markets and applications including point-of-sales terminals, power meters and white goods. We recently introduced our NEATSwitch portfolio of application-specific analog, digital, and power switches and extended our supervisor and reset-IC family. We also produce a variety of HCMOS logic device families, which include clocks, registers, gates, latches and buffers. Such devices are used in a variety of applications, including portable computers, computer networks and telecommunications systems.
(viii) Micro-electronic-mechanical systems (“MEMS”).  We manufacture these unique mechanical devicesMEMS for a wide variety of applications where real-world input is required. Our prior product line includes three-dimensionalof three-axis accelerometers for usewas expanded over 2009 to include a complete family of high-performance multi-axis gyroscopes. The combination of accelerometers and gyroscopes enables accurate motion tracking into a 3D space, which is the primary component of enhanced motion controlled user interfaces in gaming, disk drivesmobile phones, PND and mobile phoneportable multimedia media players. The same devices are also employed in laptops, automotive, HDDs and digital cameras.
In 2009, we also added active microphones and disposable biosensors to the healthcare market to our product portfolio.
(vi) Power Bipolar, IGBT and RF Division.  This division produces all bipolar power transistors, from low voltage devices to high voltage like IGBT, classic bipolar transistors and both intelligent and standard power modules, together with RF power transistors for specific market clusters such as power conversion, medical and motor control for both industrial and automotive. The Division is in charge of High-Reliability (high-rel) products and radiation-hardened (rad-hard) devices.


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(vii) MMSPower MOSFET Division.  We design, manufacture and sell Power MOSFETs (Metal-Oxide-Silicon Field Effect Transistors) ranging from 20 to 1500 volts for most of the “switching” and “linear” applications on the market today. Our products are particularly well suited for high voltage switch-mode power supplies and lighting applications.
 
MMS
(i)Memory Division.  They are used for parameter storage in various electronic devices used in all market segments.
(ii) Microcontroller Division.  We offer a wide range of 8-, 16-8-bit and 32-bit microcontrollers suitable for a wide variety of applications from those where a minimum cost is a primary requirement to those that need powerful real-time performance and high-level language support. These products are manufactured in processes capable of embedding EPROM, EEPROM and Flash nonvolatile memories as appropriate. In 2007, we added to our product offering the STM 32 family of 32-bit Flash microcontrollers based on an advanced ARM CortexTM M3 core.
(ii) Memory Division.  We believe we are the world’s number one supplier of serial nonvolatile memories that can be electronically rewritten. They are used for perimeter storage in various electronic devices used in all market segments. We manufacture our EEPROMs with sub-micron technology that delivers world-class performance and serves as a reference in the industry. Our EEPROM portfolio ranges from1-Kb to1-Mb devices delivered in innovative packages. This division also manufactures application-specific devices, RFID chips and legacy EPROM products.
 
(iii) Smartcard IC Division.  Smartcards are card devices containing ICs that store data and provide an array of security capabilities. They are used in a wide and growing variety of applications, including public pay-telephone systems, cellular telephone systems and banks, as well as pay television systems and ID/passport cards. Other applications include medical record applications, card-access security systems, toll-payment and secure transactions over the Internet applications. We have a long track record of leadership in Smartcard ICs. Our expertise in security is a key to our leadership in the finance andpay-TV segments and development of IT applications. In addition, our mastering of the nonvolatile memory technologies is instrumental to offering the highest memory sizes (128 KBytes and even to 1 MByte), particularly important to address the emerging high-end mobile phone market.
 
(vi)(iv) Incard Division.  The division develops, manufactures and sells plastic cards (both memory and microprocessor based) for banking, identification and telecom applications. Incard operates as a standalone organization and also directly controls the sales force for this product offering.
 
Flash Memories GroupWireless
 
The Flash Memories Group (“FMG”) designs, develops and manufactures a broad range of semiconductor memory products. Flash memory technology, which is one ofwireless segment resulted from the enablers of digital convergence, is the corecombination of our nonvolatile memory activity. The products developed bywireless business with NXP’s to create ST-NXP Wireless as of August 2, 2008. Subsequently, we combined that business with the various divisions are complementary and are addressing different functionsand/or market segments.EMP business to form a joint venture, ST-Ericsson, which began operations on February 1, 2009.
 
Wireless is responsible for the design, development and manufacture of semiconductors and platforms for mobile applications. In December 2006,addition, this segment spearheads our ongoing efforts to maintain and develop innovative solutions for our mobile customers while consolidating our world leadership position in wireless. This segment is organized into five groups: Wireless Multi Media (“WMM”); Connectivity & Peripherals (“C&P”); Cellular Systems (“CS”); Mobile Platforms (“MP”), in which, since February 3, 2009, we announced our decision to establish a stand-alone FMG. This group consolidates allreport the portion of our Flash memory operations including NANDsales and NOR Flash memories technology R&D, all product related activities, front-end manufacturing, marketing and sales worldwide. This strategic repositioning of Flash memories was designed to allow for potential industry consolidation and dimension of scale which we view as a necessity to compete successfully in this business.
Our memory business is comprised as follows:
(i) Wireless Flash Memories Division.  Wireless applications have very specific requirements in power consumption, packaging and memory capabilities. We offer a very wide portfolio of wireless NOR Flash memories from single-die low-density products through high-density 2-Gbit solutions, as well as multiple chip packages containing several memory technology components.
(ii) Imbedded Nor Division.  We pioneered the concept of serial Flash. This division develops products used in computer, automotive and consumer applications utilizing parallel NOR and Serial Flash technology. Serial Flash allows integration of up to 64 Mbit and 128 Mbit in an 8-pin package for a large variety of applications.
(iii) NAND Flash and Storage Media Division.  In 2004, we began offering NAND Flash memory products pursuant to a co-development and manufacturing agreement with Hynix Semiconductor Inc. (“Hynix Semiconductor”). Our efforts are targeted at the lower density memory requirements evolving for embedded wireless applications. Our most advanced offering, a single die 8 Gigabit (“Gbit”) NAND Flash manufactured in 57-nm technology, is now available in production. NAND Flash is primarily used to store information such as music, still pictures, video and data files in a variety of consumer applications, including mobile phones, MP3 readers, universal serial bus (“USB”) keys and digital still cameras.
We have made significant progress on improving the cost position of our FMG segment, in particular widely developing the two-bit-per-cell architecture and transitioning to more advanced technologies, and will continue to


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seekoperating results of ST-Ericsson as consolidated in the our revenue and operating results; and, Other Wireless, in which we report manufacturing margin, R&D revenues and other items related to enhance our competitive position on all frontswireless business activities occurring outside of the memory market we serve both by adding new products and improving manufacturing costs.ST-Ericsson.
 
We expectoffer a complete solution in mobile handsets, serving several major OEMs, with a combination of application specific ICs as well as a growing capability in our platform offering. In this market, we are strategically positioned in digital baseband, energy management, audio coding and decoding functions (“CODEC”) and radio frequency ICs and connectivity. We are also transitioning to deconsolidate this group with the closing of the Numonyx transaction planned for the first quarter of 2008. From that point forward, our Flash memory exposure will consist of our 48.6% equity interest in Numonyx and will be reported in the Earnings/Loss on equity investments line item on our consolidated statement of Income, and certain financing arrangements.platform solutions.
 
Strategic Alliances with Customers and Industry Partnerships
 
We believe that strategic alliances with customers and industry partnerships are critical to success in the semiconductor industry. We have entered into several strategic customer alliances, including alliances withAlcatel-Lucent, Bosch, Continental AG, Hewlett-Packard, Marelli, Nokia, Nortel, Pioneer, Samsung, Seagate, Continental AG, ThomsonSonyEricsson and Western Digital. Customer alliances provide us with valuable systems and application know-how and access to markets for key products, while allowing our customers to share some of the risks of product development with us and to gain access to our process technologies and manufacturing infrastructure. We are actively working to expand the number of our customer alliances, targeting OEMs in the United States, in Europe and in Asia and our recently announced digital base-band relationship with Ericsson Mobile Platform is an example of our success in formalizing this program.Asia.
 
Partnerships with other semiconductor industry manufacturers permit costly research and developmentR&D and manufacturing resources to be shared to mutual advantage for joint technology development. We have a long history of partnership for the collaborative development of CMOS process technologies in Crolles, France. Since January 1, 2008,For example, we are collaboratingcooperating with IBM on the development of 32-nmISDA to co-develop 32/28-nm and 22-nm CMOSbelow process technologies. We will pursue the development, with IBM, of CMOS derivatives in Crolles. This cooperation follows the termination at the end of 2007 of the cooperation with Freescale Semiconductor and NXP Semiconductors for the joint research and development of advanced CMOS process technology on300-mm wafers, as well as for the operations of a300-mm wafer pilot line fab which has been built in Crolles2. We remain convinced that the shared R&D business model contributes to the fast acceleration of semiconductor process technology development andIn addition, we will continue to actively pursue an expansion of our portfolio of alliances to reinforce cooperation in the area of technology development in Crolles2.
We have also established joint development programs with leading suppliers such as Air Liquide, Applied Materials, ASM Lithography, Canon, Hewlett-Packard, KLA-Tencor, LAM Research, MEMC,PACKTEC, JSR, SOITEC, Teradyne and Siltronics and with electronic design automation (“EDA”) tool producers, including Apache, Atrenta, Cadence, Co-WareMentor and Synopsys. We also participate in joint European research programs, such as the MEDEA+ITEA, the Cluster for Application and ITEA programs, Technology Research in Europe or/and cooperate on a global basis with major research institutionsElectronics (“CATRENE”) and universities. In 2007 we were a founding member of SOI (Silicon-on-Insulator) Industry Consortium.
We participated in the definition of the New Eureka program named CATRENE and to the European Nanoelectronics Initiative Advisory (“ENIAC”) programs definition.programs.
 
In 2004, we signed and announced a joint venture agreement with Hynix Semiconductor to build a front-end memory-manufacturing facility in Wuxi City, China, and we plan to contribute this asset to Numonyx.
��
Customers and Applications
 
We design, develop, manufacture and market thousands of products that we sell to thousands of customers. Our major customers include Alcatel-Lucent,Apple, Bosch, Cisco, Conti, Delphi,Continental, Delta, Denso, Ericsson, Hewlett-Packard, Huawei, LG Electronics, Marelli, Maxtor, Motorola, Nintendo, Nokia, Pace, Philips, Pioneer,Research in Motion, Samsung, Seagate, Sharp, Siemens, ThomsonSony Ericsson, Technicolor and Western Digital. To many of our key customers we provide a wide range of products, including application-specific products, discrete devices, memory products and programmable products. Our position as a strategic supplier of application-specific products to certain customers fosters close relationships that provide us with opportunities to supply such customers’ requirements for other products, including discrete devices, programmable products and memory products. We also sell our products through distributors and retailers, including Arrow Electronics, Avnet, BSI Semiconductor, Future Electronics, WintechRutronik and Yosun.


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The following table sets forth certain of our significant customers and certain applications for our products:
 
         
Telecommunications
      
Customers: 2WireAlcatel-Lucent
Cisco
Ericsson Finisar		 Huawei
LG Electronics
Motorola		 Nortel NetworksNokia
Research in Motion
Samsung		 Sharp
Alcatel-LucentLG ElectronicsResearch in MotionSiemens
CiscoMotorolaSafranSIRF
FinisarNokiaSamsung
Sony Ericsson
Applications: Camera modules/mobile imaging
Entry platforms (mobile handsets)
Central office switching systems
Data transport (routing, switching for electronic and optical networks)Thin modems
Cellular telephones
Internet access (XDSL)
ImagingInfrastructure		   Portable multimedia Application processor &
integrated modem
Telephone terminals (wireline and wireless) Wireless connectivity (Bluetooth, WLAN, FM radio)
Wireless infrastructureConnectivity
Connected devices		  
Computer Peripherals
      
Customers: Agilent
Apple
Dell		 Delta
Hewlett-Packard
Hitachi		 Intel
Microsoft
Samsung		 Seagate
Apple
Western Digital
Eastman Kodak		LexmarkTaiwan-Liteon
BenQEpsonMicrosoftWestern Digital
DellHewlett-PackardSamsungXilinx
Applications: Data storage
Microfluidics /
print-head cartridges		   Power management
Monitors and displays
Printers
Webcams		  
Automotive
      
Customers: Bosch
Continental
Delphi
Denso		 Harman
Hella

Kostal		 Lear
Marelli

Pioneer		 TRWValeo

Sirius Satellite Radio


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  ContinentalHellaMarelliValeo
  DelphiHitachiPioneerVisteon
  DensoKostalContinental AGSirius Satellite Radio
Applications: Airbags
Anti-lock braking systems
Body and chassis electronics
Engine management systems
(ignition and injection)		 Global positioning systems MultimediaGPS multimedia
Radio/satellite radio
Telematics
Vehicle stability
control		  
Consumer
        
Customers: ADB
AOC
Echostar		 PhilipsSkyworth
AOCHyundaiSafranSony
Bose CorporationGarmin
Pace
LG Electronics		SamsungThomson
ChangHong
Nintendo		 Scientific AtlantaSagem Connunications
Samsung
Cisco/SA		 Vestel
Technicolor
Applications: Audio processing (CD,
Digital TVs
Display Port
Internet TV		   DVDsHigh Definition DVD
Imaging
Set-top boxes
Multimedia player		  
DVD, Hi-Fi)Industrial/Other
Applications		  Imaging
Analog/digital TVsSet-top boxes
Digital camerasVCRs
Digital music playersDisplays
Industrial/Other Applications
      
Customers: American Power ConversionMedtronic
Autostrade
Delta		Giesecke & DevrientSiemens
ArtesynEnelNagraTaiwan-Liteon
Astec
Emerson		 GemaltoNDSUPEK
Autostrade
General Electric		 PhilipsSafran
Nagra
Nintendo		 Philips
Siemens
Taiwan-Liteon
Vodafone
Applications: Battery chargersMEMS

Smartcard ICs		Motor controllers

Intelligent power switches		Power supplies

Industrial automation/
control systems		Switch mode power supplies

Lighting systems		   
(lamp ballasts)MEMS
Motor controllers
Power supplies
Switch mode power supplies		  
 
In 2007,2009, our largest customer, the Nokia group of companies, represented approximately 21%16.1% of our net revenues, compared to approximately 22%17.5% in both 20062008 and 2005.21.1% in 2007. No other single customer accounted for more than 10% of our net revenues. Sales to our OEM customers accounted for approximately 80% of our net revenues in 2007, from approximately 81% of our net revenues in 2006 and 82% in 2005. Sales to our top ten OEM customers were approximately 49% of total revenues in 2007, 51% in 2006 and 50% in 2005. We have several large customers, certain of whom have entered into strategic alliances with us. Many of our key customers operate in cyclical businesses and have in the past, and may in the future, vary order levels significantly from period to period. In addition, approximately 20% of our net revenues in 2007 were sold through distributors, compared to 19% in 2006 and 18% in 2005. There can be no assurance that such customers or distributors, or any other customers, will continue to place orders with us in the future at the same levels as in prior periods. See “Item 3. Key Information —


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Risk Factors — Risks Related to Our Operations — Disruptions in our relationships with any one of our key customers could adversely affect our results of operations.”
 
Sales, Marketing and Distribution
 
We operateIn 2009, we operated regional sales organizations in Europe, North America, Asia Pacific, Greater China, Japan, and Emerging Markets,EMEA, which include Latin America,includes all of Europe, the Middle East and Africa, Europe (non-EUthe Americas, Asia Pacific, Greater China and non-EFTA), RussiaJapan. A description of our regional sales organizations’ activities and India. For a breakdown of net revenues by product segment and geographic region for each of the three years ended December 31, 2007, see “Item 5. Operating and Financial Review and Prospects — Results of Operations — Segment Information.”structure during 2009 is below.
 
(i) EMEA — The EuropeanEMEA region is divided into sevenfour business units: automotive, consumer and computers, Smartcard, telecom,convergence EMS, industrial and distribution. Additionally, for allmultimarket. Each business unit is dedicated to customers operating mainly in its market segment, actively promoting a broad range of products, including commodities and dedicated ICs, we actively promote and support the sales of these productsas well as proposing solutions through its sales force, field application engineers, supply-chain management, and customer-service,customer service and technical competence centercentre for system-solutions,system solutions, with support functions provided locally.
 
(ii) Americas — In the North AmericaAmericas region, the sales and marketing team is organized into six business units. They are located near major centers of activity for either a particular application or geographic region:units: automotive (Detroit, Michigan),; industrial (Boston, Massachusetts),; consumer, industrial and medical (Chicago, Illinois),; communications, consumer and computer and peripheral equipmentPeripherals (San Jose, California and Longmont, Colorado),; RFID and RFID, communications (Dallas, Texas); and distribution (Boston, Massachusetts). Each regional business unit has a sales force that specializes in the relevant business sector, providing local customer service, market development and specialized application support for differentiated system-oriented products. This structure allows us to monitor emerging applications, to provide local design support, and to identify new products for development in conjunction with the various product divisions as well as to develop new markets and applications with our current product portfolio. A central product-marketing operation in Boston provides product support and training for standard products for the North American region, while a logistics center in Phoenix, Arizona supportsjust-in-time delivery throughout North America.Americas region. In addition, a comprehensive distribution business unit provides product and sales support for the regional distribution network.
 
(iii) Asia Pacific — In the Asia Pacific region, during 2007,the sales and marketing segments wereorganization is managed from our regional sales headquarters in Singapore and is organized into seven business units (computer and peripheral,peripherals, automotive, industrial, home entertainment, communications and mobile multimedia,consumer, telecom, distribution and EMS) with regional and central support organizations (businessfunctions (service and business management, field quality, HR, Korean countryhuman resources, strategic planning, finance, corporate communication and design coordination)center). The business units are comprised of sales, marketing, customer service, technical support and competence center. We have sales offices in Korea, Malaysia, Thailand, the Philippines, Vietnam, Indonesia and Australia. The SingaporeAs of January 1, 2009, we added a part of the Emerging Market region to our sales organization provides central marketing, customer service, technical support, logistics, an application laboratoryperimeter and design services for now have offices in India, namely in Greater Noida, Mumbai, Pune and Bengalore. In Korea, we have a strong local presence serving

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the entire region. In addition, there is alocal Korean companies in telecom, consumer, automotive and industrial applications. Our design center in Korea.Singapore carries out full custom designs in HDD, smart card, imaging and display applications.
 
On January 1, 2006, we created a sales(iv) Greater China — In the Greater China region, “Greater China”, which encompasses China, Taiwan and Hong Kong. This sales region is dedicated toKong, our sales, design and support resources and is aimed at expandingare designed to expand on our many years of successful participation in this quickly growing market, not only with transnational customers that have transferred their manufacturing to China, but also with domestic customers. This market is expected to grow significantly in the next few years according to industry analysts. In 2007, we grew our sales in Greater China by 7.7% and believe that we were one of the leading semiconductor suppliers in China.
 
(v) Japan — In Japan, the large majority of our sales have historically been made through distributors, as is typical for foreign suppliers to the Japanese market. However, we are now seeking to work more directly with our major customers to address their requirements. We provide marketing and technical support services to customers through sales offices in Tokyo and Osaka. In addition, we have established a design centerquality laboratory and an application laboratory in Tokyo. The design center designs custom ICs for Japanese clients,quality laboratory allows us to respond quickly to the local requirement, while the application laboratory allows Japanese customers to test our products in specific applications. In 2006, we implemented changes
As of January 1, 2010, our regions in our organization forAsia are consolidated into two: Greater China and South Asia; and Japan and are targeting, by expanding our sales designKorea. See “Item 5. Operating and support resources, to improve our coverage of this significant market for the products we serve. In 2007, our sales grew by more than 18.7% in Japan, while the Japanese market grew only 5.2%.
Our Emerging Markets organization includes Latin America, the Middle EastFinancial Review and Africa, Europe (non-EU and non-EFTA) and Russia as well as our design and software development centers in India.Prospects — Other Developments.”
 
The sales and marketing activities carried outperformed by our regional sales organizations are supported by the product marketing that is carried out by each product division, which also includeincludes product development functions. This matrix system reinforces our sales and marketing activities and our broader strategic objectives. We have initiated a programAn important component of our regional sales and marketing efforts is to expand our customer base. This program’s key elements includebase, which we seek to do by adding sales representatives, adding regional competence centers and new generations of electronic tools for customer support.


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Except for Emerging Markets, eachMost of our regional sales organizations operatesoperate dedicated distribution organizations. To support the distribution network, we operate logistic centers in Saint Genis, France; Phoenix, ArizonaFrance and Singapore.
We also use distributors and representatives to distribute our products around the world. Typically, distributors handle a wide variety of products, including products that compete with our products, and fill orders for many customers. Most of our sales to distributors are made under agreements allowing for price protectionand/or theright-of-return on unsold merchandise. We generally recognize revenues upon the transfer of ownership of the goods at shipment.the contractual point of delivery. Sales representatives generally do not offer products that compete directly with our products, but may carry complementary items manufactured by others. Representatives do not maintain a product inventory; instead, theirinventory. Their customers place large quantity orders directly with us and are referred to distributors for smaller orders.
 
At the request of certain of our customers, we are also sellingsell and deliveringdeliver our products to EMS, which, on a contractual basis with our customers, incorporate our products into the application-specific products which they manufacture for our customers. Certain customers require us to hold inventory on consignment in their hubs and only purchase inventory when they require it for their own production. This may lead to delays in recognizing revenues, as such customers may chooserevenue recognition will occur, within a specific period of time, after the moment when they accept deliveryactual withdrawal of our products.the products from the consignment inventory, at the customer’s option.
 
For a breakdown of net revenues by product segment and geographic region for the last three fiscal years, see “Item 5. Operating and Financial Review and Prospects.”
Research and Development
 
We believe that research and development (“R&D”) is critical to our success. The main research and developmentR&D challenge we face is to continually increase the functionality, speed and cost-effectiveness of our semiconductor devices, while ensuring that technological developments translate into profitable commercial products as quickly as possible.
 
In 2007, underlining our commitment to our research and development efforts, we established a new ST Technology Council composed of 15 leading experts in the field including internationally recognized university professors. The Technology Council is chaired by Robert White, a former member of our Supervisory Board and a professor at Stanford University. The role of the technology council is to meet annually without senior management and leaders of our research and development activities to review, evaluate and advise us on the competitive technical landscape.
We are market driven in our research and developmentR&D and focused on leading-edge products and technologies developed in close collaboration with strategic alliance partners, leading universities and research institutions, key customers, leading EDA vendors and global equipment manufacturers working at the cutting edge of their own markets. In addition, we have a technology council comprised of 15 leading experts to review, evaluate and advise us on the competitive landscape. Front-end manufacturing and technology R&D, while being separate organizations, are under the responsibility of theour Chief Operating Officer, thereby ensuring a smooth flow of information between the R&D and manufacturing organizations. The research and developmentR&D activities relating to new products are managed by the Product Segments and consist mainly of design activities.
 
In 2005, we reallocated approximately 10% of our research and development resources in favor of higher priority projects for both process technology development and product design with the aim to increase the efficiency of our research and development activity and accelerate product innovation.
We continue to make significant investments in research and development and we intend to increase our focus on innovative product development. In 2007, we spent $1,802 million on research and development, which represented approximately a 8% increase from $1,667 million in 2006, while 2006 spending represented a 2% increase from $1,630 million in 2005. The table below sets forth information with respect to our research and development spending since 2005. Our reported research and development expenses are mainly in product design, technology and development and do not include marketing and design-center costs which are accounted for as selling expenses, or process engineering, pre-production and process-transfer costs, which are accounted for as cost of sales:
             
  Year Ended December 31,
  2007 2006 2005
  (In millions, except percentages)
 
Expenditures $1,802  $1,667  $1,630 
As a percentage of net revenues  18.0%  16.9%  18.3%
Approximately 85% of our research and development expenses in 2007 were incurred in Europe, primarily in France and Italy. See “— Public Funding” below. As of December 31, 2007, we employed approximately 10,570 employees in research and development activities worldwide.


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We devote significant effort to R&D because semiconductor manufacturers face immense pressure to be the first to make breakthroughs that can be leveraged into competitive advantages; new developments in semiconductor technology can make end products significantly cheaper, smaller, faster, or more reliable and embedded with more functionalities than their predecessors and enable, through their timely appearance on the market, significant value


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creation opportunities. For a description of our R&D expenses, see “Item 5. Operating and Financial Review and Prospects — Research and Development Expenses.”
 
To ensure that new technologies can be exploited in commercial products as quickly as possible, an integral part of our R&D philosophy is concurrent engineering, meaning that new fabrication processes and the tools needed to exploit them are developed simultaneously. Typically, these include not only EADEDA software, but also cell libraries that allow access to our rich IP portfolio and a demonstrator product suitable for subsequent commercialization. In this way, when a new process is delivered to our product segments or made available to external customers, they are more able to develop commercial products immediately.
 
In the same spirit, we develop, in a concurrent engineering mode, a complete portfolio of Analog and RF IP. The new generation of products now mix Analog and Digital IP Blocks, and even complex RF solutions, high performance data converters and high speed data transmission ports. Our R&D design centers located in France, India and Morocco have been specialized in the development of these functions, offering a significant advantage for us in quickly and cost effectively introducing products in the consumer and wireless market.
Our advanced R&D centers are strategically located around the world, primarilyincluding in France, (Crolles) and Italy, (Agrate), as well as in Italy (Catania), France (Grenoble, Tours and Rousset), the United States (Phoenix, Carrollton, and San Diego),Belgium, Canada, (Ottawa),China, India, Singapore, Sweden, the United Kingdom (Bristol and Edinburgh), Switzerland (Geneva), India (Noida and Bangalore), China (Beijing, Shenzhen and Shanghai) and Singapore.the United States.
 
From 2002 to December 31, 2007, we cooperated with NXP Semiconductors and Freescale Semiconductor as part of the Crolles2 Alliance to jointly develop sub-micron CMOS logic processes on300-mm wafers and to operate an advanced300-mm wafer pilot line in Crolles, France. Effective January 1,In 2008, we beganentered into an R&D alliance with the ISDA to develop core 32/28nm and 22/20 nm CMOS technologies, and derivative technologies, also working with IBMCEA Leti, in 65nm, 45nm, 32nm and its partners under an agreement to co-develop 32-nm and 22-nm core CMOS at IBM’s East Fiskill (United States) facility as well as to continue to develop with IBM state-of-the-art derivative technologies (defined as RF CMOS, Power CMOS and CMOS Imaging) at Crolles2. We may in the future add new partners to strengthen the cooperative activities in Crolles2.22nm. In this context, five strategic objectives have been established:
 
• Repatriate to Crolles the core CMOS technologies jointly developed under the ISDA alliance.
• Accelerate the development and the number of differentiated technologies for SoC so as to be able to supply amongst the worlds leading prototypes ICs, thereby develop a strategy of advanced differentiated products to compete with Asia foundries.
• Develop libraries and perform transversal R&D on the methods and tools necessary to develop complex ICs using these technologies.
• Perform advanced technology research linked to the conception of CMOS nano electric functionalities advance devices on 300mm wafers.
• Pervade local, national and European territories, taking advantage of nano-electronic diffusion technologies to further promote innovation in various application sectors.
In 2009, we entered into a framework agreement with the French Ministry of Economy, Industry and Employment for the “Nano2012” Research and Development program. For more information, see “Item 4. Information on the Company — Public Funding.” In addition, our manufacturing facility in Crolles, France houses a research and developmentR&D center that is operated in the legal form of a FrenchGroupement d’intérêt économiquenamed “Centre Commun de Microelectronique de Crolles.” Laboratoire d’Electronique de Technologie d’Instrumentation (“LETI”), a research laboratory of Commissariat à l’Energie Atomique (“CEA”), an affiliate of Areva GroupCEA (one of our indirect shareholders), is our partner.
 
There can be no assurance that we will be able to develop future technologies and commercially implement them on satisfactory terms, or that our alliances will allow the successful development ofstate-of-the-art core or derivative CMOS technologies on satisfactory terms. See “Item 3. Key Information — Risk Factors — Risks Related to Our Operations — Our research and developmentR&D efforts are increasingly expensive and dependent on alliances, and our business, results of operations and prospects could be materially adversely affected by the failure or termination of such alliances, or failure to find new partners in such alliance, or in developing new process technologies in line with market requirements.”
 
The Agrate R2 activity in Agrate encompasses prototyping, pilot and volume production of the newly developed technologies with the objective to accelerateof accelerating process industrialization andtime-to-market for Smart power affiliation (BCD), including on SOI, High Voltage CMOS and MEMS, in additionMEMS. It is the result of an ongoing cooperation under a consortium with Numonyx. The R2 consortium agreement is also part of the Micron deal. Please refer to certain memory products.
“Item 5 — Other developments”. Our intellectual propertyIP design center in Greater Noida, India supports all of our major design activities worldwide and hosts a major central R&D activity focused on software and core libraries development, with a strong emphasis on system solutions. Our corporate technology R&D teams work in a wide variety of areas that offer opportunities to harness our deep understanding of microelectronics and our ability to synthesize knowledge from around the world. These include:
• Soft Computing, in which a variety of problem-solving techniques such as fuzzy logic, neural networks and genetic algorithms are applied to situations where the knowledge is inexact or the computational resources required to obtain a complete solution would be excessive using traditional computing architectures. Potential applications include more effective automotive engine control, emerging fuel-cell technology and future quantum-computing techniques that will offer much greater computational speeds than are currently achievable;
• Nano-Organics, which encompasses a variety of emerging technologies that deal with structures smaller than the deep sub-micron scale containing as little as a few hundred or thousand atoms. Examples include carbon nanotubes, which have potential applications in displays and memories, and all applications that involve electronic properties of large molecules such as proteins; and
• Micro-Machining, in which the ability to precisely control the mechanical attributes of silicon structures is exploited. There are many potential applications, including highly sensitive pressure and acceleration sensors, miniature microphones, microfluidic devices and optical devices. In addition, along with its optical


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properties, the mechanical properties of silicon represent one of the most important links between conventional SoC technology and all the new technologies such as bioelectronics that can benefit from our semiconductor expertise.
The fundamental mission of our Advanced System Technology (“AST”) organization is to create system knowledge that supports our SoC development. AST’s objective is to develop the advanced architectures that will drive key strategic applications, including digital consumer, wireless communications, computer peripherals and Smartcards, as well as the broad range of emerging automotive applications such as car multimedia. The group has played a key role in establishing our pre-eminence in mobility, connectivity, multimedia, storage and security, the core competences required to drive today’s convergence markets.
multi-media. AST’s challenge is to combine the expertise and expectations of our customers, industrial and academic partners, our central R&D teams and product segments to create a cohesive,


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practical vision that defines the hardware, software and system integration knowledge that we will need in the next three to five years and the strategies required to master them. AST has eight large laboratories around the world, plus a number of smaller locations located near universities and research partners. Its major laboratories are located in: Agrate Brianza; Catania; Castelletto; Geneva; Grenoble; Lecce; Noida; Portland, Oregon; Rousset; and San Diego, California.
We also have divisional R&D centers such as those in Castelletto, Catania and Tours that carry out more specialized work that benefits from their close relationship to their markets. For example, Castelletto pioneered the BCD process that created the world smart-power market and has developed advanced MEMS technologies used to build products such as inkjet printheads, accelerometers and the world’s first single chip microarray for DNA amplification and detection.
The ASDtm technology developed at Tours has allowed ST to bring to the market numerous products that can handle high bi-directional currents, sustain high voltages or integrate various discrete elements in a single chip, like the IPADs. ASD technology has proved increasingly successful in a variety of telecom, computer and industrial applications: ESD protection and AC switching are key areas together with RF filter devices.
The Catania facility hosts a wide range of R&D activities and its major divisional R&D achievements in recent years include the development of our revolutionary PowerMESHtm and STripFETtm MOSFET families.
Our other specialized divisional R&D centers are located in Grenoble (packaging R&D, IP center), and Rousset (Smartcard and microcontroller development), in addition to a host of centers focusing on providing a complete system approach in digital consumer applications, such as TVs, DVD players, set-top boxes and cameras. These centers are located in various locations including: Beijing; Bristol; Carrollton, Texas; Edinburgh; Grenoble; Noida; Rousset; and Singapore. For Smartcard SoC, we have centers in Prague and Shanghai.
 
All of these worldwide activities create new ideas and innovations that enrich our portfolio of intellectual propertyIP and enhance our ability to provide our customers with winning solutions.
Furthermore, an array of important strategic customer alliances ensures that our R&D activities closely track the changing needs of the industry, while a network of partnerships with universities and research institutes around the world ensures that we have access to leading-edge knowledge from all corners of the world. We also play leadership roles in numerous projects running under the European Union’s IST (Information Society Technologies) programs. We actively participate in these programs and continue collaborative R&D efforts withinsuch as the MEDEA+ research program.CATRENE, ARTEMIS and ENIAC programs.
 
Finally, we believe that platforms are the answer to the growing need for full system integration, as customers require from their silicon suppliers not just chips, but an optimized combination of hardware and software. More than 1,500Our world-class engineers and designers are currently developing platforms we selected to spearhead our future growth in some of the fastest developing markets of the microelectronics industry. The platforms include Application Processors, namely our Nomadik platform that is bringing multimedia to the next-generation mobile devices,application arocessors and integrated modem, set-top boxes/integrated digital TV, which include the promising new wave of high-definition images,high definition and3-D capability, and in the area of computer peripherals, the SPEArSPEArTM family of reconfigurable SoC ICs for printers and related applications.


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Property, Plants and Equipment
 
We currently operate 15 (as per table below) main manufacturing sites around the world. The table below sets forth certain information with respect to our current manufacturing facilities, products and technologies. Front-end manufacturing facilities are wafer fabrication plants, known as fabs and back-end facilities are assembly, packaging and final testing plants. Some of these fabs where Flash memory production is concerned are earmarked to be transferred to Numonyx, our pending joint venture with Intel.
 


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Location
 
Products
 
Technologies
 
Front-end facilities
    
Crolles1, France Application-specific products, image sensors Fab: 200-mm CMOS and BiCMOS, Analog/RF, imaging
Crolles2, France(1)France Application-specific products and leading edge logic products Fab: 300-mm research and development on deep sub-micron(90-nm45-nm and below) CMOS and differentiated SoC technology development, imaging, TSV pilot line
Phoenix, Arizona
(identified forentering the final stages of closure)		 Application-specific products and microcontrollers Fab: 200-mm CMOS,BCD, BiCMOS, BCD, microcontrollers, CMOS
Agrate, Italy Nonvolatile memories, microcontrollers and application- specific products MEMS Smart power Fab 1: 200-mm BCD, nonvolatile memories, MEMS,
Microfluidics Fab 2: 200-mm, Flash, embedded Flash, research and development on nonvolatile memories and BCD technologies and Flash (operating in consortium with Numonyx)
Rousset, France Microcontrollers, nonvolatile memories and Smartcard ICs, application-specific products and image sensors Fab 1: 150-mm CMOS, Smartcard (shut down March 2007)
Fab 2: 200-mm CMOS, Smartcard, embedded Flash, imagingAnalog/RF
Catania, Italy Power transistors, Smart Power ICs and nonvolatile memoriesapplication-specific products 
Fab 1: 150-mm Power metal-on silicon oxide semiconductor process technology
(“MOS”),VIPpowerVIPowertm,MO-3, MO-5 and Pilot Line RF

Fab 2: 200-mm, Flash, Smartcard, EEPROMMicrocontrollers, BCD,
Fab 4: 300-mm building constructed but not fully facilitized and equipped power MOS
Tours, France Protection thyristors, diodes and ASD power transistors, IPAD Fab: 125-mm, 150-mm and 200-mm pilot line discrete
Ang Mo Kio, Singapore Analog, microcontrollers, power transistors, commodity products, nonvolatile memories, and application-specific products Fab 1: 125-mm, power MOS, bipolar, power
Fab 2: 150-mm bipolar, power MOS and BCD, EEPROM, Smartcard, Micros, CMOS logic
Fab 3: 200-mm, Flash memories
Fab 4: 150 mm Microfluidic,Microfluidics, MEMS, BCD, BiCMOS, CMOS
Carrollton, Texas
(identified for closure)		Application-specific products, MEMS, MicrofluidicsFab: 150-mm BiCMOS, BCD and CMOS
Back-end facilities
    
Muar, Malaysia Application-specific and standard products, microcontrollers Flash A building (block P) inside the plant has been contributed to STE
Kirkop, Malta Application-specific products, MEMS, Embedded Flash for Automotive  
Toa Payoh, Singapore Nonvolatile memoriesOptical packages research and power ICsdevelopment, under reconversion into an EWS center
Ain Sebaa, Morocco
(identified for closure)		Discrete and standard products  
Bouskoura, Morocco Nonvolatile memories, discrete and standard products, micromodules, RF and subsystems  
Shenzhen, China(2)China(1) Nonvolatile memories, discrete and standard products
Longgang, ChinaDiscrete and standard products
Calamba, Philippines(2)Application Specific Products and standard products  
 
 
(1)Operated jointly with NXP Semiconductors and Freescale Semiconductor. The agreement terminated at the end of 2007.
(2)Jointly operated with SHIC, a subsidiary of Shenzhen Electronics Group.
(2)Operated by ST but contributed to the ST-Ericsson joint venture.


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At the end of 2007,2009, our front-end facilities had a total capacity of approximately 125,000115,000200-mm equivalent wafer starts per week. The number of wafer starts per week varies from facility to facility and from period to period as a result of changes in product mix. We have sevenAmong the200-mm waferwafers production facilities, currentlythe fabs based in operation. Of these, four (at Crolles,Europe (Crolles and Rousset, France; Agrate Italy;and Catania, Italy;Italy) had a comparable installed capacity as of December 31, 2009. Among the150-mm wafers production facilities, two (at Catania, Italy and Phoenix, Arizona) haveTours, France) had full design

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capacity installed as of December 31, 2007; as2009. As of the same date, fabs (in Rousset, France andthe fab in Singapore) haveSingapore had approximately two-thirdstwo thirds of the ultimatefull design capacity installed. Some of our facilities where we manufacture flash memory products have been earmarked for transfer to Numonyx, upon closing of our announced transaction with Intel and Francisco Partners in the field of Flash Memory Products.
 
Our advanced300-mm wafer pilot-line fabrication facility in Crolles, France produced approximately 2,500had an installed capacity of 2,800 wafers per week at the end of 20072009, and we may in the futureplan to increase production to up to approximately 4,500 wafers per week as required by market conditions.conditions and within the framework of our R&D Nano 2012 program.
 
We own all of our manufacturing facilities, except Crolles2, France, which is the subject of a capital leaseleases for the building shell only.and some equipment that represents overall a small percentage of total assets.
 
We have historically subcontracted a portion of total manufacturing volumes to external suppliers. Our goal isIn 2009, we reduced our capital spending to reduce$451 million, from $983 million registered in 2008, and we maintained our ratio of capital investment spending to salesrevenues at 5.3%, in line with our goal of keeping this ratio from above 20% in previous years to a target of approximately 10%, due to the change in the structural growthrange of the semiconductor market which has moved from double5 to single digit over the last ten years. The reduction in ourabout 7%. Such a level of capital investmentsspending is also designed to reduce our dependence on economic cycles, which affects the loading of our fabs, and to decrease the burdeneffects of depreciation on our financial performance while optimizing opportunities between internal and external front-end production.
 
As ofAt December 31, 2007,2009, we had $683approximately $267 million in outstanding commitments for purchases of equipment and other assets for delivery in 2008. The most significant of2010. For information on our 2008anticipated 2010 capital expenditure projects are expected to be: (a) for the front-end facilities: (i) full capacity ownership of our300-mm fab in Crolles, through the purchase of the Alliance partners tools; (ii) a specific program of capacity growth devoted to MEMS in Agrate (Italy)costs, see “Item 5. Operating and mixed technologies in AgrateFinancial Review and Catania (Italy) to support the significant growth opportunity in these technologies; (iii) focused investment both in manufacturing and R&D in France sites to secure and develop our system oriented proprietary technologies portfolio (HCMOS derivatives and mixed signal) required by our strategic customers; and (b) for the back-end facilities, the capital expenditures will mainly be dedicated to the technology evolution to support the ICs path to package size reduction in Shenzhen (China) and Muar (Malaysia) and to prepare for future years capacity growth by completing the new production area in Muar and the new plant in Longgang (China). In the last five years, we have closed six manufacturing plants globally and upgraded one production line. In addition, we have announced the closure plans for three more manufacturing sites as well as the transfer to Numonyx of four sites.Prospects — Financial Outlook.”
 
Our manufacturing processes are highly complex, require technologically advanced and costly equipment and are continuously being modified in an effort to improve yields and product performance. Impurities or other difficulties in the manufacturing process can lower yields, interrupt production or result in losses of products in process. As system complexity has increased andsub-micron technology has become more advanced, manufacturing tolerances have been reduced and requirements for precision and excellence have become even more demanding. Although our increased manufacturing efficiency has been an important factor in our improved results of operations, we have from time to time experienced production difficulties that have caused delivery delays and quality control problems, as is common in the semiconductor industry.
 
The present environment is strongly affected by demand growth and supply availability remains constrained throughout the entire semiconductor market. Recently, our existing capacity has been outstripped by the increase in business demand as a result of the upturn in the semiconductor industry. This situation is completely different from the one seen in the first six months of 2009, where we had experienced a severe under-loading that resulted in significant unused capacity charges and cost inefficiencies despite our ongoing measures to reduce the activity of our fabs. No assurance can be given that we will be able to increase manufacturing efficiencyefficiencies in the future to the same extent as in the past, or that we will not experience further production difficultiesand/or unsaturation in the future.
 
AsIn addition, as is common in the semiconductor industry, we have from time to time experienced difficulty in ramping up production at new facilities or effecting transitions to new manufacturing processes and, consequently, have suffered delays in product deliveries or reduced yields. There can be no assurance that we will not experience manufacturing problems in achieving acceptable yields, product delivery delays or interruptions in production in the future as a result of, among other things, capacity constraints, production bottlenecks, construction delays, equipment failure or maintenance, ramping up production at new facilities, upgrading or expanding existing facilities, changing our process technologies, or contamination or fires, storms, earthquakes or other acts of nature, any of which could result in a loss of future revenues. In addition, the development of larger fabrication facilities that require state-of-the-art sub-micronstate-of-the-artsub-micron technology and larger-sized wafers has increased the potential for losses associated with production difficulties, imperfections or other causes of defects. In the event of an incident leading to an interruption of production at a fab, we may not be able to shift production to other facilities on a timely basis, or our customers may decide to purchase products from other suppliers, and, in either case, the loss of revenues and the impact on our relationship with our customers could be significant. Our operating results could also be adversely affected by the increase in our fixed costs and operating expenses related to increases in production capacity if


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revenues do not increase commensurately. Finally, in periods of high demand, we increase our reliance on external contractors for foundry and back-end service. Any failure to perform by such subcontractors could impact our relationship with our customers and could materially affect our results of operations.
 
Intellectual Property (IP)
 
Intellectual propertyIP rights that apply to our various products include patents, copyrights, trade secrets, trademarks and mask work rights. A mask work is the two or three-dimensional layout of an integrated circuit. WeIncluding patents owned by ST-Ericsson, we currently own close to 19,000over 18,600 patents orand pending patent applications which have been registered in several countries around the world and correspond to more than 9,0009,600 patent families (each patent family


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containing all patents originating from the same invention). We filed 497736 new patent applications around the world in 2007.2009 (including patent applications owned by ST-Ericsson).
 
Our success depends in part on our ability to obtain patents, licenses and other intellectual propertyIP rights covering our products and their design and manufacturing processes. To that end, we intend to continue to seek patents on our circuit designs, manufacturing processes, packaging technology and other inventions. The process of seeking patent protection can be long and expensive, and there can be no assurance that patents will issue from currently pending or future applications or that, if patents are issued, they will be of sufficient scope or strength to provide meaningful protection or any commercial advantage to us. In addition, effective copyright and trade-secret protection may be unavailable or limited in certain countries. Competitors may also develop technologies that are protected by patents and other intellectual propertyIP rights and therefore such technologies may be unavailable to us or available to us subject to adverse terms and conditions. Management believes that our intellectual propertyIP represents valuable assets and intends to protect our investment in technology by enforcing all of our intellectual propertyIP rights. We have used our patent portfolio to enter into several broad patent cross-licensescross- licenses with several major semiconductor companies enabling us to design, manufacture and sell semiconductor products without fear of infringing patents held by such companies, and intend to continue to use our patent portfolio to enter into such patent cross-licensing agreements with industry participants on favorable terms and conditions. As our sales increase compared to those of our competitors, the strength of our patent portfolio may not be sufficient to guarantee the conclusion or renewal of broad patent cross-licenses on terms which do not affect our results of operations. Furthermore, as a result of litigation, or to address our business needs, we may be required to take a license to third-party intellectual propertyIP rights upon economically unfavorable terms and conditions, and possibly pay damages for prior use,and/or face an injunction or exclusion order, all of which could have a material adverse effect on our results of operations and ability to compete.
 
From time to time, we are involved in intellectual propertyIP litigation and infringement claims. See “Item 8. Financial Information — Legal Proceedings.” In the event a third-party intellectual propertyIP claim were to prevail, our operations may be interrupted and we may incur costs and damages, which could have a material adverse effect on our results of operations, cash flow and financial condition.
 
Finally, we have received from time to time, and may in the future receive communications from competitors or other parties alleging infringement of certain patents and other intellectual propertyIP rights of others, which has been and may in the future be followed by litigation. Regardless of the validity or the successful assertion of such claims, we may incur significant costs with respect to the defense thereof, which could have a material adverse effect on our results of operations, cash flow or financial condition. See “Item 3. Key Information — Risk Factors — Risks Related to Our Operations — We depend on patents to protect our rights to our technology.”
 
Backlog
 
Our sales are made primarily pursuant to standard purchase orders that are generally booked from one to twelve months in advance of delivery. Quantities actually purchased by customers, as well as prices, are subject to variations between booking and delivery and, in some cases, to cancellation due to changes in customer needs or industry conditions. During periods of economic slowdownand/or industry overcapacityand/or declining selling prices, customer orders are not generally made far in advance of the scheduled shipment date. Such reduced lead time can reduce management’s ability to forecast production levels and revenues. When the economy rebounds, our customers may strongly increase their demands, which can result in capacity constraints due to our inability to match manufacturing capacity with such demand.
 
In addition, our sales are affected by seasonality, with the first quarter generally showing lowest revenue levels in the year, and the third or fourth quarter generating the highest amount of revenues due to electronic products purchased from many of our targeted market segments for the holiday period.segments.
 
We also sell certain products to key customers pursuant to frame contracts. Frame contracts are annual contracts with customers setting forth quantities and prices on specific products that may be ordered in the future.


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These contracts allow us to schedule production capacity in advance and allow customers to manage their inventory levels consistent withjust-in-time principles while shortening the cycle times required to produce ordered products. Orders under frame contracts are also subject to a high degree of volatility, because they reflect expected market conditions which may or may not materialize. Thus, they are subject to risks of price reduction, order cancellation and modifications as to quantities actually ordered resulting in inventorybuild-ups.
 
Furthermore, developing industry trends, including customers’ use of outsourcing and their deployment of new and revised supply chain models, may reduce our ability to forecast changes in customer demand and may increase our financial requirements in terms of capital expenditures and inventory levels.


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FollowingWe entered 2009 with a backlog significantly lower compared to 2008 due to the industry-wide over-inventory situation andsharp decline in the declining level of order bookingssemiconductor industry registered in the second half of 2004,2008. During 2009, our backlog grew as a result of a strong increase in order flow in the second half of the year, reflecting a more favorable industry environment. As a result of this rebound, we entered 2005 with an order backlog (defined here to include frame orders) that was lower than we had entering 2004. During 2005, our backlog registered a solid increase. We entered 2006,2010 with a backlog significantly higher than we had entering 2005, and, due to a more difficult industry environment, we entered 2007 with an order backlog lower than what we had entering 2006. We are entering 2008 with a backlog significantly higher compared to 2007 due to good order flow in the last quarter of 2007. However, based on the current outlook for the world economy, or if the demand for semiconductors were to be reduced, we cannot guarantee that our outstanding backlog will result in revenues during 2008.2009.
 
Competition
 
Markets for our products are intensely competitive. While only a few companies compete with us in all of our product lines, we face significant competition in each of our product lines. We compete with major international semiconductor companies, some of which may have substantially greater financial and other more focused resources than we do with which to pursue engineering, manufacturing, marketing and distribution of their products.companies. Smaller niche companies are also increasing their participation in the semiconductor market, and semiconductor foundry companies have expanded significantly, particularly in Asia. Competitors include manufacturers of standard semiconductors, ASICs and fully customized ICs, including both chip and board-level products, as well as customers who develop their own IC products and foundry operations. Some of our competitors are also our customers.
 
The primary international semiconductor companies that compete with us include Analog Devices, Broadcom, Hynix, IBM, Infineon, Technologies, Intel, International Rectifier, Fairchild Semiconductor, Freescale Semiconductor, Linear Technology, LSI Logic, Marvell, Technology Group, Maxim, Integrated Products,Mediatek, Microchip Technology, Mstar, National Semiconductor, Nippon Electric Company,NEC Electronics, NXP Semiconductors, ON Semiconductor, NXP Semiconductors, Qualcomm, Renesas, ROHM Semiconductor, Samsung, Spansion, Texas Instruments, Trident, Toshiba, TSMC and Toshiba.Vishay.
 
We compete in different product lines to various degrees on the basis of price, technical performance, product features, product system compatibility, customized design, availability, quality and sales and technical support. In particular, standard products may involve greater risk of competitive pricing, inventory imbalances and severe market fluctuations than differentiated products. Our ability to compete successfully depends on elements both within and outside of our control, including successful and timely development of new products and manufacturing processes, product performance and quality, manufacturing yields and product availability, customer service, pricing, industry trends and general economic trends.
 
Organizational Structure and History
 
We are a multinational group of companies that designs, develops, manufactures and markets a broad range of products used in a wide variety of microelectronic applications, including telecommunications systems, computer systems, consumer goods, automotive products and industrial automation and control systems. We are organized in a matrix structure with geographicalgeographic regions interacting with product divisions, both being supported by central functions, bringing all levels of management closer to the customer and facilitating communication among research and development,the R&D, production, marketing and sales organizations.
 
While STMicroelectronics N.V. is the parent company, we also conduct our operations through our subsidiaries. With the exception of our subsidiaries in Shenzhen, China, in which we own 60% of the shares and voting rights; Hynix, ST (China), a joint venture company, in which we own a 17% equity participation; Shanghai Blue Media Co. Ltd (China), in which we own 65%; and Incard do Brazil, in which we own 50% of the shares and voting rights, STMicroelectronics N.V. owns directly or indirectly 100% of all of our significant operating subsidiaries’ shares and voting rights, which have their own organization and management bodies, and are operated independently in compliance with the laws of their country of incorporation. We provide certain administrative, human resources, legal, treasury, strategy, manufacturing, marketing and other overhead services to our consolidated subsidiaries pursuant to service agreements for which we receive compensation. We have also recently created two joint ventures with Ericsson, which operate as independent JV companies and are currently governed by a fully balanced Board and an independent management team. Our Consolidated Financial Statements also include “JVS and related affiliates”, responsible for the full commercial operation of the combined businesses, namely sales and marketing. Its parent company is ST-Ericsson Holding AG (“JVS”), which is owned 50% plus a controlling share by us. The other JV is focused on fundamental R&D activities. Its parent company is ST-Ericsson AT Holding AG (“JVD”), which is owned 50% plus a controlling share by Ericsson and is therefore accounted for by us under the equity method.


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The following list includestable lists our principalconsolidated subsidiaries and equity investments and theour percentage of ownership we held as of December 31, 2007:2009:
 
       
    Percentage Ownership
 
Legal Seat
 
Name
 
(Direct or Indirect)
 
 
Australia — Sydney STMicroelectronics PTY Ltd  100 
Belgium — Zaventem STMicroelectronicsST-Ericsson Belgium N.V.  10050 
Belgium — Zaventem Proton World International N.V.  100 
Brazil — Sao Paolo STMicroelectronics Ltda  100 
Brazil — Sao Paulo Incard do Brazil Ltda  50 
Canada — Ottawa STMicroelectronics (Canada), Inc.  100 
ChinaCanada — Jiangsu(1)Thorn hill Hynix-ST SemiconductorGenesis Microchip (Canada) Co.100
China — BeijingSTMicroelectronics (Beijing) R&D Co. Ltd  17100
China — BeijingBeijing T3G Technology Co. Ltd50
China — ShanghaiSTMicroelectronics (Shanghai) Co. Ltd100
China — ShanghaiSTMicroelectronics (Shanghai) R&D Co. Ltd100


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Percentage Ownership
Legal Seat
Name
(Direct or Indirect)
China — ShanghaiSTMicroelectronics (China) Investment Co. Ltd100
China — ShanghaiShanghai NF Trading Ltd50
China — ShanghaiShanghai NF Semiconductors Technology Ltd50 
China — Shenzhen Shenzhen STS Microelectronics Co. Ltd  60 
China — Shenzhen STMicroelectronics (Shenzhen) Co. Ltd  100 
China — Shenzhen STMicroelectronics (Shenzhen) Manufacturing Co. Ltd  100 
China — Shenzhen STMicroelectronics (Shenzhen) R&D Co. Ltd  100 
China — ShanghaiSTMicroelectronics (Shanghai) Co. Ltd100
China — ShanghaiSTMicroelectronics (Shanghai) R&D Co. Ltd100
China — ShanghaiShanghai Blue Media Co. Ltd65
China — ShanghaiSTMicroelectronics (China) Investment Co. Ltd100
China — BeijingSTMicroelectronics (Beijing) R&D Co. Ltd100
Czech Republic — Prague STMicroelectronics Design and Application s.r.o.  100 
FinlandCzech Republic — LohjaPrague STMicroelectronics OYSTN Wireless Sro  10050 
Finland — Helsinki STMicroelectronicsST-Ericsson R&D OY  10050
Finland — LohjaST-Ericsson OY50 
France — Crolles STMicroelectronics (Crolles 2) SAS  100 
France — GrenobleSTMicroelectronics (Grenoble 2) SAS100
France — GrenobleST-Ericsson (Grenoble) SAS50
France — Montrouge STMicroelectronics S.A.  100
France — ParisST-Ericsson (France) SAS50 
France — Rousset STMicroelectronics (Rousset) SAS  100 
France — Tours STMicroelectronics (Tours) SAS100
France — GrenobleSTMicroelectronics (Grenoble) SAS  100 
Germany — Grasbrunn STMicroelectronics GmbH  100 
Germany — Grasbrunn STMicroelectronics Design and Application GmbH  100 
Germany — GrasbrunnST-NXP Wireless GmbH i.L.50
Holland — Amsterdam STMicroelectronics Finance B.V.  100 
Holland — AmsterdamLuchtavenST-Ericsson Wireless N.V.50
Holland — EindhovenST-Ericsson B.V.50
Holland — EindhovenST-Ericsson Holding B.V.50
Hong Kong — Hong Kong STMicroelectronics LTD100
India — BangaloreNF Wireless India Pvt Ltd50
India — New DelhiSTMicroelectronics Marketing Pvt Ltd  100 
India — Noida STMicroelectronics Pvt Ltd  100 
India — New DelhiNoida STMicroelectronics MarketingST-Ericsson India Pvt Ltd  10050
Ireland — DublinNXP Falcon Ireland Ltd50 
Israel — Netanya STMicroelectronics Ltd100
Italy — Caivano(1)INGAM S.r.l.20
Italy — CataniaCO.RI.M.ME.100
Italy — AostaDORA S.p.a.  100 
Italy — Agrate Brianza ST Incard S.r.l.  100 
Italy — NaplesAgrate Brianza STMicroelectronics Services S.r.l.ST-Ericsson Srl  10050 
Italy — Agrate Brianza STMicroelectronics S.r.l.  100 
Italy — Agrate BrianzaAostaDORA S.p.a.100
Italy — CataniaCO.RI.M.ME.100
Italy — Naples STMicroelectronics (Memory)Services S.r.l.  100 
Japan — Tokyo STMicroelectronics KK  100 
Japan — TokyoST-Ericsson KK50
Korea — SeoulST-Ericsson (Korea) Ltd50
Malaysia —-— Kuala Lumpur STMicroelectronics Marketing SDN BHD  100 
Malaysia — Muar STMicroelectronics SDN BHD  100 
Malaysia — Muar STMicroelectronics (Memory) Sdn BhdST-Ericsson SDN.BHD  10050 
Malta — Kirkop STMicroelectronics (Malta) Ltd  100 
Mexico — Guadalajara STMicroelectronics Marketing, S. de R.L. de C.V.  100 
Mexico — Guadalajara STMicroelectronics Design and Applications, S. de R.L. de C.V.  100 
Morocco — CasablancaSTMicroelectronics S.A.S. (Maroc)100
Morocco — Rabat Electronic Holding S.A.  100 
Morocco — CasablancaRabatST-Ericsson (Maroc) SAS50
Norway — GrimstadST-Ericsson A.S.50
Philippines — Calamba STMicroelectronics, S.A.Inc..  100
Philippines — CalambaST-Ericsson (Philippines) Inc.50
Philippines — CalambaMountain Drive Property, Inc.20 
Singapore — Ang Mo Kio STMicroelectronics ASIA PACIFIC Pte Ltd  100 
Singapore — Ang Mo Kio STMicroelectronics Pte Ltd  100 
Singapore — Ang Mo Kio STMicroelectronics (Memory)ST-Ericsson Asia Pacific Pte Ltd  100
Singapore — Ang Mo KioSTMicroelectronics ASIA PACIFIC (Memory) Pte Ltd10050 
Spain — Madrid STMicroelectronics Iberia S.A.  100 
Sweden — Kista STMicroelectronics A.B.  100 
Sweden — KistaSTMicroelectronics Wireless A.B.50
Sweden — StockholmST-Ericsson A.B.50
Switzerland — Geneva STMicroelectronics S.A.  100

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Percentage Ownership
Legal Seat
Name
(Direct or Indirect)
 
Switzerland — Geneva INCARD S.A.  100 
Switzerland — Geneva INCARD Sales and Marketing S.A.  100 
Switzerland — GenevaST-Ericsson S.A.50
Switzerland — ZurichST-Ericsson Holding AG50
Taiwan — TaipeiST-Ericsson (Taiwan) Ltd50
Thailand — BangkokSTMicroelectronics (Thailand) Ltd100
Turkey — Istanbul STMicroelectronics Elektronik Arastirma ve Gelistirme Anonim Sirketi  50
United Kingdom — BristolInmos Limited100
United Kingdom — BristolST-Ericsson (UK) Ltd50 
United Kingdom — Marlow STMicroelecrtonicsSTMicroelectronics Limited  100 
United Kingdom — Marlow STMicroelectronics (Research & Development) Limited  100 
United Kingdom — BristolInmos Limited100
United Kingdom — Reading Synad Technologies Limited  100 
United Kingdom — SouthamptonNF UK, Ltd50
United States — Carrollton STMicroelectronics Inc.100
United States — CarrolltonST-Ericsson Inc.50
United States — CarrolltonGenesis Microchip Inc.,100
United States — CarrolltonGenesis Microchip (Del) Inc.100
United States — CarrolltonGenesis Microchip LLC100
United States — CarrolltonGenesis Microchip Limited Partnership100
United States — CarrolltonSage Inc.100
United States — CarrolltonFaroudja Inc.100
United States — CarrolltonFaroudja Laboratories Inc.  100 
United States — Wilmington STMicroelectronics (North America) Holding, Inc.  100 
United States — Wilsonville The Portland Group, Inc.  100 
 
The following table lists our principal equity investments and our percentage ownership as of December 31, 2009:
 
(1)Equity InvestmentsPercentage Ownership
Legal Seat
Name
(Direct or Indirect)
The Netherlands — RotterdamNumonyx Holdings B.V.48.6
Switzerland — ZurichST-Ericsson AT Holding AG49
Singapore — The CurieVeredus Laboratories Pte Ltd41.2
South Korea — Yongin-siATLab Inc.8.1
Italy — CaivanoINGAM Srl20


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In February 2010, we entered into a definitive agreement with Micron Technology Inc., in which Micron will acquire Numonyx Holdings B.V. in an all-stock transaction. Please refer to “Item 5 — Other developments”.
 
Public Funding
 
We participate in certain programs established by the EU, individual countries and local authorities in Europe (principally France and Italy). Such funding is generally provided to encourage researchR&D activities and development activities,capital investment, industrialization and the economic development of underdeveloped regions. These programs are characterizedpartially supported by direct partial support to researchfunding, tax credits and development expenses or capital investment or by low-interest financing.specific loans (low-interest financing).
 
Public funding in France, Italy and Europe generally is open to all companies, regardless of their ownership or country of incorporation, for research and development and for capital investment and low-interest-financing related to incentive programs for the economic development of under-developed regions.incorporation. The EU has developed model contracts for research and developmentR&D funding that require beneficiaries to disclose the results to third parties on reasonable terms. As disclosed, the conditions for receipt of government funding may include eligibility restrictions, approval by EU authorities, annual budget appropriations, compliance with European Commission regulations, as well as specifications regarding objectives and results.
 
Some of our R&D government funding contracts for research and development involve advance payments that requiresrequire us to justify our expenses after receipt of funds. Certain specific contracts (Crolles2,(Crolles, Grenoble, Rousset, France and Catania, Italy) contain obligations to maintain a minimum level of employment and investment during a certain amount of time. There could be penalties (partial refund)(i.e., a partial refund due to the government) if these objectives are not fulfilled. Other contracts contain penalties for late deliveries or for breach of contract, which may result in repayment obligations. However, the obligation to repay such funding is never automatic.
 
The main programs for research and developmentR&D in which we are involved include: (i) the Micro-Electronics Development for European Application (“MEDEA+”)CATRENE cooperative research and development program;R&D program, which is the successor of MEDEA+ (which ended in 2008); (ii) EU research and developmentR&D projects with FP6 and FP7 (Sixth and Seventh Frame Program) for Information Technology; (iii) European industry initiatives such as ENIAC and (iii)ARTEMIS (Embedded Computing Systems Initiative); and (iv) national or regional programs for research and developmentR&D and for industrialization in the electronics industries involving many companies and laboratories. The pan-European

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programs cover a period of several years, while national or regional programs in France and Italy are subject mostly to annual budget appropriation.
 
The MEDEA+ cooperative research and development program was launched in June 2000 by the Eureka Conference and is designed to bring together many of Europe’s top researchers in a 12,000 man-year program that covers the period2001-2008 in two phases of four years each. The MEDEA+ program replaced the joint European research program called MEDEA, which was a European cooperative project in microelectronics among several countries that covered the period 1996 through 2000 and involved more than 80 companies. With a program duration of eight years, MEDEA+ will conclude at the end of 2008. The new EUREKA strategic initiative, called CATRENE (“Cluster for Application and Technology Research in Europe on NanoElectronics”, launched October 25, 2007, builds on the highly successful European MEDEA+ nanoelectronics programme) will start in January 2008, with the first call for project proposals expected in the first half of 2008.
In Italy, there are some national funding programs established to support the FIST (Fondonew FIRST (Fondo per gli Investimenti nella Ricerca Scientifica e Tecnologica)Tecnologica) that groupswill group previous funding regulations (FIRB,Fondo per gli Investimenti della Ricerca di Base, aimed to fund fundamental research, andresearch), FAR,Fondo per le Agevolazioni alla Ricerca, to fund industrial research), and the FCS (Fondo(Fondo per la Competitivita’Competitività e lo Sviluppo) that replacesSviluppo). The FRI (Fondo rotativo per il sostegno alle imprese e agli investimenti in ricerca) funds research and innovation activities and the FIT (Fondo(Fondo speciale rotativo per l’Innovazione Tecnologica,Tecnologica) is designed to fund precompetitive development).development in manufacturing. These programs are not limited to microelectronics and are suitable to support industry R&D in any segment. Italian programs often cover several years and the approval phase is quite long, up to two/three years. During 2004, submissionsIn 2009, under a new call for FAR and FIT were suspended for new projects, includingproposals, the MEDEA+ projects whose Italian activities are subject to FAR rules and availability. In July 2005, however, the Italian Government began considering funding new projects related to limited “strategic programmes” in areas it had selected. One of these areas was semiconductors. The company submitted 7 proposals which are expected to be approved instrategic program “industria 2015” (involving a two-step evaluation procedure) finished the first halfstage screening process and three of 2008. In July 2007 a call was launched on FCS (specifically for “Better Efficiency in Energy” and “Sustainable Mobility”) where we submitted 9 proposals. our projects proposed were advanced as full proposals to the second evaluation stage.
Furthermore, there are some regional funding tools for research that can be addressed by local initiatives, primarily in the regions of Puglia, Sicily, Campania and Val D’Aosta,d’Aosta, provided that a reasonable regional socio-economic impact could be recognized in terms of industrial exploitation, new professional hiringand/or cooperation with local academia and public laboratories.”
 
In a decision on December 6, 2006, sent to the Italian Foreign Minister, the EU Commission accepted to modifyallowed the modification of the conditions of a grant which was originally approved in 2002 for an amount of €542.3 million (Decision N844/2001), representing approximately 26.25% of the total cost (estimated at €2,066 million) (the “M6 Grant”) forpertaining to the building, facilitization and equipment of a new300-mm manufacturingour facility in Catania, M6 capable of producing approximately 5,000 wafers per week for nonvolatile memory productsItaly (the “M6 Plant”).


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Pursuant to Following this decision, the authorized timeframe for the completion of the project for the planned investment was extended and the Italian government was authorized to allocate €446 million, out of the €542.3€542 million grants originally authorized, €446 million for the completion of the M6 Plant if we made a further investment of €1,700 million between January 1, 2006 through the end of 2009. The €446 million M6 Grant is conditional uponplant and the conclusion of a Contratto di Programma providing,inter alia, for (i) the creation of a minimum number of new jobs, (ii) the fixed assets remaining at least five years after the completion of the M6 Plant, (iii) at least 31.25% of the total of €1,700 million investment for the M6 Plant being either in the form of equity or loan, (iv) an annual report on work progress being submitted to the Italian authorities and the EU Commission, and (v) a general verification of the consistency of the project. For the period prior to December 31, 2006, the Commission, upon the proposal of the Italian government, considered that we wouldprogramma have been entitled to the remaining €96 million grant (out of the total €542.3 million originally granted) in the form of a tax credit if we had made a total cumulated investment of €366 million as of such date. As of December 31, 2006, we had invested a cumulative amount of €298 million instead of €366 million and recorded a cumulative amount of tax credit of €78 million out of the €96 million to which we could have been entitled. The M6 Plant is designated for transfertransferred to Numonyx, which will benefit from future M6 Grantsgrants linked to the completion of the M6 Plantplant and assume related responsibilities. Under a Memorandum of Understanding dated July 30, 2009 the Italian Authorities declared their willingness to release public grants in connection with a revision of the current M6 Program Agreement so that original project (consisting in €1,700 million of investments to complete the M6 plant so as to make it able to produce memories with corresponding public funds for €446 million) is replaced by 2 separate projects, one related to Numonyx R&D activities in its Italian sites and the second to the finalization of the announced joint venture in the photovoltaic field with Enel and Sharp, and the conversion of the industrial destination of the new M6 facility in Catania from production of memories to production of photovoltaic panels. In particular, subject to finalization of the announced joint venture in the photovoltaic field with Enel and Sharp, we will contribute the M6 plant to the new joint venture, which will make the necessary investments to convert industrial destination of M6 from production of memories to production of photovoltaic panels up to a maximum of 1GW/year production capability for a corresponding maximum investment of €1,150 million.
 
In France, support for R&D is given by ANR (Agence Nationale de la Recherche), by OSEO (the agency taking over the missions and budgets of the AII Agency for Industrial Innovation), by the Ministry of Industry (“FCE”) and local public authorities. Specific support for microelectronics is provided through FCE to over 30 companies with activities in the semiconductor industry. The amount of support under French programs is decided annually and subject to budget appropriation. We also planIn 2009, we entered into a framework agreement with the French Ministry of Economy, Industry and Employment for the “Nano2012” Research and Development program, which confirmed our position as the Coordinator and Project Leader and allocated to benefit fromus €340 million (about $450 million) in grants for the new French law on Credit Impot Recherche which increasesperiod2008-2012. Nano2012 is designed to promote development of advanced CMOS (32nm and below) technologies forsystem-on-chip semiconductor products in the amountGrenoble-Crolles region of tax deductible R&D expenses.France, in cooperation with the ISDA.
 
In accordance with SEC Statement Accounting Bulletin No. 104Revenue Recognition(SAB 104)We also benefit from tax credits for R&D activities in several countries (notably in France). R&D tax credits consist of tax benefits granted to companies on a open and our revenue recognition policy, funding related to these contracts is booked when the conditions required by the contracts are met. Our funding programs are classified in three general categoriesnon-discriminatory base for accounting purposes: funding fortheir research activities. See “Item 5. Operating and development activities, funding for researchFinancial Review and development capital investments,Prospects — Research and loans.Development Expenses.”
 
Funding for research and developmentR&D activities is the most common form of funding that we receive. Public funding for research and developmentR&D is recorded as “Other Income and Expenses, net” in our consolidated statements of income. Public funding for researchincome and development is booked pro rata in relation to the relevant cost once the agreement with the applicablerespective government agency has been signed and as anyall applicable conditions are met. See Note 202 to our Consolidated Financial Statements. Such funding has totaled $97 million, $54 million and $76 million in the years 2007, 2006 and 2005, respectively.
 
Government support for capital expenditures funding has totaled $9 million, $15 million and $38 million in the years 2007, 2006 and 2005, respectively. Such funding has been used to support our capital investment. Although receipt of these funds is not directly reflected in our results of operations, the resulting lower amounts recorded in property, plant and equipment costs reduce the level of depreciation recognized by us. Public funding reduced depreciation charges by $33 million, $54 millionIn Italy the new “Tremonti-ter” allows business income tax reduction excluding from taxation of business income an amount equal


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to 50 percent of the value of investments in a detailed list of new machinery and $66 million in 2007, 2006 and 2005, respectively.new equipment, made from July 1, 2009 through June 30, 2010. See Note 10 to our Consolidated Financial Statements.
 
As a third category of government funding, we receive some loans, mainly related to large capital investment projects, at preferential interest rates. We recognize these loans as debt onSee Note 14 to our consolidated balance sheet in accordance with paragraph 35 of Statements ofConsolidated Financial Accounting Concepts No. 6,Elements of Financial Statements(CON 6). Low interest financing has been made available (principally in Italy) under programs such as the Italian Republic’s Fund for Applied Research, established in 1988 for the purpose of supporting Italian research projects meeting specified program criteria. At year-end 2007, 2006 and 2005, we had approximately $150 million, $125 million and $120 million, respectively, of indebtedness outstanding under state-assisted financing programs at an average interest cost of 2.4%, 0.9% and 1.0%, respectively.Statements.
 
Funding of programs in France and Italy is subject to annual appropriation, and if such governments or local authorities were unable to provide anticipated funding on a timely basis or if existing government- or local-authority-funded programs were curtailed or discontinued, or if we were unable to fulfill our eligibility requirements, such an occurrence could have a material adverse effect on our business, operating results and financial condition. Furthermore, we may need to rely on public funding as we transition to300-mm manufacturing technology. We are dependent on public funding for equipping the300-mm wafers production facility in Catania (Italy). If such planned funding does not materialize, we may lack financial resources to continue with our investment plan for this facility, which in turn could lead us to discontinue our investment in such facility and consequentially incur significant impairments. From time to time, we have experienced delays in the receipt of funding under these programs. As the availability and timing of such funding are substantially outside our control, there can be no assurance that we will continue to benefit from such government support, that funding will not be delayed from time to time, that sufficient alternative funding would be available if necessary or that any such alternative funding would be provided on terms as favorable to us as those previously committed.


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Due to changes in legislationand/or review by the competent administrative or judicial bodies, there can be no assurance that government funding granted to us may not be revoked or challenged or discontinued in whole or in part, by any competent state or European authority, until the legal time period for challenging or revoking such funding has fully lapsed. See “Item 3. Key Information — Risk Factors — Risks Related to Our Operations — Reduction in the amount of public funding available to us, changes in existing public funding programs or demands for repayment may increase our costs and impact our results of operations.”
 
Suppliers
 
We use three main critical types of suppliers in our business: equipment suppliers, raw material suppliers and external subcontractors.
 
In the front-end process, we use steppers, scanners, tracking equipment, strippers, chemo-mechanical polishing equipment, cleaners, inspection equipment, etchers, physical and chemical vapor-deposition equipment, implanters, furnaces, testers, probers and other specialized equipment. The manufacturing tools that we use in the back-end process include bonders, burn-in ovens, testers and other specialized equipment. The quality and technology of equipment used in the IC manufacturing process defines the limits of our technology. Demand for increasingly smaller chip structures means that semiconductor producers must quickly incorporate the latest advances in process technology to remain competitive. Advances in process technology cannot be brought about without commensurate advances in equipment technology, and equipment costs tend to increase as the equipment becomes more sophisticated.
 
Our manufacturing processes use many raw materials, including silicon wafers, lead frames, mold compound, ceramic packages and chemicals and gases. The prices of many of these raw materials are volatile. We obtain our raw materials and supplies from diverse sources on ajust-in-time basis. Although supplies for the raw materials used by us are currently adequate, shortages could occur in various essential materials due to interruption of supply or increased demand in the industry. See “Item 3. Key Information — Risk Factors — Risks Related to Our Operations — Because we depend on a limited number of suppliers for raw materials and certain equipment, we may experience supply disruptions if suppliers interrupt supply or increase prices.”
 
Finally, we also use external subcontractors to outsource wafer manufacturing and assembly and testing of finished products. See “— Property, Plants and Equipment” above. We also have an agreement with Hynix Semiconductor for the co-development and manufacturing of NAND products pursuant to which Hynix Semiconductor from Korea is supplying the co-developed NAND products to us. We have also set up a joint venture in China which has built and operates a memory manufacturing facility in Wuxi City, China, which entitles us to receive an amount of wafers produced at this facility at competitive conditions and commensurate with our equity interest in the joint venture. This equity interest and the right to receive wafers from the Wuxi City facility is designated to be transferred to Numonyx.
 
Environmental Matters
 
Our manufacturing operations use many chemicals, gases and other hazardous substances, and we are subject to a variety of evolving environmental and health and safety regulations related, among other things, to the use, storage, discharge and disposal of such chemicals and gases and other hazardous substances, emissions and wastes, as well as the investigation and remediation of soil and ground water contamination. In most jurisdictions in which we operate, our manufacturing activities are subject to obtainingwe must obtain permits, licenses and other forms of authorization, or other authorizations, orgive prior notification, in order to prior notification.operate. Because a large portion of our manufacturing activities are located in the EU, we are subject to European Commission regulation on environmental protection, as well as regulations of the other jurisdictions where we have operations.
 
Consistent with our Principles for Sustainable Excellence,PSE, we have established proactive environmental policies with respect to the handling of chemicals, gases, emissions and waste disposals from our manufacturing operations, and we have not suffered material environmental claims in the past. We believe that our activities comply with presently applicable environmental regulations in all material respects. We have engaged outside consultants to audit all of our environmental activities and created environmental management teams, information systems and training. We have


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also instituted environmental control procedures for processes used by us as well as our suppliers. As a company, we have been certified to be in compliance with the quality standard ISO9001:20002008 and with the technical specification ISO/TS16949:2002. In addition, all 15 of our manufacturing facilities have been certified to conform to the environmental standard ISO14001, to the Eco Management and Audit Scheme (EMAS) and to the Health and Safety standard OHSAS18001.2009.


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Our activities are subject to two directives adopted on January 27, 2003:directives: Directive 2002/95/EC on the restriction of the use of certain hazardous substances in electrical and electronic equipment (“ROHS” Directive, as amended by Commission Decision 2005/618/EC of August 18, 2005); and Directive 2002/96/EC on waste electrical and electronic equipment (“WEEE” Directive, as modified by Directive 2003/108/EC of December 8, 2003). Both Directives are in the process of being replaced by new directives that are expected to be adopted in mid-2010. The ROHS Directive 2002/95/EC aims at banning the use of lead and other flame-retardant substances in manufacturing electronic components by July 1, 2006.components. The WEEE Directive 2002/96/EC promotes the recovery and recycling of electrical and electronic waste. In France, Directives 2002/95/ECDue to unclear statutory definitions and 2002/96/EC have been implemented byinterpretations, we are unable at this time to determine in detail the ramifications of our activities under the WEEE Directive. The WEEE Directive to be adopted in 2010 may or may not clarify such definitions with respect to our activities. At this stage, we do not participate in a decree dated July 20, 2005 and five ministerial orders published“take back” organization in November 2005, December 2005 and March 2006. The French scheme for the recovery and recycling of WEEE was officially launched on November 15, 2006.France.
 
Our activities in the EU are also subject to the European Directive 2003/87/EC establishing a scheme for greenhouse gas allowance trading (as modified by Directive 2004/101/EC), and the applicable national legislation. The 2003 Directive was amended by Directive 2009/29/EC, which must be transposed into national law by the European Member States on or before December 31, 2012. Two of our manufacturing sites (Crolles, France, and Agrate, Italy) have been allocated a quota of greenhouse gas for the period2005-2007.2008-2012. Failure to comply would have forcedforce us to acquire potentially expensive additional emission allowances from third parties, or to pay a fee for each extra ton of gas emitted. This risk did not materialize, since both sites were within the allocated quota at the end of 2007. Our visibility on future emissions confirms this trend, and we do not foresee any significant impact on ST. Our on-going programs to reduce CO2 emissions willshould allow us to comply with the greenhouse gas quota allocations whichthat have been defined for Crolles and Agrate for the period2008-2012. At this stage, the emission permits are allocated for free to the industry. However, pursuant to provisions created by the 2009 Directive, a growing percentage of the permits will be auctioned by Member States beginning in 2013. However, the remaining permits will be allocated for free until 2027, when all of the permits will be subject to auction.
In the United States, we participate in the Chicago Climate Exchange program, a voluntary greenhouse gas trading program whose members commit to reduce emissions. During Phase I(2003-2006), emission reduction targets were 1% per year, below the baseline which is an average of annual emissions over the1998-2001 period. During Phase II(2008-2010), we confirmed our commitment to an additional 2% reduction. The idea is that all members should be 6% below this baseline by 2010. We have also implemented voluntary reforestation projects in several countries in order to sequester additional CO2 emissions.emissions and report our emissions in our annual Corporate Sustainable Report as well as through our internal Carbon Disclosure Project.
 
Furthermore, Regulation 1907/2006 of December 18, 2006 concerningRegulations implementing the registration, evaluation, authorization and restriction of chemicals (“REACH”) entered into force on June 1, 2007. Regulations implementing the REACH arewere adopted in preparation, particularly with regards to fees to be paid by the industry for the registration and authorization of chemical products, as well as test methods.2008. We intend to proactively implement such new legislation, in line with our commitment toward environmental protection.
The implementation of any such legislation could adversely affect our manufacturing costs or product sales by requiring us to acquire costly equipment or materials, or to incur other significant expenses in adapting our manufacturing processes or waste and emission disposal processes. However, we are currently unable to evaluate such specific expenses and therefore have no specific reserves for environmental risks. Furthermore, environmental claims or our failure to comply with present or future regulations could result in the assessment of damages or imposition of fines against us, suspension of production or a cessation of operations and, as with other companies engaged in similar activities, any failure by us to control the use of, or adequately restrict the discharge of hazardous substances could subject us to future liabilities. See “Item 3. Key Information — Risk Factors — Risks Related to Our Operations — Some of our production processes and materials are environmentally sensitive, which could lead to increased costs due to environmental regulations or to damage to the environment.” We have identified potential liabilities relating to environmental matters that are reflected on our consolidated balance sheet.
 
Industry Background
 
The Semiconductor Market
 
Semiconductors are the basic building blocks used to create an increasing variety of electronic products and systems. Since the invention of the transistor in 1948, continuous improvements in semiconductor process and design technologies have led to smaller, more complex and more reliable devices at a lower cost per function. As performance has increased and size and unitary cost have decreased, semiconductors have expanded beyond their original primary applications (military applications and computer systems) to applications such as telecommunications systems, consumer goods, automotive products and industrial automation and control systems. In addition, system users and designers have demanded systems with more functionality, higher levels of performance, greater reliability and shorter design cycle times, all in smaller packages at lower costs. These demands have resulted in increased semiconductor content as a percentage of system cost. Calculated on the basis of the total available market (the “TAM”), which includes all semiconductor products, as a percentage of worldwide revenues from production of electronic equipment according to published industry data, semiconductor content has increased from approximately 12% in 1992 to approximately 21% in 2007.
Semiconductor sales have increased significantly over the long term but have experienced significant cyclical variations in growth rates. According to trade association data, the TAM increased from $45 billion in 1988 to


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$256 billion in 2007 (growing at a compound annual growth rate of approximately 10%). In 2006, the TAM increased by approximately 9% and in 2007 by approximately 3%. On a sequential,quarter-by-quarter basis in 2007 (including actuators), the TAM decreased by approximately 6% in the first quarter over the fourth quarter 2006, while in the second quarter it decreased by approximately 2% over the first quarter, it increased by approximately 13% in the third quarter over the second quarter, and decreased by approximately 1% in the fourth quarter over the third quarter. To better reflect our corporate strategy and our current product offering, we measure our performance against our serviceable available market (“SAM”), redefined as the TAM without DRAMs, microprocessors and optoelectronic products. The SAM increased from approximately $35 billion in 1988 to $174 billion in 2007, growing at a compound annual rate of approximately 9%. The SAM increased by approximately 6% in 2007 compared to 2006. In 2007, approximately 17% of all semiconductors were shipped to the Americas, 16% to Europe, 19% to Japan, and 48% to the Asia Pacific region.
The following table sets forth information with respect to worldwide semiconductor sales by type of semiconductor and geographic region:
                                                 
  Worldwide Semiconductor Sales(1)  Compound Annual Growth Rates(2) 
    
  2007  2006  2005  2004  1998  1988  06-07  05-06  04-05  88-07  88-98  98-07 
  (In billions)  (Expressed as percentages) 
 
Integrated Circuits and Sensors $222.9  $214.8  $197.3  $183.5  $109.1  $35.9   3.8%  8.9%  7.5%  10.1%  11.8%  8.3%
Analog, Sensors and Actuators  41.6   42.3   36.5   36.1   19.1   7.2   (1.7)  16.0   0.9   9.6   10.2   9.0 
Digital Logic  123.5   114.1   112.4   100.3   67.0   17.8   8.2   1.5   12.1   10.7   14.2   7.0 
Memory:                                                
DRAM  31.3   33.8   25.6   26.8   14.0   6.3   (7.4)  32.0   (4.7)  8.8   8.3   9.3 
Others  26.6   24.7   22.9   20.3   9.0   4.6   7.7   7.7   13.0   9.7   6.9   12.8 
                                                 
Total Memory  57.9   58.5   48.5   47.1   23.0   10.9   (1.1)  20.5   2.9   9.2   7.7   10.8 
Total Digital  181.4   172.6   160.9   147.4   90.0   28.7   5.1   7.3   9.1   10.2   12.1   8.1 
Discrete  16.8   16.6   15.2   15.8   11.9   7.0   1.3   8.8   (3.3)  4.7   5.5   3.9 
Optoelectronics  15.9   16.3   14.9   13.7   4.6   2.1   (2.3)  9.3   8.6   11.2   8.1   14.7 
                                                 
TAM $255.6  $247.7  $227.5  $213.0  $125.6  $45.0   3.2%  8.9%  6.8%  9.6%(3)  10.8%  8.2%(3)
                                                 
Europe  41.0   39.9   39.3   39.4   29.4   8.1   2.7   1.6   (0.4)  8.9   13.8   3.8 
Americas  42.3   44.9   40.7   39.1   41.4   13.4   (5.7)  10.3   4.3   6.2   11.9   0.2 
Asia Pacific  123.5   116.5   103.4   88.8   28.9   5.4   6.0   12.7   16.5   17.9   18.3   17.5 
Japan  48.8   46.4   44.1   45.8   25.9   18.1   5.2   5.3   (3.7)  5.4   3.7   7.3 
                                                 
TAM $255.6  $247.7  $227.5  $213.0  $125.6  $45.0   3.2%  8.9%  6.8%  9.6%(3)  10.8%  8.2%(3)
                                                 
(1)Source: WSTS.
(2)Calculated using end points of the periods specified.
(3)Calculated on a comparable basis, without information with respect to actuators as they were not included in the indicator before 2003.
 
Although cyclical changes in production capacity in the semiconductor industry and demand for electronic systems have resulted in pronounced cyclical changes in the level of semiconductor sales and fluctuations in prices and margins for semiconductor products from time to time, the semiconductor industry has experienced substantial


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growth over the long term. Factors that are contributingcontribute to long-term growth include the development of new semiconductor applications, increased semiconductor content as a percentage of total system cost, emerging strategic partnerships and growth in the electronic systems industry, in particular, the Asia Pacific region.
 
Semiconductor Classifications
 
The processProcess technologies, levels of integration, design specificity, functional technologies and applications for different semiconductor products vary significantly. As differences in these characteristics have increased, the semiconductor market has become highly diversified as well as subject to constant and rapid change. Semiconductor product markets may be classified according to each of these characteristics.
 
Semiconductors can be manufactured using different process technologies, each of which is particularly suited to different applications. Since the mid-1970s, the two dominant processes have been bipolar (the original technology used to produce ICs) and CMOS. Bipolar devices typically operate at higher speeds than CMOS


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devices, but CMOS devices consume less power and permit more transistors to be integrated on a single IC. CMOS has become the prevalent technology, particularly for devices used inacross all major mass markets such as personal computers, consumer application and consumer applications.cellular phones. Advanced technologies have been developed during the last decade that are particularly suited to more systems-oriented semiconductor applications. BiCMOS technologies have been developed to combine the high-speed and high-voltage characteristics of bipolar technologies with the low power consumption and high integration of CMOS technologies. BCD technologies have been developed that combine bipolar, CMOS and DMOS technologies.technologies to target intelligent power control and conversion applications. Such systems-oriented technologies require more process steps and mask levels, and are more complex than the basic function-oriented technologies.
 
Process technologies, referred to as MEMS, has significantly developed in the last decade and has allowed to expand the scope of traditional semiconductor devices from signal processing, storage and power conversion, up to sensing and converting a wide variety of physical dimensions such as pressure, temperature and acceleration.
Semiconductors are often classified as either discrete devices (such as individual diodes, thyristors and single high voltage and power transistors, as well as optoelectronic products) or ICs (in which thousands of functions are combined on a single “chip” of silicon to form a more complex circuit). Compared to the market for ICs, there is typically less differentiation among discrete products supplied by different semiconductor manufacturers. Also, discrete markets have generally grown at slower, but more stable, rates than IC markets.
 
Semiconductors may also be classified as either standard components, ASSPs or ASICs. Standard components are used for a broad range of applications, while ASSPs and ASICs are designed to perform specific functions in specific applications.
 
The two basic functional technologies for semiconductor products are analog and digital. Mixed-signal products combine both analog and digital functionality. Analog devices monitor, condition, amplify or transform analog signals, which are signals that vary continuously over a wide range of values.
 
Analog/digital (or “mixed-signal”) ICs combine analog and digital devices on a single chip to process both analog signals and digital data. System designers are increasingly demanding system-level integration in which complete electronic systems containing both analog and digital functions are integrated on a single IC.
 
Digital devices are divided into two major types: memory products and logic devices. Memory products, which are used in electronic systems to store data and program instructions, are classified as either volatile memories (which lose their data content when power to the device is switched off) or nonvolatile memories (which retain their data content without the need for continuous power).
 
The primary volatile memory devices are DRAMs, which accounted for approximately 54% of semiconductor memory sales in 2007, and static RAMsdynamic random access memories (“SRAMs”DRAMs”), which accounted for approximately 4% of semiconductor memory sales in 2007. SRAMs are roughly four times as complex as DRAMs.. DRAMs are used in a computer’s main memory. SRAMs are principally used as caches and buffers between a computer’s microprocessor and its DRAM-based main memory and in other applications such as mobile handsets.
 
Nonvolatile memories are used to store program instructions. Among such nonvolatile memories, read-only memories (“ROMs”) are permanently programmed when they are manufactured while programmable ROMs (“PROMs”) can be programmed by system designers or end-users after they are manufactured. Erasable PROMs (“EPROMs”) may be erased after programming by exposure to ultraviolet light and can be reprogrammed several times using an external power supply.ultraviolet. Electrically erasable PROMs (“EEPROMs”) can be erased byte by byte and reprogrammed “in-system” without the need for removal.
“Flash” memories, which accounted for approximately 38% of semiconductor memory sales in 2007, are products that represent an intermediate solution between EPROMs and EEPROMs based on their cost and functionality. Because Flash memories can be erased and reprogrammed electrically and in-system, they are more flexible than EPROMs and are therefore progressively replacing EPROMs in many current applications. Flash memories are typically used in high volume in digital mobile phones and digital consumer applications (set-top boxes, DVDs, digital cameras, MP3 digital music players) and, because of their ability to store large amounts of information, are also suitable for solid-state mass storage of data and emerging high-volume applications.
 
Logic devices process digital data to control the operation of electronic systems. The largest segment of the logic market includes microprocessors, microcontrollers and DSPs. Microprocessors are the central processing units of computer systems. Microcontrollersmicrocontrollers are complete computer systems contained on single ICs that are


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programmed to specific customer requirements. Microcontrollers control the operation of electronic and electromechanical systems by processing input data from electronic sensors and generating electronic control signals. They are used in a wide variety of consumer, communications, automotive, industrial and computer products. DSPs are parallel processors used for high complexity, high-speed real-time computations in a wide variety of applications.


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A significant number of our logic devices is constituted by ASSP SoC, which gathers the functions of system control, multi-media signal processing and communication protocols in a wide variety of systems, such as smart-phones, set-top-boxes and communication infrastructure platforms.
Item 5.  Operating and Financial Review and Prospects
 
Overview
 
The following discussion should be read in conjunction with our Consolidated Financial Statements and Notes thereto included elsewhere in thisForm 20-F. The following discussion contains statements of future expectations and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, or Section 21E of the Securities Exchange Act of 1934, each as amended, particularly in the sections “— Critical Accounting Policies Using Significant Estimates”,Estimates,” “— Business Outlook” and “— Liquidity and Capital Resources — Financial Outlook.” Our actual results may differ significantly from those projected in the forward-looking statements. For a discussion of factors that might cause future actual results to differ materially from our recent results or those projected in the forward-looking statements in addition to the factors set forth below, see “Cautionary Note Regarding Forward-Looking Statements” and Item 3, “Key Information — Risk Factors.” We assume no obligation to update the forward-looking statements or such risk factors.
 
Critical Accounting Policies Using Significant Estimates
 
The preparation of our Consolidated Financial Statements,financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”),GAAP requires us to make estimates and assumptions that have a significant impact on the results we report in our Consolidated Financial Statements, which we discuss under the section “Results of Operations.” Some of our accounting policies require us to make difficult and subjective judgments that can affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during the reporting period.assumptions. The primary areas that require significant estimates and judgments by managementus include, but are not limited to, sales returns and allowances; reserves for price protection to certain distributor customers; allowances for doubtful accounts; inventory reserves and normal manufacturing loading thresholds to determine costs to be capitalized in inventory; accruals for warranty costs, litigation and claims; assumptions used to discount monetary assets expected to be recovered beyond one year; valuation of acquired intangibles, goodwill, investments and tangible assets as well as the impairment of their related carrying values; estimated value of the consideration to be received and used as fair value for disposal asset group classified as assets to be disposed of by sale; evaluation of the fair value of marketable securities available-for-sale for which no observable market price is obtainable and assessment of any potential impairment; estimates relating to the valuation of business transactions and relevant accounting considerations; restructuring charges; other non-recurring special charges; assumptions used in calculating pension obligations and share-based compensation including assessment of the number of awards expected to vest upon future performance condition achievement; assumptions used to measure and recognize a liability for the fair value of the obligation we assume at the inception of a guarantee; assessment of hedge effectiveness of derivative instruments; deferred income tax assets, including required valuation allowances and liabilities; and provisions for specifically identified income tax exposures and income tax uncertainties. to:
• sales returns and allowances;
• determination of best estimate of selling price for deliverables in multiple element sale arrangements;
• inventory reserves and normal manufacturing capacity thresholds to determine costs capitalized in inventory;
• accruals for litigation and claims;
• valuation at fair value of acquired assets including intangibles and assumed liabilities in a business combination, goodwill, investments and tangible assets as well as the impairment of their related carrying values;
• the assessment in each reporting period of events, which could trigger interim impairment testing;
• estimated value of the consideration to be received and used as fair value for asset groups classified as assets to be disposed of by sale and the assessment of probability to realize the sale;
• measurement of the fair value of debt and equity securities classified asavailable-for-sale, including debt securities, for which no observable market price is obtainable;
• the assessment of credit losses andother-than-temporary impairment charges on financial assets;
• the valuation of noncontrolling interests, particularly in case of contribution in kind as part of a business combination;
• restructuring charges;
• assumptions used in calculating pension obligations;
• assumptions used to measure and recognize a liability for the fair value of the obligation we assume at the inception of a guarantee;
• deferred income tax assets including required valuation allowances and liabilities as well as provisions for specifically identified income tax exposures and income tax uncertainties.


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We base ourthe estimates and assumptions on historical experience and on various other factors such as market trends and latest available business plans and levels of materiality that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. While we regularly evaluate our estimates and assumptions, ourthe actual results maywe experience could differ materially and adversely from our estimates. To the extent there are material differences between theour estimates and actual results, and these estimates, our future results of operations, cash flows and financial position could be significantly affected. With respect to the wireless segment, our estimates are made under the supervision of ST-Ericsson’s CEO and CFO, who report to ST-Ericsson’s Board of Directors.
 
We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our Consolidated Financial Statements:
 
• Revenue recognition.  Our policy is to recognize revenues from sales of products to our customers when all of the following conditions have been met: (a) persuasive evidence of an arrangement exists; (b) delivery has occurred; (c) the selling price is fixed or determinable; and (d) collectibility is reasonably assured. This usually occurs at the time of shipment.
Revenue recognition.  Our policy is to recognize revenues from sales of products to our customers when all of the following conditions have been met: (a) persuasive evidence of an arrangement exists; (b) delivery has occurred; (c) the selling price is fixed or determinable; and (d) collectability is reasonably assured. This usually occurs at the time of shipment.
 
Consistent with standard business practice in the semiconductor industry, price protection is granted to distributor customers on their existing inventory of our products to compensate them for declines in market prices. The ultimate decision to authorize a distributor refund remains fully within our control. We accrue a provision for price protection based on a rolling historical price trend computed on a monthly basis as a percentage of gross distributor sales. This historical price trend represents differences in recent months between the invoiced price and the final price to the distributor, adjusted if required, to accommodate for a significant move in the current market price. The short outstanding inventory time period, visibility into the standard inventory product pricing (as opposed to certain customized products) and long distributor pricing history have enabled us to reliably estimate price protection provisions at period-end. We record the accrued amounts as a deduction of revenue at the time of the sale. The ultimate decision to authorize a distributor refund remains fully within our control. The short outstanding inventory time period, our ability to foresee changes in standard inventory product pricing (as opposed to pricing for certain customized products) and our lengthy distributor pricing history have enabled us to reliably estimate price protection provisions at period-end. If market conditions differ from our assumptions,


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this could have an impact on future periods; inperiods. In particular, if market conditions were to deteriorate, net revenues could be reduced due to higher product returns and price reductions at the time these adjustments occur.
 
Our customers occasionally return our products from time to time for technical reasons. Our standard terms and conditions of sale provide that if we determine that our products are non-conforming, we will repair or replace the non-conforming products,them, or issue a credit or rebate of the purchase price. In certain cases, when the products we have supplied have been proven to be defective, we have agreed to compensate our customers for claimed damages in order to maintain and enhance our business relationship. Quality returns are not related to any technological obsolescence issues and are identified shortly after sale in customer quality control testing. Quality returns are always associated with end-user customers, not with distribution channels. We provide for such returns when they are considered as probablelikely and can be reasonably estimated. We record the accrued amounts as a reduction of revenue.
 
Our insurance policies relating to product liability only cover physical and other direct damages caused by defective products. We do not carry only limited insurance against immaterial, non-consequential damages.damages in the event of a product recall. We record a provision for warranty costs as a charge against cost of sales based on historical trends of warranty costs incurred as a percentage of sales which we have determined to be a reasonable estimate of the probable losses to be incurred for warranty claims in a period. Any potential warranty claims are subject to our determination that we are at fault and liable for damages, and that such claims usually must be submitted within a short period following the date of sale. This warranty is given in lieu of all other warranties, conditions or terms expressed or implied by statute or common law. Our contractual terms and conditions typically limit our liability to the sales value of the products whichthat gave rise to the claims.claim.
 
We maintain an allowance for doubtful accounts for estimated potential estimated losses resulting from our customers’ inability to make required payments. We base our estimates on historical collection trends and record a provision accordingly. Furthermore, we are required to evaluate our customers’ credit ratings from time to time and take an additional provision for any specific account that we estimate asconsider doubtful. In 2007,2009, we did not record any new material specific provision related to bankrupt customers in addition toother than our standard provision of 1% of total receivables based on the estimated historical collection trends. If we receive information that the financial condition of our customers has deteriorated, resulting in an impairment of their ability to make payments, additional allowances could be required. Such deterioration is increasingly likely given the current crisis in the credit markets. Under the current financial situation, we are obliged to hold shipment to certain of our customers on credit watch, which affects our sales and aims at protecting us from credit risk.
 
While the majority of our sales agreements contain standard terms and conditions, we may, from time to time, enter into agreements that contain multiple elements or non-standard terms and conditions, which require revenue recognition judgments. WherePrior to 2009, where multiple elements existexisted in an arrangement,agreement, the revenue arrangement is


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was allocated to the different elements based upon verifiable objective evidence of the fair value of the elements, as governed under Emerging Issues Task Force IssueNo. 00-21, Revenue Arrangementsthe guidance on revenue arrangements with Multiple Deliverables(“EITF 00-21”).multiple deliverables, for such periods. In 2009, we early adopted new revenue recognition guidance requiring allocation of revenue to different deliverables based upon the best estimate of selling price of each deliverable.
 
• Goodwill and purchased intangible assets.  The purchase method of accounting for acquisitions requires extensive use of estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired, including in-process research and development, which is expensed immediately. Goodwill and intangible assets deemed to have indefinite lives are not amortized but are instead subject to annual impairment tests. The amounts and useful lives assigned to other intangible assets impact future amortization. If the assumptions and estimates used to allocate the purchase price are not correct or if business conditions change, purchase price adjustments or future asset impairment charges could be required. At December 31, 2007, the value of goodwill amounted to $290 million.
• Impairment of goodwill.  Goodwill recognized in business combinations is not amortized and is instead subject to an impairment test to be performed on an annual basis, or more frequently if indicators of impairment exist, in order to assess the recoverability of its carrying value. Goodwill subject to potential impairment is tested at a reporting unit level, which represents a component of an operating segment for which discrete financial information is available and is subject to regular review by segment management. This impairment test determines whether the fair value of each reporting unit for which goodwill is allocated is lower than the total carrying amount of relevant net assets allocated to such reporting unit, including its allocated goodwill. If lower, the implied fair value of the reporting unit goodwill is then compared to the carrying value of the goodwill and an impairment charge is recognized for any excess. In determining the fair value of a reporting unit, we usually estimate the expected discounted future cash flows associated with the reporting unit. Significant management judgments and estimates are used in forecasting the future discounted cash flows including: the applicable industry’s sales volume forecast and selling price evolution; the reporting unit’s market penetration; the market acceptance of certain new technologies and relevant cost
Goodwill and purchased intangible assets.  The purchase method of accounting for acquisitions requires extensive use of estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired. Goodwill and intangible assets deemed to have indefinite lives are not amortized but are instead subject to annual impairment tests. The amounts and useful lives assigned to other intangible assets impact future amortization. If the assumptions and estimates used to allocate the purchase price are not correct or if business conditions change, purchase price adjustments or future asset impairment charges could be required. At December 31, 2009, the value of goodwill amounted to $1,071 million. Of such amount, $143 million was recognized in 2009 at the creation of ST-Ericsson following the purchase price allocation.
Impairment of goodwill.  Goodwill recognized in business combinations is not amortized and is instead subject to an impairment test to be performed on an annual basis, or more frequently if indicators of impairment exist, in order to assess the recoverability of its carrying value. Goodwill subject to potential impairment is tested at a reporting unit level, which represents a component of an operating segment for which discrete financial information is available. This impairment test determines whether the fair value of each reporting unit for which goodwill is allocated is lower than the total carrying amount of relevant net assets allocated to such reporting unit, including its allocated goodwill. If lower, the implied fair value of the reporting unit goodwill is then compared to the carrying value of the goodwill and an impairment charge is recognized for any excess. In determining the fair value of a reporting unit, we usually estimate the expected discounted future cash flows associated with the reporting unit. Significant management judgments and estimates are used in forecasting the future discounted cash flows. Our evaluations are based on financial plans updated with the latest available projections of the semiconductor market evolution, our sales expectations and our costs evaluation, and are consistent with the plans and estimates that we use to manage our business. It is possible, however, that the plans and estimates used may be incorrect, and future adverse changes in market conditions or operating results of acquired businesses that are not in line with our estimates may require impairment of certain goodwill. As a result of our yearly impairment testing, we recorded $6 million of impairment of goodwill charges in 2009.
We last performed our annual impairment testing in the third quarter of 2009. We did not record any goodwill impairment during the third or fourth quarter of 2009. However, many of the factors used in assessing fair values for such assets are outside of our control and the estimates used in such analyses are subject to change. Due to the ongoing uncertainty of the current market conditions, which may continue to negatively impact our market value, we will continue to monitor the carrying value of our assets. If market and economic conditions deteriorate further, this could result in future non-cash impairment charges against income. Further impairment charges could also result from new valuations triggered by changes in our product portfolio or strategic transactions, including ST-Ericsson, and possible further impairment charges relating to our investment in Numonyx (in the event its sale to Micron is not finalized), particularly in the event of a downward shift in future revenues or operating cash flow in relation to our current plans.
Intangible assets subject to amortization.  Intangible assets subject to amortization include the cost of technologies and licenses purchased from third parties, as well as from the purchase method of accounting for acquisitions, purchased software and internally developed software that is capitalized. In addition, intangible assets subject to amortization include intangible assets acquired through business combinations such as core technologies and customer relationships. Intangible assets subject to amortization are reflected net of any impairment losses and are amortized over their estimated useful life. The carrying value of intangible assets subject to amortization is evaluated whenever changes in circumstances indicate that the carrying amount may not be recoverable. In determining recoverability, we initially assess whether the carrying value exceeds the undiscounted cash flows associated with the intangible assets. If exceeded, we then evaluate whether an impairment charge is required by determining if the asset’s carrying value also exceeds its fair value. An impairment loss is recognized for the excess of the carrying amount over the fair value. We normally estimate the fair value based on the projected discounted future cash flows associated with the intangible assets. Significant management judgments and estimates are required to forecast the future operating results used in the discounted cash flow method of valuation. Our evaluations are based on financial plans updated with the latest available projections of growth in the semiconductor market and our sales expectations. They are consistent with the plans and estimates that we use to manage our business. It is possible, however, that the plans and estimates used may be incorrect and that future adverse changes in market conditions or operating results of businesses acquired may not be in line with our estimates and may therefore require us to recognize impairment of certain intangible assets. At December 31, 2009, the value of


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structure; the discount rates applied using a weighted average cost of capital; and the perpetuity rates used in calculating cash flow terminal values. Our evaluations are based on financial plans updated with the latest available projections of the semiconductor market evolution, our sales expectations and our costs evaluation and are consistent with the plans and estimates that we use to manage our business. It is possible, however, that the plans and estimates used may be incorrect, and future adverse changes in market conditions or operating results of acquired businesses not in line with our estimates may require impairment of certain goodwill. During 2007, we performed our annual review of impairment of goodwill and based on this test no impairment charges were required to be recorded.
intangible assets subject to amortization amounted to $819 million, of which $48 million was related to the ST-Ericsson joint venture consolidated in the first quarter of 2009.
 
• Intangible assets subject to amortization.  Intangible assets subject to amortization include the cost of technologies and licenses purchased from third parties, internally developed software that is capitalized and purchased software. Intangible assets subject to amortization are reflected net of any impairment losses. These are amortized over a period ranging from three to seven years. The carrying value of intangible assets subject to amortization is evaluated whenever changes in circumstances indicate that the carrying amount may not be recoverable. In determining recoverability, we initially assess whether the carrying value exceeds the undiscounted cash flows associated with the intangible assets. If exceeded, we then evaluate whether an impairment charge is required by determining if the asset’s carrying value also exceeds its fair value. An impairment loss is recognized for the excess of the carrying amount over the fair value. We normally estimate the fair value based on the projected discounted future cash flows associated with the intangible assets. Significant management judgments and estimates are required and used in the forecasts of future operating results that are used in the discounted cash flow method of valuation, including: the applicable industry’s sales volume forecast and selling price evolution; our market penetration; the market acceptance of certain new technologies; and costs evaluation. Our evaluations are based on financial plans updated with the latest available projections of the semiconductor market evolution and our sales expectations and are consistent with the plans and estimates that we use to manage our business. It is possible, however, that the plans and estimates used may be incorrect and that future adverse changes in market conditions or operating results of businesses acquired may not be in line with our estimates and may therefore require impairment of certain intangible assets. We recorded $2 million of impairment charges in 2007 on certain technologies following our decision to discontinue our activities using those technologies. At December 31, 2007, the value of intangible assets in our Consolidated Financial Statements subject to amortization amounted to $238 million.
• Property, plant and equipment.  Our business requires substantial investments in technologically advanced manufacturing facilities, which may become significantly underutilized or obsolete as a result of rapid changes in demand and ongoing technological evolution. We estimate the useful life for the majority of our manufacturing equipment, which is the largest component of our long-lived assets, to be six years. This estimate is based on our experience with using equipment over time. Depreciation expense is a major element of our manufacturing cost structure. We begin to depreciate new equipment when it is placed into service.
Property, plant and equipment.  Our business requires substantial investments in technologically advanced manufacturing facilities, which may become significantly underutilized or obsolete as a result of rapid changes in demand and ongoing technological evolution. We estimate the useful life for the majority of our manufacturing equipment, the largest component of our long-lived assets, to be six years, except for our300-mm manufacturing equipment whose useful life was estimated to be ten years. This estimate is based on our experience using the equipment over time. Depreciation expense is a major element of our manufacturing cost structure. We begin to depreciate new equipment when it is placed into service.
 
We evaluate each periodperform an impairment review when there is reason to suspect that the carrying value of tangible assets or groups of assets might not be recoverable. Factors we consider important which could trigger an impairment review include: significant negative industry trends, significant underutilization of the assets or available evidence of obsolescence of an asset, strategic management decisions impacting production or an indication that its economic performance is, or will be, worse than expected and a more likely than not expectation that assets will be sold or disposed of prior to their estimated useful life. In determining the recoverability of assets to be held and used, we initially assess whether the carrying value exceeds the undiscounted cash flows associated with the tangible assets or group of assets. If exceeded, we then evaluate whether an impairment charge is required by determining if the asset’s carrying value also exceeds its fair value. We normally estimate this fair value based on independent market appraisals or the sum of discounted future cash flows, using market assumptions such as the utilization of our fabrication facilities and the ability to upgrade such facilities, change in the selling price and the adoption of new technologies. We also evaluate the continued validity of an asset’s useful life when impairment indicators are identified. Assets classified as held for sale are reflected at the lower of their carrying amount orand fair value less selling costs and are not depreciated during the selling period. Selling costs include incremental direct costs to transact the sale that we would not have incurred except for the decision to sell.
 
Our evaluations are based on financial plans updated with the latest projections of growth in the semiconductor market evolution and of our sales expectations, from which we derive the future production needs and loading of our manufacturing facilities, and which are consistent with the plans and estimates that we use to manage our business. These plans are highly variable due to the high volatility of the semiconductor


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business and therefore are subject to continuous modifications. If the future evolutiongrowth differs from the basis ofestimates used in our plans, both in terms of both market evolutiongrowth and production allocation to our manufacturing plants, this could require a further review of the carrying amount of our tangible assets resultingand result in a potential impairment loss. At December 31, 2007,In 2009, $25 million of impairment charges were recorded on long-lived assets of our manufacturing sites in Carrollton, Texas and in Phoenix, Arizona.
Inventory.  Inventory is stated at the lower of cost and net realizable value. Cost is based on the weighted average cost by adjusting the standard cost to approximate actual manufacturing costs on a quarterly basis; therefore, the cost is dependent upon our manufacturing performance. In the case of underutilization of our manufacturing facilities, we estimate the costs associated with the excess capacity. These costs are not included in the valuation of inventories but are charged directly to the cost of sales. Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses and cost of completion. As required, we evaluate inventory acquired as part of the 2007 manufacturing restructuring planpurchase accounting at fair value, less completion and of the planned disposal of the FMG assets held for sale, we identified certain tangible assets, mainly equipment, without alternative future use, which generated a charge of $12 million.distribution costs and related margin.
• Inventory.  Inventory is stated at the lower of cost or net realizable value. Cost is based on the weighted average cost by adjusting standard cost to approximate actual manufacturing costs on a quarterly basis; the cost is therefore dependent on our manufacturing performance. In the case of underutilization of our manufacturing facilities, we estimate the costs associated with the excess capacity; these costs are not included in the valuation of inventories but are charged directly to cost of sales. Net realizable value is the estimated selling price in the ordinary course of business less applicable variable selling expenses.
 
The valuation of inventory requires us to estimate obsolete or excess inventory as well as inventory that is not of saleable quality. Provisions for obsolescence are estimated for excess uncommitted inventories based on the previous quarterquarter’s sales, order backlog and production plans. To the extent that future negative market conditions generate order backlog cancellations and declining sales, or if future conditions are less favorable than the projected revenue assumptions, we could be required to record additional inventory provisions, which would have a negative impact on our gross margin.
 
• Asset disposal.  On May 22, 2007, we entered into a definitive agreement with Intel Corporation and Francisco Partners L.P. to create a new independent semiconductor company from the key assets of businesses which for our Company had been included in our Flash Memories Group (“FMG”). Upon signature of this agreement, the conditions were met for “Assets held for sale” treatment in our Consolidated Financial Statements for the assets to be contributed to the new company. Upon movement of the assets to be contributed, which consisted primarily of fixed and intangible assets to “Assets held for sale”, the relevant depreciation and amortization charges were stopped under Statement of Financial Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“FAS 144”). Furthermore, FAS 144 requires an impairment analysis when assets are moved to “Assets held for sale” based on the difference between the Net Book Value and the Fair Value, less costs to sell, of the group of assets (and liabilities) to be sold. As a result of this review, we have registered a pre-tax loss in 2007 of $1,106 million, an additional pre-tax $1 million impairment charge on certain specific equipment that could not be transferred and for which no alternative future use could be found in the Company (as disclosed above in the paragraph related to property, plant and equipment) and an additional pre-tax $5 million of other related disposal costs. Fair value less costs to sell was based on the net consideration of the agreement and significant estimates about the valuation of our associated equity ownership. The final amount could be different subject to adjustments due to business evolution before closing of the transaction.
• Restructuring charges.  We have undertaken, and we may continue to undertake, significant restructuring initiatives, which have required us, or may require us in the future, to develop formalized plans for exiting any of our existing activities. We recognize the fair value of a liability for costs associated with exiting an activity when a probable liability exists and it can be reasonably estimated. We record estimated charges for non-voluntary termination benefit arrangements such as severance and outplacement costs meeting the criteria for a liability as described above. Given the significance of and the timing of the execution of such activities, the process is complex and involves periodic reviews of estimates made at the time the original decisions were taken. As we operate in a highly cyclical industry, we monitor and evaluate business conditions on a regular basis. If broader or newer initiatives, which could include production curtailment or closure of other manufacturing facilities, were to be taken, we may be required to incur additional charges as well as to change estimates of amounts previously recorded. The potential impact of these changes could be material and could have a material adverse effect on our results of operations or financial condition. In 2007, the net amount of restructuring charges and other related closure costs amounted to $105 million before taxes (including the $5 million related to the FMG deconsolidation as mentioned above). As of December 31, 2007, we had incurred $62 million of restructuring charges (excluding any impairment charges that are mentioned above) of the total expected approximate $270 million to $300 million in pre-tax charges associated with the new 2007 manufacturing restructuring plan of our manufacturing activities. The plan was defined on July 10, 2007 and is expected to take two to three years to complete. See Note 21 to our Unaudited Interim Consolidated Financial Statements.
• Share-based compensation.  We are required to expense our employees’ share-based compensation awards for financial reporting purposes. We measure our share-based compensation cost based on the fair value on
Business combination.  The purchase method of accounting for business combinations requires extensive use of estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired. The amounts and useful lives assigned to other intangible assets impact future amortization. If the assumptions and estimates used to allocate the purchase price are not correct or if business conditions change, purchase price adjustments or future asset impairment charges could be required. On February 3, 2009, we announced the closing of our agreement to merge ST-NXP Wireless into a joint venture with Ericsson Mobile Platforms (“EMP”). Ericsson contributed $1,155 million in cash, out of which $700 million was paid to us. We also received $99 million as an equity investment in JVD, in which we own 50% less a controlling share held by Ericsson. Our contribution to the joint venture represented a total amount of $2,210 million, of which $1,105 million was allocated to noncontrolling interests in the wireless business. The purchase price allocation resulted in the recognition of $48 million in customer relationships, $23 million in property, plant and equipment, $47 million liabilities net of other current assets, $143 million on goodwill and $306 million on Ericsson’s noncontrolling interest in the joint venture.


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the grant date of each award. This cost is recognized over the period during which an employee is required to provide service in exchange for the award or the requisite service period, usually the vesting period, and is adjusted for actual forfeitures that occur before vesting. Our share-based compensation plans may award shares contingent on the achievement of certain financial objectives, including market performance and financial results. In order to assess the fair value of this share-based compensation, we are required to estimate certain items, including the probability of meeting the market performance and financial results targets, the forfeitures and the service period of our employees. As a result, in 2007 we recorded a total pre-tax expense of $73 million out of which $9 million are related to the 2005 Unvested Stock Award Plan, $44 million to the 2006 Unvested Stock Award Plan and $20 million to the 2007 Unvested Stock Award Plan.
Restructuring charges.  We have undertaken, and we may continue to undertake, significant restructuring initiatives, which have required us, or may require us in the future, to develop formalized plans for exiting any of our existing activities. We recognize the fair value of a liability for costs associated with exiting an activity when a probable liability exists and it can be reasonably estimated. We record estimated charges for non-voluntary termination benefit arrangements such as severance and outplacement costs meeting the criteria for a liability as described above. Given the significance and timing of the execution of such activities, the process is complex and involves periodic reviews of estimates made at the time the original decisions were taken. This process can require more than one year due to requisite governmental and customer approvals and our capability to transfer technology and know-how to other locations. As we operate in a highly cyclical industry, we monitor and evaluate business conditions on a regular basis. If broader or newer initiatives, which could include production curtailment or closure of other manufacturing facilities, were to be taken, we may be required to incur additional charges as well as change estimates of the amounts previously recorded. The potential impact of these changes could be material and could have a material adverse effect on our results of operations or financial condition. In 2009, the net amount of restructuring charges and other related closure costs amounted to $256 million before taxes.
 
• Income taxes.  We are required to make estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments also occur in the calculation of certain tax assets and liabilities and provisions. Furthermore, the adoption of the Financial Accounting Standards Board (“FASB”) interpretation No. 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109 (“FIN 48”) requires an evaluation of the probability of any tax uncertainties and the booking of the relevant charges.
Share-based compensation.  We measure our share-based compensation cost based on its fair value on the grant date of each award. This cost is recognized over the period during which an employee is required to provide service in exchange for the award or the requisite service period, usually the vesting period, and is adjusted for actual forfeitures that occur before vesting. Our share-based compensation plans may award shares contingent on the achievement of certain financial objectives, including our financial results. In order to assess the fair value of this share-based compensation, we are required to estimate certain items, including the probability of meeting market performance and financial results targets, forfeitures and employees’ service period. As a result, in relation to our nonvested Stock Award Plan, we recorded a total pre-tax expense of $38 million in 2009, out of which $4 million was related to the 2006 plan; $17 million to the 2007 plan; $8 million to the 2008 plan; and $9 million to the 2009 plan, provided that two out of the three performance conditions have been met. The shares from the 2009 plan were granted on July 28, 2009. The performance measurement conditions for the 2009 plan include: evolution of sales and evolution of operating income both compared against our top competitors and actual cash flow as compared to the forecast. As of December 31, 2009, according to our best estimates, we anticipate that two criteria will probably be met: evolution of sales and cash flow.
Earnings (loss) on Equity Investments.  We are required to record our proportionate share of the results of the entities that we account for under the equity method. This recognition is based on results reported by these entities, sometimes on a one-quarter lag, and, for such purpose, we rely on their internal controls. In 2009, we recognized approximately $103 million, on a one quarter lag, as our proportional interest in the loss recorded by Numonyx, based on our 48.6% ownership interest, net of amortization of basis differences; $5 million of which was recorded in the fourth quarter of 2009. In addition, we recognized in 2009, $32 million related to the ST-Ericsson JVD entities we account for under the equity method, net of the amortization of basis differences; $7 million of which was recorded in the fourth quarter of 2009. In case of triggering events, we are required to determine the fair value of our investment and assess the classification of temporary versusother-than-temporary impairments of the carrying value. We make this assessment by evaluating the business on the basis of the most recent plans and projections or to the best of our estimates. In the first quarter of 2009, due to the deterioration of both the global economic situation and the Memory market segment, as well as Numonyx’s results, we assessed the fair value of our investment and recorded an additional other-than temporary impairment charge of $200 million. The calculation of the impairment was based on both an income approach, using discounted cash flows, and a market approach, using the metrics of comparable public companies. We did not book any impairment charge in the second, third or fourth quarter of 2009.
Financial assets.  We classify our financial assets in the following categories:held-for-trading andavailable-for-sale. Upon the adoption of FASB guidance on fair value measurements for financial assets and liabilities, we did not elect to apply the fair value option on any financial assets. Such classification depends on the purpose for which the investments are acquired. Management determines the classification of its financial assets at initial recognition. Unlisted equity securities with no readily determinable fair value are carried at cost. They are neither classified asheld-for-trading nor asavailable-for-sale. Regular purchases and sales of financial assets are recognized on the trade date — the date on which we commit to purchase or sell the asset. Financial assets are initially recognized at fair value, and transaction costs are expensed in the consolidated statements of income.Available-for-sale andheld-for-trading financial assets are subsequently carried at fair value. The gain (loss) on the sale of the financial assets is reported as a non-operating element on the consolidated statements of income. The fair values of quoted debt and equity securities are based on current market prices. If the market for a financial asset is not active and if no observable market price is obtainable, we measure fair value by using assumptions and estimates. For unquoted equity securities, these assumptions and estimates include the use of recent arm’s length


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transactions; for debt securities without available observable market price, we establish fair value by reference to publicly available indexes of securities with same rating and comparable or similar underlying collaterals or industries’ exposure, which we believe approximates the orderly exit value in the current market. In measuring fair value, we make maximum use of market inputs and rely as little as possible on entity-specific inputs. Based on the previously adopted mark to model methodology, in 2009 we had an additional impairment of $72 million on the value of the Auction Rate Securities (“ARS”) that Credit Suisse purchased on our account contrary to our mandate, that was considered as other than temporary, with no additional loss in the third or fourth quarter of 2009. For more information about the ARS purchased by Credit Suisse contrary to our instruction, which are still accounted for and owned by us pending the execution of the favorable arbitration award against Credit Suisse Securities LLC (“Credit Suisse”) by the Financial Industry Regulatory Authority (“FINRA”), see “Liquidity and Capital Resources”.
Income taxes.  We are required to make estimates and judgments in determining income tax expense or benefit for financial statement purposes. These estimates and judgments also occur in the calculation of certain tax assets and liabilities and provisions. Furthermore, the adoption of the FASB guidance on accounting for uncertainty in income taxes requires an evaluation of the probability of any tax uncertainties and the recognition of the relevant charges.
 
We are also required to assess the likelihood of recovery of our deferred tax assets. If recovery is not likely, we are required to record a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable, which would increase our provision for income taxes. Our deferred tax assets have increased substantially in recent years in light of our negative net earnings. As of December 31, 2007,2009, we believed that all of the deferred tax assets, net ofrecorded in our accounts certain valuation allowances as recordedbased on our consolidated balance sheet, would ultimately be recovered.current operating assumptions. However, should thereour operating assumptions change we may be a changeimpaired in our ability to fully recover our deferred tax assets (in our estimates ofin the valuation allowance) orfuture. Likewise, a change in the tax rates applicable in the various jurisdictions this could have an impact on our future tax provisionprovisions in the periods in which these changes could occur.
 
• Patent and other intellectual property litigation or claims.  As is the case with many companies in the semiconductor industry, we have from time to time received, and may in the future receive, communications alleging possible infringement of patents and other intellectual property rights of others. Furthermore, we may become involved in costly litigation brought against us regarding patents, mask works, copyrights, trademarks or trade secrets. In the event that the outcome of any litigation would be unfavorable to us, we may be required to take a license to the underlying intellectual property right upon economically unfavorable terms and conditions, and possibly pay damages for prior use,and/or face an injunction, all of which singly or in the aggregate could have a material adverse effect on our results of operations and ability to compete. See “Item 3. Key Information — Risk Factors — Risks Related to Our Operations — We depend on patents to protect our rights to our technology.”
Patent and other IP litigation or claims.  As is the case with many companies in the semiconductor industry, we have from time to time received, and may in the future receive, communication alleging possible infringement of patents and other IP rights of third parties. Furthermore, we may become involved in costly litigation brought against us regarding patents, mask works, copyrights, trademarks or trade secrets. In the event the outcome of a litigation claim is unfavorable to us, we may be required to purchase a license for the underlying IP right on economically unfavorable terms and conditions, possibly pay damages for prior use,and/or face an injunction, all of which singly or in the aggregate could have a material adverse effect on our results of operations and on our ability to compete. See Item 3. “Key Information — Risk Factors — Risks Related to Our Operations — We depend on patents to protect our rights to our technology.”
 
We record a provision when we believe that it is probable that a liability has been incurred and when the amount of the loss can be reasonably estimated. We regularly evaluate losses and claims with the support of our outside counsel to determine whether they need to be adjusted based on the current information available to us. Legal costs associated with claims are expensed as incurred. In the event of litigation that is adversely determined with respect to our interests, or in the event that we need to change our evaluation of a potential third-party claim based on new evidence or communications, this could have a material adverse effect on our results of operations or financial condition at the time it were to materialize. We are in discussion with several parties with respect to claims against us relating to possible infringementsinfringement of patents and similar intellectual property rights of others.other parties’ IP rights. We are also involved in several legal proceedings concerning such issues.
 
As of December 31, 2007,2009, based on our assessment, we did not record any provisions in our financial statements relating to legal proceedings, becausethird party IP right claims since we had not identified any risk of probable loss that is likely to arise out of theasserted claims or ongoing legal proceedings. There can be no assurance, however, that wethese will be successfulresolved in resolving these proceedings.our favor. If we are unsuccessful, or if the outcome of any litigationclaim or claimlitigation were to be unfavorable to us, we maycould incur monetary damages,and/or face an injunction, all of which singly or in the aggregate could have an injunction. Furthermore,adverse effect on our products as well asresults of operation and our ability to compete.
Pension and Post Retirement Benefits.  Our results of operations and our consolidated balance sheet include an amount of pension and post retirement benefits that are measured using actuarial valuations. At December 31, 2009, our pension and long-term benefit obligations net of plan assets amounted to $317 million based on the productsassumption that our employees will work with us until they reach the age of retirement. These valuations are based on key assumptions, including discount rates, expected long-term rates of return on funds and salary increase rates. These assumptions are updated on an annual basis at the beginning of each fiscal year or more frequently upon the occurrence of significant events. Any changes in the pension schemes or in the above assumptions can have an impact on our valuations. The measurement date we use for the majority of our customers which incorporate our products may be excluded from entry into U.S. territory pursuant to an exclusion order.plans is December 31.
• Pension and Post Retirement Benefits.  Our results of operations and our consolidated balance sheet include the impact of pension and post retirement benefits that are measured using actuarial valuations. At December 31, 2007, our pension obligations amounted to $323 million based on the assumption that our employees will work with us until they reach the age of retirement. These valuations are based on key assumptions, including discount rates, expected long-term rates of return on funds and salary increase rates. These assumptions are updated on an annual basis at the beginning of each fiscal year or more frequently


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upon the occurrence of significant events. Any changes in the pension schemes or in the above assumptions can have an impact on our valuations.
Other claims.  We are subject to the possibility of loss contingencies arising in the ordinary course of business. These include, but are not limited to: warranty costs on our products not covered by insurance, breach of contract claims, tax claims and provisions for specifically identified income tax exposure as well as claims for environmental damages. In determining loss contingencies, we consider the likelihood of a loss of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of such loss or liability. An estimated loss is recorded when we believe that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We regularly reevaluate any losses and claims and determine whether our provisions need to be adjusted based on the current information available to us. In the event we are unable to estimate in a correct and timely manner the amount of such loss, this could have a material adverse effect on our results of operations or financial condition at the time such loss were to materialize.
 
• Other claims.  We are subject to the possibility of loss contingencies arising in the ordinary course of business. These include, but are not limited to: warranty costs on our products not covered by insurance, breach of contract claims, tax claims and provisions for specifically identified income tax exposures as well as claims for environmental damages. In determining loss contingencies, we consider the likelihood of a loss of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of such loss or liability. An estimated loss is recorded when we believe that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We regularly reevaluate any losses and claims and determine whether our provisions need to be adjusted based on the current information available to us. In the event we are unable to estimate in a correct and timely manner the amount of such loss this could have a material adverse effect on our results of operations or financial condition at the time such loss were to materialize.
For more information, see Note 2 to our Consolidated Financial Statements.
 
Fiscal Year 20072009
 
Under Article 35 of our Articles of Association, our financial year extends from January 1 to December 31, which is the period end of each fiscal year. Our fiscal year starts on January 1 and theThe first quarter of 20072009 ended on March 31, 2007.28, 2009. The second quarter of 20072009 ended on June 30, 2007,27, 2009 and the third quarter of 20072009 ended on September 29, 2007.26, 2009. The fourth quarter of 2009 ended on December 31, 2007.2009. Based on our fiscal calendar, the distribution of our revenues and expenses by quarter may be unbalanced due to a different number of days in the various quarters of the fiscal year.
 
20072009 Business Overview
In 2007, the semiconductor market was characterized by a solid increasing demand in units, supported by a strong economic environment, but with a significant decline in average selling prices, particularly in memory products. As a result, the 2007 growth rate for the semiconductor industry was lower than the 2006 growth rate.
 
The total available market is defined as the “TAM”, while the serviceable available market, the “SAM”, is defined as the market for products produced by us (which consists of the TAM and excludes PC motherboard major devices such as microprocessorsMicroprocessors (“MPU”MPUs”), dynamic random access memories (“DRAM”),DRAMs, optoelectronics devices and optoelectronics devices)Flash Memories).
 
Based upon recently published dataIn 2009, the semiconductor industry continued to be negatively impacted by the World Semiconductor Trade Statistics (“WSTS”), semiconductor industry revenues increased year-over-year by approximately 3% for the TAM and 6% for the SAM in 2007 to reach approximately $256 billion and approximately $174 billion, respectively. This increase was driven by a robust demand in units while average selling prices declined compared to 2006.
Our 2007 revenues were characterized by a significantly high volume demand and improved products mix, which did not translate into an equivalent revenue performance due to the persisting negative impact of price pressuredifficult conditions in the markets we serve. As a result, our revenues increased by approximately 2% to $10,001 million compared to $9,854 million in 2006. Strong growth in revenues was driven by a double-digit increase in digital consumer application and a mid-single contribution of Automotive application, while FMG revenues registered a double-digit revenues decrease. Our 2007 sales performance was belowglobal economy, which caused both the TAM and the SAM growth rates. Excluding Flash segment, ourto register significant declines compared to the prior year. However, although the early part of the year was characterized by a steep downturn in demand, there was a sharp turnaround in the latter part of the year. This has resulted in difficulty for the industry to keep up with demand. On a quarterly basis, during 2009 the industry registered a sequential recovery after the bottom registered in the first quarter. In particular, in the third and fourth quarters the semiconductor market experienced a solid recovery, driven by an overall surge in volume. Based on published industry data by WSTS, semiconductor industry revenues increased about 4.3%. This performance was abovedeclined in 2009 on ayear-over-year basis by approximately 9% for the TAM without Flash, which increased about 2.6% but belowand 13% for the SAM without Flash, whichto reach approximately $226 billion and $135 billion, respectively. However, in the fourth quarter the TAM and the SAM increased 7% and 4% sequentially, exceeding their 2008 levels by 5.1%.approximately 29% and 16%, respectively.
 
With reference to our business performance, following the deconsolidation of our FMG segment during the first quarter of 2008, the consolidation of the NXP wireless business on August 2, 2008 and the consolidation of the EMP wireless business as of February 3, 2009, our operating results are no longer directly comparable to previous periods.
In 2009, our revenues as reported were $8,510 million, or a 13.5% declineyear-over-year, reflecting the difficult market conditions registered in the semiconductor industry. As a result, our overall performance was basically in line with the SAM.
Our quarterly results,revenues continuously recovered on a sequential basis during 2009 after the bottom registered in the first quarter, driven by a significant increase in demand by our customers across all of our served market segments and regions. Consequently, our fourth quarter 2007 revenues reached $2,583 million, exceeding ouryear-over-year and sequential performance by 13.5% and 13.6%, respectively. While our sequential performance was above the TAM andsignificantly better than the SAM, on a sequential basis. On a ouryear-over-year basis, our performance revenue growth was above the TAM but below the SAM.
 
On a year-over-year basis,In 2009, our fourth quarter 2007 revenues increased by approximately 10% to $2,742 million compared to $2,483 million in the fourth quarter of 2006, due largely to the ASG segment, which grew by approximately 13%, driven primarily by imaging products, data storage and application-specific wireless, and IMS revenues which improved by approximately 11% reflecting strength in MEMS and in advanced analog products. The revenues of the FMG segment continued to register a decline. On a year-over-year basis, the TAM and the SAM registered increases of approximately 3% and 12% respectively.
On a sequential basis, in the fourth quarter of 2007 revenues increased approximately 7% mainly due to the overall strength in the Telecom sector. Our net revenues performance was slightly above the mid-range of our guidance, which indicated a sequential growth between 4% and 9%. Sequentially, the TAM registered a decrease of approximately 1% while the SAM remained flat.


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In 2007, our effective average U.S. dollar exchange rate was €1.00$1.37 for $1.35,€1.00, which reflects the actual exchange rate levels and the impact of certaincash flow hedging contracts, compared to our 2006an effective average exchange rate of $1.49 for €1.00 in 2008. In the fourth quarter of 2009 our effective exchange rate was $1.43, while in the third quarter of 2009 and in the fourth quarter of 2008 our effective exchange rate was $1.38 and $1.40, respectively, for $1.24.€1.00. For a more detailed discussion of our hedging arrangements and the impact of fluctuations in exchange rates, see “— Impact“Impact of Changes in Exchange Rates” below.
 
On a total year basis, ourOur 2009 gross margin decreased from 35.8% in 2006dropped 5.3 percentage points on ayear-over-year basis to 35.4% in 200730.9%, due to lower sales volume and pressure on average selling prices as a result of the difficult market conditions in the industry, as well as underutilization charges associated with the significant loading reduction of all of our manufacturing sites. In


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addition to the severe impact of an unprecedented volume discontinuity on fab operations and efficiency, unused capacity charges negatively impacted our 2009 gross margin by approximately 4 percentage points. The loading reduction also resulted in part from our decision to cut inventory levels in order to protect our cash resources in face of the turmoil in the financial markets. The aforementioned negative impact of declining selling pricessuch charges was partially offset by the more favorable U.S. dollar exchange rate and the weakeningcontribution of an improved product portfolio mix following the U.S. dollar, which offset the improvements coming from better manufacturing performance and improved products mix. In 2007, ourwireless business integration.
Our fourth quarter 2009 gross margin alsowas 37.0%, increasing both compared to the 36.1% registered in the equivalent period in 2008 and the 31.3% reported in the third quarter of 2009. The fourth quarter benefited from the suspended depreciation on our assets that were part of the FMG disposal and were classified as held for sale following the announcement of the transaction on May 22, 2007.
On a sequential basis, our gross margin increased from 35.2% to 36.9% in the fourth quarter 2007, duemore favorable economic environment, which contributed to improved manufacturing efficiency which also includedsales volume and, consequently, the suspended depreciation on the FMG assets held for sale.loading of our fabs. Our fourth quarter gross margin was abovealso favorably impacted by improved efficiencies resulting from our restructuring and cost cutting measures, in particular the midpointclosing of certain fabs. However, we were still not at full saturation and our guidance that had indicated a gross margin of approximately 36.5% plus or minus one percentage point.continued to reflect certain unused capacity charges.
 
Our operating expenses, combining selling, general and administrative expenses and research and development increasedexpenses, grew in 20072009 compared to 20062008, due primarily to increased R&D activities consolidated with our recent wireless integration, and despite a significant favorable currency impact. As in the unfavorable U.S. dollar impact,previous year, 2009 R&D expenses were accounted for net of certain tax credits directly associated with our ongoing programs. In 2009, the higher spendingamount of these credits was $146 million compared to $161 million in research2008.
In 2009, we continued certain ongoing restructuring initiatives and development and higher share-based compensation charges forimplemented new programs to streamline our employees and members and professionalscost structure, in particular after the consolidation of the Supervisory Board.
Our totalnew wireless activities. This resulted in impairment and restructuring charges for 2007 were significantly higher compared to 2006 dueof $291 million, similar to the impairment charge foramount booked in 2008. In 2008, we reported additional charges of $216 million in connection with the planned disposalclosing of the FMG assets held for sale and for the new manufacturing restructuring plan launched in 2007.transaction.
 
In 2007, we benefited from a significant increase in funding for our research and development activities, which contributed to moveOur “Other income and expenses, net” captionimproved significantly in 2009, supported by additional funds granted to our R&D programs through new contracts signed with the French government covering the period 2008 through 2012. Total funding recognized in 2009 was approximately $202 million, including the recognition of contracts signed in 2009 but also related to 2008 projects, significantly higher than the $83 million registered in the prior year period. As a result, “Other income and expenses, net” resulted in income of $166 million compared to income of $62 million in 2008.
Our operating result in 2009 was a loss of $1,023 million compared to a loss of $198 million in 2008. As indicated above, our operating loss was largely negatively impacted by the material drop in our consolidated statements of income from a net expense of $35 million in 2006 to a net income of $48 million.
The combined effectrevenues and unused capacity charges, which exceeded the benefits of the above mentioned factors and the other operating items resulted in a negative impact on our operating income, mainly related to the impairment charge and other related closure costs of the planned disposal of the FMG assets held for sale; excluding the impairment and restructuring charges, our operating income registered a decrease in 2007 over 2006 mainly due to the weakening of thestrengthening U.S. dollar exchange rate and declining prices, which offsethigher amounts of R&D funding. Our fourth quarter 2009 operating result was a loss of $6 million, decreasing from the benefitprevious quarter’s loss of the$196 million, driven by higher sales volume and of the improved products mix. On a quarterly basis, however,manufacturing efficiencies. Our product segments, except Wireless, achieved operating profit in the fourth quarter. IMS and ACCI, in particular, registered a substantial improvement in their level of profitability.
Interest income, net decreased significantly from $51 million in 2008 to $9 million in 2009 due to lower interest income resulting from significantly lower U.S. dollar and Euro denominated interest rates registered in the financial markets compared to 2008.
In 2009, we booked a $337 million loss on equity investments, mainly consisting of $303 million related to our proportional stake in Numonyx, which included a $200 million equity investment impairment recorded in the first quarter 2007 operating income registered solid improvement both2009. In 2008, our loss on a year-over-year and a sequential basis when excluding the impact of impairment and restructuring charges.equity investments was $553 million almost entirely attributable to our loss in Numonyx.
 
In summary, our financial results for 2007 compared to the results of 2006 were favorablyprofitability in 2009 was negatively impacted by the following factors:
 
 • continuous improvementsharp drop in demand as a result of our manufacturing performances;the global economic downturn;
 
 • the suspension of depreciation on the FMG assets held for sale;negative pricing trend;
 
 • higher sales volume and a more favorable products mix; andmanufacturing inefficiencies experienced in our fabs due to the disruption in their operations throughout the year;
 
 • benefitunused capacity charges arising from the underutilization of increased fundingour fabs;
• loss recorded in relation to our researchequity investments, although mitigated compared to the prior year;
• additional impairment and development activities.other restructuring charges related to our ongoing and newly adopted plans, although lower compared to the prior year;


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Our financial results in 2007 were negatively affected by the following factors:
 
 • the provision foradditional R&D expenses inherited from the upcoming disposalintegrated wireless businesses, while the synergy plans are being implemented; and
• losses on financial assets, pending the payment by Credit Suisse of the FMG assets heldamount due pursuant to the FINRA arbitration award that is favorable to us.
The aforementioned factors were partially offset by the following elements:
• favorable currency impact;
• improved product portfolio mix, after deconsolidating Flash and integrating the wireless businesses;
• additional funding for sale and other impairment and restructuring charges;our R&D projects;
 
 • the weakening ofcost savings resulting to date from the U.S. dollar exchange rate;restructuring programs that are in progress; and
 
 • non-controlling interest related to the 50% ownership of ST-Ericsson’s losses, which counterbalanced the negative pricing trends.operating results in the wireless segment.
 
In 2007,Our fourth quarter financial results reflect a positive finish to a very difficult year for us, the semiconductor industry and the global economy. Our fourth quarter net revenues increased sequentially above our outlook range and our gross margin came above the midpoint of our outlook range. We approached break-even with a $6 million loss after restructuring charges of $96 million. Excluding restructuring charges, our fourth quarter operating result therefore returned to profitability. Our stronger than forecasted quarterly sequential revenue performance was thanks to growth in all regions and market segments, with all segments, except Telecom, posting double-digit growth. As a result, we continuedimproved our financial performance in the fourth quarter in terms of operating margins and net operating cash flow despite an unfavorable currency environment.
Despite the challenging economic environment, we made significant progress over the course of 2009 by successfully delivering on key actions announced earlier in the year. First, we protected and then enhanced our cash position. Second, we made excellent progress in lowering our cost base with a $1 billion cost savings plan announced in mid-2009, which we anticipate will be completed by around the middle of 2010.
Our focus on strong capital management is clearly evidenced from our cash flow and balance sheet metrics. We took aggressive actions to investgenerate cash by accelerating our cash conversion cycle, resulting in upgradinga $565 million reduction in inventory and expandingrecord turns above five times. We reduced the ratio of our manufacturing capacity but at a reduced capital expenditures to sales ratio. Total capital expenditures in 2007 were $1,140 million, which were financed entirely by net cash generated from operating activities. In fact, we generated $840 million of net operating cash flow during the year. Net operating cash flow is not a U.S. GAAP measure, as further discussed in the section “Liquidity and Capital Resources — Liquidity — Net operating cash flow.” At December 31, 2007, we had cash, cash equivalents, marketable securities (both current and non-current) and short-term deposits of $3,238 million of which approximately $415 million were invested in ‘auction rate securities’ that were partially impaired in the fourth quarter of 2007. Total debt and bank overdrafts were $2,220 million, of which $2,117 million was long-term debt.


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Our fourth quarter 2007 financial results exceeded the mid-point of our outlook, both in terms of revenues with 6.9% sequential growth and in terms of gross margin which reached 36.9%. Sequential sales growth was driven by our strong Industrial products offering and improving Wireless positioning, both of which are areas of significant product-development focus for us.
Over the course of 2007 we made progress in strengthening our ASG segment. ASG’s revenue growth of approximately 25%to 5.3%, comparing fourth quarter 2007 results with those of the year’s first quarter, was in line with our earlier expectations and is evidenceasset lighter strategy. We repurchased approximately one-third of our strengthening portfolio. Additionally, IMS, which includes Advanced Analog, MEMS, Smartcardsoutstanding convertible bonds with no need of refinancing. We closed the year with $2.9 billion in cash, restricted cash and Microcontrollers, had sales growth over 10% in 2007, demonstrating the qualitymarketable securities and with a net cash position of our product portfolio and capability to increase market share in the industrial and analog markets.
While we continue to make significant improvements in$420 million at of December 31, 2009, significantly improving from a numbernet debt of areas, such as our product portfolio competitiveness, capital intensity, manufacturing performance and cost structure, the financial benefits of our actions are difficult to see, as a rapidly weakening U.S. dollar has absorbed much of our progress. We remain vigilant in the management of our assets, especially in a weak U.S. dollar environment, and we will continue to take the necessary actions and portfolio efforts required to further improve our operating leverage.
We continue to emphasize a lighter asset strategy and are reconfirming our target to have capital expenditures represent approximately 10% of sales in$545 million at December 31, 2008. Importantly, we have significantly increased our net operating cash flow during 2007, improving by 26% over the prior year to $840 million.
In the fourth quarter of 2007 we acquired a world-class product development team as part of our multifaceted agreement with Nokia to deepen our collaboration announced during the third quarter of 2007. This transaction has been accounted as a business purchase and booked during the fourth quarter of 2007 in our financial statements.
 
Business Outlook
 
Looking toWe started the first quarter of 2008, in2010 with a solid backlog and are working to serve our customers’ demand. In line with traditional seasonality,historical trends, we expect to register a sequential net revenue decrease in the first quarter of 2010 of between about -7% and -13%, which equates to an increase of 35% to 45% in net revenues when compared to decline sequentiallytheyear-over-year period. We expect a better than historical evolution in the range between 5% and 11%, which represents a year-over-year improvement of about 11% at the midpoint. Theour gross margin is expected to be about 36.3%37.5%, plus or minus 1 percentage point.point, thanks to better manufacturing loading and efficiencies and an improved product mix.
 
This outlook refersLooking forward, we believe we are well positioned to benefit from the industry upturn because of the important work we have done in product and technology innovation. We plan to deliver the benefits of our innovation to our entire company,customers and we also expect ST-Ericsson to execute on its plan to transition to the new portfolio strategy they have devised for their next generation offering. Our recent design-wins for digital consumer platforms, ASICs, and automotive products and our many promising offerings including expected results32-bit microcontrollers, MEMS with our new families of gyroscopes and active microphones, low-power sensors for healthcare, and building automation applications highlight our efforts to continuously improve our product portfolio.
We have emerged from FMG for the full quarter and Genesis forrecession in a stronger financial position. Our balance sheet is among the final two months; the amount of the loss may increase pending the final evaluation report being prepared by an independent firm, as well as the impact of any further deteriorationstrongest in the market conditionssemiconductor industry, with healthy receivables, appropriate inventory levels and a solid net cash position. Two of our three product segments have returned to profitability and are expected to improve their level of operating margin performance as we move through 2010. We also expect ST-Ericsson to complete its cost realignment plan during the Flash memory businessyear. Overall, we are confident that all product segments will contribute to further improvement in our operating results.


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In summary, we are excited about the many opportunities ahead of us. While we continue to make solid progress on reducing our cost structure, our innovative product portfolio is positioning us well to achieve sustainable profitability and the credit markets generally. cash flow generation.
Our outlook is based on an assumed effective currency exchange rate of approximately $1.46 to$1.42 = €1.00 for the 2010 first quarter, of 2008, which reflects currentan assumed exchange rate levelsof $1.44 = €1.00, combined with the impact of existing hedging contracts.contracts averaging a hedged rate of about $1.41 = €1.00. In addition, the first quarter will close on March 27, 2010.
 
These are forward-looking statements that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially; in particular, refer to those known risks and uncertainties described in “Cautionary Note Regarding Forward-Looking Statements” and Item 3,3. “Key Information — Risk Factors” in thisForm 20-F.herein.
 
Other Developments
 
As of January 1, 2007, we reorganized our product segment groups as follows: the Application Specific Groups, the Industrial and Multisegment Sector and the Flash Memories Group. The Application Specific Groups include the existing Automotive Products Group and Computer Peripherals Group and the newly created Mobile, Multimedia & Communications Group and Home Entertainment & Displays Group. The Industrial and Multisegment Sector contain the Microcontrollers, Memories & Smartcards Group and the Analog, Power & MEMS Group. The Flash Memories Group incorporates all Flash memory operations, including research and development and product-related activities, front- and back-end manufacturing, marketing and sales. In conjunction with this realignment,On February 3, 2009, we announced the closing of our agreement to merge ST-NXP Wireless into a number of new executivejoint venture with EMP. Ericsson contributed $1.1 billion to the joint venture and corporate vice presidents. These include$700 million was paid to us. Prior to the promotion of Mr. Carmelo Papa to Executive Vice Presidentclosing of the Industrialtransaction, we exercised our option to buy out NXP’s 20% ownership stake of ST-NXP Wireless. Governance of ST-Ericsson is balanced, with each parent appointing four directors to the board. Employing about 8,000 people — roughly 3,000 from Ericsson and Multisegment Sector;approximately 5,000 from us — ST-Ericsson is headquartered in Geneva, Switzerland. On September 2, 2009, ST-Ericsson announced the appointment of wireless industry expert Gilles Delfassy as president and CEO. Mr. Tommi Uhari as Executive Vice President over the Mobile, Multimedia & Communications Group; Mr. Mario Licciardello as the Corporate Vice President and General Manager of the stand-alone Flash Memories Group; Mr. Claude Dardanne as the Corporate Vice President leading the Microcontrollers, Memories & Smartcards Group; and Mr. Christos Lagomichos as the Corporate Vice President for the Home Entertainment & Displays Group.
On January 16, 2007, we confirmed that the technology development at Crolles will continue beyond 2007, after the announcement that NXP Semiconductors would withdraw from the Crolles2 alliance at the end of 2007 and the joint technology cooperation agreements with NXP Semiconductors and Freescale Semiconductor would expireDelfassy assumed his position on December 31, 2007. The Crolles2 alliance, for which we have partnered with NXP Semiconductors and


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Freescale Semiconductor, has worked together to complete the program on 45-nm CMOS and manage the transition throughout 2007.
On January 22, 2007, a new option agreement was enacted with an independent foundation, Stichting Continuïteit ST (the “Stichting”), which will have an independent board. The new option agreement provides for the issuance of up to a maximum of 540,000,000 preference shares. The Stichting has the option, which it shall exercise in its sole discretion, to take up the preference shares. The preference shares would be issuable if the board of the Stichting determines that hostile actions, such as a creeping acquisition or an unsolicited offer for our common shares, would be contrary to our interests, the interests of our shareholders, or of other stakeholders. If the Stichting exercises its call option and acquires preference shares, it must pay at least 25% of the par value of such preference shares. The new option agreement with the Stichting reflects changes in Dutch legal requirements, not a response to any hostile takeover attempt.November 2, 2009.
 
On February 14, 2007,16, 2009, we announced that we had received a favorable arbitration award by FINRA against Credit Suisse for unauthorized investments made in ARS, awarding approximately $406 million plus interest to us. For more information, see “Liquidity and Capital Resources”.
At the end of March 2009, we entered into a framework agreement with the French Ministry of Economy, Industry and Employment for the “Nano2012” Research and Development program, which confirmed our position as the Coordinator and Project Leader and allocated to us €340 million (about $450 million) in grants for the period2008-2012. On July 17, 2009 we formally launched the program at our site in Crolles, near Grenoble, France.
On March 31, 2009, we announced the expansioncompletion of our partnership$500 million medium-term committed credit-facilities program. The $500 million of credit facilities were provided on a bilateral basis by Intesa-San Paolo, Société Générale, Citibank, Centrobanca (UBI Group) and Unicredit. The loan agreements had been executed between October 2008 and March 2009 with Premier Indian Institutes, BITS Pilani and IIT Delhi,commitments from the banks for up to 3 years. We do not currently envisage any utilization of these credit facilities, which have been set up research and innovation labs. The main objective of these partnerships isfor liquidity purposes to facilitate proliferation of Very Large Scale Integration (VLSI) design andstrengthen the labs have been operational since the second quarter of 2007.
In 2006, our shareholders at our annual shareholders meeting approved the grant of up to 5 million Unvested Stock Awards to our senior executives and certain of our key employees, as well as the grant of up to 100,000 Unvested Stock Awards to our President and CEO. Pursuant to such approval, the Compensation Committee approved in April 2006 the conditions which shall apply to the vesting of such awards. These conditions related to three criteria related to ourCompany’s financial performance as well as the continued presence at the defined vesting dates in 2007, 2008 and 2009. About 5 million shares had been awarded under this plan as of March 31, 2007 and on February 28, 2007, the Compensation Committee noted that the three conditions fixed in April 2006 had been fulfilled triggering the vesting of the first tranche of the 2006 awards on April 27, 2007.flexibility.
 
At our annual general meeting of shareholders held on April 26, 2007, our shareholders approvedMay 20, 2009, the following proposals, ofinter alia, were approvedand/or adopted by our Managing Board and our Supervisory Board:shareholders:
 
 • The distribution of a cash dividend of $0.30$0.12 per common share, (representing, an approximately 150% increase to last year’s cash dividend distribution.) The cash dividend distribution took placebe paid in four equal installments, in May 2007. On May 21, 2007, our common shares traded ex-dividend on2009, August 2009, November 2009 and February 2010. Payment of an installment will be made to shareholders of record in the three stock exchanges on which they are listed;month of each quarterly payment;
 
 • The reappointment for a three-year term, expiring at the appointment of Mr. Ray Bingham and Mr. Alessandro Ovi2012 Annual General Meeting, for three-year terms until the 2010 annual general meeting of shareholders as new Supervisory Boardfollowing members in replacement of Mr. Robert White whose mandate was up at such annual shareholders’ meeting and Mr. Antonio Turicchi who resigned from his position effective as of such annual shareholders’ meeting;
• the approval of the main principles of the 2007 share-based compensation plan for our employeesSupervisory Board: Mr. Doug Dunn and CEO. As part of such plan and specifically as approved by the general meeting of shareholders, our President and CEO will be entitled to receive a maximum of 100,000 ordinary shares;
• the adoption of a share-based compensation plan, for members and professionals of our Supervisory Board;
• the designation of our Supervisory Board as the corporate body authorized to resolve upon (i) issuance of any number of shares as comprised in the authorized share capital of our Company as this shall read from time to time, (ii) upon the terms and conditions of an issuance of shares, (iii) upon limitationand/or exclusion of pre-emptive rights of existing shareholders upon issuance of shares, and (iv) upon the granting of rights to subscribe for shares, all for a five-year period as of the date of our 2007 annual shareholders’ meeting;
• the authorization of our Managing Board to acquire for a consideration on a stock exchange or otherwise up to such a number of fullypaid-up ordinary sharesand/or preference shares in our share capital as is permitted by law and our Articles of Association as per the moment of such acquisition — other than acquisition of shares pursuant to article 5, paragraph 2 of our Articles of Association — for a price (i) per ordinary share which at such moment is within a range between the par value of an ordinary share and 110% of the share price per ordinary share on Eurolist by Euronexttm Paris, the New York Stock Exchange or Borsa Italiana, whichever at such moment is the highest, and (ii) per preference share which is calculated in accordance with article 5, paragraph 5 of our Articles of Association, taking into account the amendment to our Articles of Association, for a period of eighteen months as of the date of our 2007 annual shareholders’ meeting;Dr. Didier Lamouche; and
 
 • amendmentsThe maximum number of “restricted” Share Awards under our existing5-year Employee Unvested Share Award Plan(2008-2012) of 30,500,000, which includes any Unvested Stock Awards granted to our ArticlesPresident and CEO as part of Association.his compensation, with the maximum number of “restricted” shares in 2009 to be 6,100,000.


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In addition, at our annual general meeting of shareholders held in Amsterdam on April 26, 2007, our shareholders approved our statutory annual accounts for the 2006 financial year which were reported in accordance with International Financial Reporting Standards (IFRS).
On May 22, 2007, we announced that we had entered into a definitive agreement with Intel Corporation and Francisco Partners L.P. to create a new independent semiconductor company from the key assets of our and Intel’s Flash Memory businesses, which generated over $3 billion in combined annual revenue in 2007. The new company’s strategic focus will be on supplying Flash memory solutions for a variety of consumer and industrial devices, including cellular phones, MP3 players, digital cameras, computers and other high-tech equipment. Under the terms of the agreement, we will sell our Flash memory assets, including our manufacturing NAND joint venture interest with Hynix Semiconductor in Wuxi People’s Republic of China and other NOR and NAND resources, to a new company, while Intel will sell its NOR assets and business. In exchange, at closing Intel will have received a 45.1% equity ownership stake, and we will receive a 48.6% equity ownership stake. Francisco Partners L.P., a Menlo Park, California-based private equity firm, will invest $150 million in cash for convertible preferred stock representing a 6.3% ownership interest, subject to adjustment in certain circumstances. On July 19, 2007, we announced that the pending new company will be named “Numonyx.” All required regulatory clearances for Numonyx have been received. On December 26, 2007, we agreed with Intel and Francisco Partners to extend the deadline for the closing of Numonyx to March 28, 2008 pending finalization of revised financing terms and conditions. The three parties continue to work to satisfy the conditions to closing for the transaction and expect the closing to take place in the first quarter of 2008. As described in further detail above under the heading “Critical Accounting Policies Using Significant Estimates — Asset Disposal”, the creation of Numonyx gave rise to the assets being contributed to the new company being classified as “Assets held for sale” requiring an impairment analysis, As a result of this review, we have registered a pre-tax loss in 2007 of $1,106 million, an additional pre-tax $1 million impairment charge on certain specific equipment that could not be transferred and for which no alternative future use could be found in the Company and an additional pre-tax $5 million of other related disposal costs. The current estimated loss is the balance between the estimated value of our consideration and an updated calculation of our expected equity value in Numonyx at closing, and the estimated asset value of our contribution which mainly consists of tangible assets related to our fabs in Ang Mo Kio200-mm (Singapore), our Agrate R2200-mm pilot line (Italy), our300-mm building in Catania (Italy), and part of our back-end facility in Muar (Malaysia), the inventory of FMG products, the rights to use certain portions of our manufacturing capacity for a certain period of time, and our participation in the China JV with Hynix Semiconductors. The amount of the loss may increase pending the final evaluation report being prepared by an independent firm, as well as the impact of any further deterioration in the market conditions of the Flash memory business and the credit markets generally.
 
On June 18, 2007,25, 2009, we committed to a new program to optimizeannounced the publication of our cost structure2008 Corporate Responsibility Report. The report which involvescovers all our activities and sites in 2008, contains detailed indicators of our performance across the closing of three manufacturing operations. Over the next two to three years we will wind down operations of our200-mm wafer fab in Phoenix (Arizona), our150-mm wafer fab in Carrollton (Texas) and our back-end packaging and test facility in Ain Sebaa (Morocco). The plan was announced on July 10, 2007. We expect these measures to generate savings of approximately $150 million per year in the cost of goods sold once the plan is completed. The total impairment and restructuring charges for this program are expected to be in thefull range of $270 millionSocial, Environmental, Health & Safety, and $300 million of which approximately $250 million are estimatedCorporate Governance issues and reaffirms our long-established commitment to be cash charges.serving its stakeholders with integrity, transparency and excellence.
 
On July 24, 2007,September 22, 2009 we announced that we had signed an agreement with IBM to collaborate on the developmentappointment of next-generation process technology that is used in semiconductor development and manufacturing. The agreement includes 32-nm and 22-nm CMOS process-technology development, design enablement and advanced research adapted to the manufacturing of300-mm silicon wafers. In addition, it includes both the core bulk CMOS technology and value-added derivative SoC technologies and aims to position both companies at the leading edge of technology development. The new agreement between IBM and us will also include collaboration on IP development and platforms to speed the design of SoC devices in these technologies.
On August 8, 2007, we announced our intention to deepen our collaboration with Nokia on the licensing and supply of integrated circuit designs and modem technologies for 3G and its evolution and on November 5, 2007 we announced that we had completed the transaction. As part of the agreement, a part of Nokia’s Integrated Circuit (IC) operations were transferred to us. The multifaceted agreement is intended to enable us to design and manufacture in volume 3G chipsets based on Nokia’s modem technologies, energy management and RF (radio frequency) technologies, and deliver complete solutions to Nokia and the open market. The transaction also involves the transfer to us of approximately 185 Nokia employees in Finland and the UK. Nokia has awarded us a design win of an advanced 3G HSPA (high-speed packet access) chipset supporting high data rates, which would be the first contribution of the acquired IC design operations. This design win represents our first win of a complete 3G chipset.


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On August 9, 2007, we announced that Mr. Philippe Lambinet joined our CompanyPaul Grimme as Corporate Vice President and General Manager of our Home Entertainment and Displaysthe Automotive Product Group (APG), reporting directly to our President and CEO. Mr Lambinet replaced Christos Lagomichos, who resignedCEO, Carlo Bozotti.
In December 2009, we began a program to repurchase a portion of our outstanding Zero Coupon Senior Convertible Bonds due 2016 (“2016 Bonds”). At December 31, 2009, a total of 98 thousand bonds with an accreted


51

value of $106 million had been repurchased for a total cash consideration of $103 million. The bonds were repurchased in June 2007.off market transactions by financial intermediaries, acting as agents for us. On January 14, 2010, we completed our program, repurchasing over 200 thousand additional 2016 Bonds, with an accreted value of $215 million for a total cash consideration of $212 million. In all, the repurchased bonds represented approximately $321 million, or 30.6% of the total amount originally issued and were equivalent to 13,070,129 shares. The repurchased bonds have been cancelled in accordance with their terms.
On December 3, 2009, we announced changes in our global sales and marketing organization, which consolidated our regions in Asia to two: Greater China and South Asia; and Japan and Korea. Greater China and South Asia will be led by Corporate Vice President Francois Guibert, and Japan and Korea will be led by Corporate Vice President Marco Cassis. In addition, we announced that Corporate Vice President Bob Krysiak will spearhead our efforts to expand into Central and South America and to continue to increase market share in North America. With this move, we have put in place an organization to further improve the overall focus and effectiveness of our sales and marketing efforts.
 
On January 15, 2008,4, 2010, we announced the signature of a joint agreement with Enel and Sharp for the manufacture of triple-junction thin-film photovoltaic panels in Italy. The factory, located in Catania, Italy in the existing M6 facility to be contributed by us, is expected to have an initial production capacity of 160 MW per year. The plant’s capacity is targeted to be gradually increased to 480 MW per year over the next few years and from its start will represent the single most important production facility for solar panels in Italy. Photovoltaic panel manufacturing at the Catania plant is expected to start at the beginning of 2011.
On February 3, 2010, we announced that Tjerk Hooghiemstra joined the following individuals had been appointedCompany as new executive officers, allExecutiveVice-President, Chief Administrative Officer, reporting to our President and Chief Executive OfficerCEO, Carlo Bozotti: Orio Bellezza, as Executive Vice PresidentBozotti. This new position was created with the aim of generating synergies among several staff organizations by optimizing the functions of Human Resources, Health & Safety, Education, Legal, Internal Communication, Security and General Manager, Front-End Manufacturing; Jean-Marc Chery, as Executive Vice President and Chief Technology Officer; Executive Vice-President Andrea Cuomo, as General Manager of our Europe Region, who will also maintain his responsibility for the Advanced System Technology organization; Loïc Lietar, as Corporate Vice President, Corporate Business Development; and Pierre Ollivier, as Corporate Vice President and General Counsel. In addition, we announced the hiring and appointment of Alisia Grenville as Corporate Vice President, Chief Compliance Officer, and the retirement of both Laurent Bosson, as Executive Vice-President for Front-End Technology and Manufacturing, and Enrico Villa, as Executive Vice President and General Manager of our Europe Region.Responsibility.
 
On January 17, 2008,February 10, 2010, we acquired effective control of Genesis Microchipannounced that we, together with our partners Intel Corporation and Francisco Partners, had entered into a definitive agreement with Micron Technology Inc. (“Genesis Microchip”) under, in which Micron will acquire Numonyx Holdings B.V. in an all-stock transaction. In this transaction, upon the terms and subject to the conditions of a tender offer announced on December 11, 2007. On January 24, 2008, we completed a second-step mergerthe definitive agreement, in whichexchange for all of the remaining commonoutstanding capital stock of Numonyx, the cancellation of30-year notes due to the Numonyx shareholders by Numonyx, and the assumption of all outstanding restricted stock units held by Numonyx employees at closing, Micron will issue to Numonyx’s shareholders an aggregate of 140 million shares of Genesis Microchip that had not been acquired throughMicron common stock, subject to a purchase price adjustment on a linear basis of up to 10 million additional shares of Micron common stock to the tender offer were convertedextent the volume weighted average price of the Micron shares for the 20 trading days, ending two days prior to the closing of the transaction, ranges from $9.00 to $7.00 per share. At the closing, 15% of the Micron shares issuable to us and the other sellers will be deposited into the rightescrow for 12 months as partial security for our indemnification obligations to receive the same $8.65Micron. Micron shares will be held by us as a financial investment. Based on Micron’s closing stock price on February 9, 2010 of $9.08 per share, price paidwe will receive — in exchange for our 48.6% stake in Numonyx and the tender offer. Paymentcancellation of the30-year note due to us by Numonyx — approximately $34066.6 million forshares of Micron common stock (including the acquired shares was made throughthat will be held in escrow and taking into account a wholly-owned subsidiarypayable of $77.8 million that was merged withwe owe to Francisco Partners) and into Genesis Microchip promptly thereafter. Additional direct costs associated with the acquisition are estimatedtransfer to be approximately $2 million. On closing, Genesis Microchip became part of our Home Entertainment & Displays Group which is partus from Numonyx of the Application Specific Product Groups segment. At acquisition date,M6 industrial facility in Catania, Italy. As previously announced, we plan to contribute our M6 facility in Catania to our new photovoltaic joint initiative with Enel and Sharp. Upon closing, Numonyx will repay the fair valuefull amount of net assets acquired, including $157.3its outstanding $450 million term loan, while simultaneously terminating our $225 million guarantee of cash, cash equivalentits debt. The closing of the deal is subject to regulatory approvals and short term investment atcustomary closing date, was estimated to be $342  million net of $53 million of liabilities assumed.conditions.
 
Results of Operations
 
Segment Information
 
We operate in two business areas: Semiconductors and Subsystems.
 
In the semiconductors business area, we design, develop, manufacture and market a broad range of products, including discrete memories and standard commodity components, application-specific integrated circuits (“ASICs”), full-custom devices and semi-custom devices and application-specific standard products (“ASSPs”) for analog, digital and mixed-signal applications. In addition, we further participate in the manufacturing value chain of Smart CardSmartcard products through our divisions, which include the production and sale of both silicon chips and Smart Cards.cards.
 
PursuingAs of March 31, 2008, following the strategic repositioning increation with Intel of Numonyx, a new independent semiconductor company from the key assets of our and Intel’s Flash Memory and in order to better meetmemory business (“FMG deconsolidation”), we ceased reporting the requirements of the market,FMG segment.


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Starting August 2, 2008, we realignedreorganized our product groups effective January 1, 2007. Since such date,groups. A new segment was created to report wireless operations. Moreover, as of February 3, 2009, we report our semiconductor sales and operating income inadded the following threeMP product segments:line to Wireless.
The organization during 2009 was as follows:
 
 • Application Specific GroupsAutomotive, Consumer, Computer and Communication Infrastructure (“ASG”ACCI”), comprised of threefour product lines:
• Automotive Products Group (“APG”);
• Computer and Communication Infrastructure (“CCI”);
• Home Entertainment & Displays Group (“HED”); and
• Imaging (“IMG”).
• Industrial and Multi segment Sector (“IMS”), Mobile, Multimedia & Communications Groupcomprised of:
• Analog Power and Micro-Electro-Mechanical Systems (“APM”); and
• Microcontrollers, non-Flash, non-volatile Memory and Smart Card products (“MMS”).
• Wireless (“MMC”Wireless”) and Automotive Products, comprised of:
• Cellular Systems (“APG”CS”);
 
 • Flash Memories GroupConnectivity & Peripherals (“FMG”C&P”), which will be disposed; and;
 
 • IndustrialMobile Platforms (“MP”);
• Wireless Multi Media (“WMM”);
in which, since February 3, 2009, we report the portion of sales and operating results of ST-Ericsson as consolidated in our revenue and operating results; and
• Other Wireless, in which we report manufacturing margin, R&D revenues and Multisegment Sector (“IMS”), comprised ofother items related to the former Micro, Power, Analog (“MPA”) segment, non-Flash memory productswireless business but outside the ST-Ericsson JVS.
As of January 1, 2010, Wireless is comprised of the following lines:
• 2 GE TD-SCDMA & Connectivity;
• 3G Multimedia & Platforms;
• LTE & 3G Modem Solutions;
in which we report the portion of sales and operating results of ST-Ericsson as consolidated in our revenue and operating results; and
• Other Wireless, in which we report manufacturing margin, R&D revenues and Micro-Electro-Mechanical Systems (“MEMS”).other items related to the wireless business but outside the ST-Ericsson JVS.
 
We have restated our results in prior periods for illustrative comparisons of our performance by product segment and by period using the same principles applied to 2007.segment. The preparation of segment information according tobased on the newcurrent segment structure requires management to make significant estimates, assumptions and judgments in determining the operating income of the segments for the prior reporting periods. However, weWe believe that the presentation of the segment information for 2005 and 2006 is comparable torestated 2007 and 2008 presentation is consistent with 2009’s and we are usinguse these comparatives for business management.when managing our Company.
 
Certain significantOur principal investment and resource allocation decisions in the semiconductor business area are for expenditures on process, research and developmentR&D and capital investments in front-end and back-end manufacturing facilities. These decisions are not made by product group segments, but on the basis of the semiconductor business area. All of these product group segments share common research and developmentR&D for process technology and manufacturing capacity for most of their products.


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In the subsystems business area, we design, develop, manufacture and market subsystems and modules for the telecommunications, automotive and industrial markets including mobile phone accessories, battery chargers, ISDN power supplies and in-vehicle equipment for electronic toll payment. Based on its immateriality to our business as a whole, the Subsystems segment does not meet the requirements for a reportable segment as defined in Statement of Financial Accounting Standards No. 131,Disclosuresthe guidance on disclosures about Segmentssegments of an Enterpriseenterprise and Related Information(“FAS 131”).related information.


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The following tables present our consolidated net revenues and consolidated operating income by semiconductor product group segment. For the computation of the segments’ internal financial measurements, we use certain internal rules of allocation for the costs not directly chargeable to the segments, including cost of sales, selling, general and administrative expenses and a significant part of research and developmentR&D expenses. Additionally, in compliance with our internal policies, certain cost items are not charged to the segments, including unused capacity charges, impairment, restructuring charges and other related closure costs,start-up costs of new manufacturing facilities, some strategic and special research and developmentR&D programs or other corporate-sponsored initiatives, including certain corporate level operating expenses, such as patent costs and litigation expensesacquired IP R&D, other non-recurrent purchase accounting items and certain other miscellaneous charges. Starting in the first quarter of 2005, we allocated thestart-up costs to expand our marketing and design presence in new developing areas to each segment, and we restated prior year’s results accordingly.
 
             
  Year Ended December 31, 
  2007  2006  2005 
  (In millions) 
 
Net revenues by product segment:
            
Application Specific Groups (ASG) $5,439  $5,395  $4,991 
Industrial and Multisegment Sector (IMS)  3,138   2,842   2,482 
Flash Memories Group (FMG)  1,364   1,570   1,351 
Others(1)  60   47   58 
             
Total consolidated net revenues
 $10,001  $9,854  $8,882 
             
             
  Year Ended December 31, 
  2009  2008  2007 
  (In millions) 
 
Net revenues by product segments:
            
Automotive Consumer Computer and Communication Infrastructure (“ACCI”) $3,198  $4,129  $3,944 
Industrial and Multi-segment Sector (“IMS”)  2,641   3,329   3,138 
Wireless (Wireless)  2,585   2,030   1,495 
Others(1)  86   55   60 
Flash Memories Group (“FMG”)  —   299   1,364 
Total consolidated net revenues
 $8,510  $9,842  $10,001 
             
 
 
(1)Net revenues of “Others” includeIncludes revenues from the sales of Subsystems mainlysubsystems and other products not allocated to product segments.
 
             
  Year Ended December 31, 
  2007  2006  2005 
  (In millions) 
 
Operating income (loss) by product segment:
            
Application Specific Groups (ASG) $303  $439  $355 
Industrial and Multisegment Sector (IMS)  469   441   336 
Flash Memories Group (FMG)  (51)  (53)  (199)
             
Total operating income (loss) of product segments  721   827   492 
Others(1)  (1,266)  (150)  (248)
             
Total consolidated operating income (loss)
 $(545) $677  $244 
             
For each product segment, the following table discloses the revenues of their relevant product lines for the periods under review:
             
  Year Ended December 31, 
  2009  2008  2007 
  (In millions) 
 
Net revenues by product lines:
            
Automotive Products Group (“APG”) $1,051  $1,460  $1,419 
Computer and Communication Infrastructure (“CCI”)  932   1,077   1,123 
Home Entertainment & Displays (“HED”)  787   1,086   963 
Imaging (“IMG”)  417   499   439 
Others  11   7   — 
Automotive Consumer Computer and Communication Infrastructure (“ACCI”)
  3,198   4,129   3,944 
Analog, Power and Micro-Electro-Mechanical Systems (“APM”)  1,887   2,393   2,313 
Microcontrollers, non-Flash, non-volatile Memory and Smartcard products (“MMS”)  752   936   825 
Others  2   —   — 
Industrial and Multisegment Sector (“IMS”)
  2,641   3,329   3,138 
Cellular Systems (“CS”)(1)  748   321   — 
Connectivity & Peripherals (“C&P”)  416   416   207 
Mobile Platforms (“MP”)  300   —   — 
Wireless Multi Media (“WMM”)  1,110   1,293   1,288 
Others  11   —   — 
Wireless (“Wireless”)
  2,585   2,030   1,495 
Others  86   55   60 
Flash Memories Group (“FMG”)  —   299   1,364 
             
Total consolidated net revenues
 $8,510  $9,842  $10,001 
             
 
 
(1)CS includes the largest part of the revenues contributed by NXP Wireless and, as such, there are no comparable numbers available for 2007. C&P also partly benefited from the NXP wireless contribution.


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  Year Ended December 31, 
  2009  2008  2007 
  (In millions) 
 
Operating income (loss) by product segments:
            
Automotive Consumer Computer and Communication Infrastructure (“ACCI”) $(91) $136  $198 
Industrial and Multisegment Sector (“IMS”)  113   482   469 
Wireless (“Wireless”)(1)  (356)  (65)  105 
Others(2)  (689)  (767)  (1,266)
Operating income (loss) excluding FMG
  (1,023)  (214)  (494)
Flash Memories Group (“FMG”)  —   16   (51)
             
Total consolidated operating loss
 $(1,023) $(198) $(545)
(1)The majority of Wireless’ activities are run through ST-Ericsson JVS, a JV between us and Ericsson. The minority interest of Ericsson in ST-Ericsson’s operating losses (which are 100% included in the wireless segment) is credited in the line “Non controlling interest” of our Income Statement, which reported income of $265 million for the year ended December 31, 2009.
(2)Operating income (loss)loss of “Others” includes items or parts of them, which are not allocated to product segments such as unused capacity charges, impairment, restructuring charges and other related closure costs,start-up and phase-out costs, and other unallocated expenses such as: strategic or special researchR&D programs, acquired IP R&D and development programs,other non-recurrent purchase accounting items, certain corporate-levelcorporate level operating expenses, certain patent claims and litigations,litigation, and other costs that are not allocated to the product segments, as well as operating earnings or losses of the Subsystems and Other Products segment. Certain costs, mainly R&D, formerly in the “Others” category, have been allocated to the product segments; comparable amounts reported in this category have been reclassified accordingly in the above table.Group.
 


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  Year Ended December 31, 
  2007  2006  2005 
  (As a percentage of total net revenues) 
 
Operating income (loss) by product segment:
            
Application Specific Groups (ASG)(1)  5.6%  8.1%  7.1%
Industrial and Multisegment Sector (IMS)(1)  14.9   15.5   13.5 
Flash Memories Group (FMG)(1)  (3.7)  (3.4)  (14.7)
Others(2)  —   —   — 
             
Total consolidated operating income (loss)(3)
  (5.4)%  6.9%  2.7%
             
             
  Year Ended December 31, 
  2009  2008  2007 
  (As percentage of net revenues) 
 
Operating income (loss) by product segments:
            
Automotive Consumer Computer and Communication Infrastructure (“ACCI”)  (2.8)%  3.3%  5.0%
Industrial and Multi-segment Sector (“IMS”)(1)  4.3   14.5   14.9 
Wireless (“Wireless”)(1)  (13.8)  (3.2)  7.0 
Others(2)  —   —   — 
Flash Memories Group (“FMG”)(1)  0   5.4   (3.7)
             
Total consolidated operating loss(3)
  (12.0)%  (2.0)%  (5.4)%
 
 
(1)As a percentage of net revenues per product segment.group.
 
(2)As a percentageIncludes operating income (loss) from sales of total net revenues, “Operatingsubsystems and other income (loss)” of “Others” includes items or parts of them, which are(costs) not allocated to product segments such as impairment, restructuring charges and other related closure costs,start-up costs, and other unallocated expenses, such as: strategic or special research and development programs, certain corporate-level operating expenses, certain patent claims and litigations, and other costs that are not allocated to the product segments, as well as operating earnings or losses of the Subsystems and Other Products segment. Certain costs, mainly R&D, formerly in the “Others” category, have been allocated to the product segments; comparable amounts reported in this category have been reclassified accordingly in the above table.segments.
 
(3)As a percentage of total net revenues.
 
             
  Year Ended December 31, 
  2007  2006  2005 
  (In millions) 
 
Reconciliation to consolidated operating income (loss):
            
Total operating income of product segments
 $721  $827  $492 
Operating income (loss) of others(1)            
Strategic and other research and development programs  (20)  (12)  (28)
Start-up costs
  (24)  (57)  (56)
Impairment, restructuring charges and other related closure costs  (1,228)  (77)  (128)
Subsystems and Other Products Group  6   (1)  1 
One-time compensation and special contributions(2)  —   —   (22)
Seniority awards  (21)  —   — 
Other non-allocated provisions(3)  21   (3)  (15)
Total operating income (loss) of others
  (1,266)  (150)  (248)
             
Total consolidated operating income (loss)
 $(545) $677  $244 
             

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  Year Ended December 31, 
  2009  2008  2007 
  (In millions) 
 
Reconciliation to consolidated operating loss:
            
Total operating income (loss) of product segments $(334) $553  $772 
Total operating income FMG  —   16   (51)
Unused capacity charges  (322)  (57)  — 
Impairment, restructuring charges and other related closure costs  (291)  (481)  (1,228)
Start-up / phase- out costs
  (39)  (17)  (24)
Strategic and other research and development programs  (13)  (24)  (20)
Equipment write-off  (11)  —   — 
R&D funding  (9)  —   — 
Consulting fees related to business combinations  (8)  —   — 
Acquired In-Process R&D and other non recurring purchase accounting items  —   (185)  — 
Manufacturing services  16   —   — 
Other non-allocated provisions(1)  (12)  (3)  6 
Total operating loss Others  (689)  (767)  (1,266)
Total consolidated operating loss
 $(1,023) $(198) $(545)
 
 
(1)OperatingIncludes unallocated income (loss) of “Others” includes items or parts of them, which are not allocated to product segmentsand expenses such as impairment, restructuring charges and other related closure costs,start-up costs, and other unallocated expenses, such as: strategic or special research and development programs, certain corporate-levelcorporate level operating expenses certain patent claims and litigations, and other costs that are not allocated to the product segments, as well as operating earnings or losses of the Subsystems and Other Products segment. Certain costs, mainly R&D, formerly in the “Others” category, have been allocated to the product segments; comparable amounts reported in this category have been reclassified accordingly in the above table.
(2)One-time compensation and special contributions to our former CEO and other executives not allocated to product group segments.
(3)Includes unallocated expenses such as certain corporate level operating expenses and other costs.

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Net Revenuesrevenues by Locationlocation of Order Shipmentorder shipment and by market segment
 
The table below sets forth information on our net revenues by location of order shipment and as a percentage of net revenues:shipment:
 
             
  Year Ended December 31, 
  2007  2006  2005 
  (In millions) 
 
Net Revenues by Location of Order Shipment:(1)
            
Europe $3,159  $3,073  $2,789 
North America(2)  1,176   1,232   1,281 
Asia Pacific(3)  1,874   2,084   1,860 
Greater China(3)  2,750   2,552   2,203 
Japan  475   400   307 
Emerging Markets(2)(4)  567   513   442 
             
Total
 $10,001  $9,854  $8,882 
             
Net Revenues by Location of Order Shipment:(1)
            
Europe  31.6%  31.2%  31.4%
             
North America(2)  11.8   12.5   14.4 
Asia Pacific(3)  18.7   21.1   20.9 
Greater China(3)  27.5   25.9   24.8 
Japan  4.7   4.1   3.5 
Emerging Markets(2)(4)  5.7   5.2   5.0 
             
Total
  100.0%  100.0%  100.0%
             
             
  Year Ended December 31, 
  2009  2008  2007 
  (In millions) 
 
Net Revenues by Location of Order Shipment:(1)(2)
            
EMEA $2,413  $3,024  $3,342 
Americas  1,015   1,334   1,342 
Asia Pacific  2,567   2,480   2,092 
Greater China  2,132   2,492   2,750 
Japan  383   512   475 
Total
 $8,510  $9,842  $10,001 
 
 
(1)Net revenues by location of order shipment region are classified by location of customer invoiced. For example, products ordered byU.S.-based companies to be invoiced to Asia Pacific affiliates are classified as Asia Pacific revenues. Furthermore, the comparison among the different periods may be affected by shifts in order shipment from one location to another, as requested by our customers.
 
(2)As of July 2, 2006, the region “North America” includes Mexico which was part ofJanuary 1, 2009, Emerging Markets has been reallocated to the EMEA, Americas and Asia Pacific organizations.

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The table below shows our net revenues by location of order shipment and market segment application in percentage of net revenues:
             
  Year Ended December 31, 
  2009  2008  2007 
  (As percentage of net revenues) 
 
Net Revenues by Location of Order Shipment:(1)(2)
            
EMEA  28.4%  30.7%  33.4%
Americas  11.9   13.6   13.4 
Asia Pacific  30.2   25.2   20.9 
Greater China  25.0   25.3   27.5 
Japan  4.5   5.2   4.8 
             
Total
  100.0%  100.0%  100.0%
Net Revenues by Market Segment Application(3):
            
Automotive  12.2%  13.8%  14.4%
Consumer  11.5   13.6   14.0 
Computer  12.9   12.0   12.4 
Telecom  39.9   33.3   33.5 
Industrial and Other  7.7   9.0   7.5 
Distribution  15.8   18.3   18.2 
             
Total
  100.0%  100.0%  100.0%
(1)Net revenues by location of order shipment are classified by location of customer invoiced. For example, products ordered byU.S.-based companies to be invoiced to Asia Pacific affiliates are classified as Asia Pacific revenues. Furthermore, the comparison among the different periods may be affected by shifts in prior periods. Amounts haveorder shipment from one location to another, as requested by our customers.
(2)As of January 1, 2009, Emerging Markets has been reclassifiedreallocated to reflect this change.the EMEA, Americas and Asia Pacific organizations.
 
(3)AsThe above table estimates, within a variance of January 1, 2006, we created a new region “Greater China”5% to focus exclusively on10% in the absolute dollar amount, the relative weighting of each of our operations in China, Hong Kong and Taiwan. Net revenues for Asia Pacific for prior periods were restated according to the new perimeter.
(4)Emerging Markets include markets such as India, Latin America (excluding Mexico), the Middle East and Africa, Europe (non-EU and non-EFTA) and Russia.target segments.
Net Revenues by Market Segment
The table below estimates, within a variance of 5% to 10% in the absolute dollar amount, the relative weight of each of our target segments in percentages of net revenues:
             
  Year Ended December 31, 
  2007  2006  2005 
  (As a percentage of
 
  net revenues) 
 
Net Revenues by Market Segment:
            
Automotive  15%  15%  16%
Consumer  17   16   18 
Computer  16   17   17 
Telecom  37   38   35 
Industrial and Other  15   14   14 
             
Total
  100%  100%  100%
             


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The following table sets forth certain financial data from our consolidated statementsConsolidated Statements of income since 2005,Income, expressed in each case as a percentage of net revenues:
 
             
  Year Ended December 31, 
  2007  2006  2005 
  (As a percentage of net revenues) 
 
Net sales  99.7%  99.8%  99.9%
Other revenues  0.3   0.2   0.1 
             
Net revenues  100.0   100.0   100.0 
Cost of sales  (64.6)  (64.2)  (65.8)
             
Gross profit  35.4   35.8   34.2 
Selling, general and administrative  (11.0)  (10.8)  (11.6)
Research and development  (18.0)  (16.9)  (18.3)
Other income and expenses, net  0.5   (0.4)  (0.1)
Impairment, restructuring charges and other related closure costs  (12.3)  (0.8)  (1.5)
Total operating expenses  (40.8)  (28.9)  (31.5)
             
Operating income (loss)  (5.4)  6.9   2.7 
Other than temporary impairment charge on financial asset  (0.4)  —   — 
Interest income (expense), net  0.8   0.9   0.4 
Earnings (loss) on equity investment  0.1   (0.1)  — 
Income (loss) before income taxes and minority interests  (4.9)  7.7   3.1 
Income tax benefit (expense)  0.2   0.2   (0.1)
             
Income (loss) before minority interests  (4.7)  7.9   3.0 
Minority interests  (0.1)  —   — 
             
Net income (loss)
  (4.8)%  7.9%  3.0%
             
             
  Year Ended December 31, 
  2009  2008  2007 
  (As percentage of net revenues) 
 
Net sales  99.5%  99.5%  99.7%
Other revenues  0.5   0.5   0.3 
Net revenues
  100   100   100 
Cost of sales  (69.1)  (63.8)  (64.6)
Gross profit
  30.9   36.2   35.4 
Selling, general and administrative  (13.6)  (12.1)  (11.0)
Research and development  (27.8)  (21.9)  (18.0)
Other income and expenses, net  1.9   0.6   0.5 
Impairment, restructuring charges and other related closure costs  (3.4)  (4.9)  (12.3)
Operating loss
  (12.0)  (2.0)  (5.4)
Other-than-temporary impairment charge and realized losses on financial assets
  (1.6)  (1.4)  (0.4)
Interest income, net  0.1   0.5   0.8 
Gain (loss) on financial assets  (0.1)  (0.1)  — 
Gain on convertible debt buyback  0.0   —   — 
Earnings (loss) on equity investments  (4.0)  (5.6)  0.1 
Loss before income taxes and noncontrolling interests
  (17.6)  (8.4)  (4.9)
Income tax benefit  1.1   0.4   0.2 
Loss before noncontrolling interests
  (16.5)  (7.9)  (4.7)
Net loss (income) attributable to noncontrolling interest  3.2   (0.1)  (0.1)
Net loss attributable to parent company
  (13.3)%  (8.0)%  (4.8)%
 
20072009 vs. 20062008
 
In 2007, based uponBased on published industry data by WSTS, the semiconductor industry experienced a year-over-year revenue increase ofdecreased by approximately 3%9% for the TAM and approximately 6%13% for the SAM.
 
ForNet Revenues
             
  Year Ended December 31, 
  2009  2008  % Variation 
  (Audited, in millions) 
 
Net sales $8,465  $9,792   (13.5)%
Other revenues  45   50   (10.2)
Net revenues $8,510  $9,842   (13.5)%
In 2009, our net revenues decreased significantly due to the full year 2007,difficult market environment experienced overall by the effectivesemiconductor industry. Our revenues performance was basically in line with the SAM’s decline. The majority of our market segments was negatively impacted by these difficult conditions and registered declining rates, except for Telecom, which benefited from the additional contribution of the NXP and EMP wireless businesses integrated in August 2008 and February 2009, respectively. Such a negative trend in our revenues was driven by the large drop in units sold since average exchange rateselling prices basically remained flat as a result of an improved product mix.
By product segment, both ACCI and IMS registered double digit declines, driven by a sharp drop in sales volume. Wireless, however, increased approximately 27%, benefiting from the additional contribution of the integrated wireless business.
By location of order shipment, all regions but Asia Pacific registered a drop in revenues, ranging from declines of approximately 25% and 24% in Japan and Americas, respectively, to approximately 20% in EMEA and 14% in Greater China. Our largest customer, the Nokia group of companies, accounted for approximately 16.1% of our company was approximately $1.35 to €1.00,net revenues, compared to $1.2417.5% during 2008, excluding FMG.


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Gross profit
             
  Year Ended December 31, 
  2009  2008  % Variation 
  (Audited, in millions) 
 
Cost of sales $(5,884) $(6,282)  6.3%
Gross profit $2,626  $3,560   (26.2)%
Gross margin (as a percentage of net revenues)  30.9%  36.2%  — 
Our gross profit in 2009 was largely penalized by unused capacity charges of $322 million due to €1.00the significant underloading of our wafer fabs planned in response to dropping demand, coupled with our substantial reduction in inventory and manufacturing inefficiencies. Consequently, our gross margin was largely below the previous year’s result, totaling 30.9%, or a drop of 5.3 percentage points, with unused capacity charges estimated to account for approximately 4 percentage points.
Gross profit and gross margin in 2009, however, benefited from the full year 2006. Our effective exchange rate reflects actual exchange rate levels combined with thepositive impact of hedging programs.the strengthening U.S. dollar.
 
Net revenuesSelling, general and administrative expenses
 
             
  Year Ended December 31,    
  2007  2006  % Variation 
  (In millions) 
 
Net sales $9,966  $9,838   1.3%
Other revenues  35   16   — 
             
Net revenues $10,001  $9,854   1.5%
             
             
  Year Ended December 31,
  2009 2008 % Variation
  (Audited, in millions)
 
Selling, general and administrative expenses $(1,159) $(1,187)  2.3%
As a percentage of net revenues  (13.6)%  (12.1)%  — 
Our selling, general and administrative expenses decreased by approximately 2.3% despite the additional activities related to the integration of the NXP and EMP businesses, mainly due to the favorable impact of the strengthening U.S. dollar exchange rate and savings from the progression of cost restructuring plans. As a percentage of revenues, they increased to 13.6% compared to the prior year, due primarily to the sharp decline in our sales. The 2009 amount included $19 million of share-based compensation charges compared to $37 million in 2008.
Research and development expenses
             
  Year Ended December 31,
  2009 2008 % Variation
  (Audited, in millions)
 
Research and development expenses $(2,365) $(2,152)  (9.9)%
As a percentage of net revenues  (27.8)%  (21.9)%  — 
On ayear-over-year basis, our R&D expenses increased in line with the expansion of our activities, including, primarily, the integration of the businesses from NXP and Ericsson. Our 2009 R&D expenses also benefited from a stronger U.S. dollar exchange rate and savings from the progression of cost restructuring plans for both us and ST-Ericsson. The 2009 amount included $11 million of share-based compensation charges compared to $24 million in 2008. Furthermore, there was $55 million related to amortization charges generated by recently integrated intangibles, while the year ago period included $23 million of such amortization charges and $97 million as IP R&D. R&D expenses in 2009 were net of research tax credits, which amounted to $146 million, decreasing $15 million compared to the year-ago period.


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Other income and expenses, net
         
  Year Ended December 31, 
  2009  2008 
  (Audited,
 
  in millions) 
 
Research and development funding $202  $83 
Start-up/phase-out costs
  (39)  (17)
Exchange gain (loss) net  11   20 
Patent costs, net of gain from settlement  (5)  (24)
Gain on sale of other non-current assets  3   4 
Other, net  (6)  (4)
Other income and expenses, net
 $166  $62 
As a percentage of net revenues  2.0%  0.6%
Other income and expenses, net, mainly included, as income, items such as R&D funding and exchange gain and, as expenses,start-up and phase-out costs. R&D funding income was associated with our R&D projects, which, upon project approval, qualifies as funding pursuant to contracts with local government agencies in locations where we pursue our activities. In 2009, the balance of these factors resulted in net income of $166 million, a significant improvement compared to the equivalent period in 2008, resulting from the booking of new funding for an R&D program in France. As a result, total funding reached in 2009 was $202 million, which included thecatch-up of 2008 projects, and resulted in an amount significantly higher compared to 2008. The 2009 amount also included a higher level of phase-out costs associated with the closure of our facilities in Carrollton, Texas and Ain Sebaa, Morocco.
Impairment, restructuring charges and other related closure costs
         
  Year Ended December 31,
  2009 2008
  (Audited, in millions)
 
Impairment, restructuring charges and other related closure costs $(291) $(481)
In 2009, we recorded $291 million in impairment, restructuring charges and other related closure costs, of which:
• $126 million related to the closure of our Ain Sebaa (Morocco), Carrollton (Texas) and Phoenix (Arizona) sites, including $101 million of one-time termination benefits, as well as other relevant charges and $25 million as impairment charges on the fair value of Carrollton and Phoenix assets;
• $100 million related to the new plans announced in April and December 2009 by ST-Ericsson, to be completed in 2010, primarily consisting of on-going termination benefits pursuant to the closure of certain locations in Europe and the United States;
• $59 million related to other ongoing and newly committed restructuring plans, consisting primarily of voluntary termination benefits and early retirement arrangements in some of our European locations; and
• $6 million as impairment on certain goodwill.
In 2008, this expense was mainly comprised of the following: $216 million originated by the disposal of the FMG assets, which required the recognition of $190 million as an additional loss as a result of a revision in the terms of the transaction from those expected at December 31, 2007 and $26 million as restructuring and other related disposal costs; $164 million incurred as part of our ongoing 2007 restructuring initiatives which included the closure of our fabs in Phoenix and Carrollton (USA) and of our back-end facilities in Ain Sebaa (Morocco); $13 million as impairment charges on goodwill and certain financial investments; and $88 million for other


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previously and newly announced restructuring plans, consisting primarily of voluntary termination benefits and early retirement arrangements in some of our European locations.
Operating loss
         
  Year Ended December 31,
  2009 2008
  (Audited, in millions)
 
Operating loss $(1,023) $(198)
As a percentage of net revenues  (12.0)%  (2.0)%
Our operating results were largely impacted by the strong decline in revenues, which also triggered the recognition of significant underutilization charges. As a result, we registered an operating loss of $1,023 million, significantly larger than our operating loss of $198 million in 2008.
All of our product segments registered a decline in their operating results on ayear-over-year basis, driven by the drop in revenues. ACCI moved from a profit of $136 million to a loss of $91 million. IMS registered a profit of $113 million, compared to a profit of $482 million in 2008. Wireless registered an operating loss of $356 million compared to an operating loss of $65 million in the year ago period, due to deteriorated market conditions and additional charges associated with recent acquisitions. The majority of Wireless’ activities are run through ST-Ericsson JVS, the JV between us and Ericsson. The minority interest of Ericsson in ST-Ericsson’s operating losses (which are 100% included in the wireless segment) is credited in the line “Non controlling interest” of our Income Statement, which reported income of $265 million for the year ended December 31, 2009. The Segment “Others” reported a significant loss since it included the allocation of $322 million of unused capacity charges, $291 million impairment and restructuring charges and $39 million phase-out costs related to the closure of certain manufacturing facilities.
Other-than-temporary impairment charges and realized losses on financial assets
         
  Year Ended December 31,
  2009 2008
  (Audited, in millions)
 
Other-than-temporary impairment charges and realized losses on financial assets
 $(140) $(138)
 
The increase2009 amount is related to another-than-temporary impairment of $72 million and a realized loss of $68 million, both linked to the portfolio of ARS purchased on our account by Credit Suisse contrary to our instruction. See “Liquidity and Capital Resources.”
Interest income, net
         
  Year Ended December 31,
  2009 2008
  (Audited, in millions)
 
Interest income, net $9  $51 
We recorded net interest income of $9 million, which decreased compared to previous periods as a result of significantly lower U.S. dollar and Euro denominated interest rates, despite a higher amount of cash and cash equivalents. The favorable impact of lower interest rates on our financial liabilities at floating rate resulted in a lower average cost of debt of 1.18%.
Loss on equity investments
         
  Year Ended December 31,
  2009 2008
  (Audited, in millions)
 
Loss on equity investments $(337) $(553)
The 2009 amount represented a loss of $337 million, which includes $103 million as our net revenues in 2007 was primarily due to our higher sales volumes and improved products mix, as our average selling prices declinedproportional share of the loss reported by approximately 8% due to the continuing broad-based price pressureNumonyx, an additional impairment loss of $200 million booked in the industry.
With respect to our product group segments, the yearly revenue was characterized by a strong increase in IMS, a slight increase in ASG and a significant decrease in FMG. ASG net revenues increased approximately 1% over 2006, since the increase in units sold was almost entirely offset by pricing pressures; this slight revenue increase was entirely generated by Automotive, while Telecom and Computer revenues were flat and Consumer registered a decline. IMS’ net revenues increase reached a double-digit levelfirst quarter of approximately 10%, thanks to improved products mix and higher volume, led in particular by MEMS products, with almost all of its product group segments registering a sales volume increase. In 2007, FMG net revenues decreased by approximately 13% compared to2009


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on our Numonyx equity investment, a $32 million loss related to our proportionate share in JVD as a losspick-up including an amortization of basis difference and $2 million related to other investments.
In 2008, our income on equity investments included our minority interest in the joint venture with Hynix Semiconductor in China, which was transferred to Numonyx on March 30, 2008.
Gain (loss) on financial assets
         
  Year Ended December 31,
  2009 2008
  (Audited, in millions)
 
Gain (loss) on financial assets $(8) $15 
In 2006, we entered into cancellable swaps with a combined notional value of $200 million to hedge the fair value of a portion of the convertible bonds due 2016 carrying a fixed interest rate. The cancellable swaps convert the fixed rate interest expense recorded on the convertible bonds due 2016 to a variable interest rate based upon adjusted LIBOR. Until November 1, 2008, the cancellable swaps met the criteria for designation as a fair value hedge. Due to the exceptionally low U.S. dollar interest rate as a consequence of the financial crisis, we assessed in 2008 that the swaps were no longer effective as of November 1, 2008 and the fair value hedge relationship was discontinued. Consequently, the swaps were classified asheld-for-trading financial assets. An unrealized gain of $15 million was recognized in earnings from the discontinuance date and was reported on the line “Unrealized gain on financial assets” in the consolidated statement of income for the year ended December 31, 2008.
This instrument was sold in 2009 with a loss of $8 million due to variation in the underlying interest rates compared to December 31, 2008.
Gain on convertible debt buyback
         
  Year Ended December 31,
  2009 2008
  (Audited, in millions)
 
Gain on convertible debt buyback $3  $— 
The $3 million gain on convertible debt buyback is related to the repurchase of bonds with a principal value of $106 million for total cash consideration of $103 million. Please see “Capital Resources”.
Income tax benefit
         
  Year Ended December 31,
  2009 2008
  (Audited, in millions)
 
Income tax benefit $95  $43 
In 2009, we registered an income tax benefit of $95 million, reflecting the actual tax benefit estimated on our loss before income taxes in each of our jurisdictions. This benefit was net of about $56 million booked as a tax expense related to the valuation allowances on our deferred tax asset associated with our estimates of the net operating loss recoverability in certain jurisdictions.
Net loss (income) attributable to noncontrolling interest
         
  Year Ended December 31,
  2009 2008
  (Audited, in millions)
 
Net loss (income) attributable to noncontrolling interest $270  $(6)
As a percentage of net revenues  3.2%  (0.1)%
In 2009, we booked $270 million in income, which primarily represented the share of the loss attributable to noncontrolling interest that included the 20% owned by NXP in the ST-NXP joint venture for the month of January 2009 and the 50% owned by Ericsson in the consolidated ST-Ericsson Holding AG as of February 2009. This amount reflected their share in the joint venture’s losses.


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All periods included the recognition of noncontrolling interest related to our joint venture in Shenzhen, China for assembly operating activities. Such amounts were not material.
Net loss attributable to parent company
         
  Year Ended December 31,
  2009 2008
  (Audited, in millions)
 
Net loss attributable to parent company $(1,131) $(786)
As a percentage of net revenues  (13.3)%  (8.0)%
In 2009, we reported a loss of $1,131 million as a result of adverse economic conditions, which negatively impacted our operations and certain non-operating charges. In 2008, we had a net loss of $786 million.
Loss per share was $(1.29) in 2009. The impact of restructuring, impairment andother-than-temporary impairment charges was estimated to be approximately $(0.57) per share. In 2008, loss per share was $(0.88) and was impacted for approximately $(1.28) per share by restructuring, impairment charges and other specific one-time items.
2008 vs. 2007
Based upon published industry data by WSTS, semiconductor industry revenue decreased by approximately 2.8% for the TAM while the SAM increased by approximately 2.4%.
Net Revenues
             
  Year Ended December 31, 
  2008  2007  % Variation 
  (Audited, in millions) 
 
Net sales $9,792  $9,966   (1.8)%
Other revenues  50   35   — 
Net revenues $9,842  $10,001   (1.6)%
Our 2008 net revenues decreased 1.6% due to the sharp declinedeconsolidation of FMG at the end of the first quarter of 2008, despite the positive contribution received from the acquired NXP wireless business. FMG revenues accounted for $299 million in prices,2008 and also$1,364 million in 2007, while the NXP wireless contribution accounted for $491 million in 2008. Excluding FMG and the NXP wireless business, our revenues in 2008 would have registered a 4.8% increase over 2007, therefore exceeding the SAM’s performance. Such growth was due, in particular, to a decreasean improved product mix and, partially, to an increase in the units sold by our NOR business, while NAND volume increased.sold.
 
Net revenuesAll of our product group segments registered an increase in 2008 compared to 2007, with ACCI increasing by 4.7%, IMS by 6.1% and WPS by 2.9%, excluding the NXP wireless business.
By market segment application, Industrial & Others was the main contributor to positiveyear-over-year variation with growth of approximately 6.9% (13.1% excluding Flash). Excluding Flash, Telecom increased in Industrial and other by approximately 8%, Automotive and Consumer both by approximately 4%, while Computer and Telecom decreased by approximately 2% and 1%, respectively. As a significant portion of our sales are made through distributors, the foregoing are necessarily estimates within a variance of 5% to 10% in absolute dollar amounts of the relative weighting of each of our targeted market segments.22.4%.
 
By location of order shipment, net revenues increased strongly in Japan, Emerging Markets and Asia Pacific registered the most significant growth, by 18.8% and 17.4%, respectively. Japan had a more moderate increase by 7.8%, while Europe and Greater China by approximately 19%, 11%decreased significantly. Americas remained basically flat. Excluding FMG, all regions increased except for China which remained flat, with the main contributors being Japan, Asia Pacific and 8%, respectively. Europe marginallyEmerging Markets, which increased by approximately 3% while North America decreased by approximately 5%42.8%, 34.6% and Asia Pacific by approximately 10%. Geographic distribution of order shipment may significantly change due to the re-location of manufacturing by our customers.28.1%, respectively.
 
In 2007,2008, we had several large customers, with the largest one, the Nokia Group of companies, accounting for approximately 21%18% of our net revenues excluding FMG and the NXP wireless business, decreasing from the 22% (excluding FMG) it accounted for in 2006. Our top ten OEM customers accounted for approximately 49% of our net revenues in 2007, compared to approximately 51% of our net revenues in 2006.2007.


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Gross profit
 
                        
 Year Ended December 31,    Year Ended December 31, 
 2007 2006 % Variation  2008 2007 % Variation 
 (In millions)  (Audited, in millions) 
Cost of sales $(6,465) $(6,331)  (2.1)% $(6,282) $(6,465)  2.8%
Gross profit $3,536  $3,523   0.4% $3,560  $3,536   0.7%
Gross margin (as a percentage of net revenues)  35.4%  35.8%  —   36.2%  35.4%    
 
Our costgross profit increased slightly in 2008 compared to 2007, in spite of sales registered a 2.1% growth year-over-year, which resulted from a higher numberlower revenues, the significant negative impact of units soldthe U.S. dollar exchange rate and also fromthe inventorystep-up one-time charge related to the purchase accounting for the NXP wireless business. Excluding the inventorystep-up one time charge, our gross margin increased to 37.1% of net revenues compared to 35.4% in 2007, mainly driven by our portfolio repositioning and improvements in our manufacturing performance. Furthermore,year-over-year gross margin reflects an estimated 150 basis points decrease related to the negative impact of the effective U.S. dollar exchange rate on our manufacturing costs since a large part of our manufacturing activities is located in the Euro zone. As a result, our gross margin deteriorated by 40currency fluctuations and approximately 60 basis points related to 35.4% because the profitable contribution of higher sales volume, improved products mix and manufacturing efficiencies was offset by the negative impact of the decline in selling prices and the weakening effective U.S. dollar exchange rate; this was offset in part, however, by the benefit in 2007 of the suspended depreciation on the FMG assets held for sale, which is estimated at approximately $75 million.unused capacity charges.
 
Selling, general and administrative expenses
 
                        
 Year Ended December 31,   Year Ended December 31,
 2007 2006 % Variation 2008 2007 % Variation
 (In millions) (Audited, in millions)
Selling, general and administrative expenses $(1,099) $(1,067)  (3.0)% $(1,187) $(1,099)  (8.0)%
As a percentage of net revenues  (11.0)%  (10.8)%  —   (12.1)%  (11.0)%  — 
 
The increase inOur selling, general and administrative expenses wasincreased by approximately 8% mainly due to the negative impact of the effectiveweakening U.S. dollar exchange rate. Furthermore, theserate and the additional expenses in 2007originated by recent acquisitions. They also included $14 million of amortization of intangible assets as part of the purchase accounting for the NXP wireless business. In 2008, such expenses included $37 million in charges related tofor share-based compensation, compared to $14 millionwhich was the same amount we had registered in 2006.2007.
 
Research and development expenses
 
                        
 Year Ended December 31,   Year Ended December 31,
 2007 2006 % Variation 2008 2007 % Variation
 (In millions) (Audited, in millions)
Research and development expenses $(1,802) $(1,667)  (8.1)% $(2,152) $(1,802)  (19.5)%
As a percentage of net revenues  (18.0)%  (16.9)%  —   (21.9)%  (18.0)%  — 
 
Research and developmentOur R&D expenses increased compared to last year mainly duefor several reasons, such as because of $97 million of one-time charges that were booked as a write-off of IP R&D and $23 million of amortization of acquired intangible assets related to the unfavorablepurchase accounting for the NXP wireless business and Genesis. Additionally, 2008 included higher expenses originated by the expansion of our activities following the acquisition of Genesis and a 3G wireless design team, as well as those associated with the integration of the NXP wireless business. The negative impact of the U.S. dollar exchange rate since a large partalso contributed to the increase. Such higher expenses, however, were partially offset by the benefits of our activities are located in Europe. Furthermore,the FMG deconsolidation.
R&D expenses in 20072008 also included $24 million of share-based compensation charges, compared to $22 million in charges related to share-based compensation compared to $82007. In 2008, however, we benefited from $161 million recognized as research tax credits following the amendment of a law in 2006.France. The research tax credits were also available in previous periods, however under different terms and conditions. As a percentage of net revenues, research and development expenses increased from 16.9% in 2006 to 18.0% in 2007. Our reported research and development expenses are mainlysuch, in the areaspast they were not shown as a reduction in R&D expenses but rather as a reduction of product design, technology andincome tax expenses for the period.


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development and do not include marketing design center costs, which are accounted for as selling expenses, or process engineering, pre-production or process-transfer costs, which are accounted for as cost of sales.
Other income and expenses, net
 
                
 Year Ended December 31,  Year Ended December 31, 
 2007 2006  2008 2007 
 (In millions)  (Audited, in millions) 
Research and development funding $97  $54  $83  $97 
Start-up costs
  (24)  (57)
Exchange gain (loss), net  1   (9)
Start-up/phase-out costs
  (17)  (24)
Exchange gain (loss) net  20   1 
Patent litigation costs  (18)  (22)  (14)  (18)
Patent pre-litigation costs  (10)  (7)  (10)  (10)
Gain on sale of Accent subsidiary  —   6 
Gain on sale of non-current assets, net  2   2 
Gain on sale of non-current assets  4   — 
Other, net      (2)  (4)  2 
Other income and expenses, net
 $48  $(35) $62  $48 
As a percentage of net revenues  0.5%  (0.4)%  0.6%  0.5%
 
“Other income and expenses, net, mainly include, as income, items such as research and development funding and, as expenses,start-up costs, and patent claim costs. Other income and expenses, netnet” resulted in annet income of $62 million in 2008, compared to net income of $48 million in 2007 primarily as a result of some exchange gains and lowerstart-up costs. R&D funding included the income of some of our R&D projects, which qualify as funding on the basis of contracts with local government agencies in locations where we pursue our activities. The majority of our R&D funding was received in Italy and France and, compared to a net expense of $35 million in the prior year. The main supportive item of the favorable balance was the benefit associated with research and development funding, which reached $97 million in 2007, compared to $54 million in 2006. The major amounts of research and development funding were received in France and, to a less extent, in Italy.Start-up costs in 2006 were related to our150-mm fab expansion in Singapore, the conversion to200-mm fab in Agrate (Italy) and thebuild-up of our300-mm fab in Catania (Italy); however, they declined significantly in 2007 since these activities, excluding the300-mm fab in Catania, were almost entirely completed during the year. Patent claim costs included costs associated with several ongoing litigations and claims.it decreased slightly.
 
Impairment, restructuring charges and other related closure costs
 
         
  Year Ended December 31, 
  2007  2006 
  (In millions) 
 
Impairment, restructuring charges and other related closure costs $(1,228) $(77)
         
  Year Ended December 31,
  2008 2007
  (Audited, in millions)
 
Impairment, restructuring charges and other related closure costs $(481) $(1,228)
 
Impairment, restructuring charges and other related closure costs increasedcontinued to materially impact our results, although they decreased significantly compared to the previous year in view of new items which have been recorded in 2007. Thisyear. In 2008 this expense was mainly composedcomprised of:
 
 • a pre-tax impairment loss estimated at $1,106$216 million booked for the planned disposal oforiginated by the FMG assets held for sale,disposal which required the recognition of $190 million as an additional pre-tax $1loss and $26 million impairment charge on certain specific equipment that could not be transferred as part of FMG deconsolidationrestructuring and for which no alternative future use could be found in the Company and an additional pre-tax $5 million of other related disposal costs; this additional loss was the result of revised terms of the transaction from those expected at December 31, 2007;
 
 • an amount of $73$164 million related to the severance costs and impairment charge booked in relation to the 2007 manufacturing restructuring planincurred as part of our manufacturing activitiesongoing 2007 restructuring initiatives which is on-going;include the closure of our fabs in Phoenix and Carrollton (USA) and of our back-end facilities in Ain Sebaa (Morocco);
 
 • a charge of $29$13 million generated by our150-mm restructuring plan which has been completed;
• a charge of approximately $9 million for employee benefits relating to our headcount restructuring plan;
• anas impairment charge of $3 million related to an equity investment carried at cost;charges on goodwill and certain financial investments; and
 
 • an impairment charge$88 million for other previously and newly announced restructuring plans, consisting primarily of $2 million related to certain technologies without alternative future use.
• In 2006, we incurred $77 millionvoluntary termination benefits and early retirement arrangements in some of impairment, restructuring charges and other related closure costs, including $45 million relating to our headcount restructuring plan, $22 million relating to our150-mm restructuring plan, and an impairment charge of approximately $10 million recorded pursuant to subsequent decisions to discontinue adoption of Tioga related technologies in certain products.European locations.
In 2007, we incurred $1,228 million of impairment, restructuring charges and other related closure costs, including $1,106 million loss booked upon signing the agreement for the disposal of our FMG assets, a $1 million impairment charge related to certain FMG equipment and $5 million in FMG related closure costs, $73 million related to the severance costs booked in relation to the 2007 restructuring plan of our manufacturing activities, $5 million as impairment charge on equity investment and certain technologies and $38 million relating to previously announced headcount reduction programs.
Operating loss
         
  Year Ended December 31,
  2008 2007
  (Audited, in millions)
 
Operating loss $(198) $(545)
As a percentage of net revenues  (2.0)%  (5.4)%


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Our operating loss significantly decreased compared to 2007 primarily due to lower impairment charges, while our business operations improved during the period, despite the significant negative impact of fluctuations in the U.S. dollar exchange rate.
 
Operating income (loss)Other-than-temporary impairment charges on financial assets
 
             
  Year Ended December 31,    
  2007  2006  % Variation 
  (In millions) 
 
Operating income (loss) $(545) $677   — 
As a percentage of net revenues  (5.4)%  6.9%    
         
  Year Ended December 31,
  2008 2007
  (Audited, in millions)
 
Other-than-temporary impairment charges on financial assets
 $(138) $(46)
 
Our operating result translated from an operating income of $677 million in 2006 to an operating loss of $545 million in 2007, mainly dueAt December 31, 2008, subsequent to the provisions associatedunauthorized purchase made by Credit Suisse, we had Auction Rate Securities, representing interests in collateralized obligations and credit linked notes, that were carried on our balance sheet asavailable-for-sale financial assets at an amount of $242 million with a par value of $415 million. For more details, see the impairmentparagraph “Liquidity and restructuring charges described above.
In 2007, ASG registered an operating income of $303 million, significantly decreasing from an operating income of $439 million in 2006 in spite of higher sales, mainly due to the negative impact of selling price and currency trends. IMS registered an operating income of $470 million compared to $441 million mainly originated by its sales growth, despite an unfavorable currency impact. FMG operating loss was $51 million, slightly improving compared to a loss of $53 million in 2006, since depreciation charges on its assets held for sale were suspended upon signing the agreement for their disposal. The total benefit estimated for the suspended depreciation was about $75 million.Capital Resources.”
 
Interest income, (expense), net
 
         
  Year Ended December 31, 
  2007  2006 
  (In millions) 
 
Interest income (expense), net $83  $93 
         
  Year Ended December 31,
  2008 2007
  (Audited, in millions)
 
Interest income, net $51  $83 
 
In 2007,2008, interest income, net decreased approximately by $10contributed $51 million compared to 2006, mainly as a result of the redemption$83 million recorded in August 2006 of $1.4 billion2007. The lower amount is due to the decrease of our 2013 Convertible Bonds (with 0.5%cash position after payment for the NXP wireless business and Genesis, and also because of positive yield and significantless interest income contribution).received on our cash investments compared to 2007 due to lower U.S. dollar denominated interest rates.
 
Other-than-temporary impairment charges on marketable securities
         
  Year Ended December 31, 
  2007  2006 
  (In millions) 
 
Other-than-temporary impairment charges on marketable securities $(46) $0 
Beginning in May 2006, we gave a specific mandate to a global financial institution to invest a portion of our cash in a U.S. federally-guaranteed student loan program. In August 2007, we became aware that the financial institution had deviated from our instruction and that our account had been credited with investments in unauthorized auction rate securities. There is currently no active market for these assets and, therefore, we are required to evaluate the fair value of these assets based on available valuation techniques, taking into account available information. Due to the lack of liquidity, we have classified this impairment as other-than-temporary. As a result of the unauthorized investments, we have recognized impairment to the fair market value of these securities in the fourth quarter of 2007 of $46 million. The estimated value of these securities could further decrease in the future as a result of credit market deterioration and/or other downgrading. Believing we have been defrauded, and after failing to reach an amicable settlement with the responsible financial institution, we have initiated an arbitration proceeding against the financial institution that purchased the unauthorized securities for our account and are seeking full recovery of the losses. We intend to pursue our claim vigorously. See “Liquidity and Capital Resources” for a further description of the auction rate securities.
EarningEarnings (loss) on equity investments
 
         
  Year Ended December 31, 
  2007  2006 
  (In millions) 
 
Earning (loss) on equity investments $14  $(6)
         
  Year Ended December 31,
  2008 2007
  (Audited, in millions)
 
Earnings (loss) on equity investments $(553) $14 
 
OurIn 2008, we registered a loss on equity investments in 2007 resulted in a gainrelated to our Numonyx investment, which was comprised of $14$480 million comparedas an impairment of our Numonyx evaluation and $65 million as an equity loss related to aour share of the Numonyx loss of $6 millionthat was recognized in the prior year, benefiting from the full productionramp-upthird and fourth quarters pursuant to one-quarter lag reporting. The impairment of our joint venture with Hynix Semiconductorinvestment in China during 2007.Numonyx was required in light of (i) the turmoil in the financial markets and its resulting impact on the market cap of the industry, and (ii) the deviation from plan in Numonyx’s 2008 results and 2009 most recent forecast, since our evaluation is primarily based on their operating performance in terms of cash flow, revenues and EBITDA.


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Income tax benefit (expense)
 
         
  Year Ended December 31, 
  2007  2006 
  (In millions) 
 
Income tax benefit (expense) $23  $20 
         
  Year Ended December 31,
  2008 2007
  (Audited, in millions)
 
Income tax benefit $43  $23 
 
In 2007,2008, we registered an income tax benefit of $23$43 million, similar to the amount registered in 2006. The 2007 tax benefit reflectedreflecting the annual effective tax ratecomputation for recurring operations of approximately 8%the loss before the effect of the Flash memory planned disposal and included a taxincome taxes in each jurisdiction. Furthermore, this benefit from our restructuring charges that have positively affected our effective tax rate this year. Including the impact of the impairment on assets to be contributed into the planned disposal of the Flash Memories Group’s (“FMG”) assets held for sale, and other one time charges, the effective tax rate was approximately 5%. In 2006, we had an income tax benefit of $20 million, reflecting an annual effective tax rate of approximately 8%, as a resultnet of a certain favorable adjustments$47 million provision booked as evaluation of uncertain tax positions in one of our tax position that occurred during that year.jurisdictions.
 
Our tax rate is variable and depends on changes in the level of operating income within various local jurisdictions and on changes in the applicable taxation rates of these jurisdictions, as well as changes in estimated tax provisions due to new events. We currently enjoy certain tax benefits in some countries; ascountries. As such benefits may not be available in the future due to changes in the laws of the local jurisdictions, our effective tax rate could be


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different in future quarters and may increase in the coming years. In addition, our yearly income tax charges include the estimated impact of some provisions related to potential and certain positions.
 
Net income (loss)loss
 
         
  Year Ended December 31, 
  2007  2006 
  (In millions) 
 
Net income (loss) $(477) $782 
         
  Year Ended December 31,
  2008 2007
  (Audited, in millions)
 
Net loss $(786) $(477)
As a percentage of net revenues  (8.0)%  (4.8)%
 
In fiscal year 2007,2008, we reported a net loss of $477$786 million, compared to a net incomeloss of $782$477 million in 2007. Our performance in 2008 was negatively impacted by the impairment charge associated with our equity investment in Numonyx, the additional loss recorded for 2006, mainly due to the bookingFMG deconsolidation, the one-time elements of the purchase accounting used for the NXP wireless business and the adverse impact of fluctuations in the U.S. dollar exchange rate. During 2007, there was a significant amount of impairment andon the FMG deconsolidation once those assets were reclassified for sale, significant restructuring charges as described above.and a material negative effect of the weakening U.S. dollar exchange rate. Loss per share for 2007in 2008 was $0.53, compared to basic and diluted earnings of $0.87 and $0.83 per share for 2006. In 2007, the impact of impairment, restructuring charges, and other one-time items (net of taxes) was estimated to be $1.29 per diluted share.
2006 vs. 2005
In 2006, based upon recent industry data, the semiconductor industry experienced a year-over-year revenue increase of approximately 9% for the TAM and an increase of approximately 8% for the SAM, respectively.
Net revenues
             
  Year Ended December 31,    
  2006  2005  % Variation 
  (In millions) 
 
Net sales $9,838  $8,876   10.8%
Other revenues  16   6   — 
             
Net revenues $9,854  $8,882   11.0%
             
The increase in our net revenues in 2006 was primarily due to our higher sales volumes and improved products mix, which exceeded the negative impact of the declining selling prices due to the continuing pricing pressure in the markets we serve. Our average selling prices decreased overall by approximately 8%, which is the result of a tougher pure pricing effect mitigated by a higher selling price from improved products mix.
All product group segments registered a positive revenue performance. ASG net revenues increased 8.1% over 2005, mainly driven by Imaging, Computer Peripherals, Connectivity, Digital Consumer and Automotive products. Cellular Communication slightly increased, while Data Storage registered a decline. Net revenues for IMS significantly increased by 14.5% compared to 2005 and FMG net revenues increased by 16.2% compared to 2005, supported by NOR Flash for wireless applications and other memory products.
By market segment application, the most important contribution to net revenue growth came from Telecom and Industrial, while Automotive, Consumer and Computer registered approximately mid-single digit growth. Net


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revenues by market segment increased in Telecom by approximately 19% and Industrial by approximately 10%, while Automotive, Consumer and Computer each increased by approximately 6%$(0.88). As a significant portion of our sales are made through distributors, the foregoing are necessarily estimates within a variance of 5% to 10% in absolute dollar amounts of the relative weighting of each of our targeted market segments.
By location of order shipment, Japan revenues strongly increased by approximately 31%, all of the other regions registered a solid double-digit growth, with the exception of North America which slightly declined compared to last year.
In 2006, we had several large customers, with the largest one, the Nokia Group of companies, accounting for approximately 22% of our net revenues, which remained flat compared to 2005. Our top ten OEM customers accounted for approximately 51% of our net revenues in 2006, compared to approximately 50% of our net revenues in 2005.
Gross profit
             
  Year Ended December 31,    
  2006  2005  % Variation 
  (In millions) 
 
Cost of sales $(6,331) $(5,845)  (8.3)%
Gross profit $3,523  $3,037   16.0 
Gross margin (as a percentage of net revenues)  35.8%  34.2%  — 
The cost of sales increased at a lower pace than the net revenues, therefore leveraging a 16% improvement of our gross profit. The increase in gross profit was driven by sales volume, more favorable products mix and improved manufacturing efficiencies, which are the result of lower depreciation charges, the cost savings realized from the150-mm restructuring plan that has been almost totally completed, and the benefit of a solid level of loading in our facilities over the first three quarters of 2006. As a result of these improvements, which were partially offset by the negative impact of severe price pressures, our gross margin increased 160 basis points to 35.8%.
Selling, general and administrative expenses
             
  Year Ended December 31,    
  2006  2005  % Variation 
  (In millions) 
 
Selling, general and administrative expenses $(1,067) $(1,026)  (4.0)%
As a percentage of net revenues  (10.8)%  (11.6)%  — 
The increase in selling, general and administrative expenses was largely due to the higher expenses associated with increased activities and to the charges related to the share-based compensation which amounted to $14 million. However, as a percentage to sales ratio, the selling, general and administrative expenses decreased to 10.8%.
Research and development expenses
             
  Year Ended December 31,    
  2006  2005  % Variation 
  (In millions) 
 
Research and development expenses $(1,667) $(1,630)  (2.3)%
As a percentage of net revenues  (16.9)%  (18.3)%  — 
Research and development expenses increased 2.3% in 2006 resulting from a combination of higher spending in relation to our activities and $8 million in share-based compensation charges. As a percentage of net revenues, research and development expenses decreased significantly by 140 basis points to 16.9%. Our reported research and development expenses are mainly in the areas of product design, technology and development and do not include marketing design center costs, which are accounted for as selling expenses, or process engineering, pre-production or process-transfer costs, which are accounted for as cost of sales.


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Other income and expenses, net
         
  Year Ended December 31, 
  2006  2005 
  (In millions) 
 
Research and development funding $54  $76 
Start-up costs
  (57)  (56)
Exchange gain (loss), net  (9)  (16)
Patent litigation costs  (22)  (14)
Patent pre-litigation costs  (7)  (8)
Gain on sale of Accent subsidiary  6   — 
Gain on sale of non-current assets, net  2   12 
Other, net  (2)  (3)
Other income and expenses, net
 $(35) $(9)
As a percentage of net revenues  (0.4)%  (0.1)%
“Other income and expenses, net” results include miscellaneous items, such as research and development funding, gains on sale of non-current assets,start-up and phase-out costs, net exchange gain or loss and patent claim costs. Research and development funding includes income of some of our research and development projects, which qualify as funding on the basis of contracts with local government agencies in locations where we pursue our activities. The major amounts of research and development funding were received in Italy and France; however, the funding significantly decreased in 2006 due to restricted support in certain jurisdictions. The net gain on sale of non-current assets is mainly related to the sale of a minor investment.Start-up and phase-out costs in 2006 were related to our150-mm fab expansion in Singapore, the conversion to200-mm fab in Agrate (Italy) and thebuild-up of the300-mm fab in Catania (Italy). The net exchange loss related to transactions not designated as a cash flow hedge denominated in foreign currencies.
Impairment, restructuring charges and other related closure costs
         
  Year Ended December 31, 
  2006  2005 
  (In millions) 
 
Impairment, restructuring charges and other related closure costs $(77) $(128)
As a percentage of net revenues  (0.8)%  (1.5)%
In 2006, we recorded impairment, restructuring charges and other related closure costsspecific items accounted for an approximate $(1.28) loss net of $77 million. This expense was mainly composed of:
• Our headcount restructuring plan resulted in total charges of $45 million mainly for employee termination benefits; the total cost of this restructuring plan was estimated to be approximately $100 million and was substantially complete at the end of 2006, with total charges of $86 million incurred through December 31, 2006;
• An impairment charge of approximately $10 million was recorded pursuant to subsequent decisions to discontinue adoption of Tioga related technologies in certain products, of which $6 million corresponded to the write-off of Tioga goodwill and $4 million to impairment charges on technologies purchased as part of the Tioga business acquisition which were determined to be without any alternative use;
• Our ongoing150-mm restructuring plan and related manufacturing initiatives generated restructuring charges of approximately $22 million. As of December 31, 2006, we have incurred $316 million of the total expected of approximately $330 million to $350 million in pre-tax charges in connection with this restructuring plan, which was announced in October 2003.
In 2005, we incurred $128 million of impairment, restructuring charges and other related closure costs mainly related to our 2005 headcount restructuring plan and our150-mm restructuring plan. See Note 21 to our Consolidated Financial Statements.


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Operating income
             
  Year Ended December 31,    
  2006  2005  % Variation 
  (In millions) 
 
Operating income $677  $244   178.0%
As a percentage of net revenues  6.9%  2.7%  — 
Operating income increased significantlytaxes per diluted share in 2006 as the combined effect of all of the factors presented above.
In 2006, all of our product group segments were profitable. ASG registered an increase in its operating income from $355 million in 2005 to $439 million in 2006, mainly resulting from the contribution of an increase in sales volume. IMS operating income increased significantly from $336 million in 2005 to $441 million in 2006. FMG moved from an operating loss of $199 million in 2005 to an operating loss of $53 million in 2006. All the product group segments were negatively impacted by declines in pricing.
Interest income (expense), net
         
  Year Ended December 31, 
  2006  2005 
  (In millions) 
 
Interest income (expense), net $93  $34 
The interest income, net, significantly increased to $93 million in 2006 from $34 million in 2005, reflecting more effective placement of liquidity investments and rising interest rates2008, while they accounted for $(1.29) per diluted share in the U.S. dollar and the Euro on our available cash, and the strong net operating cash flow which further contributed additional cash during the year.
Loss on equity investments
         
  Year Ended December 31, 
  2006  2005 
  (In millions) 
 
Loss on equity investments $(6) $(3)
During 2006, we recorded a loss of $6 million and in 2005 we recorded a loss of $3 million, mainly related tostart-up costs due to our investment as a minority shareholder in our joint venture in China with Hynix Semiconductor.
Income tax benefit (expense)
         
  Year Ended December 31, 
  2006  2005 
  (In millions) 
 
Income tax benefit (expense) $20  $(8)
In 2006, we had an income tax benefit of $20 million. This is the result of our effective tax rate for the full year 2006 which was approximately 8% and the benefit of certain favorable adjustments in our tax position that occurred during the year. In particular, in 2006, we recorded a reversal of a $90 million provision due to a favorable outcome of a tax litigation claim in one of our jurisdictions and approximately a $23 million benefit pursuant to the application of certain favorable tax regimes. Our tax rate is variable and depends on changessame period in the level of operating profits within various local jurisdictions and on changes in the applicable taxation rates of these jurisdictions, as well as changes in estimated tax provisions due to new events. We currently enjoy certain tax benefits in some countries; as such benefits may not be available in the future due to changes within the local jurisdictions, our effective tax rate could increase in the coming years.
Net income
             
  Year Ended December 31,    
  2006  2005  % Variation 
  (In millions) 
 
Net income $782  $266   193.9%
As a percentage of net revenues  7.9%  3.0%  — 


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For 2006, we reported a net income of $782 million, a strong increase compared to 2005. Basic and diluted earnings per share for 2006 were $0.87 and $0.83, respectively, compared to basic and diluted earnings of $0.30 and $0.29 per share, respectively, for 2005.prior year.
 
Quarterly Results of Operations
 
Certain quarterly financial information for the years 20072009 and 20062008 are set forth below. Such information is derived from our unaudited interim Consolidated Financial Statements, prepared on a basis consistent with the Consolidated Financial Statements that include, in the opinion of management, all normal adjustments necessary for a fair presentationstatement of the interim information set forth therein. Operating results for any quarter are not necessarily indicative of results for any future period. In addition, in view of the significant growth we have experienced in recent years, the increasingly competitive nature of the markets in which we operate, the changes in products mix and the currency effects of changes in the composition of sales and production among different geographic regions, we believe thatperiod-to-period comparisons of our operating results should not be relied upon as an indication of future performance.
 
Our quarterly and annual operating results are also affected by a wide variety of other factors that could materially and adversely affect revenues and profitability or lead to significant variability of operating results, including, among others, capital requirements and the availability of funding, competition, new product development and technological change and manufacturing developments in litigation and possible intellectual propertyIP claims. In addition, a number of other factors could lead to fluctuations in operating results, including order cancellations or reduced bookings by key customers or distributors, intellectual propertyIP developments, international events, currency fluctuations, problems in obtaining adequate raw materials on a timely basis, impairment, restructuring charges and other related closure costs, as well as the loss of key personnel. As only a portion of our expenses varies with our revenues, there can be no assurance that we will be able to reduce costs promptly or adequately in relation to revenue declines to compensate for the effect of any such factors. As a result, unfavorable changes in the above or other factors have in the past and may in the future adversely affect our operating results. Quarterly results have also been and may be expected to continue to be substantially affected by the cyclical nature of the semiconductor and electronic systems industries, the speed of some process and manufacturing technology developments, market demand for existing products, the timing and success of new product introductions and the levels of provisions and other unusual charges incurred. Certain additions of our quarterly results will not total toour annual results due to rounding.
 
In the fourth quarter of 2007,2009, based upon recently published industry data by WSTS, the TAM and the SAM increasedyear-over-year approximately 3%29% and 12% year-over-year, respectively,16%, reaching approximately $67 billion and $39 billion, while the TAM decreasedsequentially, they increased approximately 1%7% and the SAM remained basically flat sequentially.4%, respectively.
 
In the fourth quarter of 2007,2009, our average effective average exchange rate was approximately $1.43 to €1.00, compared to $1.36$1.38 to €1.00 in the third quarter of 20072009 and $1.28$1.40 to €1.00 in the year-ago quarter. Our effective exchange rate reflects actual exchange rate levels combined with the impact of cash flow hedging programs.


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Net revenues
 
                    
 Quarter Ended % Variation                     
 Dec 31, 2007 Sept 29, 2007 Dec 31, 2006 Sequential Year-Over-Year  Three Months Ended % Variation 
 (Unaudited) (Unaudited) (Unaudited)      Dec 31, 2009 Sept 26, 2009 Dec 31, 2008 Sequential Year-Over-Year 
 (In millions)      (Unaudited, in millions) 
Net sales $2,733  $2,555  $2,482   6.9%  10.1% $2,570  $2,269  $2,264   13.3%  13.5%
Other revenues  9   10   1   (2.0)%  —   13   6   12   —   — 
                  
Net revenues
 $2,742  $2,565  $2,483   6.9%  10.4% $2,583  $2,275  $2,276   13.6%  13.5%
                  
 
Year-over-year comparison
 
Our fourth quarter 20072009 net revenues increased in all market segments compared to the year ago quarter, except in Consumer, and in all regions, except Japan, reflecting the broad based recovery in the semiconductor market. Such performance was driven by 10.4%, primarily as a result of higheran increase in sales volume, and improved products mix. Averagewhile average selling prices remained flat thanks to the more favorable products mix, which offsets the 8% pure pricing decline.declined approximately 6%.
 
With reference to our product group segments, both IMS and ASG registered a double-digit revenue growth rate, while FMG registered a negative variation. The growth rate for IMS was 11.3% and 13.3% for ASG; both groups’ performances were mainlyACCI’s revenues increased by approximately 11%, driven by higherthe strong results observed in all its served markets. IMS registered an increase of 8% across the majority of its product lines, reflecting the overall recovery in the industrial and multi-segment markets. Wireless sales volumesregistered growth of approximately 24% and a more favorable products mix. ASG net revenues increased mainly in imaging products, data storage and application-specific wireless products. IMS


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revenues increased mainly due to MEMS and Advanced Analog products. FMG net revenues decreased 4.0% as a result of a drop in selling prices.
By market segment application, Telecom, Industrial and Automotive were the main contributors toincluded the positive year-over-year variation.contribution of the integrated EMP wireless business.
 
By location of order shipment, almost all regions were positively impacted by strong local demand from their customers, ranging from the most significant increase was experiencedgreatest revenue increases of approximately 26% and 25% in Emerging Markets,Asia Pacific and Greater China, and Asia Pacific, which improved byrespectively, to the lowest of approximately 30%, 23%, and 8%, respectively.0.4% in the EMEA. Japan and Europe improved approximately by 5% and 3%, respectively, while North America basically remained flat. We had several large customers, withexperienced a decrease of 16% due to lower demand in the Consumer market. Our largest one,customer, the Nokia group of companies, accountingaccounted for approximately 24%15% of our fourth quarter 20072009 net revenues, which was higher than the approximate 21% it accounted for during the fourth quarter 2006. Our top ten OEM (original equipment manufacturers) customers accounted for approximately 51% of our net revenues compared to approximately 49% in prior year fourth quarter. Sales to distributors accounted for approximately 19%same as in the fourth quarter of 2007, compared to 20% in the fourth quarter of 2006.2008.
 
Sequential comparison
 
Our fourth quarter 2007 netOn a sequential basis our revenues grewregistered a strong performance as well, with a 13.6% increase, exceeding the high end of our targeted range of 12% sequential growth. This improvement was the result of solid demand across all of our product segments, as well as in all regions, with particular strength in Japan, Greater China and the Americas. This favorable trend was supported by 6.9% due to higher overallan approximate 14% increase in units sold, with an immaterial impact from average selling prices.
ACCI revenues increased by 17%, reflecting a solid contribution from Home Entertainment and an improved products mix. All product group segments registeredDisplays, as well as Computer and Communication Infrastructure, mainly driven by a higher level of units sold. IMS revenues increased by 23% mainly as a result of higher sales volume. Wireless revenues increased by 1%, driven by an increase in net revenues. ASG increased by 9.1%, driven by higher sales volume, with double-digit growth in Telecom. The other groups registered a single-digit increase. IMS increased by 5.3% led by higher volume. FMG sales were up by 1.6% driven by sales volume; NOR Flash products increased while NAND products decreased.demand.
 
Our fourth quarterThe sequential improvement in revenue was characterizedevident across all market segments. Distribution and Computer led, with 35% and 22% growth, respectively, followed by strong performances in Telecom and Industrial, with good results also coming from Automotive and Computer while Consumer was basically flat.Industrial.
 
By location of order shipment,On a regional basis, the larger revenue increases werestrength we saw in Emerging Markets with approximately 29%;Greater China and Asia Pacific in the third quarter expanded to the other regions. In terms of revenue growth, the sequential performance ranged from an approximate 28% and 22% increase in Japan and Greater China, Europe and Japan registered a good performance with approximately 10%, 7%, 4%, and 3%, respectively, while North America was basically flat.to an approximate 8% increase in EMEA. In the fourth quarter of 2007, we had several large customers, with the2009, our largest one,customer, the Nokia group of companies, accountingaccounted for approximately 24%14.9% of our net revenues, increasing from the 21% it accounted for duringremaining stable compared to the third quarter of 2007. Our top ten OEM customers accounted for approximately 51% of our net revenues in the fourth quarter of 2007 compared to 50% in the third quarter of 2007. Sales to distributors were approximately 19% in the fourth quarter of 2007 at the same level as in the third quarter of 2007.2009.
 
Gross profit
 
                    
 Quarter Ended % Variation                     
 Dec 31, 2007 Sept 29, 2007 Dec 31, 2006 Sequential Year-Over-Year  Three Months Ended % Variation 
 (Unaudited) (Unaudited) (Unaudited)      December 31, 2009 September 26, 2009 December 31, 2008 Sequential Year-Over-Year 
 (In millions)      (Unaudited, in millions) 
Cost of sales $(1,731) $(1,663) $(1,582)  (4.1)%  (9.4)% $(1,626) $(1,562) $(1,454)  (4.1)%  (11.9)%
Gross profit $1,011  $902  $901   12.1%  12.2%  957   713   822   34.2%  16.3%
Gross margin (as a percentage of net revenues)  36.9%  35.2%  36.3%  —   —   37.0%  31.3%  36.1%        
 
OnFourth quarter gross margin reached a level of 37%, increasing on ayear-over-year basis ourby nearly 1 percentage point. The increase in gross profit increased led by improved manufacturing efficiencies which also contributed to an improvementmargin reflected higher revenues in the gross margin from 36.3% to 36.9%. Fourthfourth quarter 2007 gross profit also benefited fromof 2009, certain purchase


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accounting related items charged in the suspended depreciation on FMG assets held for-sale. The gross margin expansion has also been supportedfourth quarter of 2008 and an improved product mix and was partially off-set by strong sales volume performance,the unfavorable impact of exchange rates and a favorable products mix, but was negatively impacted bymarket price declines and the weakening U.S. dollar exchange rate.pressure.
 
On a sequential basis, our gross margin improved 170 basisin the fourth quarter increased by nearly 6 percentage points, driven by operating efficiencies,due to higher sales volume, increased fab loading and improved products mix,efficiencies. Our manufacturing performance improved in the fourth quarter as we continued to ramp towards full capacity, which has yet to be accomplished. Unused capacity charges in the fourth quarter were partially negatively offset by$13 million, significantly lower than the weakening of$47 million registered in the U.S. dollar exchange rate and pricing pressure.third quarter.


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Selling, general and administrative expenses
 
                    
 Quarter Ended % Variation                     
 Dec 31, 2007 Sept 29, 2007 Dec 31, 2006 Sequential Year-Over-Year  Three Months Ended % Variation
 (Unaudited) (Unaudited) (Unaudited)      December 31, 2009 September 26, 2009 December 31, 2008 Sequential Year-Over-Year
 (In millions)      (Unaudited, in millions)
Selling, general and administrative expenses $(295) $(272) $(281)  (8.6)%  (5.3)% $(303) $(290) $(304)  (4.8)%  0.4%
As percentage of net revenues  (10.8)%  (10.6)%  (11.3)%  —   — 
As percentage of net revenue  (11.7)%  (12.7)%  (13.4)%  —   — 
 
The amount of our selling, general and administrative expenses was basically flat on ayear-over-year basis, benefiting in the fourth quarter of 2009 amid cost savings relating to our restructuring initiatives. On a sequential basis, SG&A expenses increased, onreflecting a year-over-year basis, mainly due to thelonger quarter, as well as a negative currency impact, of the U.S. dollar rate and higher share-based compensation charges.which were partially offset by ongoing cost saving measures. Our share-based compensation charges were $11$5 million in the fourth quarter of 2007 ($92009, compared to $5 million in the fourth quarter of 2006). Thanks to our net revenues increase, our fourth quarter 2007 ratio of SG&A as a percentage of net revenues decreased to 10.8%.
SG&A expenses increased sequentially mainly due to the negative U.S. dollar exchange rate impact2008 and increased charges related to share-based compensation, which were $7$3 million in the third quarter. Thanks to higher revenues, SG&A expenses as aquarter of 2009.
The ratio to sales of our selling, general and administrative expenses was mainly driven by the volume of our revenues. As a percentage of revenues, remained basically flat on a sequential basis.they decreased to 11.7% compared to 13.4% in the prior year’s fourth quarter, while sequentially they decreased from 12.7%.
 
Research and development expenses
 
                    
 Quarter Ended % Variation                     
 Dec 31, 2007 Sept 29, 2007 Dec 31, 2006 Sequential Year-Over-Year  Three Months Ended % Variation
 (Unaudited) (Unaudited) (Unaudited)      December 31, 2009 September 26, 2009 December 31, 2008 Sequential Year-Over-Year
 (In millions)        (Unaudited, in millions)    
Research and development expenses $(480) $(442) $(430)  (8.7)%  (11.7)% $(603) $(595) $(572)  (1.2)%  (5.3)%
As percentage of net revenues  (17.5)%  (17.2)%  (17.3)%  —   —   (23.3)%  (26.2)%  (25.1)%      
 
On a Theyear-over-year basis, our research and development increase in R&D expenses increased in line with the expansion of our activities, including the acquisition of a design team from Nokia, and alsowas primarily due to the negative impactintegration of Ericsson mobile platform activities and, to a lesser extent, the weakening U.S. dollar exchange rate. Furthermore, theOn a sequential basis, R&D expenses increased, reflecting a longer quarter, as well as a negative currency impact, which were partially offset by ongoing cost saving measures.
The fourth quarter 2007 amountof 2009 included $9$3 million of share-based compensation charges ($5compared to $4 million in the fourth quarter of 2006). On2008 and $2 million in the third quarter of 2009. In addition, the fourth quarter of 2009 included $15 million related to amortization charges generated by recent acquisitions. Total R&D expenses were net of research tax credits, which amounted to $33 million, basically equivalent to prior periods.
As a sequential basis, research and development expenses increased againpercentage of revenues, fourth quarter 2009 R&D equaled 23.3%, a decrease compared to the year ago period due to the negative impact of the U.S. dollar exchange rate and also because of the costs associated with recent business acquisitions which included $7 million following the acquisition of a design team from Nokia.increasing revenues.


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Other income and expenses, net
 
            
 Quarter Ended             
 Dec 31, 2007 Sept 29, 2007 Dec 31, 2006  Three Months Ended 
 (Unaudited) (Unaudited) (Unaudited)  December 31, 2009 September 26, 2009 December 31, 2008 
 (In millions)  (Unaudited, in millions) 
Research and development funding $36  $35  $21  $44  $26  $19 
Start-up costs
  (5)  (4)  (16)
Start-up/phase-out costs
  (2)  (3)  (7)
Exchange gain (loss) net  5   —   1   2   (4)  — 
Patent litigation costs  (3)  (3)  (8)
Patent pre-litigation costs  (3)  (3)  (3)
Patent costs, net of gain from settlement  (5)  11   (5)
Gain on sale of other non-current assets  2   1   —   2   1   — 
Other, net  (4)  (2)  (2)  (2)  (2)  (1)
Other income and expenses, net
  28   24   (7)  39   29   6 
As a percentage of net revenues  (1.0)%  (0.9)%  (0.3)%  1.5%  1.3%  0.3%
 
Other income and expenses, net, mainly include,included, as income, items such as research and developmentR&D funding and, as expenses,start-up costs and patent claim costs. In the fourth quartercosts net of 2007, research and developmentsettlement agreements. Income from R&D funding income was associated with our research and developmentR&D projects, which, qualifyupon project approval, qualifies as funding on the basis of contracts with local government agencies in locations where we pursue our activities. In the fourth quarter of 2007, all2009, the balance of these factors resulted in a net income of $28$39 million, originatedwhich was favorably impacted by the $36R&D funding of approximately $44 million, in research and development funding which experienced a quarterly-related strong increase in comparison to prior periods. As a result of the rationalized manufacturing activity, thehigher amount ofstart-up costs also decreased compared to 2006 fourththe year-ago quarter.


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Impairment, restructuring charges and other related closure costs
 
             
  Quarter Ended 
  Dec 31, 2007  Sept 29, 2007  Dec 31, 2006 
  (Unaudited)  (Unaudited)  (Unaudited) 
  (In millions) 
 
Impairment, restructuring charges and other related closure costs $(279) $(31) $(10)
As a percentage of net revenues  (10.2)%  (1.2)%  (0.4)%
             
  Three Months Ended
  December 31, 2009 September 26, 2009 December 31, 2008
  (Unaudited, in millions)
 
Impairment, restructuring charges and other related closure costs $(96) $(53) $(91)
 
In the fourth quarter of 2007,2009, we recorded $96 million of impairment and restructuring charges and other related closure costs, of which:
• $16 million was recorded in preparation of the closure of our Ain Sebaa, Morocco, Carrollton, Texas and Phoenix (Arizona) sites, and was composed of one-time termination benefits, as well as other relevant charges;
• $17 million related to the plan announced in April 2009 by ST-Ericsson, to be completed by the mid- 2010, primarily consisting of on-going termination benefits pursuant to the closure of certain locations in Europe and the United States and $45 million related to a new plan announced in December 2009 by ST-Ericsson, to be completed by 2010, primarily consisting of on-going termination benefits pursuant to workforce reduction; and
• $18 million related to other ongoing and newly committed restructuring plans, consisting primarily of voluntary termination benefits and early retirement arrangements in some of our European locations.
In the third quarter of 2009, we recorded impairment, restructuring charges and other related closure costs of $279 million. This expense was$53 million, of which: $21 million of charges were recorded in light of the closure of our Ain Sebaa (Morocco), Carrollton (Texas) and Phoenix (Arizona) sites, composed of $1 million impairment charges on the Phoenix assets and $20 million of one-time termination benefits, as well as other relevant charges; $17 million related to:to the ST-Ericsson plan announced in April 2009, primarily consisting of on-going termination benefits pursuant to the closure of certain locations in Europe and the Unites States; and $15 million related to other ongoing and newly committed restructuring plans, consisting primarily of voluntary termination benefits and early retirement arrangements in some of our European locations.
• an additional $249 million loss related to the ongoing disposal of FMG assets and $3 million of other related disposal costs, primarily originated by the revised terms of the transaction and by an updated calculation of our expected equity value at closing;
• an amount of $17 million related to the severance costs and other charges booked in relation to the 2007 restructuring plan of our manufacturing activities;
• a charge of $9 million generated by our150-mm restructuring plan; and
• a charge of $1 million for employee benefits relating to other headcount restructuring plans
 
In the fourth quarter of 2006,2008, we recorded impairment, restructuring charges and other related closure costs amounted to $10pertaining to: $29 million and were mainly related to $4one-time termination benefits to be paid at the closure of our Carrollton (Texas) and Phoenix (Arizona) sites, as well as other charges; $2 million forimpairment costs associated with an investment in a minority participation; $9 million charges related to the headcountFMG deconsolidation; and $51 million related to other ongoing and newly committed restructuring planplans, consisting primarily of voluntary termination benefits and $6 million forearly retirement arrangements in some of our European locations.


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150-mmOperating loss restructuring plan.
             
  Three Months Ended
  December 31, 2009 September 26, 2009 December 31, 2008
  (Unaudited, in millions)
 
Operating loss $(6) $(196) $(139)
In percentage of net revenues  (0.2)%  (8.6)%  (6.1)%
 
InOur operating results significantly improved compared to both the third quarter of 2007, we recorded $312009 and the year ago period. The fourth quarter 2009 registered an operating loss of $6 million in impairment, restructuring charges and other related closures costs, mainly composed of $3 million booked upon signing the agreement for the planned disposal of our FMG assets, $16 million for severance costs related to the 2007 restructuring plan of our manufacturing activities, $5 million for the150-mm restructuring plan, and $2 million for another headcount restructuring plan. See Note 21 to our Consolidated Financial Statements.
Operating income (loss)
             
  Quarter Ended 
  Dec 31, 2007  Sept 29, 2007  Dec 31, 2006 
  (Unaudited)  (Unaudited)  (Unaudited) 
  (In millions) 
 
Operating income (loss) $(15) $181  $173 
In percentage of net revenues  (0.6)%  7.0%  7.0%
Year-over-year basis
Our operating income decreased from a profit of $173 millioncompared to a loss of $15$139 million becausein the year ago quarter and $196 million in the prior quarter. The recovery in our revenues led to a strong increase in loading, thereby reducing underutilization charges from $57 million in the year ago quarter and $47 million in third quarter 2009 to $13 million in the fourth quarter of 2009.
The fourth quarter registered an improved operating result despite the charges booked asfact that our operating loss was impacted by $96 million in restructuring, impairment restructuringandother-than-temporary impairment charges and other one-time charges related closure costs. Excluding these extraordinary items, our operating income showed significant improvement driven byto acquisitions, while in the surge in sales volume and improvementthird quarter of operating performance, which exceeded2009 those charges amounted $53 million. In the year-ago quarter, the negative impact of impairment, restructuring and one-time charges related to acquisitions was $91 million.
ACCI and IMS reported an operating profit, while Wireless mitigated its loss from the U.S. dollar exchange rateyear ago period. ACCI increased its operating income from $18 million to $57 million, driven by a growth in revenues. IMS registered a profit of $90 million, compared to a profit of $101 million in the year ago quarter, following a year of severe pressure on market prices. Wireless posted an operating loss of $48 million, improving compared to a loss of $77 million in the year ago period, as a result of higher revenues and the initial impact of the decline in selling prices. With reference to our product group segments, we registered operating income in allon-going synergies plan. The segment “Others” was largely negative including the product groups, but FMG took a large benefit from the suspended depreciation associated with assets held for sale. ASG’s operating income was $108 million, while IMS operating income slightly increased thanks to sales volume.
Sequentially
On a sequential basis, our operating results deteriorated becauseallocation of the impairment and restructuring charges and other costs; excluding these costs, our operating income improved supported by higher revenues and operating efficiencies.of unused capacity charges.
 
ASG operating income declined sequentially in spite of an increase in sales volume due to the negative impact of the U.S. dollar exchange rateOther-than-temporary impairment charges and higher expenses. IMS operating income registered an improvement due to a higher level of sales and despite the unfavorable currency impact. FMG moved from a loss in the third quarter of 2007 to a profit inrealized losses on financial assets
             
  Three Months Ended
  December 31, 2009 September 26, 2009 December 31, 2008
  (Unaudited, in millions)
 
Other-than-temporary impairment charges and realized losses on financial assets
 $(68) $0  $(55)
The fourth quarter of 2007 benefiting from2009 income statement includes a pre-tax non-cash loss of $68 million related to the suspended depreciationsale of a part of the portfolio of ARS purchased on its assets held for sale.our account by Credit Suisse contrary to our instruction. See “Liquidity and Capital Resources.”


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Interest income, net
 
             
  Quarter Ended 
  Dec 31, 2007  Sept 29, 2007  Dec 31, 2006 
  (Unaudited)  (Unaudited)  (Unaudited) 
  (In millions) 
 
Interest income, net $25  $22  $25 
             
  Three Months Ended
  December 31, 2009 September 26, 2009 December 31, 2008
  (Unaudited, in millions)
 
Interest income, net $3  $4  $3 
 
NetWe recorded net interest income was $25of $3 million, insimilar to the fourthyear-ago quarter, of 2007. The slight increase versus the previous quarter was due to low U.S. dollar and Euro denominated interest rates. On a sequential basis the higher values of liquidity due to continuous cash generation and one-offnet interest income.income decreased by $1 million.
 
Other-than-temporary impairment charges on marketable securities
             
  Quarter Ended 
  Dec 31, 2007  Sept 29, 2007  Dec 31, 2006 
  (Unaudited)  (Unaudited)  (Unaudited) 
  (In millions) 
 
Other-than-temporary impairment charges on marketable securities $(46) $0  $0 
Beginning in May 2006, we gave a specific mandate to a global financial institution to invest a portion of our cash in a U.S. federally-guaranteed student loan program. In August 2007, we became aware that the financial institution had deviated from our instruction and that our account had been credited with investments in unauthorized auction rate securities. In the third quarter of 2007, we determined that since the unauthorized auction rate securities had experienced auction failure since August, and pending the above legal actions against the financial institution to recover the full amount of the losses for these unauthorized investments, the investments were to be more properly classified on our consolidated balance sheet as “Marketable securities” instead of “Cash and cash equivalents” as done in previous periods. The revision of the December 31, 2006 consolidated balance sheet results in a decrease of “Cash and cash equivalents” from $1,963 million to $1,659 million with an offsetting increase to “Marketable securities” from $460 million to $764 million. The revision of the December 31, 2006 consolidated statements of cash flows affects “Net cash used in investing activities”, which increased from $2,753 million to $3,057 million based on the increase in the investing activities line “Payment for purchase of marketable securities” from $460 million to $764 million. The “Net cash increase (decrease)” caption was also reduced $304 million from a decrease of $64 million to a decrease of $368 million, and the “Cash and cash equivalents at the end of the period” changes to match the $1,659 million on the revised consolidated balance sheet. There are no other changes on the consolidated statements of cash flows, including the “Cash and cash equivalents at the beginning of the period,” as we started to purchase auction rate securities only in 2006. We believe that investments made for our account in auction rate securities other than U.S. federally-guaranteed student loans were made without our authorization, and in 2008 we instituted proceedings against the responsible financial institution with a view to full recovery of the losses in our account. We intend to pursue our claim vigorously.
Earning (loss)Loss on equity investments
 
             
  Quarter Ended 
  Dec 31, 2007  Sept 29, 2007  Dec 31, 2006 
  (Unaudited)  (Unaudited)  (Unaudited) 
  (In millions) 
 
Earning (loss) on equity investments $2  $3  $(1)
             
  Three Months Ended
  December 31, 2009 September 26, 2009 December 31, 2008
  (Unaudited, in millions)
 
Earnings (loss) on equity investments $(13) $(42) $(204)
 
In the fourth quarter of 2007,2009, we registered an income on equity investments, mainlyrecorded a charge of $13 million, of which $5 million representing our net proportional share of the loss reported by Numonyx, booked pursuant to a one quarter lag, and $7 million related to our investmentproportionate share in JVD as minority shareholder in our joint venture with Hynix Semiconductor in China, basically equivalenta losspick-up including amortization of basis difference.


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Gain on convertible debt buyback
             
  Three Months Ended
  December 31, 2009 September 26, 2009 December 31, 2008
  (Unaudited, in millions)
 
Gain on convertible debt buyback $3  $—  $— 
The $3 million gain on convertible debt buyback is related to the amount in the previous quarter.repurchase of bonds with a principal value of $106 million for total cash consideration of $103 million. Please see “Capital Resources”.
 
Income tax benefit (expense)
 
             
  Quarter Ended 
  Dec 31, 2007  Sept 29, 2007  Dec 31, 2006 
  (Unaudited)  (Unaudited)  (Unaudited) 
  (In millions) 
 
Income tax benefit (expense) $55  $(18) $80 
             
  Three Months Ended
  December 31, 2009 September 26, 2009 December 31, 2008
  (Unaudited, in millions)
 
Income tax benefit (expense) $(48) $(15) $9 
 
During the fourth quarter of 2007,2009, we registered an income tax benefitexpense of $55$48 million, which includesreflecting actual tax provisions in each jurisdiction. There was a $72 million impairment on assets to be contributed into the planned disposal of the Flash Memories Group’s (“FMG”) assets held for sale. Duringtax charge in the fourth quarter of 2006, we had an income tax benefit of $80 million, which was primarily2009, notwithstanding the result of a favorable outcomeloss, because of a tax litigation matter. During the third quarter of 2007, we recorded an income tax expense of $18 million.ratetrue-up and some valuation allowances taken on loss carryforwards in certain jurisdictions.


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Our tax rate is variable and depends on changes in the level of operating incomeresults within various local jurisdictions and on changes in the applicable taxation rates of these jurisdictions, as well as changes in estimated tax provisions due to new events. Our income tax amounts and rates depend also on our loss carryforwards and their relevant valuation allowances, which are based on estimated projected plans; in the case of material changes in these plans, the valuation allowances could be adjusted accordingly with an impact on our tax charges. We currently enjoy certain tax benefits in some countries; as suchcountries. Such benefits may not be available in the future due to changes in the local jurisdictions,jurisdictions; our effective tax rate could be different in future quarters and may increase in the coming years. In addition, our yearly income tax charges include the estimated impact of provisions related to potential tax positions that are uncertain.
 
Net incomeloss attributable to noncontrolling interest
 
             
  Quarter Ended 
  Dec 31, 2007  Sept 29, 2007  Dec 31, 2006 
  (Unaudited)  (Unaudited)  (Unaudited) 
  (In millions) 
 
Net income $20  $187  $276 
As percentage of net revenues  0.7%  7.3%  11.1%
             
  Three Months Ended
  December 31, 2009 September 26, 2009 December 31, 2008
  (Unaudited, in millions)
 
Net loss attributable to noncontrolling interest $59  $48  $5 
In the fourth quarter of 2009, we booked $59 million income representing the loss attributable to noncontrolling interest, which mainly included the 50% owned by Ericsson in the consolidated ST-Ericsson Holding AG (JVS). In the third quarter of 2009, the corresponding amount was $48 million. These amounts reflected its share in the joint venture’s loss.
All periods included the recognition of noncontrolling interest related to our joint venture in Shenzhen, China for assembly operating activities. Those amounts were not material.
Net loss attributable to parent company
             
  Three Months Ended
  December 31, 2009 September 26, 2009 December 31, 2008
  (Unaudited, in millions)
 
Net loss attributable to parent company $(70) $(201) $(366)
As percentage of net revenues  (2.7)%  (8.8)%  (16.1)%
 
For the fourth quarter of 2007,2009, we reported a net incomeloss of $20$70 million comparedas a result of adverse economic conditions impacting our operations and also due to a net income of $276 million in the fourth quarter of 2006 and net income of $187 million in the third quarter of 2007. Our fourth quarter of 2007 was penalized by the higher value of impairment, restructuringcertain specific charges and other-than-temporary impairment on marketable securities. Basic and diluted earningsas described above.
Loss per share for the fourth quarter of 2007 were $0.02, lower than $0.312009 was $(0.08) compared to $(0.23) in the third quarter of 2009 and $0.30, respectively,$(0.42) in the year-ago quarter.
In the fourth quarter of 2006. The diluted earnings2009, the impact after tax of restructuring, impairment andother-than-temporary impairment charges was estimated to be approximately $(0.12) per share, were negatively impacted for $0.25 due to impairment,while in the third quarter of 2009, it was approximately $(0.06) per share. In the year ago quarter, the impact of restructuring and other than temporaryimpairment charges,other-than-temporary impairment charges, the loss on marketable securities.our Numonyx equity investment and non-recurrent items was estimated to be approximately $(0.36) per share.


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Impact of Changes in Exchange Rates
 
Our results of operations and financial condition can be significantly affected by material changes in the exchange rates between the U.S. dollar and other currencies, particularly the Euro.
 
As a market rule, the reference currency for the semiconductor industry is the U.S. dollar and product prices are mainly denominated in U.S. dollars. However, revenues for certainsome of our products (primarily our dedicated products sold in Europe and Japan) are quoted in currencies other than the U.S. dollar and as such are directly affected by fluctuations in the value of the U.S. dollar. As a result of currency variations, the appreciation of the Euro compared to the U.S. dollar could increase, in the short term, our level of revenues when reported in U.S. dollars; revenuesdollars. Revenues for all other products, which are either quoted in U.S. dollars and billed in U.S. dollars or in local currencies for payment, tend not to be affected significantly by fluctuations in exchange rates, except to the extent that there is a lag between the changes in currency rates and the adjustments in the local currency equivalent of the price paid for such products. Furthermore, certain significant costs incurred by us, such as manufacturing, labor costs and depreciation charges, selling, general and administrative expenses, and research and developmentR&D expenses, are largely incurred in the currency of the jurisdictions in which our operations are located. Given that most of our operations are located in the Euro zone orand othernon-U.S. dollar currency areas, including Sweden, our costs tend to increase when translated into U.S. dollars in case ofwhen the dollar weakeningweakens or to decrease when the U.S. dollar is strengthening.strengthens.
 
In summary, as our reporting currency is the U.S. dollar, currency exchange rate fluctuations affect our results of operations: if the U.S. dollar weakens, our results are negatively impacted since we receive a limited part of our revenues, and more importantly, we increaseincur a significant part of our costs, in currencies other than the U.S. dollar. Our results are favorably impacted when the dollar strengthens. As described below, our effective average U.S. dollar exchange rate weakenedstrengthened during 2007,2009, particularly against the Euro, causing us to report higherlower expenses and negativelyfavorably impacting both our gross margin and operating income. Our consolidated statements of income for 2007 include2009 included income and expense items translated at the average U.S. dollar exchange rate for the period.
 
Our principal strategy to reduce the risks associated with exchange rate fluctuations has been to balance as much as possible the proportion of sales to our customers denominated in U.S. dollars with the amount of raw materials, purchases and services from our suppliers denominated in U.S. dollars, thereby reducing the potential exchange rate impact of certain variable costs relative to revenues. Moreover, in order to further reduce the exposure to U.S. dollar exchange fluctuations, we have hedged certain line items on our consolidated statements of income, in particular with respect to a portion of costthe costs of goods sold, most of the research and developmentR&D expenses and certain selling and general and administrative expenses, located in the Euro zone. Our effective average exchange rate of the Euro to the U.S. dollar was $1.35$1.37 for €1.00 in 20072009 compared to $1.24$1.49 for €1.00 in 2006.2008. Our effective average rate of the Euro to the U.S. dollar was $1.43 for €1.00 for the fourth quarter of 2009 and $1.38 for €1.00 in the third quarter of 2009 while it was $1.40 for €1.00 for the fourth quarter of 2008. These effective exchange rates reflect the actual exchange rates combined with the impact of cash flow hedging contracts that matured in the period.
 
As of December 31, 2007,2009, the outstanding hedged amounts were €432 million to cover manufacturing costs were €158and €508 million and to cover operating expenses, were €170 million, at an average rate of about $1.46 and $1.45$1.43 for €1.00,


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respectively (including the premium paid to purchase foreign exchange options), maturing over the period from January 8,to December 2010. In the fourth quarter of 2008 the company decided to May 7, 2008.extend the time horizon of its cash flow hedging contracts for manufacturing costs and operating expenses for up to 12 months. As of December 31, 2007,2009, these outstanding hedging contracts and certain expired contracts covering manufacturing expenses capitalized in inventory represented a deferred gain of approximately $8$6 million after tax, recorded in “Other comprehensive incomeincome” in shareholders’ equity”,equity, compared to a deferred gain of approximately $13$64 million after tax asat September 26, 2009 and a deferred gain of approximately $12 million after tax at December 31, 2006. 2008.
Our cash flow hedging policy is not intended to cover the full exposure.exposure and is based on hedging a declining percentage of exposure quarter after quarter. In addition, in order to mitigate potential exchange rate risks on our commercial transactions, we purchasedpurchase and enteredenter into forward foreign currency exchange contracts and currency options to cover foreign currency exposure in payables or receivables at our affiliates. We may in the future purchase or sell similar types of instruments. See “ItemItem 11, “Quantitative and Qualitative Disclosures about Market Risk,Risk.” for full details of outstanding contracts and their fair values. Furthermore, we may not predict in a timely fashion the amount of future transactions in the volatile industry environment. Consequently, our results of operations have been and may continue to be impacted by fluctuations in exchange rates.
 
Our treasury strategies to reduce exchange rate risks are intended to mitigate the impact of exchange rate fluctuations. No assurance may be given that our hedging activities will sufficiently protect us against declines in the value of the U.S. dollar. Furthermore, if the value of the U.S. dollar increases, we may record losses in connection with the loss in value of the remaining hedging instruments at the time. In 2007,2009, as thea result of cash flow


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hedging, we recorded a net profitgain of $36$71 million, consisting of a profitgain of $16$36 million to cost of sales, a profit of $15R&D expenses, $29 million to research and development expenses,costs of goods sold and a profitgain of $5$6 million to selling, general and administrative expenses, while in 2006,2008, we recorded a net profitgain of $19 million.$1 million, consisting of a loss of $1 million to R&D expenses, a gain of $4 million to costs of goods sold and a loss of $2 million to selling, general and administrative expenses.
 
The net effect of the consolidated foreign exchange exposure resulted in a net gain of $1$11 million in “Other income and expenses, net” in 2007.2009.
 
AssetsThe asssets and liabilities of subsidiaries are, for consolidation purposes, translated into U.S. dollars at the period-end exchange rate. Income and expenses, as well as cash flows, are translated at the average exchange rate for the period. The balance sheet impact of such translation adjustments has been, and may be expected to be, significant from period to period since a large part of our assets and liabilities are accounted for in Euros as their functional currency. Adjustments resulting from the translation are recorded directly in shareholders’ equity, and are shown as “Accumulated other comprehensive income (loss)” in the consolidated statements of changes in shareholders’ equity. At December 31, 2007,2009, our outstanding indebtedness was denominated mainly in U.S. dollars and in Euros.
 
For a more detailed discussion, see Item 3, “Key Information — Risk Factors — Risks Related to Our Operations” — Our financial results can be adversely affected by fluctuations in exchange rates, principally in the value of the U.S. dollar.”.
 
Impact of Changes in Interest Rates
 
Interest rates may fluctuate upon changes in financial market conditions and material changes can affect our results from operations and financial condition, since these changes can impact the total interest income received on our cash and cash equivalents and the total interest expense paid on our financial debt.
 
Our interest income, net, as reported on our consolidated statements of income, is the balance between interest income received from our cash and cash equivalent and marketable securities investments and interest expense paid on our long-term debt. Our interest income is dependent on theupon fluctuations in the interest rates, mainly in the U.S. dollardollars and the Euro,Euros, since we are investinginvest primarily on a short-term basis; any increase or decrease in the short-term market interest rates would mean an equivalent increase or decrease in our interest income. As of December 31, 2009, approximately 40% of our long-term debt was at fixed interest rates. Our interest expenses are associated with our long-term convertible bondsZero Coupon 2016 Convertible Bonds (with a fixed rate) and floating rate senior bonds whose rateof 1.5%), our 2013 Floating Rate Senior Bond, which is fixed quarterly at a rate of EURIBOR plus 40bps, and European Investment Bank Floating Rate Loans totaling $672 million at LIBOR + 40bps.plus variable spreads. To manage the interest rate mismatch, in the second quarter of 2006, we entered into cancelablecancellable swaps to hedge a portion of the fixed rate obligations on our outstanding long-term debt with floating rate derivative instruments. Of the $974 million in 2016 Convertible Bonds issued in the first quarter of 2006, we entered into cancelablecancellable swaps for $200 million of the principal amount of the bonds, swapping the 1.5% yield equivalent on the bonds for 6 Month USD LIBOR minus 3.375%., partially offsetting the interest rate mismatch of the 2016 Convertible Bond. Our hedging policy was not intended to cover the full exposure and all risks associated with these instruments. Due to the exceptionally low U.S. dollar interest rate brought about by the financial crisis, in 2008 we determined that the swaps had not been effective since November 1, 2008 and the fair value hedge relationship was discontinued. Consequently, the swaps were designated asheld-for-trading financial assets and reported at fair value as a component of “Other receivables and current assets” in the consolidated balance sheet at December 31, 2008 for $34 million, since we intended to hold the derivative instruments for a short period of time that would not exceed twelve months. An unrealized gain of $15 million was recognized in earnings from the discontinuance date and was reported on the line “Unrealized gain on financial assets” of the consolidated statement of income for the year ended December 31, 2008. This instrument was sold during the first quarter of 2009 with a positive cash flow impact of $26 million and a loss of $8 million.
In December 2009, in order to reduce the negative carry of the outstanding Zero Coupon Senior Convertible Bonds due 2016, we began a program to repurchase a portion of them. At December 31, 2009, 98 thousand bonds had been repurchased, corresponding to 4,295,722 shares. In light of the put option that will be exercisable by bondholders on February 23, 2011, we decided to repurchase a portion of the 2016 Bonds to optimize our liquidity management and yield through that date. See “Other Developments.” We also have $250 million of restricted cash at a fixed rate (our joint venture with Hynix Semiconductor)(Hynix Semiconductor-Numonyx JV), which partially offsettingoffsets the interest rate mismatch of the 2016 Convertible Bond. Our hedging policy is not intended to cover the full exposure and all risks associated with these instruments.
 
As ofAt December 31, 2007,2009, our total financial resources, including cash, and cash equivalents, marketable securities current and non-current and restricted cash, generated an average interest income rate of 4.75%;0.86%. This does not include interest income accrued on the9-year U.S. swap interest rate was 4.81%. The fair value of the swaps as of December 31, 2007 was $8 million since they were executed at higher than current market rates. In compliance with FAS 133 provisions on fair value hedges, the net impact of the hedging transaction on our consolidated statements of income was $1 million in 2007, which represents the ineffective part of the hedge. This amount was recorded in “Other income and expenses, net.” shareholder loan to Numonyx.


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These cancelable swaps were designed and are expected to effectively replicate the bond’s behavior through a wide range of changes in financial market conditions and decisions made by both the holders of the bonds and us, thus being classified as highly effective hedges; however no assurance can be given that our hedging activities will sufficiently protect us against future significant movements in interest rates.
We may in the future enter into further cancellable swap transactions related to the 2016 Convertible Bonds or other fixed rate instruments. For full details of quantitative and qualitative information, see Item 11, “Quantitative and Qualitative Disclosures about Market Risk.”
Liquidity and Capital Resources
 
Treasury activities are regulated by our policies, which define procedures, objectives and controls. The policies focus on the management of our financial risk in terms of exposure to currency rates and interest rates. Most treasury activities are centralized, with any local treasury activities subject to oversight from our head treasury office. The majority of our cash and cash equivalents are held in U.S. dollars and Euros and are placed with financial institutions rated “A” or better. Part of our liquidity is also held in Euros to naturally hedge intercompany payables and financial debt in the same currency and is placed with financial institutions rated at least single A long-term rating, meaning at least A3 from Moody’s Investor Service and A- from Standard & Poor’s andor Fitch Ratings. Marginal amounts are held in other currencies. See Item 11, “Quantitative and Qualitative Disclosures About Market Risk.”
 
In the third quarterAs of 2007, we determined that since unauthorized investments in auction rate securities other than U.S. federally-guaranteed student loan program experienced auction failure since August such investments were to be more properly classified on our consolidated balance sheet as “Marketable securities” instead of “Cash and cash equivalents” as done in previous periods. The revision of the December 31, 2006 consolidated balance sheet results2009, our total liquidity and capital resources were comprised of $1,588 million in a decrease of “Cash and cash equivalents” from $1,963 million to $1,659 million with an offsetting increase to “Marketable securities” from $460 million to $764 million. The revision of the December 31, 2006 consolidated statements of cash flows affects “Net cash used in investing activities”, which increased from $2,753 million to $3,057 million based on the increase in the investing activities line “Payment for purchase of marketable securities” from $460 million to $764 million. The “Net cash increase (decrease)” caption was also reduced $304 million from a decrease of $64 million to a decrease of $368 million, and the “Cash and cash equivalents, of which $186 million is held at the endST-Ericsson level, $1,032 million in marketable securities as current assets, of the period” changes to match the $1,659which $40 million on the revised consolidated balance sheet. There are no other changes on the consolidated statements of cash flows, including the “Cash and cash equivalentsis held at the beginningST Ericsson level, $250 million as restricted cash and $42 million in ARS, invested by Credit Suisse contrary to our instruction, both items considered as non-current assets. Our total capital resources were $2,912 million as of December 31, 2009, a significant increase compared to $2,132 million at December 2008. Such increase was originated by the period” as we started to purchase auction rate securities only in 2006. We believe that investments made for our account in auction rate securities other than U.S. federally guaranteed student loans have been made without our due authorizationproceeds from the ST-Ericsson business combination and in 2008 we instituted proceedings against the responsible financial institution with a view to (fully) recovery of our losses. We intend to pursue our claim vigorously.from operating cash flow.
 
As of December 31, 2007,2009, we had $1,855��$1,032 million in cash and cash equivalents, marketable securities amounted to $1,014 million as current assets, composed of $484 million invested in Aaa treasury bills from the French and U.S. governments, $548 million invested in senior debt floating rate notes issued by primary financial institutions $250with an average rating, excluding one impaired debt security for a notional value of €15 million, as restricted cashof Aa3/A+ from Moody’s and $369 millionS&P. Both the treasury bills and the Floating Rate Notes are classified as non-current assets invested in auction rate securities.
At December 31, 2007, cashavailable-for-sale and cash equivalents totaled $1,855 million, compared to $1,659 million at December 31, 2006 and to $2,027 million at December 31, 2005. Cash and cash equivalents at December 31, 2006 had been changed from $1,963 million, due to a reclassification of certain marketable securities previously accounted for as cash and cash equivalents as described above. At December 31, 2007, we had no investments in short-term deposits, compared to $250 million at December 31, 2006.
As of December 31, 2007, we had $1,014 million in marketable securities, with primary financial institutions with a minimum rating of A1/A+. They are reported at fair value, with changes in fair value recognized as a separate component of “Accumulated other comprehensive income” in the consolidated statement of changes in shareholders’ equity.equity, except if deemed to beother-than-temporary. We reported as of December 31, 2009 a before tax increase of $8 million compared to December 31, 2008 in the fair value of our floating rate note portfolio. Since the duration of the floating-rate note portfolio is only an average of two years and the securities have a minimum Moody’s rating of A3, we expect the value of the securities to return to par as the final maturity approaches (with the only exception being the $15 million of Senior Floating Rate Notes issued by Lehman Brothers, the value of which was impaired through an “other than temporary” charge in 2008). The fair value of these securities is based on market prices publicly available through major financial information providers. The market price of the Floating Rate Notes is influenced by changes in the credit standing of the issuer but is not significantly impacted by movement in interest rates. In 2009, we invested $1,730 million in French and U.S. treasury bills, of which $1,263 million was sold or matured during the year. The change in fair value of these instruments amounted to approximately $3the $484 million for the year endeddebt securities classified asavailable-for-sale was not material at December 31, 2007. Marketable2009. The duration of the treasury bills portfolio is less than five months and the securities amountedare rated Aaa by Moody’s.
Due to $764regulatory and withholding tax issues, we could not directly provide the Hynix joint venture with the $250 million long-term financing as originally planned. As a result, in 2006, we entered into a ten-year term debt guarantee agreement with an external financial institution through which we guaranteed the repayment of the loan by the joint venture to the bank. The guarantee agreement includes our placing up to $250 million in cash in a deposit account with a yield of 6.06%. The guarantee deposit will be used by the bank in case of repayment failure from the joint venture (which is now known as the Numonyx-Hynix joint venture), with $250 million as the maximum potential amount of future payments we, as the guarantor, could be required to make. In the event of default and failure to repay the loan from the joint venture, the bank will exercise our rights, subordinated to the repayment to senior lenders, to recover the amounts paid under the guarantee through the sale of the joint venture’s assets. The $250 million, which has been on deposit since 2007, was reported as “Restricted cash” on the consolidated balance sheet at December 31, 2006, while2009. The debt guarantee was evaluated under guidance related to disclosures about credit derivatives and certain guarantees, and resulted in the recognition of a $17 million liability, corresponding to the fair value of the guarantee at inception of the transaction. The debt guarantee obligation continues to be reported on the line “Other non-current liabilities” in the consolidated balance sheet at December 31, 2009, since we retained the deposit, as an asset, and the related guarantee at the formation of Numonyx. At December 31, 2009, the guarantee was not exercised. To the best of our knowledge, at December 31, 2009, the joint venture was current on its debt obligations, was not in default of any debt covenants and did not have any as of December 31, 2005. Changesexpect to be in default on these obligations in the instruments adoptedforeseeable future. Our current maximum exposure to investloss as a result of our liquidityinvolvement with the joint venture is limited to our indirect investment through Numonyx and the debt guarantee commitments. Under the terms of the recently signed agreement to sell Numonyx to Micron, we will continue to retain the $250 million deposit with DBS Bank Ltd. in future periods may occurSingapore, which is intended to guarantee theHynix-Numonyx joint venture’s debt financing for such amount. Under the terms of the joint venture agreement with Hynix, upon the closing of the sale of Numonyx, Hynix and may significantly affectNumonyx have certain rights to buy or sell or cause the other party to buy or sell their interests in the Hynix JV. We have entered into an agreement with


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Micron and Numonyx that provides that, in the event that Hynix exercises its right to purchase Numonyx’ interest in the Hynix joint venture following the closing of the Numonyx transaction, Numonyx will take over all or part of our interest income (expense), net.obligations under the guarantee.
 
As of December 31, 2007,2009, we had auction rate securitiesAuction Rate Securities, purchased by Credit Suisse contrary to our instruction, representing interests in collateralized debt obligations with a par value of $415 million. These$261 million, that were carried on our balance sheet asavailable-for-sale financial assets for $42 million, including the positive revaluation of $15 million in other comprehensive income in equity. Following the continued failure of auctions for these securities represent interestwhich began in collateralized obligations and other commercial obligations. In the fourth quarterAugust 2007, we first registered a decline in fairthe value of these auction rateAuction Rate Securities as an“Other-than-temporary” impairment charge against net income for $46 million during the fourth quarter of 2007. Since the initial failure of the auctions in August 2007, the market for these securities has completely frozen without any observable secondary market trades, and considered thisconsequently, during 2008 and 2009, the portfolio experienced a further estimated decline in fair value charged to our Income Statement pursuant applicable GAAP of $127 million and $72 million, respectively, of which no additional impairment was recorded during the third or fourth quarter of 2009. The reduction in estimated fair value was recorded as “Other-than-temporary.” Recent credit concerns arisingan“Other-than-temporary” impairment charge against net income.
The investments made in the capital markets have reducedaforementioned Auction Rate Securities were made without our authorization and, in 2008, we launched a legal action against Credit Suisse. On February 16, 2009, the abilityarbitration panel of FINRA awarded us approximately $406 million comprising compensatory damages, as well as interest and attorneys’ fees, and authorized us to liquidate auctionretain an interest award of approximately $27 million, out of which $25 million has already been paid, as well as to obtain interest at the rate of 4.64% on the par value of the portfolio from December 31, 2008 until the award is paid in full. In December 2009, Credit Suisse, because of its contingent interest in certain securities held by us and issued by Deutsche Bank, requested that we classifyeither tender the securities or accept that the amount that would be received by us pursuant to such tender ($75 million) be deducted from the sum to be collected by us if and when the FINRA award is confirmed and enforced. Pursuant to legal advice, and while reserving our legal rights, we participated in the tender offer. As a result, we sold ARS with a face value of $154 million, collected $75 million and registered $68 million as available for sale securitiesrealized losses on financial assets. Such amount comes in addition to the $245 million impairment that had been taken as of September 30, 2009 with respect to the portfolio of ARS purchased on our consolidated balance sheet. Therefore, inaccount by Credit Suisse contrary to our instruction. These amounts should be recovered upon collection of the award. We are seeking confirmation of the award from the United States District Court of the Southern District of New York.
Since the fourth quarter of 2007, as there was no information available regarding ‘mark to market’ bids and ‘mark to model’ valuations from the structuring financial institutions for these securities, we recorded an impairment chargebased our estimation of $46 million to reducefair value on a theoretical model using yields obtainable for comparable assets. The value inputs for the valueevaluation of these securities to their


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estimated fair value. The fair value of these securities has been evaluated on the basis of the weighted average of available information: (i) fromwere publicly available indexesindices of securities with the same rating, similar duration and comparable/similar underlying collaterals or industries exposure (such as ABX for the collateralized debt obligation and (ii) using “mark to market” bidsITraxx and “mark to model” valuations received fromIBoxx for the structuring financial institutionscredit linked notes). The higher impairment charges during 2008 and 2009 reflect downgrading events on the collateral debt obligations comparing the relevant ABX indices of a lower rating category and a general negative trend of the outstanding auction rate securities.corporate debt market. The estimated value of these securitiesthe collateralized debt obligations could further decrease in the future as a result of credit market deteriorationand/or other downgrading. After the judgment for the $46 million impairment charge recorded in fiscal year ended December 31, 2007, our auction rate securities have, therefore, an estimated fair value of approximately $369 million as of December 31, 2007. At December 31, 2007, these securities were rated AAA from at least one major rating agency.
 
Liquidity
 
We maintain a significant cash position and a low debt to equity ratio, which provide us with adequate financial flexibility. As in the past, our cash management policy is to finance our investment needs mainly with net cash generated from operating activities.
 
During 2007,2009, the evolution of our cash flow produced an increase in our cash and cash equivalentequivalents of $196$579 million, resulting in a level ofgenerated by net cash from both operating and cash equivalent of $1,855 million.investing activities, the latter including the proceeds from the ST-Ericsson business combination.
 
The evolution of our cash flow over the last 3 years can be summarizedfor each period is as follows:
 
             
  Year Ended December 31, 
  2007  2006  2005 
  (In millions) 
 
Net cash from operating activities $2,188  $2,491  $1,798 
Net cash used in investing activities  (1,737)  (3,057)  (1,528)
Net cash from (used in) financing activities  (296)  132   (178)
Effect of change in exchange rates  41   66   (15)
             
Net cash increase (decrease)  196   (368)  77 
Cash and cash equivalent at the beginning of the period  1,659   2,027   1,950 
             
Cash and cash equivalent at the end of the period  1,855   1,659   2,027 
             
  Year Ended December 31, 
  2009  2008  2007 
  (In millions) 
 
Net cash from (used in) operating activities $816  $1,722  $2,188 
Net cash from (used in) investing activities  290   (2,417)  (1,737)
Net cash from (used in) in financing activities  (513)  (67)  (296)
Effect of change in exchange rates  (14)  (84)  41 
             
Net cash increase (decrease) $579  $(846) $196 


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Net cash from (used in) operating activities.  The net cash from operating activities in 2009 was significantly lower compared to previous periods due to a higher amount of net losses registered. See “Results of Operations” for more information. However, in response to the financial market crisis we focused on strong capital management by taking aggressive actions to generate cash by accelerating our cash conversion cycle, resulting in a $553 million reduction in inventory and reflecting the accelerated collection of States receivables, mainly certain R&D tax credits.
As a result, our net cash from operating activities decreased from $1,722 million in 2008 to $816 million in 2009. Depreciation and amortization was $1,367 million in 2009, equivalent to the prior year period.
 
Net cash from operating(used in) investing activities.  AsInvesting activities generated cash in prior periods, the major source during 2007 was cash provided by operating activities. Our net cash from operating activities totaled $2,188 million in 2007, decreasing compared to $2,491 million in 2006 and increasing compared to $1,798 million in 2005.
Changes in our operating assets and liabilities resulted in a generation of net cash for the amount of $62 million in 2007, compared to net cash used of $60 million used in 2006. The main favorable variations were2009 primarily due to the net cash provided by inventory and by trade receivables.proceeds of $1,155 million, received from Ericsson in relation to the creation of ST-Ericsson. Payments for the purchase of tangible assets totaled $451 million, a significant reduction from the $983 million registered in the equivalent prior year period. Furthermore, in 2009, we made payments of $1,730 million for the purchases of marketable securities, while we collected $1,446 million upon the sales of marketable securities largely due to their maturity dates.
 
Net cash used in investingfrom (used in) financing activities.  Net cash used in investingfinancing activities was $1,737$513 million in 2007,2009 compared to the $3,057$67 million used in 2006 and compared2008. The 2009 amount included $158 million as dividends paid to shareholders, $134 million as repayment at maturity of long term debt, $103 million related to the $1,528repurchase of the 2016 Bonds and $92 million usedof purchase of equity from noncontrolling interests related to the acquisition of NXP’s 20% stake in 2005. Payments for purchases of tangible assetsST-NXP Wireless. There were the main utilization of cash, amounting to $1,140 million for 2007, a decrease over $1,533 million in 2006. The 2006 payments were net of $660 millionno proceeds from matured short-term deposits and fromlong term debt in 2009, while the sale of our Accent subsidiary. In 2007, cash used for investmentscorresponding amount in intangible assets and financial assets2008 was $208 million and capital contributions to equity investments was $32$663 million. In addition, we had payment for marketable securities of $708 million, balanced by proceeds from sales of marketable securities and from material short-term deposits for $101 million and $250 million respectively.
Capital expenditures for 2007 were principally allocated to:
• the completion of capacityramp-up as per our Crolles2 alliance program with Freescale Semiconductor and NXP Semiconductors in our300-mm fab in Crolles (France) and the acquisition of a portion of the tools from our former partners;
• the upgrading and expansion of our200-mm fab in Agrate (Italy) for BCD technology and MEMS;
• the completion of the program of capacity expansion and the upgrading to finer geometry technologies of our200-mm front-end facility in Rousset (France);
• the capacityramp-up for one of our discrete process families and upgrading of our150-mm fabs in Singapore;
• the upgrading to leading edge technologies, down to 45 nm, of our200-mm R&D fab in Agrate (Italy);
• the capacity expansion for 65 nm, NAND and NOR Flash Memories, of our200-mm fab in Singapore; and


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• the capacity expansion of our back-end plants in Muar (Malaysia) and Shenzhen (China).
Capital expenditures for 2006 were principally allocated to:
• the expansion of the300-mm front-end joint project with NXP Semiconductors and Freescale Semiconductor in Crolles2 (France);
• the capacity expansion and the upgrading to finer geometry technologies for our200-mm plant in Rousset (France);
• the capacity expansion and the upgrading of our150-mm and200-mm plant in Singapore;
• the upgrading of our200-mm fab and pilot line in Agrate (Italy); and
• the capacity expansion for our back-end facilities in Malta, Shenzhen (China), Bouskoura (Morocco) and Muar (Malaysia).
Capital expenditures for 2005 were principally allocated to:
• the capacity expansion of our200-mm and150-mm front-end facilities in Singapore;
• the conversion to200-mm of our front-end facility in Agrate (Italy);
• the capacity expansion of our back-end plants in Muar (Malaysia), Shenzhen (China), Toa Payoh (Singapore) and Malta;
• the expansion of our200-mm front-end facility in Phoenix (Arizona);
• the capacity expansion of our200-mm front-end facility in Rousset (France);
• the completion of building and continuation of facilities for our300-mm front-end plant in Catania (Italy);
• the expansion of a150-mm front-end and a200-mm pilot line in Tours (France); and
• the expansion of the300-mm front-end joint project with NXP Semiconductors and Freescale Semiconductor in Crolles2 (France).
 
Net operating cash flow.  We also present net operating cash flow, defined as net cash from (used in) operating activities minusplus (minus) net cash used infrom (used in) investing activities, excluding payment for purchases of and proceeds from the sale of marketable securities (both current and non-current), short-term deposits and restricted cash. We believe net operating cash flow provides useful information for investors and management because it measures our capacity to generate cash from our operating and investing activities to sustain our operating activities. Net operating cash flow is not a U.S. GAAP measure and does not represent total cash flow since it does not include the cash flows generated by or used in financing activities. In addition, our definition of net operating cash flow may differ from definitions used by other companies. Net operating cash flow is determined as follows from our Audited Consolidated Statements of Cash Flow:
 
                        
 Year Ended December 31,  Year Ended December 31, 
 2007 2006 2005  2009 2008 2007 
 (In millions)  (In millions) 
Net cash from operating activities $2,188  $2,491  $1,798 
Net cash used in investing activities  (1,737)  (3,057)  (1,528)
Net cash from (used in) operating activities $816  $1,722  $2,188 
Net cash from (used in) investing activities  290   (2,417)  (1,737)
Payment for purchase and proceeds from sale of marketable securities (current and non-current), short-term deposits and restricted cash, net  389   1,232   —   258   (351)  389 
       
Net operating cash flow
 $840  $666  $270  $1,364  $(1,046) $840 
       
 
Our net operating cash flow constantly increased over the last 3 years, thanks to a solid generation of cash from operating activities and a tight control on the level of our capital investments. We were able to significantly reduce the level of our capital investments as a percentage of sales. In 2007 and 2005, our operating activities were capable of generating cash in excess of our investing activities, whereas in 2006 cash used in investing activities exceeded that from operating activities. Due to purchases of marketable securities and investments in short-term deposits, however, which are excluded from the computation of operating cash flow, net operating cash flow improved to $840 million in 2007, compared tohad favorable net operating cash flow of $666$1,364 million in 2006 and2009, significantly higher compared to net negative operating cash flow of $270$(1,046) million in 2005.
Net2008, mainly as a result of the $1,137 million, net of related fees, received from EMP as part of the creation of the ST-Ericsson joint venture. Excluding the effects of business combinations, net operating cash usedflow was favorable by $227 million in financing activities.  Net cash from financing activities was $296 million used in 20072009, decreasing compared to $132favorable net operating cash flow of $648 million generated in 2006 and $178 million used2008, because of the deterioration in 2005. The main item used in financing activities in 2007 wasour operating results which negatively impacted the dividend payment for the amount of $269 million, while there were no major activities


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related to proceeds and repayment of long-term debt. The net cash from financing activities in 2006 was mainly due to the balance of the proceeds from the issuance of our 2013 Senior Bonds and 2016 Convertible Bonds, which amounted to $1,554 million net of issuance costs, and the repayment of long-term debts, primarily the redemption of the 2013 Convertible Bonds, of $1,377 million. In 2005 and 2006, we paid dividends in the amount of $107 million.operating activities.
 
Capital Resources
 
Net financial position
 
We define ourOur net financial position asrepresents the differencebalance between our total financial resources and our total financial debt. Our total financial resources include cash position (cash,and cash equivalents, current and non-current marketable securities, short-term deposits and restricted cash) net ofcash, and our total financial debt (bankincludes bank overdrafts, current portion of long-term debt and long-term debt).debt, as represented in our consolidated balance sheet. Net financial position is not a U.S. GAAP measure. Wemeasure but we believe our net financial positionit provides useful information for investors because it gives evidence of our global position either in terms of net indebtedness or net cash by measuring our capital resources based on cash,


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cash equivalents and marketable securities and the total level of our financial indebtedness. TheOur net financial position ishas been determined as follows from our Consolidated Balance Sheets as at December 31, 2007, December 31, 2006 and December 31, 2005:2009:
 
                        
 Year Ended December 31,  Year Ended December 31, 
 2007 2006 2005  2009 2008 2007 
 (In millions)  (In millions) 
Cash and cash equivalents $1,855  $1,659  $2,027 
Cash and cash equivalents, net of bank overdrafts $1,588  $989  $1,855 
Marketable securities, current  1,014   764   —   1,032   651   1,014 
Short-term deposits  —   250   — 
Restricted cash  250   218   —   250   250   250 
Marketable securities, non-current  369   —   —   42   242   369 
Total cash position  3,488   2,891   2,027 
              
Bank overdrafts  —   —   (11)
Total financial resources  2,912   2,132   3,488 
       
Current portion of long-term debt  (103)  (136)  (1,522)  (176)  (123)  (103)
Long-term debt  (2,117)  (1,994)  (269)  (2,316)  (2,554)  (2,117)
              
Total financial debt  (2,220)  (2,130)  (1,802)  (2,492)  (2,677)  (2,220)
              
Net financial position $1,268  $761  $225  $420  $(545) $1,268 
              
 
TheOur net financial position as of December 31, 20072009 resulted in a net cash position of $1,268$420 million, representing ana solid improvement compared to the net debt of $545 million at December 31, 2008, due to the proceeds from the net cash position of $761 million as of December 31, 2006. This improvement primarily results fromST-Ericsson business combination and favorable net operating cash flow generated during 2007. The restrictedflow. In the same period, both our cash for 2007 is a long-term deposit with a bank to guarantee a loan from the bank toposition and our joint venture in China with Hynix Semiconductor; in 2007, the restricted cash amounted to $250 million. Furthermore, following the recent deteriorating conditions in the capital markets, we have classified part of ourcurrent marketable securities as non-current; the fair value of these marketable securities was estimated on December 31, 2007portfolio increased significantly to be in the amount of $369$1,588 million and $1,032 million, respectively, while total financial debt decreased by $185 million.
 
At December 31, 2007,2009, the aggregate amount of our long-term debt, including the current portion, was $2,220$2,492 million, including $2 million of our 2013 Convertible Bonds, $1,010which included $943 million of our 2016 Convertible Bonds, and $736$720 million of our 2013 Senior Bonds (corresponding to the €500 million at issuance) and $672 million in European Investment Bank loans (the “EIB Loans”). The EIB Loans represent two committed credit facilities as part of R&D funding programs. The first, for €245 million for R&D in France was fully drawn in U.S. dollars for a total amount of $341 million, of which $49 million had been paid back at December 31, 2009. The second, signed on July 21, 2008, for €250 million for R&D projects in Italy, was fully drawn in U.S. dollars for $380 million at December 31, 2009. Additionally, we had unutilized committed medium term credit facilities with core relationship banks totaling $500 million. Furthermore, the aggregate amount of our total available short-term credit facilities, excluding foreign exchange credit facilities, was approximately $1,212$759 million which was not used at December 31, 2007. 2009. In addition, as the parent companies, we and Ericsson have granted ST-Ericsson a $25 million committed facility and $25 million unutilized committed line, respectively. The withdrawal of that line is subject to approval of the parent companies at STE’s Board of Directors. We also maintain uncommitted foreign exchange facilities totaling $714 million at December 31, 2009. At December 31, 2009, the amounts available under the short-term lines of credit were not reduced by any borrowing.
Our long-term capital market financing instruments contain standard covenants, but do not impose minimum financial ratios or similar obligations on us. Upon a change of control, the holders of our 2016 Convertible Bonds and 2013 Senior Bonds may require us to repurchase all or a portion of such holder’s bonds. See Note 1714 to our Consolidated Financial Statements.
 
As of December 31, 2007,2009, debt payments due by period and based on the assumption that convertible debt redemptions are at the holder’s first redemption option were as follows:
 
                             
  Payments Due by Period 
  Total  2008  2009  2010  2011  2012  Thereafter 
  (In millions) 
 
Long-term debt (including current portion) $2,220  $103  $114  $60  $1,053  $41  $849 
                                 
  Payments Due by Period
  Total 2010 2011 2012 2013 2014 2015 Thereafter
  (In millions)
 
Long-term debt (including current portion) $2,492  $176  $1,063  $119  $836  $114  $92  $92 
In February 2006, we issued $1,131 million principal amount at maturity zero coupon senior convertible bonds due in February 2016. The bonds are convertible by the holder at any time prior to maturity at a conversion rate of 43.833898 shares per one thousand dollar face value of the bonds corresponding to 42,694,216 equivalent shares. This conversion rate was adjusted from 43.363087 shares per one thousand dollar face value of the bonds at May 21, 2007, as the result of the extraordinary cash dividend distribution of $0.36 per share approved by the Annual General Meeting of Shareholders held on May 14, 2008. This new conversion has been in effect since May 19, 2008. The holders will also be able to redeem the convertible bonds on February 23, 2011 at a price of $1,077.58, on February 23, 2012 at a price of $1,093.81 and on February 24, 2014 at a price of $1,126.99 per one thousand dollar face value of the bonds. We can call the bonds at any time after March 10, 2011 subject to our share price exceeding 130% of the accreted value divided by the conversion rate for 20 out of 30 consecutive trading days. On


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On August 7, 2006, as a result of almost all of the holders of our 2013 Convertible Bonds exercising the August 4, 2006 put option,December 30, 2009 we repurchased $1,39798 thousand bonds for a total cash consideration of $103 million, aggregate principal amountrealizing a gain on the repurchase of the outstanding convertible bonds. The outstanding 2013 Convertible Bonds, corresponding to approximately $2 million and approximately 2,505 bonds, may be redeemed, at the holder’s option, for cash on August 5, 2008 at a conversion ratio of $975.28, or on August 5, 2010 at a conversion ratio of $965.56, subject to adjustments in certain circumstances.$3 million.
 
As of the end of 2007,December 31, 2009, we have the following credit ratings on our 2013 and 2016 Bonds:
 
     
  Moody’s Investors
Standard &
Service Standard & Poor’s
 
Zero Coupon Senior Convertible Bonds due 2013 WR(1)WR(1) A-NR
Zero Coupon Senior Convertible Bonds due 2016 A3Baa1 A-BBB+
Floating Rate Senior Bonds due 2013 A3Baa1 A-BBB+
 
 
(1)Rating withdrawn since the redemption in August 2006 of $1.4 billion of our 2013 Convertible Bonds, which left only $2 million of our 2013 Convertible Bonds outstanding.Bonds.
 
We are also rated “A−” from Fitch on an unsolicited basis.
On January 9, 2007,February 6, 2009 Standard & Poor’s confirmedRating Services lowered our senior debt rating from “A−” to “BBB+” and Moody’s Investors Service affirmed the A-Baa1 senior debt ratings and issued a “stable” outlook. On May 25, 2007, Moody’s issued a credit report confirming the A3 ratings and changingchanged the outlook on the ratings to “stable”negative from “under review for possible downgrade.”stable.
 
In March 2006, STMicroelectronics Finance B.V. (“ST BV”), one of our wholly-owned subsidiaries, issued Floating Rate Senior Bonds with a principal amount of €500 million at an issue price of 99.873%. The notes, which mature on March 17, 2013, pay a coupon rate of the eventthree-month Euribor plus 0.40% on June 17, September 17, December 17 and March 17 of each year through maturity. The notes have a put for early repayment in case of a downgradechange of these ratings, we believe we would continue to have access to sufficient capital resources.control. The Floating Rate Senior Bonds issued by ST BV are collateralized with guarantee issued by us.
 
Contractual Obligations, Commercial Commitments and Contingencies
 
Our contractual obligations, commercial commitments and contingencies as of December 31, 2007,2009, and for each of the five years to come and thereafter, were as follows (1):
 
                                                       
 Total 2008 2009 2010 2011 2012 Thereafter  Total 2010 2011 2012 2013 2014 Thereafter 
Operating leases(1)(2) $300  $57  $41  $30  $25  $18  $129  $481  $131  $98  $68  $43  $26  $115 
Purchase obligations(1)(2)  1,200   1,100   65   30   5   —   —   741   604   62   37   20   18   — 
of which:
                                                        
Equipment and other asset purchase
  683   683   —   —   —   —   —   267   267   —   —   —   —   — 
Foundry purchase
  266   266   —   —   —   —   —   182   182   —   —   —   —   — 
Software, technology licenses and design
  251   151   65   30   5           292   155   62   37   20   18   — 
Other obligations(1)(2)  622   463   92   37   9   8   13   532   263   135   125   6   2   1 
Long-term debt obligations (including current portion)(2)(3)(4) of which:  2,220   103   114   60   1,053   41   849 
Long-term debt obligations (including current portion)(3)(4)(5) of which:  2,492   176   1,063   119   836   114   184 
Capital leases(2)(3)
  22   6   6   6   2   —   2   19   8   4   2   2   2   1 
Pension obligations(2)(3)  323   34   25   22   24   24   194   317   41   21   28   28   37   162 
Other non-current liabilities(2)(3)  115   17   37   15   2   2   42   342   19   20   87   8   7   201 
Total
 $4,780  $1,774  $374  $194  $1,118  $93  $1,227  $4,905  $1,234  $1,399  $464  $941  $204  $663 
 
 
(1)Contingent liabilities which cannot be quantified are excluded from the table above.
 
(2)Items not reflected on the Consolidated Balance Sheet at December 31, 2007.2009.
 
(3)Items reflected on the Consolidated Balance Sheet at December 31, 2007.2009.
 
(4)See Note 1714 to our Consolidated Financial Statements at December 31, 20072009 for additional information related to long-term debt and redeemable convertible securities.
 
(5)Year of payment is based on maturity before taking into account any potential acceleration that could result from a triggering of the change of control provisions of the 2016 Convertible Bonds and the 2013 Senior Bonds.
 
As a consequenceresult of our July 10, 2007 announcement concerningrelating to the planned closures of certain of our manufacturing facilities, the future shutdown of our plants in the United States will lead tois ongoing and negotiations with some of our suppliers.suppliers continue. As no final date for the closure has been set, nonesome of the aforementioned contracts as reported above have been terminated nor doterminated. The termination fees for the reported amounts takesites still in operation have not been taken into account any termination fees. This concerns approximately $54 million commitments (capital and operating leases and purchasing obligations.)account.


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Operating leases are mainly related to building leases.leases and to equipment. The amount disclosed is composed of minimum payments for future leases from 20082010 to 20122014 and thereafter. We lease land, buildings, plants and equipment under operating leases that expire at various dates under non-cancelable lease agreements.


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Purchase obligations are primarily comprised of purchase commitments for equipment, for outsourced foundry wafers and for software licenses. Following the termination of the Crolles2 alliance with our partners Freescale Semiconductor and NXP Semiconductors, we signed an agreement with each of the two partners to commit to purchasing300-mm equipment during 2008. The timing of the purchase has been agreed on the basis of our current visibility of the loading for our Crolles2 wafer fab.
 
Other obligations primarily relate to firm contractual commitments with respect to cooperation agreements. Following the agreement signed on December 11, 2007 to acquire Genesis Microchip, we committed to a cash tender offer to purchase all of the outstanding shares of Genesis Microchip for $8.65 per share, net to the holder in cash, for a total amount of $345 million approximately. The transaction was completed in January 2008. See more details in the “Other Developments” paragraph above.
 
Long-term debt obligations mainly consist of bank loans, convertible and non-convertible debt issued by us that is totally or partially redeemable for cash at the option of the holder. They include maximum future amounts that may be redeemable for cash at the option of the holder, at fixed prices. On August 7, 2006, as a result of almost all of the holders of our 2013 Convertible Bonds exercising the August 4, 2006 put option, we repurchased $1,397 million aggregate principal amount of the outstanding convertible bonds. The outstanding 2013 Convertible Bonds,long-term debt corresponding to approximately $2 million and approximately 2,505 bonds, may be redeemed,the 2013 convertible debt was not material at the holder’s option, for cash on August 5, 2008 at a conversion ratio of $975.28, or on August 5, 2010 at a conversion ratio of $965.56, subject to adjustments in certain circumstances.
In February 2006, we issued $1,131 million principal amount at maturity of Zero Coupon Senior Convertible Bonds due in February 2016. The bonds are convertible by the holder at any time prior to maturity at a conversion rate of 43.118317 shares per one thousand dollars face value of the bonds corresponding to 41,997,240 equivalent shares. The holders can also redeem the convertible bonds on February 23, 2011 at a price of $1,077.58, on February 23, 2012 at a price of $1,093.81 and on February 24, 2014 at a price of $1,126.99 per one thousand dollars face value of the bonds. We can call the bonds at any time after March 10, 2011 subject to our share price exceeding 130% of the accreted value divided by the conversion rate for 20 out of 30 consecutive trading days.
At our annual general meeting of shareholders held on April 26, 2007, our shareholders approved a cash dividend distribution of $0.30 per share. Pursuant to the terms of our 2016 Convertible Bonds, the payment of this dividend gave rise to a slight change in the conversion rate thereof. The new conversion rate is 43.363087 corresponding to 42,235,646 equivalent shares.
In March 2006, STMicroelectronics Finance B.V. (“ST BV”), one of our wholly-owned subsidiaries, issued Floating Rate Senior Bonds with a principal amount of €500 million at an issue price of 99.873%. The notes, which mature on March 17, 2013, pay a coupon rate of the three-month Euribor plus 0.40% on the 17th of June, September, December and March of each year through maturity. The notes have a put for early repayment in case of a change of control.31, 2009. See “Net financial position”.
 
Pension obligations and termination indemnities amounting to $323$317 million consist of our best estimates of the amounts projected to be payable by us for the retirement plans based on the assumption that our employees will work for us until they reach the age of retirement. The final actual amount to be paid and related timingstiming of such payments may vary significantly due to early retirements, terminations and changes in assumptions rates. See Note 1615 to our Consolidated Financial Statements. The projectedAs part of the FMG deconsolidation, we retained the obligation to fund the severance payment (“trattamento di fine rapporto”) due to certain transferred employees by the defined amount of about $32 million which qualifies as a defined benefit obligationplan and was classified as an other non-current liability at December 31, 2007 was estimated at $590 million, increasing by $18 million compared to 2006; this obligation is partially funded by plan assets which have an estimated fair value of $278 million, increasing $37 million compared to previous year. As a result, the pension benefits showed an unfunded status of $312 million as at December 31, 2007, decreasing compared to $331 million as at December 31, 2006. We project to pay benefits in 2008 for an amount of $32 million, and we expect to increase our contributions to $34 million.2009.
 
Other non-current liabilities include, in addition to the above-mentioned pension obligation, future obligations related to our restructuring plans and miscellaneous contractual obligations. They also include at December 31, 2009, following the FMG deconsolidation in 2008, a long-term liability for capacity rights amounting to $47 million. In addition, we and Intel have each granted in favor of Numonyx B.V., in which we hold a 48.6% equity investment through Numonyx, a 50% guarantee not joint and several, for indebtedness related to the financing arrangements entered into by Numonyx for a $450 million term loan and a $100 million committed revolving credit facility. We have estimated the guarantee to be $69 million based on the fair value of the term loan over 4 years, including the effect of savings provided by the guarantee. Upon the closing of the Numonyx deal with Micron, Numonyx will repay the full amount of its outstanding $450 million term loan, while simultaneously terminating our $225 million guarantee of its debt. Please refer to “Other developments”.
 
Off-Balance Sheet Arrangements
 
At December 31, 2007, weWe had convertible debt instruments outstanding. Our convertible debt instruments contain certain conversion and redemption options that are not required to be accounted for separately in our


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financial statements. See Note 17 to our Consolidated Financial Statements for more information about our convertible debt instruments and related conversion and redemption options.
We have no other material off-balance sheet arrangements at December 31, 2007.2009.
 
Financial Outlook
 
WeWhile we are reconfirming our target to have capital expenditures represent approximately 10%to remain in the range of sales in 2008;5 to about 7% of revenues, we therefore, currently expect that capital spending for 2008 will decreasea moderate increase compared to the $1.14 billion$451 million spent in 2007.2009 in order to keep pace with the sharp increase in customer demand. The most significant of our 20082010 capital expenditure projects are expected to be: (a) for the front-end facilities: (i) fullthe increase of up to 3200 wafers per week in the capacity ownership of our300-mm fab in Crolles, throughand costs related to the purchasepreparation for an additional increase to 3600 wafers per week; (ii) the establishment of a 32nm R&D capability in Crolles; (iii) the completion of the Alliance partners tools; (ii) a specific program for front-end fabs, targeting the increased capacity in the Ang-Mo-Kio (Singapore) 150mm to 18K wafers per week; (iv) selective programs of capacity growth devoted to MEMSrobustness / mix change in Agrate (Italy) and mixedour200-mm fabs, mainly by installing tools transferred from internal sources; (v) the strengthening of proprietary technologies in Agrateour200-mm fab in Agrate; and Catania (Italy) to support the significant growth opportunity in these technologies; (iii) focused investment(vi) quality, safety, security, maintenance both in manufacturing6” and R&D in France sites to secure and develop our system oriented proprietary technologies portfolio (HCMOS derivatives and mixed signal) required by our strategic customers; and8” front end fabs; (b) for the back-end facilities, the capital expenditures will mainly be dedicated to the technology evolution to support the ICs path to package size reductioncapacity increase: (i) growth of our manufacturing presence in Shenzhen (China)China (Longgang and Muar (Malaysia) and to prepare for future years capacity growth by completing the new production area in MuarShenzhen) and the new plantPhilippines (Calamba); (ii) further consolidation of our presence in Longgang (China).
The Crolles2 alliance with NXP SemiconductorsMalaysia (Muar); and Freescale Semiconductor expired on December 31, 2007 and we have signed an agreement to buy the remainder of their equipment(iii) specific investments in the first half 2008, based on ourareas of quality, environment, energy saving and (c) an overall capacity needs. The timing of the purchase has been agreed on the basis of our current visibility of the loadingincrease in wafers probing (EWS) for our Crolles2 300-mm wafer fab. The contracts provide for the following schedule of purchases of the equipment: $140 million on March 14, 2008; $135 million on April 1, 2008; and, $129 million on June 30, 2008.all product groups.
 
We will continue to monitor our level of capital spending by taking into consideration factors such as trends in the semiconductor industry, capacity utilization and announced additions. We expect to have significant capital requirements in the coming years and in addition we intend to continue to devote a substantial portion of our net revenues to research and development.R&D. We plan to fund our capital requirements from cash provided by operating activities, available funds and available support from third parties, (including state support), and may have recourse to borrowings under available credit lines and, to the extent necessary or attractive based on market conditions prevailing at the time, the issuing of debt, convertible bonds or additional equity securities. A substantial deterioration of our economic results and consequently of our profitability could generate a deterioration of the cash generated by our operating activities. Therefore, there can be no assurance that, in future periods, we will generate the same level of cash as in the previous years to fund our capital expenditures plans for expansion plans,expending/upgrading our production facilities, our working capital requirements, research and developmentour R&D and industrialization costs.


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On February 23, 2011, holders will be able to call for the redemption of our 2016 convertible bonds, which we believe is likely to occur in view of current market prices, for an amount of $728 million. Furthermore, there could be possible financial needs for temporary bridge financing by the parent companies of the ST-Ericsson joint venture, the amount of which cannot be estimated at this stage.
 
Impact of Recently Issued U.S. Accounting Standards
 
(a) Accounting pronouncements effective in 2007 and expected to impact the Company’s operations
In February 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 155,Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140 (“FAS 155”). The statement amended Statement of Financial Accounting Standards No. 133,Accounting for Derivative Instruments and Hedging Activities(“FAS 133”) and Statement of Financial Accounting Standards No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“FAS 140”). The primary purposes of this statement were (1) to allow companies to select between bifurcation of hybrid financial instruments or fair valuing the hybrid as a single instrument, (2) to clarify certain exclusions of FAS 133 related to interest and principal-only strips, (3) to define the difference between freestanding and hybrid securitized financial assets, and (4) to eliminate the FAS 140 prohibition of Special Purpose Entities holding certain types of derivatives. The statement is effective for annual periods beginning after September 15, 2006, with early adoption permitted prior to a company issuing first quarter financial statements. We adopted FAS 155 in 2007 and FAS 155 did not have any material effect on our financial position or results of operations.
In June 2006, the Financial Accounting Standards Board issued Financial Accounting Standards Board Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109(“FIN 48”). The interpretation seeks to clarify the accounting for tax positions taken, or expected to be taken, in a company’s tax return and the uncertainty as to the amount and timing of recognition in the company’s financial statements in accordance with Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes (“FAS 109”). The interpretation also addresses derecognition of previously recognized tax positions, classification of related tax assets and liabilities, accrual of interest and penalties, interim period accounting, and disclosure and transition provisions. The interpretation is effective for fiscal years beginning after December 15, 2006. We adopted


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FIN 48 as at January 1, 2007. The cumulative effect of the change in the accounting principle that we applied to uncertain income tax positions was recorded in 2007 as an adjustment to retained earnings. The impact of such adoption is detailed in Note 2.11. Uncertain tax positions, unrecognized tax benefits and related accrued interest and penalties are further described in Note 23.
(b) Accounting pronouncements effective in 2007 and not expected to impact the Company’s operations
In March 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 156,Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140(“FAS 156”). This statement requires initial fair value recognition of all servicing assets and liabilities for servicing contracts entered in the first fiscal year beginning after September 15, 2006. After initial recognition, the servicing assets and liabilities are either amortized over the period of expected servicing income or loss or fair value is reassessed each period with changes recorded in earnings for the period. We adopted FAS 156 in 2007 and FAS 156 did not have any material effect on our financial position and results of operations.
(c) Accounting pronouncements expected to impact the Company’s operations that are not yet effective and have not been early adopted by the Company
In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157,Fair Value Measurements (“FAS 157”). This statement defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” In addition, the statement defines a fair value hierarchy which should be used when determining fair values, except as specifically excluded (i.e. stock awards, measurements requiring vendor specific objective evidence, and inventory pricing). The hierarchy places the greatest relevance on Level 1 inputs which include quoted prices in active markets for identical assets or liabilities. Level 2 inputs, which are observable either directly or indirectly, include quoted prices for similar assets or liabilities, quoted prices in non-active markets, and inputs that could vary based on either the condition of the assets or liabilities or volumes sold. The lowest level of the hierarchy, Level 3, is unobservable inputs and should only be used when observable inputs are not available. This would include company level assumptions and should be based on the best available information under the circumstances. FAS 157 is effective for fiscal years beginning after November 15, 2007 with early adoption permitted for fiscal year 2007 if first quarter statements have not been issued. However, in November 2007, the Financial Accounting Standards Board drafted a proposed FASB Staff Position (“FSP”) that would partially defer the effective date of FAS 157 for one year for nonfinancial assets and nonfinancial liabilities that are recognized at fair value in the financial statements on a nonrecurring basis. The final FSP was issued in February 2008. However, it does not defer recognition and disclosure requirements for financial assets and financial liabilities or for nonfinancial assets and nonfinancial liabilities that are measured at least annually. We have adopted FAS 157 as of January 1, 2008. FAS 157 adoption is prospective, with no cumulative effect of the change in the accounting guidance for fair value measurement to be recorded as an adjustment to retained earnings, except for the following: valuation of financial instruments previously measured with block premiums and discounts; valuation of certain financial instruments and derivatives at fair value using the transaction price; and valuation of a hybrid instrument previously measured at fair value using the transaction price. We will not record, upon adoption, any adjustment to retained earnings since we do not hold any of the three categories of instruments described above. Consequently, Consolidated Financial Statements as of January 1, 2008 will reflect fair value measures in compliance with previous GAAP. Reassessment of fair value in compliance with FAS 157 will be dealt with as a change in estimates, if any, in the first quarter of 2008. We have identified the following items in our Consolidated Financial Statements for which detailed assessment on FAS 157 impact was required: the valuation of available-for-sale securities for which no observable market price is obtainable; the annual goodwill impairment test based on the fair value of the tested reporting units; and FAS 144 held-for-sale model when applied to the Company’s Flash memory business deconsolidation (the “FMG deconsolidation”). Concerning the valuation of available-for-sale debt securities which have currently, at the best of management’s visibility, no observable market price, management estimates that fair value of these instruments when measured in compliance with FAS 157 should not materially differ from current estimates and that fair value measure, even if using certain entity-specific assumptions, is in line with a Level 3 FAS 157 fair value hierarchy. For goodwill impairment testing and the use of fair value of tested reporting units, we are currently reviewing our goodwill impairment model to measure fair value on marketable comparables, instead of discounted cash flows generated by each reporting entity. Based on our preliminary assessment, management estimates that FAS 157 adoption could have an effect on certain future goodwill impairment tests, in the event our strategic plan could necessitate changes in the product portfolios, for which materiality will be further evaluated. Finally, we continue to evaluate the potential impact of adopting FAS 157, but management believes that, based on the current available evidence, the fair value measure on the consideration to be received upon FMG deconsolidation is in line with FAS 157 definition of fair value and that FAS 157 adoption should not have a material impact on the actual loss to be recorded at the date of the transaction closing. These conclusions are the results of analysis


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done based on current assumptions that are true today, but upon certain changes in events and circumstances may no longer be consistent with the assumptions upon the date of adoption. As a result, these conclusions on the impact of FAS 157 adoption are subject to revision as the evaluations are concluded.
In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159,The Fair Value Option for Financial Assets and Financial Liabilities- Including an amendment of FASB Statement No. 115(“FAS 159”). This statement permits companies to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses in earnings at each subsequent reporting date on items for which the fair value option has been elected. The objective of this statement is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. A company may decide whether to elect the fair value option for each eligible item on its election date, subject to certain requirements described in the statement. FAS 159 is effective for fiscal years beginning after November 15, 2007 with early adoption permitted for fiscal year 2007 if first quarter statements have not been issued. We have adopted FAS 159 as of January 1, 2008 and will accordingly evaluate the assets and liabilities on which we have elected to apply the fair value option as of the end of the first quarter 2008.
In December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 (Revised 2007),Business Combinations(“FAS 141R”) and No. 160,Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51(“FAS 160”). These new standards will initiate substantive and pervasive changes that will impact both the accounting for future acquisition deals and the measurement and presentation of previous acquisitions in Consolidated Financial Statements. The standards continue the movement toward the greater use of fair values in financial reporting. FAS 141R will significantly change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. FAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. The significant changes from current practice resulting from FAS 141R are: the definitions of a business and a business combination have been expanded, resulting in an increased number of transactions or other events that will qualify as business combinations; for all business combinations (whether partial, full, or step acquisitions), the entity that acquires the business (the “acquirer”) will record 100% of all assets and liabilities of the acquired business, including goodwill, generally at their fair values; certain contingent assets and liabilities acquired will be recognized at their fair values on the acquisition date; contingent consideration will be recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value will be recognized in earnings until settled; acquisition-related transaction and restructuring costs will be expensed rather than treated as part of the cost of the acquisition and included in the amount recorded for assets acquired; in step acquisitions, previous equity interests in an acquiree held prior to obtaining control will be remeasured to their acquisition-date fair values, with any gain or loss recognized in earnings; when making adjustments to finalize initial accounting, companies will revise any previously issued post-acquisition financial information in future financial statements to reflect any adjustments as if they had been recorded on the acquisition date; reversals of valuation allowances related to acquired deferred tax assets and changes to acquired income tax uncertainties will be recognized in earnings, except for qualified measurement period adjustments (the measurement period is a period of up to one year during which the initial amounts recognized for an acquisition can be adjusted.; this treatment is similar to how changes in other assets and liabilities in a business combination will be treated, and different from current accounting under which such changes are treated as an adjustment of the cost of the acquisition); and asset values will no longer be reduced when acquisitions result in a “bargain purchase”, instead the bargain purchase will result in the recognition of a gain in earnings. The significant change from current practice resulting from FAS 160 is that since the noncontrolling interests are now considered as equity, transactions between the parent company and the noncontrolling interests will be treated as equity transactions as far as these transactions do not create a change in control. FAS 141R and FAS 160 are effective for fiscal years beginning on or after December 15, 2008. FAS 141R will be applied prospectively, with the exception of accounting for changes in a valuation allowance for acquired deferred tax assets and the resolution of uncertain tax positions accounted for under FIN 48. FAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of FAS 160 shall be applied prospectively. Early adoption is prohibited for both standards. We are currently evaluating the effect the adoption of these statements will have on our financial position and results of operations.
(d) Accounting pronouncements that are not yet effective and are not expected to impact the Company’s operations
In June 2007, the Emerging Issues Task Force reached final consensus on IssueNo. 06-11,Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards(“EITF 06-11”). The issue applies to equity-classified nonvested shares on which dividends are paid prior to vesting, equity-classified nonvested share units on


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which dividends equivalents are paid, and equity-classified share options on which payments equal to the dividends paid on the underlying shares are made to the option-holder while the option is outstanding. The issue is applicable to the dividends or dividend equivalents that are (1) charged to retained earnings under the guidance in Statement of Financial Accounting Standards No. 123 (Revised 2004),Share-Based Payment (“FAS 123R”) and (2) result in an income tax deduction for the employer.EITF 06-11 states that a realized tax benefit from dividends or dividend equivalents that are charged to retained earnings and paid to employees for equity-classified nonvested shares, nonvested equity share units, and outstanding share options should be recognized as an increase to additionalpaid-in-capital. Those tax benefits are considered excess tax benefits (“windfall”) under FAS 123R.EITF 06-11 must be applied prospectively to dividends declared in fiscal years beginning after December 15, 2007 and interim periods within those fiscal years, with early adoption permitted for the income tax benefits of dividends on equity-based awards that are declared in periods for which financial statements have not yet been issued. We will adoptEITF 06-11 when effective. However, management does not expect thatEITF 06-11 will have a material effect on our financial position and results of operations.
In June 2007, the Emerging Issues Task Force reached final consensus on IssueNo. 07-3,Accounting for Advance Payments for Goods or Services to Be Used in Future Research and Development Activities(“EITF 07-3”). The issue addresses whether non-refundable advance payments for goods or services that will be used or rendered for research and development activities should be expensed when the advance payments are made or when the research and development activities have been performed.EITF 07-3 applies only to non-refundable advance payments for goods and services to be used and rendered in future research and development activities pursuant to an executory contractual arrangement.EITF 07-3 states that non-refundable advance payments for future research and development activities should be capitalized until the goods have been delivered or the related services have been performed. If an entity does not expect the goods to be delivered or services to be rendered, the capitalized advance payment should be charged to expense.EITF 07-3 is effective for fiscal years beginning after December 15, 2007 and interim periods within those fiscal years. Earlier application is not permitted and entities should recognize the effect of applying the guidance in this Issue prospectively for new contracts entered into afterEITF 07-3 effective date. We will adoptEITF 07-3 when effective. However, management does not expect thatEITF 07-3 will have a material effect on our financial position and results of operations.
In November 2007, the Emerging Issues Task Force reached final consensus on IssueNo. 07-1,Accounting for Collaborative arrangements(“EITF 07-1”). The consensus prohibits the application of Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock(“APB 18”) and the equity method of accounting for collaborative arrangements unless a legal entity exists. Payments between the collaborative partners would be evaluated and reported in the consolidated statements of income based on applicable GAAP. Absent specific GAAP, the entities that participate in the arrangement would apply other existing GAAP by analogy or apply a reasonable and rational accounting policy consistently.EITF 07-1 is effective for periods that begin after December 15, 2008 and would apply to arrangements in existence as of the effective date. The effect of the new consensus will be accounted for as a change in accounting principle through retrospective application. We will adoptEITF 07-1 when effective and management does not expect thatEITF 07-1 will have a material effect on our financial position and results of operations.
In November 2007, the Emerging Issues Task Force reached final consensus on IssueNo. 07-6,Accounting for the Sale of Real Estate When the Agreement Includes a Buy-Sell Clause(“EITF 07-6”). The issue addresses whether the existence of a buy-sell arrangement would preclude partial sales treatment when real estate is sold to a jointly owned entity. The consensus provides that the existence of a buy-sell clause does not necessarily preclude partial sale treatment under Statement of Financial Accounting Standards No. 66,Accounting for Sales of Real Estate(“FAS 66”).EITF 07-6 is effective for fiscal years beginning after December 15, 2007 and would be applied prospectively to transactions entered into after the effective date. We will adoptEITF 07-6 when effective and management does not expect thatEITF 07-6 will have a material effect on our financial position and results of operations.
In November 2007, the U.S. Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 109,Written Loan Commitments Recorded at Fair Value Through Earnings(“SAB 109”). SAB 109 provides the Staff’s views regarding written loan commitments that are accounting for at fair value through earnings under GAAP. SAB 109 revises and rescinds portions of Staff Accounting Bulletin No. 105,Application of Accounting Principles to Loan Commitments(“SAB 105”). SAB 105 stated that in measuring the fair value of a derivative loan commitment it would be inappropriate to incorporate the expected net future cash flows related to the associated servicing of the loan. Consistent with FAS 156 and FAS 159, SAB 109 states that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. SAB 109 does, however, retain the Staff’s views included in SAB 105 that no internally-developed intangible assets should be included in the measurement of


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the estimated fair value of a loan commitment derivative. SAB 109 is effective for all written loan commitments recorded at fair value that are entered into, or substantially modified, in fiscal quarters beginning after December 15, 2007. We will adopt SAB 109 when effective but management does not expect that SAB 109 will have a material effect on our financial position and results of operations.
In January 2008, the SEC issued Staff Accounting Bulletin No. 110,Year-End Help for Expensing Employee Stock Options(“SAB 110”). SAB 110 expresses the views of the Staff regarding the use of a “simplified” method, in developing an estimate of expected term of “plain vanilla” share options in accordance with FAS 123R and amended its previous guidance under SAB 107 which prohibited entities from using the simplified method for stock option grants after December 31, 2007. The Staff amended its previous guidance because additional information about employee exercise behavior has not become widely available. With SAB 110, the Staff permits entities to use, under certain circumstances, the simplified method beyond December 31, 2007 if they conclude that their data about employee exercise behavior does not provide a reasonable basis for estimating the expected-term assumption. SAB 110 is not relevant to our operations since we redefined in 2005 our compensation policy by no longer granting stock options but rather issuing nonvested shares.
Impairment, Restructuring Charges and Other Related Closure Costs
In 2007, we incurred charges related to the main following items: (i) the planned disposal of our FMG assets, (ii) the 2007 manufacturing restructuring plan; (iii) the150-mm restructuring plan; (iii) the headcount reduction plan; and (iv) the yearly impairment review.
On May 22, 2007, we announced that we had entered into a definitive agreement with Intel Corporation and Francisco Partners L.P. to create a new independent semiconductor company from the key assets of our and Intel’s Flash Memory businesses, which generated over $3 billion in combined annual revenue in 2007. The new company’s strategic focus will be on supplying Flash memory solutions for a variety of consumer and industrial devices, including cellular phones, MP3 players, digital cameras, computers and other high-tech equipment. Under the terms of the agreement, we will sell our Flash memory assets, including our manufacturing NAND joint venture interest with Hynix Semiconductor in Wuxi People’s Republic of China and other NOR and NAND resources, to a new company, while Intel will sell its NOR assets and business. In exchange, at closing Intel will have received a 45.1% equity ownership stake, and we will receive a 48.6% equity ownership stake. Francisco Partners L.P., a Menlo Park, California-based private equity firm, will invest $150 million in cash for convertible preferred stock representing a 6.3% ownership interest, subject to adjustment in certain circumstances. On July 19, 2007, we announced that the pending new company will be named “Numonyx.” All required regulatory clearances for Numonyx have been received. On December 26, 2007, we agreed with Intel and Francisco Partners to extend the deadline for the closing of Numonyx to March 28, 2008 pending finalization of revised financing terms and conditions. The three parties continue to work to satisfy the conditions to closing for the transaction and expect the closing to take place in the first quarter of 2008. As described in further detail above under the heading “Critical Accounting Policies Using Significant Estimates — Asset Disposal”, the creation of Numonyx gave rise to the assets being contributed to the new company being classified as “Assets held for sale” requiring an impairment analysis. As a result of this review, we have registered a pre-tax loss in 2007 of $1,106 million, an additional pre-tax $1 million impairment charge on certain specific equipment that could not be transferred and for which no alternative future use could be found in the Company and an additional pre-tax $5 million of other related disposal costs. The current estimated loss is the balance between the estimated value of our consideration and an updated calculation of our expected equity value in Numonyx at closing, and the estimated asset value of our contribution which mainly consists of tangible assets related to our fabs in Ang Mo Kio200-mm (Singapore), our Agrate R2200-mm pilot line (Italy), our300-mm building in Catania (Italy), and part of our back-end facility in Muar (Malaysia), the inventory of FMG products, the rights to use certain portions of our manufacturing capacity for a certain period of time, and our participation in the China JV with Hynix Semiconductors. The amount of the loss may increase pending the final evaluation report being prepared by an independent firm, as well as the impact of any further deterioration in the market conditions of the Flash memory business and the credit markets generally.
On June 18, 2007, we committed to a new program to optimize our cost structure which involves the closing of three manufacturing operations. Over the next two to three years we will wind down operations of our200-mm wafer fab in Phoenix (Arizona), our150-mm fab in Carrollton (Texas) and our back-end packaging and test facility in Ain Sebaa (Morocco). We expect these measures to generate savings of approximately $150 million per year in the cost of goods sold once the plan is completed. The total impairment and restructuring charges for this program are expected to be in the range of $270 million and $300 million of which approximately $250 million are estimated to be cash charges. As of December 31, 2007, we registered a charge in our accounts of approximately $73 million, of which $60 million is related to our U.S. fabs and $13 million to the other site closures. The 2007 charges are associated with impairment for $11 million and restructuring charges for $62 million.


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During the third quarter of 2003, we commenced a plan to restructure our150-mm fab operations and part of our back-end operations in order to improve cost competitiveness. The150-mm restructuring plan focuses on cost reduction by transferring a large part of European andU.S. 150-mm production to Singapore and by upgrading production to a finer geometry200-mm wafer fab. The plan includes the discontinuation of production of Rennes, France; the closure as soon as operationally feasible of the150-mm wafer pilot line in Castelletto, Italy; and the downsizing by approximately one-half of the150-mm wafer fab in Carrollton, Texas. Furthermore, the150-mm wafer fab productions in Agrate, Italy and Rousset, France has been gradually phased-out in favor of200-mm waferramp-ups at existing facilities in these locations, which has been expanded or upgraded to accommodate additional finer geometry wafer capacity. This manufacturing restructuring plan designed to enhance our cost structure and competitiveness was substantially completed by the end of 2007. The total plan of impairment and restructuring costs for the front-end and back-end reorganization was estimated to be in the range of $330 million to $350 million in pre-tax charges; as of December 31, 2007 with the plan basically completed the total cumulated net charge stood at $345 million of which $29 million was booked in 2007, $22 million in 2006, $13 million in 2005, $76 million in 2004 and $205 million in 2003.
In the second quarter of 2005, we announced a restructuring plan that, combined with other initiatives, aimed at reducing 3,000 members of our workforce outside Asia by the second half of 2006, of which 2,300 were planned for Europe. The total cost of these measures was estimated to be approximately $100 million pre-tax at the completion of the plan, of which $86 million had been incurred as of December 31, 2006. We also upgraded the150-mm production fabs to200-mm, optimized on a global scale our Electrical Wafer Sorting (EWS) activities, and harmonized and streamlined our support functions and disengaged from certain activities. This plan was substantially completed by the end of 2007. We spent $9 million in 2007.
In the third quarter of 2007, we performed our annual impairment tests in order to assess the recoverability of goodwill carrying value and based on this we assessed that no impairment charge had to be recognized on goodwill.
Impairment, restructuring charges and other related closure costs incurred in 2007 are summarized as follows:
                 
  Year Ended December 31, 2007 
           Total Impairment,
 
           Restructuring
 
           Charges and
 
     Restructuring
  Other Related
  Other Related
 
  Impairment  Charges  Closure Costs  Closure Costs 
  (In millions) 
 
Disposal of FMG assets $1,107  $—  $5  $1,112 
2007 restructuring plan  11   62   —   73 
150-mm fab plan
  —   2   27   29 
Headcount restructuring plan  —   6   3   9 
Other  5   —   —   5 
                 
Total
 $1,123  $70  $35  $1,228 
                 
In 2007, total cash outlays for the restructuring plan amounted to $55 million, corresponding mainly to the payment of expenses consisting of $31 million related to our150-mm restructuring plan, $19 million related to our headcount restructuring plan, $3 million related to the disposal our FMG assets and $2 million related to the new restructuring plan. See Note 212 to our Consolidated Financial Statements.
 
Equity Method Investmentinvestments
 
UPEK Inc.See Note 11 to our Consolidated Financial Statements.
 
In 2004, we formed with Sofinnova Capital IV FCPR a new company, UPEK Inc., as a venture capitalist-funded purchase of the Company’s TouchChip business. UPEK, Inc. was initially capitalized with the Company’s transfer of the business, personnel and technology assets related to the fingerprint biometrics business, formerly known as the TouchChip Business Unit, for a 48% interest. Sofinnova Capital IV FCPR contributed $11 million of cash for a 52% interest. In 2005, an additional $9 million was contributed by Sofinnova Capital IV FCPR, reducing our ownership to 33%. We accounted for our share in UPEK, Inc. under the equity method.
On June 30, 2005, we sold our interest in UPEK Inc. for $13 million and recorded a gain amounting to $6 million in “Other income and expenses, net” on our consolidated statements of income. Additionally, on June 30, 2005, we were granted warrants for 2,000,000 shares of UPEK, Inc. at an exercise price of $0.01 per share. The warrants are not limited in time but can only be exercised in the event of a change of control or an Initial Public Offering of UPEK Inc. above a predetermined value.


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Hynix Semiconductor-ST Joint Venture
We signed, in 2004, a joint-venture agreement with Hynix Semiconductor to build a front-end memory-manufacturing facility in Wuxi City, Jiangsu Province, China. Under the agreement, Hynix Semiconductor contributed $500 million for a 67% equity interest and we contributed $250 million for a 33% equity interest. In addition, we originally committed to grant $250 million in long-term financing to the new joint venture guaranteed by the subordinated collateral of the joint-venture’s assets. We made the total $250 million capital contributions as previously planned in the joint venture agreement in 2006. We accounted for our share in the Hynix Semiconductor-ST joint venture under the equity method based on the actual results of the joint venture through the fourth quarter of 2007. As such, we recorded earnings totaling $14 million in 2007 and a loss of $6 million in 2006, reported as “Earnings (loss) on equity investments” in the consolidated statements of income.
In 2007, Hynix Semiconductor invested an additional $750 million in additional shares of the joint venture to fund a facility expansion. As a result of this investment, in October 2007, pursuant to the formal approval by the Chinese authorities of the additional investment, our interest in the joint venture declined from approximately 33% to 17%. At December 31, 2007 the investment in the joint venture amounted to $276 million and was included in assets held for sale on the consolidated balance sheet as it is expected to be transferred to Numonyx upon the formation of that company (see Note 7 to Consolidated Financial Statements). We (or Numonyx following the transfer of our interest in the joint venture to Numonyx) have the option to purchase from Hynix Semiconductor up to $250 million in shares to increase our interest in the joint venture back to a maximum of 33%.
Due to regulatory and withholding issues we could not directly provide the joint venture with the $250 million long-term financing as originally planned. As a consequence, in the fourth quarter of 2006, we entered into a ten-year term debt guarantee agreement with an external financial institution through which we guaranteed the repayment of the loan by the joint venture to the bank. The guarantee agreement includes us placing up to $250 million in cash in a deposit account. The guarantee deposit will be used by the bank in case of repayment failure from the joint venture, with $250 million as the maximum potential amount of future payments we, as the guarantor, could be required to make. In the event of default and failure to repay the loan from the joint venture, the bank will exercise our rights, subordinated to the repayment to senior lenders, to recover the amounts paid under the guarantee through the sale of the joint-venture’s assets. In 2007, we placed the remaining $32 million of cash on the guarantee deposit account, which totaled $250 million as at December 31, 2007 and was reported as “Restricted cash for equity investments” on the consolidated balance sheet.
The debt guarantee was evaluated under FIN 45. It resulted in the recognition of a $17 million liability, corresponding to the fair value of the guarantee at inception of the transaction. The liability was reported on the line “Other non-current liabilities” in the consolidated balance sheet as at December 31, 2007 and was recorded against the value of the equity investment, which totaled $293 million. We reported the debt guarantee on the line “Other investments and other non-current assets” since the terms of the FMG sale agreement to Numonyx do not include the transfer of the debt guarantee which will be retained by us post the Numonyx closing.
We identified the joint venture as a Variable Interest Entity (VIE) at December 31, 2006, principally because the joint venture was in the development stage, but we determined that we were not the primary beneficiary of the VIE. Because of events that occurred in 2007 including the facility expansion and additional investment, it was determined that the joint venture was no longer in the development stage and accordingly that the joint venture no longer met the criteria for qualification as a VIE. Our current maximum exposure to loss as a result of our involvement with the joint venture is limited to our equity investments and debt guarantee commitments.
Backlog and Customers
 
We entered 2008 with a backlog (including frame orders) that was significantly higher than we had entering 2007. This increase is due toSee “Item 4. Information on the solid level of bookings (including frame orders) that we registered in the fourth quarter of 2007. Backlog (including frame orders) is subject to possible cancellation, push back, lower than expected hit of frame orders etc., and thus is not necessarily indicative of billings amount or growth for the year.
In 2007, we had several large customers, with the Nokia Group of companies being the largest and accounting for approximately 21% of our revenues, compared to 22% in 2006. Total OEMs accounted for approximately 80% of our net revenues, declining slightly from approximately 81% in 2006. In 2007, our top ten OEM customers accounted for approximately 49%, decreasing slightly from approximately 51% in 2006. Distributors accounted for approximately 20% of our net revenues compared to approximately 19% in 2006. We have no assurance that the Nokia Group of companies, or any other customer, will continue to generate revenues for us at the same levels. If we were to lose one or more of our key customers, or if they were to significantly reduce their bookings, not to confirm


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planned delivery dates on frame orders in a significant manner or fail to meet their payment obligations, our operating results and financial condition could be adversely affected.Company — Backlog.”
 
Item 6.  Directors, Senior Management and Employees
 
Directors and Senior Management
 
The management of our company is entrusted to the Managing Board under the supervision of the Supervisory Board.
 
Supervisory Board
 
Our Supervisory Board advises our Managing Board and is responsible for supervising the policies pursued by our Managing Board and the general course of our affairs and business. Our Supervisory Board consists of such number of members as is resolved by our annual shareholders’ meeting upon a non-binding proposal of our Supervisory Board, with a minimum of six members. Decisions by our annual shareholders’ meeting concerning the number and the identity of our Supervisory Board members are taken by a simple majority of the votes cast at a meeting, provided quorum conditions are met (15% of our issued and outstanding share capital present or represented).
 
Our Supervisory Board hadcurrently has the following nine members since our annual shareholders’ meeting held on April 26, 2007:members:
 
                          
Name(1)
 
Position
 Year Appointed(2) Term Expires Age  Position Year Appointed(1) Term Expires Age 
Antonino Turicchi Chairman  2008(2)  2011   44 
Gérald Arbola Chairman  2004   2008   59  Vice-Chairman  2004   2011   61 
Bruno Steve Vice Chairman  1989   2008   66 
Raymond Bingham Member  2007   2010   62  Member  2007   2010   64 
Matteo del Fante Member  2005   2008   40 
Tom de Waard Member  1998   2008   61 
Douglas Dunn Member  2001   2009   63  Member  2001   2012   65 
Didier Lamouche Member  2006   2009   48  Member  2006   2012   50 
Didier Lombard Member  2004   2008   66  Member  2004   2011   68 
Alessandro Ovi Member  2007   2010   64  Member  2007(3)  2010   66 
Bruno Steve Member  1989   2011   68 
Tom de Waard Member  1998   2011   63 
 
 
(1)Messrs. Antonino Turicchi and Robert M. White were Supervisory Board members until our 2007 annual shareholders’ meeting, at which time they were succeeded by Messrs. Raymond Bingham and Alessandro Ovi.
(2)As a member of the Supervisory Board.
(2)Mr. Turicchi was also a Supervisory Board member from2005-2007.
(3)Mr. Ovi was also a Supervisory Board member from1994-2005.
After our 2005 annual shareholders’ meeting, our Supervisory Board appointed Mr. Gérald Arbola as Chairman of our Supervisory Board and Mr. Bruno Steve as Vice Chairman, each for a three-year term. On April 26, 2007, our Supervisory Board appointed Chairmen and members to the Strategic Committee, the Audit Committee, the Compensation Committee, and the Nomination and Corporate Governance Committee. Mr. Gérald Arbola was appointed Chairman of the Strategic Committee, and Messrs. Bruno Steve, Douglas Dunn, Didier Lombard and Alessandro Ovi were appointed as members. Mr. Tom de Waard was appointed Chairman of the Audit Committee, Messrs. Raymond Bingham and Douglas Dunn were appointed members and Messrs. Matteo del Fante and Didier Lamouche were appointed as non-voting observers. Mr. Gérald Arbola was appointed Chairman of the Compensation Committee, and Messrs. Tom de Waard, Matteo del Fante, Didier Lombard and Bruno Steve were appointed as members. Mr. Tom de Waard was appointed Chairman of the Nomination and Corporate Governance Committee and Messrs. Gérald Arbola, Douglas Dunn, Didier Lombard and Bruno Steve were appointed as members.
 
At our annual shareholders’ meeting in 2008,2010, the mandates of Messrs. Bingham and Ovi will expire. The mandates of Messrs. Arbola, del Fante, de Waard, Lombard, Steve and SteveTuricchi will expire. Theexpire at our annual shareholders’ meeting in 2011 and the mandates of Messrs. Dunn and Lamouche will expire at our annual shareholders’shareholders meeting in 2009 and the mandate of Messrs. Bingham and Ovi will expire at our annual shareholders’ meeting in 2010.2012.
 
Resolutions of theour Supervisory Board require the approval of at least three-quarters of its members in office. TheOur Supervisory Board must meet upon request by two or more of its members or by theour Managing Board. TheOur Supervisory Board has established procedures for the preparation of Supervisory Board resolutions and the calendar for Supervisory Board meetings. TheOur Supervisory Board meets at least five times a year, including once aper quarter to approve our quarterly and annual accounts and their release. Our Supervisory Board has adopted a Supervisory


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Board Charter setting forth its duties, responsibilities and operations, as mentioned below. This charter is available on our website athttp://www.st.com/stonline/company/governance/index.htm.
 
TherePursuant to Dutch law, there is no mandatory retirement age for members of our Supervisory Board pursuant to Dutch law.Board. Members of the Supervisory Board may be suspended or dismissed by theour annual shareholders’ meeting. TheOur Supervisory Board may make a proposal to theour annual shareholders’ meeting for the suspension or dismissal of one or more of its members. The members of theour Supervisory Board receive compensation as authorized by theour annual shareholders’ meeting. Each member of theour Supervisory Board must resign no later than three years after appointment, as described in our Articles of Association, but may be reappointed following the expiryexpiration of such member’shis term of office.
 
Biographies
Antonino Turicchi was re-appointed as a member of our Supervisory Board at our 2008 annual shareholders’ meeting on May 14, 2008. He was also appointed Chairman of our Supervisory Board at that time. Mr. Turicchi is the Chairman of our Supervisory Board’s Strategic Committee, as well as its Compensation Committee, and also serves on the Nomination and Corporate Governance Committee. Mr. Turicchi was the General Manager of Cassa Depositi e Prestiti from June 2002 until January 2009, and has been a member of the Supervisory Board of Numonyx since March 2008. Since 1994, Mr. Turicchi has held positions with the Italian Ministry of the Treasury (now known as the Ministry of the Economy and Finance). In 1999, he was promoted as the director responsible for conducting securitization operations and managing financial operations as part of the treasury’s debt management functions. Between 1999 and June 2002, Mr. Turicchi was also a member of the board of Mediocredito del Friuli; from 1998 until 2000, he served on the board of Mediocredito di Roma; and from 2000 until 2003, he served on the board of EUR S.p.A. He also served as deputy chairman of Infrastrutture S.p.A. from December 2002 to January 2006 and he was previously a member of our Supervisory Board from March 2005 to April 2007.
 
Gérald Arbola was appointed to our Supervisory Board at theour 2004 annual shareholders’ meeting and was reelected at theour 2005 annual shareholders’ meeting. Mr. Arbola was appointed the ChairmanVice-Chairman of our Supervisory Board on March 18, 2005.May 14, 2008. Mr. Arbola previously served as Vice Chairman of our Supervisory Board from April 23, 2004 until March 18, 2005.2005 through May 13, 2008. Mr. Arbola is also Chairman of ourserves on the Supervisory Board’s Compensation Committee, and Strategic Committee and serves on its NominatingNomination and Corporate Governance Committee. Mr. Arbola is now Managing Director of Areva S.A., where he had also served as Chief Financial Officer, and is a member of the Executive Board of Areva since his appointment on July 3, 2001, and his reappointmentwhich was renewed on June 29, 2006. Mr. Arbola joined the AREVA NC group (ex Cogema) in 1982 as Director of Planning and Strategy for SGN, then served as Chief Financial Officer at SGN from 1985 to 1989, becoming Executive Vice President of SGN in 1988 and Chief Financial Officer of AREVA NC in 1992. He was appointed as a member of the executive committee in 1999, and also served as Chairman of the Board of SGN in 1997 and 1998. Mr. Arbola is currently a member of the boardsboard of directors of AREVA NC, AREVA NP, and Areva T&D Holdings. On July 22, 2008, he was nominated the director of the Suez Environment Company, and he has been co-President of the Areva Foundation since September 2006. Mr. Arbola is a graduate of the Institut d’Etudes Politiques de Paris and holds an advanced degree in economics. Mr. ArbolaHe is the Chairman of the Board of Directors of FT1CI and was the Chairman, until his resignation on November 15, 2006, of the Supervisory Board of ST Holding, our largest shareholder.
Bruno Steve In addition, he has been a member of our Supervisory Board since 1989 and was appointed Vice Chairman of our Supervisory Board on March 18, 2005, and previously served as Chairman of our Supervisory Board from March 27, 2002 through March 18, 2005, from July 1990 through March 1993, and from June 1996 until May 1999. He also served as Vice ChairmanDirector of the Supervisory Board from 1989 toCEA since July 1990 and from May 1999 through March 2002. Mr. Steve serves on our Supervisory Board’s Compensation Committee as well as on its Nominating and Corporate Governance and Strategic Committees. He was with Istituto per la Ricostruzione Industriale-IRI S.p.A. (“IRI”), a former shareholder of Finmeccanica, Finmeccanica and other affiliates of I.R.I. in various senior positions for over 17 years. Mr. Steve is currently Chairman of Statutory Auditors of Selex S. & A. S. S.p.A., Chairman of Surveillance Body of Selex S. & A. S. S.p.A and member of Statutory Auditors of Pirelli Tyres S.p.A. Until December 1999, he served as Chairman of MEI. He served as the Chief Operating Officer of Finmeccanica from 1988 to July 1997 and Chief Executive Officer from May 1995 to July 1997. He was Senior Vice President of Planning, Finance and Control of I.R.I. from 1984 to 1988. Prior to 1984, Mr. Steve served in several key executive positions at Telecom Italia. He is also a professor at LUISS Guido Carli University in Rome. Mr. Steve was Vice Chairman from May 1999 to March 2002, Chairman from March 2002 to May 2003 and member until his resignation on April 21, 2004 of the Supervisory Board of ST Holding, our largest shareholder.24, 2009.
 
Raymond Bingham was appointed to theour Supervisory Board at theour 2007 annual shareholders’ meeting andmeeting. He serves on the Audit Committee and the Strategic Committee. Since November, 2006, Mr. Bingham has been a Managing Director of General Atlantic LLC, a global private equity firm. From August 2005 to October 2006, Mr. Bingham was a private investor. Mr. Bingham was Executive Chairman of the Board of Directors of Cadence Design Systems Inc., a supplier of electronic design automation software and services, from May 2004 to July 2005, and served as a director of Cadence from November 1997 to July 2005. Prior to being Executive Chairman, he served as President and Chief Executive Officer of Cadence from April 1999 to May 2004, and as Executive Vice President and Chief Financial Officer from April 1993 to April 1999. Mr. Bingham also serves as a Director of Oracle Corporation and Flextronics International, Ltd.
 
Matteo del Fante was appointed to our Supervisory Board at our 2005 annual shareholders’ meeting. Mr. del Fante is also a non-voting observer on its Audit Committee. Mr. del Fante has served as the Chief Financial Officer of CDP in Rome since the end of 2003. Prior to joining CDP, Mr. del Fante held several positions at JPMorgan Chase in London, England, where he became Managing Director in 1999. During his 13 years with JPMorgan Chase, Mr. del Fante worked with large European clients on strategic and financial operations. Mr. del Fante obtained his degree in Economics and Finance from Università Bocconi in Milan in 1992, and followed graduate specialization courses at New York University’s Stern Business School. Mr. del Fante was the Vice


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Chairman until his resignation on November 15, 2006 of the Supervisory Board of ST Holding, our largest shareholder.
Tom de Waard has been a member of our Supervisory Board since 1998. Mr. de Waard was appointedhas been Chairman of the Audit Committee by the Supervisory Board insince 1999 and is also Chairman of the NominatingNomination and Corporate Governance Committee in 2004 and 2005, respectively. He alsoCommittee. In addition, he serves on our Supervisory Board’s Compensation Committee. Mr. de Waard has been a partner of Clifford Chance, a leading international law firm, since March 2000 and was the Managing Partner of Clifford Chance Amsterdam office from May 1, 2002 until May 1, 2005. From January 1, 2005 to January 1, 2007 he was a member of the Management Committee of Clifford Chance. Prior to joining Clifford Chance, he was a partner at Stibbe, where he held several positions since 1971 and gained extensive experience working with major international companies, particularly with respect to corporate finance. He is a member of the Amsterdam bar and was


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President of the Netherlands Bar Association from 1993 through 1995. He received his law degree from Leiden University in 1971. Mr. de Waard is a memberthe chairman of the Supervisory Board of BE Semiconductor Industries N.V. (“BESI”) and a member of its audit compensation and nominating committees. He is also chairman of BESI’s compensation committee. Mr. de Waard is a member of the board of the foundation “Stichting Sport en Zaken.”
 
Douglas Dunn has been a member of our Supervisory Board since 2001. He is a member of its2001 and has served on the Audit Committee since such date.time. He also serves on the Strategic Committee. He was formerly President and Chief Executive Officer of ASML Holding N.V. (“ASML”), an equipment supplier in the semiconductor industry, a position from which he retired effective October 1,in 2004. Mr. Dunn was appointed Chairman of the Board of Directors of ARM Holdings plc (United Kingdom) in October 2006. In 2005, Mr. Dunn was appointed to the board of Philips-LG LCD (Korea) (of which he is no longer a board member as of February 29, 2008), TomTom N.V. (Netherlands) and OMI, a privately-held company (Ireland) (which was sold in November 2007 and of which he is no longer a board member), and also serves as a non-executive director on the board of SOITEC (France). He is also a member of the audit committees of ARM Holdings plc, SOITEC and TomTom N.V., and a member of the Compensation Committee and Strategic Committee of SOITEC. In 2005,May 2009, Mr. Dunn resigned from his position aswas appointed to the Supervisory Board of BE Semiconductor Industries N.V. (“BESI”) and is a non-executive director on the boardmember of Sendo plc (United Kingdom)its Audit and in 2007, he resigned from his position as director on the board of OMI. In February 2008, Mr. Dunn resigned from his position as director of Philips-LG LCD (Korea).Compensation/Nomination Committees. Mr. Dunn was a member of the Managing Board of Royal Philips Electronics in 1998. From 1996 to 1998 he was Chairman and Chief Executive Officer of Philips Consumer Electronics and from 1993 to 1996 Chairman and Chief Executive Officer of Philips Semiconductors (now NXP Semiconductors). From 1980 to 1993 he was CEO of Plessey Semiconductors. Prior to this, he held several positions with Motorola Semiconductors (now Freescale).
 
Didier Lamouche has been a member of our Supervisory Board since 2006. Mr. Lamouche2006 and is currently a non-voting observer onmember of the Audit Committee of our Supervisory Board.Committee. Dr. Lamouche is a graduate of Ecole Centrale de Lyon and holds a PhD in semiconductor technology. He has over 25 years experience in the semiconductor industry. Dr. Lamouche started his career in 1984 in the R&D department of Philips before joining IBM Microelectronics where he held several positions in France and the United States. In 1995, he became Director of Operations of Motorola’s Advanced Power IC unit in Toulouse (France). Three years later, in 1998, he joined IBM as General Manager of the largest European semiconductor site in Corbeil (France) to lead its turnaround and transformation into a joint venture between IBM and Infineon: Altis Semiconductor. He managed Altis Semiconductor as CEO for four years. In 2003, Dr. Lamouche rejoined IBM and was the Vice President for Worldwide Semiconductor Operations based in New York (United States) until the end of 2004. Since December 2004,February 2005, Dr. Lamouche has been the Chairman and CEO of Groupe Bull, a France-based global company operating in the IT sector. He is also a member of the Board of Directors of CAMECASOITEC, on whose audit committee he serves, and SOITEC.Atari.
 
Didier Lombard was first appointed to our Supervisory Board at theour 2004 annual shareholders’ meeting and was reelected at our 2005 annual shareholders’ meeting. He serves on the Compensation, Strategic and StrategicNomination and Corporate Governance Committees of our Supervisory Board. Mr. Lombard has served as Chairman of France Telecom since March 2005. He was appointed Chairman andalso Chief Executive Officer of France Telecom infrom March 2005.2005 through February 2010. Mr. Lombard began his career in the Research and Development division of France Telecom in 1967. From 1989 to 1990, he served as scientific and technological director at the Ministry of Research and Technology. From 1991 to 1998, he served as General Director for industrial strategies at the French Ministry of Economy, Finances and Industry, and from 1999 to 2003 he served as an Ambassador at large for foreign investments in France and as President of the French Agency for International Investments. From 2003 through February 2005, he served as France Telecom’s Senior Executive Vice President in charge of technologies, strategic partnerships and new usages and as a member of France Telecom’s Executive Committee. Mr. Lombard also spent several years as Ambassador in charge of foreign investment in France. Mr. Lombard is also a member of the Board of Directors of Thales and Thomson,Technicolor, one of our important customers, as well as a member of the Supervisory Board of Radiall. Mr. Lombard was also a member until his resignation on November 15, 2006 of the Supervisory Board of ST Holding, our largest shareholder. Mr. Lombard is a graduate of the Ecole Polytechnique and the Ecole Nationale Supérieure des Télécommunications.


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Alessandro Ovi was a member of our Supervisory Board from 1994 until his latest term expired at our 2005 annual general shareholders’ meeting.meeting on March 18, 2005. He was reappointed to theour Supervisory Board at ourthe 2007 annual shareholders’ meeting.meeting and serves on the Strategic Committee. Mr. Ovi received a doctoral degree in Nuclear Engineering from the Politecnico in Milan and a Master’s Degree in Operations Research from the Massachusetts Institute of Technology. He has been Special Advisor to the President of the European Community for five years and has served on the boards of Telecom Italia S.p.A, Finmeccanica S.p.A., and Alitalia S.p.A. Currently, he is also a director, and serves on the audit committee, of ENIA S.p.A. and Telecom Italia Media S.p.A. He is also a director of LandiRenzo Spa. Mr. Ovi is Life Trustee in Carnegie Mellon University and Member of the Board in the Italian Institute of Technology. Until April 2000, Mr. Ovihe was the Chief Executive Officer of Tecnitel S.p.A., a subsidiary of


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Telecom Italia Group. Prior to joining Tecnitel S.p.A., Mr. Ovi was the Senior Vice President of International Affairs and Communications at I.R.I.
 
Corporate Governance at ST
Our consistent commitment to the principles of good corporate governance is evidenced by:
• our corporate organization under Dutch law that entrusts our management to a Managing Board acting under the supervision and control of a Supervisory Board totally independent from the Managing Board. Members of our Managing Board and of our Supervisory Board are appointed and dismissed by our shareholders;
• our early adoption of policies on important issues such as “business ethics” and “conflicts of interest” and strict policies to comply with applicable regulatory requirements concerning financial reporting, insider trading and public disclosures;
• our compliance with Dutch securities laws, because we are a company incorporated under the laws of the Netherlands, as well as our compliance with American, French and Italian securities laws, because our shares are listed in these jurisdictions, in addition to our compliance with the corporate, social and financial laws applicable to our subsidiaries in the countries in which we do business;
• our broad-based activities in the field of corporate social responsibility, encompassing environmental, social, health, safety, educational and other related issues;
• our implementation of a non-compliance reporting channel (managed by a third party) for issues regarding accounting, internal controls or auditing. A special ombudspersonBruno Steve has been appointed by the ST Supervisory Board, following the proposal of its Audit Committee, to collect all complaints, whatever their source, regarding accounting, internal accounting controls or auditing matters, as well as the confidential, anonymous submission by ST employees of concerns regarding questionable accounting or auditing matters;
• our Principles for Sustainable Excellence, which we distributed to all employees in 2007 and which require us to integrate and execute all of our business activities, focusing on our employees, customers, shareholders and global business partners;
• our Ethics Committee, also set up in 2007, whose mandate is to provide advice to management and employees about our Principles of Sustainable Excellence and other ethical issues; and
• our recent appointment of a Chief Compliance Officer, who reports directly to the Managing Board, acts as Executive Secretary to our Supervisory Board and chairs our Ethics Committee.
As a Dutch company, we have been subject to the Dutch Corporate Governance Code (the “Code”) since January 1, 2004. As we are listed on the NYSE, Euronext Paris, the Borsa Italiana in Milan, but not in the Netherlands, our policies and practices cannot be in every respect consistent with all Dutch “Best Practice” recommendations contained in the Code. We have summarized our policies and practices in the field of corporate governance in the ST Corporate Governance Charter, including our corporate organization, the remuneration principles which apply to our Managing and Supervisory Boards, our information policy and our corporate policies relating to business ethics and conflicts of interests. Our Charter was discussed with and approved by our shareholders at our 2004 annual shareholders’ meeting. The ST Corporate Governance Charter was updated in 2005 and will be further updated and expanded whenever necessary or advisable. We are committed to informing our shareholders of any significant changes in our corporate governance policies and practices at our annual shareholders’ meeting. Along with our Supervisory Board Charter (which includes the chartersmember of our Supervisory Board Committees)since 1989 and has previously served as both its Chairman and Vice-Chairman. Mr. Steve currently serves on our Code of Business ConductSupervisory Board’s Audit Committee, Compensation Committee and Ethics, the current version of our STNomination and Corporate Governance CharterCommittee. He was with Istituto per la Ricostruzione Industriale-IRI S.p.A. (“I.R.I”), a former shareholder of Finmeccanica, Finmeccanica and other affiliates of I.R.I. in various senior positions for over 17 years. Mr. Steve is posted on our website, at http:/www.st.com/stonline/company/governance/index.htm, and these documents are available in print to any shareholder who may request them.
Our Supervisory Board is carefully selected based upon the combined experience and expertise of its members. Certain of our Supervisory Board members, as disclosed in their biographies set forth above, have existing relationships or past relationships with Areva, CDP,and/or Finmeccanica, who are currently parties to the STH Shareholders’ Agreement as well as with ST Holding or ST Holding II, our major shareholder. See “Item 7. Major


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Shareholders and Related-Party Transactions — Shareholders’ Agreements — STH Shareholders’ Agreement.” Such relationships may give rise to potential conflicts of interest. However, in fulfilling their duties under Dutch law, Supervisory Board members serve the best interests of all of our stakeholders and of our business and must act independently in their supervision of our management. Our Supervisory Board has adopted criteria to assess the independence of its members in accordance with corporate governance listing standardsChairman of the NYSE.
We were informed in 2004 that our then principal direct and indirect shareholders, Areva, Finmeccanica, and France Telecom, FT1CI S.A. (“FT1CI”), and ST Holding and ST Holding II, signed a new shareholders’ agreement in March 2004, to which we are not a party (the “STH Shareholders’ Agreement”). We have been informed that CDP joined this agreement at the endStatutory Auditors of 2004 and that since September 2005 France Telecom is no longer a shareholder of FT1CI or an indirect shareholder (through ST Holding and ST Holding II) of our company, pursuant to the disposition by France Telecom of approximately 26.4 million of our common shares, representing the totalitySelex Galileo S.p.A. He previously served as Chairman of the shares held by France Telecom in our company. We have also been informed that in February 2008, FT1CIStatutory Auditors of Selex S.p.A. until December 2009 and Finmeccanica entered into an agreement pursuant to which Finmeccanica will sell 26,034,141 of our common shares to FT1CI. The acquisition by FT1CI will be financed by the Commissariat à l’Energie Atomique (“CEA”), an entity controlled by the French state and the controlling shareholder of Areva, and, hence, CEA will become a shareholder of FT1CI and adhere to the STH Shareholders’ Agreement. Under the STH Shareholders’ Agreement, Finmeccanica, CDP and FT1CI have provided for their right, subject to certain conditions, to insert on a list, prepared for proposal by ST Holding II to our shareholders’ meeting, certain members for appointment to our Supervisory Board. This agreement also contains other corporate governance provisions, including decisions to be taken by our Supervisory Board which are subject to certain prior approvals, and which are described in “Item 7. Major Shareholders and Related-Party Transactions.” See also “Item 3. Key Information — Risk Factors — Risks Related to Our Operations — The interests of our controlling shareholders, which are in turn controlled respectively by the French and Italian governments, may conflict with investors’ interests.”
Our Supervisory Board has on various occasions discussed the Dutch corporate governance code, the implementing rules and corporate governance standards of the SEC and of the NYSE, as well as other corporate governance standards.
In 2005, the Supervisory Board, based on the evaluations by an ad hoc committee, established the following independence criteria for its members: Supervisory Board members must not have any material relationship with STMicroelectronics N.V., or any of our consolidated subsidiaries, or our management. A “material relationship” can include commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships, among others, but does not include a relationship with direct or indirect shareholders.
We believe we are fully compliant with all material NYSE corporate governance standards, to the extent possible for a Dutch company listed on Euronext Paris, Borsa Italiana, as well as the NYSE. Two of our Supervisory Board members have been non-voting observers on our Audit Committee to date. Because we are a Dutch company, the Audit Committee is an advisory committee to the Supervisory Board, which reports to the Supervisory Board, and our shareholders must approve the selection of our statutory auditors. Our Audit Committee has established a charter outlining its duties and responsibilities with respect to the monitoring of our accounting, auditing, financial reporting and the appointment, retention and oversight of our external auditors. In 2005, in compliance with NYSE requirements, our Audit Committee established procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, and the confidential anonymous submission by our employees regarding questionable accounting or auditing matters. These procedures were approved by our Supervisory Board and implemented under the responsibility of our Managing Board. Thereupon, our chief executive officer provided a written affirmation of our compliance with NYSE standards as applicable tonon-U.S. companies like ST.
No member of the Supervisory Board or Managing Board has been (i) subject to any convictions in relation to fraudulent offenses during the five years preceding the date of thisForm 20-F, (ii) no member has been associated with any company in bankruptcy, receivership or liquidation in the capacity of member of the administrative, management or supervisory body, partner with unlimited liability, founder or senior manager in the five years preceding the date of thisForm 20-F or (iii) subject to any official public incriminationand/or sanction by statutory or regulatory authorities (including professional bodies) or disqualified by a court from acting as a member of the administrative, management or supervisory bodiesStatutory Auditors of any issuer orPirelli. Until December 1999, he served as Chairman of MEI. He served as the Chief Operating Officer of Finmeccanica from acting1988 to July 1997 and Chief Executive Officer from May 1995 to July 1997. He was Senior Vice President of Planning, Finance and Control of I.R.I. from 1984 to 1988. Prior to 1984, Mr. Steve served in the management or conduct of the affairs of any issuer during the five years preceding the date of thisForm 20-F.
We have demonstratedseveral key executive positions at Telecom Italia. He is also a consistent commitmentprofessor at LUISS Guido Carli University in Rome. Mr. Steve was Vice Chairman from May 1999 to the principles of good corporate governance evidenced by our early adoption of policiesMarch 2002, Chairman from March 2002 to May 2003 and member until his resignation on important issues such as “conflicts of interest.” Pursuant to our Supervisory Board Charter, the Supervisory Board is responsible for handling and deciding on potential reported conflicts of interests


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between the Company on the one hand and membersApril 21, 2004 of the Supervisory Board and Managing Board on the other hand.
For example, one of the members ofST Holding, our Supervisory Board is managing director of Areva SA, which is a controlled subsidiary of Commissariat à l’Energie Atomique (“CEA”), one of the members of our Supervisory Board is the Chairman and CEO of France Telecom, and a member of the Board of Directors of Thomson, another is the non-executive Chairman of the Board of Directors of ARM Holdings PLC (“ARM”) and a non-executive director of Soitec, one of the members of the Supervisory Board is also a member of the supervisory board of BESI and one of the members of the Supervisory Board is a director of Oracle Corporation (“Oracle”) and Flextronics International. France Telecom and its subsidiaries Equant and Orange, as well as Oracle’s new subsidiary PeopleSoft supply certain services to our Company. We have a long-term joint research and development partnership agreement with LETI, a wholly-owned subsidiary of CEA. We have certain licensing agreements with ARM, and have conducted transactions with Soitec and BESI as well as with Thomson and Flextronics. We believe that each of these arrangements and transactions are made on an arms-length basis in line with market practices and conditions. Please see “Item 7. Major Shareholders and Related-Party Transactions.”largest shareholder.
 
Supervisory Board Committees
 
Membership and Attendance.  As of December 31, 2009, the composition of our Supervisory Board’s committees was as follows: i) Mr. Tom de Waard is the Chairman of the Audit Committee, and Messrs. Raymond Bingham, Douglas Dunn, Didier Lamouche and Bruno Steve are all voting members; ii) Mr. Antonino Turicchi is the Chairman of the Compensation Committee, and Messrs. Gérald Arbola, Tom de Waard, Didier Lombard and Bruno Steve are members; iii) Mr. Tom de Waard is the Chairman of the Nomination and Corporate Governance Committee, and Messrs. Gérald Arbola, Didier Lombard, Bruno Steve and Antonino Turicchi are members; and, iv) Mr. Antonino Turicchi is the Chairman of the Strategic Committee, and Messrs. Gérald Arbola, Raymond Bingham, Douglas Dunn, Didier Lombard and Alessandro Ovi are members.
Detailed information on attendance at full Supervisory Board and Supervisory Board Committee meetings during 2007 was2009 is as follows:
 
                         
              Nomination
    
              and
    
              Corporate
    
     Audit
  Compensation
  Strategic
  Governance
  Ad Hoc
 
Number of Meetings Attended in 2007(1)
 Full Board  Committee  Committee  Committee  Committee  Committee 
 
Gérald Arbola  12   1(2)  6   9   6   1 
Raymond Bingham(3)  6   6   —   —   —   — 
Tom de Waard  11   11   6   —   6   2 
Matteo del Fante(4)  12   11   3   —   3   1 
Douglas Dunn  11   9   —   5   —   1 
Didier Lamouche(4)  11   11   —   —   —   — 
Didier Lombard  12   1(2)  6   9   3   — 
Alessandro Ovi(3)  7   —   —   6   —   — 
Bruno Steve  12   —   5   9   5   1 
Antonino Turicchi(3)  5   —   1   3   3   — 
Robert M. White(3)  5   5   —   3   —   — 
                     
              Nominating
 
              and
 
              Corporate
 
     Audit
  Compensation
  Strategic
  Governance
 
Number of Meetings Attended in 2009
 Full Board  Committee  Committee  Committee  Committee 
 
Antonino Turicchi  13   —   3   1   1 
Gérald Arbola  13   —   3   1   1 
Raymond Bingham  13   11   —   1   — 
Douglas Dunn  13   11   —   1   — 
Didier Lamouche  9   11   —   —   — 
Didier Lombard  11   —   3   1   1 
Alessandro Ovi  13   —   —   1   — 
Bruno Steve  13   9   2   —   — 
Tom de Waard  12   11   3   —   1 
(1)Includes meetings attended by way of conference call.
(2)Messrs. Arbola and Lombard attended an extraordinary Audit Committee by way of conference call.
(3)Messrs. Turicchi and White were Supervisory Board members until our 2007 annual shareholders’ meeting, at which time they were succeeded by Messrs. Bingham and Ovi.
(4)Appointed as non-voting observers to Audit Committee.
 
Audit Committee.  The Audit Committee was established in 1996 to assist the Supervisory Board in fulfilling its oversight responsibilities relating to corporate accounting, reporting practices, and the quality and integrity of our financial reports as well as our auditing practices, legal and regulatory related risks, execution of our auditors’ recommendations regarding corporate auditing rules and the independence of our external auditors.
 
The Audit Committee met 11 times during 2007.2009 and, in addition, held several conference calls related to subjects that arose during the year. At many of thesethe Audit Committee’s meetings, the Audit Committeecommittee received presentations on current financial and accounting issues and had the opportunity to interview our CEO, CFO, General Counsel, external and internal auditors. On several occasions, theThe Audit Committee also met with outside U.S. legal counsel to discuss corporate requirements pursuant to NYSE’s corporate governance rules and the Sarbanes-Oxley Act. The Audit Committee also proceeded with its annual review of our internal audit function. The Audit Committee reviewed our annual Consolidated Financial Statements in U.S. GAAP for the year ended December 31, 2007,2009, and the associatedresults press release was published on January 23, 2008.27, 2010.
 
The Audit Committee reviewed our external auditors’ statement of independence with them. The Audit Committee also approved the compensation of our external auditors for 20062009 and provisionally approved the scope of their audit, audit-related and non-audit-related services for 2007. Additionally, in anticipation of the expiration of the current mandate of our current auditors at our next annual general shareholders’ meeting, the Audit Committee reviewed its2010.


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options and decided to recommend to the Supervisory Board to propose to our shareholders to renew the mandate of our current auditors for an additional two year period. The Audit Committee noted that the new managing partner of our current auditors would be in charge over the control of our accounts in accordance with its internal rotation policy. Furthermore, the Audit Committee held separate meetings with the external auditors and discussed with them our critical accounting policies with our external auditors, outside the presence of our management.
An external U.S. law firm appointed by the Audit Committee concluded in 2007 its independent investigation to determine the nature of the fraud perpetrated by our former head of treasury operations, which led to his arrest at the end of 2006 and sentencing in February 2008 (see Item 8 “Financial Information — legal proceedings”), and to report on our internal controls and practices. This investigation involved several meetings with current and former senior management and an examination of extensive documentation. The Audit Committee met several times to discuss the results of this investigation and the final recommendations were shared at an extraordinary Audit Committee meeting to which all members of the Supervisory Board were invited. Pursuant thereto, several initiatives were recommended to management to improve our internal controls. Of note, in December 2007 we appointed a Chief Compliance Officer.
At the end of each quarter, prior to each Supervisory Board meeting to approve our results and quarterly earnings press release, the Audit Committee reviewed our interim financial information and the proposed press release and had the opportunity to raise questions to management and the independent registered public accounting firm. In addition, the Audit Committee reviewed our quarterly “Operating and Financial Review and Prospects” and interim Consolidated Financial Statements (and notes thereto) before they were filed with the SEC and voluntarily certified by the CEO and the CFO (pursuant to sections 302 and 906 of the Sarbanes-Oxley Act). The Audit Committee also reviewed Operating and Financial Review and Prospects and our Consolidated Financial Statements contained in thisour 2009Form 20-F,20-F. as well as our financial reporting using IFRS as presented in our Annual Report to Shareholders for our annual shareholders meeting held in April 2007.
Also in 2007, our Audit Committee reviewed with our Auditors our Compliance with Section 404 of the Sarbanes-Oxley Act, noting that this was the first year where, as a foreign registrant, we were required to assess our compliance with Section 404. Pursuant to such review, our Audit Committee noted that our Auditors had issued an unqualified 404 opinion as no material weakness in internal reporting over financial reporting were identified. In addition, the Audit Committee regularly discussed the progress of implementation of internal control over financial reporting and reviewed management’s conclusions as to the effectiveness of internal control.
Furthermore, the Audit Committee monitorsmonitored our compliance with the European Directive and applicable provisions of Dutch law that require us to prepare a set of accounts pursuant to IFRS in advance of our annual shareholders’ meetings. In this respect, the Audit Committee has approved our decision to continue to report our Consolidated Financial Statements under U.S. GAAP, while complying with our reporting obligations under IFRS by preparing a complementary set of our accounts. Furthermore, our Audit Committee has noted that while our accounting systems are in place to prepare a separate set of accounts pursuant to IFRS for the 2007 financial year, we will not be able to provide reconciliations pursuant to IFRS for periods prior to 2005, in particular critical items such as capitalization of our development expenses.meetings, which was held on May 20, 2009. See “Item 3. Key Information — Risk Factors — Risks Related to Our Operations.”
 
In connection with the Numonyx transaction, theAlso in 2009, our Audit Committee reviewed with our managementexternal auditors our compliance with Section 404 of the Sarbanes-Oxley Act. In addition, the Audit Committee regularly discussed the progress of the implementation of internal control over financial reporting and our auditorsreviewed management’s conclusions as to the impacteffectiveness of such transaction on our consolidation obligations as well as the impairment charges resulting from the announcement of this transaction.internal control.
 
As part of each of its quarterly meetings our Audit Committee reviewed our significant business risksfinancial results as presented by Management and whistleblowing reports, regarding financial accounting or reporting issues, including independent investigative reports provided by internal audit or outside consultants on such matters. Finally our Audit Committee sponsored various initiatives in the area of corporate ethics, including a specific program prepared by an outside consultant, considered by the Audit Committee to be well suited for our employees.
On April 26, 2007, our Supervisory Board re-appointed Mr. de Waard as Chairman, and appointed Messrs. Bingham and Dunn as members. Messrs. del Fante and Lamouche were appointed non-voting observers to the Audit Committee. The Audit Committee also determined that three members of the Audit Committee qualified as “audit committee financial experts” and that all of its members are financially literate.
 
Compensation Committee.  Our Compensation Committee proposes to our Supervisory Board the compensation for our President and Chief Executive Officer and sole member of our Managing Board as well as for our Chief Operating Officer, including the variable portion of such compensation based on performance criteria recommended by our Compensation Committee. It also approves any increase in the incentive component of compensation for our executive officers. The Compensation Committee is also informed of the compensation plans


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for our executive officers and specifically approves stock-based compensation plans for our executive officers and key employees. The Compensation Committee met six3 times in 2007.2009.
 
Among its main activities, the Compensation Committee proposedCommittee: (i) agreed, jointly with the CEO, to propose a bonus for the CEO related to fiscal year 2008 equal to 75% of his base salary, given the difficult market conditions and the objectives that had been met; (ii) recommended the performance criteria which must be met by the CEO in order to benefit from the bonus which has beenthat was approved by the shareholders’ meetingour 2009 Annual General Meeting of Shareholders as part of the Managing Board compensation policy, as well as the performance criteria to be met by our COO to be eligible for eligibility to his 2007 bonus2009 bonus; and (ii)(iii) proposed performance criteria, which must be met by the CEO as well as all other employees participating in the employees stock award plans to benefit from such awards. In particular, the Compensation Committee recommended the performance targets for the base bonus toof our CEO and COO be based to new product introductions,on, among other factors, market share, introduction of new products, the budget for the second half of 2009, the Company’s share price versus SOX from July 29, 2009 through January 27, 2010, corporate governance and budget targets, and criteria on corporate governance. In addition the restructuring program. The Compensation Committee, recommended that in viewon behalf, and with the approval, of the challenges facingentire Supervisory Board, also set the Company in 2007,criteria for a special additional bonus of up to 60% of base salary be considered if certain targets linked to technology R&D, and deconsolidation of activities are met. Concerning the targets to be met for vesting of the share awards these are based on sales, operating income and return on net assets.incentive bonus.
 
With regard toFor the employee 2006 unvested2009 nonvested stock award plan, the Compensation Committee, monitoredon behalf, and with the performanceapproval, of the entire Supervisory Board, established the applicable performance criteria, relatingwhich are based on sales and operating income as compared against a panel of semiconductor companies and cash flow before acquisitions as well as cash restructuring costs, with the target to have it positive for the vestingsecond half of such awards and noted that the targets in terms of sales, profits and return on net assets which had been set in the prior year had been met.2009.
 
In addition, the Compensation Committee confirmed that all Unvested Stock Awards would vest upon Change of Control, as decided by the Supervisory Board in 2006, but upon the request of the Managing Board, the Compensation Committee proposed to the Supervisory Board that the transfer ofreceived presentations and discussed our employees to Numonyx should not be considered as a “change of control” so that such employees so long as they remain employed by Numonyx can continue to benefit from the vesting conditions of all unvested stock awards granted to them prior to their transfer to Numonyx.
Furthermore, in 2007, the Compensation Committee decided to recommend to the Supervisory Board that the compensation of the Supervisory Board members and the professionals be paid in Euros instead of U.S. dollars, thus changing the compensation structure as follows: (i) Chairman, Vice Chairman and President of the Audit Committee would receive €115,000, while all other Supervisory Board members would receive €57,500; and (ii) Audit Committee members would receive an additional €7,500, while members of the other committees would receive €3,500. The Compensation Committee decided to propose to maintain the stock-based compensationsuccession planning for Supervisory Board members and professionals as in 2007. Both of these proposals will be presented for adoption at our 2008 annual general shareholders’ meeting in accordance with Article 23 of our Articles of Association.
On April 26, 2007, our Supervisory Board appointed Mr. Arbola as Chairman of the Compensation Committee, and Messrs. de Waard, del Fante, Lombard and Steve were appointed as members.key employees.
 
Strategic Committee.  Our Strategic Committee was created to monitor key developments within the semiconductor industry and our overall strategy, and is, particularlyin particular, involved in supervising the execution of strategic transactions.
The Strategic Committee met nine timesonly once in 2007, in the presence2009, as several of the CEO, the COO, the Director of Strategic Planningstrategic discussions were extended to involve all Supervisory Board members and the CFO.occurred at extended Supervisory Board meetings. Among its main activities, the Strategic Committee reviews our long-term plans andreviewed prospects and various possible scenarios and opportunities to meet the challenges of the semiconductor market, including the evaluation of possible acquisitions or divestitures.
The Strategic Committee focused on our key challenges which concerneddivestitures and partnerships to invest in particular the new organization of our Product Segment Groups effective January 1st, 2007 including the new Flash Memories Group which comprises all Flash Memory operations including research & development, product related activities, front-end and back-end manufacturing marketing and sales, as well as our R&D programs in the field of advanced CMOS technologies, following the announcement by Freescale Semiconductor and NXP Semiconductors of their desire to terminate their participation for the end of 2007. During 2007 our Strategic Committee met with the directors of our new Mobile Multimedia and Communications Group, our Home Entertainment and also Displays Group as well as our Computer Peripherals Group.
The Strategic Committee monitored the negotiations which led to the announcement in May 2007 of our decision to contribute our Flash Memory Business to a new independent flash memory company later named Numonyx currently planned to be created by us, Intel and Francisco Partners in the first quarter of 2008.
The Strategic Committee reviewed our various future options concerning advanced CMOS process R&D which led to our decision to enter into an agreement with IBM to co-develop 32-nm and 22-nm core CMOS at IBM’s East Fiskill (United States) facility as well as to continue to develop with IBM state-of-the-art derivative technologies at Crolles2.


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The Strategic Committee also reviewed our challenges linked to the weakening of the U.S. Dollar and market conditions which led to the announcement of a new restructuring plan in June 2007, as well as internal growth opportunities, which led to the announcement of a significant acquisition in the field of wireless IP and to our decision to launch a public tender offer on Genesis Microchip, a provider of integrated digital TV products, whose acquisition is intended to strengthen our product offering in the digital consumer market.
On April 26, 2007, our Supervisory Board appointed Mr. Arbola as Chairman of the Strategic Committee, and Messrs. Dunn, Lombard, Ovi and Steve were appointed as members.markets.
 
Nominating and Corporate Governance Committee.  Our Nominating and Corporate Governance Committee was created to establish the selection criteria and appointment procedures for the appointment of members to our Supervisory Board and Managing Board, and to resolve issues relating to corporate governance. The Nominating and Corporate Governance Committee met six times in 2007.
The Nominating and Corporate Governance Committee metonce during 2009 to evaluate candidatesdiscuss modifications to the Supervisory Board


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Charter for the Supervisory Board member position upCompany’s joint ventures, recent developments in Dutch law regarding Dutch listed companies and preparations for renewal at the 2007 annual shareholders’ meeting and decided to recommend a proposal of Messrs. Dunn and Bingham for a three-year term. In the fourth quarter of 2007, the Nominating and Corporate Governance Committee discussed the Managing Board and the five Supervisory Board positions for which proposals for appointment are to be made at the 2008 annual general shareholders’ meeting.
On April 26, 2007, our Supervisory Board appointed Mr. de Waard as President of the Nominating and Corporate Governance Committee and Messrs. Arbola, del Fante, Lombard and Steve were appointed as members.Annual General Meeting.
 
Secretariat and Controllers.  Our Supervisory Board appoints a Secretary and Vice Secretary as proposed by theour Supervisory Board. Furthermore, the Managing Board makes an Executive Secretary available to theour Supervisory Board, who is appointed by the Supervisory Board. The Secretary, Vice Secretary and Executive Secretary constitute the Secretariat of the Board. The mission of the Secretariat is primarily to organize meetings, ensure the continuing education and training of theour Supervisory Board members as well asand to maintain record-keeping. Mr. AcciariMessrs. Bertrand Loubert and Mr. LoubertLuigi Chessa serve as Secretary and Vice Secretary, respectively, for theour Supervisory Board, and for each of the Compensation, Nominating and Corporate Governance and Strategic Committees of our Supervisory Board, while Mr. Willem Steenstra ToussaintBoard. Our Chief Compliance Officer, Ms. Alisia Grenville, serves as Secretary of the Audit Committee. Mr. Pierre Ollivier served as Executive Secretary of our Supervisory Board until January 22, 2008, when he was replaced by the newly appointed Chief Compliance Officer, Ms. Alisia Grenville.Board.
 
Our Supervisory Board appoints and dismisses two financial experts (“Controllers”). The mission of the Controllers is primarily to assist theour Supervisory Board in evaluating our operational and financial performance, business plan, strategic initiatives and the implementation of Supervisory Board decisions, as well as to review the operational reports provided under the responsibility of the Managing Board. The Controllers generally meet once a month with the management of the Company and report to theour Supervisory Board. The current Controllers are Messrs. Christophe Duval and Andrea Novelli, who have served as controllers since our 2005 annual shareholders’ meeting.
 
The STH Shareholders’ Agreement amongbetween our principal direct and indirect shareholders contains provisions with respect to the appointment of the Secretary, AssistantVice Secretary and Controllers, which are described in “Item 7. Major Shareholders and Related-PartyRelated Party Transactions.”
 
Managing Board
 
In accordance with Dutch law, our management is entrusted to the Managing Board under the supervision of theour Supervisory Board. Mr. Carlo Bozotti, appointedre-appointed in 2005 with2008 for a three-year term to expire at the end of our annual shareholders’ meeting in 2008,2011, is currently the sole member of our Managing Board with the function of President and Chief Executive Officer. Mr. Alain Dutheil serves as Chief Operating Officer, reporting to Mr. Bozotti. Since its creation in 1987, theour managing board has always been comprised of a sole member. The member of theour Managing Board is appointed for a three-year terms,term, as described in our Articles of Association, which may be renewed one or more times in accordance with our Articles of Association upon a non-binding proposal by our Supervisory Board at theour shareholders’ meeting adoptedand adoption by a simple majority of the votes cast at athe shareholders’ meeting where at least 15% of the issued and outstanding share capital is present or represented. If our Managing Board were to consist of more than one member, our Supervisory Board would appoint one of the members of our Managing Board to be chairman of our Managing Board for a three-year term, as defined in our Articles of Association (upon approval of at least three-quarters of the members of theour Supervisory Board in office)Board). ResolutionsIn such case, resolutions of our Managing Board would require the approval of a majority of its members.
 
Our shareholders’ meeting may suspend or dismiss one or more members of our Managing Board at a meeting at which at least one-half of the outstanding share capital is present or represented. If thea quorum is not present, a


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further meeting shall be convened, to be held within four weeks after the first meeting, which shall be entitled, irrespective of the share capital represented, to pass a resolution with regard to the suspension or dismissal.dismissal of one or more members of our Managing Board. Such a quorum is not required if a suspension or dismissal is proposed by our Supervisory Board. In that case, a resolution to dismiss or to suspend a member of our Managing Board can be taken by a simple majority of the votes cast at a meeting where at least 15% of our issued and outstanding share capital is present or represented. Our Supervisory Board may suspend members of our Managing Board, but a shareholders’ meeting must be convened within three months after such suspension to confirm or reject the suspension. Our Supervisory Board shall appoint one or more persons who shall, at any time, in the event of absence or inability to act of all the members of our Managing Board, be temporarily responsible for our management.
 
Under Dutch law, our Managing Board is entrusted with our general management and the representation of the Company. Our Managing Board must seek prior approval from theour shareholders’ meeting for decisions regarding a significant change in the identity or nature of the Company. Under our Articles of Association, our Managing Board must obtain prior approval from our Supervisory Board for (i) all proposals to be submitted to a vote at a shareholders’ meeting; (ii) the formation of all companies, acquisition or sale of any participation, and conclusion of any cooperation and participation agreement; (iii) all of our multi-year plans and the budget for the coming year, covering investment policy, policy regarding research and development,R&D, as well as commercial policy and objectives, general financial policy, and policy regarding personnel; and (iv) all acts, decisions or operations covered by the foregoing and constituting a significant change with respect to decisions already taken by our Supervisory Board. In addition,


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under our Articles of Association, our Supervisory Board and our shareholders’ meeting may specify by resolution certain additional actions by our Managing Board that require its prior approval.
 
In accordance with our Corporate Governance Charter, the sole member of our Managing Board and our Executive Officers may not serve on the board of a public company without the prior approval of our Supervisory Board. We are not aware of any potential conflicts of interests between the private interest or other duties of our sole Management Board member and our Executive Officers and their duties to our Company.
 
Pursuant to the charter adopted by our Supervisory Board, the following decisions by our Managing Board with regards to STthe Company and any of our direct or indirect subsidiaries (an “ST Group Company”) require prior approval from our Supervisory Board: (i) any modification of our or any ST Group Company’s Articles of Association or other constitutional documents, other than those of our wholly-owned subsidiaries; (ii) any change in our or any ST Group Company’s authorized share capital or any issue, acquisition or disposal by us of our own shares, or any ST Group Company’s shares, or change in any shareholdershare rights or issue of any instruments granting an interest in our or an ST Group Company’s capital or profits other than those of our wholly-owned subsidiaries; (iii) any liquidation or dissolution of us or any ST Group Company or the disposal of all or a substantial and material part of our business or assets, or those of any ST Group Company, or of any shares we hold in any of our subsidiaries;such ST Group Company; (iv) entering into any merger, acquisition or joint venture agreement (and, if substantial and material, any agreement relating to intellectual property)IP) or formation of a new company;company to which we or any ST Group Company is, or is proposed to be, a party, as well as the formation of new companies by us or any ST Group Company (with the understanding that only acquisitions above $25 million per transaction are subject to prior Supervisory Board approval); (v) approval of such company’sour draft consolidated balance sheets and financial statements, or anyas well as our and our subsidiaries’ profit distribution by such company;policies; (vi) entering into any agreement that may qualify as a related-partyrelated party transaction, including any agreement withbetween us or any ST Group Company and ST Holding, ST Holding II, FT1CI, Areva, CDP or Finmeccanica;CEA; (vii) the key challengesparameters of our five-year5-year plans and our consolidated annual budgets, as well as any significant modifications to said plans and budgets, or any one of the matters set forth in Article 16.1 of our Articles of Association and not included in the approved plans or budgets; (viii) approval of operations of exceptional importance which have to be submitted for Supervisory Board prior approval althougheven if their financing was already provided for in the approved annual budget; and (ix) approval of theour quarterly, semiannual and annual Consolidated Financial Statements prepared in accordance with U.S. GAAP and since 2005,semiannual and annual accounts using IFRS, prior to submission for shareholder adoption.adoption; and (x) the exercise of any shareholder right in an ST joint venture company (“ST Joint Venture Company”), which is a company (i) with respect to which we hold directly or indirectly either a minority equity position in excess of 25% or a majority position without the voting power to adopt extraordinary resolutions or (ii) in which we directly or indirectly participate and such participation has a value of at least one-third of our total assets according to the consolidated balance sheet and notes thereto in our most recently adopted (statutory) annual accounts.
 
During a meeting held on September 23, 2000, our Supervisory Board authorized our Managing Board to proceed with acquisitions without prior consent of our Supervisory Board subject to a maximum amount of $25 million per transaction, provided our Managing Board keeps our Supervisory Board informed of progress regarding such transactions and gives a full report once the transaction is completed.


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Executive Officers
 
Our executive officers support our Managing Board in its management of us,the Company, without prejudice to our Managing Board’s ultimate responsibility. New corporate officers during 2009 and the first quarter of 2010 include: Paul Grimme, who joined the Company in September 2009 as Corporate Vice President and General Manager of the Automotive Product Group (APG) following Ugo Carena’s retirement; and Tjerk Hooghiemstra, who joined our company in February 2010 in the new position of Executive Vice-President, Chief Administrative Officer. In this role, Mr. Hooghiemstra reports to the President and CEO, Carlo Bozotti. We created this new position with the aim of generating synergies among many staff organizations, by optimizing the functions of Human Resources, Health & Safety, Education, Legal, Internal Communication, Security, and Corporate Responsibility.
From August 2, 2008 through November 1, 2009, our Chief Operating Officer, Alain Dutheil, was also the CEO of ST-NXP Wireless, and briefly acted as CEO of the new ST-Ericsson joint venture following the merger of ST-NXP Wireless with EMP. The current CEO of ST-Ericsson is Gilles Delfassy.


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As of February 2010, our organizational chart is as follows:
(FLOW CHART)
As a company committed to good governance, we hold several corporate meetings on a regular basis. Such meetings, which involve the participation of several of our executive officers, include:
• Corporate Operation Reviews (COR), which meets once per month to review monthly results and short term forecasts and involve the following executive officers/groups: CEO; COO; CFO; Infrastructures and Services; Product Quality Excellence; Manufacturing (Front-End and Back-End); TR&D; Regions; and Product Groups.
• Corporate Strategic Committeemeetings,which occur twice per quarter with the objective of defining the strategic directions of the Company. They are attended by the CEO, COO and the following executive officers: Orio Bellezza; Jean-Marc Chery; Andrea Cuomo; Carlo Ferro; Tjerk Hooghiemstra; Philippe Lambinet; Loic Liétar; and Carmelo Papa.


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Our executive officers during fiscal year 20072009 were:
 
                          
     Years in
        Years in
   
     Semi-
        Semi-
   
   Years with
 Conductor
   ��  Years with
 Conductor
   
Name
 
Position
 Company Industry Age  Position Company Industry Age 
Executive Committee
              
Carlo Bozotti President and Chief Executive Officer  30   30   55 
Alain Dutheil Chief Operating Officer  24   37   62 
Laurent Bosson(2) Executive Vice President, Front-end Technology and Manufacturing  24   24   65 
Andrea Cuomo Executive Vice President, Advanced System Technology and General Manager  24   24   53 
Carlo Ferro Executive Vice President, Chief Financial Officer (and for Infrastructure and Services organization)  7   7   47 
Carmelo Papa Executive Vice President, IMS  24   24   58 
Tommi Uhari Executive Vice President, MMC  1   13   36 
Enrico Villa(2) Executive Vice President, Europe Region (and for Sales and Marketing organizations)  40   40   66 
Executive Staff
              
Carlo Bozotti, Chairman President and Chief Executive Officer  33   33   57 
Alain Dutheil, Vice Chairman Chief Operating Officer  26   40   64 
Georges Auguste Corporate Vice President, Total Quality and Environmental Management  20   33   58  Executive Vice President, Quality, Education and Sustainable Development  23   35   60 
Orio Bellezza Executive Vice President and General Manager, Front-End Manufacturing  26   26   50 
Gian Luca Bertino Corporate Vice President, CPG  10   21   48  Corporate Vice President, Computer and Communications Infrastructure  12   23   50 
Ugo Carena Corporate Vice President, APG  10   29   64 
Ugo Carena(1) Corporate Vice President, Automotive Products Group  12   32   66 
Marco Luciano Cassis Corporate Vice President, Japan Region  19   19   44  Corporate Vice President, Japan Region  22   22   46 
Patrice Chastagner Corporate Vice President, Human Resources  21   21   60  Corporate Vice President, Human Resources  25   25   62 
Jean-Marc Chery Executive Vice President and Chief Technology Officer  25   25   49 
Andrea Cuomo Executive Vice President and General Manager, Sales & Marketing, Europe, Middle  26   26   55 
 East and Africa            
Claude Dardanne Corporate Vice President, General Manager, Microcontrollers, Memories & Smartcards  25   28   55  Corporate Vice President, General Manager, Microcontrollers, Memories & Smartcards  27   30   57 
Carlo Ferro Executive Vice President, Chief Financial Officer  10   10   49 
Alisia Grenville Corporate Vice President, Chief Compliance Officer  2   2   42 
Paul Grimme Corporate Vice President and General Manager, Automotive Product Group  1   29   50 
François Guibert Corporate Vice President, Asia Pacific Region  26   29   54  Corporate Vice President, President, Greater China & South Asia Region  29   32   56 
Reza Kazerounian Corporate Vice President, North America Region  7   22   50 
Reza Kazerounian(2) Corporate Vice President, North America Region  25   25   52 
Otto Kosgalwies Corporate Vice President, Infrastructure and Services  23   23   52  Executive Vice President, Infrastructure and Services  26   26   54 
Robert Krysiak Corporate Vice President and General Manager, Greater China Region  18   24   53  Corporate Vice President and General Manager, Greater China Region  27   27   55 
Christos Lagomichos(1) Corporate Vice President, General Manager, Home Entertainment & Displays Group  23   26   51 
Philippe Lambinet Corporate Vice President, General Manager, Home Entertainment & Displays Group  14   27   50  Executive Vice President, General Manager, Home Entertainment & Displays Group  16   16   52 
Mario Licciardello Corporate Vice President, MPG  42   42   66 
Loïc Lietar Corporate Vice President, Corporate Business Development  24   24   47 
Pierre Ollivier Corporate Vice President and General Counsel  20   20   54 
Carlo Ottaviani Corporate Vice President, Communications  42   42   64  Corporate Vice President, Communication  45   45   66 
Jeffrey See Ah Bah Corporate Vice President, Central Back-End General Manager  37   37   62 
Carmelo Papa Executive Vice President and General Manager, Industiral Multi-segment Sector  27   27   60 
Jeffrey See Executive Vice President, Central Packaging and Test Manufacturing  40   40   64 
Thierry Tingaud(3) Corporate Vice President, Emerging Markets Region  23   23   48  Corporate Vice President, Emerging Markets Region  25   25   50 
 
 
(1)Christos Lagomichos resignedRetired in June 2007.2009.
 
(2)Retiring in 2008.As of April 2009, Mr. Kazerounian is no longer with the Company.
Effective January 1, 2008, the following individuals are new executive officers, all reporting to President and Chief Executive Officer Carlo Bozotti: Orio Bellezza, as Executive Vice President and General Manager, Front-End Manufacturing; Jean-Marc Chery, as Executive Vice President and Chief Technology Officer; Executive Vice President Andrea Cuomo, as General Manager of our Europe Region, who will also maintain his responsibility for the Advanced System Technology organization; Loïc Lietar, as Corporate Vice President, Corporate Business


99

Development; and Pierre Ollivier, as Corporate Vice President and General Counsel. In addition, we announced the hiring and appointment of Alisia Grenville as Corporate Vice President, Chief Compliance Officer, and the retirement of both Laurent Bosson, as Executive Vice-President for Front-End Technology and Manufacturing, and Enrico Villa, as Executive Vice President and General Manager of our Europe Region. The current members of our Executive Committee and Executive Staff are as follows:
               
       Years in
    
       Semi-
    
    Years with
  Conductor
    
Name
 
Position
 Company  Industry  Age 
 
Executive Committee
              
Carlo Bozotti President and Chief Executive Officer  30   30   55 
Alain Dutheil Chief Operating Officer  24   37   62 
Georges Auguste Executive Vice President, Total Quality and Environmental Management  20   33   58 
Orio Bellezza Executive Vice President and General Manager, Front-End Manufacturing  23   23   48 
Laurent Bosson(1) Executive Vice President, Front-end Technology and Manufacturing  24   24   65 
Jean-Marc Chery Executive Vice President and Chief Technology Officer  23   23   47 
Andrea Cuomo Executive Vice President, Advanced System Technology and General Manager, Europe Region  24   24   53 
Carlo Ferro Executive Vice President, Chief Financial Officer  7   7   47 
Otto Kosgalwies Executive Vice President, Infrastructure and Services  23   23   52 
Philippe Lambinet Executive Vice President, General Manager, Home Entertainment & Displays Group  14   21   50 
Carmelo Papa Executive Vice President, IMS  24   24   58 
Jeffrey See Ah Bah Executive Vice President, Central Back-End General Manager  37   37   62 
Tommi Uhari Executive Vice President, MMC  1   13   36 
Enrico Villa(1) Executive Vice President, Europe Region (and for Sales and Marketing organizations)  40   40   66 
Executive Staff
              
Gian Luca Bertino Corporate Vice President, CPG  10   21   48 
Ugo Carena Corporate Vice President, APG  10   29   64 
Marco Luciano Cassis Corporate Vice President, Japan Region  19   19   44 
Patrice Chastagner Corporate Vice President, Human Resources  21   21   60 
Claude Dardanne Corporate Vice President, General Manager, Microcontrollers, Memories & Smartcards  25   28   55 
Alisia Grenville Corporate Vice President, Chief Compliance Officer  0   0   40 
François Guibert Corporate Vice President, Asia Pacific Region  26   29   54 
Reza Kazerounian Corporate Vice President, North America Region  7   22   50 
Robert Krysiak Corporate Vice President and General Manager, Greater China Region  18   24   53 
Mario Licciardello Corporate Vice President, MPG  42   42   66 
Loïc Lietar Corporate Vice President, Corporate Business Development  22   22   45 
Pierre Ollivier Corporate Vice President and General Counsel  23   23   52 
Carlo Ottaviani Corporate Vice President, Communications  42   42   64 
Thierry Tingaud Corporate Vice President, Emerging Markets Region  22   22   48 
(3)
(1)RetiringMr. Tingaud left ST in 2008.February 2009.


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Our President and Chief Executive Officer and sole memberBiographies of our Managing Board, Mr. Carlo Bozotti, has appointed a CorporateCurrent Executive Committee, which is currently comprised of six Executive Vice Presidents, the CEO and the COO. The Executive Vice Presidents represent all the functions of the organization: the product segments, sales and marketing (including regions), the manufacturing and technology research and development activities and the central functions. The role of the Executive Committee is to set corporate policy, coordinate strategies of the Company’s various functions representing its constituents, and drive major cross functional programs. The Executive Committee, chaired by Mr. Bozotti, or by Mr. Dutheil in Mr. Bozotti’s absence, meets twice per quarter, while executive staff meetings are held on a quarterly basis with the attendance of all corporate vice presidents. Under our organizational structure, product segments and staff functions report directly to Mr. Bozotti, while our sales, marketing, manufacturing and technology research and development functions report to our COO.
BiographiesOfficers
 
Carlo Bozotti is our President, Chief Executive Officer and the sole member of our Managing Board. As CEO, Mr. Bozotti chairsis the Chairman of our Executive Committee. Prior to taking on this new role at the 2005 annual shareholders’ meeting, Mr. Bozotti served as Corporate Vice President, MPGMemories Product Group (“MPG”) since August 1998. Mr. Bozotti joined SGS Microelettronica in 1977 after graduating in Electronic Engineering from the University of Pavia. Mr. Bozotti served as Product Manager for the Industrial, Automotive and Telecom products in the Linear Division and as Business Unit Manager for the Monolithic Microsystems Division from 1987 to 1988. He was appointed Director of Corporate Strategic Marketing and Key Accounts for the Headquarters Region in 1988 and became Vice President, Marketing and Sales, Americas Region in 1991. Mr. Bozotti served as Corporate Vice President, MPG from August 1998 through March 2005, after having served as Corporate Vice President, Europe and Headquarters Region from 1994 to 1998. In 2008, Mr. Bozotti was appointed Chairman of the Supervisory Board of Numonyx. As of February 1, 2009, he is Vice Chairman of the Board of Directors of ST-Ericsson.
 
Alain Dutheil was appointed Chief Operating Officer in 2005, with the endorsement of the Supervisory Board. He is also the Vice Chairman of our Corporate Executive Committee. Prior to his appointment as COO, he served as Corporate Vice President, Strategic Planning and Human Resources from 1994 and 1992, respectively. After graduating in Electrical Engineering from the Ecole Supérieure d’Ingénieurs de Marseille (“ESIM”), Mr. Dutheil joined Texas Instruments in 1969 as a Production Engineer, becoming Director for Discrete Products in France and Human Resources Director in France in 1980 and Director of Operations for Portugal in 1982. He joined Thomson Semiconductors in 1983 as General Manager of a plant in Aix-en-Provence, France and then became General Manager of SGS-Thomson Discrete Products Division. From 1989 to 1994, Mr. Dutheil served as Director for Worldwide Back-end Manufacturing, in addition to serving as Corporate Vice President for Human Resources from 1992 until 2005. From August 2008 through January 2009, Mr. Dutheil acted as CEO for our joint venture ST-NXP Wireless, and from February 1, 2009 through November 15, 2009, was the CEO of ST- Ericsson.
 
Orio Bellezza, most recently the Assistant General Manager of Front-End Technology and Manufacturing, was promoted to Executive Vice President in January 2008 and also stepped into the role of General Manager, Front-End Manufacturing. Born in Bergamo (Italy), he graduated with honors in Chemistry with a thesis in Theoretical Chemical- Physics from Milan University in 1983. Bellezza joined a precursor company to STMicroelectronics in 1984Georges Auguste currently serves as a process engineer and later on worked in technology development. He has helped ST build and launch several wafer fabs and he managed the Agrate R1 and R2 R&D and manufacturing facilities where generations of nonvolatile memory and smart-power technologies were developed and produced.
Laurent Bosson is currently Executive Vice President of Front-End Technology and Manufacturing. He is also a member of our Corporate Executive Committee. He served as Corporate Vice President, Front-end Manufacturing and VLSI Fabs from 1989 to 2004 and from 1992 to 1996 he was given additional responsibility as President and Chief Executive Officer of our operations in the Americas. Mr. Bosson remains Chairman of the Board of STMicroelectronics Inc., our affiliate in the United States. Mr. Bosson received a masters’ degree in Chemistry from the University of Dijon in 1969. He joined Thomson-CSF in 1964 and has held several positions in engineering and manufacturing. In 1982, Mr. Bosson was appointed General Manager of the Tours and Alençon facilities of Thomson Semiconducteurs. In 1985, he joined the French subsidiary of SGS Microelettronica as General Manager of the Rennes, France manufacturing facility.
Jean-Marc Chery, former General Manager of Front- and Back-End Manufacturing operations in Asia Pacific, was promoted to Executive Vice President in January 2008 and stepped into the newly created post of Chief Technology Officer. He graduated from the National Superior School for Engineering, ENSAM France in 1984. Chery joined the Discrete Division of Thomson Semiconducteurs in 1986 and, early in 2001, he joined our Central Front-End Manufacturing organization as General Manager of the Rousset200-mm plant orchestrating the expansion of200-mm production. Chery later moved to Singapore, where he led our150-mm wafer restructuring and managed our Asia-Pacific fabs, the largest high-capacity fabs in the Company.


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Andrea Cuomo, Executive Vice President for the Advanced System Technology Group, assumed the additional responsibilities of General Manager of our Europe Region in January 2008. Mr. Cuomo is also a member of our Corporate Executive Committee. After studying at Milano Politecnico in Nuclear Sciences, with a special focus on analog electronics, Mr. Cuomo joined us in 1983 as a System Testing Engineer, and from 1985 to 1989 held various positions to become Marketing Manager in the automotive, computer and industrial product segment. In 1989, Mr. Cuomo was appointed Director of Strategy and Market Development for the Dedicated Products Group, and in 1994 became Vice President responsible for Marketing and Strategic Accounts within the Headquarters Region. In 1998, Mr. Cuomo was appointed as Vice President responsible for Advanced System Technology and in 2002, Mr. Cuomo was appointed as Corporate Vice President and Advanced System Technology General Manager. In 2004, he was given the additional responsibility of serving as our Director of Strategic Planning and was promoted to Executive Vice President.
Carlo Ferro is Executive Vice President and Chief Financial Officer. He is also a member of our Executive Committee. Mr. Ferro has served as our CFO since May 2003. Mr. Ferro graduated with a degree in Business and Economics from the LUISS Guido Carli University in Rome, Italy in 1984, and has a professional qualification as a Certified Public Accountant. From 1984 through 1996, Mr. Ferro held a series of positions in finance and control at Istituto per la Ricostruzione Industriale-IRI S.p.A. (“IRI”), and Finmeccanica. Mr. Ferro served as one of our Supervisory Board Controllers from 1992 to 1996. Mr. Ferro was also a part-time university professor of Planning and Control until 1996. From 1996 to 1999, Mr. Ferro held positions at EBPA NV, a process control company listed on the NYSE, rising to Vice President Planning and Control and principal financial officer. Mr. Ferro joined us in June 1999 as Group Vice President Corporate Finance, overseeing finance and accounting for all affiliates worldwide, and served as Deputy CFO from April 2002 through April 2003. Mr. Ferro holds positions on the board of directors of several of ST’s affiliates. He is also a part-time professor of finance at the University LUISS Guido Carli in Rome (Italy).
Carmelo Papa is our Executive Vice President, Quality, Education and General Manager of our Industrial & Multisegment Sector. He is also a member of our Corporate Executive Committee. He received his degree in Nuclear Physics at Catania University. Mr. Papa joined us in 1983 and in 1986 was appointed Director of Product Marketing and Customer Service for Transistors and Standard ICs. In 2000, Mr. Papa was appointed Corporate Vice President, Emerging Markets and in 2001, he took on additional worldwide responsibility for our Electronic Manufacturing Service to drive forward this new important channel of business. From January 2003 through December 2004, he was in charge of formulating and leading our strategy to expand our customer base by providing dedicated solutions to a broader selection of customers, one of our key growth areas. In 2005, he was named Corporate Vice President, MPA.
Tommi Uhari was promoted to Executive Vice President and General Manager of the Mobile, Multimedia & Communications Group in January 2007. Mr. Uhari is also a member of our Executive Committee. After graduating from the University of Oulu with a Master’s degree in Industrial Engineering and Management, Mr. Uhari worked at Nokia in various R&D and management positions. He started as a design engineer, working on digital ASICs for mobile phones. In 2004, he was promoted Vice President, Head of Wireless platforms. Mr. Uhari joined our Company in 2006 as the Manager of the Personal Multimedia Group.
Enrico Villa is currently Executive Vice President, Europe Region. He also serves on our Executive Committee, representing the sales and marketing functions. He was appointed Corporate Vice President, Europe Region on January 1, 2000, after having served as Corporate Vice President, Region 5 (now Emerging Markets) from January 1998 through 2000. Mr. Villa has served in various capacities within our management since 1967 after obtaining a degree in Business Administration from the University of Milan and has 40 years of experience in the semiconductor industry. He is currently President of the European Electronics Components Association (“EECA”) as well as Chairman for Europe at the Joint Steering Committee of the World Semiconductor Council.
Georges Auguste has served as Corporate Vice President, Total Quality and Environmental Management since 1999.Sustainable Development. Mr. Auguste received a degree in Engineering from the Ecole Supérieure d’Electricité (“SUPELEC”) in 19741973 and a diploma in Business Administration from Caen University in 1976. Prior to joining us, Mr. Auguste worked with Philips Components from 1974 to 1986, in various positions in the field of manufacturing. From 1990 to 1997, he headed our operations in Morocco, and from 1997 to 1999, Mr. Auguste served as Director of Total Quality and Environmental Management.
 
Orio Bellezza, Executive Vice President and General Manager, Front-End Manufacturing, is responsible for all of our wafer fabrication operations and facilities. He graduated with honors in Chemistry from Milan University in 1983. He joined SGS-ATES in 1984 as a Process Engineer and after two years moved to the Central R&D department, where he worked first as a Development Engineer and later as the Process Integration Manager, responsible for submicron EPROM (Erasable Programmable Read-Only Memories) process technology modules. In 1996, Bellezza was named Director of the Agrate R1 Research and Development facility. In 2002, he was appointed Vice President of Central R&D and then in 2005 was named Vice President and Assistant General Manager of Front-End Technology and Manufacturing. Bellezza also served on the Board of the ST-Hynix memory-manufacturing joint venture established in Wuxi (China).
Gian Luca Bertino is our Corporate Vice President, Computer and Communications Infrastructure. He graduated in 1985 in Electronic Engineering from the Polytechnic of Turin. From 1986 to 1997 he held several positions within the Research and Development organization of Olivetti’s semiconductor group before joining ST in 1997. HePreviously, he was Group Vice President, Peripherals, General Manager of our Data Storage Division within the Telecommunications, Peripherals and Automotive (TPA) Groups, until he was appointed Corporate Vice President, CPG.


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Ugo Carena graduated in Mechanical Engineering from the Polytechnic of Turin in 1970. His semiconductor career began in 1977 within Olivetti’s semiconductor group. He joined ST in 1997 and he held the position of Telecommunications, Peripherals and Automotive (TPA) Groups Vice President, General Manager Computer Peripherals and Industrial Group, until he was named Corporate Vice President, APG in 2005.Groups.
 
Marco Luciano Cassis is Corporate Vice President, Japan region. He graduated from the Polytechnic of Milan with a degree in Electronic Engineering. Cassis joined us in 1988 as a mixed-signal analog designer for car radio applications. In 1993, Cassis moved to Japan to support our newly created design center with his expertise in audio products. Then in 2000, Cassis took charge of the Audio Business Unit and a year later he was promoted to Director of Audio and Automotive Group, responsible for design, marketing, sales, application support, and customer services. In 2004, Cassis was named Vice President of Marketing for the automotive, computer peripheral, and telecom products. In 2005, he advanced to Vice President APGAutomotive Segment Group and joined the Board of the Japanese subsidiary, STMicroelectronics K.K. Mr. Cassis was appointed Corporate Vice President, Japan region on September 6, 2005.
 
Patrice Chastagner is Corporate Vice President, Human Resources. He is a graduate of the HEC business school in France and in 1988 became the Grenoble Site Director, guiding the emergence of this facility to become one of the most important hubs in Europe for advanced, complex silicon chip development and solutions. As Human Resources Manager for the Telecommunications, Peripherals and Automotive (TPA) Groups, which was our largest


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product group at the time, he was also TQM Champion and applied the principle of continuous improvement to human resources as well as to manufacturing processes. Since March 2003, he has also been serving as Chairman of STMicroelectronics S.A. in France. Upon
Jean-Marc Chery is our Executive Vice President and Chief Technology Officer, where his promotionresponsibilities include our corporate technology R&D, as well as the production at the Company’s 12” (300mm) Crolles wafer fab. He graduated from the National Superior School for Engineering, ENSAM France in 1984. He began his professional career in 1985 with MATRA SA in its Quality organization and by the end of 1986 had joined the Discrete Division of Thomson Semiconducteurs, located in Tours, where he remained until the beginning of 2001, first as Division Planning and Front-End Production Control Manager and later as the Front-End Operation Manager. Early in 2001, Chery joined our Central Front-End Manufacturing organization as General Manager of the Rousset 8” (200mm) plant, eventually assuming responsibilities for the 6” and 8” wafer fab operations at the site. In 2005, Chery successfully led our restructuring program for 6” front-end wafer manufacturing and he moved to Singapore, where, in 2006, his efforts earned him the responsibility for our Asia-Pacific Front-End Manufacturing operations and EWS (electrical wafer-sort) operations. In February 2009, he was appointed a member of ST-Ericsson’s Board of Directors. He is also Chairman of ST Microelectronics, Crolles 2, SAS, and, in September 2009, he was appointed a deputy of ST-Ericsson’s Board of Directors. Since October 2009, he has been in charge of Information communication Technology.
Andrea Cuomo is Executive Vice President and General Manager, Sales & Marketing, Europe, Middle East and Africa. After studying at Milano Politecnico in Nuclear Sciences, with a special focus on analog electronics, Mr. Cuomo joined us in 1983 as a System Testing Engineer, and from 1985 to 1989 held various positions to become Automotive Marketing Manager, then computer and industrial product manager . In 1989, Mr. Cuomo was appointed Director of Strategy and Market Development for the Dedicated Products Group, and in 1994 became Vice President of the Headquarters Region, responsible for Corporate Strategic Marketing and for Sales and Marketing to ST Strategic Accounts. In 1998, Mr. Cuomo was appointed as Vice President responsible for Advanced System Technology and in 2002, Mr. Cuomo was appointed as Corporate Vice President Human Resources in January 2005,and Advanced System Technology General Manager. In 2004, he tookwas given the leadershipadditional responsibility of a group with about 50,000 people.serving as our Chief Strategy officer and was promoted to Executive Vice President. Since 2008, he has been responsible for EVP, GM, EMEA and AST.
 
Claude Dardanne was promoted tois Corporate Vice President and General Manager of our newly created Microcontrollers, Memories & Smartcards (MMS) Group, part of our Industrial & MultisegmentMulti-segment Sector, in January 2007. Mr. Dardanne graduated from the Ecole Supérieure d’Ingénieurs en Génie Electrique de Rouen in France with a Master’s degree in Electronic Engineering. After graduation, Mr. Dardanne spent five years at Thomson Semiconducteurs in France before moving to North America as a Field Application Engineer. From 1982, Mr. Dardanne was responsible for marketing of Microcontrollers & Microprocessor products in North America and, in 1987, Mr. Dardanne was appointed Thomson’s Worldwide Marketing Manager for Microcontrollers & Microprocessors in France. In 1989, Mr. Dardanne joined Apple Computer, France, as Marketing Director, responsible for business development in segments including Industrial, Education, Banking and Communications. From 1991 to 1994, Mr. Dardanne served as Marketing Director at Alcatel-Mietec in Belgium and in 1994, Mr. Dardanne rejoined Thomson (which by then had merged with SGS Microelettronica) as Director of Central Marketing for the Memory Products Group (MPG). In 1998, Mr. Dardanne became the head of the EEPROM division. In 2002, Mr. Dardanne was promoted to Vice President of the Memory Products Group and General Manager of the Serial Non-Volatile Memories division and in 2004, he was promoted to Deputy General Manager, Memory Products Group, where his responsibilities included the management of our Smart CardSmartcard Division.
 
Carlo Ferro is Executive Vice President, Chief Financial Officer. Mr. Ferro has been serving as our CFO since May 2003. Mr. Ferro graduated with a degree in Business and Economics from the LUISS Guido Carli University in Rome, Italy in 1984, and has a professional qualification as a Certified Public Accountant in Italy. From 1984 through 1996, Mr. Ferro held a series of positions in finance and control at Istituto per la Ricostruzione Industriale-IRI S.p.A. (I.R.I), and Finmeccanica. Mr. Ferro served as one of our Supervisory Board Controllers from 1992 to 1996. Mr. Ferro was also a part-time university professor of Planning and Control until 1996. From 1996 to 1999, Mr. Ferro held positions at EBPA NV, a process control company listed on the NYSE, rising to Vice President Planning and Control and principal financial officer. Mr. Ferro joined us in June 1999 as Group Vice President Corporate Finance, overseeing finance and accounting for all affiliates worldwide, and served as Deputy CFO from April 2002 through April 2003. Mr. Ferro holds positions on the board of directors of several of our affiliates. He is also a part-time professor of finance at the University LUISS Guido Carli in Rome (Italy). As of February 1, 2009, he is a member of ST-Ericsson’s Board of Directors, as well as Chair of its Audit Committee. He is also the Chairman of Incard SA, our fully owned affiliate.


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Alisia Grenville joined ST in the newly created position ofis Corporate Vice President, Chief Compliance Officer in December 2007. In addition to her role as Chief Compliance Officer, she is also in charge of the Executive Secretariat of the Supervisory Board, heads the Company’s Internal Audit and chairs the Company’s Ethics Committee. Born in Montreal, Canada, she earned a degree in French and ItalianOfficer. She graduated from Queen’s University in Kingston, Ontario with an honor’s degree in French and Italian and from the University of Sussex with a bachelor in law (LLB) from the University of Sussex. Ms.. Between 1999 and 2004, Grenville has worked in top-tier American law firms as a corporate associate, specializing in bank finance, capital markets and M&A transactions, as well as governance, based in both New York and hasFrankfurt. In 2004, Grenville became a Senior Compliance Officer at Zurich Financial Services in Zurich. In 2005, she became the Head of Legal Compliance for Serono, S.A. in Geneva, and she joined ST in December 2007. Grenville is also in charge of the Executive Secretariat of the Supervisory Board, and supervises the Company’s Internal Audits in addition to chairing the Company’s Ethics Committee.
Paul Grimme was born in 1959 in Yankton, South Dakota, and graduated from the University of Nebraska (Lincoln) with a degree in Electrical Engineering and from the University of Texas (Austin) with a Master of Business Administration. Grimme began his career at Motorola, where he held senior compliance positions of increasing responsibility in product engineering, marketing and operations management. He served as Corporate Vice President and General Manager of the 8/16-bit Products Division. In 1999, Grimme was promoted to Vice President and General Manager of the Advanced Vehicle Systems Division. He was later appointed Senior Vice President of the Transportation and Standard Products Group and continued in that role at other international corporations.Freescale Semiconductor after Motorola spun off its semiconductor business. Grimme also served as Senior Vice President and General Manager of Freescale Semiconductor’s Microcontroller Solutions Group. Grimme joined STMicroelectronics as Deputy General Manager of the Automotive Product Group in early 2009. Grimme was promoted as Corporate Vice President and General Manager of STMicroelectronics’ Automotive Product Group in September 2009.
 
François Guibert is Corporate Vice President, President, Greater China & South Asia Region. He was born in Beziers, France in 1953 and graduated from the Ecole Supérieure d’Ingénieurs de Marseilles in 1978. After three years at Texas Instruments, he joined Thomson Semiconducteurs in 1981 as Sales Manager Telecom. From 1983 to 1986, he was responsible for ICs and strategic marketing of telecom products in North America. In 1988 he was appointed Director of our SemicustomSemi-custom Business for Asia Pacific and in 1989 he became President of ST-Taiwan. Since 1992 he has occupied senior positions in Business Development and Investor Relations and was Group Vice President, Corporate Business Development which includes M&A activities from 1995 to the end of 2004. In January 2005, Mr. Guibert was promoted to the position of Corporate Vice President, Emerging Markets Region and in October 2006, he was appointed Corporateto his current position. In 2008, Mr. Guibert was appointed a member of Veredus’ Board of Directors.
Tjerk Hooghiemstra is Executive Vice President, Chief Administrative Officer, responsible for the Company’s Human Resources, Health and CEO, Asia Pacific Region.
Reza KazerounianSafety, Education, Legal, Internal Communication, Security, and Corporate Responsibility. He has held this position since February 2010 and is a graduatemember of our Corporate Strategic Committee. He began his career at AMRO Bank. Later he joined HayGroup, a leading global HR consultancy, where he rose through the Universityranks to become the European head of IllinoisHayMcBer, the group’s HR and received his PhD from the Universityleadership development arm, in 1991. Five years later, Hooghiemstra joined Philips Consumer Electronics as Managing Director of California, Berkeley in electrical engineering and computer sciences.Human Resources. In 1985, Mr. Kazerounian started his professional career as a research and development engineer at WaferScale Integration (WSI), specializing in Programmable System Devices. At WSI, he became Vice President of Technology and Product Development (1995) and later Chief Operating Officer in 1997. When we acquired WSI in 2000, Mr. Kazerounian became the


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general manager of the newly formed Programmable Systems Division, charged with the development of 8-bit and 32-bit embedded systems. In 2003, he was appointed a member of Royal Philips Electronics’ Group Management Committee, responsible for Corporate Human Resources of the 160,000-employee global electronics group. In this position, Hooghiemstra successfully developed global HR processes, policies and tools across all Philips’ businesses, establishing leading-edge talent and leadership development programs. In2007-2009, Hooghiemstra served as Executive Vice President, Human Resources, at the Majid Al Futtaim retail and General Manager ofreal-estate group in Dubai, UAE. Tjerk Hooghiemstra was born in Hoogeveen, The Netherlands in 1956. He graduated with a degree in Economics from the Smart Card IC Division. Mr. Kazerounian was appointed Corporate Vice President for the North America Region on September 6, 2005.Erasmus University in Rotterdam, The Netherlands.
 
Otto Kosgalwies was appointed Corporateis Executive Vice President, Infrastructure and Services, in November 2004, with responsibility for all of our corporate activities related to Information Technology,Capacity Planning, Logistics, and Procurement and Material Management, with particular emphasis on the complete supply chain between customer demand, manufacturing execution, inventory management, and supplier relations. Mr. Kosgalwies has been with us since 1984 after graduating with a degree in Economics from Munich University. From 1992 through 1995, he served as European Manager for Distribution, from 1995 to 2000 as Sales and Distribution Director for Central Europe, and since 1997 as CEO of our German subsidiary. In 2000, Mr. Kosgalwies was appointed Vice President for Sales and Marketing in Europe and General Manager for Supply Chain Management, where he was responsible at a corporate level for the effective flow of goods and information from suppliers to end users. In December 2007, he was promoted Executive Vice President and became responsible for capacity and investment planning at the corporate level.
 
Robert Krysiak is Corporate Vice President and General Manager, Greater China Region, and focuses exclusively on our operations in China, Hong Kong and Taiwan. He graduated from Cardiff University with a degree in Electronics and holds an MBA from the University of Bath. In 1983, Mr. Krysiak joined INMOS, as a VLSI Design Engineer. Then in 1992, Mr. Krysiak formed a group dedicated to the development of CPU products


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based on the Reusable-Micro-Core architecture. Mr. Krysiak was appointed Group Vice President and General Manager of our16/32/64 and DSP division in 1997. In 1999, Mr. Krysiak became Group Vice President of the Micro Cores Development, and in 2001, he took charge of our DVD division. Mr. KrysiakHe was appointed on October 17, 2005 as Corporate Vice President and General Manager of our Greater China region, which focuses exclusively on our operations in China, Hong Kong and Taiwan. Before that, Mr. Krysiak wasa Marketing Director for HPC.HPC before assuming his current responsibilities.
 
Philippe Lambinet is Executive Vice President, General Manager Home Entertainment & Displays Group. He graduated from the Paris Ecole Supérieure d’Electricité in 1979 with a Master’s Degree in Electronics. He began his professional career as a software engineer with Control Data Corporation in 1979 and in 1980 joined Thomson’s semiconductor subsidiary EFCIS to work in product engineering.Application Enginering. He later supervised ASIC Operations at Thomson’s Mostek Corporation in Carrollton, Texas and in 1990 took charge of design and marketing for Mixed Signal SemicustomSemi-custom Products within the Company’s Programmable Products Group. In 1997, he became Group Vice President and General Manager of the Digital Video Division. He then joined Advanced Digital Broadcast Group (ADB) as CEO of ADB-SA and became CEOCOO of ADB Holdings SA and Vice Chairman. Philippe Lambinet rejoined STMicroelectronics as Corporate Vice President, General Manager Home Entertainment & Displays Group in August 2007.
Mario Licciardello was born in Catania, Italy, on January 28, 1942. He graduated in Physics from the University of Catania in 1964. Mr. Licciardello has spent his entire career within companies that have evolved into the current STMicroelectronics. In 1965 he joined ATES, a predecessor of ST, initially in process development, then in strategic planning, after one year spent at the Catania University engaged in various research programs. In 1970, he joined the MOS field where he spent a large part of his professional career in various positions ranging from Operations Manager to Business Unit Manager contributing to the success in the market of several product lines. From 1986 to 1990 he covered the role of Director of Marketing and Business Management for the Semicustom Product Division (named IST). The position included the worldwide responsibility for the external design centers network. From 1990 to 1993, as Director of Corporate Strategic Planning with the relevant Corporate Central Organization, his responsibility ranged from Capital Investment Control to shareholder relations. He moved to MPG in 1993 and in 2003 was promoted from General Manager of our Flash Memories Division to Deputy General Manager of MPG. In 2005, he was named Corporate Vice President and General Manager of MPG. In 2007, he became Corporate Vice President and General Manager of FMG, which incorporates all Flash memory operations, including R&D, all product related activities, front-end and back-end manufacturing, marketing and sales worldwide.
 
Loïc Liétar is a Corporate Vice President and Chief Strategic Officer of STMicroelectronics, and has held this position since January 2008. He is responsible for the Company’s Strategic Planning, Corporate Business Development, and Corporate Communication (since February 2010). Liétar also sits on the Board of Directors of ST-Ericsson. Liétar joined Thomson Semiconducteurs, a predecessor company to STMicroelectronics, in 1985. After working in R&D Management and Marketing, he was appointed Director of the Company’s Advanced Systems Technology (AST) labs in the US in 1999. Four years later, Liétar became General Manager of ST’s Cellular Terminals Division, and later moved to head the Application Processor Division, which brought to market ST’s leading-edge Nomadik mobile multimedia processor. In 2006, he was appointed Group Vice President, Strategies, and contributed to establishing ST’s R&D partnership with IBM and two joint ventures — the Numonyx flash-memory joint venture with Intel and ST-Ericsson, combining the wireless operations of ST, NXP and Ericsson. Liétar sits on the Board of Directors of the Global Semiconductor Alliance (GSA). Loïc Liétar was born in Paris, France, in 1962. He graduated with a degreedegrees in Engineering and Microelectronics from the EcoleÉcole Polytechnique Paris, in 1984, a degree in Microelectronics fromand Orsay University (1985),in Paris, respectively, and he holds an MBA from Columbia University, New York (1993). Liétar joined Thomson Semiconducteurs in 1985 as an analog IC designer in Grenoble, France. Between 1987 and 1998 he held several positions in R&D Management and Marketing in Milan, Paris and Singapore. In 1999, he was appointed Direct of Advanced System Technologies U.S. Labs, and in 2003, was named General Manager of ST’s Cellular Terminals Division, later moving to ST’s Application Processor Division. In 2006, Loïc Liétar was promoted to Group Vice President, Strategies, for ST’s Strategies and System Technologies Group and, in January 2008, was appointed Corporate Vice President, Corporate Business Development.York.
 
Pierre Ollivier previously Group Vice President, Corporate General Counsel, was promoted tois Corporate Vice President, and General Counsel, responsible for all legal matters and the management and valorization of our


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valuable Intellectual Property, in January 2008.Counsel. He was born in London (UK) and obtained hisa Law Degree at Caen University in 1976 and a postgraduate degree in International Business law at Paris I1 University in 1978. Having started his career withAfter graduation, he joined Clifford ChanceTurner (now Clifford Chance) and then, in Paris, Mr. Ollivier worked for1982, joined Stein Heurtey, an engineering company, as corporate counsel, andfirm, where he was responsible for legal affairs. In 1984, Ollivier joined Thomson CSF where he first worked in the Electronics systems and equipment branch, later moving to corporate headquarters. Ollivier became general counsel of STMicroelectronics in 1990, a position he has held since. From 1994 until 2007, he also acted as Executive Secretary to the Secretariat of the Supervisory Board. In January 2008, Ollivier was promoted to Corporate Vice President, General Counsel. In addition to legal department of Thomson CSF specializing inmatters involving contracts, litigation and general corporate restructuringmatters, his responsibilities include developing the protection and M&A matters before joining usextraction of value from ST’s Intellectual Property, as general counsel in 1990.well as the negotiation and management of worldwide insurance programs for ST’s global group of companies.
 
Carlo Emanuele Ottaviani was namedis Corporate Vice President, Communications in March 2003.Communication. He began his career in 1965 in the Advertisement and Public Relations Office of SIT-SIEMENS, today known as ITALTEL. Since the beginning, heHe later had responsibilities inresponsibility for the activities of the associated semiconductor company ATES Electronic Components. ATES merged with the Milan-based SGS in 1971, and Mr. Ottaviani was in charge of the advertisement and marketing services of the newly formed SGS-ATES. In 1975, he was appointed Head of Corporate Communication worldwide, and has held this position since that time. In 2001, Mr. Ottaviani was also appointed President ofby STMicroelectronics Foundation.Foundation, an independent charitable organization, as its President.
 
Jeffrey SeeCarmelo Papa is our Executive Vice President and General Manager of our Industrial & Multi-segment Sector. He received his degree in Nuclear Physics at Catania University. Mr. Papa joined us in 1983 and in 1986 was appointed Director of Product Marketing and Customer Service for Transistors and Standard ICs. In 2000, Mr. Papa was appointed Corporate Vice President, Central Back-endEmerging Markets and in 2001, he took on additional worldwide responsibility for our Electronic Manufacturing Service to drive forward this new important channel of business. From January 2003 through December 2004, he was in charge of formulating and leading our strategy to expand our customer base by providing dedicated solutions to a broader selection of customers, one of our key growth areas. In 2005, he was named Corporate Vice President.
Jeffrey See is our Executive Vice President and General Manager, in April 2006.Central Packaging & Test Manufacturing. After Mr. See graduated from the Singapore Polytechnic in 1965, he became a Chartered Electronic Engineer at the Institution of Electrical Engineers (IEE) in the UK. In 1969, Mr. See joined SGS Microelettronica, a forerunner company of ST, as a Quality Supervisor at its first Assembly and Test facility in Toa Payoh, Singapore and was promoted to Deputy Back-End Plant Manager in 1980. In 1983, Mr. See was appointed to manage thestart-up of the


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region’s first wafer fabrication plant(125-mm) in Ang Mo Kio, Singapore and became General Manager of the front-end operations in 1992. In 2001, Mr. See was appointed Vice President and Assistant General Manager of Central Front-End Manufacturing and General Manager of the Asia Pacific Manufacturing Operations, responsible for wafer fabrication and electrical wafer sort in the region.
Thierry Tingaud was promoted to Corporate Vice President, Emerging Markets Region General Manager, responsible for our sales and marketing operations in Africa and the Middle East, India, Latin America, Russia and the Eastern European countries in July 2006. Mr. Tingaud graduated from INSA Lyon in 1982 with a Master’s degree in Electronic Engineering and he also holds an MBA from Ecole Supérieure des Sciences Economiques et Commerciales (ESSEC). Mr. Tingaud joined the sales and marketing organization of Thomson Semiconducteurs, a forerunner company of ST, in 1985. Three years later, he took responsibility for the Company’s telecommunications business in France. In 1996, Mr. Tingaud moved to North America as Corporate Strategic Key Account Director for our Headquarters Region. In this role, he strengthened the strategic alliance with a major key account, responsible for its operations in Europe, North America, Mexico, and Malaysia. In 1999, Mr. Tingaud was appointed Vice President for Sales and Marketing of Telecommunications in Europe.
 
As is common in the semiconductor industry, our success depends to a significant extent upon, among other factors, the continued service of our key senior executives and research and development, engineering, marketing, sales, manufacturing, support and other personnel, and on our ability to continue to attract, retain and motivate qualified personnel. The competition for such employees is intense, and the loss of the services of any of these key personnel without adequate replacement or the inability to attract new qualified personnel could have a material adverse effect on us. We do not maintain insurance with respect to the loss of any of our key personnel. See “Item 3. Key Information — Risk Factors — Risks Related to Our Operations — Loss of key employees could hurt our competitive position.”
 
Compensation
 
Pursuant to the decisions adopted by our shareholders at the annual shareholders’ meeting held on April 26, 2007,May 14, 2008, the aggregate compensation for the members and former members of our Supervisory Board in respect of


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service in 20072009 was $1,496,000€993,875 before any withholding taxes and applicable mandatory social contributions, as set forth in the following table.
 
     
Supervisory Board Member
 Directors’ Fees 
 
Gérald Arbola $228,500 
Raymond Bingham(1)  101,500 
Tom de Waard(2)  223,500 
Matteo del Fante  147,500 
Douglas Dunn  133,500 
Didier Lamouche  123,000 
Didier Lombard  156,500 
Alessandro Ovi(1)  113,000 
Bruno Steve  227,000 
Antonino Turicchi(1)  18,000 
Robert M. White(1)  24,000 
     
Total
 $1,496,000 
     
Supervisory Board Member
Directors’ Fees
Antonino Turicchi€146,875
Gérald Arbola€146,875
Raymond Bingham€98,375
Douglas Dunn€96,875
Didier Lamouche€86,250
Didier Lombard€88,125
Alessandro Ovi€75,875
Bruno Steve€97,375
Tom de Waard(1)€157,250
Total
€993,875
 
 
(1)Messrs. Antonino Turicchi and Robert M. White were Supervisory Board members until our 2007 annual shareholders’ meeting, at which time they were succeeded by Messrs. Raymond Bingham and Alessandro Ovi.
(2)Compensation, including attendance fees of $2,000 per meeting of theour Supervisory Board or committee thereof, was paid to Clifford Chance LLP.
 
We do not have any service agreements with members of our Supervisory Board.
 
The total amount paid as compensation in 20072009 to our 24 executive officers, including Mr. Carlo Bozotti, the sole member of our Managing Board and our President and CEO as well as executive officers employed by us during 2009, was approximately $14.16$15.3 million before any withholding taxes. Such amount also includes the amounts of EIP paid to the executive officers pursuant to a Corporate Executive Incentive Program (the “EIP”) that entitles selected executives to a yearly bonus based upon the individual performance of such executives. The maximum bonus awarded under the EIP is based upon a percentage of the executive’s salary and is adjusted to reflect our overall performance. The participants in the EIP must satisfy certain personal objectives that are focused,inter alia, on return on net assets, customer service, profit, cash flow and market share. The relative charges and non-cash benefits were approximately $5.93$10.6 million. Within such amount, the remuneration of our current sole member of our Managing Board and President and CEO in 20072009 was:
 
                                
Sole Member of Our Managing Board and President and CEO
 Salary(2) Bonus(1) Non-cash Benefits(3) Total 
Sole Member of Our Managing Board and
     Non-cash
  
President and CEO
 Salary(2) Bonus(1) Benefits(3) Total
Carlo Bozotti $714,089  $643,082  $377,881  $1,735,052  $933,474  $649,755  $884,662  $2,467,891 
 
 
(1)The bonus paid to the sole member of our Managing Board and President and CEO during the 20072009 financial year was approved by the Compensation Committee, and approved by the Supervisory Board in respect of the 20062008 financial year, based on fulfillment of a number of pre-defined objectives for 2006.2008.
 
(2)Our Supervisory Board, upon the recommendation of our Compensation Committee, approved an annual salary for 20072009 for our Managing Board and President and CEO of $700,000. The difference between the amount approved and the amount actually received by Mr. Bozotti resulted because the salary was paid partially in euros using$700,000, with an exchange rate of approximatelyfor the salary paid in Euro fixed at €1.00 to $1.20 and partiallyan exchange rate for the salary paid in Swiss francs using an exchange rateFrancs of approximately CHF 1.00 to $0.80.$0.90.


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(3)Including stock awards, employer social contributions, company car allowance and miscellaneous allowances.
 
Mr. Bozotti was appointedre-appointed as sole member of our Managing Board and President and Chief Executive Officer of our company by our annual shareholders’ meeting on March 18, 2005May 14, 2008 for a three-year period. At our annual shareholders’ meeting in 2008,2011, the mandate of Mr. Bozotti will expire. In each of 2005, 2006the years 2007, 2008 and 2007,2009, Mr. Bozotti was granted, pursuant toin accordance with the compensation policy appointedapproved by the shareholdersshareholders’ meeting, up to 100,000 Unvestednonvested Stock Awards. The vesting of such stock awards is conditional upon certain performance criteria, fixed by our Supervisory Board, being achieved andas well as Mr. Bozotti’s continued service with us.
 
In 2005,2009, our Supervisory Board approved the terms of Mr. Bozotti’s employment by us, upon terms which are consistent with the compensation policy approved by our 2005 annual shareholders’ meeting. Mr. Bozotti has two employment agreements with us, the first with our Dutch parent company, which relates to his activities as sole


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member of our Managing Board and representative of the Dutch legal entity, and the second in Switzerland, which relates to his activities as President and CEO, and contain all benefits including Unvested Share Awards, EIP, Pension and other items covered by the compensation policy approved by our shareholders.
 
Consistent with this compensation policy, the Supervisory Board, upon the recommendation of its compensation committee, fixed in March 2007set the criteria to be met for Mr. Bozotti for attribution of his 20072009 bonus (based on new product introductions, market share and budget targets, as well as corporate governance initiatives) and also decided to grant a super bonus of up to 60% based on special items linked to technology R&D, carve outs and decondolidation.. The Supervisory Board, however, has not yet ruled ondetermined the amount of the CEO bonus for 2007.2010.
 
With regard to Mr. Bozotti’s 20062008 nonvested stock awards, the Supervisory Board, upon the recommendation of its compensation committee concluded in 2007Compensation Committee, noted that all threeonly two out of the three performance criteria established by the Supervisory Boardlinked to sales, operations, income and return on net assets had been achieved.met under the Employee stock award Plan and concluded that Mr. Bozotti was therefore entitled to receive all 100,00066,666 stock awards, originally granted in 2006, which vest as defined by the Plan one year, two years and three years, respectively, after the date of the grant, provided Mr. Bozotti is still an employee at such time (subject to the acceleration provisions in the event of a change in control).
 
With regard to Mr. Bozotti’s 20072009 stock awards, the Supervisory Board upon recommendation of the Compensation Committee, fixedset the criteria for the attribution of the 100,000 stock awards.awards permitted. The Supervisory Board, however, has not yet determined whether the performance criteria which condition the vesting (and which, like for all employees benefiting from nonvested share awards, are linked to sales, operations, income and return on net assets) have been met.
 
During 2007,2009, Mr. Bozotti did not exercise any stock options granted to him, and did not sell any vested stock awards or purchase or sell any of our shares.
 
Our Supervisory Board has approved the establishment of a complementary pension plan for our top executive management, comprising the CEO, COO and other key executives to be selected by the CEO according to the general criteria of eligibility and service set up by the Supervisory Board upon the proposal of its Compensation Committee. In respect to such plan, we have set up an independent foundation under Swiss law which manages the Planplan and to which we make contributions. Pursuant to this plan, in 2009 we have made a contribution of $314,501$0.3 million to the plan of our current and former President and Chief Executive Officers, $591,634Officer, $0.6 million to the plan of our Chief Operating Officer, and $951,924$0.4 million to the plan for all other beneficiaries. The amount of pension plan payments made for other beneficiaries, such as former employees retired at the end of2006/2007in 2009 and no longer salaried in 20072009 were $1.79$0.5 million.
 
We did not extend any loans, overdrafts or warranties to our Supervisory Board members or to the sole member of our Managing Board and President and CEO. Furthermore, we have not guaranteed any debts or concluded any leases with our Supervisory Board members or their families, or the sole member of the Managing Board.
 
For information regarding stock options and other stock-based compensation granted to members of our Supervisory Board, the Managing Board and our executive officers, please refer to “— Stock Awards and Options” below.
 
The executive officerscurrent members of our Executive Committee and the Managing Board were covered in 20072009 under certain group life and medical insurance programs provided by us. The aggregate additional amount set aside by us in 20072009 to provide pension, retirement or similar benefits for executive officersour Executive Committee and our Managing Board as a group is in addition to the amounts allocated to the complementary pension plan described above and is estimated to have been approximately $1.86$3.3 million, which includes statutory employer contributions for state-run retirement, similar benefit programs and other miscellaneous allowances.


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Share Ownership
 
None of the members of our Supervisory Board and Managing Board or our executive officers holds shares or options to acquire shares representing more than 1% of our issued share capital.
 
Stock Awards and Options
 
Our stock options and stock award plans are designed to incentivize, attract and retain our executives and key employees by aligning compensation with our performance and the evolution of our share price. We have adopted stock-based compensation plans comprising either stock options or unvestednonvested stock awards and benefiting respectively tothat benefit our President and CEO andas well as key employees (“employee(employee stock options”optionsand/or “employee unvestedemployee nonvested stock award plans”),plans) and stock options or vested stock awards tothat benefit our Supervisory Board members and professionals (“Supervisory(Supervisory Board stock options”optionsand/or “stockstock award plans”)plans).


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Following changes in accounting and tax treatment of stock options, we have since 2005 transitioned our stock-based compensation plans from stock-option grants to vested or unvested stock awards. Pursuant to the shareholders’ resolutions adopted by our 2005, 20062007, 2008 and 20072009 annual shareholders’ meeting, our Supervisory Board, upon the proposal of the Managing Board and the recommendation of the Compensation Committee, took the following actions:
 
 • approved the terms and conditions of the 2005 Supervisory Board Stock-Based Compensation Plan for members and professionals valid for a three year period;
• amended our 2001 Employee Stock Option Plan which expired at the end of 2005 with the aim of enhancing our ability to retain key employees and motivate them to shareholder value creation, by replacing stock options to be granted in the last year of such Plan by unvested stock awards and in addition, approved the vesting conditions, linked to our future performance and continued service with us;
• approved grants pursuant to the 2005 stock-based compensation plan for Supervisory Board members and professionals approved by our 2005 annual shareholders’ meeting and amended byat our 2007 annual shareholders’ meeting;
 
 • adopted our 2006 Unvested Stock Award Plan for Executives and Key Employees (the “Employee USA Plan”) with the aim of enhancing our ability to retain key employees and motivate them to shareholder value creation and in addition approved vesting conditions linked to our future performance and continued service with us;
• adopted our 2007 Unvestednonvested Stock Award Plan for Executives and Key Employees (the “Employee USA Plan”) with the goal of enhancing our ability to retain key employees and motivate them to work to create shareholder value and, in addition, approved vesting conditions linked to our future performance and continued service with us;
• approved, for a five year period, our 2008 nonvested Stock Award Plan for Executives and Key Employees, under which directors, managers and selected employees may be granted stock awards upon the fulfillment of restricted criteria, such as those linked to our performance and continued service with us; and
 
 • reviewed preliminary information regardingapproved conditions relating to our 2009 nonvested stock award allocation under the 2008 Unvested Stock Award Plan, for Executives and Key Employees to be presentedincluding restriction criteria linked to our 2008 annual shareholders’ meeting.performance.
 
We are usinguse our treasury shares to cover the stock awards granted in 2005, 2006 and 2007 under the Employee USA Plans.Plans in 2007, 2008 and 2009. As of December 31, 2007, 2,867,1192009, 3,532,201 stock awards granted in relation to the 2005, 20062007, 2008 and 20072009 plans had vested, leaving an amount of 10,532,88131,985,739 treasury shares outstanding as of December 31, 2007.outstanding. The 20072009 Employee unvestednonvested stock award plan generated an additional charge of $7.8 million in the consolidated statements of income for 2007 of $18 million,2009, which corresponds to the cost per service in the year for all granted shares that are (or are expected to be) vested pursuant to the financial performance criteria being met..met.
 
The exercise of stock options and the sale or purchase of shares of our stock by the members of our Supervisory Board, the sole member of our Managing Board and President and CEO, and all our employees are subject to an internal policy which involves,inter alia,certain blackout periods.
 
Employee and Managing Board Stock-Based Compensation Plans
 
1995 Stock Option Plan.  On October 20, 1995, our shareholders approved resolutions authorizing the Supervisory Board for a period of five years to adopt and administer a stock option plan that provides for the granting to our managers and professionals of options to purchase up to a maximum of 33 million common shares (the “1995 Stock Option Plan”). We granted options to acquire a total of 31,561,941 shares pursuant to the 1995 Stock Option Plan as indicated.
The description of our 1995 Stock Option Plan as indicated in the following table, takes into consideration the 2:1 stock split effected on June 16, 1999 and the 3:1 stock split effected on May 5, 2000. The term “options outstanding” means options existing as of December 31, 2007 not cancelled or exercised by their respective beneficiaries (employees and members or professionals of our Supervisory Board). Options are cancelled either because the beneficiary waives them or because the beneficiary loses the right to exercise them when leaving the company (with the exception of retirement or termination of employment pursuant to collective plans or restructurings):
As of December 31, 2007 the total number of options exercised pursuant to the 1995 Stock Option Plan was 14,523,601; the number of options, which can no longer be exercised, because they have expired or been cancelled, was 11,091,608; and the number of options outstanding, which can still be exercised, was 5,946,732. These outstanding options correspond to 5,946,732 common shares, which could be issued.
2001 Stock Option Plan.  At the annual shareholders’ meeting on April 25, 2001, our shareholders approved resolutions authorizing the Supervisory Board, for a period of five years, to adopt and administer a stock option plan


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(in (in the form of five annual tranches) that providesprovided for the granting to our managers and professionals of options to purchase up to a maximum of 60 million common shares (the “2001 Stock Option Plan”). The amount of options granted to the sole member of our Managing Board and President and CEO is determined by our Compensation Committee, upon delegation from our Supervisory Board and, since 2005, ishas been submitted for approval by our annual shareholders’ meeting. The amount of stock options granted to other employees iswas made by our Compensation Committee on delegation by our Supervisory Board and following the recommendation of the sole member of our Managing Board and President and CEO. In addition, the Supervisory Board delegates each yeardelegated to the sole member of our Managing Board and President and CEO the flexibility to grant, each year, up to a determined number of share awards to our employees pursuant to the 2001 Stock Option Plan in special cases or in connection with an acquisition.
 
In 2005, our shareholders at our annual shareholders’ meeting adoptedapproved a modification to our 2001 Stock Option Plan so as to provide the grant of up to four million unvestednonvested stock awards instead of stock options to our senior executives and certain of our key employees, as well as the grant of up to 100,000 Unvestednonvested Stock Awards instead of stock options to our President and CEO. A total of 4,159,915 shares have been awarded pursuant to the modification of such Plan, which include shares that were awarded to employees who subsequently left our


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Company thereby forfeiting their awards. Certain forfeited share awards were subsequently reawardedawarded to other employees.
 
Pursuant to such approval, the Compensation Committee, upon delegation from our Supervisory Board, approved the conditions whichthat apply to the vesting of such awards. These conditions related to both to our financial performance, meetingpursuant to certain defined criteria in 2005 and during the first quarter of 2006, and to the continued presence of the beneficiaries of the nonvested stock awards at the defined vesting dates in 2006, 2007 and 2008,2008. Of the shares awarded, none remain outstanding but nonvested as of the beneficiaries of the unvested stock awards.December 31, 2009.
 
19952001 Plan (Employees)
October 20, 1995April 25, 2001
(outstanding grants)
 
             
  Special Grant Tranche 5 Special Grant Tranche 6 Special Grant Tranche 7
 
Date of Supervisory Board Meeting Jan 24, 2000 June 16, 2000 Sept 18, 2000 Dec 11, 2000 Dec 18, 2000 March 1, 2001
Total Number of Shares which may be purchased 150,000 5,331,250 70,000 2,019,640 26,501 113,350
Vesting Date Jan 24, 2003 June 16, 2002 Sept 18, 2002 Dec 11, 2002 Dec 18, 2002 March 1, 2003
Expiration Date Jan 24, 2008 June 16, 2008 Sept 18, 2008 Dec 11, 2008 Dec 18, 2008 March 1, 2009
Exercise Price $55.25 $62.01 $52.88 $50.69 $44.00 $31.65
Terms of Exercise 50% on 32% on 32% on 32% on 32% on 32% on
  Jan 24, 2003 June 16, 2002 Sept 18, 2002 Dec 11, 2002 Dec 18, 2002 March 1, 2003
  50% on 32% on 32% on 32% on 32% on 32% on
  Jan 24, 2004 June 16, 2003 Sept 18, 2003 Dec 11, 2003 Dec 18, 2003 March 1, 2004
    36% on 36% on 36% on 36% on 36% on
    June 16, 2004 Sept 18, 2004 Dec 11, 2004 Dec 18, 2004 March 1, 2005
Number of Shares to be acquired with Outstanding Options as of Dec 31, 2007 1,980 4,337,930 25,765 1,515,680 20,527 44,850
Held by Managing Board/Executive Officers 0 310,200 7,650 0 0 0


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2001 Plan (Employees)
April 25, 2001
(outstanding grants)
                            
 Tranche 1 Tranche 2 Tranche 3 Tranche 4 Tranche 5 Tranche 6 Tranche 7 Tranche 1 Tranche 2 Tranche 3 Tranche 4 Tranche 5 Tranche 6 Tranche 7
Date of the grant April 27, 2001 Sept 4, 2001 Nov 1, 2001 Jan 2, 2002 Jan 25, 2002 April 25, 2002 June 26, 2002 27-Apr-01 4-Sep-01 1-Nov-01 2-Jan-02 25-Jan-02 25-Apr-02 26-Jun-02
Total Number of Shares which may be purchased 9,521,100 16,000 61,900 29,400 3,656,103 9,708,390 318,600 9,521,100 16,000 61,900 29,400 3,656,103 9,708,390 318,600
Vesting Date April 27, 2003 Sept 4, 2003 Nov 1, 2003 Jan 2, 2004 Jan 25, 2003 April 25, 2004 June 26, 2004 27-Apr-03 4-Sep-03 1-Nov-03 2-Jan-04 25-Jan-03 25-Apr-04 26-Jun-04
Expiration Date April 27, 2011 Sept 4, 2011 Nov 1, 2011 Jan 2, 2012 Jan 25, 2012 April 25, 2012 June 26, 2012 27-Apr-11 4-Sep-11 1-Nov-11 2-Jan-12 25-Jan-12 25-Apr-12 26-Jun-12
Exercise Price $39.00 $29.70 $29.61 $33.70 $31.09 $31.11 $22.30 $39.00 $29.70 $29.61 $33.70 $31.09 $31.11 $22.30
Terms of Exercise 32% on 32% on 32% on 32% on 50% on 32% on 32% on 32% on 32% on 32% on 32% on 50% on 32% on 32% on
 April 27, 2003 Sept 4, 2003 Nov 1, 2003 Jan 2, 2004 Jan 25, 2003 April 25, 2004 June 26, 2004 27-Apr-03 4-Sep-03 1-Nov-03 2-Jan-04 25-Jan-03 25-Apr-04 26-Jun-04
 32% on 32% on 32% on 32% on 50% on 32% on 32% on 32% on 32% on 32% on 32% on 50% on 32% on 32% on
 April 27, 2004 Sept 4, 2004 Nov 1, 2004 Jan 2, 2005 Jan 25, 2004 April 25, 2005 June 26, 2005 27-Apr-04 4-Sep-04 1-Nov-04 2-Jan-05 25-Jan-04 25-Apr-05 26-Jun-05
 36% on 36% on 36% on 36% on   36% on 36% on 36% on
27-Apr-05		 36% on
4-Sep-05		 36% on
1-Nov-05		 36% on
2-Jan-06		   36% on
25-Apr-06		 36% on
26-Jun-06
 April 27, 2005 Sept 4, 2005 Nov 1, 2005 Jan 2, 2006   April 25, 2006 June 26, 2006
Number of Shares to be acquired with Outstanding Options as of December 31, 2007 7,867,140 16,000 47,010 24,300 2,924,247 8,278,324 140,906
Number of Shares to be acquired with Outstanding Options as of December 31, 2009 7,309,350 0 43,500 19,400 2,709,996 7,661,061 123,706
Held by Managing Board/Executive Officers 410,000 0 0 0 158,925 424,500 0 323,500 0 0 0 126,300 335,030 0
 
2001 Plan (Employees) (continued)
April 25, 2001
(outstanding grants)
 
                                        
 Tranche 8 Tranche 9 Tranche 10 Tranche 11 Tranche 12 Tranche 13 Tranche 14 Tranche 15 Tranche 16 Tranche 17 Tranche 8 Tranche 9 Tranche 10 Tranche 11 Tranche 12 Tranche 13 Tranche 14 Tranche 15 Tranche 16 Tranche 17
Date of the grant Aug 1, 2002 Dec 17, 2002 Mar 14, 2003 June 3, 2003 Oct 24, 2003 Jan 2, 2004 Apr 26, 2004 Sept 1, 2004 Jan 31, 2005 Mar 17, 2005 1-Aug-02 17-Dec-02 14-Mar-03 3-Jun-03 24-Oct-03 2-Jan-04 26-Apr-04 1-Sep-04 31-Jan-05 17-Mar-05
Total Number of Shares which may be purchased 24,500 14,400 11,533,960 306,850 135,500 86,400 12,103,490 175,390 29,200 13,000 24,500 14,400 11,533,960 306,850 135,500 86,400 12,103,490 175,390 29,200 13,000
Vesting Date Aug 1, 2004 Dec 17, 2004 Mar 14, 2005 June 3, 2005 Oct 24, 2005 Jan 2, 2006 Apr 26, 2006 Sept 1, 2006 Jan 31, 2007 Mar 17, 2007 1-Aug-04 17-Dec-04 14-Mar-05 3-Jun-05 24-Oct-05 2-Jan-06 26-Apr-06 1-Sep-06 31-Jan-07 17-Mar-07
Expiration Date Aug 1, 2012 Dec 17, 2012 Mar 14, 2013 June 3, 2013 Oct 24, 2013 Jan 2, 2014 Apr 26, 2014 Sept 1, 2014 Jan 31, 2015 Mar 17, 2015 1-Aug-12 17-Dec-12 14-Mar-13 3-Jun-13 24-Oct-13 2-Jan-14 26-Apr-14 1-Sep-14 31-Jan-15 17-Mar-15
Exercise Price $20.02 $21.59 $19.18 $22.83 $25.90 $27.21 $22.71 $17.08 $16.73 $17.31 $20.02 $21.59 $19.18 $22.83 $25.90 $27.21 $22.71 $17.08 $16.73 $17.31
Terms of Exercise 32% on 32% on 32% on 32% on 32% on 32% on 32% on 32% on 32% on 32% on 32% on 32% on 32% on 32% on 32% on 32% on 32% on 32% on 32% on 32% on
 Aug 1, 2004 Dec 17, 2004 Mar 14, 2005 June 3, 2005 Oct 24, 2005 Jan 2, 2006 Apr 26, 2006 Sept 1, 2006 Jan 31, 2007 Mar 17, 2007 1-Aug-04 17-Dec-04 14-Mar-05 3-Jun-05 24-Oct-05 2-Jan-06 26-Apr-06 1-Sep-06 31-Jan-07 17-Mar-07
 32% on 32% on 32% on 32% on 32% on 32% on 32% on 32% on 32% on 32% on 32% on 32% on 32% on 32% on 32% on 32% on 32% on 32% on 32% on 32% on
 Aug 1, 2005 Dec 17, 2005 Mar 14, 2006 June 3, 2006 Oct 24, 2006 Jan 2, 2007 Apr 26, 2007 Sept 1, 2007 Jan 31, 2008 Mar 17, 2008 1-Aug-05 17-Dec-05 14-Mar-06 3-Jun-06 24-Oct-06 2-Jan-07 26-Apr-07 1-Sep-07 31-Jan-08 17-Mar-08
 36% on 36% on 36% on 36% on 36% on 36% on 36% on 36% on 36% on 36% on 36% on 36% on 36% on 36% on 36% on 36% on 36% on 36% on 36% on 36% on
 Aug 1, 2006 Dec 17, 2006 Mar 14, 2007 June 3, 2007 Oct 24, 2007 Jan 2, 2008 Mar 14, 2008 Sept 1, 2008 Jan 31, 2009 Mar 17, 2009 1-Aug-06 17-Dec-06 14-Mar-07 3-Jun-07 24-Oct-07 2-Jan-08 14-Mar-08 1-Sep-08 31-Jan-09 17-Mar-09
Number of Shares to be acquired with Outstanding Options as of Dec 31, 2007 13,800 14,400 9,909,670 193,650 121,550 17,500 10,582,215 118,291 17,900 13,000
Number of Shares to be acquired with Outstanding Options as of December 31, 2009 13,100 14,400 9,298,738 167,950 112,150 11,700 9,886,815 110,666 17,300 6,000
Held by Managing Board/ Executive Officers 0 0 507,800 0 31,000 0 595,100 0 0 0 0 0 402,200 0 31,000 0 486,400 0 0 0
 
2006 Unvestednonvested Stock Award Plan
 
In 2006, our shareholders at our annual shareholders’ meeting approved the grant of up to five million unvestednonvested stock awards to our senior executives and certain of our key employees, as well as the grant of up to 100,000 Unvestednonvested Stock Awards to our President and CEO. 5,131,640 shares have been awarded under such Planplan as of December 31, 2007,2009, out of which up to 3,702,449none remain outstanding but unvested as of December 31, 2007.2009.
 
2007 Unvestednonvested Stock Award Plan
 
In 2007, our shareholders at our annual shareholders’ meeting approved the grant of up to six million unvestednonvested stock awards to our senior executives and certain of our key employees, as well as the grant of up to 100,000 Unvestednonvested Stock Awards to our President and CEO. 5,776,2905,911,840 shares have been awarded under such plan as of December 31, 2009, out of which up to 1,601,328 remain outstanding but nonvested as of December 31, 2009.


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2008 nonvested Stock Award Plan — 2008 Allocation
In 2008, our shareholders at our annual shareholders’ meeting approved the grant of up to six million nonvested stock awards to our senior executives and certain of our key employees, as well as the grant of up to 100,000 nonvested Stock Awards to our President and CEO. 5,773,705 shares have been awarded under such Plan as of December 31, 2007,2009, out of which up to 5,702,8001,411,702 remain outstanding but unvestednonvested as of December 31, 2007.2009.
2009 nonvested Stock Award Plan — 2009 Allocation
In 2009, our shareholders at our annual shareholders’ meeting approved the grant of up to six million nonvested stock awards to our senior executives and certain of our key employees, as well as the grant of up to 100,000 nonvested Stock Awards to our President and CEO. 5,583,540 shares have been awarded under such allocation as of December 31, 2009, out of which up to 5,540,740 remain outstanding but nonvested as of December 31, 2009.
 
Pursuant to such approval, the Compensation Committee, upon delegation from our Supervisory Board has approved the conditions which shall apply to the vesting of such awards. These conditions relate both to our financial performance meeting certain defined criteria in 2007,2009, and to the continued presence at the defined vesting dates in 2008, 20092010, 2011 and 20102012 of the beneficiaries of the unvestednonvested stock awards.


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Furthermore, the Compensation Committee, on behalf of the entire Supervisory Board and with the approval of the entire Supervisory Board, approved the list of beneficiaries of the unvested stock awards and delegated to our President and Chief Executive Officer the right to grant certain additional unvested stock awards to key employees, in exceptional cases, provided that the total number of unvested stock awards granted to executives and key employees shall not exceed for 20072009 six million shares. Pursuant to such authorization, the Managing Board, as authorized by the Compensation Committee of the Supervisory Board, granted on December 6, 2007 an additional 84,450 shares, and on February 19, 2008 an additional 135,500 to selected employees designated by the Managing Board as part of the Employee Plan. This additional grant has the same terms and conditions as the original plan.
 
The implementation of our Stock-Based Compensation Plan for Employees is subject to periodic proposals from our Managing Board to our Supervisory Board, and recommendations by the Compensation Committee of our Supervisory Board.
 
Supervisory Board Stock Option Plans
 
1999 Stock Option Plan for members and professionals of theour Supervisory Board.  A plan was adopted in 1999 for a three-year period expiring on December 31, 2001 (the “1999 Stock Option Plan”), providing for the grant of at least the same number of options as were granted during the period from 1996 to 1999.
 
2002 Stock Option Plan for members and professionals of theour Supervisory Board.  A 2002 Planplan was adopted on March 27, 2002 (the “2002 Stock Option Plan”). Pursuant to this 2002 Plan, the annual shareholders’ meeting authorized the grant of 12,000 options per year to each of the membersmember of our Supervisory Board during the course of his three-year tenure (during the three-year period from2002-2005), and of 6,000 options per year to all of the professionals. Pursuant to the 1999 and 2002 Plans, stock options for the subscription of 1,219,500819,000 shares were granted to the members of the Supervisory Board and professionals. Options were granted to members and professionals of our Supervisory Board under the 1999, and 2002 Stock Option Plans as shown in the table below:
 
1999 and 2002 Plans
(for Supervisory Board Members and Professionals)
(outstanding grants)
 
                    
Date of Annual
 May 31, 1999 March 27, 2002 May 31, 1999 March 27, 2002
Shareholders’ Meeting Tranche 2 Tranche 3 Tranche 1 Tranche 2 Tranche 3 Tranche 2 Tranche 3 Tranche 1 Tranche 2 Tranche 3
Date of the grant June 16, 2000 April 27, 2001 April 25, 2002 March 14, 2003 April 26, 2004 16-Jun-00 27-Apr-01 25-Apr-02 14-Mar-03 26-Apr-04
Total Number of Shares which may be purchased 103,500 112,500 132,000 132,000 132,000 103,500 112,500 132,000 132,000 132,000
Vesting Date June 16, 2001 April 27, 2002 May 25,2002 April 14, 2003 April 26, 2004 16-Jun-01 27-Apr-02 25-May-02 14-Apr-03 26-May-04
Expiration Date June 16, 2008 April 27, 2011 April 25,2012 March 14, 2013 April 26, 2014 16-Jun-08 27-Apr-11 25-Apr-12 14-Mar-13 26-Apr-14
Exercise Price $62.01 $39.00 $31.11 $19.18 $22.71 $62.01 $39.00 $31.11 $19.18 $22.71
 All exercisable All exercisable All exercisable All exercisable All exercisable
Terms of Exercise after 1 year after 1 year after 1 year after 1 year after 1 year All exercisable
after 1 year		 All exercisable
after 1 year		 All exercisable
after 1 year		 All exercisable
after 1 year		 All exercisable
after 1 year
Number of Shares to be acquired with Outstanding Options as of December 31, 2007 81,000 90,000 108,000 108,000 132,000
Number of Shares to be acquired with Outstanding Options as of December 31, 2009 0 90,000 108,000 108,000 132,000
 
As ofAt December 31, 20072009, options to purchase a total of 171,00090,000 common shares were outstanding under the 1999 Stock Option Plans. At the same date,Plan and options to purchase 348,000 common shares were outstanding under the 2002 Supervisory Board Stock Option Plan.


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2005, 2006 and 2007 Stock-based Compensation for members and professionals of the Supervisory Board.  Our 2005 annual shareholders’Annual Shareholders’ meeting approved the adoption of an amendment to the Stock Option Plana three year stock based compensation plan for Supervisory Board members and Professionals. The plan provided for the grant of a maximum number of 6,000 newly issued shares per year for each member of the Supervisory Board and 3,000 newly issued shares for each of the Professionals of the Supervisory Board. The amendment hasBoard at a price of €1.04 per share, corresponding to the following termsnominal value of our share. Pursuant to our 2007 annual shareholders’ meeting, the 2005 plan was modified as the maximum number was increased to 15,000 newly issued shares per year for each member of the Supervisory Board and conditions:7,500 newly issued shares per year for each professional of the Supervisory Board for the remaining year of the plan.
• A maximum number of 6,000 newly issued shares per year for each member of the Supervisory Board and 3,000 newly issued shares per year for each professional of the Supervisory Board and a subscription price of €1.04 per share, corresponding to the nominal value of our share.
• Our 2006 Annual Shareholders’ meeting approved the adoption of a three year stock based compensation plan for Supervisory Board members and Professionals. The Plan provided for the grant of a maximum number of 6,000 newly issued shares per year for each member of the Supervisory Board and 3,000 newly issued shares for each of the Professionals of the Supervisory Board at a price of €1.04 per share, corresponding to the nominal value of our share. Pursuant to our 2007 annual shareholders meeting, the 2006 plan was modified as the maximum number was increased to 15,000 newly issued shares per year for


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each member of the Supervisory Board and 7,500 newly issued shares per year for each professional of the Supervisory Board for the remaining year of the plan.
 
In 2005, 66,000 shares were granted to the beneficiaries under such plan, out of which 17,000 were outstandinghad completely vested as of December 31, 2007.
2008. In 2006, 66,000 shares were granted to the beneficiaries under such plan, out of which 34,000 were outstandinghad completely vested as of December 31, 2007.
2009. In 2007, pursuant to the approval of our annual shareholders’ meeting the number of stock awards granted to each Supervisory Board member and professional was increased, and 165,000 shares were granted to the beneficiaries under such plan, out of which 142,50045,000 were outstanding as of December 31, 2007.2009.
 
The table below reflects the grants to the Supervisory Board members and professionals under the 2005 Stock-Based Compensation Plan.Plan as of December 31, 2009. See Note 18.616 to our Consolidated Financial Statements.
 
                        
 2005 2006 2007  2005 2006 2007
Total number of shares outstanding  17,000   34,000   142,500 
Total number of Shares outstanding  0   0   45,000 
Expiration date  October 25, 2015   April 29, 2016   April 28, 2017   25-Oct-15   29-Apr-16   28-Apr-17 
2008, 2009 and 2010 Stock-based Compensation for members and professionals of the Supervisory Board.  Our 2008 annual shareholders’ meeting approved the adoption of a new three-year stock-based compensation plan for Supervisory Board members and professionals. This plan provides for the grant of a maximum number of 15,000 newly issued shares per year for each member of the Supervisory Board and 7,500 newly issued shares for each of the professionals of the Supervisory Board at a price of €1.04 per share, corresponding to the nominal value of our share. In 2008, 165,000 shares were granted to the beneficiaries under such plan, out of which 95,000 were outstanding as of December 31, 2009. In 2009, 165,000 shares were granted to the beneficiaries under such plan, out of which 157,500 were outstanding as of December 31, 2009.
The table below reflects the grants to the Supervisory Board members and professionals under the 2008 Stock-Based Compensation Plan as of December 31, 2009. See Note 16 to our Consolidated Financial Statements.
         
  Plan 2008 Plan 2009
 
Total number of Shares outstanding  95,000   157,500 
Expiration date  14-May-18   20-May-19 
 
Employees
 
The tables below set forth the breakdown of employees, including the employees of the consolidated entities of ST-Ericsson JVS, by main category of activity and geographic area for the past three years.
 
                        
 At December 31,  At December 31, 
 2007 2006 2005  2009 2008 2007 
France  10,560   10,660   10,330   10,960   10,790   10,560 
Italy  10,090   10,320   10,500   8,290   8,200   10,090 
Rest of Europe  1,730   1,580   1,550   3,200   2,320   1,730 
United States  3,120   3,280   3,120   2,000   3,250   3,120 
Malta and Morocco  6,990   7,330   6,900 
Mediterranean (Malta, Morocco, Tunisia)  4,630   5,840   6,990 
Asia  19,690   18,600   17,600   22,480   21,410   19,690 
              
Total  52,180   51,770   50,000   51,560   51,810   52,180 
              
 
             
  At December 31, 
  2007  2006  2005 
 
Research and Development  10,570   10,300   9,700 
Marketing and Sales  2,870   2,850   2,880 
Manufacturing  33,520   33,420   32,400 
Administration and General Services  2,570   2,600   2,550 
Divisional Functions  2,650   2,600   2,470 
             
Total  52,180   51,770   50,000 
             


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  At December 31, 
  2009  2008  2007 
 
Research and Development  12,330   11,900   10,570 
Marketing and Sales  2,640   2,670   2,870 
Manufacturing  31,300   32,290   33,520 
Administration and General Services  2,560   2,470   2,570 
Divisional Functions  2,730   2,480   2,650 
             
Total  51,560   51,810   52,180 
             
 
Our future success, in particularparticularly in a period of strong increased demand, will alsopartly depend on our ability to continue to attract, retain and motivate highly qualified technical, marketing, engineering and management personnel. Unions are represented at several of our manufacturing facilities. We use temporary employees, if required, during production spikes and, in Europe, during the summer vacations. We have not experienced any significant strikes or work stoppages in recent years, other than in Rennes, France in connection with the closure of this plant and managementyears. Management believes that our relations with employees are good.
 
As part of our commitment to the principles of PSE, we founded ST University in 1994 to develop an internal education organization, responsible for organizing training courses to executives, engineers, technicians and sales personnel within STMicroelectronics and coordinating all training for our employees.


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Item 7.  Major Shareholders and Related-PartyRelated Party Transactions
 
Major Shareholders
 
The following table sets forth certain information with respect to the ownership of our issued common shares based on information available to us as of December 31, 2007:February 15, 2010:
 
                
 Common Shares Owned  Common Shares Owned 
Shareholders
 Number %  Number % 
STMicroelectronics Holding II B.V. (“ST Holding II”)  250,704,754   27.5 
ST Holding II  250,704,754   27.54 
Public  568,492,104   62.5   542,946,425   59.64 
Brandes Investment Partners(1)  80,563,681   8.8   66,620,387   7.32 
Capital World Investors(2)  18,050,000   1.98 
Treasury shares  10,532,881   1.2   31,985,739   3.52 
Total
  910,307,305   100 
     
(1)According to information filed February 12, 2010 on Schedule 13G, Brandes Investment Partners’ shares in our company are beneficially owned by the following group of entities: Brandes Investment Partners, L.P., Brandes Investment Partners, Inc., Brandes Worldwide Holdings, L.P., Charles H. Brandes, Glenn R. Carlson and Jeffrey A. Busby.
(2)At December 31, 2008, Capital World Investors held 5.4% of our shares. As of December 31, 2009, it held less than 5% of our shares and has ceased to be a major shareholder of our company.
 
Our principal shareholders do not have different voting rights from those of our other shareholders.
 
ST Holding II is a wholly-ownedwholly owned subsidiary of STMicroelectronics Holding N.V. (“ST Holding”).Holding. As of December 31, 2007,2009, FT1CI (the “French Shareholder”), controlled by Areva and a consortium of Italian shareholdersCEA, and CDP (the “Italian Shareholders”Shareholder”) made up of CDP and Finmeccanica, directly held 50% each in ST Holding based on voting rights. CDP held 30% in ST Holding and Finmeccanica held 20% in ST Holding based on voting rights.Holding. The indirect interest of FT1CI and the Italian ShareholdersCDP in us is split on a 50%-50% basis. Through a structured tracking stock system implemented in the articles of association of ST Holding and ST Holding II, FT1CI and CDP each indirectly held 99,318,236125,352,377 of our common shares, representing 10.9%13.7% of our issued share capital as of December 31, 2007, CDP indirectly held 91,644,941 of our common shares, representing 10.1% of our issued share capital as of December 31, 2007 and Finmeccanica indirectly held 59,741,577 of our common shares, representing 6.5% of our issued share capital as of December 31, 2007.2009. Any disposals or, as the case may be, acquisitions by ST Holding II on behalf of respectively FT1CI or CDP and Finmeccanica, will decrease or, as the case may be, increase the indirect interest of respectively FT1CI or CDP and Finmeccanica in our issued share capital. FT1CI was formerly a jointly held company set up by Areva and France Telecom to control the interest of the French shareholders in ST Holding. Following the transactions described below, Areva was,and CEA are, as of December 31, 2007,2009, the sole shareholdershareholders of FT1CI. Following CDP’s acquisition of all of Finmeccanica’s remaining shares in our company in December 2009, Finmeccanica no longer has a shareholding in ST Holding. Areva (formerly known as CEA-Industrie) is a corporation controlled by the CEA. Areva is listed on Euronext Paris in the form of Investment Certificates. CEA is a French government funded technological research organization. CDP is an Italian corporationfinancial institution 70% owned by the ItalianMinistero dell’Economia e delle Finanze(the (the “Ministry of Economy and Finance”) and 30% owned by a consortium of 66 Italian banking foundations. Finmeccanica is a listed Italian holding company majority owned by the Italian Ministry of Economy and Finance and the public. Finmeccanica is listed on the Italian Mercato Telematico Azionario (“MTA”) and is included in the S&P/MIB 30 stock index.
 
ST Holding II owned 90% of our shares before our initial public offering in 1994, and has since then gradually reduced its participation, going below the 66% threshold in 1997 and below the 50% threshold in 1999. ST Holding

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may further dispose of its shares as provided below in “— Shareholders’ Agreements — STH Shareholders’ Agreement” and “— Disposals of our Common Shares” and pursuant to the eventual conversion of our outstanding convertible instruments. Set forth below is a table of ST Holding II’s holdings in us as of the end of each of the past three financial years:
 
         
  Common Shares Owned 
  Number  % 
 
December 31, 2007  250,704,754   27.5 
December 31, 2006  250,704,754   27.5 
December 31, 2005  250,704,754   27.6 
         
  Common Shares Owned
  Number %
 
December 31, 2009  250,704,754   27.5 
December 31, 2008  250,704,754   27.5 
December 31, 2007  250,704,754   27.5 
 
Announcements about additional disposals of our shares by ST Holding II on behalf of one or more of its indirect shareholders, Areva, CEA, CDP FT1CI or FinmeccanicaFT1CI may come at any time.


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The chart below illustrates the shareholding structure as of December 31, 2007:2009:
 
(FLOW CHART)
 
 
(1)FT1CI owns 50% ofIn addition to the 27.5% held by ST Holding and indirectly holds 99,318,236 of our common shares.
(2)Not a legal entity, purely for illustrative purposes.
(3)CDP and Finmeccanica own 50% of ST Holding and indirectly hold 91,644,941 and 59,741,577 of our common shares, respectively.
(4)CDP owns 30% of ST Holding, while Finmeccanica owns 20% of ST Holding.
(5)The 71.4% ownedthe 68.9% held by the public includes the 8.9% shareholding of Brandes Investment Partners.
(6)ST Holding II owns 27.5% of our shares, the Public, owns 71.4% of our shares and we hold the remaining 1.2%3.5% are held by us as treasury shares.Treasury Shares.
 
On December 17, 2001, France Telecom issued €1,522,950,000 aggregate principal amount of 1.0% notes due December 17, 2004, redeemable by way of exchange for up to 30 million of our existing common shares on or after January 2, 2004 (the “2001 Notes”). Pursuant to the terms and conditions of the 2001 Notes, on March 9, 2004, France Telecom redeemed the 2001 Notes, and the shares underlying the 2001 Notes held in escrow by BNP Paribas Securities Services (France) were released from escrow. On December 3, 2004, France Telecom sold through ST Holding those 30 million of our common shares (corresponding to the entire amount released from escrow) to institutional investors in a block trade.
On July 30, 2002, France Telecom issued €442.2 million aggregate principal amount of 6.75% notes due August 6, 2005, mandatorily exchangeable into our existing common shares held by France Telecom (the “2002 Notes”). On August 6, 2005, the mandatory exchangeable notes reached maturity. We were informed that the exchange ratio was 1.25 of our common shares per each €20.92 principal amount of notes, which resulted in the disposal by France Telecom of approximately 26.4 million of our currently existing common shares, representing the totality of the shares held by France Telecom in our company. Following this disposition, France Telecom is no longer a shareholder of FT1CI or an indirect shareholder (through ST Holding and ST Holding II) of our company. Since August 5, 2005, France Telecom is no longer one of our indirect shareholders, following the conversion of convertible notes issued in 2001 and 2002 into approximately 56.4 million of our common shares to institutional investors.
On August 12, 2003, Finmeccanica Finance, a subsidiary of Finmeccanica, has issued €438,725,000€501 million aggregate principal amount of 0.375% senior unsecured exchangeable notes, due 2010, guaranteed by Finmeccanica (the “Finmeccanica Notes”). On September 1, 2003, Finmeccanica Finance issued an additional €62,675,000 aggregate principal amount of Finmeccanica Notes, raising the issue size to €501,400,000. The Finmeccanica Notes have been exchangeable at the option of the holder since January 2, 2004 into up to 20 million of our existing common shares held by ST Holding II, or 2.3%due 2010 (the “Finmeccanica Notes”). Finmeccanica has entered into a call option arrangement with Deutsche Bank for a corresponding amount of our then-outstanding share capital. The Finmeccanica Notes have an initial exchange ratio of 39.8883 shares per note.in the event the notes become exchangeable. As of December 31, 2007,2009, none of the Finmeccanica Notes had been exchanged for our common shares.
 
During the second halfOn December 17, 2009, CDP acquired all of 2003, ST Holding II sold on the market a total of nine millionFinmeccanica’s remaining 33,707,436 shares or approximately 1.0% of our issued and outstanding common shares corresponding to indirect shareholdingsin us, held


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by Finmeccanica. During 2004, Finmeccanica sold three million shares to institutional investors in block trades. During 2004, Finmeccanica lent 23 million of company shares it holds indirectly through ST Holding. Finally, on December 23, 2004,Following this transaction, Finmeccanica transferred 93 million of its indirect holdingno longer holds any of our existing common shares, to CDP,whether indirectly through ST Holding or directly, and CDP signedis no longer a deed of adherenceparty to the STH Shareholders’ Agreement (as defined below).
Finmeccanica also caused ST Holding II to transfer seven million shares corresponding toand all of its indirect stake in us to an account at BNP Paribas Securities Services, Luxembourg. Werights related thereto have been informed that on December 20, 2005, ST Holding II sold on behalf of Finmeccanica 1,355,122 of these seven million shares at a net price of €15.34 per share. We were also informed that in December 2005, CDP sold a certain number of ST Holding sharestransferred to Finmeccanica, corresponding indirectly to 1,355,123 of our common shares.
We have been informed that on February 26, 2008, Finmeccanica agreed to sell 26,034,141 of our common shares to FT1CI. We were also informed that FT1CI’s acquisition of the shares will be financed by CEA, the parent company of Areva, and, hence, CEA will become a shareholder of FT1CI and will adhere to the STH Shareholders’ Agreement.CDP.
 
Announcements about additional disposals by ST Holding II or our indirect shareholders may come at any time. See “Item 3. Key Information — Risk Factors — Risks Related to Our Operations — Our direct or indirect shareholders may sell our existing common shares or issue financial instruments exchangeable into our common shares at any time while at the same time seeking to retain their rights regarding our preference shares. In addition, substantial sales by us of new common shares or convertible bonds could cause our common share price to drop significantly.”
 
Shareholders’ Agreements
 
STH Shareholders’ Agreement
 
We were formed in 1987 as a result of the decision by Thomson-CSF (now called Thales) and STET (now called Telecom Italia S.p.A.) to combine their semiconductor businesses and to enter into a shareholders’ agreement


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on April 30, 1987, which was amended on December 10, 2001, and restated on March 17, 2004 asand further amended “the STHon February 26, 2008. The February 26, 2009 amended and restated agreement (as amended, the “STH Shareholders’ Agreement”.) replaces all previous agreements. The current parties to the STH Shareholders’ Agreement are Areva, CEA, CDP Finmeccanica and FT1CI (CDP became bound by the STH Shareholders’ Agreement pursuant to a deedFT1CI. Following CDP’s acquisition of adherence dated December 23, 2004 following its purchase from Finmeccanica of a majorityall of Finmeccanica’s indirect interestshares in us, held directly through ST Holding). The March 17, 2004 amended and restated agreement supercedes and replaces all previous agreements. CDP andHolding, Finmeccanica entered into an agreement that provides for the transfer of certain of the rights of Finmeccanica under the STH Shareholders’ Agreement to CDP. See “— Other Shareholders’ Agreements — Italian Shareholders’ Pact” below. Therefore, references to the rights and obligations of Finmeccanica under the STH Shareholders’ Agreement described below also refer to CDP.
We have been informed that on February 26, 2008, the partiesis no longer a party to the STH Shareholders’ Agreement and all of its rights and obligations related thereto have agreed upon certain further amendmentsbeen transferred to the STH Shareholders’ Agreement, concerning:CDP.
• the decision of our French and Italian shareholders to equally align their respective equity participation in our Company, held through STH, through an agreed sale by Finmeccanica to FT1CI of 26,034,141 of our common shares or approximately 2.85% of our share capital;
• the fact that CEA, a company owned and controlled by the French State and the controlling shareholder or Areva will finance the acquisition of the shares being purchased by FT1CI from Finmeccanica and, upon such acquisition, will also become a party to the STH Shareholders’ Agreement;
• the decision to extend for a further three year period until March 17, 2011 the balancing period as defined under the STH Shareholders’ Agreement (see below under “Corporate Governance”); and
• the decision to increase from 9.5% to 10.5% the minimum voting stakes to be held respectively by our French and Italian shareholders (see below under “Corporate Governance”).
 
Pursuant to the terms of the STH Shareholders’ Agreement and for the duration of such agreement, FT1CI, on the one hand, and Finmeccanica/CDP, on the other hand, have agreed that the corporate governance of STH shall remain balanced and shared on anto maintain equal basis.interests in our share capital. See further details below.
 
Restructuring of the Holding Companies
 
If necessary, the parties agreed to restructure the two holding companies (ST Holding and ST Holding II) to simplify the structure to the extent possible or desirable. In any case, at least one holding company will continue to


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exist to hold our common shares. The Company that now holds or may hold our common shares in the future for indirect shareholders is referred to below as the “holding company.”
 
Standstill
 
The STH Shareholders’ Agreement contains a standstill provision that precludes any of the parties and the parties’ affiliates from acquiring, directly or indirectly, any of our common shares or any instrument providing for the right to acquire any of our common shares other than through the holding company. The standstill is in effect for as long as such party holds our common shares through ST Holding. The parties agreed to continue to hold their stakes in us at all times through the current holding structure of ST Holding and ST Holding II.II, subject to exercising the preference share option granted to ST Holding if ST Holding were to choose not to exercise such rights directly.
 
Corporate Governance
 
The STH Shareholders’ Agreement provides for a balanced corporate governance of the indirect interests in us between FT1CI and Finmeccanica (references to Finmeccanica now include the stake transferred to CDP (FT1CI and CDP are collectively defined as well“STH Shareholders” and individually defined as CDP, and together with FT1CI, the “STH shareholders”Shareholder”) for the duration of the “Balance Period”, despite actual differences in indirect economic interest in us. The “Balance Period” is defined as (i) a period through March 17, 2008,2011, provided that each of Areva (or its assignees) on the one hand and Finmeccanica or CDP on the other hand ownSTH Shareholder owns at all times a voting stake at least equal to 9.5%10.5% of our issued and outstanding shares, and (ii) subject to the aforementioned condition, thereafter as long as FT1CI, on the one hand, and the Italian shareholders, on the other hand,each STH Shareholder owns at any time, including as a result of the exercise of the “Rebalancing“Re-balancing Option” (as defined below), own a voting stake equal to at least 47.5% of the total voting stakes. Further to the amendments to the STH Shareholders’ Agreement entered into on February 26, 2008, the balance period will be extended for a further three year period running through March 17, 2011 provided that each of FT1CI on the one hand and Finmeccanica or CDP on the other hand own a voting stake at least equal to 10.5% of our issued and outstanding shares. During the Balance Period, each of FT1CI and Finmeccanica (together with CDP)CDP has an option to rebalance their shareholdings, referred to as the “Rebalancing Option”, as further described below.
 
During the Balance Period, the STH shareholdersShareholders agree that the holding company will have a managing board comprised of two members (one member designated by FT1CI, and one designated by common agreement of Finmeccanica and CDP pursuant to the Italian Shareholders’ Pact as described below)CDP) and a supervisory board comprised of eightsix members (four designated by FT1CI and four designated by common agreement of Finmeccanica and CDP pursuant to the Italian Shareholders’ Pact as described below). In November 2006, FT1CI, CDP and Finmeccanica decided to reduce the number of members of the supervisory board from eight to six (three designated by FT1CI and three designated by common agreement of Finmeccanica and CDP). The chairman of the supervisory board of the holding company shall be designated for a three-year term by one shareholder (with the other shareholder entitled to designate the Vice Chairman), such designation to alternate between Finmeccanica and CDP on the one hand and FT1CI on the other hand. The current Chairman is Mr. Gilbert Lehmann (following the resignation of Mr. Gérald Arbola in November 2006). The parties agreed that the next chairman of the supervisory board of the holding company will be appointed by the Italian Shareholders.Matteo del Fante.
 
During the Balance Period, any other decision, to the extent that a resolution of the holding company is required, must be pursuant to the unanimous approval of the shareholders, including but not limited to the following: (i) the definition of the role and structure of our Managing Board and Supervisory Board, and those of the holding company; (ii) the powers of the Chairman and the Vice Chairman of our Supervisory Board, and that of the holding company; (iii) information by our Managing Boardthe holding company’s managing board and by our Supervisory Board,supervisory board, and those of the holding company;by us; (iv) treatment of confidential information; (v) appointment of any additional members of our Managing Board and those of the holding company; (vi) remuneration of the members of our Managing Board and those of the holding company; (vii) internal audit of STMicroelectronics N.V. and of the holding company; (viii) industrial and commercial relationships between STMicroelectronics N.V. and FinmeccanicaCDP or STMicroelectronics N.V. and either or both FT1CI shareholders, or any of their affiliates; and (ix) any of the decisions listed in article 16.1 of our Articles of Association including our budget and pluri-annual plans.
 
AsWith regards to STMicroelectronics N.V., during the Balance Period: (i) each of the STH shareholdersShareholders (FT1CI on the one hand, and Finmeccanica and CDP on the other hand) shall have the right to insert on a list prepared for proposal by the holding company to our annual shareholders’ meeting the same number of members for election to the Supervisory Board, and the holding company shall vote in favor of such members; (ii) the STH shareholdersShareholders will cause the


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holding company to submit to our annual shareholders’ meeting and to vote in favor of a common proposal for the appointment of the Managing Board; and (iii) any decision relating to the voting rights of the holding company in us shall require the unanimous approval of the holding company shareholders and shall be submitted by the holding company to our annual shareholders’ meeting. The STH shareholdersShareholders also agreed that the


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Chairman of our Supervisory Board will be designated upon proposal of an STH shareholderShareholder for a three-year term, and the Vice Chairman of our Supervisory Board will be designated upon proposal of the other STH shareholderShareholder for the same period, and vice-versa for the following three-year term. The STH shareholdersShareholders further agreed that the STH shareholderShareholder proposing the appointment of the Chairman be entitled to propose the appointment of the Assistant Secretary of our Supervisory Board, and the STH shareholderShareholder proposing the appointment of the Vice Chairman be entitled to propose the appointment of the Secretary of our Supervisory Board. Finally, each STH shareholderShareholder is entitled to appoint a Financial Controller to the Supervisory Board. Our Secretary, Assistant Secretary and two Financial Controllers are referred to as professionals (not members) of our Supervisory Board.
 
In addition, the following resolutions, to the extent that a resolution of the holding company is required, must be resolved upon by a shareholders’ resolution of the holding company, which shall require the unanimous approval of the STH shareholders:Shareholders: (i) any alteration in the holding company’s articles of association; (ii) any issue, acquisition or disposal by the holding company of its shares or change in share rights; (iii) any alteration in our authorized share capital or issue by us of new sharesand/or of any financial instrument giving rights to subscribe for our common shares; any acquisition or disposal by the holding company of our sharesand/or any right to subscribe for our common shares; any modification to the rights attached to our common shares; any merger, acquisition or joint venture agreement to which we are or are proposed to be a party; and any other items on the agenda of our general shareholders’ meeting; (iv) the liquidation or dissolution of the holding company; (v) any legal merger, legal de-merger, acquisition or joint venture agreement to which the holding company is proposed to be a party; and (vi) the adoption or approval of our annual accounts or those of the holding company or a resolution concerning a dividend distribution by us.
 
At the end of the Balance Period, the members of our Supervisory Board and those of the holding company designated by the minority shareholder of the holding company will immediately resign upon request of the holding company’s majority shareholder, subject to the rights described in the previous paragraph.
 
After the end of the Balance Period, unanimous approval by the shareholders of the holding company remains required to approve:
 
(i) as long as any of the shareholders indirectly owns at least equal to the lesser of 3% of our issued and outstanding share capital or 10% of the remaining STH shareholders’Shareholders’ stake in us at such time, with respect to the holding company, any changes to the articles of association, any issue, acquisition or disposal of shares in the holding company or change in the rights of its shares, its liquidation or dissolution and any legal merger, de-merger, acquisition or joint venture agreement to which the holding company is proposed to be a party;party.
 
(ii) as long as any of the shareholders indirectly owns at least 33% of the holding company, certain changes to our Articles of Association (including any alteration in our authorized share capital, or any issue of share capitaland/or financial instrument giving the right to subscribe for our common shares, changes to the rights attached to our shares, changes to the preemptive rights, issues relating to the form, rights and transfer mechanics of the shares, the composition and operation of the Managing and Supervisory Boards, matters subject to the Supervisory Board’s approval, the Supervisory Board’s voting procedures, extraordinary meetings of shareholders and quorums for voting at shareholders’ meetings);.
 
(iii) any decision to vote our shares held by the holding company at any shareholders’ meeting of our shareholders with respect to any substantial and material merger decision. In the event of a failure by the shareholders to reach a common decision on the relevant merger proposal, our shares attributable to the minority shareholder and held by the holding company will be counted as present for purposes of a quorum of shareholders at one of our shareholders’ meetings, but will not be voted (i.e., will be abstained from the vote in a way that they will not be counted as a negative vote or as a positive vote);.
 
(iv) in addition, the minority shareholder will have the right to designate at least one member of the list of candidates for our Supervisory Board to be proposed by the holding company if that shareholder indirectly owns at least 3% of our total issued and outstanding share capital, with the majority STH shareholderShareholder retaining the right to appoint that number of members to our Supervisory Board that is at least proportional to such majority STH shareholder’sShareholder’s voting stake.
 
Finally, at the end of the Balance Period, the unanimous approval required for other decisions taken at the STMicroelectronics N.V. level shall only be compulsory to the extent possible, taking into account the actual power attached to the direct and indirect shareholding jointly held by the STH shareholdersShareholders in our company.


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Disposals of our Common Shares
 
The STH Shareholders’ Agreement provides that each STH shareholderShareholder retains the right to cause the holding company to dispose of its stake in us at its sole discretion, provided it is pursuant to either (i) the issuance of financial instruments, (ii) an equity swap, (iii) a structured finance deal or (iv) a straight sale. ST Holding II may enter into escrow arrangements with STH shareholdersShareholders with respect to our shares, whether this be pursuant to exchangeable notes, securities lending or other financial instruments. STH shareholdersShareholders that issuedispose of our shares through the issuance of exchangeable instruments, may include in their voting stakean equity swap or a structured finance deal maintain the voting rights of the underlying shares in their ST Holding voting stake, provided theythat such rights remain freely and continuously held by the holding company as ifthough the holding company were still holding the full ownership of the shares. STH shareholders that issue financial instruments with respect to our underlying shares may have a call option over those shares upon exchange of exchangeable notes for common shares.
 
As long as any of the parties to the STH Shareholders’ Agreement has a direct or indirect interest in us, except in the case of a public offer, no sales by a party may be made of any of our shares or of FT1CI, ST Holding or ST Holding II to any of our top ten competitors, or any company that controls such competitor.
 
Re-adjusting and Re-balancing options
 
The STH Shareholders’ Agreement provides that the parties have the right, subject to certain conditions, to re-balance their indirect holdings in our shares to achieve parity between FT1CI on the one hand and Finmeccanica and CDP on the other hand. If at any time prior to March 17, 2008,2011, the voting stake in us of one of the STH shareholdersShareholders (FT1CI on the one hand, and Finmeccanica and CDP on the other hand) falls below 9.5%10.5% due either to (a) the exchange by a third party of any exchangeable instruments issued by an STH shareholderShareholder or (b) to an issuance by us of new shares subscribed to by a third party, such STH shareholderShareholder will have the right to notify the other STH shareholderShareholder of its intention to exercise a “Re-adjusting Option.” In such case, the STH shareholdersShareholders will cause the holding company to purchase the number of our common shares necessary to increase the voting stake of such STH shareholderShareholder to 9.5%10.5% of our issued and outstanding share capital.
 
We have been informed thatIf by three months prior to March 17, 2010, the Balance Period has not already expired and if on February 26, 2008, purusant to its rights undersuch date the voting stake of one of the STH Shareholders’ AgreementShareholders (FT1CI on the one hand, and CDP on the other hand) has fallen below 47.5% of the total voting stake in ST Holding, such STH Shareholder will have the right to rebalancenotify the other STH Shareholder of its shareholding, FT1CI agreedintention to exercise a “Re-balance Option” no later than 30 Business Days prior to March 17, 2011. In such case, the STH Shareholders will cause the holding company to purchase 26,034,141before March 17, 2011 the number of our common shares from Finmeccanica, with financing provided by CEA, which, as a result, will become a shareholdernecessary to re-balance at50/50% the respective voting stakes of FT1CI. As indicated above, the Balance Period has now been extended through March 17, 2011, and the 9.5% voting rights threshold respectively for our French and Italian shareholders increased to 10.5%.STH Shareholders.
 
Change of Control Provision
 
The STH Shareholders’ Agreement provides for tag-along rights, preemptive rights, and provisions with respect to a change of control of any of the shareholders or any controlling shareholder of FT1CI, on the one hand, and Finmeccanica,CDP, on the other hand. The shareholders may transfer shares of the holding company or FT1CI to any of the shareholders’ affiliates, which would include the Italian state or the French state with respect to entities controlled by a state. The shareholders and their ultimate shareholders will be prohibited from launching any takeover process on any of the other shareholders.
 
Non-competition
 
Pursuant to the terms of STH Shareholders’ Agreement, neither we nor ST Holding are permitted, as a matter of principle, to operate outside the field of semiconductor products. The parties to the STH Shareholders’ Agreement also undertake to refrain directly or indirectly from competing with us in the area of semiconductor products, subject to certain exceptions, and to offer us opportunities to commercialize or invest in any semiconductor product developments by them.
 
Deadlock
 
In the event of a disagreement that cannot be resolved between the parties as to the conduct of the business and actions contemplated by the STH Shareholders’ Agreement, each party has the right to offer its interest in ST Holding to the other, which then has the right to acquire, or to have a third party acquire, such interest. If neither party agrees to acquire or have acquired the other party’s interest, then together the parties are obligated to try to find a third party to acquire their collective interests, or such part thereof as is suitable to change the decision to terminate the agreement. The STH Shareholders’ Agreement otherwise terminateswill remain in force as long as CDP, on the event that one hand, and any of Areva, FT1CI or CEA, on the other hand, are shareholders of the parties thereto ceases to hold shares in ST Holding.holding company.


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Preference Shares
 
On May 31, 1999, our shareholders approved the creation of preference shares that entitle a holder to full voting rights at any meeting of shareholders and to a preferential right to dividends and distributions. On the same day, in order to protect ourselves from a hostile takeover or similar action, we entered into an option agreement with ST Holding II, as amended, which provided that up to a maximum of 540,000,000 preference shares would be issued to ST Holding II upon its request and subject to the adoption of a resolution by our Supervisory Board giving its consent to the exercise of the option and upon payment of at least 25% of the par value of the preference shares to be issued. On November 27, 2006, our Supervisory Board decided to authorize us to terminate the May 31, 1999 option agreement, as amended, and to enter into a newan option agreement with an independent foundation, Stichting Continuïteit ST (the “Stichting”). Our Managing Board and our Supervisory Board, along with the board of the Stichting, have declared that they are jointly of the opinion that the Stichting is legally independent of our Company and our major shareholders. Our Supervisory Board approved the newthis option agreement, dated February 7, 2007, to reflect changes in Dutch legal requirements, not in response to any hostile takeover attempt. The May 31, 1999 option agreement, as amended, was terminated by mutual consent by ST Holding II and us on February 7, 2007 and the new option agreement we concluded with the Stichting became effective on that date.
The option agreement with the StichtingIt provides for the issuance of up to a maximum of 540,000,000 preference shares. The Stichting would have the option, which it shall exercise in its sole discretion, to take up the preference shares. The preference shares would be issuable in the same numberevent of actions considered hostile by our Managing Board and Supervisory Board, such as a creeping acquisition or an unsolicited offer for our common shares, which are unsupported by our Managing Board and Supervisory Board and which the May 31, 1999board of the Stichting determines would be contrary to the interests of our Company, our shareholders and our other stakeholders. If the Stichting exercises its call option agreement, as amended. and acquires preference shares, it must pay at least 25% of the par value of such preference shares. The preference shares may remain outstanding for no longer than two years.
The Stichting would have the option, which it shall exercise in its sole discretion, to take up the preference shares. The preference shares would be issuable in the event of actions considered hostile by our Managing Board and Supervisory Board, such as a creeping acquisition or an unsolicited offer for our common shares, which are unsupported by our Managing Board and Supervisory Board and which the board of the Stichting determines would be contrary to the interests of our Company, our shareholders and our other stakeholders. If the Stichting exercises its call option and acquires preference shares, it must pay at least 25% of the par value of such preference shares. The preference shares may remain outstanding for no longer than two years.
 
No preference shares have been issued to date. The effect of the preference shares may be to deter potential acquirers from effecting an unsolicited acquisition resulting in a change of control or otherwise taking actions considered hostile by our Managing Board and Supervisory Board. In addition, any issuance of additional capital within the limits of our authorized share capital, as approved by our shareholders, is subject to the requirements of our Articles of Association, see “Item 10. Additional Information — Memorandum and Articles of Association — Share Capital as of December 31, 2007 — Issuance of Shares, Preemptive Rights and Preference Shares (Article 4).”Association.
 
Other Shareholders’ Agreements
 
Italian Shareholders’ Pact
 
In connection with the transfer of an interest in ST Holding from Finmeccanica to CDP, Finmeccanica and CDP entered into a shareholders’ pact (the “Italian Shareholders’ Pact”) on November 26, 2004 setting forth the rights and obligations of their respective interests as shareholders of ST Holding. Pursuant to the terms of the Italian Shareholders’ Pact, CDP became a party to the STH Shareholders’ Agreement. Under the Italian Shareholders’ Pact, CDP will haveAgreement and had the right to exercise certain corporate governance rights in usthe Company previously exercised by Finmeccanica under the STH Shareholders’ Agreement.
 
TheFollowing CDP’s acquisition in December 2009 of all of Finmeccanica’s remaining shares in us, held indirectly through ST Holding, Finmeccanica’s rights granted under the STH Shareholders’ Agreement have been transferred to CDP and the Italian Shareholders’ Pact provides that CDP has the right to appoint one of the two members of the ST Holding’s Managing Board. Moreover, CDP will have the right to nominate a number of representatives to the Supervisory Board of ST Holding, ST Holding II and STMicroelectronics N.V. In particular, CDP has the right to propose two members for membership on our Supervisory Board, while one member will be proposed by Finmeccanica for so long as Finmeccanica owns indirectly at least 3% of our capital. If and when its indirect interest in us is reduced below such threshold, Finmeccanica will cause its appointed director to resign and be replaced by a director appointed by CDP.been terminated.
 
French Shareholders’ Pact
 
Since August 1, 2001, and the disposal of all indirect shareholding interest in our Company, France Telecom ceased to be a shareholder of FT1CI, and Areva remained its sole shareholder. Following the announcement of the plannedFT1CI’s acquisition by FT1CI of approximately 26 million of our shares representing approximately 2.85% of our share capital, thewhich was financed by CEA, will upon completion of this transactionCEA has become a minority shareholder of FT1CI and will adherenow adheres to the STH Shareholders’ Agreement.


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Statutory Considerations
 
As is the case with other companies controlled by the French government, the French government has appointed aCommissaire du Gouvernementand aContrôleur d’Etatfor FT1CI. Pursuant to DecreeNo. 94-214, dated March 10, 1994, these government representatives have the right (i) to attend any board meeting of FT1CI, and (ii) to veto any board resolution or any decision of the president of FT1CI within ten days of such board meeting (or, if they have not attended the meeting, within ten days of the receipt of the board minutes or the notification of such president’s decision); such veto lapses if not confirmed within one month by the Ministry of the Economy or the Ministry of the Industry. FT1CI is subject to certain points of the Decree of August 9, 1953 pursuant to which the Ministry of the Economy and any other relevant ministries have the authority to approve decisions of FT1CI relating to budgets or forecasts of revenues, operating expenses and capital expenditures. The effect of these provisions may


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be that the decisions taken by us and our subsidiaries that, by the terms of the STH Shareholders’ Agreement, require prior approval by FT1CI, may be adversely affected by these veto rights under French law.
 
Pursuant to the principal Italian privatization law, certain special government powers may be introduced into the bylaws of firms considered strategic by the Italian government. In the case of Finmeccanica, these powers were established by decrees adopted by the Minister of the Treasury on November 8, 1999, and Finmeccanica’s bylaws were subsequently amended on November 23, 1999. The aforementioned decrees were amended by the Law Decree 350 enacted on December 24, 2003, and Finmeccanica has modified its bylaws accordingly. The special powers of the Minister of the Treasury (who will act in agreement with the Minister of Industry) include: (i) the power to object to the acquisition of material interests in Finmeccanica’s share capital; (ii) the power to object to material shareholders’ agreements relating to Finmeccanica’s share capital; (iii) the power to appoint one member of Finmeccanica’s board of directors without voting rights; and (iv) the power to veto resolutions to dissolve Finmeccanica, transfer its business, merge, conduct spin-offs, transfer its registered office outside of Italy, change its corporate purposes, or amend or modify any of the Minister of the Treasury’s special powers.
Pursuant to Law Decree 269 of September 30, 2003 (as subsequently amended) and Decree of the Ministry of the Economy and Finance of December 5, 2003, CDP was transformed from a public entity into a joint stock limited liability company ((società per azioni)azioni).While transforming itself into a holding company, CDP maintained its public interest purpose. CDP’s core business is to finance public investments and more specifically infrastructure and other major public works sponsored by the Republic of Italy, regions, local authorities, public agencies and other public bodies. By virtue of a special provision of Law Decree 269, the Ministry of Economy and Finance will always be able to exercise its control over CDP.
 
Related-PartyRelated Party Transactions
 
One of the members of our Supervisory Board is managing director of Areva SA, which is a controlled subsidiary of CEA, one of the members of our Supervisory Board is the Chairman and CEO of France Telecom and a member of the Board of Directors of Thomson,Technicolor (formerly known as Thomson), another is the non-executive Chairman of the Board of Directors of ARM Holdings PLC (“ARM”) and a, two of our Supervisory Board members are non-executive directordirectors of Soitec, one of our Supervisory Board members is the CEO of Groupe Bull, one of the members of the Supervisory Board is also a member of the supervisory boardSupervisory Board of BESI and one of the members of our Supervisory Board is a director of Oracle Corporation (“Oracle”) and Flextronics International. France Telecom and its subsidiaries Equant and Orange, as well as Oracle’s new subsidiary PeopleSoft supply certain services to our Company. We have a long-term joint research and developmentR&D partnership agreement with LETI, a wholly-owned subsidiary of CEA. We have certain licensing agreements with ARM, and have conducted transactions with Soitec and BESI as well as with ThomsonTechnicolor, Flextronics and Flextronics. Wea subsidiary of Groupe Bull. Each of the aforementioned arrangements and transactions are negotiated without the personal involvement of our Supervisory Board members and we believe that each of these arrangements and transactionsthey are made on an arms-length basis in line with market practices and conditions.
For the years ended, December 31, 2009 December 31, 2008 and December 31, 2007, our related party transactions were primarily with our significant shareholders, or their subsidiaries and companies in which our management perform similar policymaking functions. These include, but are not limited to: Areva, France Telecom, Equant, Orange, Finmeccanica, CDP, Flextronics, Oracle and Technicolor. In addition, our CEO, Carlo Bozotti is Chairman of the Supervisory Board of Numonyx, the flash memory joint venture we set up with Intel and Francisco Partners effective March 30, 2008. Mr. Turicchi also serves on the Supervisory Board of Numonyx.
See Note 26 for transactions with significant shareholders, their affiliates and other related parties, which also include transactions between us and our equity investments.
 
Item 8.  Financial Information
 
Financial Statements
 
Please see “Item 18. Financial Statements” for a list of the financial statements filed with thisForm 20-F.
 
Legal Proceedings
 
As is the case with many companies in the semiconductor industry, we have from time to time received, and may in the future receive, communications from other semiconductor companies or third parties alleging possible infringement of patents. Furthermore, we may become involved in costly litigation brought against us regarding patents, copyrights, trademarks, trade secrets or mask works. In the event that the outcome of anysuch IP litigation would be unfavorable to us, we may be required to take a license to the underlying intellectual property rightpatents or other IP rights upon economically unfavorable terms and conditions, and possibly pay damages for prior use,and/or face an injunction, all of which singly or in the aggregate could have a material adverse effect on our results of operations and ability to


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compete. See “Item 3. Key Information — Risk Factors — Risks Related to Our Operations — We depend on patents to protect our rights to our technology.”
In September 2009, we and SanDisk settled our dispute on amicable and confidential terms. The related matters have been dismissed with prejudice.
We are a party to legal proceedings with Tessera, Inc.
On January 31, 2006, Tessera filed suit against us, adding us as a co-defendant, with several other semiconductor companies to a lawsuit filed by Tessera on October 7, 2005 against Advanced Micro Devices Inc. and Spansion in the United States District Court of the Northern District of California. Tessera is claiming that our BGA packages infringe certain patents owned by Tessera, and that our U.S. affiliate, ST Inc. (“ST Inc.”), has breached the terms of a license agreement with Tessera.


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On May 15, 2007, Tessera filed a complaint with the International Trade Commission (“ITC”) against us, ATI Technologies, Freescale, Motorola, Qualcomm and Spansion claiming infringement of two Tessera U.S. patents, 5,892,326 and 6,433,419 (the “326” and “419” patents), and seeking an exclusion order against infringing products. Since the beginning of the ITC investigation, the proceedings filed in California in January 2006 have been stayed.
Several claims contained in the ‘419 and ‘326 patents asserted in the ITC lawsuit are under final rejection notice by the U.S. Patent and Trademark Office, and the two patents are set to expire in September 2010.
The Initial Determination from the Administrative Law Judge (“ALJ”) at the ITC ruled that the ‘326 and ‘419 patents were valid but not infringed. However, the ITC subsequently reversed the ALJ’s decision, ruling that the patents were valid and infringed and ordering a partial exclusion order applicable to the importation into the U.S. of “infringing products”. We were not concerned by the May 2009 ITC exclusion order because our products are imported into the United States by ST Inc., which has a preexisting license agreement with Tessera. The ITC’s ruling is currently under appeal with the Court of Appeals of the Federal Circuit.
We are a party to a dispute with Credit Suisse Securities and Credit Suisse Group concerning Auction Rate Securities.
In February 2008, we instituted arbitration proceedings against Credit Suisse Securities (“Credit Suisse”) in connection with the unauthorized purchase by Credit Suisse of collateralized debt obligations and credit-linked notes (the “Unauthorized Securities”) instead of the federally guaranteed student loan securities that we had instructed Credit Suisse to purchase. On February 12, 2009, an arbitration panel of the FINRA awarded us approximately $406 million in compensatory and consequential damages, plus interest, in exchange for the transfer of all of the Unauthorized Securities back to Credit Suisse. On February 17, 2009, we filed a petition in the United States District Court for the Southern District of New York (the “Court”) seeking confirmation and enforcement of the FINRA award. Credit Suisse has responded by seeking to vacate the FINRA award. All required written submissions have to date been filed with the court by us and Credit Suisse, and the court may rule at any time. We have also filed a claim against Credit Suisse Group in the United States District Court of the Eastern District of New York.
We are a party to arbitration proceedings following a complaint filed by NXP Semiconductors.
On December 4, 2009, we were notified, by the International Chamber of Commerce, of a request for arbitration filed by NXP Semiconductors Netherlands BV “NXP” against us, claiming alleged compensation in excess of $46 million for “underloading costs”. Such costs are, according to NXP allegedly due pursuant to a manufacturing services agreement entered into between NXP and ST-NXP Wireless in August 2008, at the time of the creation of the the wireless semiconductor products joint venture with NXP. On February 12, 2010, we filed our answer to the claim, which we are contesting vigorously. The arbitration tribunal has recently been constituted and its first meeting to decide how to proceed and rule has yet to be established.
Other matters:
On October 21, 2008, the EU Commission proceeded to a dawn raid at our Montrouge premises near Paris, France, based on an investigation being conducted by the EU Commission on alleged anti-competitive practices pertaining to the manufacture of integrated circuits for smartcards.
The Commission believes that the main manufacturers of ICs for smartcards may have been in contact and exchanged confidential information on future pricing, prices to certain customers, future production capacities, and plans for new products during a period between January 1999 and November 2006.
We have offered to support the EU in the pursuit of its investigation. We have not received any further communication from the EU since October 21, 2008.
 
We record a provision when it is probable that a liability has been incurred and when the amount of the loss can be reasonably estimated. We regularly evaluate losses and claims to determine whether they need to be adjusted based on the most current information available to us. Legal costs associated with claims are expensed as incurred. We are in discussion with several parties with respect to claims against us relating to possible infringements of patents and similar intellectual property rights of others.
 
We are currently a party to legal proceedings with SanDisk Corporation.
On October 15, 2004, SanDisk filed a complaint for patent infringement and a declaratory judgment of non-infringement and patent invalidity against us with the United States District Court for the Northern District of California. The complaint alleges that our products infringed a single SanDisk U.S. patent and seeks a declaratory judgment that SanDisk did not infringe several of our U.S. patents (Civil Case No. C04-04379JF). By an order dated January 4, 2005, the court stayed SanDisk’s patent infringement claim, pending final determination in an action filed contemporaneously by SanDisk with the United States International Trade Commission (“ITC”), which covers the same patent claim asserted in Civil Case No. C04-04379JF. The ITC action was subsequently resolved in our favor. On August 2, 2007, SanDisk filed an amended complaint adding allegations of infringement with respect to a second SanDisk U.S. patent which had been the subject of a second ITC action and which was also resolved in our favor. On September 6, 2007, we filed an answer and a counterclaim alleging various federal and state antitrust and unfair competition claims. SanDisk filed a motion to dismiss our antitrust counterclaim, which was denied on January 25, 2008. Discovery is now proceeding.
On October 14, 2005, we filed a complaint against SanDisk and its current CEO, Dr. Eli Harari, before the Superior Court of California, County of Alameda. The complaint seeks, among other relief, the assignment or co-ownership of certain SanDisk patents that resulted from inventive activity on the part of Dr. Harari that took place while he was an employee, officerand/or director of Waferscale Integration, Inc. and actual, incidental, consequential, exemplary and punitive damages in an amount to be proven at trial. We are the successor to Waferscale Integration, Inc. by merger. SanDisk removed the matter to the United States District Court for the Northern District of California which remanded the matter to the Superior Court of California, County of Alameda in July 2006. SanDisk moved to transfer the case to the Superior Court of California, County of Santa Clara and to strike our claim for unfair competition, which were both denied by the trial court. SanDisk appealed these rulings and also moved to stay the case pending resolution of the appeal. On January 12, 2007, the California Court of Appeals ordered that the case be transferred to the Superior Court of California County of Santa Clara. On August 7, 2007, the California Court of Appeals affirmed the Superior Court’s decision denying SanDisk’s motion to strike our claim for unfair competition. SanDisk appealed this ruling to the California Supreme Court, which refused to hear it. Discovery is now proceeding. A hearing on Dr. Hariri’s motion for summary judgment on the statute of limitations defense is scheduled for the third quarter of 2008.
With respect to the lawsuits with SanDisk as described above, and following two prior decisions in our favor taken by the ITC, we have not identified any risk of probable loss that is likely to arise out of the outstanding proceedings.
We are also a party to legal proceedings with Tessera, Inc.
On January 31, 2006, Tessera added our Company as a co-defendant, along with several other semiconductor and packaging companies, to a lawsuit filed by Tessera on October 7, 2005 against Advanced Micro Devices Inc. and Spansion in the United States District Court for the Northern District of California. Tessera is claiming that certain of our small format BGA packages infringe certain patents owned by Tessera, and that ST is liable for damages. Tessera is also claiming that various ST entities breached a 1997 License Agreement and that ST is liable for unpaid royalties as a result. In February and March 2007, our codefendants Siliconware Precision Industries Co., Ltd. and Siliconware USA, Inc., filed reexamination requests with the U.S. Patent and Trademark Office covering all of the patents and claims asserted by Tessera in the lawsuit. In April and May 2007, the U.S. Patent and Trademark Office initiated reexaminations in response to all of the reexamination requests and final decisions regarding the reexamination requests are pending. On May 24, 2007, this action was stayed pending the outcome of the ITC proceeding described below.
On April 17, 2007, Tessera filed a complaint against us, Spansion, ATI Technologies, Inc., Qualcomm, Motorola and Freescale with the ITC with respect to certain small format ball grid array packages and products containing the same, alleging patent infringement claims of two of the Tessera patents previously asserted in the District Court action described above and seeking an order excluding importation of such products into the United States. On May 15, 2007, the ITC instituted an investigation pursuant to 19 U.S.C. § 1337, entitled In the Matter of


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Certain Semiconductor Chips with Minimized Chip Package Size and Products Containing Same, Inv.No. 337-TA-605. On February 25, 2008, the administrative law judge at the ITC issued a decision to stay all Tessera’s ITC proceedings pending completion of re-examination proceedings before the U.S. Patent and Trademark Office (“PTO”) concerning the two asserted Tessera patents. This decision from the administrative law judge was the result of a motion by the defendants seeking to stop ITC action following recent PTO actions rejecting numerous claims on the Tessera patents being asserted in the litigation. Tessera has indicated its intent to appeal the aforementioned ITC and PTO actions.
In September 2006, after we uncovered by our internal audit fraudulent foreign exchange transactions not known to us performed by our former Treasurer and resulting in payments by a financial institution of over 28 million Swiss Francs in commissions for the personal benefit of our former Treasurer, we filed a criminal complaint before the Public Prosecutor in Lugano, Switzerland. Following such complaint, our former Treasurer was arrested in November 2006 and on February 12, 2008 sentenced to three and half years imprisonment. To date, we have recovered over half of the illegally paid commissions and we are actively pursuing outstanding dues pursuant to the fraud and will continue to do so from all responsible parties.
In February 2008, following unauthorized purchases for our account of certain auction-rate securities, we initiated a proceeding against the responsible financial institution seeking to reverse the unauthorized purchases and recover all losses in our account, including, but not limited to, the $46 million impairment posted in Q4 2007.
Risk Management and Insurance
 
We cover our industrial and business risks through insurance contracts with top ranking insurance carriers, to the extent reasonably permissible by the insurance market which does not provide insurance coverage for certain risks and imposes certain limits, terms and conditions on coverage that it does provide.
 
Risks may be covered either through local policies or through corporate policies negotiated on a worldwide level for the ST Group of Companies. Corporate policies are negotiated when the risks are recurrent in various STMicroelectronicsof our affiliated companies.


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Currently we have four corporate policies covering the following risks:
 
 • Property damage and business interruption;
 
 • General liability and product liability;
 
 • Directors and officers liability; and
 
 • Transportation risks.
 
Our policies generally cover a twelve-month period. Theyperiod although may be subscribed for a longer period if conditions for a longer term arrangement are deemed beneficial to us. Such policies are subject to certain terms and conditions, exclusions and limitations, generally in line with prevailing conditions, exclusions and limitations, in the insurance market. Pursuant to such conditions, risks such as terrorism, earthquake, fire, floods and loss of production, may not be fully insured and we may not, in the event of a claim under a policy, receive an indemnification from our insurers commensurate with the full amount of the damage we have incurred. Furthermore, our product liability insurance covers physical and direct damages, which may be caused by our products, however, immaterial, non-consequential damages resulting from failure to deliver or delivery of defective products are generally not covered because such risks are considered to occur in the ordinary course of business and cannot be insured. We may decide to subscribe for excess coverage in addition to the coverage provided by our standard policies. If we suffer damage or incur a claim, which is not covered by one of our corporate insurance policies, this may have a material adverse effect on our results of operations.
 
We also perform annual assessments through an external consultant of our risk exposure in the field of property damage/business interruption in our production sites, to assess potential losses and actual risk exposure. Such assessments are provided to our underwriters. We do not own or operate any insurance captive, which acts an insurer for our own risks, although we may consider such an option in the future.
 
Reporting Obligations in International Financial Reporting Standards (“IFRS”)IFRS
 
We are incorporated in the Netherlands and our shares are listed on Euronext Paris and Borsa Italiana. Consequently, we are subject to an EU regulation issued on September 29, 2003 requiring us to report our results of operations and Consolidated Financial Statements using IFRS (previously known as International Accounting Standards or “IAS”).IFRS. As from January 1, 20082009 we are also required to prepare a semi-annual set of accounts using IFRS reporting standards.


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We use U.S. GAAP as our primary set of reporting standards, as U.S. GAAP has been our reporting standard since our creation in 1987. ApplyingUntil the SEC adopted rules allowing foreign private issuers to file financial statements prepared in accordance with IFRS without reconciliation to U.S. GAAP, in our financialU.S. GAAP was the sole admitted reporting is designed to ensurestandard for companies like us whose shares are listed on the comparability of our results to those of our competitors, as well as the continuity of our reporting, thereby providing our investors with a clear understanding of our financial performance.NYSE.
 
The obligation to report our Consolidated Financial Statements under IFRS will requirerequires us to prepare our results of operations using two different sets of reporting standards, U.S. GAAP and IFRS, which are currently not consistent. Such dual reporting could materially increase the complexity of our investor communications. The main potential areasGiven this risk, and the complexity of discrepancy concern capitalizationmaintaining and later amortizationreviewing two sets of development expenses requiredaccounts, we are considering reporting primarily under IFRS andat some point in the accounting for compound financial instruments.
We will comply with our reporting obligations under IFRS by presenting a complementary set of accounts or as may be otherwise requested by local stock exchange authorities.future.
 
Dividend Policy
 
We seek to use our available cash in order to develop and enhance our position in the very capital-intensive semiconductor market while at the same time managing our cash resources to reward our shareholders for their investment and trust in us.
 
Based on our annual results, projected capital requirements as well as business conditions and prospects, the Managing Board proposes each year to the Supervisory Board the allocation of our earnings involving, whenever deemed possible and desirable in line with our objectives and financial situation, the distribution of a cash dividend.
 
The Supervisory Board, upon the proposal of the Managing Board, decides each year, in accordance with this policy, which portion of the profits shall be retained in reserves to fund future growth or for other purposes and makes a proposal to the shareholders concerning the amount, if any, of the annual cash dividend. This policy was discussed at our 2005 annual shareholders’ meeting. See “Item 10. Additional Information — Memorandum and Articles of Association — Articles of Association — Distribution of Profits (Articles 37, 38, 39 and 40).”
 
Upon the approval of our Supervisory Board, we plan to announce the proposed agenda for our upcoming annual shareholders’ meeting and the amount of the cash dividend with respect to the year ended December 31, 2007.
In the past five years, we have paid the following dividends:
 
 • On April 26, 2007,May 20, 2009, our Shareholders approvedshareholders adopted the payment of a cash dividend with respect to the year ended December 31, 2008 of $0.12.


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• On May 14, 2008, our shareholders adopted the payment of a quarterly cash dividend with respect to the year ended December 31, 2007 of $0.30 payable$0.36.
• On April 26, 2007, our shareholders adopted the payment of a cash dividend with respect to Dutch Registry Shareholdersthe year ended December 31, 2006 of record on May 21, 2007 and New York Registry Shareholders of record on May 23, 2007. This dividend was approximately 34% of our earnings in 2006.$0.30.
 
 • On April 27, 2006, our shareholders approvedadopted the payment of a cash dividend with respect to the year ended December 31, 2005 of $0.12 per share payable to Dutch Registry Shareholders of record on May 22, 2006 and New York Registry Shareholders of record on May 24, 2006. This dividend was approximately 40% of our earnings in 2005.share.
 
 • On March 18, 2005, our shareholders approvedadopted the payment of a cash dividend with respect to the year ended December 31, 2004 of $0.12 per share payable to Dutch Registry Shareholders of record on May 23, 2005 and New York registry shareholders of record on May 25, 2005. This dividend was approximately 18% of our earnings in 2004.
• On April 23, 2004, our shareholders approved the payment of a cash dividend with respect to the year ended December 31, 2003 of $0.12 per share payable to Dutch Registry shareholders of record on May 21, 2004 and New York registry shareholders of record on May 26, 2004. This dividend was approximately 42% of our earnings for 2003.
• In 2003, we paid a cash dividend with respect to the year ended December 31, 2002 of $0.08 per share. This dividend was approximately 17% of our earnings for 2002.
 
In the future, we may consider proposing dividends representing a proportion of our earnings for a particular year. Future dividends will depend on our capacity to generate profitable results, our profit situation, our financial situation, the general economic situation and prospects and any other factorfactors that the Supervisory Board, deemsupon the recommendation of our Managing Board, shall deem important.


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Item 9.  Listing
 
Trading History of the Company’s Shares
 
Since 1994, our common shares have been traded on the New York Stock ExchangeNYSE under the symbol “STM” and on Euronext Paris (formerly known as ParisBourse) and were quoted on SEAQ International. On June 5, 1998, our common shares were also listed for the first time on the Borsa Italiana (Italian Stock Exchange), where they have been traded since that date.
 
OurSince November 12, 1997, our common shares have been included since November 12, 1997, in the CAC 40, the main benchmark for Euronext Paris which tracks a sample of 40 stocks selected from among the top 100 market capitalization and the most active stocks listed on Euronext, Paris, and which is the underlying asset for options and futures contracts. The base value was 1,000 at December 31, 1987.
 
On December 1, 2003, the CAC 40 index shifted to free-float weightings. As of this date, the CAC 40 weightings are based on free-float capitalization instead of total market capitalization. On February 21, 2005, Euronext Paris created a new range of indices; along with four existing indices including the CAC 40, six new indices have been created.
 
On March 18, 2002, we were admitted into the S&P/MIB (formerly the MIB 30 Index), which iswas comprised of the 40 leading stocks, based upon their industry, market capitalization and liquidity, listed on the Borsa Italiana. It featuresfeatured free-float adjustment, high liquidity and broad, accurate representation of market performance based on the leading companies in leading industries. On June 1, 2009, the Borsa Italiana introduced a new series of indexes and, as a result, our shares were included in the new FTSE MIB Index, which replaced the S&P/MIB Index. The new FTSE MIB Index is still comprised of 40 leading stocks, selected on the basis of their market capitalization, liquidity, free float and financial viability. On January 29, 2010, the Borsa Italiana announced the introduction of a new index, aims to cover 80%the FTSE MIB Dividend Index. This new index relies on the composition of the Italian equity universe.FTSE MIB Index, to which we belong, and will comprise the cumulative value of ordinary gross dividends announced and paid by the individual constituents of the underlying FTSE MIB Index, calculated in terms of index points.
 
On June 23, 2003, we were admitted into the Semiconductor Sector Index (or “SOX”) of the Philadelphia Stock Exchange.SOX. The SOX is a widely followed, price-weightedmodified capitalization-weighted index composed of 18 companies that are primarily involved in the design, distribution, manufacturingmanufacture and sale of semiconductors.
 
The tables below indicate the range of the high and low prices in U.S. dollars for the common shares on the New York Stock Exchange,NYSE, and the high and low prices in Euros for the common shares on Euronext, Paris, and the Borsa Italiana annually for the past five years, during each quarter in 20062007 and 2007,2008, and monthly for the past 18 months. In December 1994, we completed our Initial Public Offering of 21,000,000 common shares at an initial price to the public of $22.25 per share. On June 16, 1999, we effected a 2-to-1 stock split and on May 5, 2000, we effected a 3-to-1 stock split. The tables below have been adjusted to reflect the split. Each range is based on the highest or lowest rate within each day for common share price ranges for the relevant exchange.


124109

Euronext Paris(1)
 
                                
 Average Daily Trading
      Average Daily Trading
     
 Volumes      Volumes     
 Number of
   Price Ranges  Number of
   Price Ranges 
Calendar Period
 Shares Capital High Low  Shares Capital High Low 
   (€)   (€)    (€) (€) (€) 
Annual Information for the Past Five Years
                                
2003          24.74   15.20 
2004          23.81   13.25 
2005          15.81   10.83   5,367,485   72,641,065   15.81   10.83 
2006          16.56   11.34   5,748,008   78,944,778   16.56   11.34 
2007  5,430,551       15.61   9.70   5,430,551   71,352,748   15.61   9.70 
2008  7,490,827   54,414,076   9.89   4.52 
2009  4,613,574   23,933,547   7.02   2.97 
Quarterly Information for the Past Two Years
                                
2006
                
2008
                
First quarter          16.56   13.98   7,826,688   62,318,108   9.89   6.21 
Second quarter          15.97   11.82   8,048,986   60,926,675   8.70   6.55 
Third quarter          13.91   11.34   8,051,424   62,352,058   9.49   6.17 
Fourth quarter          14.45   13.03   6,049,032   34,975,690   7.66   4.52 
2007
                
2009
                
First quarter  5,449,082       15.31   13.57   4,318,138   17,103,184   5.29   2.97 
Second quarter  5,431,749       15.61   13.82   5,127,833   25,919,626   5.96   3.67 
Third quarter  5,350,203       14.64   11.58   4,519,462   25,896,652   6.78   4.96 
Fourth quarter  5,492,462       12.19   9.70   4,504,956   26,817,174   7.02   5.18 
Monthly Information for the Past 18 Months
                
2006
                
Monthly Information for the Past 6 Months
                
2009
                
September  6,107,356   79,814,418   13.91   12.35   5,540,498   35,694,154   6.78   5.80 
October  5,944,635   80,676,802   14.24   13.03   5,556,260   34,655,655   7.02   5.44 
November  5,187,519   71,998,052   14.45   13.20   4,642,508   26,148,817   6.16   5.18 
December  4,750,629   66,096,256   14.36   13.38   3,322,354   19,848,345   6.43   5.41 
2007
                
2010
                
January  6,022,753   86,746,809   15.00   13.57   5,118,605   31,814,948   6.59   5.81 
February  5,135,836   75,080,782   15.31   14.13 
March  5,160,180   74,086,108   14.75   14.02 
April  5,555,233   82,354,867   15.40   14.28 
May  6,047,522   87,851,254   15.61   14.24 
June  4,674,931   66,646,707   14.61   13.82 
July  5,474,539   76,257,845   14.64   12.32 
August  5.565,957   69,395,386   13.15   11.85 
September  4,965,317   60,445,282   13.10   11.58 
October  6,027,143   70,415,373   12.19   11.10 
November  5,800,434   63,978,792   11.94   10.03 
December  4,488,617   46,194,961   10.83   9.70 
2008
                
January  8,385,124   71,620,389   9.89   7.55 
February  7,788,533   64,644,823   8.73   7.74 
February (as of February 22, 2010)  5,126,795   30,994,039   6.45   5.73 
 
 
Sources: Reuters (for monthly high and low prices) andSource: Bloomberg (for average daily trading volumes at average closing prices).


125110

Borsa Italiana (Milan)(1)
 
                
 Average Daily Trading
                     
 Volumes      Average Daily Trading Price Ranges
 
 Number of
   Price Ranges  Number of
   Volumes 
Calendar Period
 Shares Capital High Low  Shares Capital High Low 
   (€) (€) (€)    (€) (€) (€) 
Annual Information for the past five years
                                
2003          24.75   15.21 
2004          23.81   13.25 
2005          15.82   10.82   15,530,038   210,190,100   15.82   10.82 
2006          16.55   11.33   10,316,084   141,689,828   16.55   11.33 
2007          15.60   9.80   7,485,654   98,885,773   15.60   9.80 
2008  7,194,358   52,370,415   9.90   4.52 
2009  6,606,116   34,222,931   7.03   2.97 
Quarterly Information for the past two years
                                
2006
                
2008
                
First quarter          16.55   13.99   8,127,048   64,733,773   9.90   6.21 
Second quarter          15.94   11.81   8,234,557   62,311,404   8.69   6.55 
Third quarter          13.92   11.33   8,080,374   62,486,775   9.50   6.17 
Fourth quarter          14.46   13.07   4,293,847   24,952,098   7.66   4.52 
2007
                
2009
                
First quarter          15.32   13.63   4,708,890   18,660,286   5.29   2.97 
Second quarter          15.60   13.82   7,575,169   38,304,696   5.95   3.67 
Third quarter          14.64   11.57   6,923,926   39,684,060   6.79   4.96 
Fourth quarter          12.16   9.80   7,216,727   42,888,549   7.03   5.15 
Monthly Information for the past 18 months
                
2006
                
Monthly Information for the past 6 months
                
2009
                
September  11,221,327   146,557,480   13.92   12.35   9,419,477   60,734,216   6.78   5.78 
October  12,183,594   165,369,033   14.25   13.07   9,420,406   58,764,062   7.03   5.45 
November  11,129,232   154,443,388   14.46   13.19   6,560,369   36,977,051   6.11   5.15 
December  8,004,114   111,322,904   14.36   13.37   5,481,856   32,563,593   6.43   5.42 
2007
                
2010
                
January  10,773,375   155,258,040   15.00   13.63   9,438,785   58,671,489   6.58   5.81 
February  9,767,322   142,907,639   15.32   14.13 
March  8,623,576   124,007,021   14.76   14.02 
April  9,225,128   136,842,636   15.40   14.29 
May  8,634,820   125,562,443   15.60   14.23 
June  5,873361   83,732,310   14.61   13.82 
July  6,361,012   88,695,350   14.64   12.30 
August  7,254,127   90,597,108   13.13   11.83 
September  5,758,327   70,194,586   13.10   11.57 
October  6,709,056   78,489,824   12.16   11.08 
November  5,512,953   60,869,514   11.92   10.06 
December  4,887,232   50,380,846   10.81   9.80 
2008
                
January  10,071,980   86,256,895   9.90   7.65 
February  6,982,043   57,925,024   8.73   7.75 
February (as of February 22, 2010)  7,826,391   47,278,742   6.45   5.71 
 
 
Sources: Reuters (for monthly high and low prices) andSource: Bloomberg (for average daily trading volumes at average closing prices).


126111

New York Stock Exchange
 
                                
 Average Daily Trading
    Average Daily Trading
     
 Volumes      Volumes     
 Number of
   Price Ranges  Number of
   Price Ranges 
Calendar Period
 Shares Capital High Low  Shares Capital High Low 
   (U.S.$) (U.S.$) (U.S.$)    (US$) (US$) (US$) 
Annual Information for the past five years
                                
2003          28.67   16.67 
2004          29.90   16.36 
2005          19.47   13.96   1,087,913   18,288,128   19.47   13.96 
2006          19.90   14.55   1,069,476   18,428,607   19.90   14.55 
2007          20.84   14.22   1,823,514   32,857,113   20.84   14.22 
2008  2,615,829   28,015,734   14.35   5.90 
2009  1,707,480   12,411,885   10.28   3.73 
Quarterly Information for the past two years
                                
2006
                
2008
                
First quarter          19.90   16.67   2,820,614   33,476,984   14.35   9.88 
Second quarter          19.60   14.83   2,644,567   31,193,912   13.56   10.33 
Third quarter          17.79   14.55   2,836,884   32,893,674   13.74   9.75 
Fourth quarter          18.82   16.50   2,171,834   16,582,971   10.46   5.9 
2007
                
2009
                
First quarter          20.18   17.97   1,780,595   9,166,855   7.15   3.73 
Second quarter          20.84   18.55   1,632,902   11,183,826   8.30   4.97 
Third quarter          20.17   15.85   1,483,681   11,785,948   9.99   6.89 
Fourth quarter          17.36   14.22   1,980,001   17,386,576   10.28   7.86 
Monthly Information for the past 18 months
                
2006
                
Monthly Information for the past 6 months
                
2009
                
September  1,215,410   20,286,408   17.79   15.75   1,601,857   15,009,397   9.99   8.24 
October  1,363,027   23,423,624   17.82   16.50   2,199,882   20,174,914   10.28   7.93 
November  1,753,133   31,380,252   18.66   16.91   1,866,736   15,730,980   9.05   7.86 
December  1,453,165   26,690,282   18.82   17.85   1,863,090   16,233,438   9.46   8.23 
2007
                
January 2007  1,611,140   30,090,456   19.40   17.97 
February  1,901,586   36,437,396   20.18   18.40 
March  1,751,946   33,330,764   19.54   18.41 
April  1,984,663   39,793,481   20.84   19.15 
May  2,299,235   45,178,923   20.72   19.15 
June  2,103,313   40,156,252   19.49   18.55 
July  2,203,551   41,951,414   20.17   16.94 
August  2,224,766   37,742,679   18.14   15.85 
September  1,351,409   22,843,080   17.87   16.05 
October  1,534,802   25,551,120   17.36   15.72 
November  1,524,103   24,640,399   17.25   14.91 
December  1,314,994   19,640,756   15.78   14.22 
2008
                
2010
                
January  2,171,989   27,444,626   14.35   11.42   2,687,037   23,781,694   9.5   8.1 
February  2,773,272   33,843,628   12.97   11.39 
February (as of February 22, 2010)  1,867,142   15,549,559   8.77   7.87 
 
 
Sources: Reuters (for monthly high and low prices) andSource: Bloomberg (for monthly average daily trading volumes at average closing prices).
 
At December 31, 2006, there were 899,760,539 common shares outstanding, not including (i) common shares issuable under our various employee stock option plans or employee share purchase plans, (ii) common shares issuable upon conversion of our outstanding convertible debt securities and (iii) 10,532,881 common shares repurchased in 2001 and 2002. Of the 899,760,539878,333,566 common shares outstanding as of December 31, 2007, 89,372,7132009, 78,305,804, or 9.9%8.9%, were registered in the common share registry maintained on our behalf in New York and


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582,683,072 581,333,347, or 64.8%66.2%, of our common shares outstanding were listed on Euroclear France and traded on Euronext Paris S.A.SA and on the Borsa Italiana in Milan. Of the 874,276,833 common shares outstanding as of December 31, 2008, 65,100,373, or 7.4%, were registered in the common share registry maintained on our behalf in New York and 558,471,706, or 63.9%, of our common shares outstanding were listed on Euroclear France and traded on Euronext SA and on the Borsa Italiana in Milan.
 
Market Information
 
Euronext
 
General
 
On September 22, 2000, upon successful completion of an exchange offer, the Paris-Bourse(SBF) (“SBF”) SA, or the “SBF”, the Amsterdam Stock Exchange and the Brussels Stock Exchange merged to create Euronext, the first pan-European stock exchange. Through the exchange offer, all the shareholders of SBF, the Amsterdam Stock Exchange and the Brussels Stock Exchange contributed their shares to Euronext N.V. (“Euronext”), a Dutch holding company, and the Portugal Exchange was included in Euronext in January 2002. Following the creation of Euronext, the SBF changed its name to Euronext Paris SA (“Euronext Paris”). Securities quoted on exchanges participating in Euronext cash markets are traded and cleared over common Euronext platforms but remain listed on their local exchanges. “NSC”“UTP” is the common Euronext platform for trading and “Clearing 21” for clearing. In addition,


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Euronext, through Euroclear, anticipates, but not before 2008, implementation ofhas a central settlement and custody structure over a common system.system (“ESES”). In January 2002, Euronext acquired the London International Financial Futures and Options Exchange (“LIFFE”), London’s derivatives market, and created Euronext.liffe. Euronext.liffe is the international derivatives business of Euronext, comprising the Amsterdam, Brussels, Lisbon, London and Paris derivatives markets. Euronext.liffe creates a single market for derivatives, by bringing all its derivatives products together on the one electronic trading platform, LIFFE CONNECTtm.
 
NYSE Group Inc. and Euronext combined in April 2007 to create NYSE Euronext, the world’s largest and first transatlantic stock exchange operator, with six cash equities exchanges in five countries and six derivatives exchange.exchanges. NYSE Euronext is the group holding company, and NYSE Group Inc. and Euronext are its subsidiaries.
 
Euronext Paris
 
On February 21,In 2005, Euronext Paris createdoverhauled its listing arrangements, creating a single regulated market,list, Eurolist by EuronextTM (“Eurolist”), to replacethat encompassed all of its regulated markets. In Paris, the three former regulated markets operated by Euronext Paris: the—Premier Marché,Second MarchéandNouveau Marché.The revised listing format was inaugurated — were amalgamated in Paris before being rolled out in allFebruary 2005, becoming Euronext markets. As part of Euronext,Paris. Euronext Paris retains responsibility for the admission of shares on, Eurolist as well as theand regulation of, thisthe Paris market.
 
Our shares have been listed on thePremier Marchéof Euronext Paris since July 2001 and are now listed on compartment A of Eurolist. In accordance with Euronext Paris rules, the shares issued by domestic and other companies listed on EuronextEurolist are classified in capitalization compartments. The shares of listed companies are distributed between the following three market capitalization compartments, according to the criteria set by Euronext Paris:compartments:
 
 • compartmentCompartment A comprises the companies with market capitalizations above €1 billion;
 
 • compartmentCompartment B comprises the companies with market capitalizations from €150 million and up to and including €1 billion; and
 
 • compartmentCompartment C comprises the companies with market capitalizations below €150 million.
 
Our common shares are listed on the compartment A under the ISIN Code NL0000226223.
 
Securities listed on Euronext Paris are placed in one of two categories ((ContinuorFixing)Fixing) depending on the volume of transactions.whether they belong to certain indices or compartmentsand/or their trading volume. Our common shares are listed in the category known asContinu,which includes the most actively traded securities. The minimum yearly trading volume required for a security of a listed company on a regulated market of Euronext Paris in theContinucategory is 2,500 trades.
 
Securities listed on EurolistEuronext Paris are traded through providers of investment services (investment companies and other financial institutions). The trading of our common shares takes place continuously on each business day from 9:00 a.m. to 5:2530 p.m. (Paris time), with a pre-opening session from 7:15 a.m. to 9:00 a.m. (Paris time) and a pre-closing session from 5:2530 p.m. to 5:3035 p.m. (Paris time) during which transactions are recorded but not executed and a closing auction at 5:3035 p.m. (Paris time). From 5:3035 p.m. to 5:40 p.m. (Paris time) (“trading at last phase”), transactions are executed at the closing price. Any trade effected after the close of a stock exchangetrading session will be recorded, on the next Euronext Paris trading day, at the closing price for the relevant security at the end of the previous day’s session. Euronext Paris publishes a daily official price list that includes price information on each listed security. Euronext Paris has introduced continuous electronic trading during trading hours for most actively


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traded securities. Any trade of a security that occurs outside trading hours is effected at a price within a range of 1% of the closing price for that security.
 
TradingUnder the NSC trading manual, Euronext Paris may temporarily interrupt trading in a security admitted to trading on the Euronext Paris market if purchases and sales recorded in the listed securitiessystem would inevitably result in a price beyond a certain threshold, determined on the basis of an issuer may be suspendeda percentage fluctuation from a reference price. With respect to shares belonging to thecontinu category, once trading has commenced, volatility interruptions for a reservation period of 2 minutes (subject to extension by Euronext Paris if a quoted price exceeds certain price limits defined by the regulations of Euronext Paris. In particular,Paris) are possible if the quoted price of aContinusecurity varies either by more than 5% from a reference price Euronext may suspend trading (for the portion of the orders which would be traded outside of the 5% threshold) for up to two minutes. The reference price is usually the(e.g., opening price,auction price) or with respect to the first quoted price of the given trading day, the last traded price of the previous trading day, as adjusted if necessary by Euronext Paris to take into account available information. Further suspensions for up to four minutes are also possible if the price again varies by more than 5% from a new reference price equal to the price which caused the first trading suspension. If the quoted price of aContinusecurity varies by more than 2% (with respect to CAC 40 issuers like our company) from the last quoted price, trading may be suspended for up to two minutes.trade on such securities. Euronext Paris may also suspend trading of a listed security admitted to trading on the Euronext Paris market in certain other limited circumstances including for example, the occurrence of unusual trading activity in sucha security. In addition, in exceptional cases, including, for example, upon announcement of a takeover bid, the French market regulator (Autorité des marchés financiers(the “AMF”or“AMF”) (the regulatory authority over French stock exchanges) may also require Euronext Paris to suspend trading.
Under the UTP trading manual, for securities belonging to thecontinucategory, an order which breaches volatility thresholds no longer triggers the interruption of the trading of the security. Instead, until confirmed by the


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ordering member, such order is automatically rejected by Euronext Paris. If confirmed, the order is executed. In addition, Euronext Paris still remains entitled to suspend trading of a security belonging to thecontinucategory in case of repeated volatility threshold breaches.
 
All trades of securities listed on EurolistEuronext Paris are performed on a cash-settlement basis on the third trading day after the trade. Market intermediaries are also permitted to offer investors a deferred settlement service (Service à Réglement Différéor “SRD”) for a fee. The SRD allows investors who elect this service to benefit from leverage and other special features of the monthly settlement market. The SRD is reserved for securities which have both a total market capitalization of at least €1 billion and represent a minimum daily trading volume of €1 million and which are normally cited on a list published by Euronext Paris. Investors in securities eligible for the SRD can elect on the determination date ((date de liquidation)liquidation), which is, at the latest, the fifth trading day before the end of the month, either to settle the trade by the last trading day of the month or to pay an additional feededuct a margin amount and postpone the settlement decision to the determination date of the following month. Our common shares are eligible for the SRD.
 
Ownership of securities traded on a deferred settlement basis belongs to the market intermediary (in whose account they are registered at the date set by market rules) pending registration in the buyer’s account. According to the rules of Euronext Paris, the market intermediary is entitled to the dividends and coupons pertaining to the securities he has full title, provided he is responsible for paying the buyer, when the settlement matured, the exact cash equivalent of the rights received.
 
Prior to any transfer of securities held in registered form on Eurolist, the securities must be converted into bearer form and accordingly inscribed in an account maintained by an accredited intermediary with Euroclear France SA (“Euroclear”), a registered clearing agency. Transactions in securities are initiated by the owner giving instructions (through an agent, if appropriate) to the relevant accredited intermediary. Trades of securities listed on Eurolist are cleared through Clearing 21, a common Euronext platform, and settled through Euroclear using a continuous net settlement system. A fee or a commission is payable to the broker-dealer or other agent involved in the transaction.
 
Our common shares have been included in the CAC 40, the principal index published by Euronext Paris, since November 12, 1997. The CAC 40 is derived daily by comparing the total market capitalization of 40 stocks included in the monthly settlement market of Euronext Paris to a baseline established on December 31, 1987. Adjustments are made to allow for expansion of the sample due to new issues. The CAC 40 indicates the trends in the French stock market as a whole and is one of the most widely followed stock price indices in France.
 
Our common shares could be removed from the CAC 40 at any time, and the exclusion or the announcement thereof could cause the market price of our common shares to drop significantly.
 
Securities Trading in Italy
 
The Mercato Telematico Azionario (the “MTA”), the Italian automated screen-based quotation system on which our common shares are listed, is organized and administered by Borsa Italiana S.p.A. (“Borsa Italiana”) subject to the supervision of the Commissione Nazionale per le Società e la Borsa (“CONSOB”) the public authority charged, inter alia, with regulating investment companies, securities markets and public offerings of securities in Italy to ensure the transparency and regularity of dealings and protect investors. Borsa Italiana was established to manage the Italian regulated financial markets (including the MTA) as part of the implementation in Italy of the EU Investment Services Directive pursuant to Legislative Decree No. 415 of July 23, 1996 (the “Eurosim Decree”) and as modified by Legislative Decree No. 58 of February 24, 1998, as amended (the “Financial Act”). Borsa Italiana became operative in January 1998, replacing the administrative body Consiglio di Borsa, and has issued rules governing the organization and the administration of the Italian stock exchange, futures and options


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markets as well as the admission to listing on and trading in these markets. The shareholdersAs of October 1, 2007, upon a merger with the London Stock Exchange, 99.9% of the share capital of Borsa Italiana are primarily financial institutions.is held by the London Stock Exchange Group plc, which, as of June 25, 2009, holds such interest through its subsidiary, London Stock Exchange Group Holdings (Italy) LTD.
 
Athree-day rolling cash settlement period of three open market days applies to all trades of equity securities in Italy effected on a regulated market. Any person, through an authorized intermediary, may purchase or sell listed securities following (i) in the case of sales, deposit of the securities; and (ii) in the case of purchases, deposit of 100% of such securities’ value in cash, or deposit of listed securities or government bonds of an equivalent amount. No “closing price” is reported for the electronic trading system, butwhich requires the daily publication of: (i) an “official price” for each security calculated as a weighted average price of all trades effected during the trading day net of trades executed on a “cross order” basis,day; and (ii) a “reference price” for each security calculated as the closing-auction price or, in the event that no closing-auction price is available, as a weighted average of the last 10% of the trades effected during such day neta ten-minute interval of trades executed on a “cross order” basis are published daily.the continuous trading phase.


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If the opening price of aan equity security contained in the FTSE MIB Index (established each trading day prior to the commencement of trading based on bids received) differs by more than 10% (or5% or such other amount established by Borsa Italiana)Italiana from the previous day’s reference price, trading in that security will not be permitted until Borsa Italiana authorizes it.and a volatility bid takes place. (For equity securities other than those contained in the FTSE MIB Index, trading will not be permitted, and a volatility bid takes place, if the opening price differs by more than 10% from the previous day’s reference price). If in the course of a trading day the price of our securitiesa security fluctuates by more than 5%3.5% from the last reported sale price, (or 10% from the previous day’s reference price), an automatic five minute suspension in the trading of that security will be declared by the Borsa Italiana. (For equity securities other than those contained in the FTSE MIB Index, this suspension will apply upon a 5% fluctuation from the last reported sale price). In the event of such a suspension orders already placed may not be modified or cancelled and new orders may not be processed.a volatility bid takes place, lasting for ten minutes plus a variable period of time, randomly determined by the trading system, of up to one minute. Borsa Italiana has the authority to suspend trading in any security, among other things, in response to extreme price fluctuations. In urgent circumstances, CONSOB may, where necessary, adopt measures required to ensure the transparency of the market, orderly trading and protection of investors.
 
Italian law requires that trading of equity securities, as well as any other investment services, may be carried outvis-à-visthe public on a professional basis by SIMS,financial intermediaries, banks and certain types of finance companies. In addition, banks and investment firms organized in any member state of the EU are permitted to operate in Italy either on a branch or on a cross-border basis provided that the intent of such bank or investment firm is communicated to CONSOB and the Bank of Italy by the competent authorities of the member state according to specific procedures. Non-EU banks and non-EU investment firms may operate in Italy subject to the specific authorization of CONSOB and the Bank of Italy.
 
The settlement of Italian stock exchange transactions is facilitated by Monte Titoli S.p.A., a centralized securities clearing system owned by the Italian stock exchange.Borsa Italiana. Most Italian banks and certain Italian securities dealers have securities accounts with Monte Titoli and act as depositories for investors. Beneficial owners of shares may hold their interests through custody accounts with any such institution. Beneficial owners of shares held with Monte Titoli may transfer their shares, collect dividends, create liens and exercise other rights with respect to those shares through such accounts.
 
Participants in Euroclear and Clearstream may hold their interests in shares and transfer the shares, collect dividends, create liens and exercise their shareholders’ rights through Euroclear and Clearstream. A holder may require Euroclear and Clearstream to transfer its shares to an account of such holder with an Italian bank or any authorized broker.
 
Our common shares are included in the S&P/FTSE MIB Index. Our common shares could be removed from the S&P/FTSE MIB Index at any time, and the exclusion or announcement thereof could cause the market price of our common shares to drop significantly.
 
Item 10.  Additional Information
 
Memorandum and Articles of Association
 
Applicablenon-U.S. Regulations
 
Applicable Dutch Legislation
 
We were incorporated under the lawlaws of the Netherlands by deed of May 21, 1987, and we are governed by Book 2 of the Dutch Civil Code. Set forth below is a summary of certain provisions of our Articles of Association and relevant Dutch corporate law. The summary below does not purport to be complete and is qualified in its entirety by reference to our Articles of Association and relevant Dutch corporate law.
 
The summary below sets forth our current Articles of Association as most recently amended.amended on May 20, 2009.
 
We are subject to various provisions of the Dutch Financial Markets Supervision Act(“Wet op het financieel toezicht”)(the “FMSA”) and, in particular, to the provisions summarized below.


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Unless an exemption applies, we are subject to (i) a prohibition from offering securities in the Netherlands without the publication of an approved prospectus (and the same prohibition applies for such offers in other jurisdictions of the European Economic Area (the “EEA”)); (ii) a prohibition of proceeding with any transaction in our financial instruments admitted to trading on a regulated market in the EEA or in any other financial instrument the value of which depends in part on these instruments, in the event where we would possess inside information; and (iii) certain restrictions (related to market manipulation) in repurchasing our shares. Furthermore, we are required to inform the Dutch Authority for the Financial Markets(“Autoriteit Financiële Martken”Markten”)(the “AFM”) immediately if our issued and outstanding share capital or voting rights change by 1 percent1% or more since our previous


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notification. Other changes in our share capital or voting rights need to be notified periodically. Also, the sole member of our Managing Board and the members of our Supervisory Board (unless they have already been notified pursuant to the requirements described below in “— Disclosure of Holdings”), certain of their relatives, entities closely related with them and (under certain circumstances) members of senior management must notify the AFM of all transactions conducted on their own account relating to our financial instruments admitted to trading on a regulated market in the EEA or in any other financial instrument the value of which depends in part on these instruments. The AFM keeps a public register of all notifications made pursuant to the FMSA. We must once a year file with the AFM a document containing or referencing all information we were required to make public over the twelve months preceding the publication of our annual accounts under securities rules (Dutch and other) to which we are subject. The provisions of the FMSA regarding statements of holdings in our share capital and voting rights are described below in “— Disclosure of Holdings.”
 
On October 28, 2007, the Dutch legislation implementing Directive 2004/25/EC on takeover bids (the “Takeover Directive”) entered into force. This new Dutch legislation requires a shareholder who (individually or jointly) obtains control to launch an offer to all of our other shareholders. Such control is deemed present if a (legal) person is able to exercise, alone or acting in concert, at least 30% of the voting rights in our shareholders’ meeting. The acquisition of control does not require an act of the person who obtains control (e.g., if we repurchase shares as a consequence of which the relative stake of a major shareholder increases (and may result in control having been obtained)).
 
In the event control is acquired, whether or not by acting in concert, two options exist: (i) either a mandatory offer is launched or (ii) within 30 days the relevant stake is decreased below the 30% voting rights threshold, provided the voting rights have not been exercised during this period and our shares are not sold to a controlling shareholder. The Enterprise Chamber of the Amsterdam Court of Appeal (“Ondernemingskamer”Ondernemingskamer”) may extend this period by an additional 60 days.
 
The new Dutch legislation contains a substantial number of exemptions to the obligation to launch a (mandatory) offer. One of those exemptions is that Stichting Continuïteit ST, an independent foundation, is allowed to cross the 30% voting rights threshold when obtaining our preference shares after the announcement of a public offer, but only for a maximum period of 2 years.
 
Applicable French Legislation
 
As our registered offices are based in the Netherlands, the AMF is not the competent market authority to control our disclosure obligations. The AMF General Regulation only requires that the periodic and ongoing information to be disclosed pursuant to the EU Transparency Directive and which content is controlled by the Netherlands AuthorityAFM (for instance the annual, half-yearly and quarterly financial reports or any inside information) also be also disclosed at the same time in France and made available on our Internet website.
 
In addition, as our shares are listed on Eurolist,Euronext Paris, in France, we must (i) disclose the amount of the fees paid to its statutory auditors (pursuant toArticle 222-8 of the AMF General Regulation), (ii) disclose a report on internal control procedures (pursuant toArticle 222-9 of the AMF General Regulation and (iii) inform the AMF of any modification of itsour bylaws and articles of incorporation (pursuant toArticle 223-20 of the AMF General Regulation).
The AMF can also ask our company to; and (ii) disclose information relating to threshold crossings as well as information on the total number of shares and voting rights composing our capital on a monthly basis (pursuant toArticle 223-14223-16 seq. of the AMF General Regulation). This information is then disclosed to the public by the AMF.
 
Articles 241-1 to241-6 of the AMF General Regulation on buyback programs for equity securities admitted to trading on a regulated market and transaction reporting requirements are also applicable to our company as well asArticles 611-1 to632-1 of the AMF General Regulation on market abuse (insider dealing and market manipulation).
 
As a general rule, the information disclosed to the public must be accurate, precise and fairly presented.


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Following the opening of Eurolist by EuronextTM,Euronext Paris, all financial instruments formerly traded on thePremier,theSecondand theNouveau Marchéare now distributed between three capitalization compartments, A, B, and C, whose regulations are generally applicable to us. See “Item 9. Listing.”
 
Other provisions of French securities regulations are not applicable to us.
 
Regarding the regulation of public tender offers,articles 231-1 to237-13 of the AMF General RegulationsRegulation shall apply to our shares, except for the provisions concerning the standing offer, the mandatory filing of a tender offer and the squeeze out.
 
Applicable Italian Legislation
 
Because our common shares are listed on the MTA, as described in “Item 9. Listing” above, we are required to publish certain information in order to comply with (i) the Financial Act and related regulations promulgated by the CONSOB and (ii) certain rules of the Borsa Italiana. These requirements are related to: (i) disclosure of price-sensitive information (such as capital increases, mergers, creation of joint subsidiaries, major acquisitions)acquisitions, approval


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of draft financial statements, proposals for dividend payments, approval of financial statements and interim reports); (ii) periodic information (such as financial statements to be provided in compliance with the jurisdiction of the country of incorporation) or information on the exercise of shareholders’ rights (such as the calling of the shareholders’ meeting or the exercise of pre-emptive rights); and (iii) the publication of research, budgets and projections.projections; and (iv) in certain circumstances, dissemination to the public in Italy, and communication to CONSOB, of any additional information that we provide to our shareholders in countries other than Italy where our shares are listed on a stock exchange.
 
As a result of our admission to the S&P/FTSE MIB Index, we now must comply with certain additional stock market rules. These additional provisions require that we announce through a press release, within one month from our year-end closing (i) the month in which the payment of the dividend for the year ended, where applicable, is planned to take place (if different from the month when the previous dividend was distributed), and (ii) our intent, if any, of adopting a policy of distributing interim dividends for the current year, mentioning the months when the distribution of dividends and interim dividends will take place. In the event of a modification of the policy of distributing dividends,information referred to in (i) and (ii) above, we shall be required to promptly update such information in another press release. In addition, stock splits and certain other transactions must be carried out in accordance with the Borsa Italiana’s calendar. We must notify the Italian stock market of any modification to the amount and distribution of our share capital. The notification must be made no later than one day after the modification has become effective under the rules to which we are subject.
 
We are required to communicate to the CONSOB and the Borsa Italiana the same information that we are required to disclose to the AMF and the AFM regarding transactions in our securities and any exercise of stock options by our Supervisory Board members and executive officers, as described below.
 
Articles of Association
 
Purposes of the Company (Article 2)
 
Article 2 of our Articles of Association sets forth the purposes of our company. According to Article 2, our purposes shall be to participate in or take, in any manner, any interests in other business enterprises; to manage such enterprises; to carry on business in semiconductors and electronic devices; to take and grant licenses and other industrial property interests; to assume commitments in the name of any enterprises with which we may be associated within a group of companies; and to take any other action, such as but not limited to the granting of securities or the undertaking of obligations on behalf of third parties, which in the broadest sense of the term, may be related or contribute to the aforementioned objects.
 
Company and Trade Registry
 
We are registered with the Chamber of Commerce and Industry in Amsterdam(Kamer van Koophandel en Fabrieken voor Amsterdam)under no. 33194537.
 
Supervisory Board and Managing Board
 
Our Articles of Association do not include any provisions related to a Supervisory Board member’s:
 
 • power to vote on proposals, arrangements or contracts in which such member is directly interested;
 
 • power, in the absence of an independent quorum, to vote on compensation to themselves or any members of the Supervisory Board; or
 
 • borrowing powers exercisable by the directors and how such borrowing powers can be varied.


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Our Supervisory Board Charter, however, explicitly prohibits members of our Supervisory Board from participating in discussions and voting on matters where any such member has a conflict of interest. Our Articles of Association provide that our shareholders’ meeting must adopt the compensation of our Supervisory Board members.
 
Neither our Articles of Association nor our Supervisory Board Charter have a requirement or policy that Supervisory Board members hold a minimum number of our common shares.
 
Compensation of our Managing Board (Article 12)
 
Our Supervisory Board determines the compensation of the sole member of our Managing Board, within the scope of the compensation policy adopted by our shareholders’ meeting upon the proposal of our Supervisory Board. Our Supervisory Board will submit for approval by the shareholders’ meeting a proposal regarding the


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compensation in the form of shares or rights to acquire shares. This proposal sets forth at least how many shares or rights to acquire shares may be awarded to our Managing Board and which criteria apply to an award or a modification.
 
Compensation of our Supervisory Board (Article 23)
 
Our shareholders’ meeting determines the compensation of our Supervisory Board members. Our shareholders’ meeting shall have the authority to decide whether such compensation will consist of a fixed amountand/or an amount that is variable in proportion to profits or any other factor.
 
Information from our Managing Board to our Supervisory Board (Article 18)
 
At least once per year our Managing Board shall inform our Supervisory Board in writing of the main features of our strategic policy, our general and financial risks and our management and control systems.
 
Our Managing Board shall then submit to our Supervisory Board for approval:
 
 • our operational and financial objectives;
 
 • our strategy designed to achieve the objectives; and
 
 • the parameters to be applied in relation to our strategy,inter alia,regarding financial ratios.ratios; and
• corporate social responsibility issues that are relevant to the enterprise.
 
For more information on our Supervisory Board and our Managing Board, see “Item 6. Directors, Senior Management and Employees.”
 
Adoption of Annual Accounts and Discharge of Management and Supervision Liability (Article 25)
 
Each year, within four months after the end of our financial year, our Managing Board must prepare our statutory annual accounts, certified by one or several auditors appointed by our shareholders’ meeting and submit them to our shareholders’ meeting for adoption. Within this period and in accordance with the statutory obligations to which we are subject, our Managing Board must make generally available: (i) our statutory annual accounts, (ii) our annual report, (iii) the auditor’s statement, as well as (iv) other annual financial accounting documents which we, under or pursuant to the law, must make generally available together with our statutory annual accounts.
 
Each year, our shareholders’ meeting votes whether or not to discharge the members of our Supervisory Board and of our Managing Board for their supervision and management, respectively, during the previous financial year. In accordance with the applicable Dutch legislation, the discharge of the members of our Managing Board and the Supervisory Board must, in order to be effective, be the subject of a specific resolution on the agenda of our shareholders’ meeting. Under Dutch law, this discharge does not extend to matters not disclosed to our shareholders’ meeting.
 
Distribution of Profits (Articles 37, 38, 39 and 40)
 
Subject to certain exceptions, dividends may only be paid out of the profits as shown in our adopted annual accounts. Our profits must first be used to set up and maintain reserves required by Dutch law and our Articles of Association. Our Supervisory Board may, upon proposal of our Managing Board, also establish reserves out of our annual profits. Subsequently, if any of our preference shares are issued and outstanding, preference shareholders shall be paid a dividend, which will be a percentage of the paid up part of the par value of their preference shares. Our Supervisory Board may then, upon proposal of our Managing Board, also establish reserves out of our annual profits. The portion of our annual profits that remains after the establishment or maintenance of reserves and the payment of a dividend to our preference shareholders is at the disposal of our shareholders’ meeting. No distribution may be made to our shareholders when the equity after such distribution is or becomes inferior to the fully-paid share capital, increased by the legal reserves. Our preference shares are cumulative by nature, which means that if in a financial year the dividend or the preference shares cannot be (fully) paid, the deficit must first be paid in the following financial year.


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Our shareholders’ meeting may, upon the proposal of our Supervisory Board, declare distributions out of our share premium reserve and other reserves available for shareholder distributions under Dutch law. Pursuant to a resolution of our Supervisory Board, distributions adopted by the shareholders’ meeting may be fully or partially made in the form of our new shares to be issued. Our Supervisory Board may, subject to certain statutory provisions, make one or more interim distributions in respect of any year before the accounts for such year have been adopted at a shareholders’ meeting. Rights to cash dividends and distributions that have not been collected within five years after the date on which they became due and payable shall revert to us.


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For the history of dividends paid by us to our shareholders in the past five years, see “Item 8. Financial Information — Dividend Policy.”
 
Shareholders’ Meetings, Attendance at Shareholders’ Meetings and Voting Rights
 
Notice Convening the Shareholders’ Meeting (Articles 25, 26, 27, 28 and 29)
 
Our ordinary shareholders’ meetings are held at least annually, within six months after the close of each financial year, in Amsterdam, Haarlemmermeer (Schiphol Airport), Rotterdam or The Hague, the Netherlands. Extraordinary shareholders’ meetings may be held as often as our Supervisory Board deems necessary, and must be held upon the written request of registered shareholders or other persons entitled to attend shareholders’ meetings of at least 10% of the total outstandingissued share capital to our Managing Board or our Supervisory Board specifying in detail the business to be dealt with. Such written requests may not be submitted electronically. In the event that the Managing Board or the Supervisory Board does not convene the shareholders’ meeting within six weeks of such a request, the aforementioned shareholders or individuals may be authorized by a competent judicial authority.
 
We will giveNotice of shareholders’ meetings shall be given by our Managing Board or by our Supervisory Board or by those who according to the law or our Articles of Association are entitled thereto. The notice shall be given in such manner as shall be authorized or required by maillaw (including but not limited to registered holdersa written notice, a legible and reproducible message sent by electronic means and an announcement published by electronic means), as well as in accordance with the regulations of shares of each shareholders’ meeting, and will publish notice thereof in a national daily newspaper distributed throughout the Netherlands and in at least one daily newspaper in France and Italy,stock exchange where our shares are also admitted for official quotation. Such notice shall be given no later than eight days prior to the registration date (as described below) though in any event no later than the twenty-first day prior to the day of the meeting and shall either state the business to be considered or state that the agenda is open to inspection byofficially listed at our request. In addition, shareholders and other persons entitled to attend the shareholders’ meetings that are registered in our share register shall be notified by letter that the meeting is being convened. The notice convening the shareholders’ meeting shall be given with due observance of the statutory notice period, which is currently 15 days prior to the meeting. However, a draft bill, which will implement the EU Directive on Shareholders’ Rights (Directive 2007/36/EC), is currently pending with the First Chamber of Dutch Parliament which, if enacted, will set the minimum notice period at our offices.42 days prior to the meeting.
 
The notice of the shareholders’ meeting must include details onstates the agendabusiness to be transacted as well as other information prescribed by law and our Articles of the meeting and must indicate that the agenda may be consulted at our registered office, notwithstanding the provisions of Dutch law.Association. The agenda is fixed by the author of the notice of the meeting; however, one or more shareholders or other persons entitled to attend shareholders’ meetings representing at least one-tenth of our issued share capital may, provided that the request was made at least five days prior to the date of convocation of the meeting, request that proposals be included on the agenda. Notwithstanding the previous sentence, proposals of persons who are entitled to attend shareholders’ meetings will be included on the agenda, if such proposals are made in writing to our Managing Board within a period of sixty days before that meeting by persons who are entitled to attend our shareholders’ meetings who, solely or jointly, represent at least 1% of our issued share capital or a market value of at least €50,000,000 unless we determine that such proposal would conflict with our substantial interests. The requests referred to in the previous two sentences may not be submitted electronically. The aforementioned requests must comply with conditions stipulated by our Managing Board, subject to the approval of our Supervisory Board, which shall be posted on our website.
 
We are exempt from the proxy solicitation rules under the United States Securities Exchange Act of 1934. Euroclear France will provide notice of shareholders’ meetings to, and compile voting instructions from, holders of shares held directly or indirectly through Euroclear France at the request of the Company, the Registrar or the voting Collection Agent.  A voting collection agent must be appointed; Netherlands Management Company B.V. acts as our voting collection agent. DTC will provide notice of shareholders’ meetings to holders of shares held directly or indirectly through DTC and the New York Transfer Agent and Registrar will compile voting instructions. In order for holders of shares held directly or indirectly through Euroclear France to attend shareholders’ meetings in person, such holders must withdraw their shares from Euroclear France and have such shares registered directly in their name or in the name of their nominee. In order for holders of shares held directly or indirectly through DTC to attend shareholders’ meetings of shareholders in person, such holders need not withdraw such shares from DTC but must follow rules and procedures established by the New York Transfer Agent and Registrar.
 
Attendance at Shareholders’ Meetings and Voting Rights (Articles 6, 30, 31, 32, 33 and 34)
 
Each share is entitled to one vote.
 
All shareholders and other persons entitled to attend and to vote at shareholders’ meetings are entitled to attend the shareholders’ meeting either in person or represented by a person holding a written proxy, to address the shareholders’ meeting and, as for shareholders and other persons entitled to vote, to vote, subject to our Articles of


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Association. Subject to the approval of our Supervisory Board, our Managing Board may resolve that shareholders and other persons entitled to attend the shareholders’ meetings are authorized to directly take note of the business


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transactions at the meeting via an electronic means of communication. Our shareholders’ meeting may set forth rules regulating,inter alia,the length of time during which shareholders may speak in the shareholders’ meeting. If there are no such applicable rules, the chairman of the meeting may regulate the time during which shareholders are entitled to speak if desirable for the orderly conduct of the meeting.
 
Our Managing Board may, subject to the approval of our Supervisory Board, resolve that each person entitled to attend and vote at shareholders’ meetings is authorized to vote via an electronic means of communication, either in person or by a person authorized in writing, provided that such person can be identified via the electronic means of communication and furthermore provided that such person can directly take note of the business transacted at the meeting. Our Managing Board may, subject to the approval of our Supervisory Board, attach conditions to the use of the electronic means of communication, which conditions shall be announced in the notice convening the shareholders’ meeting and must be posted on our website.
 
Unless our Managingand/or Supervisory Board has determinedProvided the law does not prescribe a fixed registration date (as described below), in order to exercise the aforementioned voting rights, shareholders and other persons entitled to attend shareholders’ meetings must notify us in writing of their intention to do so by theour Managing Board will establish a registration date, mentioned on the notice of the annual shareholders’ meeting and at the place mentioned on the notice of the shareholders’ meeting. In addition, holders of type II shares must notify us of the number of shares they hold. Type II shares are common shares in the form of an entry inwhich means that our shareholders register with issue of a share certificate consisting of a main part without dividend coupon. In addition to type II shares, type I shares are available. Type I shares are common shares in the form of an entry in our shareholders register without issue of a share certificate. Type II shares are only available should our SupervisoryManaging Board decide. Our preference shares are in the form of an entry in our shareholders register without issue of a share certificate. Shareholders and other persons entitled to attend shareholders’ meetings may only exercise their rights at the shareholders’ meeting for shares from which they can derive said rights both on the day referred to above and on the day of the meeting (as described above).
Our Managing or Supervisory Board maywill determine that shareholders and other persons entitled to attend shareholders’ meetings are those persons who have such rights at a determined date and, as such, are registered in a register designated by our Managing or Supervisory Board, regardless of who is a shareholder or otherwise a person entitled to attend shareholders’ meetings at the time of the meeting if a registration date as referred to in our Articles of Association had not been determined. TheCurrently, the registration date cannot be set earlier than on the thirtieth day prior to the meeting. However, a draft bill, which will implement the EU Directive on Shareholders’ Rights (Directive 2007/36/EC), is currently pending with the First Chamber of Dutch Parliament which, if enacted, will set the registration date at 28 days prior to the meeting. In the notice convening the shareholders’ meeting the time of registration must be mentioned as well as the manner in which shareholders and other persons entitled to attend shareholders’ meetings can register themselves and the manner in which they can exercise their rights.
 
If and to the extent that ourOur Managing or Supervisory Board determine a registration date (as described above), it may also resolve that persons entitled to attend and vote at shareholders’ meetings may vote via an electronic means of communication determined by our Managing or Supervisory Board within a period to be set by our Managing or Supervisory Board prior to our shareholders’ meeting, which period cannot commence earlier than the registration date (as described above). Votes cast in accordance with the provisions of the preceding sentence are equal to votes cast at our shareholders’ meeting.
 
We shall send a card of admission to the meeting to shareholders and other persons entitled to attend shareholders’ meetings who have notified us of their intention to attend or, if applicable, we will provide access to the electronic means of communication for the purpose of directly taking note of the business transacted at the meeting. Shareholders and other persons entitled to attend meetings of shareholders may be represented by proxies with written authorization, which must be shown for admittance to the meeting. All matters regarding admittance to the shareholders’ meeting, the exercise of voting rights and the result of voting, as well as any other matters regarding the business of the shareholders’ meeting, shall be decided upon by the chairman of that meeting, in accordance with the requirements of Section 13 of the Dutch Civil Code.
 
Our Articles of Association allow for separate meetings for holders of common shares and for holders of preference shares. At a meeting of holders of preference shares at which the entire issued capital of shares of such class is represented, valid resolutions may be adopted even if the requirements in respect of the place of the meeting and the giving of notice have not been observed, provided that such resolutions are adopted by unanimous vote. Also, valid resolutions of preference shareholder meetings may be adopted outside a meeting if all persons entitled to vote on our preference shares indicate in writing that they vote in favor of the proposed resolution, provided that no depositary receipts for preference shares have been issued with our cooperation. Our managing board may, subject to the approval of our Supervisory Board, resolve that written resolutions may be adopted via an electronic means of communication. Our Managing Board may, subject to the approval of our Supervisory Board, attach


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conditions to the use of the electronic means of communication, which conditions shall be notified in writing to all holders of preference shares and other persons entitled to vote on our preference shares.
 
Authority of theour Shareholders’ Meeting (Articles 12, 16, 19, 25, 28, 32 and 41)
 
Our shareholders’ meeting decides upon (i) the discharge of the members of our Managing Board for their management during the past financial year and the discharge of the members of our Supervisory Board for their supervision during the past financial year; (ii) the adoption of our statutory annual accounts and the distribution of dividends; (iii) the appointment of the members of our Supervisory Board and our Managing Board; and (iv) any other resolutions listed on the agenda by our Supervisory Board, our Managing Board or our shareholders and other persons entitled to attend shareholders’ meetings.
 
Furthermore, our shareholders’ meeting has to approve resolutions of our Managing Board regarding a significant change in the identity or nature of us or our enterprise, including in any event (i) transferring our enterprise or practically our entire enterprise to a third party, (ii) entering into or canceling any long-term cooperation between us or a subsidiary(“dochtermaatschappij”)of us and any other legal person or company or as


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a fully liable general partner of a limited partnership or a general partnership, provided that such cooperation or the cancellation thereof is of essential importance to us, and (iii) us or a subsidiary(“dochtermaatschappij”)of us acquiring or disposing of a participating interest in the capital of a company with a value of at least one-third of our total assets according to our consolidated balance sheet and notes thereto in our most recently adopted annual accounts.
 
Our Articles of Association may only be amended (and our liquidation can only be decided on) if amendments are proposed by our Supervisory Board and approved by a simple majority of the votes cast at a shareholders’ meeting at which at least 15% of the issued and outstanding share capital is present or represented. The complete proposal for the amendment (or liquidation) must be made available for inspection by the shareholders and the other persons entitled to attend shareholders’ meetings at our offices as from the day of the notice convening such meeting until the end of the meeting. Any amendment of our Articles of Association that negatively affects the rights of the holders of a certain class of shares requires the prior approval of the meeting of holders of such class of shares.
 
Quorum and Majority (Articles 4, 13 and 32)
 
Unless otherwise required by our Articles of Association or Dutch law, resolutions of shareholders’ meetings of shareholders require the approval of a majority of the votes cast at a meeting at which at least 15% of the issued and outstanding share capital is present or represented, subject to the provisions explained below. We may not vote our common shares held in treasury. Blank and invalid votes shall not be counted.
 
A quorum of shareholders, present or represented, holding at least half of our issued share capital, is required to dismiss a member of our Managing Board, unless the dismissal is proposed by our Supervisory Board. In the event of the lack of a quorum, a second shareholders’ meeting must be held within four weeks, with no applicable quorum requirement. Any decision or authorization by the shareholders’ meeting which has or could have the effect of excluding or limiting preferential subscription rights must be taken by a majority of at least two-thirds of the votes cast, if at the shareholders’ meeting less than 50% of the issued and outstanding share capital is present or represented. Otherwise such a resolution can be taken by a simple majority at a meeting orat which at least 15% of the issued and outstanding share capital is represented.
 
Disclosure of Holdings under Dutch Law
 
Holders of our shares or rights to acquire shares (which includes options and convertible bonds) may be subject to notification obligations under Chapter 5.3 of the Dutch Financial Markets Supervision Act (the “FMSA”).FMSA.
 
Under Chapter 5.3 of the FMSA, any person whose direct or indirect interest (including potential interest, such as options and convertible bonds) in our share capital or voting rights reaches or crosses a threshold percentage must notify the AFM either (a) immediately, if this is the result of an acquisition or disposal by it; or (b) within 4 trading days after such reporting, if this is the result of a change in our share capital or votes reported in the AFM’s public register. The threshold percentages are 5, 10, 15, 20, 25, 30, 40, 50, 60, 75 and 95 percent. It is expected that in the course of 2011 a legislative proposal will be adopted pursuant to which the 5 percent threshold will be replaced by a 3 percent threshold. Under the same proposal each holder of a 3 percent interest would need to declare, in a filing to be publicly made with the AFM, whether it has any objections to our strategy as publicly submitted to the AFM.
 
Furthermore, persons holding 5 percent5% or more in our voting rights or capital interest must within four weeks after December 31 notify the AFM of any changes in the composition of their interest since their last notification.
 
The following instruments qualify as “shares”: (i) shares, (ii) depositary receipts for shares (or negotiable instruments similar to such receipts), (iii) negotiable instruments for acquiring the instruments under (i) or (ii) (such as convertible bonds), and (iv) options for acquiring the instruments under (i) or (ii). There is a possibility that in the course of 2011 legislation will be adopted pursuant to which holdings of instruments of which the value is dependent on an increase in value of the shares or dividend rights but that are not settled in these shares (such as contracts for differences) will also qualify as holdings of shares.
Among others, the following


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shares and votes qualify as shares and votes “held” by a person: (i) those directly held by him; (ii) those held by his subsidiaries; (iii) shares held by a third party for such person’s account and the votes such third party may exercise; (iv) the votes held by a third party if such person has concluded an oral or written agreement with such party which provides for a lasting common policy on voting; (v) the votes held by a third party if such person has concluded an oral or written agreement with such party which provides for a temporary and paid transfer of the shares; and (vi) the votes which a person may exercise as a proxy but in his own discretion. Special rules apply to the attribution of the ordinary shares which are part of the property of a partnership or other community of property. A holder of a pledge or right of usufruct in respect of our shares can also be subject


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to a notification obligation if such person has, or can acquire, the right to vote on our shares. If a pledgor or usufructuary acquires such voting rights, this may trigger a notification obligation for the holder of our shares.
 
Under Section 5.48 of the FMSA, the sole member of our Managing Board and each of the members of our Supervisory Board must without delay notify the AFM of any changes in his interest or potential interest in our share capital or voting rights.
 
The AFM will publish all notifications on its public website (www.afm.nl).
 
Non-compliance with the notification obligations of Chapter 5.3 of the FMSA can lead to imprisonment or criminal fines, or administrative fines or other administrative sanctions. In addition, non-compliance with these notification obligations may lead to civil sanctions, including, without limitation, suspension of the voting rights attaching to our shares held by the offender for a maximum of three years, (suspension and) nullification of a resolution adopted by our shareholders’ meeting (if it is likely that such resolution would not have been adopted if the offender had not voted) and a prohibition for the offender to acquire our shares or votes for a period of not more than five years.
 
Share Capital as of December 31, 2007
 
Our authorized share capital amounts to €1,809,600,000, allowing the issuance of 1,200,000,000 common shares and 540,000,000 preference shares, with a nominal value of €1.04 per share. The shares may not be issued at less than their par value; our common shares must be fully paid up at the time of their issuance. Our preference shares must be paid up for at least 25% of their par value at the time of their issuance.
As of December 31, 2007, we had issued 910,293,420 ofissuance (and the remaining 75% if and when requested by our common shares, representing issued share capital of approximately €947 million.
At December 31, 2007, there were 899,760,539 common shares outstanding, not including (i) common shares issuable under our various employee stock option plans or employee share purchase plans, (ii) common shares issuable upon conversion of our outstanding convertible debt securities and (iii) 10,532,881 common shares repurchased in 2001 and 2002, as compared to 897,395,042 common shares outstanding as of December 31, 2006. As of December 31, 2007, the book value of our common shares held by us or our subsidiaries was approximately $274 million and the face value was approximately €11 million. As of December 31, 2007 options to acquire approximately 47 million common shares were outstanding. In addition, there were approximately 10 million of non-vested shares. No preference shares have been issued to date.
All of our issued common shares are fully paid up.Managing Board). Our authorized share capital is not restricted by redemption provisions, sinking fund provisions or liability to further capital calls by us. Our Articles of Association allows for the company.acquisition of own shares and the cancellation of shares. There are no conditions imposed by our Memorandum and Articles of Association governing changes in capital which are more stringent than is required by law.
 
Shares can be issued in registered form only. Share registersType II shares are maintained in New York by The Bank of New York, the New York Transfer Agent and Registrar (the “New York Registry”), and in Amsterdam, the Netherlands, by Netherlands Management Company B.V., the Dutch Transfer Agent and Registrar (the “Dutch Registry”). Shares of New York Registry held through DTC are registeredcommon shares in the nameform of Cede & Co.,an entry in our shareholders register with the nomineeissue of DTC, anda share certificate consisting of a main part without a dividend coupon. In addition to type II shares, of Dutch Registry held through the French clearance and settlement system, Euroclear France,type I shares are registeredavailable. Type I shares are common shares in the nameform of Euroclear France or its nominee.
Non-issued Authorized Share Capital asan entry in our shareholders register without the issue of December 31, 2007a share certificate. Type II shares are only available should our Supervisory Board decide to offer them. Our preference shares are in the form of an entry in our shareholders register without issue of a share certificate.
 
Non-issued authorized share capital, which is different from issued share capital, allows us to proceed with capital increases excluding the preemptive rights, upon our Supervisory Board’s decision, within the limits of the authorization granted by our shareholders’ meeting of April 26, 2007. Such a decision can be taken to allow us to benefit from the best conditions offered by the international capital markets in our interest and that of all of our shareholders. In the past, particularly in 1994, 1995, and 1998, we proceeded with capital increases, upon the single


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decision of our Supervisory Board, to accompany sales of our shares made by our shareholders. However, it is not possible to predict if we will request such an authorization again and at what time and under what conditions. The impact of any future capital increases within the limit of our authorized share capital, upon the decision of our Supervisory Board acting on the delegation granted to it by our shareholders’ meeting, cannot therefore be evaluated.
Other Securities Giving Access to Our Share Capital as of December 31, 2007
 
Other securities in circulation which give access to our share capital include (i) the options giving the right to subscribe to our shares granted to our employees, including the sole member of our Managing Board and our executive officers; (ii) the options giving the right to subscribe to our shares granted to the members of our Supervisory Board, its secretaries and controllers, as described in “Item 6. Directors, Senior Management and Employees”; (iii) the exchangeable bonds convertible into our shares issued by Finmeccanica Finance in August and September 2003, which are described above in “Item 7. Major Shareholders and Related-PartyRelated Party Transactions — Major Shareholders”; (iv) our 2013 Convertible Bonds as described above; and (v) our 2016 Convertible Bonds.
 
Securities Not Representing Our Share Capital
None.We do not have securities not representing our share capital.
 
Issuance of Shares, Preemptive Rights, and Preference Shares (Article 4)and Capital Reduction (Articles 4 and 5)
 
Unless excluded or limited by the shareholders’ meeting or our Supervisory Board according to the conditions described below, each holder of common shares has a pro rata preemptive right to subscribe to an offering of common shares issued for cash in proportion to the number of common shares which he owns. There is no preemptive right with respect to an offering of shares for non-cash consideration, with respect to an offering of shares to our employees or to the employees of one of our subsidiaries, or with respect to preference shares.
 
TheOur shareholders’ meeting, upon proposal and on the terms and conditions set by our Supervisory Board, has the power to issue shares. The shareholders’ meeting may also authorize our Supervisory Board, for a period of no more than five years, to issue shares and to determine the terms and conditions of share issuances. Our shares cannot be issued at below par and as for our common shares must be fully paid up at the time of their issuance. Our preference shares must be paid up for at least 25% of their par value.


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TheOur shareholders’ meeting, upon proposal by theour Supervisory Board, also has the power to limit or exclude preemptive rights in connection with new issuances of shares. Such a resolution of the shareholders’ meeting must be taken with a majority of at least two-thirds of the votes cast if at such shareholders’ meeting less than 50% of the issued and outstanding share capital is present or represented. Otherwise such a resolution can be taken by a simple majority of the votes cast at a shareholders’ meeting at which at least 15% of our issued and outstanding share capital is present or represented. TheOur shareholders’ meeting may authorize our Supervisory Board, for a period of no more than five years, to limit or exclude preemptive rights.
 
Pursuant to a shareholders’ resolution adopted at our annual shareholders’ meeting held on April 26, 2007, our Supervisory Board has been authorized for a period of five years to resolve to (i) issue any number of common sharesand/or preference shares as comprised in our authorized share capital from time to time; (ii) to fix the terms and conditions of share issuance; (iii) to exclude or to limit preemptive rights of existing shareholders; and (iv) to grant rights to subscribe for common sharesand/or preference shares, all for a period of five years from the date of such annual shareholders’ meeting.
 
Except as stated below, ourOur Supervisory Board has not yet acted on its authorization to increase the registered capital to the limits of the authorized registered capital.
 
Upon the proposal of our Supervisory Board, our shareholders’ meeting may, in accordance with the legal provisions, reduce our issued capital by canceling the shares that we hold in treasury, by reducing the par value of the shares or by canceling our preference shares.
 
See “Item 7. Major Shareholders and Related-PartyRelated Party Transactions” for details on changes in the distribution of our share capital over the past three years.
 
We may issue preference shares in certain circumstances. On November 27, 2006, our Supervisory Board decided to authorize us to enter into an option agreement with an independent foundation, Stichting Continuïteit ST (the “Stichting”), and to terminate a substantially similar option agreement dated May 31, 1999, as amended, between us and ST Holding II. On February 7, 2007, the May 31, 1999 option agreement, as amended, was terminated by mutual consent by ST Holding II and us and the new option agreement with the Stichting became


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effective on the same date. The new option agreement provides for the issuance of up to a maximum of 540,000,000 preference shares, the same number as the May 31, 1999 option agreement, as amended. The preference shares would be issuable in the event of actions considered hostile by our Managing Board and Supervisory Board, such as a creeping acquisition or an unsolicited offer for our common shares, which are unsupported by our Managing Board and Supervisory Board and which the board of the Stichting determines would be contrary to the interests of our Company, our shareholders and our other stakeholders. See “Item 7. Major Shareholders and Related-PartyRelated Party Transactions — Major Shareholders — Shareholders’ Agreements — Preference Shares.”
 
The effect of the preference shares may be to deter potential acquirers from effecting an unsolicited acquisition resulting in a change of control or otherwise taking action as considered hostile by our Managing Board and Supervisory Board. See “Item 3. Key Information — Risk Factors — Risks Related to Our Operations — Our shareholder structure and our preference shares may deter a change of control.”
 
No preference shares have been issued to date and therefore none are currently outstanding.
 
Changes to Our Share Capital and Stock Option Grants
                               
          Cumulative
     Nominal Value
  Amount of
    
       Nominal
  Amount of
  Cumulative
  of Increase/
  Issue
  Cumulative —
 
    Number of
  Value
  Capital
  Number of
  Reduction in
  Premium
  Issue Premium
 
Year
 
Transaction
 Shares  (Euro)  (Euro)  Shares  Capital  (Euro)  (Euro) 
 
March 29, 2003 Exercise of options
Exercise of options
and employee stock		  91,146   1.04   937,055,288   901,014,700   94,792   404,011   1,676,187,762 
June 28, 2003 purchases  217,490   1.04   937,281,478   901,232,190   226,190   2,075,922   1,678,263,684 
September 27, 2003 Exercise of options  903,283   1.04   938,220,892   902,135,473   939,414   10,857,587   1,689,121,271 
December 31, 2003 Exercise of options  634,261   1.04   938,880,523   902,769,734   659,631   4,458,391   1,693,579,662 
March 27, 2004 Exercise of options  1,964,551   1.04   940,923,656   904,734,285   2,043,133   9,048,811   1,702,628,473 
June 26, 2004 Exercise of options  84,740   1.04   941,011,786   904,819,025   88,130   1,640,712   1,704,269,185 
September 25, 2004 Exercise of options  65,990   1.04   941,080,416   904,885,015   68,630   605,542   1,704,874,727 
September 25, 2004 Bonds conversion  101   1.04   941,080,521   904,885,116   105   7,006   1,704,881,733 
December 31, 2004 Exercise of options  422,120   1.04   941,519,525   905,307,236   439,005   4,021,536   1,708,903,269 
December 31, 2004 LYONs conversion  1,761   1.04   941,521,357   905,308,997   1,831   46,225   1,708,949,494 
April 2, 2005 Exercise of options  63,270   1.04   941,587,158   905,372,267   65,801   571,525   1,709,521,019 
April 2, 2005 LYONs conversion  59   1.04   941,587,219   905,372,326   61   1,448   1,709,522,467 
June 2, 2005 Exercise of options  145,454   1.04   941,738,491   905,517,780   151,272   1,436,236   1,710,958,703 
October 1, 2005 Exercise of options  2,079,369   1.04   943,901,035   907,597,149   2,162,544   21,629,617   1,732,651,320 
December 31, 2005 Exercise of options  227,130   1.04   944,137,250   907,824,279   236,215   2,062,234   1,734,713,554 
April 1, 2006 Exercise of options  201,340   1.04   944,346,644   908,025,619   209,394   2,360,525   1,737,074,079 
July 1, 2006 Exercise of options  1,398,210   1.04   945,800,782   909,423,829   1,454,138   9,009,053   1,746,083,132 
September 30, 2006 Exercise of options  731,904   1.04   946,561,962   910,155,733   761,180   8,447,102   1,754,530,234 
December 31, 2006 Exercise of options  2,200   1.04   946,564,250   910,157,933   2,288   2,420   1,754,532,654 
March 31, 2007 Exercise of options  26,050   1.04   946,591,342   910,183,983   27,092   352,478   1,754,885,132 
June 30, 2007 Exercise of options  105,117   1.04   946,700,664   910,289,100   109,322   1,315,306   1,756,200,438 
September 29, 2007 Exercise of options  4,320   1.04   946,705,157   910,293,420   4,493   54,544   1,756,254,982 
December 31, 2007 Exercise of options  0   1.04   946,705,157   910,293,420   0   0   1,756,254,982 
Liquidation Rights (Articles 42 and 43)
 
In the event of our dissolution and liquidation, after payment of all debts and liquidation expenses, the holders of preference shares if issued, would receive the paid up portion of the par value of their preference shares. Any assets then remaining shall be distributed among the registered holders of common shares in proportion to the par value of their shareholdings.
 
Acquisition of Shares in Our Own Share Capital (Article 5)
 
We may acquire our own shares, subject to certain provisions of Dutch law and of our Articles of Association, if and to the extent that (i) the shareholders’ equity less the payment required to make the acquisition does not fall below the sum of thepaid-up andcalled-up portion of the share capital and any reserves required by Dutch law and (ii) the aggregate nominal value of shares that we or our subsidiaries acquire, hold or hold in pledge would not exceed one-tenth of our issued share capital. Share acquisitions may be effected by our Managing Board, subject to the approval of our Supervisory Board, only if the shareholders’ meeting has authorized our Managing Board to effect such repurchases, which authorization may apply for a maximum period of 18 months. We may not vote shares we hold in treasury. Our purchases of our own shares are not subject to any acquisition price conditions except as described below.authorized by our shareholders’ meeting. Pursuant to a shareholders’ resolution adopted at our annual shareholders’ meeting held on May 14, 2008, our Managing Board, subject to the approval of our Supervisory Board, was authorized for a period up to November 13, 2009 (inclusive) to acquire ST shares subject to the limits set forth above and the acquisition price conditions set forth in such shareholders’ resolution.


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Our Articles of Association have been amended effective as of May 5, 2000, implementing a resolution of our shareholders’ meeting held on April 26, 2000, to provide that we shall be able to acquire shares in our own share capital in order to transfer these shares under employee stock option or stock purchase plans, without an authorization of the annualour shareholders’ meeting.
 
In 2001, we acquired 9.4 million of our common shares, and in May 2002, we acquired an additional 4.0 million of our common shares to fund attributions of stock options to managers and employees pursuant to our 2001 Stock Option Plan, which was adopted by our shareholders’ meeting on April 25, 2001. As a result of these two repurchases and disposals after these repurchases, as of December 31, 2007, we held 10,532,881 million of our common shares in treasury. We may in the future proceed with additional repurchases of our common shares to fund further attributions of stock-based compensation pursuant to the 2001 plan.
Pursuant to a shareholders’ resolution adopted at our annual shareholders’ meeting held on April 26, 2007, our Managing Board was authorized to acquire for a consideration on a stock exchange or otherwise up to such a number of fullypaid-up common sharesand/or preference shares in our share capital as is permitted by law and our Articles of Association as per the moment of such acquisition for a price (i) per common share which at such moment is within a range between the par value of a common share and 110% of the share price per common share on Eurolist by Euronexttm Paris, the NYSE or Borsa Italiana, whichever at such moment is the highest, and (ii) per preference share which is calculated in accordance with article 5 paragraph 5 of our Articles of Association, being the amount paid up on the relevant preference shares increased with the accrued but unpaid dividend up to and including the date of repurchase of the relevant preference shares, all subject to the approval of our Supervisory Board, for a period of eighteen months as of the date of our 2007 annual shareholders’ meeting.
Changes to Our Share Capital, Stock Option Grants and Other Matters
The following table sets forth changes to our share capital as of December 31, 2007:
                                 
                 Nominal
       
           Cumulative
     Value of
  Amount of
    
        Nominal
  Amount of
  Cumulative
  Increase/
  Issue
  Cumulative
 
     Number of
  Value
  Capital
  Number of
  Reduction
  Premium
  Issue Premium
 
Year
 
Transaction
  Shares  (Euro)  (Euro)  Shares  in Capital  (Euro)  (Euro) 
 
December 31, 2005  Conversion of bonds   59   1.04   941,521,418   905,309,056   61   1,448   1,708,950,942 
December 31, 2005  Exercise of options   2,515,223   1.04   944,137,250   907,824,279   2,615,832   25,762,612   1,734,713,554 
December 31, 2006  Exercise of options   2,333,654   1.04   946,564,250   910,157,933   2,427,000   19,819,100   1,754,532,654 
December 31, 2007  Exercise of options   135,487   1.04   946,705,147   910,293,420   140,907   1,722,328   1,756,254,982 
The following table summarizes the amount of stock options and awards authorized to be granted, exercised, cancelled and expired and outstanding as of December 31, 2007:
Employees Stock Options
             
  1995 Plan  2001 Plan  Total 
 
Remaining amount authorized to be granted  0   0   0 
Amount exercised (stock options) or vested (stock awards)  14,523,601   141,537   14,665,138 
Amount cancelled and expired  11,091,608   7,292,743   18,384,351 
Amount outstanding  5,946,732   40,299,903   46,246,635 
Employees Unvested Share Awards
                 
  2005 Plan  2006 Plan  2007 Plan  Total 
 
Remaining amount authorized to be granted  0   0   323,710   323,710 
Amount vested  1,676,653   1,190,466   0   2,867,119 
Amount cancelled  1,571,981   238,725   73,490   1,884,196 
Amount outstanding  911,281   3,702,449   5,702,800   10,316,530 


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Supervisory Board and Professionals Stock Options
             
  Supervisory Board and Professionals 
  1999  2002  Total 
 
Remaining amount authorized to be granted  0   0   0 
Amount exercised  18,000   0   18,000 
Amount cancelled and expired  234,000   48,000   282,000 
Amount outstanding  171,000   348,000   519,000 
Supervisory Board and Professionals Unvested Share Awards
                 
  Supervisory Board and Professionals 
  2005  2006  2007  Total 
 
Remaining amount authorized to be granted  0   0   0   0 
Amount vested  34,000   17,000   0   51,000 
Amount cancelled  15,000   15,000   22,500   52,500 
Amount outstanding  17,000   34,000   142,500   193,500 
No options were granted in 2007.
In line with the resolutions of our 2005 annual shareholders’ meeting, we have transitioned our stock-based compensation plans from stock-option grants to non-vested stock awards. Pursuant to the shareholders’ resolutions adopted by our 2007 annual shareholders’ meeting, our Supervisory Board, upon the recommendation of the Compensation Committee, approved the terms and conditions of the 2007 Supervisory Board Stock-Based Compensation Plan for members and professionals, which resulted in a $18 million charge in 2007.
We intend to use 6 million of our shares held by us in treasury (out of the approximately 10.5 million currently available) to cover the six million non-vested stock awards granted to our employees in 2007 as well as the granting of up to 100,000 non-vested shares to the sole member of our Managing Board that was also approved by shareholders at the 2007 annual shareholders’ meeting.
Following these decisions, and the grant of additional unvested shares as part of the 2006 Employee plan, the share-based compensation plans generated a total additional charge in our consolidated statements of income of 2007 of $20 million pre-tax. This charge corresponded to the compensation expense to be recognized for the non-vested stock awards from the grant date over the vesting period. The vesting of the awards depends on the following performance achievement: (i) one-third if the evolution of our sales for 2007 compared to 2006 is equal to or greater than the evolution of the sales of top ten semiconductor companies; (ii) one-third if our actual return on net assets achieved in 2007 is equal to or higher than our target as per 2007 budget and (iii) one-third if the evolution of our operating profit excluding restructuring charges as expressed as a percentage of sales for 2007 compared to 2006 is equal to or greater than the evolution of operating income excluding restructuring charges as expressed as a percentage of sales of the top ten semiconductor companies.
Limitations on Right to Hold or Vote Shares
 
There are currently no limitations imposed by Dutch law or by our Articles of Association on the right of non-resident holders to hold or vote the shares.


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Material Contracts
 
The only material contract thatST-NXP
On April 10, 2008, we have entered into duringan agreement with NXP B.V. to combine our respective key wireless operations to form a joint venture company, ST-NXP Wireless, which started operations on August 2, 2008. The agreement governs the last two years, other than thoseterms on which we received an 80% stake in the joint venture and paid NXP $1,518 million net of cash received, including a control premium that was funded from outstanding cash. The consideration also included a contribution in kind, measured at fair value, corresponding to a 20% interest in the wireless business. Coincidentally with the closing of our agreement with Ericsson to combine ST-NXP with EMP, we purchased NXP’s 20% stake in ST-NXP in the first quarter of 2009 for $92 million.
ST-Ericsson
On August 19, 2008, we entered into ina Framework Agreement with Telefonaktiebolaget L.M. Ericsson to create ST-Ericsson, which began operations on February 1, 2009. The agreement governs the ordinary course of business, relatesterms on which Ericsson contributed certain businesses and $1.1 billion net to the Numonyx transaction.joint venture, out of which $0.7 billion was paid to us, and we contributed ST-NXP Wireless, following our purchase of NXP’s 20% stake.
 
Exchange Controls
 
None.
 
Taxation
 
Dutch Taxation
 
ThisThe following is a general summary and the tax consequences as described here may not apply to a holder of common shares. Any potential investor should consult his own tax adviser for more information about the tax consequences of acquiring, owning and disposing of common shares in his particular circumstances.


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This taxation summary solely addresses the principal Dutch tax consequences of the acquisition, ownership and disposal of common shares. It does not consider every aspect of taxation that may be relevant to a particular holder of common shares under special circumstances or who is subject to special treatment under applicable law. Where in this summary English terms and expressions are used to refer to Dutch concepts, the meaning to be attributed to such terms and expressions shall be the meaning to be attributed to the equivalent Dutch concepts under Dutch tax law. This summary also assumes that we are organized, and that our business will be conducted, in the manner as outlined in thisForm 20-F. A change to such organizational structure or to the manner in which we conduct our business may invalidate the contents of this summary, which will not be updated to reflect any such change.
 
This summary is based on the tax law of the Netherlands (unpublished case law not included) as it stands onat the date of thisForm 20-F. The law upon which this summary is based is subject to change, perhaps with retroactive effect. Any such change may invalidate the contents of this summary, which will not be updated to reflect such change.
 
Where in this Dutch Taxation paragraph reference is made to “your common shares”, that concept includes, without limitation, that:
1. you own one or more common shares and in addition to the title to such common shares, you have an economic interest in such common shares;
2. you hold the entire economic interest in one or more common shares;
3. you hold an interest in an entity, such as a partnership or a mutual fund, that is transparent for Dutch tax purposes, the assets of which comprise one or more common shares; or
4. you are deemed to hold an interest in common shares, as referred to under 1. to 3., pursuant to the attribution rules of article 2.14a, of the Dutch Income Tax Act 2001 (Wet inkomstenbelasting 2001), with respect to property that has been segregated, for instance in a trust or a foundation.
Taxes on income and capital gains
 
The summary set out in this section “Dutch taxation”Taxation” applies only applies to a holder of common shares who is a Non-resident holder of common shares.


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YouFor the purposes of this section, you are a “Non-resident holder of common shares” if you satisfy the following tests:
 
(a) you are neither resident, nor deemed to be resident, in the Netherlands for purposes of Dutch income tax or corporation tax, as the case may be, and, if you are an individual, you have not elected to be treated as a resident of the Netherlands for Dutch income tax purposes;
 
(b) your common shares and any benefits derived or deemed to be derived therefromfrom such common shares have no connection with your past, present or future employment or membership of a management boardManagement Board(bestuurder)or a supervisory boardSupervisory Board(commissaris);
 
(c) your common shares do not form part of a substantial interest or a deemed substantial interest in us within the meaning of Chapter 4 of the Dutch Income Tax Act 2001 (Wet Inkomstenbelastinginkomstenbelasting 2001), unless such interest forms part of the assets of an enterprise; and
 
(d) if you are not an individual, no part of the benefits derived from your common shares is exempt from Dutch corporation tax under the participation exemption as laid down in the Dutch Corporation Tax Act 1969 (Wet op de Vennootschapsbelastingvennootschapsbelasting 1969); and
(e) you are not an entity that is resident in a Member State of the European Union and that is not subject to a tax on profits levied there..
 
Generally, if a person holds an interest in us, such interest forms part of a substantial interest, or a deemed substantial interest, in us if any one or more of the following circumstances is present:
 
1. Such personYou — either alone or, if he isin the case of an individual, together with hisyour partner (partner,as defined in Article 1.2(partner), if any — own, or pursuant to article 2.14a, of the Dutch Income Tax Act 2001 (Wet Inkomstenbelasting 2001)), if any, owns,(Wet inkomstenbelasting 2001) are deemed to own, directly or indirectly, either a number of shares in us representing 5% or more of our total issued and outstanding capital (or the issued and outstanding capital of any class of our shares), or rights to acquire, directly or indirectly, shares, whether or not already issued, representing 5% or more of our total issued and outstanding capital (or the issued and outstanding capital of any class of our shares), or profit participating certificates ((winstbewijzen)winstbewijzen) relating to 5% or more of our annual profit or to 5% or more of our liquidation proceeds.
 
2. Such person’sYour shares, profit participating certificates or rights to acquire shares or profit participating certificates in us have been acquired by himyou or are deemed to have been acquired by himyou under a non-recognition provision.
 
3. Such person’sYour partner or any of hisyour relatives by blood or by marriage in the direct line (including foster-children) or of those of hisyour partner has a substantial interest (as described under 1. and 2. above) in us.
 
A person who isIf you are entitled to the benefits from shares or profit participating certificates (for instance if you are a holder of a right of usufruct) is, you are deemed to be a holder of shares or profit participating certificates, as the case may be, and hisyour entitlement to benefits is considered a share or profit participating certificate, as the case may be.
 
If you are a holder of common shares and you satisfy test a., but do not satisfy any one or more of tests b., c., d. and e.,d, your Dutch income tax position or corporation tax position, as the case may be, is not discussed in thisForm 20-F.


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If you are a Non-resident holder of common shares you will not be subject to any Dutch taxes on income or capital gains (other than the dividend withholding tax described below) in respect of any benefits derived or deemed to be derived by you from your common shares, including any capital gain realized on the disposal thereof, except if
 
1. (i) you derive profits from an enterprise, as an entrepreneur ((ondernemer)ondernemer) or pursuant to a co-entitlement to the net value of such enterprise, other than as a shareholder, if you are an individual, or other than as a holder of securities, if you are not an individual and;and (ii) such enterprise is either managed in the Netherlands or carried on, in whole or in part, through a permanent establishment or a permanent representative in the Netherlands;Netherlands, and (iii) your common shares are attributable to such enterprise; or
 
2. you are an individual and you derive benefits from common shares that are taxable as benefits from miscellaneous activities in the Netherlands. You may,inter alia,, derive, or be deemed to derive, benefits from common shares that are taxable as benefits from miscellaneous activities in the following circumstances:
a. if your investment activities go beyond the activities of an active portfolio investor, for instance in the case of the use of insider knowledge ((voorkennis)voorkennis) or comparable forms of special knowledge, on the understanding that such benefits will be taxable in the Netherlands only if such activities are performed or deemed to be performed in the Netherlands.Netherlands; or
b. if you hold common shares, whether directly or indirectly, and any benefits to be derived from such common shares are intended, in whole or in part, as remuneration for activities performed or deemed


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to be performed in the Netherlands by you or by a person who is a connected person to you as meant by article 3.92b, paragraph 5, of the Dutch Income Tax Act 2001 (Wet inkomstenbelasting 2001).
 
Attribution rule
 
Benefits derived or deemed to be derived from certain miscellaneous activities by a child or a foster child thatwho is under eighteen years of age even if the child is resident in the Netherlands, are attributed to the parent who exercises, or the parents who exercise, authority over the child, regardlessirrespective of whether the child is resident incountry of residence of the Netherlands or abroad.child.
 
Dividend withholding tax
 
Dividends distributed by usWe are generally subjectrequired to awithhold Dutch dividend withholding tax imposed by the Netherlands at a rate of 15%. from dividends distributed by us.
 
The concept “dividends distributed by us” as used in this section “Dutch Taxation” includes, but is not limited to, the following:
 
 • distributions in cash or in kind, deemed and constructive distributions and repayments of capital not recognized as paid-in for Dutch dividend withholding tax purposes;
 
 • liquidation proceeds and proceeds of repurchase or redemption of shares in excess of the average capital recognized as paid-in for Dutch dividend withholding tax purposes;
 
 • the par value of shares issued by us to a holder of common shares or an increase of the par value of shares, as the case may be, to the extent that it does not appear that a contribution, recognized for Dutch dividend withholding tax purposes, has been made or will be made; and
 
 • partial repayment of capital, recognized as paid-in for Dutch dividend withholding tax purposes, if and to the extent that there are net profits (zuivere winst), unless (a) the general meeting of our shareholders has resolved in advance to make such repayment and (b) the par value of the shares concerned has been reduced by an equal amount by way of an amendment to our articles of association.
 
If a Non-resident holder of common shares is resident in the Netherlands Antilles or Aruba or in a country that has concluded a double taxation treaty with the Netherlands, such holder may be eligible for a full or partial relief from the dividend withholding tax, provided such relief is timely and duly claimed. Pursuant to domestic rules to avoid dividend stripping, dividend withholding tax relief will only be available to the beneficial owner (uiteindelijk gerechtigde) of dividends distributed by us. The Dutch tax authorities have taken the position that this beneficial-ownership test can also be applied to deny relief from dividend withholding tax under double tax treaties and the Tax Arrangement for the Kingdom (Belastingregeling voor het Koninkrijk). A holder of common shares who receives proceeds therefrom shall not be recognized as the beneficial owner of such proceeds if, in connection with the receipt of the proceeds, it has given a consideration, in the framework of a composite transaction including, without limitation, the mere acquisition of one or more dividend coupons or the creation of short-term rights of enjoyment of shares (kortlopende genotsrechten op aandelen), whereas it may be presumed that (i) such proceeds in whole or in part, directly or indirectly, inure to a person who would not have been entitled to an exemption from, reduction or refund of, or credit for, dividend withholding tax, or who would have been entitled to a smaller reduction or refund of, or credit for, dividend withholding tax than the actual recipient of the proceeds; and (ii) such person acquires or retains, directly or indirectly, an interest in common shares or similar instruments, comparable to its interest in common shares prior to the time the composite transaction was first initiated.


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In addition, a Non-resident holder of common shares that is not an individual and that is resident in a Member State of the European Union is entitled to an exemption from dividend withholding tax, provided that the following tests are satisfied:
 
1. it takes oneis, according to the tax law of a Member State of the legal forms listed in the Annex to the EU Parent Subsidiary Directive (Directive 90/435/EEC, as amended)European Union or a legal formstate designated by ministerial decree;decree, that is a party to the Agreement regarding the European Economic Area, resident there and it is not transparent according to the tax law of such state;
 
2. any one or more of the following threshold conditions are satisfied:
 
a. at the time the dividend is distributed by us, it holds shares representing at least 5% of our nominal paid up capital; or
 
b. it has held shares representing at least 5% of our nominal paid up capital for a continuous period of more than one year at any time during the four years preceding the time the dividend is distributed by us, provided that such period ended after December 31, 2006; or


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c. it is connected with us within the meaning of article 10a, paragraph 4, of the Dutch Corporation Tax Act;Act 1969 (Wet op de vennootschapsbelasting 1969); or
 
d. an entity connected with it within the meaning of article 10a, paragraph 4, of the Dutch Corporation Tax Act 1969 (Wet op de vennootschapsbelasting 1969) holds at the time the dividend is distributed by us, common shares representing at least 5% of our nominal paid up capital;
 
3. it is subject to the tax levied in its country of residence as meant by article 2, paragraph 1, letter c of the EU Parent Subsidiary Directive (Directive 90/435/EEC, as amended) without the possibility of an option or of being exempt; and
4. it is not considered to be resident outside the Member States of the European Union or the states designated by ministerial decree, that are a party to the Agreement regarding the European Economic Area under the terms of a double taxation treaty concluded with a third State.State; and
4. the holder of common shares does not perform a similar function as an investment institution (beleggingsinstelling) as meant by article 6a or article 28 of the Dutch Corporation Tax Act 1969 (Wet op de vennootschapsbelasting 1969).
 
The exemption from dividend withholding tax is not available if pursuant to a provision for the prevention of fraud or abuse included in a double taxation treaty between the Netherlands and the country of residence of the Non-resident holder of common shares, such holder would not be entitled to the reduction of tax on dividends provided for by such treaty. Furthermore, the exemption from dividend withholding tax will only be available to the beneficial owner of dividends distributed by us. If a Non-resident holder of common shares is resident in a Member State of the European Union with which the Netherlands has concluded a double taxation treaty that provides for a reduction of tax on dividends based on the ownership of the number of voting rights, the test under 2.a. above is also satisfied if such holder owns 5% of the voting rights in us.
 
The convention of December 18, 1992, between the Kingdom of the Netherlands and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (the “U.S./NL Income Tax Treaty”) provides for an exemption for dividends received by exempt pension trusts and exempt organizations, as defined therein. In such case, a refund may be obtained of the difference between the amount withheld and the amount that the Netherlands was entitled to levy in accordance with the U.S./NL Income Tax Treaty by filing the appropriate forms with the Dutch tax authorities within the term set therefor.therein.
 
Reduction.If we receive a profit distribution from a qualifying foreign entity, or a repatriation of qualifying foreign branch profit, that is exempt from Dutch corporate income tax and that has been subject to a foreign withholding tax of at least 5%, we may be entitled to a reduction of the amount of Dutch dividend withholding tax that must be paid to the Dutch tax authorities in respect of dividends distributed by us. Such reduction is the lesser of:
 
 • 3% of the dividends paid by us in respect of which Dutch dividend withholding tax is withheld; and
 
 • 3% of the qualifying profit distributions grossed up by the foreign tax withheld on such distributions received from foreign subsidiaries and branches prior to the distribution of the dividend by us during the current calendar year and the two preceding calendar years (to the extent such distributions have not been taken into account previously when applying this test).
 
Non-resident holders of common shares are urged to consult their tax advisers regarding the general creditability or deductibility of Dutch dividend withholding tax and, in particular, the impact on such investors of our potential ability to receive a reduction as described in the previous paragraph.
 
See the section “Taxes on income and capital gains” for a description of the term Non-resident holder of common shares.


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Gift and inheritance taxes
 
If you acquirea holder of common shares as adisposes of common shares by way of gift, (inin form or in substance)substance, or if you acquire or are deemed to acquirea holder of common shares on the death ofwho is an individual you will not be subject todies, no Dutch gift tax or to Dutch inheritance tax, as the case mayapplicable, will be due, unless:
 
 • the donor is, or the deceased was, resident or deemed to be resident in the Netherlands for purposes of Dutch gift tax or Dutch inheritance tax, (as the case may be); or
• the common shares are or were attributable to an enterprise or part of an enterprise that the donor or deceased carried on through a permanent establishment or a permanent representative in the Netherlands at the time of the gift or of the death of the deceased;as applicable; or
 
 • the donor made a gift of common shares, then became a resident or deemed resident of the Netherlands, and died as a resident or deemed resident of the Netherlands within 180 days of the date of the gift.
 
Other taxes and duties
 
No Dutch registration tax, transfer tax, stamp duty or any other similar documentary tax or duty, other than court fees, is payable in the Netherlands by the holder of common shares in respect of or in connection with (i) the


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subscription, issue, placement, allotment, delivery of common shares, (ii) the deliveryand/or enforcement by way of legal proceedings (including the enforcement of any foreign judgment in the courts of the NetherlandsNetherlands) of the documents relating to the issue of common shares or the performance by us of our obligations thereunder,under such documents, or in respect of or in connection with(iii) the transfer of common shares.
 
United States Federal Income Taxation
 
The following discussion is a general summary of the material U.S. federal income tax consequences to a U.S. holder (as defined below) of the ownership and disposition of our common shares. You are a U.S. holder only if you are a beneficial owner of common shares:
 
 • that is, for U.S. federal income tax purposes, (a) a citizen or individual resident of the United States, (b) a U.S. domestic corporation or a domestic entity taxable as a corporation, (c) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (d) a trust if a court within the United States can exercise primary supervision over the administration of the trust and one or more U.S. persons are authorized to control all substantial decisions of the trust;
 
 • that owns, directly, indirectly or by attribution, less than 10% of our voting power or outstanding share capital;
 
 • that holds the common shares as capital assets;
 
 • whose functional currency for U.S. federal income tax purposes is the U.S. dollar;
 
 • that is a resident of the United States and not also a resident of the Netherlands for purposes of the U.S./NL Income Tax Treaty;
 
 • that is entitled, under the “limitation on benefits” provisions contained in the U.S./NL Income Tax Treaty, to the benefits of the U.S./NL Income Tax Treaty; and
 
 • that does not have a permanent establishment or fixed base in the Netherlands.
 
This summary does not discuss all of the tax consequences that may be relevant to you in light of your particular circumstances. Also, it does not address holders that may be subject to special rules including, but not limited to, U.S. expatriates, tax-exempt organizations, persons subject to the alternative minimum tax, banks, securities broker-dealers, financial institutions, regulated investment companies, insurance companies, traders in securities who elect to apply amark-to-market method of accounting, persons holding our common shares as part of a straddle, hedging or conversion transaction, or persons who acquired common shares pursuant to the exercise of employee stock options or otherwise as compensation. Because this is a general summary, you are advised to consult your own tax advisor with respect to the U.S. federal, state, local and applicable foreign tax consequences of the ownership and disposition of our common shares. In addition, you are advised to consult your own tax advisor concerning whether you are entitled to benefits under the U.S./NL Income Tax Treaty.
 
If a partnership (including for this purpose any entity treated as a partnership for U.S. federal income tax purposes) holds common shares, the tax treatment of a partner generally will depend upon the status of the partner and the activities of the partnership. If you are a partner in a partnership that holds common shares, you are urged to


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consult your own tax advisor regarding the specific tax consequences of the ownership and the disposition of common shares.
 
This summary is based on the Internal Revenue Code of 1986, as amended (the “Code”), the U.S./NL Income Tax Treaty, judicial decisions, administrative pronouncements and existing, temporary and proposed Treasury regulations as of the date of thisForm 20-F, all of which are subject to change or changes in interpretation, possibly with retroactive effect.
 
Dividends
 
In general, you must include the gross amount of distributions paid (including the amount of any Dutch taxes withheld from those distributions) to you by us with respect to the common shares in your gross income as foreign-source taxable dividend income. A dividends-received deduction will not be allowed with respect to dividends paid by us. The amount of any distribution paid in foreign currency (including the amount of any Dutch withholding tax thereon) will be equal to the U.S. dollar value of the foreign currency on the date of actual or constructive receipt by you regardless of whether the payment is in fact converted into U.S. dollars at that time. Gain or loss, if any, realized on a subsequent sale or other disposition of such foreign currency will beU.S.-source ordinary income or loss. Special rules govern and specific elections are available to accrual method taxpayers to determine the U.S. dollar


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amount includible in income in the case of taxes withheld in a foreign currency. Accrual basis taxpayers are urged to consult their own tax advisors regarding the requirements and elections applicable in this regard.
 
Subject to applicable limitations, Dutch taxes withheld from a distribution paid to you at a rate not exceeding the rate provided in the U.S./NL Income Tax Treaty will be eligible for credit against your U.S. federal income tax liability. As described in “— Taxation — Dutch Taxation” above, under limited circumstances we may be permitted to deduct and retain from the withholding a portion of the amount that otherwise would be required to be remitted to the taxing authorities in the Netherlands. If we withhold an amount from dividends paid to you that we then are not required to remit to any taxing authority in the Netherlands, the amount in all likelihood would not qualify as a creditable tax for U.S. federal income tax purposes. We will endeavor to provide you with information concerning the extent to which we have applied the reduction described above to dividends paid to you. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by us with respect to the common shares generally will constitute “passive category income” or in the case of certain U.S. holders, “general category income.” The use of foreign tax credits is subject to complex rules and limitations. In lieu of a credit, a U.S. holder who itemizes deductions may elect to deduct all of such holder’s foreign taxes in the taxable year. A deduction does not reduce tax on adollar-for-dollar basis like a credit, but the deduction for foreign taxes is not subject to the same limitations applicable to foreign tax credits. You should consult your own tax advisor to determine whether and to what extent a credit would be available to you.
 
Certain non-corporate U.S. holders (including individuals) are eligible for reduced rates of U.S. federal income tax (currently at a maximum of 15%) in respect of “qualified dividend income” received in taxable years beginning before January 1, 2011. For this purpose, “qualified dividend income” generally includes dividends paid by anon-U.S. corporation if, among other things, the U.S. holders meet certain minimum holding period and other requirements and thenon-U.S. corporation satisfies certain requirements, including either that (i) the shares of thenon-U.S. corporation are readily tradable on an established securities market in the United States, or (ii) thenon-U.S. corporation is eligible for the benefits of a comprehensive income tax treaty with the United States (such as the U.S./NL Income Tax Treaty) which provides for the exchange of information. We currently believe that dividends paid by us with respect to our common shares should constitute “qualified dividend income” for U.S. federal income tax purposes; however, this is a factual matter and subject to change. You are urged to consult your own tax advisor regarding the availability to you of a reduced dividend tax rate in light of your own particular situation.
 
Sale, Exchange or Other Disposition of Common Shares
 
Upon a sale, exchange or other disposition of common shares, you generally will recognize capital gain or loss in an amount equal to the difference between the amount realized and your tax basis in the common shares, as determined in U.S. dollars. This gain or loss generally will beU.S.-source gain or loss, and will be treated as long-term capital gain or loss if you have held the common shares for more than one year. If you are an individual, capital gains generally will be subject to U.S. federal income tax at preferential rates if specified minimum holding periods are met. The deductibility of capital losses is subject to significant limitations.


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Passive Foreign Investment Company Status
 
We believe that we will not be classified as a passive foreign investment company (a “PFIC”) for U.S. federal income tax purposes for the year ended December 31, 20072009 and do not expect to become a PFIC in the foreseeable future. This conclusion is a factual determination that must be made annually at the close of each taxable year and therefore we can provide no assurance that we will not be a PFIC in our current or any future taxable year. If we were to be characterized as a PFIC for any taxable year, the tax on certain distributions on our common shares and on any gains realized upon the disposition of common shares may be materially less favorable than as described herein. In addition, if we were a PFIC in a taxable year in which we pay dividends or the prior taxable year, such dividends would not be “qualified dividend income” (as described above) and would be taxed at the higher rates applicable to other items of ordinary income. You should consult your own tax advisor regarding the application of the PFIC rules to your ownership of our common shares.
 
U.S. Information Reporting and Backup Withholding
 
Dividend payments with respect to common shares and proceeds from the sale, exchange, retirement or other disposition of our common shares may be subject to information reporting to the U.S. Internal Revenue Service (the “IRS”) and possible U.S. backup withholding at a current rate of 28%. Backup withholding will not apply to you, however, if you furnish a correct taxpayer identification number or certificate of foreign status and make any other


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required certification or if you are otherwise exempt from backup withholding. U.S. persons required to establish their exempt status generally must provide certification on IRSForm W-9.Non-U.S. holders generally will not be subject to U.S. information reporting or backup withholding. However, these holders may be required to provide certification ofnon-U.S. status (generally onForm W-8BEN) in connection with payments received in the United States or through certainU.S.-related financial intermediaries. Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing the appropriate claim for refund with the IRS and furnishing any required information.
 
Documents on Display
 
Any statement in thisForm 20-F about any of our contracts or other documents is not necessarily complete. If the contract or document is filed as an exhibit to thisForm 20-F the contract or document is deemed to modify the description contained in thisForm 20-F. You must review the exhibits themselves for a complete description of the contract or document.
 
Our Articles of Association, the minutes of our annual shareholders’ meetings, reports of the auditors and other corporate documentation may be consulted by the shareholders and any other individual authorized to attend the meetings at our registeredhead office at Schiphol Airport Amsterdam, the Netherlands, at the registered offices of the SupervisoryManaging Board in Geneva, Switzerland and at Crédit Agricole-Indosuez, 9, Quai du Président Paul-Doumer, 92400 Courbevoie, France.
 
You may review a copy of our filings with the U.S. Securities and Exchange Commission (the “SEC”), including exhibits and schedules filed with it, at the SEC’s public reference facilities in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at1-800-SEC-0330 for further information. In addition, the SEC maintains an Internet site athttp://www.sec.gov that contains reports and other information regarding issuers that file electronically with the SEC. These SEC filings are also available to the public from commercial document retrieval services.
 
WE ARE REQUIRED TO FILE REPORTS AND OTHER INFORMATION WITH THE SEC UNDER THE SECURITIES EXCHANGE ACT OF 1934. REPORTS AND OTHER INFORMATION FILED BY USU.S. WITH THE SEC MAY BE INSPECTED AND COPIED AT THE SEC’S PUBLIC REFERENCE FACILITIES DESCRIBED ABOVE OR THROUGH THE INTERNET AT HTTP://WWW.SEC.GOV. AS A FOREIGN PRIVATE ISSUER, WE ARE EXEMPT FROM THE RULES UNDER THE EXCHANGE ACT PRESCRIBING THE FURNISHING AND CONTENT OF PROXY STATEMENTS AND OUR OFFICERS, DIRECTORS AND PRINCIPAL SHAREHOLDERS ARE EXEMPT FROM THE REPORTING AND SHORT- SWING PROFIT RECOVERY PROVISIONS CONTAINED IN SECTION 16 OF THE EXCHANGE ACT. UNDER THE EXCHANGE ACT, AS A FOREIGN PRIVATE ISSUER, WE ARE NOT REQUIRED TO PUBLISH FINANCIAL STATEMENTS AS FREQUENTLY OR AS PROMPTLY AS UNITED STATES COMPANIES.
 
In addition, material filed by us with the SEC can be inspected at the offices of the New York Stock Exchange at 20 Broad Street, New York, NY 10005 and at the offices of The Bank of New York, as New York Share Registrar, at One Wall Street, New York, NY 10286 (telephone: 1-888-269-2377).


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Item 11.  Quantitative and Qualitative Disclosures About Market Risk
 
We are exposed to changes in financial market conditions in the normal course of business due to our operations in different foreign currencies and our ongoing investing and financing activities. Market risk is the uncertainty to which future earnings or asset/liability values are exposed due to operating cash flows denominated in foreign currencies and various financial instruments used in the normal course of operations. The major financial risks to which we are exposed are related to the fluctuations of the U.S. dollar exchange rate compared to the Euro and the other major currencies, the coverage of our foreign currency exposures, the variation of the interest rates and the risks associated to the investments of our available cash. We have established policies, procedures and internal processes governing our management of market risks and the use of financial instruments to manage our exposure to such risks.
 
Our interest income, net, as reported on our consolidated statements of income, is the balance between interest income received from our cash and cash equivalent and marketable securities investments and interest expense paid on our long-term debt. Our interest income is dependent on the fluctuations in the interest rates, mainly in the U.S. dollar and the Euro, since we are investing on a short-term basis; any increase or decrease in the short-term market interest rates would mean an equivalent increase or decrease in our interest income. Our interest expenses are associated with our long-term convertible bonds (with a fixed rate)See “Item 5. Operating and floating rate senior bonds whose rate is fixing quarterly at LIBOR + 40bps. To manage the interest rate mismatch,Financial Review and Prospects — Impact of Changes in the second quarter of 2006, we entered into cancelable swaps to hedge a portion of the fixed rate obligations on our outstanding long-term debt with floating rate derivative instruments. Of the $974 million in 2016 Convertible Bonds issued in the first quarter of 2006, we entered into cancelable swaps for $200 million of the principal amount of the bonds, swapping the 1.5% yield equivalent on the bonds for 6 Month USD LIBOR minus 3.375%. We also have $250 million of restricted cash at fixed rate (Hynix Semiconductor-ST JV) partially offsetting the interest rate mismatch of the 2016 Convertible Bond. Our hedging policy is not intended to cover the full exposure and all risks associated with these instruments.Interest Rates.”


130

We place our cash and cash equivalents, or a part of it, with high credit quality financial institutions with at least single “A” long-term rating from two of the major rating agencies, meaning at least A3 from Moody’s Investor Service and A- from Standard & Poor’s andor Fitch Ratings, invested as term deposits, treasury bills and FRN marketable securities and, as such we are exposed to the fluctuations of the market interest rates on our placement and our cash, which can have an impact on our accounts. We manage the credit risks associated with financial instruments through credit approvals, investment limits and centralized monitoring procedures but do not normally require collateral or other security from the parties to the financial instruments. TheseThe treasury bills have a value of $484 million and the FRN have a par value of $1,017 million,$548 million. They are classified asavailable-for-sale and are reported at fair value, with changes in fair value recognized as a separate component of “Accumulated other comprehensive income” in the consolidated statement of changes in shareholders’ equity.equity except if deemed to be other-than temporary. For that reason, as at December 31, 2009, after recent economic events and given our exposure to Lehman Brothers’ senior unsecured bonds for a purchase price of nearly €15 million, we had another-than-temporary charge of $11 million, recorded in 2008, which represents 50% of the face value of these Floating Rate Notes, according to recovery rate calculated from a major credit rating company. The change in fair value of these instruments amounting(excluding Lehman Brothers FRN) amounted to approximately $3$9 million before tax for the year ended December 31, 2007.
Since May 2006, we have granted a specific mandate to a global financial institution to invest a portion of our cash in a U.S. federally-guaranteed student loan program. In mid-2007, we became aware that the managing financial institution had deviated from its specific authorization and that we had been credited with investments in unauthorized auction rate securities. We have started an arbitration proceeding against the global financial institution that purchased the unauthorized securities for our account and we intend to pursue our claim vigorously. On December 31, 2007, we considered the decline in fair value of these auction rate securities as “Other-than-temporary” and charged the relevant impairment in the fourth quarter consolidated statements of income. Recent credit concerns arising in the capital markets have reduced the ability to liquidate auction rate securities that we classify as available for sale securities on our consolidated balance sheet. As of December 31, 2007, we had auction rate securities with a par value of $415 million. These securities represent interest in collateralized obligations and other commercial obligations. In the fourth quarter of 2007, we recorded in “Other-than-temporary” impairment charges of $46 million to reduce the value of these securities to their estimated fair value. The fair value of these securities has been evaluated on the basis of the weighted average of available information: (i) from publicly available indexes of securities with the same rating and comparable/similar underlying collaterals or industries exposure and (ii) using “mark to market” bids and “mark to model” valuations received from the structuring financial institutions of the outstanding auction rate securities.2009. The estimated value of these securities could further decrease in the future as a result of credit market deteriorationand/or other downgrading. After the judgment for the $46 million impairment charge recorded in the year ended December 31, 2007, our auction rate securities have, therefore, an estimated fair value of approximately $369 million as
As of December 31, 2007. The estimated2009, we had ARS, purchased by Credit Suisse contrary to our instruction, representing interests in collateralized obligations and credit linked notes, with a par value of these$261 million that were carried on our balance sheet asavailable-for-sale financial assets at an amount of $42 million, including a favorable revaluation of $15 million through Other comprehensive income in our Total Equity. See “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources”. In December 2009, Credit Suisse, because of its contingent interest in certain securities could further decreaseheld by us and issued by Deutsche Bank, requested that we either tender the securities or accept that the amount that would be received by us pursuant to such tender ($75 million) be deducted from the sum to be collected by us if and when the FINRA award is confirmed and enforced. See “Item 8. Financial Information — Legal Proceedings.” Pursuant to legal advice, and while reserving our legal rights, we participated in the future astender offer. As a result, we sold ARS with a face value of credit market deterioration and/or other downgrading.$154 million, collected $75 million and registered $68 million as realized losses on Financial Assets. Through such action, we have endeavored to protect our rights to immediately recover the full amounts awarded to us pursuant to the FINRA award, upon confirmation and enforcement of such award by the United States District Court for the Southern District of New York.


148

We do not anticipate any material adverse effect on our financial position, result of operations or cash flows resulting from the use of our instruments in the future. There can be no assurance that these strategies will be effective or that transaction losses can be minimized or forecasted accurately.
 
The information below summarizes our market risks associated with cash equivalents, marketable securities, debt obligations, and other significant financial instruments as of December 31, 2007.2009. The information below should be read in conjunction with Note 2725 to our Consolidated Financial Statements.
 
The table below presents principal amounts and related weighted-average interest rates by year of maturity for our investment portfolio and debt obligations (in millions of U.S. dollars, except percentages):
 
                                                        
               Fair Value at
                Fair Value at
 
               December 31,
                December 31,
 
 Total 2008 2009 2010 2011 2012 Thereafter 2007  Total 2010 2011 2012 2013 2014 Thereafter 2009 
Assets:
                                                                
Cash and cash equivalents  1,855                           1,855  $1,588                          $1,588 
Average interest rate  4.75%                              0.27%                            
Current marketable securities  1,014                           1,014  $1,032                          $1,032 
Average interest rate  4.96%                              0.42%                            
Non current marketable securities  369                           369  $42                          $42 
Average interest rate  5.81%                              3.26%                            
Short-term deposits                                
Average interest rate                                
Restricted Cash  250                           250  $250                          $250 
Average interest rate  6.06%                              6.06%                            
Long-term debt:
                                 $2,492   176   1,063   119   836   114   184  $2,459 
Fixed rate  2,220   103   114   60   1,053   41   849   2,220 
Average interest rate  3.35%  3.93%  4.40%  3.69%  1.62%  4.37%  5.21%      1.18%                            
 


131

     
  Amounts in Millions
 
  Millions of
U.S. Dollars 
 
Long-term debt by currency as of December 31, 2007:2009:    
U.S. dollar  1,3131,666 
Euro  907
826 
Total in U.S. dollars
  2,220
2,492 
 
Amounts in Millions
of U.S. Dollars
Long-term debt by currency as of December 31, 2006:
U.S. dollar1,242
Euro818
Singapore dollar65
Other currencies5
Total in U.S. dollars
2,130
     
  Amounts in
 
  Millions of
 
  U.S. Dollars 
 
Long-term debt by currency as of December 31, 2008:    
U.S. dollar  1,840 
Euro  837 
     
Total in U.S. dollars
 $2,677 
     
The following table provides information about our FX forward contracts and FX currency options at December 31, 2009 (in millions of U.S. dollars):
FORWARD CONTRACTS AND CURRENCY OPTIONS AT DECEMBER 31, 2009
                   
        Notional Amount  Average Rate  Fair Value 
 
Buy EUR Sell USD  1,669   1.4   —4 
Buy USD Sell CAD  8   1.1   0 
Buy JPY Sell EUR  19   131.7   0 
Buy INR Sell USD  28   46.9   0 
Buy USD Sell JPY  31   90.5   0 
Buy JPY Sell USD  3   92.1   0 
Buy SGD Sell USD  96   1.4   0 
Buy MYR Sell USD  11   3.4   0 
Buy GBP Sell USD  39   1.6   0 
Buy USD Sell GBP  14   1.6   0 
Buy SEK Sell USD  84   7.3   2 
Buy USD Sell SEK  4   7.2   0 
Buy CZK Sell USD  1   18.3   0 
Buy CHF Sell USD  34   1.0   0 
Buy USD Sell CHF  12   1.0   0 
Buy CNY Sell USD  8   6.8   0 
Buy TWD Sell USD  4   32.3   0 
Buy PHP Sell USD  1   46.2   0 
Buy NOK Sell USD  5   5.8   0 
Buy USD Sell NOK  1   5.8   0 
                   
         2,072       (2)
                   


149132

The following table provides information about our FX forward contracts and FX currency options at December 31, 20072008 (in millions of U.S. dollars):
 
FORWARD CONTRACTS AND CURRENCY OPTIONS AS AT DECEMBER 31, 20072008
 
                   
        Notional Amount  Average Rate  Fair Value 
 
Buy EUR Sell USD  483   1.4   12 
Buy USD Sell CAD  8   1.0   0 
Buy JPY Sell EUR  9   163.0   0 
Buy INR Sell USD  28   39.7   0 
Buy USD Sell JPY  19   112.7   0 
Buy JPY Sell USD  1   112.5   0 
Buy SGD Sell USD  108   1.4   0 
Buy MYR Sell USD  30   3.3   0 
Buy GBP Sell USD  41   2.0   0 
Buy SEK Sell USD  8   6.4   0 
Buy CZK Sell USD  1   18   0 
Buy TND Sell USD  1   1.2   0 
                   
         737       12 
                   
The following table provides information about our FX forward contracts and FX currency options at December 31, 2006 (in millions of U.S. dollars):
FORWARD CONTRACTS AND CURRENCY OPTIONS AS AT DECEMBER 31, 2006
                                    
       Notional Amount Average Rate Fair Value        Notional Amount Average Rate Fair Value 
Buy EUR Sell USD  594   1.3   12  EUR Sell USD  1,031   1.4   23 
Buy USD Sell CAD  8   1.2   0  USD Sell EUR  2   1.4   0 
Buy JPY Sell EUR  11   153.1   0  USD Sell CAD  8   1.3   0 
Buy INR Sell USD  27   45.2   0  JPY Sell EUR  3   120.7   0 
Buy USD Sell JPY  20   117.5   0  INR Sell USD  24   49.5   0 
Buy JPY Sell USD  1   117.4   0  USD Sell JPY  37   90.5   0 
Buy SGD Sell USD  74   1.5   1  SGD Sell USD  96   1.5   3 
Buy MYR Sell USD  27   3.5   0  MYR Sell USD  12   3.5   0 
Buy GBP Sell USD  43   2.0   0  GBP Sell USD  23   1.5   —1 
Buy CHF Sell USD  9   1.2   0  SEK Sell USD  3   8.2   0 
Buy SEK Sell USD  11   6.7   0  CZK Sell USD  1   18.8   0 
Buy CHF Sell USD  5   1.1   0 
Buy USD Sell CHF  6   1.0   0 
Buy CNY Sell USD  16   6.8   0 
              
        825       13         1,268       25 
              
 
Item 12.  Description of Securities Other Than Equity Securities
 
Not applicable.We sell ordinary shares in the United States that are evidenced by American registered certificates (“New York Shares”). In connection therewith, a holder of our New York Shares may have to pay, either directly or indirectly, certain fees and charges, as described in Item 12D.3. In addition, we receive fees and other direct and indirect payments from our depositary, Bank of New York Mellon (“BNY Mellon”), that are related to our New York Shares, as described in Item 12D.4.
12.D.3 Fees and Charges that a holder of our New York Shares May Have to Pay
BNY Mellon collects fees for the delivery and surrender of New York Shares directly from investors depositing or surrendering New York Shares for the purpose of withdrawal or from intermediaries acting for them. BNY Mellon also collects fees for making distributions to investors and may collect an annual fee for New York Agent services. BNY Mellon has the right to collect fees and charges by offsetting them against dividends received and deposited securities.
Persons depositing or withdrawing our New York Shares must pay to BNY Mellon:
• $5.00 (or less) per 100 New York Shares (or portion of 100 New York Shares) for the issuance of New York Shares, including issuances resulting from a distribution of shares or rights or other property, and cancellation of New York Shares for the purpose of withdrawal, including if the New York Share agreement terminates.
• Taxes and other governmental charges BNY Mellon or the custodian have to pay on any New York Shares or share underlying a New York Share, such as stock transfer, stamp duty or withholding taxes, as necessary.
• Any charges incurred by the New York Agent or its agents for servicing the deposited securities, as necessary.
12D.4 Fees and Other Payments Made by the New York Agent to Us
From January 1, 2009 through February 24, 2010, a total of $655,137 was paid by BNY Mellon on our behalf for our New York Share program. Specifically, the following fees, amongst others, were paid on our behalf: $170,753 for NYSE annual listing fees; $398,251 for investor relations fees paid to third party vendors; and $86,133 for standardout-of-pocket maintenance costs for the New York Shares (primarily consisting of expenses related to our Annual General Meeting, such as those for the production and distribution of proxy materials, customization of voting cards and tabulation of shareholder votes).


150133

 
PART II
 
Item 13.  Defaults, Dividend Arrearages and Delinquencies
 
None.
 
Item 14.  Material Modifications to the Rights of Security Holders and Use of Proceeds
 
None.
 
Item 15.  Controls and Procedures
 
Disclosure Controls and Procedures
 
We conducted an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (Disclosure Controls) as of the end of the period covered by thisForm 20-F. The controls evaluation was conducted under the supervision and with the participation of management, including our CEO and CFO. Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as thisForm 20-F, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our quarterly evaluation of Disclosure Controls includes an evaluation of some components of our internal control over financial reporting, and internal control over financial reporting is also separately evaluated on an annual basis for purposes of providing the management report which is set forth below.
 
The evaluation of our Disclosure Controls included a review of the controls’ objectives and design, the company’s implementation of the controls and their effect on the information generated for use in thisForm 20-F. In the course of the controls evaluation, we reviewed identified data errors, control problems or acts of fraud and sought to confirm that appropriate corrective actions, including process improvements, were being undertaken. This type of evaluation is performed at least on a quarterly basis so that the conclusions of management, including the CEO and CFO, concerning the effectiveness of the Disclosure Controls can be reported in our periodic reports onForm 6-K andForm 20-F. Many of theThe components of our Disclosure Controls are also evaluated on an ongoing basis by our Internal Audit Department.Department, which, as of January 2008, reports to our Chief Compliance Officer. The overall goals of these various evaluation activities are to monitor our Disclosure Controls, and to modify them as necessary. Our intent is to maintain the Disclosure Controls as dynamic systems that change as conditions warrant.
We rely on ST-Ericsson’s CEO and CFO certification of internal control at ST-Ericsson and their affiliates that are an integral part of our Consolidated Financial Statements but act as independent companies under the50-50% governance structure of their two parents.
 
Based upon the controls evaluation, our CEO and CFO have concluded that, as of the end of the period covered by thisForm 20-F, our Disclosure Controls were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC, and that material information related to STMicroelectronics and its consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared.
 
Management’s Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
 
Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.


134

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


151

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2007,2009, the end of our fiscal year. Management based its assessment on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies and our overall control environment. This assessment was supported by testing performed by our Internal Audit organization.
Based on ourthis assessment management has concluded that, as of December 31, 2009, our internal control over financial reporting was effectiveeffective.
Management excluded activities associated with ST-Ericsson AB Sweden and ST-Ericsson AS Norway from our assessment of internal control over financial reporting as of December 31, 2007 to provide reasonable assurance regarding2009 because they had been acquired by the reliabilityCompany in a purchase business combination during 2009. ST-Ericsson AB Sweden and ST-Ericsson AS Norway, whose main activities are research and development, represent total assets of 0.44% and R&D costs of 8.2% of the related consolidated financial reportingstatement amounts as of and for the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.year ended December 31, 2009.
 
The effectiveness of the Company’s internal control over financial reporting as of December 31, 20072009 has been audited by PricewaterhouseCoopers SA, an independent registered public accounting firm, as stated in their report which appears in Item 1518 of thisForm 20-F.
 
Attestation Report of the Registered Public Accounting Firm
 
Please see the “Report of Independent Registered Accounting Firm” included in our Consolidated Financial Statements.
 
Changes in Internal Control over Financial Reporting
 
ThereOther than for our wireless business, there were no changes in our internal control over financial reporting that occurred during the period covered by theForm 20-F that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. During 2009, our wireless business merged with EMP into a new JV Company owned 50% plus + 1 share by us and governed by a Board of Directors comprised of 8 members, half designated by us and half by Ericsson. The design and operation of ST-Ericsson’s internal control is under the responsibility of ST-Ericsson’s CEO and CFO, on whose certification we rely.
 
Item 16A.  Audit Committee Financial Expert
 
Our Supervisory Board has concluded that Tom de Waard, a member of our Audit Committee, and an independent member of our Supervisory Board qualified as an “audit committee financial expert” as defined in Item 16A and is independent as defined in the listing standards applicable to us as a listed issuer as required by Item 16A(2) ofForm 20-F.
 
Item 16B.  Code of Ethics
 
Policy on Business Conduct and Ethics
 
Since 1987, we have had a corporate policy on Business Conduct and Ethics (the “Policy”) for all of our employees, including our chief executive officer and chief financial officer. We have adapted this Policy to reflect recent regulatory changes. The Policy is designed to promote honest and ethical business conduct, to deter wrongdoing and to provide principles to which our employees are expected to adhere and which they are expected to advocate.
 
The Policy provides that if any officer to whom it applies acts in contravention of its principles, we will take appropriate steps in terms of the procedures in place for fair disciplinary action. This action may, in cases of severe breaches, include dismissal.
 
Our Policy on Business Conduct and Ethics is posted on our internet website athttp://www.st.com. There have been no amendments or waivers, express or implicit, to our Policy since its inception.
 
Item 16C.  Principal Accountant Fees and Services
 
PricewaterhouseCoopers has served as our independent registered public accounting firm for each of the fiscal years since 1996. The auditors are elected by the shareholders’ meeting once every three years.


135

PricewaterhouseCoopers was reelected for a three-year term by our March 2005May 2008 shareholders’ meeting to expire at our shareholders’ meeting in 2008.2011.


152

The following table presents the aggregate fees for professional audit services and other services rendered by PricewaterhouseCoopers to us in 20052008 and 2006.2009.
 
                                
   Percentage of
   Percentage of
    Percentage of
   Percentage of
 
 2007 Total Fees 2006 Total Fees  2009(1) Total Fees 2008 Total Fees 
Audit Fees
                                
Statutory audit, certification, audit of individual and Consolidated Financial Statements $5,758,230   97% $4,866,174   92% $7,494,914   98% $5,384,962   99%
Audit-related fees $194,940   3%  404,639   8% $155,867   2% $15,360   0.2%
Non-audit Fees
                                
Tax compliance fees  —       —      $3,883   —  $40,880   0.8%
Other fees  —       —       —       —     
                  
Total $5,953,170   100% $5,270,813   100% $7,654,614   100% $5,441,202   100%
                  
(1)These figures include the fees paid for the audit of ST-Ericsson.
 
Audit Fees consist of fees billed for the annual audit of our company’s Consolidated Financial Statements, the statutory audit of the financial statements of the Company’s subsidiaries and consultations on complex accounting issues relating to the annual audit. Audit Fees also include services that only our independent auditor can reasonably provide, such as comfort letters andcarve-out audits in connection with strategic transactions, certain regulatory-required attest and certifications letters, consents and the review of documents filed with U.S., French and Italian stock exchanges.
 
Audit-related services are assurance and related fees consisting of the audit of employee benefit plans, due diligence services related to acquisitions and certainagreed-upon procedures.
 
Tax Fees include fees billed for tax compliance services, including the preparation of original and amended tax returns and claims for refund; tax consultations, such as assistance in connection with tax audits and expatriate tax compliance.
 
Audit Committee Pre-approval Policies and Procedures
 
Our Audit Committee is responsible for selecting the independent registered public accounting firm to be employed by us to audit our financial statements, subject to ratification by the Supervisory Board and approval by our shareholders for appointment. Our Audit Committee also assumes responsibility (in accordance with Dutch law) for the retention, compensation, oversight and termination of any independent auditor employed by us. We adopted a policy (the “Policy”), which was approved in advance by our Audit Committee, for the pre-approval of audit and permissible non-audit services provided by our independent auditors (PricewaterhouseCoopers). The Policy defines those audit-related services eligible to be approved by the Audit Committee.
 
All engagements with the external auditors, regardless of amount, must be authorized in advance by our Audit Committee, pursuant to the Policy and its pre-approval authorization or otherwise.
 
The independent auditors submit a proposal for audit-related services to our Audit Committee on a quarterly basis in order to obtain prior authorization for the amount and scope of the services. The independent auditors must state in the proposal that none of the proposed services affect their independence. The proposal must be endorsed by the office of our CFO with an explanation of why the service is needed and the reason for sourcing it to the audit firm and validation of the amount of fees requested.
 
We do not intend to retain our independent auditors for permissible non-audit services other than by exception and within a limited amount of fees, and the Policy provides that such services must be explicitly authorized by the Audit Committee.
 
The Corporate Audit Vice-President is responsible for monitoring that the actual fees are complying with the pre-approval amount and scope authorized by the Audit Committee. During 2006,2009, all services provided to us by PricewaterhouseCoopers were approved by the Audit Committee pursuant to paragraph (c)(7)(i) ofRule 2-01 ofRegulation S-X.


136

Item 16D.  Exemptions from the Listing Standards for Audit Committees
 
Not applicable.


153

Item 16E.  Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 
                 
           Maximum Number
 
        Total Number of
  of Securities that
 
  Total Number of
     Securities Purchased
  May yet be
 
  Securities
  Average Price Paid
  as Part of Publicly
  Purchased Under
 
Period
 Purchased  per Security  Announced Programs  the Programs 
 
2007-01-012009-01-01 to2007-01-312009-01-31
  —   —   —   — 
2007-02-012009-02-01 to2007-02-282009-02-28
  —   —   —   — 
2007-03-012009-03-01 to2007-03-312009-03-31
  —   —   —   — 
2007-04-012009-04-01 to2007-04-302009-04-30
  —   —   —   — 
2007-05-012009-05-01 to2007-05-312009-05-31
  —   —   —   — 
2007-06-012009-06-01 to2007-06-302009-06-30
  —   —   —   — 
2007-07-012009-07-01 to2007-07-312009-07-31
  —   —   —   — 
2007-08-012009-08-01 to2007-08-312009-08-31
  —   —   —   — 
2007-09-012009-09-01 to2007-09-302009-09-30
  —   —   —   — 
2007-10-012009-10-01 to2007-10-312009-10-31
  —   —   —   — 
2007-11-012009-11-01 to2007-11-302009-11-30
  —   —   —   — 
2007-12-012009-12-01 to2007-12-312009-12-31
  —   —   —   — 
 
We currently hold 10,532,881As of December 31, 2009 we held 31,985,739 of our common shares in treasury pursuant to repurchases made in prior years.years, and we currently hold 31,976,451 of such shares. We did not purchase anyrepurchase our common shares in 2007. We2009 and we have not announced any additional repurchase programs.
 
Item 16F.  Change in Registrant’s Certifying Accountant
We note that on November 16, 2000, we issued $2,146 million initial aggregate principal amount
Not applicable.
Item 16G.  Corporate Governance
Our consistent commitment to the principles of zero-coupon senior convertible bonds due 2010 (the “2010 Bonds”), for net proceeds of $1,458 million. The 2010 Bonds are not “equity securities”, as they were not registered in the United States. As previously disclosed, while not noted in the table above, in 2003 we repurchased on the market approximately $1,674 million aggregate principal amount at maturity of 2010 Bonds and in 2004, we completed the repurchase of our 2010 Bonds and repurchased on the market approximately $472 million aggregate principal amount at maturity of a total amount paid of $375 million.good corporate governance is evidenced by:
• Our corporate organization under Dutch law that entrusts our management to a Managing Board acting under the supervision and control of a Supervisory Board totally independent from the Managing Board. Members of our Managing Board and of our Supervisory Board are appointed and dismissed by our shareholders.
• Our early adoption of policies on important issues such as “business ethics” and “conflicts of interest” and strict policies to comply with applicable regulatory requirements concerning financial reporting, insider trading and public disclosures.
• Our compliance with Dutch securities laws, because we are a company incorporated under the laws of the Netherlands, as well as our compliance with American, French and Italian securities laws, because our shares are listed in these jurisdictions, in addition to our compliance with the corporate, social and financial laws applicable to our subsidiaries in the countries in which we do business.
• Our broad-based activities in the field of corporate social responsibility, encompassing environmental, social, health, safety, educational and other related issues.
• Our implementation of a non-compliance reporting channel (managed by a third party) for issues regarding accounting, internal controls or auditing. A special ombudsperson has been appointed by our Supervisory Board, following the proposal of its Audit Committee, to collect all complaints, whatever their source, regarding accounting, internal accounting controls or auditing matters, as well as the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters.
• Our PSE, which require us to integrate and execute all of our business activities, focusing on our employees, customers, shareholders and global business partners;
• Our Ethics Committee, whose mandate is to provide advice to management and employees about our PSE and other ethical issues; and


154137

• Our Chief Compliance Officer, who reports directly to the Managing Board, acts as Executive Secretary to our Supervisory Board and chairs our Ethics Committee.
As a Dutch company, we are subject to the Dutch Corporate Governance Code as revised by the Dutch Corporate Governance Monitoring Committee on December 10, 2008. As we are listed on the NYSE, Euronext Paris, the Borsa Italiana in Milan, but not in the Netherlands, our policies and practices cannot be in every respect consistent with all Dutch “Best Practice” recommendations. We have summarized our policies and practices in the field of corporate governance in the ST Corporate Governance Charter, including our corporate organization, the remuneration principles which apply to our Managing and Supervisory Boards, our information policy and our corporate policies relating to business ethics and conflicts of interests. We are committed to informing our shareholders of any significant changes in our corporate governance policies and practices at our annual shareholders’ meeting. Along with our Supervisory Board Charter (which includes the charters of our Supervisory Board Committees) and our Code of Business Conduct and Ethics, the current version of our ST Corporate Governance Charter is posted on our website, at http:/www.st.com/stonline/company/governance/index.htm, and these documents are available in print to any shareholder who may request them. As recommended by the Dutch Corporate Governance Monitoring Committee, we anticipate including a chapter in our 2009 statutory annual report on the broad outline of our corporate governance structure and our compliance with the Dutch Corporate Governance Code and will present this chapter to our 2010 annual shareholders’ meeting for discussion as a separate agenda item.
Our Supervisory Board is carefully selected based upon the combined experience and expertise of its members. Certain of our Supervisory Board members, as disclosed in their biographies set forth above, have existing relationships or past relationships with Areva, CEAand/or CDP, who are currently parties to the STH Shareholders’ Agreement as well as with ST Holding or ST Holding II, our major shareholder. See “Item 7. Major Shareholders and Related Party Transactions — Shareholders’ Agreements — STH Shareholders’ Agreement.” See also “Item 3. Key Information — Risk Factors — Risks Related to Our Operations — The interests of our controlling shareholders, which are in turn controlled respectively by the French and Italian governments, may conflict with investors’ interests.” Such relationships may give rise to potential conflicts of interest. However, in fulfilling their duties under Dutch law, Supervisory Board members serve the best interests of all of our stakeholders and of our business and must act independently in their supervision of our management. Our Supervisory Board has adopted criteria to assess the independence of its members in accordance with corporate governance listing standards of the NYSE.
Our Supervisory Board has on various occasions discussed Dutch corporate governance standards, the implementing rules and corporate governance standards of the SEC and of the NYSE, as well as other corporate governance standards.
The Supervisory Board has determined, based on the evaluations by an ad hoc committee, the following independence criteria for its members: Supervisory Board members must not have any material relationship with STMicroelectronics N.V., or any of our consolidated subsidiaries, or our management. A “material relationship” can include commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships, among others, but does not include a relationship with direct or indirect shareholders.
We believe we are fully compliant with all material NYSE corporate governance standards, to the extent possible for a Dutch company listed on Euronext Paris, Borsa Italiana, as well as the NYSE. Because we are a Dutch company, the Audit Committee is an advisory committee to the Supervisory Board, which reports to the Supervisory Board, and our shareholders must approve the selection of our statutory auditors. Our Audit Committee has established a charter outlining its duties and responsibilities with respect to the monitoring of our accounting, auditing, financial reporting and the appointment, retention and oversight of our external auditors. In addition, our Audit Committee has established procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, and the confidential anonymous submission by our employees regarding questionable accounting or auditing matters.
No member of the Supervisory Board or Managing Board has been (i) subject to any convictions in relation to fraudulent offenses during the five years preceding the date of thisForm 20-F, (ii) no member has been associated with any company in bankruptcy, receivership or liquidation in the capacity of member of the administrative, management or supervisory body, partner with unlimited liability, founder or senior manager in the five years preceding the date of thisForm 20-F or (iii) subject to any official public incriminationand/or sanction by statutory or regulatory authorities (including professional bodies) or disqualified by a court from acting as a member of the administrative, management or supervisory bodies of any issuer or from acting in the management or conduct of the affairs of any issuer during the five years preceding the date of thisForm 20-F.


138

We have demonstrated a consistent commitment to the principles of good corporate governance evidenced by our early adoption of policies on important issues such as “conflicts of interest.” Pursuant to our Supervisory Board Charter, the Supervisory Board is responsible for handling and deciding on potential reported conflicts of interests between the Company on the one hand and members of the Supervisory Board and Managing Board on the other hand.
For example, one of the members of our Supervisory Board is managing director of Areva SA, which is a controlled subsidiary of CEA, one of the members of our Supervisory Board is the Chairman of France Telecom and a member of the Board of Directors of Technicolor (formerly known as Thomson), another is the non-executive Chairman of the Board of Directors of ARM, two of our Supervisory Board members are non-executive directors of Soitec, one of our Supervisory Board members is the CEO of Groupe Bull, one of the members of the Supervisory Board is also a member of the Supervisory Board of BESI and one of the members of our Supervisory Board is a director of Oracle and Flextronics International. France Telecom and its subsidiaries Equant and Orange, as well as Oracle’s new subsidiary PeopleSoft supply certain services to our Company. We have a long-term joint R&D partnership agreement with LETI, a wholly-owned subsidiary of CEA. We have certain licensing agreements with ARM, and have conducted transactions with Soitec and BESI as well as with Technicolor, Flextronics and a subsidiary of Groupe Bull. We believe that each of these arrangements and transactions are made on an arms-length basis in line with market practices and conditions. Please see “Item 7. Major Shareholders and Related Party Transactions.”


139

 
PART III
 
Item 17.  Financial Statements
 
Not applicable.
 
Item 18.  Financial Statements
 
     
  Page
 
Financial Statements:
    
Report of Independent Registered Public Accounting Firm for Years Ended December 31, 2007, 20062009, 2008 and 2005
2007		  F-2 
Consolidated Statements of Income for the Years Ended December 31, 2007, 20062009, 2008 and 2005
2007		  F-4 
Consolidated Balance Sheets as at December 31, 20072009 and 2006
2008		  F-5 
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 20062009, 2008 and 2005
2007		  F-6 
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2007, 20062009, 2008 and 2005
2007		  F-7 
Notes to Consolidated Financial Statements
  F-8
Numonyx Holdings B.V. Consolidated Financial Statements for the Year Ended December 31, 2009 and the Nine Month Period Ended December 31, 2008F-79 
Financial Statement Schedule:
    
For each of the three years in the period ended December 31, Schedule II Valuation and Qualifying Accounts
  S-1 
 
Item 19.  Exhibits
 
   
1.1
 Amended and Related Articles of Associations of STMicroelectronics N.V., dated May 15, 2007,20, 2009, as approvedadopted by the annual general meeting of Shareholders on April 26, 2007.May 20, 2009.
4.1 The master agreement bySale and Contribution Agreement between STMicroelectronics N.V., Intel Corporation, Redwood Blocker S.A.R.L., and Francisco Partners II (Cayman) L.P.NXP B.V. dated May 22, 2007April 10, 2008 (incorporated by reference toForm 6-K20-F of STMicroelectronics N.V. filed on August 3, 2007)May 13, 2009).
4.2 Form of ST Asset ContributionFramework Agreement by and between STMicroelectronics N.V. and Telefonaktiebolaget L.M. Ericsson dated August 19, 2008 (incorporated by reference toForm 6-K20-F of STMicroelectronics N.V. filed on August 3, 2007)May 13, 2009).
8.1
 Subsidiaries and Equity Investments of the Company.
12.1
 Certification of Carlo Bozotti, President and Chief Executive Officer of STMicroelectronics N.V., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
12.2
 Certification of Carlo Ferro, Executive Vice President and Chief Financial Officer of STMicroelectronics N.V., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
13.1
 Certification of Carlo Bozotti, President and Chief Executive Officer of STMicroelectronics N.V., and Carlo Ferro, Executive Vice President and Chief Financial Officer of STMicroelectronics N.V., pursuant to 18 U.S.C. §1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
14(a)15.1 Consent of Independent Registered Public Accounting Firm.
15.2Consent of Independent Registered Public Accounting Firm for Numonyx Holdings B.V.


155140

CERTAIN TERMS
 
ADSLAssymmetricalAsymmetrical digital subscriber line
 
ASDapplication-specific discrete technology
 
ASICapplication-specific integrated circuit
 
ASSPapplication-specific standard product
 
BCDbipolar, CMOS and DMOS process technology
 
BiCMOSbipolar and CMOS process technology
 
CADcomputer aided design
 
CMOScomplementary metal-on silicon oxide semiconductor
 
CODECaudio coding and decoding functions
 
CPEcustomer premises equipment
 
DMOSdiffused metal-on silicon oxide semiconductor
 
DRAMDRAMsdynamic random access memory
 
DSLdigital subscriber line
 
DSPdigital signal processor
 
EMASEco-Management and Audit Scheme, the voluntary European Community scheme for companies performing industrial activities for the evaluation and improvement of environmental performance
 
EEPROMelectrically erasable programmable read-only memory
 
EPROMerasable programmable read-only memory
 
EWSelectrical wafer sorting
 
G-bitgigabit
 
GPRSglobal packet radio service
 
GPSglobal positioning system
 
GSMglobal system for mobile communications
 
GSM/GPRSEuropean standard for mobile phones
 
HCMOShigh-speed complementary metal-on silicon oxide semiconductor
 
ICintegrated circuit
 
IGBTinsulated gate bipolar transistors
 
IPADintegrated passive and active devices
 
ISOInternational Organization for Standardization
 
K-bitkilobit
 
LANlocal area network
 
M-bitmegabit
 
MEMSmicro-electro-mechanical system
 
MOSmetal-on silicon oxide semiconductor process technology
 
MOSFETmetal-on silicon oxide semiconductor field effect transistor
 
MPEGmotion picture experts group
 
ODMoriginal design manufacturer
 
OEMoriginal equipment manufacturer


156141

OTPone-time programmable
PDApersonal digital assistant
 
PFCpower factor corrector
 
PROMprogrammable read-only memory
 
PSMprogrammable system memories
 
RAMrandom access memory
 
RFradio frequency
 
RISCreduced instruction set computing
 
ROMread-only memory
 
SAMserviceable available market
 
SCRsilicon controlled rectifier
 
SLICsubscriber line interface card
 
SMPSswitch-mode power supply
 
SoCsystem-on-chip
 
SRAMstatic random access memory
 
SNVMserial nonvolatile memories
 
TAMtotal available market
 
USBuniversal serial bus
 
VIPpowertmvertical integration power
 
VLSIvery large scale integration
 
XDSLdigital subscriber line


157142

SIGNATURES
 
The registrant hereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
 
STMICROELECTRONICS N.V.
STMICROELECTRONICS N.V.
   
Date: March 3, 200810, 2010 
By:
/s/  Carlo Bozotti
Carlo Bozotti
President and Chief Executive Officer


158143

 

CONSOLIDATED FINANCIAL STATEMENTS

Index to Consolidated Financial Statements
     
  
Page
 
Financial Statements:
    
Report of Independent Registered Public Accounting Firm for the Years Ended December 31, 2007, 20062009, 2008 and 20052007
  F-2 
Consolidated Statements of Income for the Years Ended December 31, 2007, 20062009, 2008 and 20052007
  F-4 
Consolidated Balance Sheets as at December 31, 20072009 and 20062008
  F-5 
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 20062009, 2008 and 20052007
  F-6 
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2007, 20062009, 2008 and 20052007
  F-7 
Notes to Consolidated Financial Statements
  F-8 
Numonyx Holdings B.V. Consolidated Financial Statements for the Year Ended December 31, 2009 and the Nine Month Period Ended December 31, 2008
F-79
Financial Statement Schedule:
For each of the three years in the period ended December 31, Schedule II Valuation and Qualifying Accounts
S-1


F-1

(PRICEWATERHOUSECOOPERS LETTERHEAD)
Report of Independent Registered Public Accounting Firm
 
To the Supervisory Board and Shareholders of STMicroelectronics N.V.:
 
In our opinion, the consolidated financial statements of STMicroelectronics N.V. listed in the index appearing under Item 18 on page 155 of this 20072009 Annual Report to Shareholders onForm 20-F present fairly, in all material respects, the financial position of STMicroelectronics N.V. and its subsidiaries at December 31, 20072009 and December 31, 2006,2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20072009 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule of STMicroelectronics N.V. listed in the index appearing under Item 18 on page 155 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007,2009, based on criteria established inInternal Control —- Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual“Management’s Report on Internal Control over Financial Reporting,Reporting”, appearing on page 151under Item 15 of this 20072009 Annual Report to Shareholders onForm 20-F. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our audits (which were integrated audits in 2007 and 2006).audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
 
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation in 2005 and the manner in which it accounts for defined benefit pension and other postretirement plans effective December 31, 2006.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
With offices in Aarau, Basel, Berne, Chur, Geneva, Lausanne, Lugano, Lucerne, Neuchâtel, Sitten, St. Gallen, Thun, Winterthur, Zug and Zurich, PricewaterhouseCoopers AG is a provider of auditing services and tax, legal and business consultancy services. PricewaterhouseCoopers AG is a partner in a global network of companies that are legally independent of one another and is located in some 150 countries throughout the world.


F-2

(PRICEWATERHOUSECOOPERS LETTERHEAD)
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


F-2

As described in “Management’s Report on Internal Control over Financial Reporting” appearing under Item 15, management has excluded ST-Ericsson AB Sweden and ST-Ericsson AS Norway from its assessment of internal control over financial reporting as of December 31, 2009 because they were acquired by the Company in a purchase business combination during 2009. Therefore, we have also excludedST-Ericsson AB Sweden andST-Ericsson AS Norway from our audit of internal control over financial reporting. ST-Ericsson AB Sweden and ST-Ericsson AS Norway, are consolidated subsidiaries whose total assets and total research and development expenses represent 0.44% and 8.2%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2009.
 
PricewaterhouseCoopers SA
 
   
-s- Michael Foley/s/ Travis Randolph
 -s- Felix Roth/s/ Felix Roth
Michael FoleyTravis Randolph Felix Roth
 
Geneva, March 3, 200810, 2010


F-3

STMicroelectronics N.V.
 
CONSOLIDATED STATEMENTS OF INCOME
In millionmillions of U.S. dollars, except per share amounts
 
            
 Twelve Months Ended             
 (audited)
 (audited)
 (audited)
  Twelve Months Ended 
 December 31,
 December 31,
 December 31,
  December 31,
 December 31,
 December 31,
 
 2007 2006 2005  2009 2008 2007 
Net sales  9,966   9,838   8,876   8,465   9,792   9,966 
Other revenues  35   16   6   45   50   35 
              
Net revenues
  10,001   9,854   8,882   8,510   9,842   10,001 
Cost of sales  (6,465)  (6,331)  (5,845)  (5,884)  (6,282)  (6,465)
              
Gross profit
  3,536   3,523   3,037   2,626   3,560   3,536 
Selling, general and administrative  (1,099)  (1,067)  (1,026)  (1,159)  (1,187)  (1,099)
Research and development  (1,802)  (1,667)  (1,630)  (2,365)  (2,152)  (1,802)
Other income and expenses, net  48   (35)  (9)  166   62   48 
Impairment, restructuring charges and other related closure costs  (1,228)  (77)  (128)  (291)  (481)  (1,228)
              
Operating income (loss)
  (545)  677   244 
Other -than-temporary impairment charge on financial assets  (46)  —   — 
Operating loss
  (1,023)  (198)  (545)
Other-than-temporary impairment charge and realized losses on financial assets  (140)  (138)  (46)
Interest income, net  83   93   34   9   51   83 
Earnings (loss) on equity investments  14   (6)  (3)  (337)  (553)  14 
Gain (loss) on financial assets  (8)  15   — 
Gain on convertible debt buyback  3   —   — 
              
Income (loss) before income taxes and minority interests
  (494)  764   275 
Income tax benefit (expense)  23   20   (8)
Loss before income taxes and noncontrolling interest
  (1,496)  (823)  (494)
Income tax benefit  95   43   23 
              
Income (loss) before minority interests
  (471)  784   267 
Minority interests  (6)  (2)  (1)
Loss before noncontrolling interest
  (1,401)  (780)  (471)
Net loss (income) attributable to noncontrolling interest  270   (6)  (6)
              
Net income (loss)
  (477)  782   266 
Net loss attributable to parent company
  (1,131)  (786)  (477)
              
Earnings (loss) per share (Basic)
  (0,53)  0,87   0,30 
Loss per share (Basic) attributable to parent company shareholders
  (1.29)  (0.88)  (0.53)
              
Earnings (loss) per share (Diluted)
  (0,53)  0,83   0,29 
Loss per share (Diluted) attributable to parent company shareholders
  (1.29)  (0.88)  (0.53)
              
 
The accompanying notes are an integral part of these audited consolidated financial statements
 
(ST LOGO)


F-4

STMicroelectronics N.V.
 
CONSOLIDATED BALANCE SHEETS
In million of U.S. dollars
 
        
 As at         
 December 31,
 December 31,
  As at 
 2007 2006  December 31,
 December 31,
 
 (Audited) (Audited)  2009 2008 
Assets
                
Current assets:
                
Cash and cash equivalents  1,855   1,659   1,588   1,009 
Marketable securities  1,014   764   1,032   651 
Short-term deposits  —   250 
Trade accounts receivable, net  1,605   1,589   1,367   1,064 
Inventories, net  1,354   1,639   1,275   1,840 
Deferred tax assets  205   187   298   252 
Assets held for sale  1,017   —   31   — 
Other receivables and assets  612   498   753   685 
          
Total current assets
  7,662   6,586   6,344   5,501 
          
Goodwill  290   223   1,071   958 
Other intangible assets, net  238   211   819   863 
Property, plant and equipment, net  5,044   6,426   4,081   4,739 
Long-term deferred tax assets  237   124   333   373 
Equity investments  —   261   273   510 
Restricted cash for equity investments  250   218 
Restricted cash  250   250 
Non-current marketable securities  369   —   42   242 
Other investments and other non-current assets  182   149   442   477 
          
  6,610   7,612   7,311   8,412 
          
Total assets
  14,272   14,198   13,655   13,913 
          
Liabilities and shareholders’ equity
                
Current liabilities:
                
Bank overdrafts  —   —   —   20 
Current portion of long-term debt  103   136   176   123 
Trade accounts payable  1,065   1,044   883   847 
Other payables and accrued liabilities  744   664   1,049   996 
Dividends payable to shareholders  26   79 
Deferred tax liabilities  11   7   20   28 
Accrued income tax  154   112   126   125 
          
Total current liabilities
  2,077   1,963   2,280   2,218 
          
Long-term debt  2,117   1,994   2,316   2,554 
Reserve for pension and termination indemnities  323   342   317   332 
Long-term deferred tax liabilities  14   57   37   27 
Other non-current liabilities  115   43   342   350 
          
  2,569   2,436   3,012   3,263 
          
Total liabilities
  4,646   4,399   5,292   5,481 
          
Commitment and contingencies                
Minority interests
  53   52 
     
Common stock (preferred stock: 540,000,000 shares authorized, not issued; common stock: Euro 1.04 nominal value, 1,200,000,000 shares authorized, 910,293,420 shares issued, 899,760,539 shares outstanding)  1,156   1,156 
Equity
        
Parent company shareholders’ equity        
Common stock (preferred stock: 540,000,000 shares authorized, not issued; common stock: Euro 1.04 nominal value, 1,200,000,000 shares authorized, 910,319,305 shares issued, 878,333,566 shares outstanding)  1,156   1,156 
Capital surplus  2,097   2,021   2,481   2,324 
Accumulated result  5,274   6,086   2,723   4,064 
Accumulated other comprehensive income  1,320   816   1,164   1,094 
Treasury stock  (274)  (332)  (377)  (482)
          
Shareholders’ equity
  9,573   9,747 
Total parent company shareholders’ equity  7,147   8,156 
Noncontrolling interest  1,216   276 
          
Total liabilities and shareholders’ equity
  14,272   14,198 
Total equity
  8,363   8,432 
Total liabilities and equity
  13,655   13,913 
          
 
The accompanying notes are an integral part of these audited consolidated financial statements
 
(ST LOGO)


F-5

STMicroelectronics N.V.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
In million of U.S. dollars
 
            
 Twelve Months Ended             
 December 31,
 December 31,
 December 31,
  Twelve Months Ended 
 2007 2006 2005  December 31,
 December 31,
 December 31,
 
 (Audited) (Audited) (Audited)  2009 2008 2007 
Cash flows from operating activities:
                        
Net income (loss)  (477)  782   266 
Items to reconcile net income and cash flows from operating activities:            
Net loss  (1,401)  (780)  (471)
Items to reconcile net loss and cash flows from operating activities:            
Depreciation and amortization
  1,413   1,766   1,944   1,367   1,366   1,413 
Amortization of discount on convertible debt
  18   18   5   13   18   18 
Other-than-temporary impairment charge and realized losses on financial assets
  140   138   46 
Unrealized gain on financial assets
  —   (15)  — 
Loss on sale of financial assets
  8   —   — 
Gain on convertible debt buyback
  (3)  —   — 
Other non-cash items
  155   50   10   (64)  159   109 
Minority interest in net income of subsidiaries
  6   2   1 
Deferred income tax
  (148)  (74)  (31)  (24)  (69)  (148)
Earnings (loss) on equity investments
  (14)  6   3 
(Earnings) loss on equity investments
  337   553   (14)
Impairment, restructuring charges and other related closure costs, net of cash payments
  1,173   1   72   (4)  371   1,173 
Changes in assets and liabilities:                        
Trade receivables, net
  2   (104)  (117)  (300)  565   2 
Inventories, net
  24   (161)  (174)  553   (299)  24 
Trade payables
  19   36   (71)  (54)  (34)  19 
Other assets and liabilities, net
  17   169   (110)  248   (251)  17 
              
Net cash from operating activities
  2,188   2,491   1,798   816   1,722   2,188 
              
Cash flows from investing activities:
                        
Payment for purchase of tangible assets  (1,140)  (1,533)  (1,441)  (451)  (983)  (1,140)
Payment for purchase of marketable securities  (708)  (864)  —   (1,730)  —   (708)
Proceeds from sale of marketable securities  101   100   —   1,371   351   101 
Investment in short-term deposits  —   (903)  — 
Proceeds from sale of non current marketable securities  75   —   — 
Proceeds from matured short-term deposits  250   653   —   —   —   250 
Restricted cash for equity investments  (32)  (218)  — 
Restricted cash  —   —   (32)
Disposal of financial instrument  26   —   — 
Investment in intangible and financial assets  (208)  (86)  (49)  (138)  (91)  (208)
Proceeds from the sale of Accent subsidiary  —   7   — 
Capital contributions to equity investments  —   (213)  (38)
Proceeds received in business combinations  1,155   —   — 
Payment for business acquisitions, net of cash and cash equivalents acquired  (18)  (1,694)  — 
              
Net cash used in investing activities
  (1,737)  (3,057)  (1,528)
Net cash from (used in) investing activities
  290   (2,417)  (1,737)
              
Cash flows from financing activities:
                        
Proceeds from issuance of long-term debt  102   1,744   50 
Proceeds from long-term debt  1   663   102 
Buyback of convertible debt  (103) ��—   — 
Repayment of long-term debt  (125)  (1,522)  (110)  (134)  (187)  (125)
Decrease in short-term facilities  —   (12)  (47)
Increase (decrease) in short-term facilities  (20)  20   — 
Capital increase  2   28   35   —   —   2 
Dividends paid  (269)  (107)  (107)
Dividends paid to minority interests  (6)        
Repurchase of common stock  —   (313)  — 
Dividends paid to shareholders  (158)  (240)  (269)
Dividends paid to noncontrolling interests  (5)  (10)  (6)
Purchase of equity from noncontrolling interests  (92)  —   — 
Other financing activities  —   1   1   (2)  —   — 
              
Net cash from (used in) financing activities
  (296)  132   (178)
Net cash used in financing activities
  (513)  (67)  (296)
              
Effect of changes in exchange rates  41   66   (15)  (14)  (84)  41 
              
Net cash increase (decrease)
  196   (368)  77   579   (846)  196 
              
Cash and cash equivalents at beginning of the period
  1,659   2,027   1,950   1,009   1,855   1,659 
              
Cash and cash equivalents at end of the period
  1,855   1,659   2,027   1,588   1,009   1,855 
              
Supplemental cash information:                        
Interest paid  52   29   17   34   63   52 
Income tax paid  133   117   90 
Income tax paid (refund)  (141)  154   133 
 
The accompanying notes are an integral part of these audited consolidated financial statements
 
(ST LOGO)


F-6

STMicroelectronics N.V.
 
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
In millionmillions of U.S. dollars, except per share amounts
 
                                                    
  ��       Accumulated
            Accumulated
     
         Other
            Other
     
 Common
 Capital
 Treasury
 Accumulated
 Comprehensive
 Shareholders’
  Common
 Capital
 Treasury
 Accumulated
 Comprehensive
 Noncontrolling
 Total
 
 Stock Surplus Stock Result income (loss) Equity  Stock Surplus Stock Result Income (Loss) Interests Equity 
Balance as of December 31, 2004 (Audited)
  1,150   1,924   (348)  5,268   1,116   9,110 
             
Capital increase  3   32               35 
Stock-based compensation expense      11               11 
Comprehensive income (loss):                        
Net Income              266       266 
Other comprehensive loss, net of tax                  (835)  (835)
   
Comprehensive loss                      (569)
Dividends, $0.12 per share              (107)      (107)
             
Balance as of December 31, 2005 (Audited)
  1,153   1,967   (348)  5,427   281   8,480 
             
Capital increase  3   25               28 
Stock-based compensation expense      29   16   (16)      29 
Comprehensive income (loss):                        
Net Income              782       782 
Other comprehensive income, net of tax                  535   535 
   
Comprehensive income                      1,317 
Dividends, $0.12 per share              (107)      (107)
             
Balance as of December 31, 2006 (Audited)
  1,156   2,021   (332)  6,086   816   9,747 
Balance as of December 31, 2006
  1,156   2,021   (332)  6,086   816   52   9,799 
                            
Cumulative effect of FIN 48 adoption              (8)      (8)              (8)          (8)
Capital increase      2               2       2                   2 
Stock-based compensation expense      74   58   (58)      74       74   58   (58)          74 
Comprehensive income (loss):                                                    
Net Loss              (477)      (477)
Net income (loss)              (477)      6   (471)
Other comprehensive income, net of tax                  504   504                   504   1   505 
      
Comprehensive income                      27                           34 
Dividends, $0.30 per share              (269)      (269)              (269)      (6)  (275)
                            
Balance as of December 31, 2007 (Audited)
  1,156   2,097   (274)  5,274   1,320   9,573 
Balance as of December 31, 2007
  1,156   2,097   (274)  5,274   1,320   53   9,626 
                            
Repurchase of common stock          (313)              (313)
Issuance of shares by subsidiary      152               246   398 
Stock-based compensation expense      75   105   (105)          75 
Comprehensive income (loss):                            
Net income (loss)              (786)      6   (780)
Other comprehensive loss, net of tax                  (226)  (19)  (245)
   
Comprehensive loss                          (1,025)
Dividends, $0.36 per share              (319)      (10)  (329)
               
Balance as of December 31, 2008
  1,156   2,324   (482)  4,064   1,094   276   8,432 
               
Purchase of equity from noncontrolling interest      119               (211)  (92)
Business combination                      1,411   1,411 
Stock-based compensation expense      38   105   (105)          38 
Comprehensive income (loss):                            
Net loss              (1,131)      (270)  (1,401)
Other comprehensive income, net of tax                  70   15   85 
   
Comprehensive loss                          (1,316)
Dividends, $0.12 per share              (105)      (5)  (110)
               
Balance as of December 31, 2009
  1,156   2,481   (377)  2,723   1,164   1,216   8,363 
               
 
The accompanying notes are an integral part of these audited consolidated financial statements


F-7

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in millions of U.S. dollars, except share and per share amounts)
 
1 — THE COMPANY
1.  THE COMPANY
 
STMicroelectronics N.V. (the “Company”) is registered in The Netherlands with its statutory domicilecorporate legal seat in Amsterdam, the Netherlands, and its corporate headquarters located in Geneva, Switzerland.
 
The Company is a global independent semiconductor company that designs, develops, manufactures and markets a broad range of semiconductor integrated circuits (“ICs”) and discrete devices. The Company offers a diversified product portfolio and develops products for a wide range of market applications, including automotive products, computer peripherals, telecommunications systems, consumer products, industrial automation and control systems. Within its diversified portfolio, the Company hasis focused on developing products that leverage its technological strengths in creating customized, system-level solutions with high-growth digital andmixed-signal content.
 
2 — ACCOUNTING POLICIES
2.  ACCOUNTING POLICIES
 
The accounting policies of the Company conform to generally accepted accounting principles generally accepted in the United States of America (“U.S. GAAP”). All balances and values in the current and prior periods are in millions of dollars, except share and per-share amounts. Under Article 35 of the Company’s Articles of Association, the financial year extends from January 1 to December 31, which is the period-end of each fiscal year.
 
2.1 — Principles of consolidation
 
The consolidated financial statements of the Company have been prepared in conformity with U.S. GAAP. The Company’s consolidated financial statements include the assets, liabilities, results of operations and cash flows of its majority-owned subsidiaries. The ownership of other interest holdersSubsidiaries are fully consolidated from the date on which control is reflected as minority interests.transferred to the Company. They are de-consolidated from the date that control ceases. Intercompany balances and transactions have been eliminated in consolidation. Since the adoption in 2003 of Financial Accounting Standards Board Interpretation No. 46Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51(revised 2003) and the related FASB Staff Positions (collectively “FIN 46R”),In compliance with U.S. GAAP guidance, the Company assesses for consolidation any entity identified as a Variable Interest Entity (“VIE”) and consolidates any VIEs, if any, for which the Company is determined to be the primary beneficiary, as described in Note 2.20.2.19.
When the Company owns some, but not all, of the voting stock of an entity, the shares held by third parties represent a noncontrolling interest. The consolidated financial statements are prepared based on the total amount of assets and liabilities and income and expenses of the consolidated subsidiaries. However, the portion of these items that does not belong to the Company is reported on the line “Noncontrolling interest” in the consolidated financial statements.
 
2.2 — Use of estimates
 
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during the reporting period.assumptions. The primary areas that require significant estimates and judgments by management include, but are not limited to, to:
• sales returns and allowances,
• determination of best estimate of selling price for deliverables in multiple element sale arrangements,
• inventory reserves and normal manufacturing capacity thresholds to determine costs capitalized in inventory,
• accruals for litigation and claims,
• valuation at fair value of acquired assets including intangibles and assumed liabilities in a business combination, goodwill, investments and tangible assets as well as the impairment of their related carrying values,
• the assessment in each reporting period of events, which could trigger interim impairment testing,
• estimated value of the consideration to be received and used as fair value for asset groups classified as assets to be disposed of by sale and the assessment of probability to realize the sale,
• measurement of the fair value of debt and equity securities classified as available-for-sale, including debt securities, for which no observable market price is obtainable,


F-8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and allowances, allowances for doubtful accounts, inventory reserves and normal manufacturing capacity thresholds to determine costs capitalized in inventory, accruals for warranty costs, litigation and claims, assumptions used to discount monetary assets expected to be recovered beyond one-year, valuation of acquired intangibles, goodwill, investments and tangible assets as well as the impairment of their related carrying values, estimated value of the consideration to be received and used as fair value for disposal asset group classified as assets to be disposed of by sale, measurement of the fair value of marketable securities classified as available-for-sale for which no observable market price is obtainable, restructuring charges, assumptions used in calculating pension obligations and share-based compensation including assessment of the number of awards expected to vest upon future performance condition achievement, assumptions used to measure and recognize a liability for the fair value of the obligation the Company assumes at the inception of a guarantee, measurement of hedge effectiveness of derivative instruments, deferred income tax assets including required valuation allowances and liabilities as well as provisions for specifically identified income tax exposures and income tax uncertainties. per share amounts)
• the assessment of credit losses and other-than-temporary impairment charges on financial assets,
• the valuation of noncontrolling interests, particularly in case of contribution in kind as part of a business combination,
• restructuring charges,
• assumptions used in calculating pension obligations,
• assumptions used to measure and recognize a liability for the fair value of the obligation the Company assumes at the inception of a guarantee,
• deferred income tax assets including required valuation allowances and liabilities as well as provisions for specifically identified income tax exposures and income tax uncertainties.
The Company bases the estimates and assumptions on historical experience and on various other factors such as market trends and latest available business plans that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. While the Company regularly evaluates its estimates and assumptions, the actual results experienced by the Company could differ materially and adversely from management’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations, cash flows and financial position could be significantly affected.


F-8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
 
2.3 — Foreign currency
 
The U.S. dollar is the reporting currency for the Company. The U.S.US dollar is the currency of the primary economic environment in which the Company operates since the worldwide semiconductor industry uses the U.S. dollar as a currency of reference for actual pricing in the market. Furthermore, the majority of the Company’s transactions are denominated in U.S. dollars, and revenues from external sales in U.S. dollars largely exceed revenues in any other currency. However, labor costs are concentrated primarily in the countries that have adoptedof the Euro currency.zone.
 
The functional currency of each subsidiary throughoutof the groupCompany is either the local currency or the U.S.US dollar, determineddepending on the basis of the economicaleconomic environment in which each subsidiary operates. For consolidation purposes, assets and liabilities of these subsidiaries having the local currency as functional currency are translated at current rates of exchange at the balance sheet date. Income and expense items are translated at the monthly average exchange rate of the period. The effectscurrency translation adjustments (“CTA”) generated by the conversion of translating the financial position and results of operations from local functional currencies are reported as a component of “Accumulated other comprehensive income”income (loss)” in the consolidated statements of changes in shareholders’ equity.
 
Assets, liabilities, revenues, expenses, gains or losses arising from transactions denominated in foreign currency transactions are recorded in the functional currency of the recording entity at the exchange rate in effect during the month of the transaction. At each balance sheet date, recorded balances denominated in a currency other than the recording entity’s functional currency are measured into the functional currency at the exchange rate prevailing at the balance sheet date. The related exchange gains and losses are recorded in the consolidated statements of income as “Other income and expenses, net”.
 
2.4 — Financial assets
 
The Company classifies its financial assets in the following categories: held-for-trading financial assets and available-for-sale financial assets.available-for-sale. The Company did not hold at December 31, 20072009 any investment classified as held-to-maturity financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its financial assets at initial recognition.recognition and reassesses the appropriateness of the classification at each reporting date. On January 1, 2008 upon adoption of the new U.S. GAAP guidance allowing the election of fair value treatment for any or all financial assets, the Company did not elect to apply the fair value option to any financial assets. Unlisted equity securities with no readily determinable fair value are carried at cost, as described in Note 2.20.2.19. They are neither classified as held-for-trading nor as available-for-sale.
Regular purchases and sales of financial assets are recognized on the trade date — the date on which the Company commits to purchase or sell the asset. Financial assets are initially recognized at fair value, and transaction costs are expensed in the consolidated statements of income. Available-for-sale financial assets and held-for-trading financial assets are subsequently carried at fair value. Financial assets are derecognized when the


F-9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
rights to receive cash flows from the investments have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership: the relevant gain (loss) is reported as a non-operating element on the consolidated statements of income.
The fair values of quoted debt and equity securities are based on current market prices. If the market for a financial asset is not active and if no observable market price is obtainable, the Company measures fair value by using assumptions and estimates. These assumptions and estimates include the use of recent arm’s length transactions; for debt securities without available observable market price, the Company establishes fair value by reference to publicly available indices of securities with the same rating and comparable underlying collaterals or industries’ exposure, which the Company believes approximates the orderly exit value in the current market. In measuring fair value, the Company makes maximum use of market inputs and relies as little as possible on entity-specific inputs.
 
Held-for-trading financial assets
 
A financial asset is classified in this category if it is a security acquired principally for the purpose of selling in the short term.term or if it is a derivative instrument not designated as a hedge. Assets in this category are classified as current assets when they are expected to be realized within twelve months of the balance sheet date. Derivatives are classified as held for trading unless they are designated as hedges, asAs described in Note 2.5.2.5, the Company enters into derivative transactions to hedge currency exposures resulting from its operating activities. For mark-to-market gains or losses on its trading derivatives that do not qualify as hedging instruments, gains and losses arising from changes in the fair value of the derivatives are reported in the consolidated statements of income within “Other income and expenses, net” in the period in which they arise, since the transactions for such instruments would only occur within the Company’s operating activities and, as such, should be included in operating income. Gains and losses arising from changes in the fair value of financial assets not related to the operating activities of the Company, such as discontinued fair value hedge on interest rate risk exposure or discontinued cash flow hedge for which the hedged forecasted transaction is not probable of occurrence anymore, are presented in the consolidated statements of income as a non-operating element within “Gain (loss) on financial assets” in the period in which they arise.
 
Available-for-sale financial assets
 
Available-for-sale financial assets are non-derivative financial assets that are either designated in this category or not classified as held-for-trading. They are included in non-current assets unless management intends to dispose of the investment within twelve months of the balance sheet date.
 
Regular purchases and sales of financial assets are recognized on the trade date — the date on which the Company commits to purchase or sell the asset. Financial assets are initially recognized at fair value, and transaction costs are expensed in the consolidated statements of income. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and held-for-trading financial assets are subsequently carried at fair value.
Gains and losses arising from changesChanges in the fair value, of the financial assets classified as held-for-trading are presented in the consolidated statements of income within “Other income and expenses, net” in the period in which they arise. Changes in the fair valueincluding declines determined to be temporary, of securities classified as available-for-sale are recognized as a separate component of “Accumulated other comprehensive income”income (loss)” in the consolidated statements of changes in shareholders’ equity.


F-9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
( The Company ceases to defer gains or losses in millions of U.S. dollars, except per share amounts)
When securities classified as available for sale are sold, the accumulated fair value adjustments previously recognizedconsolidated equity and reports an income or impairment charge in equity are included in “Other income and expenses, net” on the consolidated statements of income as gains and losses from marketable securities.
The fair values of quoted debt and equity securities are based on current market prices. If the market for a financial asset is not active and if no observable market price is obtainable,non-operating element when the Company measures fair value by using assumptions and estimates. For unquoted equity securities, these assumptions and estimates includewill be required to sell the use of recent arm’s length transactions; for debt securities without available observable market price, the Company establishes fair value by reference to public available indexes of securities with the same rating and comparable or similar underlying collaterals or industries’ exposure, using “mark to market” bids and “mark to model” valuations received from the structuring financial institutions. In measuring fair value, the Company makes maximum use of market inputs and relies as little as possible on entity-specific inputs.
security. The Company assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A significant or prolonged decline in the fair value of the security below its cost or a significant drop in the number of the transactions of the security which are becoming illiquid are considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss —or gain is measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss-loss. If a credit loss exists, but the Company does not intend to sell the impaired security and is removed from equitynot more likely than not to be required to sell before recovery, the impairment is other than temporary and is separated into the estimated amount relating to credit loss, and the amount relating to all other factors. Only the estimated credit loss amount is recognized currently in the consolidated statements of incomeearnings on the line “Other-than-temporary impairment charge and realized losses on marketable securities”financial assets”, with the remainder of the loss amount recognized in accumulated other comprehensive income (loss). Impairment losses recognized in the consolidated statements of income are not reversed through earnings. The Company assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets classified as available-for-sale is impaired.
When securities classified as available for sale are sold, the accumulated fair value adjustments previously recognized in equity are reported as a non-operating element on the consolidated statements of income.income as gains or losses on financial assets. The cost of securities sold and the amount reclassified out of accumulated other comprehensive income into earnings is determined based on the specific identification of the securities sold.
 
2.5 — Derivative financial instruments and hedging activities
 
Derivative financial instruments are initially recognized at fair value on the date a derivative contract is entered into and are subsequently measured at their fair value. The method of recognizing the resulting gain or loss resulting from the


F-10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
derivative instrument depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Company designates certain derivatives as either:
 
(a) hedges of the fair value of recognized liabilities (fair value hedge); or
 
(b) hedges of a particular risk associated with a highly probable forecastforecasted transaction (cash flow hedge)
 
The Company documents, at inception of the transaction, the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Company also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Derivative instruments that are not designated as hedges are classified as held-for-trading financial assets, as described in Note 2.4.
 
Derivative financial instruments classified as held for trading
 
The Company conducts its business on a global basis in various major international currencies. As a result, the Company is exposed to adverse movements in foreign currency exchange rates. The Company enters into foreign currency forward contracts and currency options to reduce its exposure to changes in exchange rates and the associated risk arising from the denomination of certain assets and liabilities in foreign currencies at the Company’s subsidiaries. These instruments do not qualify as hedging instruments under Statement of Financial Accounting Standards No. 133,Accounting for Derivative Instruments and Hedging Activities(“FAS 133”)as per U.S. GAAP guidance, and are marked-to- marketmarked-to-market at each period-end with the associated changes in fair value recognized in “Other income and expenses, net” in the consolidated statements of income, as described in Note 2.4.
 
Cash Flow Hedges
 
To further reduce its exposure to U.S. dollar exchange rate fluctuations, the Company also hedges certain Euro-denominated forecasted transactions that cover at year-end a large part of its projected research and development, selling, general and administrative expenses as well as a portion of its projected front-end manufacturing production costs of semi-finished goods. The foreign currency forward contracts and currency options used to hedge foreign currency exposures are reflected at their fair value in the consolidated balance sheet and meet the criteria for designation as cash flow hedge. The criteria for designating a derivative as a hedge include the instrument’s effectiveness in risk reduction and, in most cases, a one-to-one matching of the derivative instrument to its underlying transaction.


F-10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(transaction, which enables the Company to conclude, based on the fact that, at inception, the critical terms of the hedging instrument and the hedged forecasted transaction are the same, that changes in millions of U.S. dollars, except per share amounts)
cash flows attributable to the risk being hedged are expected to be completely offset by the hedging derivative. Foreign currency forward contracts and currency options used as hedges are effective at reducing the Euro/U.S. dollar currency fluctuation risk and are designated as a hedge at the inception of the contract and on an on-going basis over the duration of the hedge relationship.
 
For derivative instruments designated as cash flow hedge, the gain or loss from the effective portion of the hedge is reported as a component of “Accumulated other comprehensive income”income (loss)” in the consolidated statements of changes in shareholders’ equity and is reclassified into earnings in the same period in which the hedged transaction affects earnings, and within the same consolidated statements of income line item as the impact of the hedged transaction. For these derivatives, ineffectiveness appears if the hedge relationship is not perfectly effective or if the cumulative gain or loss on the derivative hedging instrument exceeds the cumulative change in the expected future cash flows on the hedged transactions. The ineffective portion of the hedge is immediately reported in “Other income and expenses, net” in the consolidated statements of income. Effectiveness on transactions hedged through purchased currency options is measured on the full fair value of the option, including the time value of the option.
 
TheWhen a forecasted transaction is no longer expected to occur, the cumulative gain or loss that was reported in “Accumulated other comprehensive income (loss)” in the consolidated statements of changes in equity is recognized immediately transferred to the consolidated statements of income within “Other income and expenses, net”. If the de-designated derivative is still related to operating activities, the changes in fair value subsequent to the discontinuance continue to be reported within “Other income and expenses, net” in the consolidated statements of income, whenas described in Note 2.4. If upon de-designation, the derivative instrument is held in view to be sold with no direct relation with current operating activities, changes in the fair value of the derivative instrument following de-designation are reported as a non-operating element on the line “Gain (loss) on financial assets” in the consolidated statements of income. When a designated hedging instrument is either terminated early or an improbable or ineffective portion of the hedge is identified. When a hedging instrument expires or is sold, or when a hedge no longer meetsidentified, the criteria for hedge accounting, any cumulative gain or loss existingdeferred in equity at that time remains “Accumulated other comprehensive income


F-11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in equitymillions of U.S. dollars, except share and is recognized when the forecasted transaction is ultimately recognizedper share amounts)
(loss)” in the consolidated statements of income. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reportedchanges in equity is recognized immediately transferred toin “Other income and expenses, net” in the consolidated statements of income withinwhen it is probable that the forecasted transaction will not occur by the end of the originally specified time period.
In order to optimize its hedging strategy, the Company can be required to cease the designation of certain cash flow hedge transactions and enter into a new designated cash flow hedge transaction with the same hedged forecasted transaction but with a new hedging instrument. De-designation and re-designation are formally authorized and limited to the de-designation of purchased currency options with re-designation of the cash flow hedge through subsequent forward contract when the Euro/US dollar exchange rate is decreasing, the intrinsic value of the option is nil, the hedged transaction is still probable of occurrence and meets at re-designation date all criteria for hedge accounting. At de-designation date, the net derivative gain or loss related to the de-designated cash flow hedge deferred in “Accumulated other comprehensive income (loss)” in the consolidated statements of changes in equity continues to be reported in net equity. From de-designation date, the change in fair value of the de-designated hedging item is recognized each period in the consolidated statements of income on the line “Other income and expenses, net”., as described in Note 2.4. The net derivative gain or loss related to the de-designated cash flow hedge deferred in net equity since de-designation date is reclassified to earnings in the same period in which the hedged transaction affects earnings, and within the same consolidated statements of income line item as the impact of the hedged transaction.
The principles regulating the hedging strategy for derivatives designated as cash flow hedge are established as follows: (i) for R&D and Corporate costs between 50% and 80% of the total forecasted transactions; (ii) for manufacturing costs between 40% and 70% of the total forecasted transactions. The maximum length of time over which the Company hedges its exposure to the variability of cash flows for forecasted transactions is 14 months.
 
Fair Value Hedges
 
In 2006,To the Company entered intoextent that cancellable swaps withheld as a combined notional value of $200 million to hedge against the fair value of a portion of theCompany’s convertible bonds due 2016 carrying a fixed interest rate. These financial instruments correspond to interest rate swaps with a cancellation feature depending on the Company’s bonds convertibility. They convert the fixed rate interest expense recorded on the convertible bond due 2016 to a variable interest rate based upon adjusted LIBOR. As of December 2007 and 2006, the cancelable swaps metmeet the criteria for designation as a fair value hedge, and, as such, both the interest rate swaps and the hedged portion of the bonds are reflected at their fair values in the consolidated balance sheets. The criteria for designating a derivative as a hedge include evaluating whether the instrument is highly effective at offsetting changes in the fair value of the hedged item attributable to the hedged risk. Hedged effectiveness is assessed on both a prospective and retrospective basis at each reporting period. As of December 31, 2007 and 2006, the cancellable swaps are highly effective at hedging the change in fair value of the hedged bonds attributable to changes in interest rates. Any ineffectiveness of the hedge relationship is recorded as a gain or loss on derivatives as a component of “Other income and expenses, net”, in the consolidated statements of income. IfAt the hedge becomespoint that the cancellable swaps no longer highly effective,meet the hedged portion ofcriteria for designation as a fair value hedge, the bondsswaps will discontinue beingcontinue to be marked to fair value whilevalue. At such point, the changes in the fair value of the swaps are recorded in “Gain (loss) on financial assets”. Also, the associated bonds will no longer be marked to fair value and the difference between fair value and amortized costs will be amortized to earnings as a component of interest rateexpense. Results on the sale of the swaps will continue to be recordedare recognized in the line “Gain (loss) on financial assets” in the consolidated statements of income.income, as discussed in Note 25.
 
2.6 — Reclassifications
Certain prior-year amounts have been reclassified to conform to the current year presentation. In 2007, the Company determined that certain auction rate securities were to be more properly classified on its consolidated balance sheet as “Marketable securities” instead of “Cash and cash equivalents”, as reported in previous periods and namely as of December 31, 2006. The revision of the December 31, 2006 consolidated balance sheet results in a decrease of “Cash and cash equivalents” from $1,963 million to $1,659 million with an offsetting increase to “Marketable securities” from $460 million to $764 million. The revision of the December 31, 2006 consolidated statement of cash flows affects “Net cash used in investing activities”, which increased from $2,753 million to $3,057 million based on the increase in the investing activities line “Payment for purchase of marketable securities” from $460 million to $864 million and the increase of the line “Proceeds from sale of marketable securities” from $0 million to $100 million. The “Net cash increase (decrease)” caption was also reduced by $304 million from a decrease of $64 million to a decrease of $368 million, and the “Cash and cash equivalents at the end of the period” changes to match the $1,659 million on the revised consolidated balance sheet. There are no other changes on the consolidated statements of cash flows, including the “Cash and cash equivalents at the beginning of the period” as the Company started to purchase auction rate securities only in 2006.


F-11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
2.7 — Revenue Recognition
 
Revenue is recognized as follows:
 
Net sales
 
Revenue from products sold to customers is recognized pursuant to SEC Staff Accounting Bulletin No. 104,Revenue Recognition(“SAB 104”), when all the following conditions have been met: (a) persuasive evidence of an arrangement exists; (b) delivery has occurred; (c) the selling price is fixed or determinable; and (d) collection is reasonably assured. This usually occurs at the time of shipment.
 
Consistent with standard business practice in the semiconductor industry, price protection is granted to distribution customers on their existing inventory of the Company’s products to compensate them for declines in market prices. The ultimate decision to authorize a distributor refund remains fully within the control of the Company. The Company accrues a provision for price protection based on a rolling historical price trend computed on a monthly basis as a percentage of gross distributor sales. This historical price trend represents differences in recent months between the invoiced price and the final price to the distributor, adjusted if required, to accommodate a significant move in the current market price. The short outstanding inventory time period, visibility into the standard inventory product pricing (as opposed to certain customized products) and long distributor pricing history


F-12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
have enabled the Company to reliably estimate price protection provisions at period-end. The Company records the accrued amounts as a deduction of revenue at the time of the sale.
 
The Company’s customers occasionally return the Company’s products for technical reasons. The Company’s standard terms and conditions of sale provide that if the Company determines that products are non-conforming, the Company will repair or replace the non-conforming products, or issue a credit or rebate of the purchase price. Quality returns are not related to any technological obsolescence issues and are identified shortly after sale in customer quality control testing. Quality returns are usually associated with end-user customers, not with distribution channels. The Company provides for such returns when they are considered as probable and can be reasonably estimated. The Company records the accrued amounts as a reduction of revenue.
 
The Company’s insurance policy relating to product liability only covers physical damage and other direct damages caused by defective products. The Company does not carry insurance against immaterial non consequential damages. The Company records a provision for warranty costs as a charge against cost of sales, based on historical trends of warranty costs incurred as a percentage of sales, which management has determined to be a reasonable estimate of the probable losses to be incurred for warranty claims in a period. Any potential warranty claims are subject to the Company’s determination that the Company is at fault for damages, and such claims usually must be submitted within a short period following the date of sale. This warranty is given in lieu of all other warranties, conditions or terms expressexpressed or implied by statute or common law. The Company’s contractual terms and conditions limit its liability to the sales value of the products which gave rise to the claims.
 
While the majority of the Company’s sales agreements contain standard terms and conditions, the Company may, from time to time, enter into agreements that contain multiple elements or non-standard terms and conditions, which require revenue recognition judgments. Where multiple elements exist in an arrangement, the arrangement is allocated to the different elements based upon verifiable objective evidence of the fair value of the elements as governed under Emerging Issues Task Force IssueNo. 00-21,Revenue Arrangements with Multiple Deliverables(“EITF 00-21”).for periods 2008 and prior, while allocation is based on verifiable objective evidence, third party evidence or management’s best estimate of selling price of the separable deliverables beginning in 2009. In 2009, the Company early adopted new US GAAP guidance for multiple deliverable arrangements. This new guidance removes the previous requirements of allocating revenue to delivered elements only to the extent that there was verifiable objective evidence of the fair value of all undelivered elements, and now requires the use of relative fair values based on either vendor specific objective evidence or third party evidence of fair values. If neither of these is available, the guidance requires the use of management’s best estimate of selling price for each separable deliverable. The early adoption of this new guidance was retroactively adopted back to January 1, 2009; however, it did not have a material effect on the consolidated statements of income of the Company for the year ended December 31, 2009. These arrangements generally do not include performance-, cancellation-, termination- or refund-type provisions.
 
Other revenues
 
Other revenues primarily consist of license revenue, andservice revenue related to transferring licenses, patent royalty income, which are recognized ratably over the termand sale of the agreements.scrap and manufacturing by-products.
 
Funding
 
Funding received by the Company is mainly from governmental agencies and income is recorded as recognized when all contractually required conditions are fulfilled. The Company’s primary sources for government funding are French, Italian, other European Union (“EU”) governmental entities and Singapore agencies. Such funding is generally provided to encourage research and development activities, industrialization and local economic development. The EU has developed model contracts for research and development fundingfundings that require


F-12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
beneficiaries to disclose the results to third parties on reasonable terms. The conditions for receipt of government funding may include eligibility restrictions, approval by EU authorities, annual budget appropriations, compliance with European Commission regulations, as well as specifications regarding objectives and results. Certain specific contracts contain obligations to maintain a minimum level of employment and investment during a certain period of time. There could be penalties if these objectives are not fulfilled. Other contracts contain penalties for late deliveries or for breach of contract, which may result in repayment obligations. In accordance with SAB 104 and the Company’s revenue recognition policy, funding related to these contracts is recorded when the conditions required by the contracts are met. The Company’s funding programs are classified under three general categories: funding for research and development activities, capital investment, and loansloans.


F-13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
 
Funding for research and development activities is the most common form of funding that the Company receives. Public funding for research and development is recorded as “Other income and expenses, net” in the Company’s consolidated statements of income. Public funding for research and development is recognized ratably as the related costs are incurred once the agreement with the respective governmental agency has been signed and all applicable conditions are met. Furthermore, following the enactment of the French Finance Act for 2008, which included several changes to the research tax credit regime (“Crédit Impôt Recherche”), French research tax credits that in prior years were recorded as a reduction of tax expense were deemed to be grants in substance. Unlike other research and development funding, the amounts to be received are determinable in advance and accruable as the funded research expenditures are made. They were thus reported, starting from January 1, 2008, as a reduction of research and development expenses. The 2008 French research tax credits were classified as long term receivables in the consolidated balance sheet as at December 31, 2008. The 2009 French research tax credits were classified as current receivables in the consolidated balance sheet as at December 31, 2009. The research tax credits are to be reimbursed in cash by the French tax authorities within three years in case they are not deducted from income tax payable during this period of time. The Company considers such cash settlement features of the French research tax credits as long-term receivables.
 
Capital investment funding is recorded as a reduction of “Property, plant and equipment, net” and is recognized in the Company’s consolidated statements of income according to the depreciation charges of the funded assets during their useful lives. The Company also receives capital funding in Italy, which is recovered through the reduction of various governmental liabilities, including income taxes, value-added tax and employee-related social charges. The funding has been classified as long-term receivable and is reflected in the balance sheet at its discounted net present value. The subsequent accretion of the discount is recorded as non-operating income in “Interest income (expense), net”.
 
The Company receives certain loans, mainly related to large capital investment projects, at preferential interest rates. The Company records these loans as debt in its consolidated balance sheet.
 
2.82.7 — Advertising costs
 
Advertising costs are expensed as incurred and are recorded as selling, general and administrative expenses. Advertising expenses for 2009, 2008 and 2007 2006 and 2005 were $12$9 million, $14$10 million and $14$12 million respectively.
 
2.92.8 — Research and development
 
Research and development expenses include costs incurred by the Company, the Company’s share of costs incurred by other research and development interest groups, and costs associated with co-development contracts. Research and development expenses do not include marketing design center costs, which are accounted for as selling expenses and process engineering, pre-production or process transfer costs which are recorded as cost of sales. Research and development costs are charged to expense as incurred. The amortization expense recognized on technologies and licenses purchased by the Company from third parties to facilitate the Company’s research is recorded as research and development expenses. Research and development expenses also include charges originated from purchase accounting, such as in-process research and development recognized on business combinations concluded before January 1, 2009 and amortization of acquired intangible assets. Finally, starting January 1, 2008 the research and development expenses are reported net of research tax credits received in the French jurisdiction, as described in Note 2.6.
 
2.102.9 —Start-up and phase-out costs
 
Start-up costs represent costs incurred in thestart-up and testing of the Company’s new manufacturing facilities, before reaching the earlier of a minimum level of production or6-months after the fabrication line’s quality qualification. Similarly, phase-out costs for facilities during the closing stage are also included.Start-up costs are included in “Other income and expenses, net” in the consolidated statements of income. Similarly, phase-out costs for facilities during the closing stage are also included in “Other income and expenses, net” in the consolidated statements of income. The costs of phase-outs are associated with the latest stages of facilities closure when the relevant production volumes become immaterial.
 
2.112.10 — Income taxes
 
The provision for current taxes represents the income taxes expected to be paid or the benefit expected to be received related to the current year income or loss in each individual tax jurisdiction. Deferred tax assets and


F-14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
liabilities are recorded for all temporary differences arising between the tax and book bases of assets and liabilities and for the benefits of tax credits and operating loss carry-forwards. Deferred income tax is determined using tax rates and laws that are enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. The effect on deferred tax assets and liabilities from changes in tax law is recognized in the period of enactment. Deferred income tax assets are recognized in full, but the Company assesses whether it is probable that future taxable profit will be available against which the


F-13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
temporary differences can be utilized. A valuation allowance is provided where necessary to reduce deferred tax assets to the amount for which management considers the possibility of recovery to be more likely than not. The Company utilizes the flow-through method to account for its investment credits, reflecting the credits as a reduction of tax expense in the year they are recognized. Similarly, research and development tax credits are classified as a reduction of tax expense in the year they are recognized. As described in Note 2.6, French research tax credits are recorded as grants starting from January 1, 2008 and reported as a reduction of research and development expenses. French research tax credits prior to January 1, 2008 were recorded as a reduction of tax expense and were reported as deferred tax assets as at December 31, 2008. No French research tax credits were reported as deferred tax assets as at December 31, 2009.
 
Deferred taxes on the undistributed earnings of the Company’s foreign subsidiaries are provided for unless the Company intends to indefinitely reinvest the earnings in the subsidiaries. In case the Company does not have this intention,Additionally, a distribution of the related earnings would not have any material tax impact. Thus, the Company did not provide for deferred taxes on the earnings of those subsidiaries.
 
On January 1, 2007,A deferred tax is recognized on compensation for the grant of stock awards to the extent that such charge constitutes a temporary difference in the Company’s local tax jurisdictions. The measurement of the deferred tax asset is based on an estimate of the future tax deduction, for the amount of the compensation cost recognized for book purposes. Changes in the stock price do not thus impact the deferred tax asset or do not result in any adjustments prior to vesting. When the actual tax deduction is determined, generally upon vesting, it is compared to the estimated tax benefit as recognized over the vesting period. When a windfall tax benefit is determined (as the excess tax benefit of the actual tax deduction over the deferred tax asset) the excess tax benefit is recorded in equity on the line “Capital surplus” on the consolidated statements of changes in equity. In case of shortfall, only the actual tax benefit is to be recognized in the consolidated statements of income. The Company adopted Financial Accounting Standards Board Interpretation No. 48,Accounting for Uncertaintywrites off the deferred tax asset at the level of the actual tax deduction by charging first capital surplus to the extent of the pool of windfall benefits from prior years and then earnings. When the settlement of an award results in Income Taxes — an interpretation of FASB Statement No. 109(“FIN 48”a net operating loss (“NOL”). carryforward, or increase existing NOLs, the excess tax benefit and the corresponding credit to capital surplus is not recorded until the deduction reduces income tax payable.
At each reporting date, the Company assesses all material open income tax positions in all tax jurisdictions to determine the appropriate amount ofany uncertain tax benefits that are recognizable under FIN 48. In compliance with FIN 48, thepositions. The Company uses a two-step process for the evaluation of uncertain tax positions. The recognition threshold in step one permits the benefit from an uncertain tax position to be recognized only if it is more likely than not, or 50 percent assured, that the tax position will be sustained upon examination by the taxing authorities. The measurement methodology in step two is based on a “cumulative probability”, approach, resulting in the recognition of the largest amount that is greater than 50 percent likely of being realized upon settlement with the taxing authority. Before adoption, the Company applied Statement of Financial Accounting Standards No. 5,Accounting for Contingencies(“FAS 5”) in accounting for income tax uncertainties and tax exposures. In compliance with FAS 5 provisions, liabilities and accruals for income tax uncertainties and specific tax exposures were recorded or reversed when it was probable that additional taxes would be due or refund. As such, a level of sustainability that met the “probable” threshold was necessary to recognize any benefit from a tax-advantaged transaction. The Company recorded as of the adoption date an incremental tax liability of $8 million for the difference between the amounts recognized under its previous accounting policies and the income tax benefits determined under the new guidance. The cumulative effect of the change in the accounting principle that the Company applied to uncertain income tax positions was recorded in 2007 as an adjustment to retained earnings.
The Company classifies accrued interest and penalties related to uncertain tax positions as components of income tax expense in its consolidated statements of income. Uncertain tax positions, unrecognized tax benefits and related accrued interest and penalties are further described in Note 23.21.
 
2.122.11 — Earnings per share (“EPS”)
 
Basic earnings per share are computed by dividing net income (loss) attributable to parent company shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed using the treasury stock method by dividing net income (adding-back interest expense, net of tax effects, related to convertible debt if determined to be dilutive) by the weighted average number of common shares and common share equivalents outstanding during the period. The weighted average number of shares used to compute diluted earnings per share include the incremental shares of common stock relating to stock-options granted, nonvested shares and convertible debt to the extent such incremental shares are dilutive. Nonvested shares with performance or market conditions are included in the computation of diluted earnings per share if their conditions have been satisfied at the balance sheet date and if the awards are dilutive. If all necessary conditions have not been satisfied by the end of the period, the number of nonvested shares included in the computation of the


F-15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
diluted EPS shall be based on the number of shares, if any that would be issuable if the end of the reporting period were the end of the contingency period and if the result would bewere dilutive.
 
2.132.12 — Cash and cash equivalents
 
Cash and cash equivalents represent cash on hand and deposits at call with external financial institutions with an original maturity of ninety days or less.less that are readily convertible in cash. Bank overdrafts are not netted against cash and cash equivalents and are shown as part of current liabilities on the consolidated balance sheets.
 
2.14 —2.13— Restricted cash
 
Restricted cash includeincludes collateral deposits used as security under arrangements for financing of certain entities.


F-14

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
2.152.14 — Trade accounts receivable
 
Trade accounts receivable are recognized at their sales value, net of allowances for doubtful accounts. The Company maintains an allowance for doubtful accounts for potential estimated losses resulting from its customers’ inability to make required payments. The Company bases its estimates on historical collection trends and records a provision accordingly. In addition, the Company is required to evaluate its customers’ financial condition periodically and records an additional provision for any specific account the Company estimates as doubtful. The carrying amount of the receivable is thus reduced through the use of an allowance account, and the amount of the loss is recognized on the line “Selling, general and administrative expenses”administrative” in the consolidated statements of income. When a trade accounts receivable is uncollectible, it is written-off against the allowance account for trade accounts receivables. Subsequent recoveries, if any, of amounts previously written-off are credited against “Selling, general and administrative expenses”administrative” in the consolidated statements of income.
 
In the events of sale of receivables and factoring, the Company derecognizes the receivables and accounts for them as a sale only to the extent that the Company has surrendered control over the receivables in exchange for a consideration other than beneficial interest in the transferred receivables.
2.162.15 — Inventories
 
Inventories are stated at the lower of cost or net realizable value. Cost is based on the weighted average cost by adjusting standard cost to approximate actual manufacturing costs on a quarterly basis; the cost is therefore dependent on the Company’s manufacturing performance. In the case of underutilization of manufacturing facilities, the costs associated with the excess capacity are not included in the valuation of inventories but charged directly to cost of sales. Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.expenses and cost of completion.
 
The Company performs on a continuous basis inventory write-off of products, which have the characteristics of slow-moving, old production date and technical obsolescence. Additionally, the Company evaluates its product inventory to identify obsolete or slow-selling stock and records a specific provision if the Company estimates the inventory will eventually become obsolete. Provisions for obsolescence are estimated for excess uncommitted inventory based on the previous quarter sales, orders’ backlog and production plans.
 
2.172.16 — Goodwill
 
Goodwill recognized inrepresents the excess of the cost of an acquisition over the fair value of the net identifiable assets of the acquired business combinationsat the date of acquisition. Goodwill is carried at cost less accumulated impairment losses. Goodwill is not amortized but rather is subject to antested annually for impairment, test to be performed on an annual basis or more frequently if indicators of impairment exist, in order to assess the recoverability of its carrying value.exist. Goodwill subject to potential impairment is tested at a reporting unit level, which represents a component of an operating segment for which discrete financial information is available and is subject to regular review by segment management. This impairment test determines whether the fair value of each reporting unit for which goodwill is allocated is lower than the total carrying amount of relevant net assets allocated to such reporting unit, including its allocated goodwill. If lower, the implied fair value of the reporting unit goodwill is then compared to the carrying value of the goodwill and an impairment charge is recognized for any excess. In determining the fair value of a reporting unit, the Company usuallyuses a market approach with financial metrics of comparable public companies and estimates the expected discounted future cash flows associated with the reporting unit. Significant


F-16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
management judgments and estimates are used in forecasting the future discounted cash flows, including: the applicable industry’s sales volume forecast and selling price evolution, the reporting unit’s market penetration and its revenues evolution, the market acceptance of certain new technologies and products, the relevant cost structure, the discount rates applied using a weighted average cost of capital and the perpetuity rates used in calculating cash flow terminal values.
 
2.182.17 — Intangible assets
 
Intangible assets subject to amortization include the cost of technologies and licensesintangible assets purchased from third parties purchased softwarerecorded at cost and internally developed software which is capitalized. Intangible assets subject to amortization are reflected net of any impairment losses. The carrying value of intangible assets subject to amortization is evaluated whenever changes in circumstances indicate that the carrying amount may not be recoverable. In determining recoverability, the Company usually estimates the fair value based on the projected discounted future cash flows associated with the intangible assets acquired in business combinations recorded at fair value, which include trademarks, technologies and compares this to their carrying value. An impairment loss is recognized in the consolidated statements of income for the amount by which the asset’s carryinglicenses, contractual customer relationships and computer software.


F-15

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSTrademarks and technology licenses
(in millions of U.S. dollars, except per share amounts)
 
amount exceeds itsSeparately acquired trademarks and licenses are recorded at historical cost. Trademarks and licenses acquired in a business combination are recognized at fair value.value at the acquisition date. Trademarks and licenses have a finite useful life and are carried at cost less accumulated amortization. Amortization is computedcalculated using the straight-line method to allocate the cost of trademarks and licenses over the estimated useful lives. The estimate useful lives on licenses range from 3 to 7 years while trademarks have a useful life ranging from 2 to 3 years.
Contractual customer relationships
Contractual customer relationships acquired in a business combination are recognized at fair value at the acquisition date. Contractual customer relationships have a finite useful life and are carried at cost less accumulated amortization. Amortization is calculated using the straight-line method over the following estimated useful lives:
Technologies & licenses3-7 years
Purchased software3-4 years
Internally developed software4 years
expected life of the customer relationships, which ranges from 4 to 12 years.
 
The Company evaluates the remaining useful life of an intangible asset at each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization.Computer software
 
Separately acquired computer software is recorded at historical cost. Costs associated with maintaining computer software programmes are recognized as expenses as incurred. The capitalization of costs for internally generated software developed by the Company for its internal use begins when preliminary project stage is completed and when the Company, implicitly or explicitly, authorizes and commits to funding a computer software project. It must be probable that the project will be completed and will be used to perform the function intended. Computer software recognized as assets are amortised over their estimated useful lives, which does not exceed 4 years.
Intangible assets subject to amortization are reflected net of any impairment losses. The carrying value of intangible assets subject to amortization is evaluated whenever changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized in the consolidated statements of income for the amount by which the asset’s carrying amount exceeds its fair value. The Company evaluates the remaining useful life of an intangible asset at each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization.
 
2.192.18 — Property, plant and equipment
 
Property, plant and equipment are stated at historical cost, net of government funding and any impairment losses. Major additions and improvements are capitalized, minor replacements and repairs are charged to current operations.
 
Land is not depreciated. Depreciation on fixed assets is computed using the straight-line method over the followingtheir estimated useful lives:lives, as follows:
 
     
Buildings  33 years 
Facilities & leasehold improvements  5-10 years 
Machinery and equipment  3-63-10 years 
Computer and R&D equipment  3-6 years 
Other  2-5 years 


F-17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
In 2008, the Company launched its first300-mm production facility. Consequently, the Company assessed the useful life of its300-mm manufacturing equipment, based on relevant economic and technical factors. The conclusion was that the appropriate depreciation period for such300-mm equipment was 10 years. This policy was applied starting January 1, 2008.
 
The Company evaluates each period whether there is reason to suspect that tangible assets or groups of assets might not be recoverable. Several impairment indicators exist for making this assessment, such as: significant changes in the technological, market, economic or legal environment in which the Company operates or in the market to which the asset is dedicated, or available evidence of obsolescence of the asset, or indication that its economic performance is, or will be, worse than expected. In determining the recoverability of assets to be held and used, the Company initially assesses whether the carrying value of the tangible assets or group of assets exceeds the undiscounted cash flows associated with these assets. If exceeded, the Company then evaluates whether an impairment charge is required by determining if the asset’s carrying value also exceeds its fair value. This fair value is normally estimated by the Company based on independent market appraisals or the sum of discounted future cash flows, using market assumptions such as the utilization of the Company’s fabrication facilities and the ability to upgrade such facilities, change in the selling price and the adoption of new technologies. The Company also evaluates, and adjusts if appropriate, the assets’ useful lives, at each balance sheet date or when impairment indicators exist.
 
Assets are classified as assets held for sale when the following conditions arehave been met for the assets to be disposed of by sale: management has approved the plan to sell; assets are available for immediate sale; assets are actively being marketed; sale is probable within one year; price is reasonable in the market and it is unlikely tothat there will be significant changes in the assets to be sold or a withdrawal to the plan to sell. Assets classified as held for sale are reflectedreported as current assets at the lower of their carrying amount or fair value less selling costs and are not depreciated during the selling period. Costs to sell include incremental direct costs to transact the sale that would not have been incurred except for the decision to sell. When the held-for-sale accounting treatment requires an impairment charge for the difference between the carrying amount and the fair value, such impairment is reflected on the consolidated statements of income on the line “Impairment, restructuring charges and other related closure costs”.
If the long-lived assets no longer meet the held-for-sale model, they are reported as assets held for use and thus reclassified from current assets to the line “Property, plant and equipment, net” in the consolidated balance sheet. The assets are measured at the lower of their fair value at the date of the subsequent decision not to sell and their carrying amount prior to their classification as assets held for sale, adjusted for any depreciation that would have been recognized if the long-lived assets had not been classified as assets held for sale. The fair value at the date of the decision not to sell is based on the discounted cash flows expected from the use of the assets. Any required adjustment to the carrying value of the asset that is reclassified as held and used is recorded in the income statement at the time of the reclassification and reported in the same income statement caption that was used to report adjustments to the carrying value of the asset during the time it was held for sale (line “Impairment, restructuring charges and other related closure costs”). When property, plant and equipment are retired or otherwise disposed of, the net book value of the assets is removed from the Company’s books and the net gain or loss is included in “Other income and expenses, net” in the consolidated statements of income.
 
Leasing arrangements in which a significant portion of the risks and rewards of ownership are retained by the Company are classified as capital leases. Capital leases are included in “Property, plant and equipment, net” and


F-16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
depreciated over the shorter of the estimated useful life or the lease term. Leasing arrangements classified as operating leases are arrangements in which the lessor retains a significant portion of the risks and rewards of ownership of the leased asset. Payments made under operating leases are charged to the consolidated statements of income on a straight-line basis over the period of the lease.
 
Borrowing costs incurred for the construction of any qualifying asset are capitalized during the period of time that is required to complete and prepare the asset for its intended use. Other borrowing costs are expensed.
 
2.202.19 — Investments
For investments in public companies that have readily determinable fair values and for which the Company does not exercise significant influence, the Company classifies these investments as held-for-trading or available-for-sale as described in Note 2.4. Investments in equity securities without readily determinable fair values and for which the Company does not have the ability to exercise significant influence are accounted for under the cost method. Under the cost method of accounting, investments are carried at historical cost and are adjusted only for


F-18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
declines in value. The value of a cost method investment is estimated on a non-recurring basis when there are identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. Other-than-temporary impairment losses are immediately recorded in the consolidated statements of income and are based on the Company’s assessment of any significant and sustained reductions in the investment’s fair value. For unquoted equity securities, assumptions and estimates used in measuring fair value include the use of recent arm’s length transactions when they reflect the orderly exit price of the investments. Gains and losses on investments sold are determined on the specific identification method and are recorded as a non-operating element on the line “Gain (loss) on financial assets” in the consolidated statements of income.
 
Equity investments are all entities over which the Company has the ability to exercise significant influence but not control, generally representing a shareholding of between 20% and 50% of the voting rights. These investments are accounted for by the equity method of accounting and are initially recognized at cost. TheyEquity investments also include entities which the Company determines to be variable interest entities, as described below, if the Company has the ability to exercise significant influence over the entity’s operations even if the Company owns less than 20% and is not the primary beneficiary. Equity investments are presented on the face of the consolidated balance sheet on the line “Equity investments,” except if they meet the criteria for classification as assets held for sale.investments”. The Company’s share in its equity investments’ profit and loss is recognized in the consolidated statements of income as “Income (loss)“Loss on equity investments” and in the consolidated balance sheetsheets as an adjustment against the carrying amount of the investments. When the Company’s share of losses in an equity investment equals or exceeds its interest in the investee, including any unsecured receivable, the Company does not recognize further losses, unless it has incurred obligations or made payments on behalf of the investee.
Investments without readily determinable fair values and for which At each period-end, the Company does not haveassesses whether there is objective evidence that its interests in the ability to exercise significant influence are accounted for under the cost method. Under the cost method of accounting,equity investments are carriedimpaired. Once a determination is made that an other-then-temporary impairment exists, the Company writes down the carrying value of the equity investment to its fair value at historicalthe balance sheet date, which establishes a new cost and are adjusted only for declines in fair value.basis. The fair value of a cost methodan equity investment is estimated when there are identified events or changes in circumstances that may havemeasured on a significant adverse effect on the fair valuenon-recurring basis using a combination of the investment. For investments in public companies that have readily determinable fair values and for which the Company does not exercise significant influence, the Company classifies these investments as available-for-sale as described in note 2.4. Other-than-temporary losses are recorded in netan income and areapproach, based on the Company’s assessmentdiscounted cash flows, and a market approach with financial metrics of any significant, sustained reductions in the investment’s market value and of the market indicators affecting the securities. Gains and losses on investments sold are determined on the specific identification method and are recorded as “Other income or expenses, net” in the consolidated statements of income.comparable public companies.
 
Since the adoption in 2003 of Financial Accounting Standards Board Interpretation No. 46Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51(revised 2003) and the related FASB Staff Positions (collectively “FIN 46R”), theThe Company assesses for consolidation entities identified as a Variable Interest Entity (“VIE”) and consolidates the VIEs, if any, for which the Company is determined to be the primary beneficiary. The primary beneficiary of a VIE is the party that absorbs the majority of the entity’s expected losses, receives the majority of its expected residual returns, or both as a result of holding variable interests. Assets, liabilities, and the non-controllingnoncontrolling interest of newly consolidated VIEs are initially measured at fair value in the same manner as if the consolidation resulted from a business combination. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are de-consolidated from the date that control ceases.
 
TheFor business combinations concluded before January 1, 2009, the purchase method of accounting iswas used to account for a business combination if the acquired entity meetsmet the definition of a business. If the acquired entity iswas a development stage entity and hashad not commenced planned principal operations, it iswas presumed not to be a business, and the individual assets and liabilities arewere recognized at their relative fair values with no goodwill recognized in the consolidated balance sheet. In case of acquisition of a business, the cost of the acquisition iswas measured at the fair value of the assets given, equity instruments issued and liabilities incurred or assumed, plus costs directly attributable to the acquisition. If part of the consideration iswas contingent on a future event, the additional cost iswas not generally recognized until the contingency iswas resolved, the amount iswas determinable, or beyond a reasonable doubt. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination arewere measured initially at their fair values at the acquisition date. Any acquired in-process research and development (“IPR&D”) iswas expensed immediately in the consolidated statements of income since it hashad no alternative future use. The excess of the cost of acquisition over the fair value of the Company’s share of the identifiable net assets acquired iswas recorded as goodwill. If the cost of acquisition iswas lower than the fair value of the Company’s share in the net assets of the entity acquired, the difference iswas used to reduce proportionately the fair value assigned and allocated on a pro-rata basis to all assets other than current and financial assets, assets to be sold, prepaid pension assets and deferred taxes. Any negative goodwill remaining iswas recognized as an extraordinary gain. Goodwill arising from a purchase of less than 100% of a business was valued as the difference between the purchase price paid by the Company and its proportionate share of the fair values of the identifiable net assets acquired, while the noncontrolling interest was reported based on the book value of net assets acquired. Consequently, there was no step up for the noncontrolling interests’ share of the excess of the fair value of net assets over book value. When the Company acquired a business and a portion of the consideration was a noncontrolling interest in one or more of the Company’s businesses, the Company valued the net assets of the subsidiaries in which the interest was being given at fair value and recorded the


F-17F-19

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in millions of U.S. dollars, except share and per share amounts)
difference between fair value and book value related to the interest on the line “Issuance of shares by subsidiary” in the consolidated statements of changes in equity.
The purchase accounting method applied to all business combinations concluded on or after January 1, 2009, was on the basis of the amended purchase accounting guidance. The net of the acquisition-date amount of the identifiable asset acquired, equity instruments issued, and liabilities assumed is measured at fair value on the acquisition date. Any contingent purchase price, and contingent assets and liabilities are recorded at fair value on the acquisition date, regardless of the likelihood of payment and acquisition-related transaction costs are expensed as incurred. Restructuring costs relating to the acquired business are expensed as incurred. Acquired in-process research and development (“IPR&D”) costs are no longer written off to earnings upon the acquisition; instead, IPR&D is capitalized and recorded as an intangible asset on the acquisition date, subject to impairment testing until the research or development is completed or abandoned. The excess of the aggregate of the consideration transferred and the fair value of any noncontrolling interest in the acquiree over the net of the acquisition-date amount of the identifiable assets acquired and liabilities assumed is recorded as goodwill. In case of a bargain purchase, the Company reassesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed; the noncontrolling interest in the acquiree, if any; the Company’s previously held equity interest in the acquiree, if any; and the consideration transferred. If after this review, a bargain purchase is still indicated, it is recognized in earnings attributed to the Company. The purchase of additional interests in a partially owned subsidiary is treated as an equity transaction as well as all transactions concerning the sale of subsidiary stock or the issuance of stock by the partially owned subsidiary as long as there is no change in control of the subsidiary. If as a consequence of selling subsidiary shares, the Company no longer controls the subsidiary, the Company recognizes a gain or loss in earnings.
 
2.212.20 — Employee benefits
 
(a) Pension obligations
 
The Company sponsors various pension schemes for its employees. These schemes conform to local regulations and practices in the countries in which the Company operates. They are generally funded through payments to insurance companies, or trustee-administered funds or state institutions, determined by periodic actuarial calculations. Such plans include both defined benefit and defined contribution plans. A defined benefit plan is a pension plan that defines the amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. A defined contribution plan is a pension plan under which the Company pays fixed contributions into a separate entity. Theentity for which the Company has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. With the adoption in 2006 of Statement of Financial Accounting Standards No. 158,Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R)(“FAS 158”), the
The liability recognized in the consolidated balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets. The Company accounted thus for the overfunded and underfunded status of defined benefit plans and other post retirement plans in its financial statements as at December 31, 2006, with offsetting entries made at adoption to “Accumulated other comprehensive income (loss)” in the consolidated statement of changes in shareholders’ equity. The overfunded or underfunded status of the defined benefit plans are calculated as the difference between plan assets and the projected benefit obligations. Overfunded plans are not netted against underfunded plans and are shown separately in the financial statements. Prior to FAS 158 adoption in 2006, the liability recognized in the consolidated balance sheet in respect of defined benefit pension plans was the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognized actuarial gains and losses and past service costs. Additional minimum liability was required when the accumulated benefit obligation exceeded the fair value of the plan assets and the amount of the accrued liability. Such minimum liability was recognized as a component of “Accumulated other comprehensive income (loss)” in the consolidated statements of changes in shareholders’ equity, as described in note 18.7. Significant estimates are used in determining the assumptions incorporated in the calculation of the pension obligations, which is supported by input from independent actuaries. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to income over the employees’ expected average remaining working lives. Past-service costs are recognized immediately in income,earnings, unless the changes to the pension scheme are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortized on a straight-line basis over the vesting period. The net periodic benefit cost of the year is determined based on the assumptions used at the end of the previous year.
 
For defined contribution plans, the Company pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Company has no further payment obligations once the contributions have been paid. The contributions are recognized as employee benefit expense when they are due. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in the future payments is available.


F-20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
 
(b) Other post-employmentpost-retirement obligations
 
The Company provides post-retirement benefits to some of its retirees. The entitlement to these benefits is usually conditional on the employee remaining in service up to retirement age and to the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment using an accounting methodology similar to that for defined benefit pension plans. Actuarial gains and losses arising from experience adjustments, and changes in actuarial assumptions, are charged or credited to income over the expected average remaining working lives of the related employees. These obligations are valued annually by independent qualified actuaries.
 
(c) Termination benefits
 
Termination benefits are payable when employment is involuntarily terminated, or whenever an employee accepts voluntary termination in exchange for these benefits. For the accounting treatment and timing recognition of the involuntarily termination benefits, the Company distinguishes between one-time termination benefit arrangements and


F-18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
on-going termination benefit arrangements. A one-time termination benefit arrangement is one that is established by a termination plan that applies to a specified termination event or for a specified future period. These one-time involuntary termination benefits are recognized as a liability when the termination plan meets certain criteria and has been communicated to employees. If employees are required to render future service in order to receive these one-time termination benefits, the liability is recognized ratably over the future service period. Termination benefits other than one-time termination benefits are termination benefits for which criteria for communication are not met but that are committed to by management, or termination obligations that are not specifically determined in a new and single plan. These termination benefits are all legal, contractual and past practice termination obligations to be paid to employees in case of involuntary termination. These termination benefits are accrued for at commitment date when it is probable that employees will be entitled to the benefits and the amount can be reasonably estimated.
 
In the case of special termination benefits proposed to encourage voluntary termination, the Company recognizes a provision for voluntary termination benefits at the date on which the employee irrevocably accepts the offer and the amount can be reasonably estimated.
 
(d) Profit-sharing and bonus plans
 
The Company recognizes a liability and an expense for bonuses and profit-sharing plans when it is contractually obliged or where there is a past practice that has created a constructive obligation.
 
(e) Other long termlong-term employee benefits
 
The Company provides long termlong-term employee benefits such as seniority awards in certain subsidiaries. The entitlement to these benefits is usually conditional on the employee completing a minimum service period. The expected costs of these benefits are accrued over the period of employment using an accounting methodology similar to that for defined benefit pension plans. Actuarial gains and losses arising from experience adjustments, and changes in actuarial assumptions, are charged or credited to incomeearnings in the period of change. These obligations are valued annually by independent qualified actuaries.
 
(f) Share-based compensation
 
Stock options
At December 31, 2007, the Company had five employee and Supervisory Board stock-option plans, which are described in detail in Note 18. Until the fourth quarter of 2005, the Company applied the intrinsic-value-based method prescribed by Accounting Principles Board Opinion No. 25Accounting for Stock Issued to Employees(“APB 25”), and its related implementation guidance, in accounting for stock-based awards to employees. For all option grants prior to the fourth quarter of 2005, no stock-based employee compensation cost was reflected in net income as all options under those plans were granted at an exercise price equal to the market value of the underlying common stock on the date of grant.
In 2005, the Company redefined its equity-based compensation strategy by no longer granting options but rather issuing nonvested shares. In July 2005, the Company amended its latest Stock Option Plans for employees, Supervisory Board and Professionals of the Supervisory Board accordingly. As part of this revised stock-based compensation policy, the Company decided in July 2005 to accelerate the vesting period of all outstanding unvested stock options, following authorization from the Company’s shareholders at the annual general meeting held on March 18, 2005. As a result, underwater options equivalent to approximately 32 million shares became exercisable immediately in July 2005 with no earnings impact.


F-19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
The following tabular presentation provides pro forma information on net income and earnings per share required to be disclosed as if the Company had applied the fair value recognition provisions prescribed by Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation(“FAS 123”) for the year ended December 31, 2005:
Year Ended
December 31,
2005
Net income (loss), as reported266
of which compensation expense on nonvested shares, net of tax effect
(7)
Deduct: Total stock-option employee compensation expense determined under FAS 123, net of related tax effects(244)
Net income, pro forma22
Earnings (loss) per share:
Basic, as reported0.30
Basic, pro forma0.02
Diluted, as reported0.29
Diluted, pro forma0.02
The Company has amortized the pro forma compensation expense over the nominal vesting period for employees. The pro forma information presented above for the year ended December 31, 2005 includes an approximate $182 million charge relating to the effect of accelerating the vesting period of all outstanding unvested stock options during the third quarter of 2005, which has been recognized immediately in the pro forma result for the amount that otherwise would have been recognized ratably over the remaining vesting period.
The fair value of the Company’s stock-options was estimated under FAS 123 using a Black-Scholes option pricing model since the simple characteristics of the stock-options did not require complex pricing assumptions. Forfeitures of options are reflected in the pro forma charge as they occur. For those stock option plans with graded vesting periods, the Company has determined that the historical exercise activity actually reflects that employees exercise the option after the close of the graded vesting period. Therefore the Company recognizes the estimated pro forma charge for stock option plans with graded vesting period on a straight-line basis.
The fair value of stock-options under FAS 123 provisions was estimated using the following weighted-average assumptions:
Year Ended
December 31,
2005
Expected life (years)6.1
Historical Company share price volatility52.9%
Risk-free interest rate3.84%
Dividend yield0.69%
The Company has determined the historical share price volatility to be the most appropriate estimate of future price activity. The weighted average fair value of stock options granted during 2005 was $8.60. Following the change in the Company’s compensation policy occurred in 2005, no stock option was granted in 2006 and in 2007.
Nonvested shares
 
In 2005, theThe Company began to grantgrants nonvested shares to senior executives, selected employees and members of the Supervisory Board. The shares are granted for free to employees and at their nominal value for the members of the Supervisory Board. The awards granted to employees will contingently vest upon achieving certain market or performance conditions and upon completion of an average three-year service period. Shares granted to the Supervisory Board vest unconditionally along the same vesting period as employees and are not forfeited even if the service period is not completed.
In the fourth quarter of 2005 the The Company decided to early adopt Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Paymentand the related FASB Staff Positions (collectively “FAS 123R”), which requires a public entity to measuremeasures the cost of share-based service awards based on the grant-date fair value of


F-20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award or the requisite service period, usually the vesting period. The Company early adopted FAS 123R usingCompensation is recognized only for the modified prospective application method. As such, the Company has not restated periods prior to adoption to reflect the recognition of stock-based compensation cost. Nonvested share grants and the relatedawards that ultimately vest. The compensation cost are further explainedis recorded through earnings over the vesting period against equity, under “Capital surplus” in detailsthe consolidated statement of changes in Note 18.equity. The


F-21

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
 
Furthermore the Company created in 2006 a local subplan for the 2005 stock awards. The Company elected to apply the pool approach, as set forth in FAS 123R to account for the modification of the original plan. Under the pool approach, the Company determined as at the modification date the unrecognized compensation expense related tocost is calculated based on the number of nonvested shares subjectawards expected to vest, which includes assumptions on the number of awards to be forfeited due to the vesting modificationsemployees’ failing to provide the service condition, and incremental cost, if any, to be recognized ratablyforfeitures following the non-completion of one or more performance conditions. When the stock-award plan contains a market condition feature, the market condition is reflected in the estimated fair value of the award at grant date.
Liabilities for the Company’s portion of payroll taxes are not accrued for over the modified vesting period.period but are recognized at vesting, which is the event triggering the measurement of employee-related social charges, based on the intrinsic value of the share at vesting date, and payment of the social contributions in most of the Company’s local tax jurisdictions.
 
2.222.21 — Long-term debt
 
(a) Convertible debt
 
Zero-coupon convertible bonds are recorded at the principal amount on maturity in long-term debt and are presented net of the debt discount on issuance. This discount issubsequently stated at amortized over the term of the debt as interest expense using the effective interest rate method.
Zero-coupon convertible bonds issued with a negative yield are initially recorded at their accreted value as of the first redemption right of the holder. The negative yield is recorded as capital surplus and represents the difference between the principal amount at issuance and the lower accreted value at the first redemption right of the holder.cost.
 
Debt issuance costs are included in long-termreported as non-current assets on the line “Other investments and other non-current assets” of the consolidated balance sheets. They are subsequently amortized inthrough earnings on the line “Interest income, (expense), net” of the consolidated statements of income until the first redemption right of the holder. Outstanding bondsbond amounts are classified in the consolidated balance sheet as “Current portion of long termlong-term debt” in the year of the redemption right of the holder.
 
(b) Bank loans and senior bonds
 
Bank loans, including non-convertible senior bonds, are recognized at historical cost, net of transaction costs incurred. They are subsequently stated at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the consolidated statements of income over the period of the borrowings using the effective interest rate method.
 
Borrowings are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least twelve months after the balance sheet date. The Company may from time to time enter into “repurchase agreements” with certain financial institutions and may give as collateral certain available-for-sale debt securities. The Company retains control over the pledged debt securities and consequently does not de-recognize the financial assets from its consolidated balance sheet upon transfer of the collateral. The Company accounts for such transactions as secured borrowings and recognizes the cash received upon transfer by recording a liability for the obligation to return the cash to the lending financial institution within a term which does not exceed three months. Such obligation is extinguished when the Company repurchases the pledged securities in accordance with the terms of the repurchase agreements.
 
2.232.22 — Share capital
 
Ordinary shares are classified as equity. Incremental costs directly attributable to the issuance of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.
 
Where any subsidiarythe Company purchases the Company’sits equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from equity attributable to the Company’s shareholders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received net of directly attributable incremental transaction costs and the related income tax effect is included in equity.
 
2.242.23 — Comprehensive income (loss)
 
Comprehensive income (loss) is defined as the change in equity of a business during a period except those changes resulting from investment by shareholders and distributions to shareholders. In the accompanying consolidated financial statements, “Accumulated other comprehensive income (loss)” consists of temporary unrealized gains or losses on marketable securities classified as available-for-sale, the unrealized gain (loss) on derivatives designated as cash flow hedgeshedge and the impact of recognizing the overfunded and underfunded status of defined benefit plans upon FAS 158 adoption as at December 31, 2006,, all net of tax, as well as foreign currency translation adjustments.


F-21F-22

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in millions of U.S. dollars, except share and per share amounts)
 
2.252.24 — Provisions
 
Provisions are recognized when: the Company has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognized for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlements is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of the outflow with respect to any one item included in the same class of obligations may be small.
 
The Company, when acting as a guarantor, recognizes, at the inception of a guarantee, a liability for the fair value of the obligation the Company assumes under the guarantee, in compliance with FASB Interpretation No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34(“FIN 45”).guarantee. When the guarantee is issued in conjunction with the formation of a partially owned business or a venture accounted for under the equity method, the recognition of the liability for the guarantee results in an increase to the carrying amount of the investment. The liabilities recognized for the obligations of the guarantees undertaken by the Company are measured subsequently on each reporting date, the initial liability being reduced as the Company, as a guarantor, is released from the risk underlying the guarantee.
 
2.262.25 — Recent accounting pronouncements
 
(a) Accounting pronouncements effective in 2007 and expected to impact the Company’s operations2009
 
In February 2006,The fair value measurement guidance specifically related to nonfinancial assets and nonfinancial liabilities that are recognized at fair value in the financial statements on a nonrecurring basis, such as impaired long lived assets or goodwill, was previously deferred by the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 155,Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140(“FAS 155”). The statement amended Statement of Financial Accounting Standards No. 133,Accounting for Derivative Instruments and Hedging Activities(“FAS 133”(“FASB”) and Statementbecame effective as of Financial Accounting Standards No. 140,Accounting for TransfersJanuary 1, 2009. For goodwill impairment testing and Servicingthe use of Financial Assetsfair value of tested reporting units, the Company reviewed its goodwill impairment model to measure fair value relying on external inputs and Extinguishmentsmarket participant’s assumptions rather than exclusively using discounted cash flows generated by each reporting entity. Such fair value measurement corresponds to a level 3 fair value hierarchy in the amended guidance, as described in Note 25. This new fair value measurement basis, when applied in a comparable market environment as in the last impairment campaign, had no significant impact on the results of Liabilities(“FAS 140”). The primary purposes of this statement were (1) to allow companies to select between bifurcation of hybrid financial instruments or fair valuing the hybridgoodwill impairment tests as performed in 2009. However, as a single instrument, (2) to clarify certain exclusionsresult of FAS 133the continuing downturn in market conditions and the general business environment, this new measurement of the fair value of the reporting units, when used in future goodwill and impairment testing, could generate impairment charges as the fair value will be estimated on business indicators that could reflect a distressed market.
In December 2007, the FASB issued guidance related to interestbusiness combinations and principal-only strips, (3) to define the difference between freestanding and hybrid securitized financial assets, and (4) to eliminate the FAS 140 prohibition of Special Purpose Entities holding certain types of derivatives. The statement is effective for annual periods beginning after September 15, 2006, with early adoption permitted prior to a company issuing first quarternoncontrolling interests in consolidated financial statements. The Company adopted FAS 155 in 2007guidance significantly changed how business acquisitions are accounted for and FAS 155 did not have any material effect on its financial position or results of operations.
In June 2006, the Financial Accounting Standards Board issued Financial Accounting Standards Board Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109(“FIN 48”). The interpretation seeks to clarifychanged the accounting and reporting for tax positions taken,minority interests, which are recharacterized as noncontrolling interests and classified as a component of equity. The significant changes from past practice are as follows: the new guidance expands the definitions of a business and business combination; it requires the recognition of contingent consideration at fair value on the acquisition date; acquisition-related transaction costs and restructuring costs are expensed as incurred; it changes the way certain assets are valued and requires retrospective application of measurement period adjustments. Additionally, for all business combinations (whether partial, full, or expected to be taken, in a company’s tax return andstep acquisitions), the uncertainty as toentity that acquires the amount and timingbusiness records 100% of recognition in the company’s financial statements in accordance with Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes(“FAS 109”). The interpretation also addresses derecognition of previously recognized tax positions, classification of related taxall assets and liabilities accrual of interestthe acquired business, including goodwill, generally at their fair values. The significant changes from past practice related to noncontrolling interests include that they are now considered as equity and penalties, interim period accounting,transactions between the parent company and disclosure and transition provisions. The interpretationthe noncontrolling interests are treated as equity transactions as far as these transactions do not create a change in control. Additionally, the guidance requires the recognition of noncontrolling interests at fair value rather than at book value as in past practice in cases of partial acquisitions. Such guidance is effective for fiscal years beginning on or after December 15, 2006.2008 and was adopted by the Company on January 1, 2009. The Company adopted FIN 48business combination guidance has been applied prospectively. The noncontrolling interest guidance required retroactive adoption of the presentation and disclosure requirements for existing noncontrolling interests. All other requirements of the noncontrolling interest guidance was applied prospectively. Acquisition-related costs, which amounted to $7 million and were capitalized as at December 31, 2008, were immediately recorded in earnings in the first quarter of 2009. Additionally, presentation and disclosures of noncontrolling interests generated a reclassification in all reporting periods as at January 1, 2007. The cumulative effect of2009 from the changemezzanine line “Minority interests” in the accounting principle that the Company appliedpreviously filed consolidated balance sheet as at December 31, 2008 to uncertain income tax positions was recorded in 2007 as an adjustment to retained earnings. The impactequity for a total amount of such adoption is detailed in Note 2.11. Uncertain tax positions, unrecognized tax benefits and related accrued interest and penalties are further described in Note 23.
(b) Accounting pronouncements effective in 2007 and not expected to impact the Company’s operations
In March 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 156,Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140(“FAS 156”). This statement requires initial fair value recognition of all servicing assets and liabilities for servicing contracts entered in the first fiscal year beginning after September 15, 2006. After initial recognition, the servicing assets and liabilities are either amortized over the period of expected servicing income or loss or fair value is reassessed each period with changes recorded in earnings for the period. The Company adopted FAS 156 in 2007 and FAS 156 did not have any material effect on its financial position and results of operations.$276 million. No significant


F-22F-23

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in millions of U.S. dollars, except share and per share amounts)
changes were recorded upon adoption in valuation allowance for acquired deferred tax assets and the resolution of assumed uncertain tax positions on past business combinations.
In March 2008, the FASB amended the guidance on disclosures about derivative instruments and hedging activities intended to improve financial reporting about derivative instruments and hedging activities and to enable investors to better understand how these instruments and activities affect an entity’s financial position, financial performance and cash flows through enhanced disclosure requirements. This amendment is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. The Company adopted the amendment in the first quarter of 2009 and included the new disclosure requirements in Note 25.
In November 2008, additional guidance was issued related to equity method investment accounting considerations. The guidance addresses a certain number of matters associated with the impact that the December 2007 amended guidance on business combinations and noncontrolling interests might have on the accounting for equity method investments. This additional guidance is effective for financial statements issued for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008, with no early application permitted. This guidance must be applied prospectively to new investments acquired after the effective date and was adopted by the Company in the first quarter of 2009. There was no material effect on its financial position and results of operations as a result of adoption.
In November 2008, additional guidance was issued on accounting for defensive intangible assets. This additional guidance applies to all defensive assets, either acquired from a third party or through a business combination. However, it excludes from its scope in-process research and development acquired in a business combination. The additional guidance states that a defensive asset should be considered a separate unit of accounting and should not be combined with the existing asset whose value it may enhance. A useful life should be assigned that reflects the acquiring entity’s consumption of the defensive asset’s expected benefits. The guidance is effective prospectively to intangible assets acquired on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, with no early application permitted. The Company adopted the guidance in the first quarter of 2009. The Company did not acquire significant defensive intangible assets.
In April 2009, the FASB issued clarifying guidance on the determination of fair values when volumes and levels of activity for assets or liabilities have significantly decreased and on identifying transactions that are not orderly. The guidance clarifies the issue of determining the fair values of assets and liabilities in non-active markets and that distressed or forced sales are not considered to represent fair value. It also requires additional disclosures in both interim and annual financial statements of the inputs and valuation techniques used in measuring fair value and disclosure of any changes in valuation techniques. The clarifying guidance is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted in certain circumstances for periods ending after March 15, 2009. The Company adopted the guidance in the second quarter of 2009 and included all required disclosures in its consolidated financial statements beginning in the period ended June 27, 2009. This guidance did not have any impact on the Company’s financial position and results of operations.
In April 2009, the FASB also issued clarifying guidance on the recognition and presentation of other-than-temporary impairments. This guidance amends the impairment guidance for certain debt securities and requires an investor to assess the likelihood of selling the security prior to recovering its cost basis. If an investor is able to meet the criteria to assert that it will not have to sell the security before recovery, impairment charges related to credit losses, or the inability to collect cash flows sufficient to amortized cost basis, would be recognized in earnings, while impairment charges related to non-credit losses would be reflected in other comprehensive income. The guidance, which is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009 required adoption through a cumulative effect adjustment. It also requires additional disclosures for both annual and interim periods on debt and equity securities. The Company adopted the guidance in the second quarter of 2009 and included all required disclosures in its consolidated financial statements beginning in the period ended June 27, 2009. The adoption did not have any impact on the Company’s financial position and results of operations.
In June 2009, the FASB issued guidance on subsequent events, which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. Although there is new terminology, the guidance is based on the same principles as those that existed prior to adoption. The guidance also includes a new required disclosure of the date through which an entity has evaluated subsequent events. The guidance is effective for interim and annual periods


F-24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
ending after June 15, 2009 and was adopted by the Company in the second quarter of 2009 with no material impact on the consolidated financial statements.
In June 2009, the U.S. Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 112 (“SAB 112”), which updates and amends the SEC staff’s previous interpretive guidance relating to business combinations and noncontrolling interests. Specifically, SAB 112 updates various sections of the Staff Accounting Bulletin Series to bring it into conformity with the FASB guidance on business combinations and noncontrolling interests. The Company adopted SAB 112 in the second quarter of 2009, which did not have a material impact on the Company’s financial position and results of operations.
In July 2009, the FASB issued the Accounting Standards Codification (“Codification”). The Codification is a single authoritative source for U.S. GAAP. While not intended to change U.S. GAAP, the Codification significantly changes the way in which the accounting literature is organized. It is structured by accounting topic to identify the guidance that applies to a specific accounting issue. The Codification is effective for financial statements that cover interim and annual periods ending after September 15, 2009. The Company has adopted the Codification in its interim consolidated financial statements for the period ending September 26, 2009.
In October 2009, the FASB updated the Codification to provide share lenders with guidance on how to account for own-share lending arrangements. Specifically, a share lender should record as debt issuance cost the fair value of a share lending arrangement. The outstanding shares should be excluded from basic and diluted earnings per share, unless the counterparty defaults. When a default is probable, expense should be recognized with an offset to equity for the fair value of the shares less estimated recoveries. The guidance is effective for new share lending arrangements for interim and annual periods beginning on or after June 15, 2009. For existing arrangements, the guidance is effective for fiscal years beginning on or after December 15, 2009 and must be applied retrospectively for arrangements outstanding as of the effective date. The Company does not hold any share lending arrangements and thus the guidance did not have any impact on the Company’s financial position and results of operations upon adoption.
In October 2009, the FASB also released clarifying guidance on arrangements with multiple deliverables. The new guidance requires companies to allocate arrangement consideration in multiple deliverable arrangements in a manner that better reflects the transaction’s economics through the use of relative fair values based on either vendor specific objective evidence or third party evidence of fair values. If neither of these is available, the guidance requires the use of management’s best estimate of selling price. The residual method of allocating arrangement consideration is no longer permitted. The new guidance also removes non-software components of tangible products and certain software components of tangible products from the scope of existing software revenue guidance. It finally requires expanded qualitative and quantitative disclosures. The new guidance is effective for fiscal years beginning on or after June 15, 2010, with early adoption permitted as early as interim periods ended September 30, 2009. The guidance may be applied either prospectively from the beginning of the fiscal year for new or materially modified arrangements or retrospectively. The Company has early adopted the guidance on a prospective basis, with effect as of January 1, 2009. The adoption resulted in no material effects to the Company’s financial position, timing of revenue recognition, units of accounting, allocation of consideration or results of operations and does not result in the restatement of any prior interim periods.
 
(c)(b) Accounting pronouncements expected to impact the Company’s operations that are not yet effective and have not been adopted early adopted by the Company
 
In September 2006,June 2009, the Financial Accounting Standards BoardFASB issued Statementamendments to the guidance on accounting for transfers of Financial Accounting Standards No. 157,Fair Value Measurements(“FAS 157”). This statement defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” In addition, the statement defines a fair value hierarchy which should be used when determining fair values, except as specifically excluded (i.e. stock awards, measurements requiring vendor specific objective evidence, and inventory pricing). The hierarchy places the greatest relevance on Level 1 inputs which include quoted prices in active markets for identical assets or liabilities. Level 2 inputs, which are observable either directly or indirectly, include quoted prices for similar assets or liabilities, quoted prices in non-active markets, and inputs that could vary based on either the condition of the assets or liabilities or volumes sold. The lowest level of the hierarchy, Level 3, is unobservable inputs and should only be used when observable inputs are not available. This would include company level assumptions and should be based on the best available information under the circumstances. FAS 157 is effective for fiscal years beginning after November 15, 2007 with early adoption permitted for fiscal year 2007 if first quarter statements have not been issued. However, in November 2007, the Financial Accounting Standards Board drafted a proposed FASB Staff Position (“FSP”) that would partially defer the effective date of FAS 157 for one year for nonfinancial assets and nonfinancial liabilities that are recognized at fair value in the financial statements on a nonrecurring basis. The final FSP was issued in February 2008. However, it does not defer recognition and disclosure requirements for financial assets and the guidance on consolidation of variable interest entities. The amendment regarding accounting for transfers of financial liabilities orassets includes: (i) eliminating the qualifying special-purpose entity (“QSPE”) concept; (ii) a new unit of account definition that must be met for nonfinancialtransfers of portions of financial assets and nonfinancial liabilities that are measured at least annually. The Company has adopted FAS 157 as of January 1, 2008. FAS 157 adoption is prospective, with no cumulative effect of the change in the accounting guidance for fair value measurement to be recorded as an adjustment to retained earnings, excepteligible for the following: valuation of financial instruments previously measured with block premiums and discounts; valuation of certain financial instruments and derivatives at fair value using the transaction price; and valuation of a hybrid instrument previously measured at fair value using the transaction price. The Company will not record, upon adoption, any adjustment to retained earnings since it does not hold any of the three categories of instruments described above. Consequently, consolidated financial statements as of January 1, 2008 will reflect fair value measures in compliance with previous GAAP. Reassessment of fair value in compliance with FAS 157 will be dealt with as a change in estimates, if any, in the first quarter of 2008. The Company has identified the following items in its consolidated financial statements for which detailed assessment on FAS 157 impact was required: the valuation of available-for-sale securities for which no observable market price is obtainable; the annual goodwill impairment test based on the fair value of the tested reporting units; and FAS 144 held-for-sale model when applied to the Company’s flash memory business deconsolidation (the “FMG deconsolidation”). Concerning the valuation of available-for-sale debt securities which have currently, at the best of management’s visibility, no observable market price, management estimates that fair value of these instruments when measured in compliance with FAS 157 should not materially differ from current estimates and that fair value measure, even if using certain entity-specific assumptions, is in line with a Level 3 FAS 157 fair value hierarchy. For goodwill impairment testing and the use of fair value of tested reporting units, the Company is currently reviewing its goodwill impairment model to measure fair value on marketable comparables, instead of discounted cash flows generated by each reporting entity. Based on the Company’s preliminary assessment, management estimates that FAS 157 adoption could have an effect on certain future goodwill impairment tests, in the event the Company’s strategic plan could necessitate changes in the product portfolios, for which materiality will be further evaluated. Finally, the Company continues to evaluate the potential impact of adopting FAS 157, but management believes that, based on the current available evidence, the fair value measure on the consideration to be received upon FMG deconsolidation is in line with FAS 157 definition of fair value and that FAS 157 adoption should not have a material impact on the actual loss to be recorded at the date of the transaction closing. These conclusions are the results of analysis done based on current assumptions that are true today, but upon certain changes in events and circumstances may no longer be consistent with the assumptions upon the date of adoption. As a result, these conclusions on the impact of FAS 157 adoption are subject to revision as the evaluations are concluded.
In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159,The Fair Value Option for Financial Assets and Financial Liabilities- Including an amendment of FASB Statement No. 115(“FAS 159”). This statement permits companies to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses in earnings at each subsequent reporting date on items for which the fair value option has been elected. The objective of this statement is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by


F-23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. A company may decide whether to elect the fair value option for each eligible item on its election date, subject to certain requirements described in the statement. FAS 159 is effective for fiscal years beginning after November 15, 2007 with early adoption permitted for fiscal year 2007 if first quarter statements have not been issued. The Company has adopted FAS 159 as of January 1, 2008 and will accordingly evaluate the assets and liabilities on which it has elected to apply the fair value option as of the end of the first quarter 2008.
In December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 (Revised 2007),Business Combinations (“FAS 141R”) and No. 160,Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51(“FAS 160”). These new standards will initiate substantive and pervasive changes that will impact both the accounting for future acquisition deals and the measurement and presentation of previous acquisitions in consolidated financial statements. The standards continue the movement toward the greater use of fair values in financial reporting. FAS 141R will significantly change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. FAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. The significant changes from current practice resulting from FAS 141R are: the definitions of a business and a business combination have been expanded, resulting in an increased number of transactions or other events that will qualify as business combinations; for all business combinations (whether partial, full, or step acquisitions), the entity that acquires the business (the “acquirer”) will record 100% of all assets and liabilities of the acquired business, including goodwill, generally at their fair values; certain contingent assets and liabilities acquired will be recognized at their fair values on the acquisition date; contingent consideration will be recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value will be recognized in earnings until settled; acquisition-related transaction and restructuring costs will be expensed rather than treated as part of the cost of the acquisition and included in the amount recorded for assets acquired; in step acquisitions, previous equity interests in an acquiree held prior to obtaining control will be remeasured to their acquisition-date fair values, with any gain or loss recognized in earnings; when making adjustments to finalize initial accounting, companies will revise any previously issued post-acquisition financial information in future financial statements to reflect any adjustments as if they had been recorded on the acquisition date; reversals of valuation allowances related to acquired deferred tax assetssale accounting; (iii) clarifications and changes to acquired income tax uncertainties will be recognized in earnings, exceptthe derecognition criteria for qualified measurement period adjustments (the measurement period is a period of uptransfer to one year during which the initial amounts recognized for an acquisition can be adjusted.; this treatment is similar to how changes in other assets and liabilities in a business combination will be treated, and different from current accounting under which such changes are treated as an adjustment of the cost of the acquisition); and asset values will no longer be reduced when acquisitions result in a “bargain purchase”, instead the bargain purchase will result in the recognition of a gain in earnings. The significant change from current practice resulting from FAS 160 is that since the noncontrolling interests are now considered as equity, transactions between the parent company and the noncontrolling interests will be treated as equity transactions as far as these transactions do not create a change in control. FAS 141R and FAS 160 are effective for fiscal years beginning on or after December 15, 2008. FAS 141R will be applied prospectively, with the exception of accounting for changes in a valuation allowance for acquired deferred tax assets and the resolution of uncertain tax positions accounted for under FIN 48. FAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of FAS 160 shall be applied prospectively. Early adoption is prohibited for both standards. The Company is currently evaluating the effect the adoption of these statements will have on its financial position and results of operations.
(d) Accounting pronouncements that are not yet effective and are not expected to impact the Company’s operations
In June 2007, the Emerging Issues Task Force reached final consensus on IssueNo. 06-11,Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards(“EITF 06-11”). The issue applies to equity-classified nonvested shares on which dividends are paid prior to vesting, equity-classified nonvested share units on which dividends equivalents are paid, and equity-classified share options on which payments equal to the dividends paid on the underlying shares are made to the option-holder while the option is outstanding. The issue is applicable to the dividends or dividend equivalents that are (1) charged to retained earnings under the guidance in Statement of Financial Accounting Standards No. 123 (Revised 2004),Share-Based Payment(“FAS 123R”) and (2) result in an income tax deduction for the employer.EITF 06-11 states that a realized tax benefit from dividends or dividend equivalents that are charged to retained earnings and paid to employees for equity-classified nonvested shares,


F-24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
nonvested equity share units, and outstanding share options should be recognized as an increase to additionalpaid-in-capital. Those tax benefits are considered excess tax benefits (“windfall”) under FAS 123R.EITF 06-11 must be applied prospectively to dividends declared in fiscal years beginning after December 15, 2007 and interim periods within those fiscal years, with early adoption permitted for the income tax benefits of dividends on equity-based awards that are declared in periods for which financial statements have not yet been issued. The Company will adoptEITF 06-11 when effective. However, management does not expect thatEITF 06-11 will have a material effect on the Company’s financial position and results of operations.
In June 2007, the Emerging Issues Task Force reached final consensus on IssueNo. 07-3,Accounting for Advance Payments for Goods or Services to Be Used in Future Research and Development Activities(“EITF 07-3”). The issue addresses whether non-refundable advance payments for goods or services that will be used or rendered for research and development activities should be expensed when the advance payments are made or when the research and development activities have been performed.EITF 07-3 applies only to non-refundable advance payments for goods and services to be used and rendered in future research and development activities pursuant to an executory contractual arrangement.EITF 07-3 states that non-refundable advance payments for future research and development activities should be capitalized until the goods have been delivered or the related services have been performed. If an entity does not expect the goods to be delivered or services to be rendered, the capitalized advance payment should be charged to expense.EITF 07-3 is effective for fiscal years beginning after December 15, 2007 and interim periods within those fiscal years. Earlier application is not permitted and entities should recognize the effect of applying the guidance in this Issue prospectively for new contracts entered into afterEITF 07-3 effective date. The Company will adoptEITF 07-3 when effective. However, management does not expect thatEITF 07-3 will have a material effect on the Company’s financial position and results of operations.
In November 2007, the Emerging Issues Task Force reached final consensus on IssueNo. 07-1,Accounting for Collaborative arrangements(“EITF 07-1”). The consensus prohibits the application of Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock(“APB 18”) and the equity method of accounting for collaborative arrangements unless a legal entity exists. Payments between the collaborative partners would be evaluated and reported in the consolidated statements of income based on applicable GAAP. Absent specific GAAP, the entities that participate in the arrangement would apply other existing GAAP by analogy or apply a reasonable and rational accounting policy consistently.EITF 07-1 is effective for periods that begin after December 15, 2008 and would apply to arrangements in existence as of the effective date. The effect of the new consensus will be accounted for as a sale; (iv) a change in accounting principle through retrospective application.to the amount of recognized gain or loss on a transfer of financial assets accounted for as a sale when beneficial interests are received by the transferor, and (v) extensive new disclosures. The Company will adoptEITF 07-1amendment regarding consolidation of variable interest entities includes: (i) the elimination of exemption for QSPEs; (ii) a new approach for determining who should consolidate a variable-interest entity and (iii) changes to when it is necessary to reassess who should consolidate a variable-interest entity. Both amendments are effective and management does not expect thatEITF 07-1 will have a material effect onas of the Company’s financial position and resultsbeginning of operations.
In November 2007, the Emerging Issues Task Force reached final consensus on IssueNo. 07-6,Accounting for the Sale of Real Estate When the Agreement Includes a Buy-Sell Clause(“EITF 07-6”). The issue addresses whether the existence of a buy-sell arrangement would preclude partial sales treatment when real estate is sold to a jointly owned entity. The consensus provides that the existence of a buy-sell clause does not necessarily preclude partial sale treatment under Statement of Financial Accounting Standards No. 66,Accounting for Sales of Real Estate(“FAS 66”).EITF 07-6 is effective foran entity’s first fiscal yearsyear beginning after DecemberNovember 15, 20072009 and would be applied prospectively to transactions entered into after the effective date. The Company will adoptEITF 07-6 when effective and management does not expectfor interim periods within thatEITF 07-6 will have a material effect on the Company’s financial position and results of operations.
In November 2007, the U.S. Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 109,Written Loan Commitments Recorded at Fair Value Through Earnings(“SAB 109”). SAB 109 provides the Staff’s views regarding written loan commitments that are accounting for at fair value through earnings under GAAP. SAB 109 revises and rescinds portions of Staff Accounting Bulletin No. 105,Application of Accounting Principles to Loan Commitments(“SAB 105”). SAB 105 stated that in measuring the fair value of a derivative loan commitment it would be inappropriate to incorporate the expected net future cash flows related to the associated servicing of the loan. Consistent with FAS 156 and FAS 159, SAB 109 states that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. SAB 109 does, however, retain the Staff’s views included in SAB 105 that no internally-developed intangible assets should be included in the measurement of the estimated fair value of a loan commitment derivative. SAB 109 first year. Earlier adoption is effective for all written loan commitments recorded at fair value that are entered into, or substantially modified, in fiscal quarters beginning after December 15,


F-25

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in millions of U.S. dollars, except share and per share amounts)
 
2007.prohibited. The Company will adopt SAB 109 when effective but managementthe amendments as of January 1, 2010 and does not expect that SAB 109 will have a material effectany significant impact on the Company’s financial position and results of operations.
 
In January 2008,September 2009, the U.S. Securities and Exchange Commission (SEC)FASB issued Staff Accounting Bulletin No. 110,Year-End Help for Expensing Employee Stock Options (“SAB 110”). SAB 110 expressesfinal guidance on measuring the viewsfair value of liabilities. It amends the Codification primarily as follows: (i) it sets forth the types of valuation techniques to be used to value a liability when a quoted price in an active market is not available; (ii) clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the Staff regardingliability; (iii) clarifies that both a quoted price in an active market for the useidentical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of a “simplified” method,the asset are required are Level 1 fair value measurements. The amended guidance is effective for the first reporting period beginning after issuance. The Company will adopt the amendment as of January 1, 2010 and does not expect any significant impact on the Company’s financial position and results of operations.
3.  MARKETABLE SECURITIES
Changes in developing an estimatethe value of expected term of “plain vanilla” share optionsmarketable securities, as reported in accordance with FAS 123Rcurrent and amended its previous guidance under SAB 107 which prohibited entities from usingnon-current assets on the simplified method for stock option grants afterconsolidated balance sheets as at December 31, 2007. The Staff amended its previous guidance because additional information about employee exercise behavior has not become widely available. With SAB 110, the Staff permits entities to use, under certain circumstances, the simplified method beyond2009 and December 31, 2007 if2008 are detailed in the table below:
                                 
    Increase in
 Other than
          
    fair value
 temporary
          
    included in
 impairment
          
    OCI* for
 charge
     Foreign
    
    available-
 and realized
     exchange
 Foreign
  
    for-sale
 losses
     result
 exchange
  
  December 31,
 marketable
 on marketable
     through
 result
 December 31,
  2008 securities securities Purchase Sale P&L through OCI 2009
  In millions of U.S. dollars
 
Aaa debt securities issued by the U.S. Treasury  —   —   —   1,060   (720)          340 
Aaa debt securities issued by foreign governments  —   —   —   670   (543)  14   3   144 
Senior debt Floating Rate Notes issued by financial institutions  651   8           (108)      (3)  548 
Auction Rate Securities  242   15   (140)  —   (75)  —   —   42 
Total
  893   23   (140)  1,730   (1,446)  14   —   1,074 
*Other Comprehensive Income
The floating rate notes and the government bonds are reported as current assets on the line “Marketable Securities” on the consolidated balance sheet as at December 31, 2009, since they conclude that their data about employee exercise behavior does not providerepresent investments of funds available for current operations. The auction-rate securities, which have a reasonable basis for estimatingfinal maturity up to 40 years, were purchased in the expected-term assumption. SAB 110 is not relevantCompany’s account by Credit Suisse Securities LLC contrary to the Company’s operations sinceinstructions; they are classified as non-current assets on the line “Non-current marketable securities” on the consolidated balance sheet as at December 31, 2009. On February 16, 2009, the Company redefinedannounced that an arbitration panel of the Financial Industry Regulatory Authority (“FINRA”), in 2005a full and final resolution of the issues submitted for determination, awarded the Company, in connection with such unauthorized auction rate securities, approximately $406 million, comprising compensatory damages, as well as interest, attorney’s fees and consequential damages, which were assessed against Credit Suisse. In addition, the Company is entitled to retain an interest award of approximately $27 million, out of which $25 million has already been paid, plus interest at the rate of 4.64% on the par value of the portfolio from December 31, 2008 until the award is paid in full. The Company has petitioned the United States District Court for the Southern District of New York seeking enforcement of the award. Credit Suisse has responded by seeking to vacate the FINRA award. Upon receipt of the award, the Company will transfer ownership of the portfolio of unauthorized auction rate securities to Credit Suisse. Until the award is executed, the Company will continue to own the Auction Rate Securities and, consequently, will account for them in the same manner as in the prior periods. In December 2009, Credit Suisse, because of its compensation policycontingent interest in certain securities held by no longer granting stock options but rather issuing nonvested shares.us and issued by Deutsche Bank, requested that we either tender the securities or accept that the amount that would be received by us pursuant to such tender ($75 million) be deducted from the sum to be collected by us if and when the FINRA award is confirmed and enforced. Pursuant to legal advice, and while reserving our legal rights, we participated in the tender offer and paid $0.49 per dollar of face value. As a result, we sold Auction Rate Securities with a face value of $154 million, collected $75 million and registered $68 million as realized losses on financial assets. Losses as a result of this transaction should be recovered upon collection of the award. The


F-26

 
3 — BUSINESS COMBINATIONSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
 
On November 1, 2007Company is seeking confirmation of the award from the United States District Court of the Southern District of New York.
No significant gain or loss was included in earnings as a result of floating rate notes sales. Out of the fifteen investment positions in floating-rate notes, with the only exception of a senior floating rate note of Euro 15 million issued by Lehman Brothers whose impairment was recorded as other-than-temporary in 2008, nine positions are in an unrealized loss position, which has been considered as temporary. For all floating rate notes, except the Lehman Brothers senior unsecured bonds described below, the Company acquiredexpects to recover the debt securities’ entire amortized cost basis. Since the duration of the floating rate note portfolio is less than two years on average and the securities have a minimum Moody’s rating of A3 (with the only exception of the Lehman Brothers senior unsecured bonds), the Company expects the value of the securities to return to par as the final maturity is approaching. In addition, the Company does not expect to be required to sell the securities before maturity. As such, no credit loss has been identified on these instruments. Thus, under the new clarifying guidance on other-than-temporary impairments issued in April 2009, as described in details in Note 2.25, these declines in fair value are considered as temporary. As a result, the change in fair value is recognized as a separate component of “Accumulated other comprehensive income (loss)” in the consolidated statements of changes in equity and no cumulative effect adjustment was recorded in 2009 upon adoption of such guidance. The Company estimated the fair value of these financial assets based on publicly quoted market prices, which corresponds to a level 1 fair value measurement hierarchy.
For the Lehman Brothers senior unsecured bonds, the Company has been measuring fair value since Lehman Brothers Chapter 11 filing on September 15, 2008 based on information received from a major credit rating entity. Such fair value information relies on historical recovery rates and is assessed to correspond to a level 3 fair value hierarchy. At the date of Lehman Brothers Chapter 11 filing, the Company did not expect to recover the entire amortized cost basis of the securities and reported in earnings an other-than-temporary impairment charge representing 50% of the face value of the debt securities. Since all of this other-than-temporary impairment charge corresponded to credit losses, no cumulative effect adjustment was recorded in 2009 upon adoption of the new accounting guidance on recognition and presentation of other-than-temporary impairment charges. As at December 31, 2009, the Company assessed that it expected to recover the impaired amortized cost basis of the Lehman Brothers debt securities amounting to $11 million and no additional other-than-temporary impairment charge was recorded on the Lehman Brothers senior unsecured bonds in 2009.
The Company invested in 2009 $1,730 million in French and U.S. government bonds, of which $1,263 million was sold or matured in 2009. In 2009, the Company realized in earnings a $14 million exchange gain upon the sale of Euro 100 million French Government bonds. The change in fair value of the $484 million government debt securities classified as available-for-sale was not material as at December 31, 2009. The Company estimated the fair value of these financial assets based on publicly quoted market prices, which corresponds to a level 1 fair value measurement hierarchy. The duration of the government bonds portfolio is less than five months on average and the securities are rated Aaa by Moody’s.
Until the FINRA award is executed, the ownership of the auction-rate securities must be considered as a separate unit of accounting for impairment assessment. Consequently, upon adoption of the new accounting guidance on recognition and presentation of other-than-temporary impairment charges, the Company determined that in the assumption that the FINRA award was not executed the Company would not expect to recover the entire amortized cost basis of the securities resulting in an impairment of the securities based on credit losses. Consequently, the Company reported an other-than-temporary decline in fair value amounting to $72 million in 2009, which was immediately reported in the consolidated statement of income on the line “Other-than-temporary impairment charge on financial assets”. As this impairment assessment was in line with past accounting practice, no cumulative effect adjustment was recorded in 2009 upon adoption of the new accounting guidance. From the first quarter of 2008, the fair value measure of these securities, which corresponds to a level 3 fair value hierarchy, was based on a theoretical model using yields obtainable for comparable assets. The value inputs for the evaluation of these securities were publicly available indexes of securities with the same rating, similar duration and comparable/similar underlying collaterals or industries exposure (such as ABX for the collateralized debt obligation, ITraxx and IBoxx for the credit-linked notes), which the Company believes approximates the orderly exit value in the current market. In 2009, the value of the remaining ARS securities increased in value by $15 million, which has been recorded as a separate component of “Accumulated other comprehensive income (loss)” in the consolidated statements of changes in equity. The estimated value of these securities could further decrease due to a


F-27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
deterioration of the corporate industry indexes used for the evaluation. Fair value measurement information is further detailed in Note 25.
4.  TRADE ACCOUNTS RECEIVABLE, NET
Trade accounts receivable, net consisted of the following:
         
  December 31,
  December 31,
 
  2009  2008 
 
Trade accounts receivable  1,386   1,089 
Less valuation allowance  (19)  (25)
Total
  1,367   1,064 
Bad debt expense in 2009, 2008 and 2007 was $2 million, $1 million and $1 million respectively. In 2009, 2008 and 2007, one customer, the Nokia group of companies, represented 16.1%, 17.5% and 21.1% of consolidated net revenues, respectively.
In 2009, $11 million of receivables due to ST Ericsson in 2009 were sold without recourse, with a financial cost of less than 0.2% of the factored amount. The Company enters into factoring transactions to accelerate the realization in cash of some trade accounts receivable.
5.  INVENTORIES, NET
Inventories, net of reserve, consisted of the following:
         
  December 31,
 December 31,
  2009 2008
 
Raw materials  73   76 
Work-in-process  769   1,124 
Finished products  433   640 
Total
  1,275   1,840 
As at December 31, 2008, inventories included $203 million related to the consolidation of the NXP wireless business. The fair value adjustment arising from the purchase accounting for the acquisition as discussed in Note 7 was totally expensed in cost of sales as at December 31, 2008.
6.  OTHER RECEIVABLES AND ASSETS
Other receivables and assets consisted of the following:
         
  December 31,
 December 31,
  2009 2008
 
Receivables from government agencies  208   125 
Taxes and other government receivables  272   238 
Advances  79   83 
Prepayments  50   64 
Loans and deposits  14   18 
Interest receivable  10   16 
Financial instruments  36   37 
Held-for-trading cancellable swaps
  —   34 
Other current assets  84   70 
Total
  753   685 
Due to the high volatility in the interest rates generated by the recent financial turmoil, the Company assessed in 2008 that the swaps, entered into to hedge the fair value of a portion of the integrated circuit operations of the major wireless customer of its Application Specific Product Group product segment. The acquisition provides the Company with, among other things, engineering resources, equipmentconvertible bonds due 2016, had been no longer effective since November 1, 2008 and a license for certain technologies and other intellectual property. The transaction is also expected to strengthen the strategic relationship between the Company and the customer. Of the total purchase price of $92 million, $10 million was paid for the acquisition of the technology license, $24 million was allocated to the customer relationship based upon the expected value of future sales, $3 million was the fair value ofhedge relationship was discontinued. Consequently, the fixed assets acquired, $3 million in employee liabilitiesswaps were assumed, and the resulting goodwill was $58 million. The allocation to goodwill is supported by the significant value of the skills and technical knowledge of the acquired workforce and other assets not separately identifiable. The total purchase price includes current payments and a further $6 million based upon sales that the Company expects, beyond a reasonable doubt, to pay at the end of 2010, which accordingly is included in “Other non-current liabilities” on the consolidated balance sheet. Because substantially the entire purchase price was allocated to intangibleclassified asheld-for-trading financial assets and goodwill, the acquisition has been shown on the line “Investment in intangiblereported at fair value as a component of “Other receivables and financialcurrent assets” in the consolidated cash flowbalance sheet as at December 31, 2008 since the Company intended to hold the derivative instruments for a short period of time which will not exceed twelve months. An


F-28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
unrealized gain was recognized in earnings from discontinuance date totaling $15 million and was reported on the line “Gain (loss) on financial assets” of the consolidated statement of income for the year ended December 31, 2007. This transaction resulted2008. During the first quarter of 2009, the Company sold these cancellable swaps and generated a loss of $8 million, which is included in an increase of the Company’s research and development expenses but did not have a material impactline “Gain (loss) on 2007 revenues or net income, and it is not expected to materially impact 2008 revenues or net income.financial assets”.
7.  BUSINESS COMBINATIONS
Genesis Microchip Inc.
 
On January 17, 2008, the Company acquired effective control of Genesis Microchip Inc. (“Genesis Microchip”) under the terms of a tender offer announced on December 11, 2007. On January 25, 2008, the Company completed a second-step merger in which the remaining common shares of Genesis Microchip that had not been acquired through the tender offer were converted into the right to receive the same $8.65 per share price paid in the tender offer. Payment of approximately $340 million for the acquired shares was made through a wholly-owned subsidiary of the Company that was merged with and into Genesis Microchip promptly thereafter.thereafter and received $170 million of cash and cash equivalents from Genesis Microchip. Additional direct costs associated with the acquisition are estimatedamounting to be approximately $2 million.$6 million were paid in 2008. On closing, Genesis Microchip became part of the Company’s Home Entertainment & Displays Groupbusiness activity which is part of the Application SpecificAutomotive Consumer Computer and Communications Infrastructure Product GroupGroups segment. At the dateThe acquisition of acquisition, Genesis Microchip hadwas performed to expand the Company’s leadership in the digital TV market. Genesis Microchip will enhance the Company’s technological capabilities for the transition to fully digital solutions in the segment and strengthen its product intellectual property portfolio.
Purchase price allocation resulted in the recognition of $11 million in marketable securities, $14 million in property, plant and equipment, $44 million of deferred tax assets, net of valuation allowance, while intangible assets included $44 million of core technologies, $27 million related to customer relationships, $2 million of trademarks, $15 million of goodwill primarily related to the workforce, and not deductible for tax purposes, and $2 million of liabilities net of other assets. During the course of 2008, the company reduced its estimate of direct cost associated with the acquisition and made a corresponding reduction in the amount of purchased goodwill. The Company also recorded in 2008 $21 million of acquired IP R&D with no alternative future use that the Company immediately wrote off. Such in-process research and development charge was recorded on the line “research and development expenses” in the consolidated statement of income in the first quarter of 2008. The core technologies have an average useful life of approximately four years, the customers’ relationship of seven years and the trademarks of approximately two years. The Company obtained a third party independent appraisal to assist in making its purchase price allocation although the Company takes full responsibility for such allocation.
NXP Wireless
On August 2, 2008, ST-NXP Wireless, a joint venture owned 80% by the Company, began operations based on contributions of the wireless businesses of the Company and NXP, as the noncontrolling interest holder. The Company paid to NXP $1.55 billion for the 80% stake, which included a control premium, and received cash and cash equivalents valued at $155from the NXP businesses of $33 million. The consideration also included a contribution in kind, measured at fair value, corresponding to a 20% interest in the Company’s wireless business. Additional direct costs associated with the acquisition amounted to $21 million and were fully paid as at December 31, 2009. On closing, ST-NXP Wireless was determined to be included in the Wireless segment.
Purchase price allocation resulted in the recognition of $308 million in property, plant and equipment, $72 million of tax receivables net of valuation allowances, inventory of $282 million which includes $88 million ofstep-up in value that increased charges against earnings in 2008 as the inventory was sold, deferred tax liabilities of $14 million, restructuring reserves of $44 million and $42 million in liabilities, net of other assets. In addition, intangible assets recognized included core technologies of $223 million, customer relationships of $405 million, and acquired IP R&D of $76 million. Such IP R&D did not have any alternative future use and was written-off immediately in the consolidated statement of income in 2008 to the line “Research and development.” The resulting goodwill in the transaction was $669 million at acquisition date. During 2009 the Company made final adjustments to the acquisition related goodwill and reduced its value by $12 million with offsetting adjustments in property, plant and equipment, tax receivables and net other assets and liabilities. The goodwill deductible for tax purposes amounts to approximately $108 million. The core technologies have useful lives ranging from approximately three and a half to six and a half years and the customer relationships’ average useful lives were estimated at 12 years. To assist in making the purchase price has not yet been completed.
4 — EQUITY INVESTMENTS
UPEK Inc.
In 2004,allocation for the contribution from the noncontrolling interest holder, the Company and Sofinnova Capital IV FCPR formedobtained a new company, UPEK Inc., as a venture capitalist-funded purchase of the Company’s TouchChip business. UPEK, Inc. was initially capitalized with the Company’s transfer of the business, personnel and technology assets related to the fingerprint biometrics business, formerly known as the TouchChip Business Unit, for a 48% interest. Sofinnova Capital IV FCPR contributed $11 million of cash for a 52% interest. In 2005, an additional $9 million was contributed by Sofinnova Capital IV FCPR, reducing the Company’s ownership to 33%. The Company accounted for its share in UPEK, Inc. under the equity method.
On June 30, 2005,third party independent appraisal although the Company soldremains fully responsible for the allocation. The contribution by the Company was carried over at its interest in UPEK Inc. for $13 million and recorded a gain amounting to $6 million in “Other income and expenses, net” on its consolidated statements of income. Additionally, on June 30,book value. The restructuring reserves represent


F-26F-29

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in millions of U.S. dollars, except share and per share amounts)
 
2005,estimated redundancy costs incurred to achieve the rationalization of the combined organization as anticipated as part of the transaction and cover approximately 500 people, includingsub-contractors. The plan affects mainly employees in Belgium, China, Germany, India, the Netherlands, Switzerland and the United States of America.
On February 1, 2009, the Company was granted warrantsexercised its option to purchase the 20% noncontrolling interest of NXP in ST-NXP wireless for 2,000,000 shares of UPEK, Inc. at an exercisea price of $0.01$92 million. Transactions with noncontrolling interests are summarized in the table below:
         
  Twelve Months Ended
  December 31,
 December 31,
  2009 2008
  In millions of U.S. dollars
 
Net loss attributable to parent company  (1,131)  (786)
Transfers (to) from noncontrolling interests:        
Increase in parent company’s capital surplus for purchase of outstanding 20% of ST-NXP shares  119   — 
Change from net loss attributable to parent company and transfers (to) from noncontrolling interests
  (1,012)  (786)
Ericsson Mobile Platforms
On February 3, 2009, the Company closed a transaction to combine the businesses of Ericsson Mobile Platforms (“EMP”) and ST-NXP Wireless into a new venture, ST-Ericsson. ST-Ericsson combines the resources of the two companies and focuses on developing and delivering a complete portfolio of mobile platforms wireless semiconductor solutions across the broad spectrum of mobile technologies. The operations of ST-Ericsson are conducted through two groups of companies. The parent of one of the groups is ST-Ericsson Holding AG (“JVS”), which is owned 50% plus a controlling share by ST. JVS is responsible for the full commercial operation of the combined businesses, namely sales, marketing, supply and the full product responsibility. The parent of the other group, ST-Ericsson AT Holding AG (“JVD”), is owned 50% plus a controlling share by Ericsson and is focused on fundamental R&D activities. Both JVS and JVD are variable interest entities. The Company has determined that it is the primary beneficiary of JVS and therefore consolidates JVS, but that it is not the primary beneficiary of JVD and therefore accounts for its noncontrolling interest in JVD under the equity method of accounting. JVD is discussed further in Note 11. In addition to the contributions by ST and Ericsson of their respective businesses to the venture entities, the consideration received from Ericsson included $1,155 million in cash, of which $700 million was paid directly to the Company. The transaction has been accounted for as a business combination under the amended business combination guidance adopted by the Company as of January 1, 2009.
The purchase accounting results are the following, in millions of U.S. dollars:
Consideration transferred:
Noncontrolling interest in the Company’s business contributed1,105
Cash received by the Company(700)
Equity investment in JVD(99)
Total consideration transferred
306
Acquisition related costs included in SG&A
9
Assets acquired and liabilities assumed:
Cash in JVS445
Other current assets and liabilities — net(47)
Customer relationships48
Property, plant and equipment23
Total identifiable net assets
469
Noncontrolling interest in EMP business acquired(306)
Goodwill143
Total
306
The goodwill arises principally due to expected synergies and the value of the assembled workforce. It is tax deductible for an amount of $26 million. In connection with this transaction, the Company recognized acquisition


F-30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share.share amounts)
costs of $9 million, which were included in selling, general and administrative expenses in 2009. The warrantscustomer relationships have a useful life of four years. There are no contingent assets or liabilities recognized in the transaction.
The fair value of the noncontrolling interests was determined by the Company with the assistance of a third party evaluation of the fair values of the businesses contributed. Due to lack of comparable market transactions, the EMP business was valued using a discounted cash flow approach. The primary inputs used to measure the fair value were the stand alone business plan for the five-year period2009-2013, including certain cost synergies of the venture, and the weighted average cost of capital, which was determined to be 8.9%. This represents a Level 3 measurement of fair value in the fair value measurement hierarchy. The resulting value of the EMP business was then allocated between the two entities of the venture as follows: (a) specifically identifiable assets as well as customer-related intangibles and the cost synergies were allocated to the portion of the EMP business contributed to JVS, and (b) specifically identifiable assets as well as the value of the usage rights of the technology were allocated to the portion of the EMP business contributed to JVD. The fair value of the Company’s contribution of its ST-NXP Wireless business to JVS was determined based upon the valuation of the EMP business contributed to JVS and JVD and the cash consideration that was agreed upon between the Company and Ericsson to compensate for the difference in fair values between the two companies’ contributions. This valuation is therefore also considered Level 3. Due to the significant minority rights of the Company and Ericsson in JVD and JVS respectively, no control premium or discount was assigned in the valuation of the noncontrolling interests. Upon closing, JVS was determined to be included in the reportable segment “Wireless”.
The unaudited proforma information below assumes that JVS was created on January 1, 2009 and 2008 and incorporates the results of JVS beginning on those dates. The unaudited twelve months ended December 31, 2009 and December 31, 2008 information has been adjusted to incorporate the results of JVS on January 1, 2009 and January 1, 2008. Such results include estimated results of the business acquired, adjustments to conform to the Company’s accounting policies, additional depreciation and amortization resulting from the step up to the fair values of the tangible and intangible assets, consequential tax effects and noncontrolling interest adjustments. These amounts are presented for information purposes only and are not limited in time but can only be exercisedindicative of the results of operations that would have been achieved had the acquisition taken place as of January 1, 2009 and January 1, 2008.
         
  Twelve Months Ended 
  December 31,
  December 31,
 
Pro forma Statements of Income (unaudited)
 2009  2008 
  In millions of U.S. dollars 
 
Net revenues  8,536   10,485 
Gross profit  2,640   4,027 
Operating expenses  (3,688)  (4,308)
Operating loss  (1,048)  (281)
Net loss attributable to parent company  (1,113)  (798)
Loss per share (basic)  (1.27)  (0.89)
Loss per share (diluted)  (1.27)  (0.89)
         
  Twelve Months Ended 
  December 31,
  December 31,
 
Statements of Income, as reported
 2009  2008 
  In millions of U.S. dollars 
 
Net revenues  8,510   9,842 
Gross profit  2,626   3,560 
Operating expenses  (3,649)  (3,758)
Operating loss  (1,023)  (198)
Net loss attributable to parent company  (1,131)  (786)
Loss per share (basic)  (1.29)  (0.88)
Loss per share (diluted)  (1.29)  (0.88)
Net revenues of the EMP business for the period from the acquisition date of February 3, 2009 to December 31, 2009 included in the eventconsolidated statement of income were $300 million. Net income (loss) during this period is no


F-31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
longer separately identifiable, as the EMP business was immediately integrated across a changelarge number of control orlegal entities combining the cost structures of the EMP and ST-NXP Wireless businesses.
8.  GOODWILL
Following the segment reorganization as described in Note 27, the Company has restated its results in prior periods for illustrative comparisons of its allocation of goodwill by product segment.
Changes in the carrying amount of goodwill were as follows:
                     
  Automotive
        
  Consumer
        
  Computer and
   Industrial and
    
  Communication
 Wireless
 Multisegment
    
  Infrastructure
 Sector
 Sector
    
  (“ACCI”) (“Wireless”) (“IMS”) Other Total
 
December 31, 2007  41   147   100   2   290 
Business Combination  15   669   —   —   684 
PGI goodwill impairment  (4)  —   —   (2)  (6)
Incard goodwill impairment  —   —   (7)  —   (7)
Foreign currency translation  (1)  —   (2)  —   (3)
December 31, 2008  51   816   91   —   958 
Business Combination  —   131   —   —   131 
Vision goodwill impairment  (6)  —   —   —   (6)
Foreign currency translation  (2)  (11)  1   —   (12)
December 31, 2009  43   936   92   —   1,071 
Gross goodwill recognized amounted to respectively $1,138 million and $1,019 million as at December 31, 2009 and 2008. Accumulated impairment amounted to respectively $67 million and $61 million as at December 31, 2009 and 2008.
On February 3, 2009, the Company closed a transaction to combine the businesses of Ericsson Mobile Platforms (“EMP”) and ST-NXP Wireless into a new venture, named ST-Ericsson. An amount of $143 million of the purchase price for this transaction was allocated to goodwill. This business combination is discussed in details in Note 7. Additionally, at the beginning of the third quarter of 2009, the Company made final adjustments to the NXP business combination and decreased goodwill by $12 million.
In 2008, the Company acquired 100% of Genesis Microchip Inc. and 80% of the NXP wireless business. Amounts of $15 million and $669 million, respectively, of the purchase price for these two transactions were allocated to goodwill. These business combinations are discussed in details in Note 7.
During the first half of 2009, the Company performed an Initialimpairment test on goodwill and based on this test, impairment charge totaling $6 million was recorded on the line “Impairment, restructuring charges and other related closure costs” of the consolidated statement of income for the period ended December, 2009. This impairment charge is further described in Note 19.
In the third quarter of 2009 and 2008, the Company performed its annual impairment test on goodwill and indefinite long-lived assets, which did not evidence any additional impairment charge to be recorded in 2009 and charges totaling $13 million were recorded on the line “Impairment, restructuring charges and other related closure costs” of the consolidated statement of income for the year ended December 31, 2008. These impairment charges are further described in Note 19.


F-32

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
9.  OTHER INTANGIBLE ASSETS
Other intangible assets consisted of the following:
             
  Gross
  Accumulated
  Net
 
December 31, 2009
 Cost  Amortization  Cost 
 
Technologies & licences  787   (501)  286 
Contractual customer relationships  485   (70)  415 
Purchased software  302   (226)  76 
Other intangible assets  119   (77)  42 
             
Total
  1,693   (874)  819 
             
             
  Gross
  Accumulated
  Net
 
December 31, 2008
 Cost  Amortization  Cost 
 
Technologies & licences  707   (365)  342 
Contractual customer relationships  436   (22)  414 
Purchased software  253   (200)  53 
Other intangible assets  125   (71)  54 
             
Total  1,521   (658)  863 
             
The line Other intangible assets in the table above consists primarily of internally developed software. The amortization expense on capitalized software costs in 2009, 2008 and 2007 was $20 million, $15 million, and $11 million, respectively.
On February 3, 2009, the Company closed a transaction to combine the businesses of Ericsson Mobile Platforms (“EMP”) and ST-NXP Wireless into a new venture, named ST-Ericsson. An amount of $48 million of the purchase price for this transaction was allocated to customer relationships. This business combination is discussed in details in Note 7.
The amortization expense in 2009, 2008 and 2007 was $208 million, $141 million, and $82 million, respectively.
The estimated amortization expense of the existing intangible assets for the following years is:
     
Year
   
 
2010  235 
2011  215 
2012  155 
2013  58 
2014  39 
Thereafter  117 
Total
  819 


F-33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
10.  PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
             
  Gross
  Accumulated
  Net
 
December 31, 2009
 Cost  Depreciation  Cost 
 
Land  96   —   96 
Buildings  1,004   (294)  710 
Capital leases  79   (61)  18 
Facilities & leasehold improvements  3,158   (2,332)  826 
Machinery and equipment  13,765   (11,632)  2,133 
Computer and R&D equipment  544   (458)  86 
Other tangible assets  252   (146)  106 
Construction in progress  106   —   106 
             
Total
  19,004   (14,923)  4,081 
             
             
  Gross
  Accumulated
  Net
 
December 31, 2008
 Cost  Depreciation  Cost 
 
Land  89   —   89 
Buildings  1,001   (264)  737 
Capital leases  68   (53)  15 
Facilities & leasehold improvements  3,153   (2,115)  1,038 
Machinery and equipment  13,700   (11,037)  2,663 
Computer and R&D equipment  528   (440)  88 
Other tangible assets  187   (127)  60 
Construction in progress  49   —   49 
Total  18,775   (14,036)  4,739 
             
As described in note 7, an amount of $23 million of the purchase price for the business of Ericsson Mobile Platforms (“EMP”) was allocated to property, plant and equipment.
Upon the acquisition of Genesis, the Company recorded in January 2008 property, plant and equipment totaling $14 million. The integration of NXP wireless business in 2008 resulted in the consolidation of long-lived assets totaling $302 million, of which $25 million corresponded to fair valuestep-up on the Company’s 80% interest.
In 2008, as described in Note 19, the Company recorded $77 million impairment charge on long-lived assets of the Company’s manufacturing sites in Carrollton (Texas) and in Phoenix (Arizona), of which $75 million on Phoenix site that had previously been designated for closure as part of the 2007 restructuring plan.
The depreciation charge in 2009, 2008 and 2007 was $1,159 million, $1,225 million and $1,331 million, respectively.
Capital investment funding has totaled $4 million, $4 million and $9 million in the years ended December 31, 2009, 2008 and 2007, respectively. Public Offeringfunding reduced depreciation charges by $22 million, $25 million and $33 million in 2009, 2008 and 2007 respectively.
For the years ended December 31, 2009, 2008 and 2007 the Company made equipment sales for cash proceeds of UPEK Inc. above a predetermined value.$10 million, $8 million and $4 million respectively.


F-34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
11.  EQUITY INVESTMENTS
Equity investments as at December 31, 2009 and 2008 were as follows:
                 
  2009  2008 
  Carrying
  Ownership
  Carrying
  Ownership
 
  value  Percentage  value  Percentage 
  (In millions of USD, except percentages) 
 
Numonyx Holdings B.V  193   48.6%  496   48.6%
ST-Ericsson AT Holding  67   49.9%  —   — 
Other equity investments  13       14     
Total
  273       510     
 
Numonyx
In 2007, the Company entered into an agreement with Intel Corporation and Francisco Partners L.P. to create a new independent semiconductor company from the key assets of the Company’s Flash Memory Group and Intel’s flash memory business (“FMG deconsolidation”). Under the terms of the agreement, the Company would sell its flash memory assets, including its NAND joint venture interest with Hynix STas described below and other NOR resources, to the new company, which was called Numonyx Holdings B.V. (“Numonyx”), while Intel would sell its NOR assets and resources. In connection with this announcement, the Company reported in 2007 an impairment charge of $1,106 million to adjust the value of these assets to fair value less costs to sell.
The Numonyx transaction closed on March 30, 2008. At closing, through a series of steps, the Company contributed its flash memory assets and businesses as previously announced, for 109,254,191 common shares of Numonyx, representing a 48.6% equity ownership stake valued at $966 million, and $156 million in long-term subordinated notes, as described in Note 12. As a consequence of the final terms and balance sheet at the closing date and additional agreements on assets to be contributed, coupled with changes in valuation for comparable Flash memory companies, the Company incurred an additional pre-tax loss of $190 million for the year ended December 31, 2008, which was reported on the line “Impairment, restructuring charges and other related closure costs” of the consolidated statement of income.
Upon creation, Numonyx entered into financing arrangements for a $450 million term loan and a $100 million committed revolving credit facility from two primary financial institutions. The loans have a four-year term. Intel and the Company have each granted in favor of Numonyx a 50% debt guarantee not joint and several. In the event of default, the banks will exercise the Company’s rights, subordinated to the repayment to senior lenders, to recover the amounts paid under the guarantee through the sale of the assets. The debt guarantee was evaluated under the FASB guidance on guarantee liabilities. It resulted in the recognition of a $69 million liability, corresponding to the fair value of the guarantee at inception of the transaction. The same amount was also added to the value of the equity investment. The debt guarantee obligation was reported on the line “Other non-current liabilities” in the consolidated balance sheet as at December 31, 2009 and 2008. As at December 31, 2009, the guarantee was not exercised. As at December 31 2009, Numonyx was current on their debt obligations, not in default of any debt covenants and did not expect to be in default on these obligations in the foreseeable future.
The Company accounts for its share in Numonyx under the equity method based on the actual results of the venture. In the valuation of Numonyx investment under the equity method, the Company applies a one-quarter lag reporting. For the year ended December 31, 2009 the Company reported on the line “Earnings (loss) on equity investments” on the Company’s consolidated statement of income $171 million of equity loss in Numonyx equity investment, that represents the Company’s proportional share of the loss reported by Numonyx in the fourth quarter of 2008 and the three first quarters of 2009, a benefit of $69 million related to the amortization of basis differences arising principally from impairment charges recorded by the Company in prior periods. Furthermore, the Company evaluates on a quarterly basis the fair value of the investment in Numonyx based upon a combination of (i) an income approach, using net equity adjusted for net debt, and (ii) a market approach, using the metrics of comparable public companies, both in relation to actual results and the most updated available forecast. In the first quarter of 2009, the Company recorded an impairment charge of $200 million considered asother-than-temporary, resulting from a re-assessment by the Company of the fair value of its investment in Numonyx following the deterioration of both the global economic situation and the memory market segment, as well as a revision by Numonyx of its 2009 projected results. At December 31, 2009 the Company’s investment in Numonyx, including the amount of the debt guarantee, amounted to $193 million.


F-35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
The Company’s current maximum exposure to loss as a result of its involvement with Numonyx is limited to its equity investment, its investment in subordinated notes and its debt guarantee obligation.
Summarized unaudited financial information for Numonyx, as of September 26, 2009 and for the twelve months then ended that, because of the one-quarter lag discussed above, correspond to the amounts included in the Company’s Consolidated Financial Statements as of December 31, 2009 and for the twelve months then ended, are as follows:
In million of US dollars
Statement of Income Information:
Net sales1,673
Gross profit289
Net income (loss)(352)
Financial Position Information:
Current assets1,322
Noncurrent assets1,220
Current liabilities348
Noncurrent liabilities894
Net worth1,300
ST-Ericsson AT Holding
As disclosed in Note 7, on February 3, 2009, the Company announced the closing of a transaction to combine the businesses of Ericsson Mobile Platforms (“EMP”) and ST-NXP Wireless into a new venture, namedST-Ericsson. As part of the transaction, the Company received an interest in ST-Ericsson AT Holding AG (“JVD”). JVD, in which the Company owns 50% less a controlling share held by Ericsson, is the parent company of a group of entities that perform fundamental R&D activities for the ST-Ericsson venture. The Company has determined that JVD is a variable interest entity, but has determined that the Company is not the primary beneficiary of the entity. Accordingly, the Company accounts for its noncontrolling interest in JVD under the equity method of accounting. The Company’s investment in JVD at the date of the transaction was valued at $99 million. In 2009, the line “Loss on equity investments” in the Company’s consolidated statement of income included a charge of $32 million related to JVD. This amount includes the amortization of basis differences. The Company’s current maximum exposure to loss as a result of its involvement with JVD is limited to its equity investment, which was shown at $67 million on the consolidated balance sheet at December 31, 2009.
Hynix-Numonyx Joint Venture
 
TheIn 2004, the Company signed in 2004, a joint-venturejoint venture agreement with Hynix Semiconductor Inc. to build a front-end memory-manufacturingmemory manufacturing facility in Wuxi City, Jiangsu Province, China. Under the agreement, Hynix Semiconductor Inc. contributed $500 million for a 67% equity interest and the Company contributed $250 million for a 33% equity interest. In addition,Additionally, the Company originally committed to grant $250 million in long-term financing to the new joint venture guaranteed by the subordinated collateral of the joint-venture’sjoint venture’s assets. The Company made the total $250 million capital contributions as previously planned in the joint venture agreement in 2006. The Company accounted for its share in the Hynix ST joint venture under the equity method based on the actual results of the joint venture through the fourth quarter of 2007. As such, the Company recorded earnings totaling $14 million in 2007 and a loss of $6 million and $3 million in 2006 and 2005 respectively, reported as “Earnings (loss) on equity investments” in the consolidated statements of income.
In 2007, Hynix Semiconductor Inc. invested an additional $750 million in additional shares of the joint venture to fund a facility expansion. As a result of this investment, in October, when the Chinese authorities formally approved the additional investment, the Company’s interest in the joint venture declined from approximately 33% to 17%. At December 31, 2007On March 30, 2008, the investment in the joint venture, which amounted to $276$291 million andat the time, was included in assets held for sale on the consolidated balance sheet as it is expected to be transferred to Numonyx upon the formation of that company, as described in note 7. The Company (or Numonyx following the transfer of the Company’s interest in the joint venture to Numonyx) has the option to purchase from Hynix Semiconductor Inc. up to $250 million in shares to increase its interest in the joint venture back to a maximum of 33%.
entity. Due to regulatory and withholding tax issues the Company could not directly provide the joint venture with the $250 million long-term financing as originally planned. As a consequence,result, in the fourth quarter of 2006, the Company entered into a ten-year term debt guarantee agreement with an external financial institution through which the Company guaranteed the repayment of the loan by the joint venture to the bank. The guarantee agreement includes the Company placing up to $250 million in cash on a deposit account. The guarantee deposit will be used by the bank in case of repayment failure from the joint venture, with $250 million as the maximum potential amount of future payments the Company, as the guarantor, could be required to make. In the event of default and failure to repay the loan from the joint venture, the bank will exercise the Company’s rights, subordinated to the repayment to senior lenders, to recover the amounts paid under the guarantee through the sale of the joint-venture’sjoint venture’s assets. In 2006, the Company placed $218 million of cash on the guarantee deposit account. In 2007, the Company placed the remaining $32 million of cash, which totaledThe $250 million, as at December 31,which has been on deposit since 2007, and washas been reported as “Restricted cash for equity investments”cash” on the consolidated balance sheet.
sheet as at December 2009 and 2008. The debt guarantee was evaluated under FIN 45. It resulted in the recognition of a $17 million liability, corresponding to the fair value of the guarantee at inception of the transaction. The liability wasdebt guarantee obligation continues to be reported on the line “Other non-current liabilities” in the consolidated balance sheet as at December 31, 2007 and was recorded against the value of the equity investment, which totaled $293 million. The Company reported the debt guarantee on the line “Other investments and other non-current assets”2009, since the terms of the FMG sale agreement dodeconsolidation did not include the transfer of the debt guarantee. As at


F-36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
 
The Company identifiedDecember 31, 2009, the joint ventureguarantee was not exercised. To the best of management’s knowledge as a Variable Interest Entity (VIE) at December 31, 2006, principally because2009, the joint venture was current on their debt obligations, not in default of any debts covenants and did not expect to be in default on these obligations in the development stage, but it determined that the Company was not the primary beneficiary of the VIE. Because of events that occurred in 2007 including the facility expansion and additional investment, it was determined that the joint venture was no longer in the development stage and accordingly that the joint venture no longer met the criteria for qualification as a VIE.foreseeable future. The Company’s current maximum exposure to loss as a result of its involvement with the joint venture is limited to its equityindirect investment through Numonyx and the debt guarantee obligation.
12.  OTHER INVESTMENTS AND OTHER NON-CURRENT ASSETS
Other investments and debt guarantee commitments.


F-27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
5 — TRADE ACCOUNTS RECEIVABLE, NET
Trade accounts receivable, netother non-current assets consisted of the following:
 
         
  December 31,
  December 31,
 
  2007  2006 
 
Trade accounts receivable  1,626   1,620 
Less valuation allowance  (21)  (31)
         
Total
  1,605   1,589 
         
         
  December 31,
  December 31,
 
  2009  2008 
 
Investments carried at cost  29   32 
Available-for-sale equity securities
  10   5 
Long-term notes from equity investment  173   168 
Held-for-trading equity securities
  7   7 
Long-term receivables related to funding  8   8 
Long-term receivables related to tax refund  170   206 
Debt issuance costs, net  4   7 
Prepaid for pension  2   1 
Deposits and other non-current assets  39   43 
         
Total
  442   477 
         
 
Bad debt expense in 2007, 2006 and 2005 was $1 million, $7 million and $7 million respectively.Investments carried at cost are equity securities with no readily determinable fair value. In 2007, 2006 and 2005, one customer, the Nokia group of companies, represented 21.1%, 21.8% and 22.4% of consolidated net revenues, respectively.
6 — INVENTORIES, NET
Inventories, net of reserve consisted of the following:
         
  December 31,
  December 31,
 
  2007  2006 
 
Raw materials  72   80 
Work-in-process  808   1,032 
Finished products  474   527 
         
Total
  1,354   1,639 
         
As at December 31, 2007 inventories amounting to $329 million were reported as a component of the line “Assets held for sale” on the consolidated balance sheet as part of the assets to be transferred to Numonyx, the newly created flash memory company upon FMG deconsolidation.
7 — ASSETS HELD FOR SALE
On May 22, 2007,2009, the Company announced that it had entered into a definitive agreement with Intel Corporation and Francisco Partners L.P to create a new independent semiconductor company from the key assets of the Company’s Flash Memory Group and Intel’s flash memory business (“FMG deconsolidation”). Under the terms of the agreement, the Company will sell its flash memory assets, including its NAND joint venture interest and other NOR resources, to the new company, which will be called Numonyx, while Intel will sell its NOR assets and resources. In exchange, the Company was expected to receive, at closing, a combination of cash and a 48.6% equity ownership stake in the new company; Intel was expected to receive cash and a 45.1% equity ownership stake; and Francisco Partners L.P was to invest $150 million in cash to purchase participating convertible preferred stock with certain liquidation preferences and convertible into a 6.3% ownership interest, subject to adjustments in certain circumstances.
As a result of the signing of the definitive agreement for the FMG deconsolidation and upon meeting FAS 144 criteria for assets held for sale, the Company reclassified the assets to be transferred to Numonyx from their original balance sheet classification to the line “Assets held for sale” in the second quarter of 2007. Coincident with this classification, the Company recorded anincurredother-than-temporary impairment charge on one of $857its investments for $3 million to adjust the value of these assets to fair value less costs to sell at June 30, 2007, reporting the lossthat was recorded on the line “Impairment, restructuring charges and other related closure costs” ofin the consolidated statements of income for the period. Fair value less costs to sell wasyear ended December 31, 2009. The impairment is based on the net consideration provided for in the agreement and significant estimates.
Although the transaction was originally expected to close in the second halfa review of 2007, the closing was delayed due, among other things, to the significant turmoil in the debt capital markets which in turn resulted in certain revisions to the terms of the transaction. Based on the revised structure, Numonyx is expected to have at closing a similar level of cash but a lower level of indebtedness compared to what had originally been anticipated. The term debt and revolving credit agreement of Numonyx, totalling $525 million, will be guaranteed by the Company and Intel. Both the Company and Intel now expect to receive the same equity stakes as originally agreed, however the balance of their consideration will be lower in total value than the cash payment that had previously been expected and it will be paid in a combination of cash and long-term, interest-bearing subordinated notes and cash. As had been anticipated earlier, Francisco Partners will invest $150 million in exchange for its convertible preferred


F-28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
interest. The three parties currently anticipate that the transaction will close during the first quarter of 2008. As a consequence of the changes to the terms of the transaction, in combination with changes to the levels of assets used by the business and exchange rates, as well as a general decline in market valuations for comparable companies during the second half of 2007 that impacted the valuation of the equity stake to be received, the estimated value of the total consideration to be received byentity upon liquidation. In 2008, the Company in the transaction was reduced in the fourth quarter of 2007, resulting in an additionalincurredother-than-temporary impairment charge during the period of $249 million.
The final impairment charge could be materially different subject to further adjustments due to business and market evolution prior to the closing of the transaction.
Assets held for sale consisted of the following:
         
  December 31,
  December 31,
 
  2007  2006 
 
Inventories, net  329   — 
Other intangible assets, net  12   — 
Property, plant and equipment, net  394     
Long term deferred tax assets  6   — 
Equity investment  276          
         
Total
  1,017   — 
         
As required under FAS 144held-for-sale model, the Company ceased to record amortization and depreciationcharges on intangible and tangible assets classified as assets held for sale.
8 — OTHER RECEIVABLES AND ASSETS
Other receivables and assets consisted of the following:
         
  December 31,
  December 31,
 
  2007  2006 
 
Receivables from government agencies  143   122 
Taxes and other government receivables  258   194 
Advances to suppliers  5   5 
Advances to employees  9   13 
Advances to State and government agencies  9   12 
Insurance prepayments  5   4 
Rental prepayments  3   3 
License and technology agreement prepayments  17   7 
Other prepaid expenses  17   23 
Loans and deposits  15   15 
Accrued income  11   9 
Interest receivable  28   27 
Long-lived assets held for sale  8   4 
Foreign exchange forward contracts  1   14 
Sundry debtors within cooperation agreements  30   31 
Receivables for payments on behalf of Numonyx  26     
Purchased currency options  12   1 
Other current assets  15   14 
         
Total
  612   498 
         
Long-lived assets held for sale (other than those related to the FMG deconsolidation) are property, machinery and equipment that satisfied as at December 31, 2007 and 2006 all of the criteria required forheld-for-sale status, as set forth in Statement of Financial Accounting Standards No. 144,Accounting for the impairment or disposal of long-term assets(“FAS 144”). As at December 31, 2007, the Company identified certain machinery and equipment to be disposed of by sale, amounting to $8 million, which was primarily located in Morocco and Singapore,


F-29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
following the decision of the Company to get disengaged from certain activities as parttwo of its latest restructuring initiatives. These assets are reflected at their carrying value,investments, which did not exceed their selling price less selling costs. These long-lived assets are not depreciated until disposal by sale which is expected to occur within one year. As at December 31, 2006, assets held for sale amounted to $4totaled $6 million and were located in the Company’s back-end sites in Morocco and Malaysia.
Amounts shown in the table above on the line “Receivables for payments on behalf of Numonyx” represent costs to create the infrastructure necessary to prepare Numonyx to operate immediately following the FMG deconsolidation, for which the Company has paid and will be reimbursed by Numonyx following the closing of the transaction.
9 — GOODWILL
Changes in the carrying amount of goodwill were as follows:
                 
  Application
          
  Specific
  Memory
       
  Products  Products  Other  Total 
 
December 31, 2005  134   85   2   221 
Tioga goodwill impairment  (6)  —   —   (6)
Foreign currency translation  —   8   —   8 
                 
December 31, 2006  128   93   2   223 
                 
Business Combination  58   —   —   58 
Foreign currency translation  —   9   —   9 
                 
December 31, 2007
  186   102   2   290 
                 
As discussed in Note 3, on November 1, 2007 the Company acquired a portion of the integrated circuit operations of one of the significant wireless customers of its Application Specific Products Group product segment. $58 million of the purchase price for this transaction was allocated to goodwill.
During the third quarter of 2007, the Company performed the annual review of impairment of goodwill and based on this test no impairment charges were required to be recorded.
In 2006, the Company decided to cease product development from technologies inherited from Tioga business acquisition. The Company reports Tioga business as part of the Application Specific Product Groups (“ASG”) product segment. Following this decision, the Company incurred in 2006 a $6 million impairment charge corresponding to the write-off of Tioga goodwill. This impairment charge was reportedrecorded on the line “Impairment, restructuring charges and other related closure costs” ofin the consolidated statements of income for the year ended December 31, 2006.
10 — OTHER INTANGIBLE ASSETS
Other intangible assets consisted of2008. For one investment, the following:
             
  Gross
  Accumulated
  Net
 
December 31, 2007
 Cost  Amortization  Cost 
 
Technologies & licences  431   (303)  128 
Purchased software  230   (179)  51 
Internally developed software  128   (69)  59 
             
Total
  789   (551)  238 
             
             
  Gross
  Accumulated
  Net
 
December 31, 2006
 Cost  Amortization  Cost 
 
Technologies & licences  353   (258)  95 
Purchased software  193   (149)  44 
Internally developed software  134   (62)  72 
             
Total  680   (469)  211 
             


F-30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
As at December 31, 2007 other intangible assets amounting to $12 million were reported as a component of the line “Assets held for sale” on the consolidated balance sheet as part of the assets to be transferred to Numonyx, the newly created flash memory company upon FMG deconsolidation.
As at December 31, 2007, the Company recorded a $2 million impairment charge on certain technologies without any alternative future usewas based on the Company’s products’ roadmap.
Pursuant to its decision to cease product development from technologies inherited from Tioga business acquisition,valuation for the Company recorded in 2006underlying investment of a $4 million impairment charge on technologies purchased as partnew round of Tioga business acquisition, which were determined to be without any alternative use and for whichthird party financing. For the other one, the valuation at fair value was determined by estimating the discounted expected cash flows associated with their future use. This impairment charge was reported on the line “Impairment, restructuring charges and other related closure costs” of the consolidated statements of income for the year ended December 31, 2006.
The aggregate amortization expense in 2007, 2006 and 2005 was $82 million, $93 million and $98 million, respectively.
The estimated amortization expense of the existing intangible assets for the following years is:
     
Year
   
 
2008  90 
2009  66 
2010  39 
2011  25 
2012  14 
Thereafter  4 
     
Total
  238 
     
11 — PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
             
  Gross
  Accumulated
  Net
 
December 31, 2007
 Cost  Depreciation  Cost 
 
Land  91   —   91 
Buildings  1,036   (344)  692 
Capital leases  71   (49)  22 
Facilities & leasehold improvements  3,205   (1,975)  1,230 
Machinery and equipment  13,938   (11,183)  2,755 
Computer and R&D equipment  554   (458)  96 
Other tangible assets  185   (128)  57 
Construction in progress  101   —   101 
             
Total
  19,181   (14,137)  5,044 
             


F-31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
             
  Gross
  Accumulated
  Net
 
December 31, 2006
 Cost  Depreciation  Cost 
 
Land  91   —   91 
Buildings  1,208   (319)  889 
Capital leases  61   (39)  22 
Facilities & leasehold improvements  3,135   (1,668)  1,467 
Machinery and equipment  14,463   (10,940)  3,523 
Computer and R&D equipment  551   (441)  110 
Other tangible assets  156   (118)  38 
Construction in progress  286   —   286 
             
Total  19,951   (13,525)  6,426 
             
As at December 31, 2007 property, plant and equipment amounting to $394 million were reported as a component of the line “Assets held for sale” on the consolidated balance sheet as part of the assets to be transferred to Numonyx, the newly created flash memory company upon FMG deconsolidation.
The depreciation charge in 2007, 2006 and 2005 was $1,331 million, $1,673 million and $1,846 million, respectively.
Capital investment funding has totaled $9 million, $15 million and $38 million in the years ended December 31 2007, 2006 and 2005, respectively. Public funding reduced the depreciation charge by $33 million, $54 million and $66 million in 2007, 2006 and 2005 respectively.
For the years ended December 31, 2007, 2006 and 2005 the Company made equipment sales for cash proceeds of $4 million, $22 million and $82 million respectively.
12 —AVAILABLE-FOR-SALE FINANCIAL ASSETS
As at December 31, 2007, the Company had financial assets classified asavailable-for-sale corresponding to equity and debt securities.
The amount invested in equity securities was $5 million at December 31, 2007 and 2006. These investments correspond to financial assets held as part of a long-term incentive plan in one of the Company’s subsidiaries. They are reported on the line “Other investments and other non-current assets” on the consolidated balance sheet as at December 31, 2007 and 2006. The Company did not record any significant change in fair value on these equity securities classified asavailable-for-sale in the years ended December 31, 2007 and 2006.
As at December 31, 2007, the Company had investments in debt securities amounting to $1,383 million, composed of $1,014 million invested in senior debt floating rate notes issued by primary financial institutions rated at least A1 from “Moody’s Investment services” and $369 million invested in auction rate securities which are regularly paying monthly interests and whose rating at December 31, 2007 was AAA from at least one major rating agency. The floating rate notes are reported as current assets on the line “Marketable securities” on the consolidated balance sheet as at December 31, 2007 since they represent investments of funds available for current operations. The auction-rate securities, which have a final maturity between ten and forty years, are classified as non-current assets on the line “Non-current marketable securities” on the consolidated balance sheet as at December 31, 2007 since the Company intends to hold these investments beyond one year.
In 2007, the Company invested $536 million of existing cash in floating rate notes with primary financial institutions with minimum Moody’s rating “A1” with a maturity between twenty one months and six years, of which $40 million were sold in 2007. In 2006, the Company invested $460 million of existing cash in eleven floating rate notes with primary financial institutions with minimum Moody’s rating “A1”. Subsequently, the Company entered into a basis asset swap for one floating rate note for a notional amount of $50 million in order to purchase it at par. Even if strictly related to the underlying note, the swap is contractually transferable independently from the marketable security to which it is attached. As such, the asset swap was recorded separately from the underlying financial asset and was reflected at its fair value in the consolidated balance sheet on the line “Other receivables and assets” as at December 31, 2007 and 2006. The changes in the fair value of this derivative instrument were recorded in the consolidated statements of income as part of “Other income and expenses, net” and did not exceed $1 million for the years ended December 31, 2007 and 2006. Additionally, the amount of auction-rate securities purchased and

F-32

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
sold in 2007 is $172 million and $61 million respectively. In addition, the Company determined that these financial assets were to be more properly classified on its consolidated balance sheet as of December 31, 2006 as “Marketable securities” instead of “Cash and cash equivalents”, as reported previously. The revision of the December 31, 2006 consolidated balance sheet results in a decrease of “Cash and cash equivalents” by $304 million with an offsetting increase to “Marketable securities”. This reclassification also affects the consolidated statement of cash flows for the year ended December 31, 2006 based on the increase in the investing activities line “Payment for purchase of marketable securities” by $404 million and the increasevaluation of the line “Proceeds from sale of marketable securities” by $100 million corresponding to the amount the Company sold in 2006. There are no other changes on the consolidated financial statements for previous years, since the Company started to purchase auction-rate securities only in 2006.
All these debt securities are classified asavailable-for-sale and recorded at fair value as at December 31, 2007 and 2006, with changes in fair value, including temporary declines, recognized as a separate component of “Accumulated other comprehensive income” in the consolidated statement of changes in shareholders’ equity. As of December 31, 2007 the Company reported a pre-tax decline in fair value on the floating rate notes totaling $3 million due to the widening of credit spreads. Out of the 25 investment positions in floating-rate notes, 11 positions are in an unrealized loss position.entity upon liquidation. The Company estimated the fair value of these financial assets based on public quoted market prices. This change in fair value was recognized as a separate component of “Accumulated other comprehensive income” in the consolidated statement of changes in shareholders’ equity since the Company assessed that this decline in fair value was temporary and that the Company was in a position to recover the totalaggregate carrying amount of thesecost method investments on subsequent periods. Sincethat the duration of the floating-rate note portfolio in only 2.6 years on average and the securities have a minimum Moody’s rating “A1”, the Company expects the value of the securities to tend at par as the final maturity is approaching. On the auction-rate securities, the Company reported another-than-temporary decline in fair value amounting to $46 million, which was immediately recorded in the consolidated statements of income on the line“Other-than-temporary impairment charge on financial assets”. These securities were evaluated based on the weighted average of available information (i) from publicly available indexes of securities with same rating and comparable/similar underlying collaterals or industries exposure (such as ABX, ITraxx and IBoxx) and (ii) using ’mark to market’ bids and ’mark to model’ valuations received from the structuring financial institutions of the outstanding auction rate securities, weighting the different information at 80% and 20% respectively, which the Company believes approximates the orderly exit value in the current market. The estimated value of these securities could further decrease in the future as a result of credit market deteriorationand/or other downgrading.
13 — SHORT-TERM DEPOSITS
In 2006, the Company invested $903 million of existing cash in short-term deposits with a maturity between three months and one year. These deposits were held at various banks with “A3/A-” minimum long-term rating from at least two major rating agencies. Interest on these deposits is paid at maturity with interest rates fixed at inception for the duration of the deposits. The principal will be repaid at final maturity. In 2006, the Companyinvestor did not roll over $653evaluate for impairment in 2009 and 2008 because there was no triggering event is $29 million of these short-term deposits, primarily pursuant to the early redemption in cash of 2013 convertible bonds at the option of the holders which occurred on August 7, 2006.
In 2007, the Company did not roll over the remaining $250and $32 million, of short term deposits. Consequently, no amount of existing cash was held in short term deposits as at December 31, 2007.


F-33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
14 — OTHER INVESTMENTS AND OTHER NON-CURRENT ASSETS
Investments and other non-current assets consisted of the following:
         
  December 31,
  December 31,
 
  2007  2006 
 
Investments carried at cost  34   34 
Available-for-sale equity securities
  5   5 
Long-term receivables related to funding  46   36 
Long-term receivables related to tax refund  34   33 
Debt issuance costs, net  11   12 
Cancellable swaps designated as fair value hedge  8   4 
Deposits and other non-current assets  44   25 
         
Total
  182   149 
         
respectively.
 
The Company entered into a joint venture agreement in 2002 with Dai Nippon Printing Co, Ltd for the development and production of Photomask in which the Company holds a 19% equity interest. The joint venture, DNP Photomask Europe S.p.A, was initially capitalized with the Company’s contribution of €2 million of cash. Dai Nippon Printing Co, Ltd contributed €8 million of cash for an 81% equity interest. In the event of the liquidation of the joint-venture, the Company is required to repurchase the land at cost, and the facility at 10% of its net book value, if no suitable buyer is identified. No provision for this obligation has been recorded to date. At December 31, 2007,2009, the Company’s total contribution to the joint venture is $10 million. The Company continues to maintain its 19% ownership of the joint venture, and therefore continues to account for this investment under the cost method. The Company has identified the joint venture as a Variable Interest Entity (VIE), but has determined that it is not the primary beneficiary of the VIE. The Company’s current maximum exposure to loss as a result of its involvement with the joint venture is limited to its equity investment.
 
Long-term receivables related to funding are mainly public grants to be received from governmental agencies in Italy and France as part of long-term research and development, industrialization and capital investment projects.
 
Long-term receivables related to tax refund correspond to tax benefits claimed by the Company in certain of its local tax jurisdictions, for which collection is expected beyond one year.
 
In 2006,The Company received upon the Company entered into cancellable swapscreation of Numonyx long-term subordinated notes amounting to $156 million at inception, bearing interest at market rates and with a combined notional value of $200 million to hedge the fair value of a portion of the convertible bonds due 2016 carrying a fixed interest rate. The cancellable swaps convert the fixed rate interest expense recorded on the convertible bonds due 2016 to a variable interest rate based upon adjusted LIBOR. The cancellable swaps meet the criteria for designation as a fair value hedge, as further detailed in Note 27 and are reflected at their fair value in the consolidated balance sheetmaturity as at December 31, 2007,March 30, 2038. These long-term notes yield 9.5% interest, generally payable in kind for seven years and in cash thereafter. In liquidation events in which was positive for approximately $8 million.
Depositsproceeds are insufficient to pay off the term loan, revolving credit facilities and other long-term receivables include, in addition to Hynix ST joint venture debt guarantee as detailed in note 4, individually insignificant amounts as of December 31, 2007 and December 31, 2006.the Francisco Partners’ preferential


F-34F-37

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in millions of U.S. dollars, except share and per share amounts)
 
payout rights, the subordinated notes will be deemed to have been retired. These notes are also classified as15 — OTHER PAYABLES AND ACCRUED LIABILITIESavailable-for-sale financial assets. The nominal value of the notes was accreted since inception by $27 million ofpaid-in-kind interests receivable, of which $16 million was recognized in 2009. Changes in fair value were recognized as a separate component of “Accumulated other comprehensive income (loss)” in the consolidated statements of changes in equity and corresponded to a pre-tax cumulative $11 million deferred loss as of December 31, 2009. This decline in fair value was assessed to be temporary as the Company expects to recover the debt securities’ entire amortized cost basis, and, in compliance with the accounting guidance onother-than-temporary impairment charges on debt securities, it does not intend to sell the securities or is not more likely than not to be required to sell them before recovery. Consequently, no cumulative effect adjustment was recorded upon adoption of the new accounting guidance. Fair value measurement, which corresponds to a level 3 fair value measurement hierarchy, is based on publicly available swap rates for fixed income obligations with similar maturities. Fair value measurement information is further detailed in Note 25.
13.  OTHER PAYABLES AND ACCRUED LIABILITIES
 
Other payables and accrued liabilities consisted of the following:
 
         
  December 31,
  December 31,
 
  2007  2006 
 
Taxes other than income taxes  91   78 
Salaries and wages  300   308 
Social charges  143   124 
Advances received on government funding  28   28 
Advances from customers  10   10 
Foreign exchange forward contracts  1   1 
Current portion of provision for restructuring  43   28 
Pension and termination benefits  23   10 
Warranty and product guarantee provisions  4   6 
Accrued interest  6   4 
Royalties  20   8 
Other  75   59 
         
Total
  744   664 
         
         
  December 31,
 December 31,
  2009 2008
 
Payroll  325   319 
Social charges  149   146 
Taxes other than income taxes  80   91 
Advances  47   51 
Payables to equity investments  30   7 
Obligations for capacity rights  21   29 
Financial instruments  34   5 
Provision for restructuring  180   197 
Pension and long-term benefits  30   21 
Royalties  35   14 
Acquisition-related expenses  0   17 
Others  118   99 
Total
  1,049   996 
The terms of the agreement for the inception of Numonyx included rights granted to Numonyx to use certain assets retained by the Company. As at December 31, 2009 and 2008 the value of such rights totaled $65 million and $87 million respectively, of which $18 million and $24 million respectively were reported as a current liability. The remaining obligations for capacity rights is due to the terms of the agreement for the integration of NXP wireless business that included rights for NXP to obtain products from the Company at preferential pricing.
 
Other payables and accrued liabilities also include individually insignificant amounts as of December 31, 20072009 and December 31, 2006.
16 — POST-RETIREMENT AND OTHER LONG-TERM EMPLOYEES BENEFITS
The Company and its subsidiaries have a number of both funded and unfunded defined benefit pension plans and other long-term employees’ benefits covering employees in various countries. The defined benefits plans provide for pension benefits, the amounts of which are calculated based on factors such as years of service and employee compensation levels. The other long-term employees’ plans provide for benefits due during the employees’ period of service after certain seniority levels. Consequently, the Company reported for 2007, 2006 and 2005 those plans under a separate tabular presentation. The Company uses a December 31 measurement date for the majority of its plans. Eligibility is generally determined in accordance with local statutory requirements. In 2007, the Company recorded a one-time charge of $21 million, which is included on the line “Plan amendment” in the table below, for adjustments to the expenses of a seniority program in prior periods. These prior period adjustments individually and in the aggregate are not material to the financial results for previously issued annual consolidated financial statements or for the consolidated statements for the year ended December 31, 2007.
For Italian termination indemnity plan (“TFR”), the Company continues to measure the vested benefits to which Italian employees are entitled as if they retired immediately as of December 31, 2007, in compliance with the Emerging Issues Task Force IssueNo. 88-1, Determination of Vested Benefit Obligation for a Defined Benefit Pension Plan(“EITF 88-1”). The TFR was reported according to FAS 132(R), as any other defined benefit plan until the new Italian regulation concerning employee retirement schemes enacted on July 1, 2007. Since that date, the future TFR has been accounted for as a defined contribution plan the accruals being maintained as a Defined Benefit plan in the company books.
As at December 31, 2007 the Company reports all its defined benefit pension plan information according to FAS 132(R), and all its other long-term employees’ benefits information according to APB 12.
The changes in benefit obligation and plan assets were as follows:
                 
  Pension Benefits  Other Long-Term Benefits 
  December 31,
  December 31,
  December 31,
  December 31,
 
  2007  2006  2007  2006 
 
Change in benefit obligation:
                
Benefit obligation at beginning of year  572   503   3   2 
Service cost  19   38   3   1 
Interest cost  28   25   2   — 


F-35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
                 
  Pension Benefits  Other Long-Term Benefits 
  December 31,
  December 31,
  December 31,
  December 31,
 
  2007  2006  2007  2006 
 
Employee contributions  3   3   —   — 
Benefits paid  (26)  (41)  (1)  — 
Effect of settlement  (1)  (6)  —   — 
Effect of curtailment  (7)      —   — 
Actuarial gain  (41)  (14)  (4)  — 
Foreign currency translation adjustment  38   48   8   — 
Plan amendment  2   16   31   — 
Other  3   —   —     
                 
Benefit obligation at end of year
  590   572   42   3 
                 
Change in plan assets:
                
Plan assets at fair value at beginning of year  241   194   —   — 
Expected return on plan assets  15   13   —   — 
Employer contributions  16   28   —   — 
Employee contributions  2   3   —   — 
Benefits paid  (9)  (11)  —   — 
Settlement  (1)  (6)  —   — 
Actuarial gain  7   2   —   — 
Foreign currency translation adjustments  7   16   —   — 
Other      2   —   — 
                 
Plan assets at fair value at end of year
  278   241   —   — 
                 
           —   — 
Funded status
  (312)  (331)  (42)  (3)
                 
Net amount recognized in the balance sheet consisted of the following:
                
Non current assets  4   3   —   — 
Current liabilities  (6)  —   (13)  (3)
Non Current liabilities  (310)  (334)  (29)  — 
Prepaid benefit cost  —   —   —   — 
Accrued benefit liability  —   —   —   — 
Intangible asset  —   —   —   — 
Accumulated other comprehensive income  —   —   —   — 
                 
Net amount recognized
  (312)  (331)  (42)  (3)
                 
Changes in Other Comprehensive Income were as follows:
                 
  Before tax
     Foreign
  Net of tax
 
  amount as at
     currency
  amount as at
 
  December 31,
  Tax (expense or
  translation
  December 31,
 
  2007  benefit)  adjustment  2007 
 
Net actuarial gain generated in current year  48   (9)  (2)  37 
Amortization of actuarial gain  (3)  —   —   (3)
Effect of curtailment, net  6   —   —   6 
Net prior service cost arising during period  (2)  —   —   (2)
Amortization of prior service cost  2   —   —   2 
                 
Changes in Other comprehensive income
  51   (9)  (2)  40 
                 

F-36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
The components of the net periodic benefit cost included the following:
                         
  Pension Benefits  Other Long-term Benefits 
  Year Ended
  Year Ended
  Year Ended
  Year Ended
  Year Ended
  Year Ended
 
  December 31,
  December 31,
  December 31,
  December 31,
  December 31,
  December 31,
 
  2007  2006  2005  2007  2006  2005 
 
Service cost  19   38   41   3   1   1 
Interest cost  28   25   24   2   —   — 
Expected return on plan assets  (15)  (13)  (11)      —   — 
Amortization of unrecognized transition obligation  —   —   —       —   — 
Amortization of actuarial net loss (gain)  (3)  4   3   (4)  —   — 
Amortization of prior service cost  2   (4)  —   31   —   — 
Effect of settlement  —   6   —       —   — 
Effect of curtailment  (1)              —   — 
                         
Net periodic benefit cost
  30   56   57   32   1   1 
                         
The weighted average assumptions used in the determination of the benefit obligation for the pension plans were as follows:
             
  December 31,
  December 31,
  December 31,
 
Assumptions
 2007  2006  2005 
 
Discount rate  5.43%  4.86%  4.54%
Salary increase rate  3.24%  2.95%  3.75%
Expected long-term rate of return on funds for the pension expense of the year  6.34%  6.05%  6.34%
The discount rate was determined by comparison against long-term corporate bond rates applicable to the respective country of each plan. In developing the expected long-term rate of return on assets, the Company modelled the expected long-term rates of return for broad categories of investments held by the plan against a number of various potential economic scenarios.
The Company pension plan asset allocation at December 31, 2007 and 2006 and target allocation for 2007 are as follows:
             
     Percentage of Plan Assets at
 
  Target allocation
  December 
Asset Category
 2007  2007  2006 
 
Equity securities  51%  54%  55%
Fixed income securities  30%  27%  33%
Real estate  9%  9%  4%
Other  10%  10%  8%
             
Total  100%  100%  100%
             
The Company’s investment strategy for its pension plans is to maximize the long-term rate of return on plan assets with an acceptable level of risk in order to minimize the cost of providing pension benefits while maintaining adequate funding levels. The Company’s practice is to periodically conduct a review in each subsidiary of its asset allocation strategy. A portion of the fixed income allocation is reserved in short-term cash to provide for expected benefits to be paid. The Company’s equity portfolios are managed in such a way as to achieve optimal diversity. The Company does not manage any assets internally.


F-37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
After considering the funded status of the Company’s defined benefit plans, movements in the discount rate, investment performance and related tax consequences, the Company may choose to make contributions to its pension plans in any given year in excess of required amounts. The Company contributions to plan assets were $16 million and $28 million in 2007 and 2006 respectively and the Company expects to contribute cash of $34 million in 2008.
The Company’s estimated future benefit payments as of December 2007 are as follows:
         
Years
 Pension Benefits  Other Long-term Benefits 
 
2008  32   1 
2009  9   2 
2010  11   2 
2011  12   2 
2012  17   2 
         
From 2013 to 2017  111   18 
         
The Company has certain defined contribution plans, which accrue benefits for employees on a pro-rata basis during their employment period based on their individual salaries. The Company accrued benefits related to defined contribution pension plans of $7 million and $16 million, as of December 31, 2007 and 2006 respectively. The annual cost of these plans amounted to approximately $69 million, $28 million and $42 million in 2007, 2006 and 2005, respectively. The benefits accrued to the employees on a pro-rata basis, during their employment period are based on the individuals’ salaries.
17 — LONG-TERM DEBT
Long-term debt consisted of the following:
         
  December 31,
  December 31,
 
  2007  2006 
 
Bank loans:
        
2.54% (weighted average), due 2007, fixed interest rate  —   65 
5.68% (weighted average rate), due 2007, variable interest rate  —   30 
5.21% due 2008, floating interest rate at Libor + 0.40%  43   49 
5.51% due 2009, floating interest rate at Libor + 0.40%  50   35 
Funding program loans:
        
1.44% (weighted average), due 2009, fixed interest rate  13   18 
0.88% (weighted average), due 2010, fixed interest rate  38   45 
2.74% (weighted average), due 2012, fixed interest rate  12   12 
0.49% (weighted average), due 2014, fixed interest rate  9   8 
3.33% (weighted average), due 2017, fixed interest rate  80   53 
4.98% due 2014, floating interest rate at Libor + 0.017%  205   140 
Capital leases:
        
4,97% (weighted average), due 2011, fixed interest rate  22   23 
Senior Bonds:
        
5.35%, due 2013, floating interest rate at Euribor + 0.40%  736   659 
Convertible debt:
        
(0.50)% convertible bonds due 2013  2   2 
1.5% convertible bonds due 2016  1,010   991 
Total long-term debt
  2,220   2,130 
Less current portion  (103)  (136)
         
Total long-term debt, less current portion
  2,117   1,994 
         


F-38

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in millions of U.S. dollars, except share and per share amounts)
14.  LONG-TERM DEBT
Long-term debt consisted of the following:
         
  December 31,
  December 31,
 
  2009  2008 
 
Bank loans:
        
2.10% due 2009, floating interest rate at Libor + 0.40%  —   50 
1.79% due 2010, floating interest rate at Libor + 1.0%  40   50 
Funding program loans:
        
2.00% (weighted average), due 2009, fixed interest rate  —   4 
0.90% (weighted average), due 2010, fixed interest rate  12   24 
3.27% (weighted average), due 2012, fixed interest rate  6   10 
0.50% (weighted average), due 2013, fixed interest rate  3   2 
0.50% (weighted average), due 2014, fixed interest rate  8   10 
0.50% (weighted average), due 2016, fixed interest rate  2   — 
3.24% (weighted average), due 2017, fixed interest rate  67   72 
0.27% due 2014, floating interest rate at Libor + 0.017%  100   120 
0.31% due 2015, floating interest rate at Libor + 0.026%  56   65 
0.33% due 2016, floating interest rate at Libor + 0.052%  136   136 
0.57% due 2016, floating interest rate at Libor + 0.317%  180   180 
0.49% due 2016, floating interest rate at Libor + 0.213%  200   200 
Capital leases:
        
5.39% (weighted average), due 2011, fixed interest rate  8   13 
6.00% (weighted average), due 2014, fixed interest rate  9   — 
5.29% (weighted average), due 2017, fixed interest rate  2   2 
Senior Bonds:
        
1.12%, due 2013, floating interest rate at Euribor + 0.40%  720   703 
Convertible debt:
        
-0.50% convertible bonds due 2013  —   — 
1.50% convertible bonds due 2016  943   1,036 
         
Total long-term debt
  2,492   2,677 
Less current portion  (176)  (123)
         
Total long-term debt, less current portion
  2,316   2,554 
         
 
Long-term debt is denominated in the following currencies:
 
                
 December 31,
 December 31,
  December 31,
 December 31,
 2007 2006  2009 2008
U.S. dollar  1,313   1,242   1,666   1,840 
Euro  907   818   826   837 
Singapore dollar  —   65 
Other  —   5   —   — 
     
Total
  2,220   2,130   2,492   2,677 
     
The European Investment Bank’s loans denominated in EUR, but drawn in USD, are classified as USD denominated debt. The 2008 figures have been updated accordingly.


F-39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
 
Aggregate future maturities of total long-term debt outstanding (including current portion) are as follows:
 
        
 December 31,
  December 31,
 
 2007  2009 
2008  103 
2009  114 
2010  60   176 
2011  1,053   1,063 
2012  41   119 
2013  836 
2014  114 
Thereafter  849   184 
      
Total
  2,220   2,492 
      
 
In August 2003, the Company issued $1,332 million principal amount at issuance of zero coupon unsubordinated convertible bonds due 2013. The bonds were issued2013 with a negative yield of 0.5% that resulted in a higher principal amount at issuance of $1,400 million and net proceeds of $1,386 million. The negative yield through the first redemption right of the holder totalled $21 million and was recorded in capital surplus. The bonds are convertible at any time by the holders at the rate of 29.9144 shares of the Company’s common stock for each one thousand dollar face value of the bonds. The holders may redeem their convertible bonds on August 5, 2006 at a price of $985.09, on August 5, 2008 at $975.28 and on August 5, 2010 at $965.56 per one thousand dollar face value of the bonds. As a result of this holder’s option, the redemption occurred in August 2006.. Pursuant to the terms of the convertible bonds due 2013, the Company was required to purchase, atrepurchased the optionlargest part of the holders, 1,397,493 convertible bonds at a price of $985.09 each betweenin August 7 and August 9, 2006. This resulted in a cash payment of $1,377 million. The outstanding long-term debt corresponding to the 2013 convertible debt amounted to approximately $2 millionwas not material as at December 31, 2007,2009 corresponding to the remaining 2,505188 bonds valued at August 5, 20082010 redemption price. At any time from August 20, 2006 the Company may redeem for cash at their negative accreted value all or a portion of the remaining convertible bonds subject to the level of the Company’s share price.
 
In February 2006, the Company issued $1,131 million principal amount at maturity of zero coupon senior convertible bonds due in February 2016. The bonds were issued at 100% of principal with a yield to maturity of 1.5% and resulted in net proceeds to the Company of $974 million less transaction fees. The bonds are convertible by the holder at any time prior to maturity at a conversion rate of 43.36308743.833898 shares per one thousand dollar face value of the bonds corresponding to 42,235,64642,694,216 equivalent shares. This conversion rate has been adjusted from 43.11831743.363087 shares per one thousand dollar face value of the bonds as at issuance,May 21, 2007, as the result of the extraordinary cash dividend approved by the Annual General Meeting of Shareholders held on April 26, 2007.May 14, 2008. This new conversion has been effective since May 21, 2007. The19, 2008. Upon a change of control, the holders can also redeem the convertible bonds on February 23, 2011 at a price of $1,077.58, on February 23, 2012 at a price of $1,093.81 and on February 24, 2014 at a price of $1,126.99 per one thousand dollar face value of the bonds. The Company can call the bonds at any time after March 10, 2011 subject to the Company’s share price exceeding 130% of the accreted value divided by the conversion rate for 20 out of 30 consecutive trading days. The Company may redeem for cash at the principal amount at issuance plus accumulated gross yield all, but not a portion, of the convertible bonds at any time if 10% or less of the aggregate principal amount at issuance of the convertible bonds remain outstanding in certain circumstances or in the event of changes to the tax laws of the Netherlands or any successor jurisdiction. InDuring December 2009 the second quarterCompany repurchased 98 thousand bonds corresponding to $106 million principal amount for a total cash consideration of $103 million, realizing a gain on the repurchase of $3 million. During January 2010, the Company repurchased around 200 thousand bonds corresponding to $215 million principal amount for a total cash consideration of $212 million, realizing a gain on the repurchase of $3 million. The total of bonds repurchased in December and January represented approximately 30% of the total amount originally issued. The repurchased bonds have been cancelled in accordance with their terms. In 2006, the Company entered into cancellable swaps with a combined notional value of $200 million to hedge the fair value of a portion of these convertible bonds. As a result of thethese cancellable swap hedging transactions, aswhich are described in further detail in Note 27,25, the effective yield on the $200 million principal amount of the hedged convertible bonds has increasedchanged from a nominal interest rate of 1.50% to 1.95%an effective yield of -0.27% as of December 31, 2007.


F-39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(at November 1, 2008, date on which the fair value hedge relationship was discontinued, as described in millions of U.S. dollars, except per share amounts)
Note 6.
 
In March 2006, STMicroelectronics Finance B.V. (“ST BV”), a wholly owned subsidiary of the Company, issued floating rate senior bonds with a principal amount of Euro 500€500 million at an issue price of 99.873%. The notes, which mature on March 17, 2013, pay a coupon rate of the three-month Euribor plus 0.40% on the 17th17th of June, September, December and March of each year through maturity. In the event of changes to the tax laws of the Netherlands or any successor jurisdiction, ST BV or the Company may redeem the full amount of senior bonds for cash. In the event of certain change in control triggering events, the holders can cause ST BV or the Company to repurchase all or a portion of the bonds outstanding.
 
The Company entered in 2008 into repurchase agreements with certain financial institutions and gave as collateral $262 million principal amount of floating rate notes classified asavailable-for-sale. The Company


F-40

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
retained control over the pledged debt securities and consequently did not de-recognize the financial assets from its consolidated balance sheet upon transfer of the collateral. The Company accounted for such transactions as secured borrowings and recognized the cash received upon transfer by recording a liability for the obligation to return the cash to the lending financial institution within a term which did not exceed 57 days. Such obligation, with a weighted average interest rate of 2.94%, amounted to $249 million and was extinguished during 2008 when the Company repurchased the pledged securities in accordance with the terms of the repurchase agreements.
Credit facilities
 
The Company had unutilized committed medium term credit facilities with core relationship banks totalling $500 million. In addition, the aggregate amount of the Company’s and its subsidiaries has uncommittedsubsidiaries’ total available short-term credit facilities, with several financial institutions totalling $1,212excluding foreign exchange credit facilities, was approximately $759 million as at December 31, 2007.2009. In addition, ST-Ericsson had $25 million of unutilized committed line from Ericsson as parent company. The Company has also a $736 million (€500 million ) long-termhad two committed credit facilityfacilities with the European Investment Bank as part of R&D funding programs. The first one, for a funding program loan,total of €245 million for R&D in France was fully drawn in U.S. dollars for a total amount of $341 million, of which $205$49 million was usedwere paid back as at December 31, 2007.2009. The second one, signed on July 21, 2008, for a total amount of €250 million for R&D projects in Italy, was fully drawn in U.S. dollars for $380 million as at December 31, 2009. The Company maintains also uncommitted foreign exchange facilities totalling $939$714 million at December 31, 2007.2009. At December 31, 2007,2009 and December 31, 2006,2008, amounts available under the short-term lines of credit were not reduced by any borrowing.
 
15.  POST-RETIREMENT AND OTHER LONG-TERM EMPLOYEES BENEFITS
The Company and its subsidiaries have a number of defined benefit pension plans, mainly unfunded, and other long-term employees’ benefits covering employees in various countries. The defined benefit plans provide for pension benefits, the amounts of which are calculated based on factors such as years of service and employee compensation levels. The other long-term employees’ plans provide for benefits due during the employees’ period of service after certain seniority levels. The Company uses a December 31 measurement date for the majority of its plans. Eligibility is generally determined in accordance with local statutory requirements. For Italian termination indemnity plan (“TFR”), generated before July 1, 2007, the Company continues to measure the vested benefits to which Italian employees are entitled as if they retired immediately as of December 31, 2009, in compliance with U.S. GAAP guidance on determining vested benefit obligations for defined benefit pension plans.


F-41

18 — SHAREHOLDERS’ EQUITYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
 
The changes in benefit obligation and plan assets were as follows:
                 
  Pension Benefits Other Long-Term Benefits
  December 31,
 December 31,
 December 31,
 December 31,
  2009 2008 2009 2008
 
Change in benefit obligation:
                
Benefit obligation at beginning of year  587   590   42   42 
Service cost  22   20   4   4 
Interest cost  25   32   2   3 
Employee contributions  4   3   —   — 
Benefits paid  (25)  (35)  (2)  (8)
Effect of settlement  (16)  (5)  (3)  — 
Effect of curtailment  (2)  (1)  —   — 
Actuarial (gain) loss  29   15   (1)  1 
Transfer in  12   70   1   8 
Transfer out  (5)  (53)  (1)  (5)
Plan amendment  —   (3)  —   — 
Foreign currency translation adjustment  23   (46)  1   (3)
Benefit obligation at end of year
  654   587   43   42 
Change in plan assets:
                
Plan assets at fair value at beginning of year  262   278   —   — 
Expected return on plan assets  16   18   —   — 
Employer contributions  46   16   —   — 
Employee contributions  5   2   —   — 
Benefits paid  (13)  (11)  —   — 
Effect of settlement  (14)  (2)  —   — 
Actuarial gain (loss)  25   (59)  —   — 
Transfer in  7   54   —   — 
Transfer out  (6)  (5)  —     
Foreign currency translation adjustments  11   (28)  —   — 
Other  —   (1)  —   — 
Plan assets at fair value at end of year
  339   262   —   — 
Funded status
  (315)  (325)  (43)  (42)
Net amount recognized in the balance sheet consisted of the following:
                
Non current assets  2   1   —   — 
Current liabilities  (8)  (5)  (9)  (2)
Non Current liabilities  (309)  (321)  (34)  (40)
Net amount recognized
  (315)  (325)  (43)  (42)
The components of accumulated other comprehensive income (loss) before tax effects were as follows:
             
  Actuarial
  Prior service
    
  (gains)/losses  cost  Total 
 
Other comprehensive income as at December 31, 2007
  12   10   22 
Net amount generated/arising in current year  74   (2)  72 
Amortization  (3)  (2)  (5)
Foreign currency translation adjustment  (9)  —   (9)
Other comprehensive income as at December 31, 2008
  74   6   80 
Net amount generated/arising in current year  4   —   4 
Amortization  (6)  (2)  (8)
Foreign currency translation adjustment  4   —   4 
Effect of curtailment/settlement  (4)  —   (4)
Other comprehensive income as at December 31, 2009
  72   4   76 
In 2010, we expect to amortize $4 million of actuarial losses and $1 million of past service cost.


F-42

18.1NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
The components of the net periodic benefit cost included the following:
                         
  Pension Benefits  Other Long-term Benefits 
  Year Ended
  Year Ended
  Year Ended
  Year Ended
  Year Ended
  Year Ended
 
  December 31,
  December 31,
  December 31,
  December 31,
  December 31,
  December 31,
 
  2009  2008  2007  2009  2008  2007 
 
Service cost  22   20   19   4   4   3 
Interest cost  25   32   28   2   3   2 
Expected return on plan assets  (16)  (18)  (15)  —   —   — 
Amortization of actuarial net loss (gain)  6   2   (3)  (1)  1   (4)
Amortization of prior service cost  2   2   2   —   —   31 
Effect of settlement  2   (3)  —   —   —   — 
Effect of curtailment  (2)  (1)  (1)  —   —   — 
                         
Net periodic benefit cost
  39   34   30   5   8   32 
                         
The weighted average assumptions used in the determination of the benefit obligation and the plan asset for the pension plans and the other long term benefits were as follows:
             
  December 31,
 December 31,
 December 31,
Assumptions
 2009 2008 2007
 
Discount rate  5.11%  5.23%  5.43%
Salary increase rate  3.08%  3.46%  3.24%
Expected long-term rate of return on funds for the pension expense of the year  5.28%  5.69%  6.34%
The discount rate was determined by comparison against long-term corporate bond rates applicable to the respective country of each plan. In developing the expected long-term rate of return on assets, the Company modelled the expected long-term rates of return for broad categories of investments held by the plan against a number of various potential economic scenarios.
The Company’s pension plan asset allocation at December 31, 2009 and 2008 are as follows:
         
  Percentage of Plan Assets at December
Asset Category
 2009 2008
 
Equity securities  38%  36%
Bonds securities remunerating regular interest  33%  37%
Real estate  9%  6%
Other  20%  21%
Total  100%  100%


F-43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
The Company’s detailed pension plan asset allocation including the fair-value measurements of those plan assets as at December 31, 2009 is as follows:
                 
    Quoted Prices in
   Significant
    Active Markets
 Significant Other
 Unobservable
    for Identical
 Observable Inputs
 Inputs
  Total Assets (Level 1) (Level 2) (Level 3)
 
Cash and cash equivalents  27   27   —   — 
Equity securities  128   111   17   — 
Government debt securities  57   57   —   — 
Corporate debt securities  56   52   4   — 
Derivatives  22   16   6   — 
Investment funds  1   —   1   — 
Real estate  30   3   20   7 
Other (mainly insurance assets — contracts and reserves)  18   1   12   5 
TOTAL
  339   267   60   12 
The Company’s investment strategy for its pension plans is to maximize the long-term rate of return on plan assets with an acceptable level of risk in order to minimize the cost of providing pension benefits while maintaining adequate funding levels. The Company’s practice is to periodically conduct a review in each subsidiary of its asset allocation strategy. A portion of the fixed income allocation is reserved in short-term cash to provide for expected benefits to be paid. The Company’s equity portfolios are managed in such a way as to achieve optimal diversity and in certain jurisdictions they are entirely managed by the multi-employer funds. The Company does not manage any assets internally.
After considering the funded status of the Company’s defined benefit plans, movements in the discount rate, investment performance and related tax consequences, the Company may choose to make contributions to its pension plans in any given year in excess of required amounts. The Company contributions to plan assets were $46 million and $16 million in 2009 and 2008 respectively and the Company expects to contribute cash of $18 million in 2010.
The Company’s estimated future benefit payments as of December 2009 are as follows:
         
Years
 Pension Benefits Other Long-term Benefits
 
2010  41   3 
2011  21   2 
2012  28   2 
2013  28   3 
2014  37   3 
From 2015 to 2019  192   17 
The Company has certain defined contribution plans, which accrue benefits for employees on a pro-rata basis during their employment period based on their individual salaries. The Company accrued benefits related to defined contribution pension plans of $13 million and $11 million, as of December 31, 2009 and 2008 respectively. The annual cost of these plans amounted to approximately $81 million, $72 million and $66 million in 2009, 2008 and 2007, respectively. Major changes as compared to previous periods are mainly related to the acquisition of the NXP wireless business and the formation of the ST-Ericsson joint-venture. The benefits accrued to the employees on a pro-rata basis, during their employment period are based on the individuals’ salaries.
16.  SHAREHOLDERS’ EQUITY
16.1 — Outstanding shares
 
The authorized share capital of the Company is EUR 1,810 million consisting of 1,200,000,000 common shares and 540,000,000 preference shares, each with a nominal value of EUR 1.04. As at December 31, 20072009 the number of shares of common stock issued was 910,293,420910,319,305 shares (910,157,933(910,307,305 at December 31, 2006)2008).


F-44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
 
As of December 31, 20072009 the number of shares of common stock outstanding was 899,760,539 (897,395,042878,333,566 (874,276,833 at December 31, 2006)2008).
 
18.216.2 — Preference shares
 
The 540,000,000 preference shares, when issued, will entitle a holder to full voting rights and to a preferential right to dividends and distributions upon liquidation. On May 31, 1999, the Company entered into an option agreement with STMicroelectronics Holding II B.V. in order to protect the Company from a hostile takeover or other similar action. The option agreement provided for 540,000,000 preference shares to be issued to STMicroelectronics Holding II B.V. upon their request based on approval by the Company’s Supervisory Board. STMicroelectronics Holding II B.V. would be required to pay at least 25% of the par value of the preference shares to be issued, and to retain ownership of at least 30% of the Company’s issued share capital. An amendment was signed in November 2004 which reduced the threshold required for STMicroelectronics Holding II B.V. to exercise its right to subscribe preference shares of the Company, down to 19% issued share capital compared to the previous requirement of at least 30%.
 
On January 22, 2008, following the termination of the existing option agreement between the Company and STMicroelectronics Holding II B.V. and the constitution in December 2006 of an independent Dutch Foundation “Stichting Continuïteit ST”, a new option agreement of substantially similar terms was concluded between the Company and Stichting Continuïteit ST. This new option agreement provides for the issuance of 540,000,000 preference shares. Any such shares wouldshould be issued by the Company to the Foundation, upon its request and in its sole discretion, upon payment of at least 25% of the par value of the preference shares to be issued. The issuing of the preference shares is conditional upon (i) the Company receiving an unsolicited offer or there being the threat of such an offer; (ii) the Company’s Managing and Supervisory Boards deciding not to support such an offer and; (iii) the Board of the Foundation determining that such an offer or acquisition would be contrary to the interests of the Company and its stakeholders. The preference shares may remain outstanding for no longer than two years. There were no preference shares issued as of December 31, 2007.2009.
 
18.316.3 — Treasury stock
 
In 2002 and 2001,Following the authorization by the Supervisory Board, announced on April 2, 2008, to repurchase up to 30 million shares of its common stock, the Company repurchased 13,400,000 of its ownacquired 29,520,220 shares as at December 31, 2008, for a total amount of $348approximately $313 million, which werealso reflected at cost as a reduction of the shareholders’ equity. No treasuryThis repurchase intends to cover the transfer of shares were acquired in 2007, 2006 and 2005.


F-40

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millionsto employees upon vesting of U.S. dollars, except perfuture share amounts)based remuneration programs.
 
The treasury shares have been designated for allocation under the Company’s share based remuneration programs onof non-vested shares including such plans as approved by the 2005, 2006, 2007, 2008 and 20072009 Annual General Meeting of Shareholders. As of December 31, 2007, 2,867,1192009, 10,934,481 of these treasury shares were transferred to employees under the Company’s share based remuneration programs of which 4,044,733 in the year ended December 31, 2009, following the full vesting as of April 27,the 2006 stock-award plan, the vesting of the first and second tranches of the 2007 stock-award plan, the vesting of the first tranche of the stock award plan granted in 2005, as of April 27, 2007 of the second tranche of the stock award plan granted in 2005 and the first tranche of the2008 stock-award plan granted in 2006, the vesting as of October 26, 2007 of first tranche of the stock awards granted under the 2005 French subplan of 2005 (representing 64% of shares granted under this sub plan) andtogether with the acceleration of the vesting of a limited number of stock awards.stock-awards.
 
As of December 31, 2007,2009, the Company owned a residual number of treasury shares equivalent to 10,532,881.31,985,739.
 
18.416.4 — Stock option plans
 
In 1995, the Shareholders voted to adopt the 1995 Employee Stock Option Plan (the “1995 Plan”) whereby options for up to 33,000,000 shares may be granted in installments over a five-year period. Under the 1995 Plan, the options may be granted to purchase shares of common stock at a price not lower than the market price of the shares on the date of grant. At December 31, 2007,2008, under the 1995 plan, 1,98042,300 of the granted options outstanding originally vest 50% after three years and 50% after four years following the date of the grant; 5,944,752 of the granted options vestvested 32% after two years, 32% after three years and 36% after four years following the date of the grant. The options expire 10 years after the date of grant. During 2005, the vesting periods for all options under the plan were accelerated with no impact on the consolidated statements of income.
 
In 1996, the Shareholders voted to adopt the Supervisory Board Option Plan whereby each member of the Supervisory Board was eligible to receive, during the three-year period1996-1998, 18,000 options for 1996 and 9,000 options for both 1997 and 1998, to purchase shares of common stock at the closing market price of the shares on the date of the grant. In the same three-year period, the professional advisors to the Supervisory Board were eligible to receive 9,000 options for 1996 and 4,500 options for both 1997 and 1998. Under the Plan, the options vest over one year and are exercisable for a period expiring eight years from the date of grant.
 
In 1999, the Shareholders voted to renew the Supervisory Board Option Plan whereby each member of the Supervisory Board may receive, during the three-year period1999-2001, 18,000 options for 1999 and 9,000 options for both 2000 and 2001, to purchase shares of capital stock at the closing market price of the shares on the date of the grant. In the same three-year period, the professional advisors to the Supervisory Board may receive 9,000 options for 1999 and 4,500 options for both 2000 and 2001. Under the Plan, the options vest over one year and are exercisable for a period expiring eight years from the date of grant.


F-45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
 
In 2001, the Shareholders voted to adopt the 2001 Employee Stock Option Plan (the “2001 Plan”) whereby options for up to 60,000,000 shares may be granted in installments over a five-year period. The options may be granted to purchase shares of common stock at a price not lower than the market price of the shares on the date of grant. In connection with a revision of its equity-based compensation policy, the Company decided in 2005 to accelerate the vesting period of all outstanding unvested stock options. The options expire ten years after the date of grant.
 
In 2002, the Shareholders voted to adopt a Stock Option Plan for Supervisory Board Members and Professionals of the Supervisory Board. Under this plan, 12,000 options can be granted per year to each member of the Supervisory Board and 6,000 options per year to each professional advisor to the Supervisory Board. Options willwould vest 30 days after the date of grant. The options expire ten years after the date of grant.


F-41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
 
A summary of the stock option activity for the plans for the three years ended December 31, 2007, 20062009, 2008 and 20052007 follows:
 
                        
   Price Per Share    Price Per Share 
     Weighted
      Weighted
 
 Number of Shares Range Average  Number of Shares Range Average 
Outstanding at December 31, 2004  65,424,207  $12.03 - $62.01  $29.18 
Options granted:            
2001 Plan  42,200  $16.73 - $17.31  $16.91 
Supervisory Board Plan  —   —   — 
Options forfeited  (2,364,862) $12.03 - $62.01  $29.65 
Options exercised  (2,542,978) $12.03 - $14.23  $13.88 
Outstanding at December 31, 2005  60,558,567  $12.03 - $62.01  $29.80 
       
Options granted:            
2001 Plan  —   —   — 
Supervisory Board Plan  —   —   — 
Options expired  (16,832) $12.03  $12.03 
Options forfeited  (1,912,584) $12.03 - $62.01  $30.66 
Options exercised  (2,303,899) $12.03 - $17.08  $12.03 
Outstanding at December 31, 2006  56,325,252  $12.03 - $62.01  $30.50   56,325,252  $12.03 - $62.01  $30.50 
              
Options granted:                        
2001 Plan  —   —   —   —   —   — 
Supervisory Board Plan  —   —   —   —   —   — 
Options expired  (7,566,170) $24.88  $24.88   (7,566,170) $24.88  $24.88 
Options forfeited  (1,861,960) $16.73 - $62.01  $31.19   (1,861,960) $16.73 - $62.01  $31.19 
Options exercised  (131,487) $17.08 - $19.18  $18.90   (131,487) $17.08 - $19.18  $18.90 
Outstanding at December 31, 2007
  46,765,635  $16.73 - $62.01  $31.42   46,765,635  $16.73 - $62.01  $31.42 
              
Options granted:            
2001 Plan  —   —   — 
Supervisory Board Plan  —   —   — 
Options expired  (5,923,552) $44.00 - $62.01  $59.1 
Options forfeited  (1,410,650) $16.73 - $62.01  $27.9 
Options exercised  —   —   — 
Outstanding at December 31, 2008  39,431,433  $16.73 - $39.00  $27.35 
       
Options granted:            
2001 Plan  —   —   — 
Supervisory Board Plan  —   —   — 
Options expired  —   —   — 
Options forfeited  (1,487,601) $17.08 - $39.00  $27.69 
Options exercised  —   —   — 
Outstanding at December 31, 2009
  37,943,832  $16.73 - $39.00  $27.33 
       
 
Stock options exercisable following acceleration in 2005 of vesting for all outstanding unvested stock options were as follows:
 
                        
 December 31,
 December 31,
 December 31,
  December 31,
 December 31,
 December 31,
 2007 2006 2005  2009 2008 2007
Options exercisable  46,765,635   56,325,252   60,558,567   37,943,832   39,431,433   46,765,635 
Weighted average exercise price $31,42  $30.50  $29.80  $27.33  $27.35  $31,42 
              
 
The weighted average remaining contractual life of options outstanding as of December 31, 2009, 2008 and 2007 2006was 2.9, 3.9 and 2005 was 4.3 4.7 and 5.5 years, respectively.


F-46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
 
The range of exercise prices, the weighted average exercise price and the weighted average remaining contractual life of options exercisable as of December 31, 20072009 were as follows:
 
                 
          Weighted
 
       Weighted
  average
 
    Option price
  average
  remaining
 
  
Number of shares
 range  exercise price  contractual life 
 
   149,191  $16.73 - $17.31  $17.06   6.8 
   21,094,641  $19.18 - $24.88  $21.03   5.8 
   202,060  $25.90 - $29.70  $27.18   5.2 
   19,357,388  $31.09 - $44.00  $34.37   3.9 
   5,962,355  $50.69 - $62.01  $59.09   0.6 
               
      Weighted
    Weighted
 average
  Option price
 average
 remaining
Number of shares
 range exercise price contractual life
 
 133,966  $16.73 - $17.31  $17.05   4.7 
 19,744,709  $19.18 - $24.88  $21.02   3.8 
 167,350  $25.90 - $29.70  $26.96   3.3 
 17,897,807  $31.09 - $39.00  $34.37   1.8 
 
18.516.5 — EmployeeNonvested share purchase plansawards
No employee share purchase plan was offered in 2007, 2006 or 2005.


F-42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
18.6 — Share Awards Plans
In 2005, the Company redefined its equity-based compensation strategy by no longer granting options but rather share awards. In July 2005, the Company amended its latest Stock Option Plans for employees, Supervisory Board and Professionals of the Supervisory Board accordingly.
As part of this revised stock-based compensation policy, the Company granted on October 25, 2005 3,940,065 nonvested shares to senior executives and selected employees, to be issued upon vesting from treasury stock (“The 2005 Employee Plan”). The Compensation Committee also authorized the future grant of 219,850 additional shares to selected employees upon nomination by the Managing Board of the Company. These additional shares were granted in 2006. The shares were granted for free to employees and would vest upon completion of market and internal performance conditions. Under the program, if the defined market condition was met in the first quarter of 2006, each employee would receive 100% of the nonvested shares granted. If the market condition was not achieved, the employee could earn one third of the grant for each of the two performance conditions. If neither the market or performance conditions were met, the employee would receive none of the grant. In addition to the market and performance conditions, the nonvested shares vest over the following requisite service period: 32% after 6 months, 32% after 18 months and 36% after 30 months following the date of the grant. In 2006, the Company failed to meet the market condition while the performance conditions were reached. Consequently, one third of the shares granted, amounting to 1,364,902 shares, was lost for vesting. In March 2006 the Company decided to modify the original plan to create a subplan for the employees in one of its European subsidiaries for statutory payroll tax purposes. The original plan terms and conditions were modified to extend for these employees the requisite service period as follows: 64% of the granted stock awards vest as at October 26, 2007 and 36% as at April 27, 2008 following the date of the grant. In addition, the sale by the employees of the shares once vested is restricted over an additional two-year period, which is not considered as an extension of the requisite service period. In compliance with the graded vesting of the grant and pursuant to the acceleration of a limited number of stock awards, the first tranche of the original plan, representing 637,109 shares, vested as at April 27, 2006. In 2007, the second tranche of the original plan, representing 598,649 shares, vested as at April 27, 2007, and the first tranche of the subplan, representing 434,592 shares, vested as at October 26, 2007. In addition, 6,303 additional shares were accelerated during the year, of which 864 were under the subplan. These shares were transferred to employees from the 13,400,000 treasury shares owned by the Company. At December 31, 2007, 911,281 nonvested shares were outstanding, of which 243,467 under the subplan.
On October 25 2005, the Compensation Committee granted 66,000 stock-based awards to the members of the Supervisory Board and professionals of the Supervisory Board (“The 2005 Supervisory Board Plan”). These awards are granted at the nominal value of the share of €1.04 and vest over the following period: one third after 6 months, one third after 18 months and one third after 30 months following the date of the grant. Nevertheless, they are not subject to any market, performance or service conditions. As such, their associated compensation cost was recorded immediately at grant. In 2006, in compliance with the graded vesting of the grant, the first tranche of the plan, representing 17,000 shares, vested as at April 27, 2006.
In 2007, the second tranche of the plan, representing 17,000 shares vested as at April 27, 2007. As of December 31 2007, 17,000 awards were outstanding.
 
On April 29, 2006 the Compensation Committee (on behalf of the entire Supervisory Board and with its approval) granted 66,000 stock-based awardsnon vested shares to the members of the Supervisory Board and professionals of the Supervisory Board (“The 2006 Supervisory Board Plan”), of which 15,000 awards were immediately waived. These awards are granted at the nominal value of the share of €1.04 and vest over the following period: one third after 12 months, one third after 24 months and one third after 36 months following the date of the grant. Nevertheless, they are not subject to any market, performance or service conditions. As such, their associated compensation cost was recorded immediately at grant. In 2007, the first tranche of the plan, representing 17,000 shares vested as at April 27, 2007. In 2008, the second tranche of the plan, representing 16,000 shares vested as at April 27, 2008. Furthermore, following the end of mandate of one of the members of the Board, 4,000 shares were accelerated in 2008. In 2009, the third tranche of the plan, representing 14,000 shares vested as at April 27, 2009. As of December 31 2007, 34,0002009, no awards were outstanding.outstanding under the 2006 Supervisory Board Plan.
 
On September 29, 2006 the Company granted 4,854,280 nonvested shares to senior executives and selected employees to be issued upon vesting from treasury stock (“The 2006 Employee Plan”). The Compensation Committee and the Supervisory Board also authorized on September 29, 2006 the future grant of additional shares to selected employees upon designationnomination by the Managing Board of the Company. These additional shares were granted in 2006 and 2007, as detailed below. The shares were granted for free to employees, and vested upon completion of three internal performance conditions, each weighting for one third of the total number of awards granted. Except for employees in one of the Company’s European subsidiaries for whom a subplan was simultaneously created on September 29,


F-43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
2006 for statutory payroll tax purposes, the nonvested shares vestvested over the following requisite service period: 32% as at April 27, 2007, 32% as at April 27, 2008 and 36% as at April 27, 2009. The following requisite service period iswas required for the nonvested shares granted under the local subplan: 64% of the granted stock awards vestvested two years from grant date and 36% as at April 27, 2009. In addition, the sale by the employees of the shares included in the subplan, once vested, is restricted over an additional two-year period which is not considered as an extension of the requisite service period.
In compliance with the graded vesting of the grant, the first tranche of the original plan, representing 1,120,234 shares, vested as at April 27, 2007. In addition, 10,120 additional shares were accelerated during the year, of which 340 under the subplan. In 2008, the second tranche of the original plan, representing 1,079,952 shares, vested as at April 27, 2008, and the first tranche of the subplan, representing 748,394 shares vested as at September 30, 2008. In addition, 30,590 shares were accelerated during the year, of which 5,941 under the subplan. These shares were transferred to employees from the 13,400,000 treasury shares owned by the Company. In 2009, the third tranche of the original plan, representing 1,155,238 shares and the third tranche of the subplan, representing 400,149 shares vested as at April 27, 2009. In addition, 9,446 shares were accelerated during the year, of which 4,035 under the subplan. At December 31, 2007, 3,489,9742009, no nonvested shares from the 2006 plan were outstanding, of which 1,189,115 under the subplan.outstanding.
 
On December 19, 2006, the Compensation Committee recorded(on behalf of the grant of anentire Supervisory Board and with its approval) granted additional 62,360 shares to selected employees designated by the Managing Board of the Company as part of the 2006 Employee Plan. This additional grant hashad the same terms and conditions as the original plan. In compliance with the graded vesting of the grant, the first tranche of this plan, representing 8,885 shares, vested as at April 27, 2007. At2007, and the first tranche of the subplan, representing 21,648 shares vested as at December 20, 2008. In 2008, the second tranche of the plan, representing 8,885 shares, vested as at April 27, 2008. In 2009, the third tranche of the plan, representing 9,264 shares and the third tranche of the subplan representing 12,147 shares vested as at April 27, 2009. As at December 31, 2007 53,1302009, no nonvested shares were outstanding as part of this additional grant,grant.


F-47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of which 34,255 under the local subplan.U.S. dollars, except share and per share amounts)
 
On February 27, 2007, the Compensation Committee recorded(on behalf of the grant of anentire Supervisory Board and with its approval) granted additional 215,000 shares to selected employees designated by the Managing Board of the Company as part of the 2006 Employee Plan. This additional grant hashad the same terms and conditions as the original plan. In compliance with the graded vesting of the grant, the first tranche of this plan, representing 50,031 shares, vested as at April 27, 2007. In addition, 1,196 additional shares were accelerated during the year. AtIn 2008, the second tranche of the plan, representing 47,551 shares vested as at April 27, 2008. In addition, 598 shares were accelerated during the year. In 2009, the first tranche of the subplan, representing 36,122 shares vested as at February 28, 2009. The third tranche of the plan representing 51,514 shares and the third tranche of the subplan representing 20,174 shares vested as at April 27, 2009. In addition, 108 shares were accelerated during the year. As at December 31, 2007 159,3452009, no nonvested shares were outstanding as part of this additional grant, of which 57,390 under the local subplan.grant.
 
On April 2928, 2007, following the decision by the Annual Shareholders’ meeting to increase the number of share awards to membersCompensation Committee (on behalf of the entire Supervisory Board and Professionals of the Supervisory Board under the 2006 Supervisory Board plan, the Compensation Committeewith its approval) granted 165,000 stock-based awards to the members of the Supervisory Board and professionals of the Supervisory Board (“The 2007 Supervisory Board Plan”), of which 22,500 awards were immediately waived. These awards are granted at the nominal value of the share of €1.04 and vest over the following period: one third after 12 months, one third after 24 months and one third after 36 months following the date of the grant. Nevertheless, they are not subject to any market, performance or service conditions. As such, their associated compensation cost was recorded immediately at grant. In compliance with the graded vesting of the grant, the first tranche of this plan, representing 45,000 shares, vested as at April 28, 2008. Furthermore, following the end of mandate of one of the members of the Board, 7,500 shares were accelerated in 2008. The second tranche of this plan, representing 45,000 shares, vested as at April 28, 2009. As of December 31, 2007, 142,5002009, 45,000 awards were outstanding.outstanding under the 2007 Supervisory Board Plan.
 
On June 18, 2007, the Company granted 5,691,840 nonvested shares to senior executives and selected employees to be issued upon vesting from treasury stock (“The 2007 Employee Plan”). The Compensation Committee and the Supervisory Board also authorized the future grant of additional shares to selected employees upon nomination by the Managing Board of the Company.Company as detailed below. The shares were granted for free to employees, and will vest upon completion of three internal performance conditions, each weighting for one third of the total number of awards granted. Except for employees in two of the Company’s European subsidiaries for whom a subplan was simultaneously created, the nonvested shares vest over the following requisite service period: 32% as at April 26, 2008, 32% as at April 26, 2009 and 36% as at April 26, 2010. The following requisite service period is required for the nonvested shares granted under the two local subplans: for the first one, 64% of the granted stock awards vest as at June 19, 2009 and 36% as at June 19, 2010. In addition, the sale by the employees of the shares once vested is restricted over an additional two-year period, which is not considered as an extension of the requisite service period. For the second one,subplan, 32% vest as at June 19, 2008, 32% as at April 26, 2009 and 36% as at April 26, 2010. In 2008, the Company failed to meet one performance condition during one semester. Consequently, one sixth of the shares granted, totaling 926,121 shares, of which 242,233 on the first subplan and 2,634 on the second subplan, was lost for vesting. In compliance with the graded vesting of the grant, the first tranche of the original plan, representing 1,097,124 shares, vested as at April 26, 2008. The first tranche of one of the local subplans, representing 4,248 shares, vested as at June 19, 2008. In addition, 31,786 shares were accelerated during the year, of which 2,999 under the subplans. These shares were transferred to employees from the treasury shares owned by the Company. The second tranche of the original plan, representing 1,048,429 shares and the second tranche of one of the local subplans, representing 3,914 shares, vested as at April 26, 2009. The first tranche of the other local subplan, representing 768,157 shares, vested as at June 19, 2009. In addition, 32,360 shares were accelerated during the year, of which 4,974 under the subplans. These shares were transferred to employees from the treasury shares owned by the Company. At December 31, 2007 5,618,3502009, 1,539,083 nonvested shares were outstanding, of which 1,459,635409,491 under the first subplan and 15,9004,395 under the second one.
 
On December 6, 2007, the Managing Board of the Company, as authorized by the Supervisory Board of the Compensation Committee, granted additional 84,450 shares to selected employees designated by the Managing Board of the Company as part of the 2007 Employee Plan. This additional grant has the same terms and conditions as the original plan. As a consequence of the forecastfailed performance condition results, as explained above, one half14,023 shares were lost for vesting, of which 498 on the subplan. In compliance with the graded vesting of the grants are estimated to be lost for vesting.grant, the first tranche of the original plan, representing 10,434 shares, vested as at April 26, 2008. In addition, 11,311 shares were accelerated during the year. The second tranche of the original plan, representing 21,585 shares, vested as at April 26, 2009. The first tranche of the subplan, representing 1,602 shares, vested as at December 7, 2009. At December 31, 2007 84,4502009, 24,711 nonvested shares were outstanding as part of this additional grant, of which 3,000900 under the first local subplan and 42,400 under the second one.subplan.


F-44F-48

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in millions of U.S. dollars, except share and per share amounts)
On February 19, 2008, the Managing Board of the Company, as authorized by the Supervisory Board of the Compensation Committee, granted additional 135,550 shares to selected employees designated by the Managing Board of the Company as part of the 2007 Employee Plan. This additional grant has the same terms and conditions as the original plan. As a consequence of the failed performance condition explained above, 22,559 shares were lost for vesting, of which 5,887 on the local subplan. In compliance with the graded vesting of the grant, the first tranche of the original plan, representing 26,407 shares, vested as at April 26, 2008. In addition, 320 shares were accelerated during the year. The second tranche of the original plan, representing 21,978 shares, vested as at April 26, 2009. In addition, 567 shares were accelerated during the year. At December 31, 2009, 37,534 nonvested shares were outstanding as part of this additional grant, of which 12,821 under the local subplan.
On May 16, 2008, the Compensation Committee (on behalf of the entire Supervisory Board and with its approval) granted 165,000 stock-based awards to the members of the Supervisory Board and professionals of the Supervisory Board (“The 2008 Supervisory Board Plan”), of which 22,500 awards were immediately waived. These awards are granted at the nominal value of the share of €1.04 and vest over the following period: one third after 12 months, one third after 24 months and one third after 36 months following the date of the grant. Nevertheless, they are not subject to any market, performance or service conditions. As such, their associated compensation cost was recorded immediately at grant. In compliance with the graded vesting of the grant, the first tranche of this plan, representing 47,500 shares, vested as at May 16, 2009. As of December 31, 2009, 95,000 awards were outstanding under the 2008 Supervisory Board Plan.
On July 22, 2008, the Company granted 5,723,305 nonvested shares to senior executives and selected employees to be issued upon vesting from treasury stock (“The 2008 Employee Plan”). The Compensation Committee also authorized the future grant of additional shares to selected employees upon nomination by the Managing Board of the Company. The shares were granted for free to employees, and will vest upon completion of three internal performance conditions, each weighting for one third of the total number of awards granted. Except for employees in two of the Company’s European subsidiaries for whom a subplan was simultaneously created, the nonvested shares vest over the following requisite service period: 32% as at May 14, 2009, 32% as at May 14, 2010 and 36% as at May 14, 2011. The following requisite service period is required for the nonvested shares granted under the two local subplans: for the first one, 64% of the granted stock awards vest as at July 23, 2010 and 36% as at May 14, 2011. In addition, the sale by the employees of the shares once vested is restricted over an additional two-year period, which is not considered as an extension of the requisite service period. For the second one, 32% vest as at July 22, 2009, 32% as at May 14, 2010 and 36% as at May 14, 2011. In 2009, based on the final calculations, it turned out that the Company failed to meet two performance conditions. Consequently, two third of the shares granted, totaling 3,747,193 shares, of which 1,020,134 on the first subplan and 35,598 on the second subplan, was lost for vesting. In compliance with the graded vesting of the grant, the first tranche of the original plan, representing 427,324 shares, vested as at May 14, 2009. The first tranche of one of the local subplans, representing 5,719 shares, vested as at July 23, 2009. In addition, 15,588 shares were accelerated during the year. These shares were transferred to employees from the treasury shares owned by the Company. At December 31, 2009, 1,399,373 nonvested shares were outstanding, of which 509,324 under the first local subplan and 11,906 under the second local subplan.
On February 27, 2009, the Managing Board of the Company, as authorized by the Supervisory Board of the Compensation Committee, granted additional 50,400 shares to selected employees designated by the Managing Board of the Company as part of the 2008 Employee Plan. This additional grant has the same terms and conditions as the original plan. As a consequence of the failed performance condition explained above, 33,589 shares were lost for vesting, of which 11,365 on the first local subplan and 1,332 on the second local subplan. In compliance with the graded vesting of the grant, the first tranche of the original plan, representing 3,348 shares, vested as at May 14, 2009. At December 31, 2009, 12,329 nonvested shares were outstanding as part of this additional grant, of which 5,685 under the first local subplan and 668 under the second local subplan.
On May 20, 2009, the Compensation Committee (on behalf of the entire Supervisory Board and with its approval) granted 165,000 stock-based awards to the members of the Supervisory Board and professionals of the Supervisory Board (“The 2009 Supervisory Board Plan”), of which 7,500 awards were immediately waived. These awards are granted at the nominal value of the share of €1.04 and vest over the following period: one third after 12 months, one third after 24 months and one third after 36 months following the date of the grant. Nevertheless, they are not subject to any market, performance or service conditions. As such, their associated compensation cost was recorded immediately at grant. As of December 31 2009, 157,500 awards were outstanding under the 2009 Supervisory Board Plan.


F-49

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
On July 28, 2009, the Company granted 5,575,240 nonvested shares to senior executives and selected employees to be issued upon vesting from treasury stock (“The 2009 Employee Plan”). The Compensation Committee also authorized the future grant of additional shares to selected employees upon nomination by the Managing Board of the Company. The shares were granted for free to employees, and will vest upon completion of three internal performance conditions, each weighting for one third of the total number of awards granted. Except for employees in one of the Company’s European subsidiaries for whom a subplan was simultaneously created, the nonvested shares vest over the following requisite service period: 32% as at May 20, 2010, 32% as at May 20, 2011 and 36% as at May 20, 2012. The following requisite service period is required for the nonvested shares granted under the local subplan: 64% of the granted stock awards vest as at July 29, 2011 and 36% as at May 20, 2012. In addition, the sale by the employees of the shares once vested is restricted over an additional two-year period, which is not considered as an extension of the requisite service period. At December 31, 2009, 5,532,440 nonvested shares were outstanding, of which 1,438,185 under the subplan.
On November 30, 2009, the Managing Board of the Company, as authorized by the Supervisory Board of the Compensation Committee, granted additional 8,300 shares to selected employees designated by the Managing Board of the Company as part of the 2009 Employee Plan. This additional grant has the same terms and conditions as the original plan. At December 31, 2009, 8,300 nonvested shares were outstanding as part of this additional grant.


F-50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
 
A summary of the nonvested share activity for the years ended December 31, 20072009 and December 31, 20062008 is presented below:
 
                
Nonvested Shares
 Number of Shares Exercise price  Number of Shares Exercise price 
Outstanding as at December 31, 2005  3,965,220  $0-€1.04 
     
Outstanding as at December 31, 2007  10,510,030  $0-€1.04 
Awards granted:                
2005 Employee Plan  219,850  $0 
2006 Employee Plan  4,916,640  $0 
2006 Supervisory Board Plan  66,000  €1.04 
Awards forfeited:        
2005 Employee Plan  (138,615) $0 
2006 Employee Plan  (118,430) $0 
2006 Supervisory Board Plan  (15,000) €1.04 
Awards cancelled on failed vesting conditions:        
2005 Employee Plan  (1,364,902) $0 
Awards vested:        
2005 Employee Plan  (637,109) $0 
2005 Supervisory Board Plan  (17,000) €1.04 
Outstanding as at December 31, 2006  6,876,654  $0-€1.04 
     
Awards granted:        
2006 Employee Plan  215,000  $0 
2007 Employee Plan  5,776,290  $0   135,550  $0 
2007 Supervisory Board Plan  165,000  €1.04 
2008 Employee Plan  5,723,305  $0 
2008 Supervisory Board Plan  165,000  €1.04 
Awards forfeited:                
2005 Employee Plan  (42,619) $0   (7,900) $0 
2006 Employee Plan  (120,295) $0   (62,162) $0 
2007 Employee Plan  (73,490) $0   (141,201) $0 
2007 Supervisory Board Plan  (22,500) €1.04 
2008 Employee Plan  (56,185) $0 
2008 Supervisory Board Plan  (22,500) €1.04 
Awards cancelled on failed vesting conditions:        
2007 Employee Plan  (962,703) $0 
Awards vested:                
2005 Employee Plan  (1,039,544) $0   (903,381) $0 
2005 Supervisory Board Plan  (17,000) €1.04   (17,000) €1.04 
2006 Employee Plan  (1,190,466) $0   (1,937,618) $0 
2006 Supervisory Board Plan  (17,000) €1.04   (20,000) €1.04 
Outstanding as at December 31, 2007
  10,510,030  $0-€1.04 
2007 Employee Plan  (1,181,630) $0 
2007 Supervisory Board Plan  (52,500) €1.04 
Outstanding as at December 31, 2008  11,169,105  $0-€1.04 
Awards granted:        
2008 Employee Plan  50,400  $0 
2009 Employee Plan  5,583,540  $0 
2009 Supervisory Board Plan  165,000  €1.04 
Awards forfeited:        
2006 Employee Plan  (8,507) $0 
2007 Employee Plan  (52,896) $0 
2008 Employee Plan  (73,057) $0 
2009 Employee Plan  (42,800) $0 
2009 Supervisory Board Plan  (7,500) €1.04 
Awards cancelled on failed vesting conditions:        
2008 Employee Plan  (3,780,782) $0 
Awards vested:        
2006 Employee Plan  (1,694,162) $0 
2006 Supervisory Board Plan  (14,000) €1.04 
2007 Employee Plan  (1,898,592) $0 
2007 Supervisory Board Plan  (45,000) €1.04 
2008 Employee Plan  (451,979) $0 
2008 Supervisory Board Plan  (47,500) €1.04 
Outstanding as at December 31, 2009
  8,851,270  $0-€1.04 
          
 
The Company recorded compensation expense for the nonvested share awards based on the fair value of the awards at the grant date. The fair value of the awards granted in 2005 represents the $16.61 share price at the date of the grant. On the 2005 Employee Plan, the fair value of the nonvested shares granted, since they are affected by a market condition, reflects a discount of 49.50%, using a Monte Carlo path-dependent pricing model to measure the probability of achieving the market condition.


F-51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
 
The following assumptions were incorporated into the Monte Carlo pricing model to estimate the 49.50% discount:
 
   
  2005
  Employee Plan
 
Historical share price volatility 27.74%
Historical volatility of reference index 25.5%
Three-year average dividend yield 0.55%
Risk-free interest rates used 4.21%-4.33%


F-45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
 
Consistent with fair value calculations of stock option grants in prior years, the Company has determined the historical share price volatility to be the most appropriate estimate of future price activity. The weighted average grant-date fair value of nonvested shares granted to employees under the 2005 Employee Plan was $8.50.
 
In 2006, the Company accounted for the impact of the modification of the 2005 Employee Plan with the creation of a local subplan in compliance with Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment (“FAS 123R”) provisions related to stock awards subject to a market condition and for which the original vesting period is extended.U.S. GAAP guidance. Such modification did not generate any incremental cost since, when measured as at the modification date, the fair value was discounted at 100% due to the nil probability as at March 2006 to achieve the market condition.
 
The weighted average grant date fair value of nonvested shares granted to employees under the 2006 Employee Plan was $17.35. On the 2006 Employee Plan, the fair value of the nonvested shares granted did not reflect any discount since they are not affected by a market condition. On February 27, 2007, the Compensation Committee approved the statement that the three performance conditions were met (as per initial assumption).met. Consequently, the compensation expense recorded on the 2006 Employee Plan reflects the statement that all of the awards granted will vest, as far as the service condition is met.
 
The weighted average grant date fair value of nonvested shares granted to employees under the 2007 Employee Plan was $19.35. On the 2007 Employee Plan, the fair value of the nonvested shares granted did not reflect any discount since they are not affected by a market condition. On April 1, 2008, the Compensation Committee approved the statement that two performance conditions were fully met and that for one condition only one half of it was achieved. Consequently, the compensation expense recorded on the 2007 Employee Plan reflects the statement that five sixths of the awards granted will vest, as far as the service condition is met.
The grant date fair value of nonvested shares granted to employees under the 2008 Employee Plan was $10.64. On the 2008 Employee Plan, the fair value of the nonvested shares granted did not reflect any discount since they are not affected by a market condition. On March 23, 2009, the Compensation Committee approved the statement that one performance condition was fully met. Consequently, the compensation expense recorded on the 2008 Employee Plan reflects the statement that one third of the awards granted will vest, as far as the service condition is met.
The grant date fair value of nonvested shares granted to employees under the 2009 Employee Plan was $7.54. On the 2009 Employee Plan, the fair value of the nonvested shares granted did not reflect any discount since they are not affected by a market condition. On the contrary, the Company estimates the number of awards expected to vest by assessing the probability of achieving the performance conditions. At December 31, 2007,2009, a final determination of the achievement of the performance conditions had not yet been made by the Compensation Committee of the Supervisory Board. However, the Company has estimated that half of numbertwo third of awards isare expected to vest. Consequently, the compensation expense recorded for the 20072009 Employee Plan reflects the vesting of halftwo third of the awards granted, subject to the service condition being met.
The compensation expense recorded for nonvested sharesassumption of the expected number of awards to be vested upon achievement of the performance conditions is subject to changes based on the final measurement of the conditions, which is expected to occur in 2006 included a reduction for future forfeitures, estimated at a pluri-annual ratethe first quarter of 4.99%, reflecting the historical trend of forfeitures on past stock award plans. This estimate was adjusted in 2007 at a pluri-annual rate of 4.40%. This estimate will be adjusted for actual forfeitures upon vesting. For employees eligible for retirement during the requisite service period, the Company records compensation expense over the applicable shortened period. For awards for which vesting was accelerated in 2007, the Company recorded immediately the unrecognized compensation expense as at the acceleration date.2010.
 
The following table illustrates the classification of pre-payroll tax and social contribution stock-based compensation expense included in the consolidated statements of income for the year ended December 31, 2007,2009, December 31, 20062008 and December 31, 2005,2007, respectively:
 
                        
 December 31,
 December 31,
 December 31,
  December 31,
 December 31,
 December 31,
 
 2007 2006 2005  2009 2008 2007 
Cost of sales  14   6   2   7   15   14 
Selling, general and administrative  37   14   6   19   37   37 
Research and development  22   8   3   11   24   22 
Total compensation
  73   28   11 
       
Loss on equity investment  1   2   — 
Total pre-payroll tax and social contribution compensation
  38   78   73 


F-52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
 
Compensation cost, excluding payroll tax and social contribution, capitalized as part of inventory was $2 million at December 31, 2009, $3 million at December 31, 2008 whereas it amounted to $6 million at December 31, 2007 whereas it amounted to $3 million at December 31, 2006.2007. As of December 31, 20072009 there was $58$27 million of total unrecognized compensation cost related to the grant of nonvested shares, which is expected to be recognized over a weighted average period of 16.4approximately 16.3 months.
 
The total deferred income tax expense recognized in the consolidated statements of income related to unvested share-based compensation expense amounted to $8 million for the year ended December 31, 2009, including a shortfall recorded on the 2006 Employee Plan closed during 2009 due to the vesting fair value being significantly lower than the grant fair value. The total deferred income tax benefit recognized in the consolidated statements of income related to unvested share-based compensation expense amounted to $3 million and $9 million for the yearyears ended December 31, 2008 and 2007, $7 million for the year ended December 31, 2006 and $2 million for the year ended December 31, 2005.


F-46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)respectively.
 
18.716.6 — Accumulated other comprehensive income (loss)
 
The accumulated balances related to each component of Other comprehensive income (loss) were as follows:
 
                                            
   Unrealized
   Minimum
        Unrealized
   Guidance on
   
 Foreign
 gain (loss) on
 Unrealized
 pension
 FAS 158
 Accumulated
  Foreign
 gain (loss) on
 Unrealized
 defined benefit
 Accumulated
 
 currency
 available-for-sale
 gain (loss) on
 liability
 adoption
 other
  currency
 available-for-sale
 gain (loss) on
 plans adoption
 other
 
 translation
 financial assets,
 derivatives,
 adjustment,
 adjustment,
 comprehensive
  translation
 financial assets,
 derivatives,
 adjustment,
 comprehensive
 
 income (loss) net of tax net of tax net of tax net of tax income (loss)  income (loss) net of tax net of tax net of tax income (loss) 
Balance as of December 31, 2004  1,098   0   59   (41)  —   1,116 
Other comprehensive income (loss)  (770)  —   (72)  7   —   (835)
             
Balance as of December 31, 2005  328   0   (13)  (34)  —   281 
Other comprehensive income (loss)  532   —   26   34   (57)  535 
             
Balance as of December 31, 2006  860   0   13   —   (57)  816   860   0   13   (57)  816 
Other comprehensive income (loss)
  467   (2)  (1)      40   504   467   (2)  (1)  40   504 
             
Balance as of December 31, 2007
  1,327   (2)  12   —   (17)  1,320   1,327   (2)  12   (17)  1,320 
             
Other comprehensive income (loss)  (163)  (14)  (1)  (48)  (226)
Balance as of December 31, 2008  1,164   (16)  11   (65)  1,094 
Other comprehensive income (loss)
  61   10   (5)  4   70 
Balance as of December 31, 2009
  1,224   (6)  6   (60)  1,164 
For the year ended December 31, 2009, the net amount of accumulated other comprehensive income reclassified as earnings was approximately $11 million related to cash flow hedge transactions outstanding as at December 31, 2008, for which the forecasted hedged transaction occurred in 2009.
 
18.816.7 — Dividends
 
In 2007,At the Company paidCompany’s Annual General meeting of Shareholders held on May 20, 2009, the distribution of a cash dividend of $105 million or $0.12 per common share to be paid in four equal installments was adopted by the Company’s shareholders. Through December 31, 2009, payments were made for an amount of $79 million including the payment of $3 million for related withholding tax. The remaining $0.03 per share cash dividend to be paid in the first quarter of 2010 totaled $26 million and was reported as “dividends payable to shareholders” on the consolidated balance sheet as at December 31, 2009.
At the Annual General Meeting of Shareholders on May 14, 2008 shareholders adopted the distribution of $0.36 per share in cash dividends, payable in four equal quarterly installments. Through December 31, 2008, payments totaled $0.27 per share or approximately $240 million. The remaining $0.09 per share cash dividend to be paid in the first quarter of 2009 totaled $79 million and was reported as “dividends payable to shareholders” on the consolidated balance sheet as at December 31, 2008.
In 2008 the cash dividend paid was of $0.36 per share for a total amount of $319 million. In 2007, the cash dividend paid was $0.30 per share for a total amount of $269 million. In 2006 and 2005, the cash dividend paid was of $0.12 per share for a total amount of $107 million each year.


F-53

 
19 — EARNINGS (LOSS) PER SHARENOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
17.  EARNINGS (LOSS) PER SHARE
 
For the years ended December 31, 2007, 20062009, 2008 and 2005,2007, earnings (loss) per share (“EPS”) was calculated as follows:
 
                        
 Year Ended
 Year Ended
 Year Ended
  Year Ended
 Year Ended
 Year Ended
 
 December 31,
 December 31,
 December 31,
  December 31,
 December 31,
 December 31,
 
 2007 2006 2005  2009 2008 2007 
Basic EPS
                        
Net income (loss)  (477)  782   266   (1,131)  (786)  (477)
Weighted average shares outstanding  898,731,154   896,136,969   892,760,520   876,928,190   891,955,940   898,731,154 
Basic EPS  (0.53)  0.87   0.30   (1.29)  (0.88)  (0.53)
Diluted EPS
                        
Net income (loss)  (477)  782   266   (1,131)  (786)  (477)
Convertible debt interest, net of tax  —   17   5 
       
Net income (loss) adjusted  (477)  799   271   (1,131)  (786)  (477)
Weighted average shares outstanding  898,731,154   896,136,969   892,760,520   876,928,190   891,955,940   898,731,154 
Dilutive effect of stock options  —   211,770   854,523   —   —   — 
Dilutive effect of nonvested shares  —   1,252,996   116,233   —   —   — 
Dilutive effect of convertible debt  —   60,941,995   41,880,104   —   —   — 
       
Number of shares used in calculating diluted EPS  898,731,154   958,543,730   935,611,380   876,928,190   891,955,940   898,731,154 
Diluted EPS  (0.53)  0.83   0.29   (1.29)  (0.88)  (0.53)
 
At December 31, 2007,2009, if the Company had reported an income, outstanding stock options would have included anti-dilutive shares totalledtotalling approximately 46,722,25537,943,832 shares. At December 31, 20062008 and 2005,2007, outstanding stock options included anti-dilutive shares totalledtotalling approximately 56,113,482 shares39,431,433 and 59,704,04446,722,255 shares, respectively.
There was also the equivalent of 38,404,118 common shares outstanding for convertible debt, out of which 5,624 for the 2013 bonds and 38,398,494 for the 2016 bonds, with no dilutive effect. None of these bonds have been converted to shares during 2009.
18.  OTHER INCOME AND EXPENSES, NET
Other income and expenses, net consisted of the following:
             
  Year Ended
  Year Ended
  Year Ended
 
  December 31,
  December 31,
  December 31,
 
  2009  2008  2007 
 
Research and development funding  202   83   97 
Start-up and phase-out costs
  (39)  (17)  (24)
Exchange gain, net  11   20   1 
Patent costs, net of gain from settlement  (5)  (24)  (28)
Gain on sale of long-lived assets, net  3   4   2 
Other, net  (6)  (4)  — 
             
Total
  166   62   48 
             
The Company receives significant public funding from governmental agencies in several jurisdictions. Public funding for research and development is recognized ratably as the related costs are incurred once the agreement with the respective governmental agency has been signed and all applicable conditions have been met.
Start-up costs represent costs incurred in thestart-up and testing of the Company’s new manufacturing facilities, before reaching the earlier of a minimum level of production or six months after the fabrication line’s quality certification. Phase-out costs for facilities during the closing stage are treated in the same manner.
Exchange gains and losses included in “Other income and expenses, net” represent the portion of exchange rate changes on transactions denominated in currencies other than an entity’s functional currency and the changes in fair value ofheld-for-trading derivative instruments which are not designated as hedge and which have a cash flow effect related to operating transactions.


F-47F-54

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in millions of U.S. dollars, except share and per share amounts)
There was also the equivalent of 42,310,582 common shares outstanding for convertible debt, out of which 74,936 for the 2013 bonds and 42,235,646 for the 2016 bonds. None of these bonds have been converted to shares during 2007.
20 — OTHER INCOME AND EXPENSES, NET
 
Other income and expenses,Patent costs, net consisted of the following:
             
  Year Ended
  Year Ended
  Year Ended
 
  December 31,
  December 31,
  December 31,
 
  2007  2006  2005 
 
Research and development funding  97   54   76 
Start-up costs
  (24)  (57)  (56)
Exchange gain (loss), net  1   (9)  (16)
Patent litigation costs  (18)  (22)  (14)
Patent pre-litigation costs  (10)  (7)  (8)
Gain on sale of investment in Accent  —   6   — 
Gain on sale of other non-current assets, net  2   2   12 
Other, net  —   (2)  (3)
             
Total
  48   (35)  (9)
             
Patent litigation costssettlement agreements, include legal and attorney fees and payment offor claims, and patent pre-litigation costs are composed of consultancy fees and legal fees. Patentfees, netted against settlements, which primarily includes reimbursements of prior patent litigation costs are costs incurred in respect of pending litigation. Patent pre-litigation costs are costs incurred to prepare for licensing discussions with third parties with a view to concluding an agreement.costs.
 
As at December 31, 2008 and 2007, the caption “Other, net” included a $3 million and a $7 million income respectively, net of attorney and consultancy fees that the Company received in its ongoing pursuit to recover damages related to the case with its former Treasurer as previously disclosed.
 
On June 29, 2006, the Company sold to Sofinnova Capital V its participation in Accent Srl, a subsidiary based in Italy. Accent Srl, in which the Company held a 51% interest, was jointly formed with Cadence Design Systems Inc. and is specialized in hardware and software design and consulting services for integrated circuit design and fabrication. The total consideration amounting to $7 million was received in cash on June 29, 2006. Net of consolidated carrying amount and transactions related expenses, the divestiture resulted in a net pre-tax gain of $6 million which was recorded in “Other income and expenses, net” in the 2006 consolidated statements of income. In addition the Company simultaneously entered into a license agreement with Accent by which the Company granted to Accent, for a total agreed lump sum amount of $3 million, the right to use “as is” and with no right to future development certain specific intellectual property of the Company that are currently used in Accent’s business activities. The total consideration was recognized immediately in 2006 and recorded as “Other revenues” in the consolidated statements of income. The Company was also granted warrants for 6,675 new shares of Accent. Such warrants expire after 15 years and can only be exercised in the event of a change of control or an Initial Public Offering of Accent above a predetermined value.
19.  21 — IMPAIRMENT, RESTRUCTURING CHARGES AND OTHER RELATED CLOSURE COSTS
Impairment, restructuring charges and other related closure costs incurred in 2009, 2008, and 2007 are summarized as follows:
                 
           Total impairment,
 
           restructuring
 
           charges and other
 
     Restructuring
  Other related
  related closure
 
Year Ended December 31, 2009
 Impairment  charges  closure costs  costs 
 
2007 restructuring plan  (25)  (69)  (32)  (126)
STE restructuring plan  —   (99)  (1)  (100)
Goodwill annual impairment test  (6)  —   —   (6)
Other restructuring initiatives  (4)  (53)  (2)  (59)
Total
  (35)  (221)  (35)  (291)
                 
                 
           Total impairment,
 
           restructuring
 
           charges and other
 
     Restructuring
  Other related
  related closure
 
Year Ended December 31, 2008
 Impairment  charges  closure costs  costs 
 
2007 restructuring plan  (77)  (79)  (8)  (164)
FMG deconsolidation  (190)  (2)  (24)  (216)
Goodwill annual impairment test  (13)  —   —   (13)
Other restructuring initiatives  (10)  (75)  (3)  (88)
Total
  (290)  (156)  (35)  (481)
                 
                 
           Total impairment,
 
           restructuring
 
           charges and other
 
     Restructuring
  Other related
  related closure
 
Year Ended December 31, 2007
 Impairment  charges  closure costs  costs 
 
2007 restructuring plan  (11)  (62)  —   (73)
FMG deconsolidation  (1,107)  —   (5)  (1,112)
Other restructuring initiatives  (5)  (8)  (30)  (43)
Total
  (1,123)  (70)  (35)  (1,228)
                 
Impairment charges and disposal loss
 
In 2007,2009, the Company has incurred impairment and restructuring charges related to the following items: (i) the valuation of assets to be disposed of within Flash memory business deconsolidation under FAS 144 held-for-sale model; (ii) the manufacturing plan committed to by the Company in the second quarter of 2007 (the “2007 restructuring plan”); (iii) the 150mm restructuring plan started in 2003; (iv) the headcount reduction plan announced in the second quarter of 2005; (v)recorded impairment charges on certain financial investments carried at cost and on intangible assets pursuant to the annual impairment test in order to assess recoverability of the carrying value of goodwill and related intangible assets.for $35 million relating primarily to:
 
During the third quarter of 2003, the Company commenced a plan to restructure its 150mm fab operations and part of its back-end operations in order to improve cost competitiveness. The 150mm restructuring plan focuses on cost reduction by migrating a large part of European and U.S. 150mm production to Singapore and by upgrading production to finer geometry 200mm wafer fabs. The plan includes the discontinuation of the 150mm production of
•  $25 million impairment linked to the 2007 restructuring plan. These impairment charges were triggered by the reclassification of the Company’s long-lived assets of its manufacturing site in Carrollton (Texas) (previously designated for closure as part of the 2007 restructuring plan) on the line “Assets held for sale” on the consolidated balance sheets, pursuant to its decision to sell the facility. The reclassified assets are primarily property and other long-lived assets that satisfied all of the criteria required for the“held-for-sale” classification guidance. The carrying value of the assets to be sold totalled $51 million at the date of the reclassification, while fair value less costs to sell amounted to approximately $30 million, which generated an impairment charge of $21 million. Fair value less costs to sell was based on the consideration to be received upon the sale, which is expected to occur within one year. This fair value measure corresponds to a level 2 fair value hierarchy for nonfinancial assets measured at fair value on a nonrecurring basis, as described in Note 25. The Company also recorded impairment charges totalling


F-48F-55

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in millions of U.S. dollars, except share and per share amounts)
 
$4 million on certain specific equipment of the Company’s manufacturing site in Phoenix (Arizona), for which no alternative future use existed within the Company. Fair value was estimated based on broker prices available for similar assets from past sales, which corresponds to a level 2 fair value hierarchy for nonfinancial assets measured at fair value on a nonrecurring basis, as described in Note 25.
Rennes (France)
The long-lived assets affected by the restructuring plans are owned by the Company and were assessed for impairment using theheld-for-use model when they did not satisfy all of the criteria required forheld-for-sale status. In 2009, 2008 and 2007, apart from assets held for sale within FMG deconsolidation and long-lived assets of the manufacturing site in Carrollton (Texas), the closure as soon as operationally feasibleCompany did not identify any significant tangible asset to be disposed of the 150mm wafer pilot line in Castelletto (Italy) and the downsizing by approximately one-half of the 150mm wafer fab in Carrollton, Texas. Furthermore, the 150mm wafer fab productions in Agrate (Italy) and Rousset (France) will be gradually phased-out in favor of 200mm waferramp-ups at existing facilities in these locations, which will be expanded or upgraded to accommodate additional finer geometry wafer capacity. The Company incurred the balance of the restructuring charges related to this manufacturing restructuring plan in 2007, later than previously anticipated to accommodate unforeseen qualification requirements of the Company’s customers.sale.
•  $6 million impairment on goodwill, pursuant to the interim impairment test on goodwill performed during the first and second quarter of 2009. As a result of this testing and a decline in the business outlook for the Vision business acquired in 1999, the Company recorded a $6 million impairment charge. The Vision business is included in the Automotive Consumer Computer and Communication infrastructure Product Group reporting segment and is dedicated to image sensors, camera modules and image processors for mobile phones.
•  $3 millionother-than-temporary impairment on an investment carried at cost based on the liquidation value of the investment.
•  $1 million of other non-cash charges.
 
In the first quarter of 2005,2008, the Company decided to reduce its Access technology productsrecorded impairment charges and disposal loss for Customer Premises Equipment (“CPE”) modem products. This decision was intended to eliminate certain low volume, non-strategic product families whose returns in the current environment did not meet internal targets. Additional restructuring initiatives were also implemented in the first quarter of 2005 such as the closure of a research and development design center in Karlsruhe (Germany) and in Malvern (U.S.A.), and the discontinuation of a development project in Singapore. In May 2005, the Company announced additional restructuring efforts to improve profitability. These initiatives were aimed to reduce the Company’s workforce by 3,000 outside Asia by the second half of 2006, of which 2,300 are planned for Europe. The Company plans to reorganize its European activities by optimizing on a global scale its EWS activities (wafer testing); harmonizing its support functions; streamlining its activities outside its manufacturing areas and by disengaging from certain activities.$290 million corresponding primarily to:
•  $190 million loss on FMG deconsolidation, which, together with the $1,107 million recorded in the year ended December 31, 2007, gives the total loss of the FMG deconsolidation of $1,296 million.
•  $75 million impairment charge on long-lived assets of the Company’s manufacturing site Phoenix (Arizona).
•  $13 million impairment on goodwill, pursuant to the annual impairment test on goodwill and indefinite long-lived assets.
•  $6 millionother-than-temporary impairment on investments carried at cost.
•  $4 million impairment on certain specific equipment with no alternative future use.
 
In the second quarter of 2007, the Company announced it had entered intorecorded impairment charges for $1,123 million corresponding primarily to $1,107 million impairment as a result of the signing of the definitive agreement with Intel to create a new independent semiconductor company fromfor the key assets ofFMG deconsolidation and upon meeting the Company’s and Intel’s Flash memory business as described in details in Note 7. Upon meeting FAS 144 criteria for assets held for sale, to adjust the Company reclassified the assets to be transferred pursuant FMG deconsolidation from their original balance sheet classification to the line “Assets held for sale”, reflectingvalue of the to-be-contributed assets atto fair value less costs to sell. Fair value less costs to sell was based on the net consideration provided for in the agreement and significant estimates.
Restructuring charges and other related closure costs
The Company is currently engaged in two major restructuring plans, the STE restructuring plan and the 2007 restructuring plan that are briefly described hereafter. The Company is also engaged in various initiatives launched in 2008 and 2009 aimed at reducing the operating expenses through a workforce reduction.
In addition,April 2009, ST-Ericsson announced a restructuring plan to be completed by mid-2010 (the “STE restructuring plan”). The main actions included in the second halfrestructuring plan are a re-alignment of 2007,product roadmaps to create a more agile and cost-efficient R&D organization and a reduction in workforce of 1,200 worldwide to reflect further integration activities following the Company started to incur certainmerger. On December 3, 2009, ST-Ericsson expanded its restructuring charges related toplan, targeting additional annualized savings in operating expenses and spending, along with an extensive R&D efficiency program. The targeted time of completion of this new plan is the disposalend of FMG business.2010.
 
The Company announced in the third quarter of 2007 that management committed to a new restructuring plan (“the 2007 restructuring plan”). This plan is aimed at redefining the Company’s manufacturing strategy in order to be more competitive in the semiconductor market.market (the “2007 restructuring plan”). In addition to the prior restructuring measures undertaken in the past years, this new manufacturing plan willwould pursue, among other initiatives: the transfer of 150mm production from Carrollton Texas(Texas) to Asia, the transfer of 200mm production from Phoenix Arizona,(Arizona), to Europe and Asia and the restructuring of the


F-56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
manufacturing operations in Morocco with a progressive phase out of the activities in Ain Sebaa site synchronized with a significant growth in Bouskoura site.
 
In the third quarter of 2007,2009, the Company also performed the yearly impairment test in order to assess the recoverability of the goodwill carrying value.
Impairment,incurred restructuring charges and other related closure costs incurred in 2007, 2006, and 2005 are summarized as follows:for $256 million relating primarily to:
 
                 
           Total impairment,
 
           restructuring
 
           charges and other
 
     Restructuring
  Other related
  related closure
 
Year ended December 31, 2007
 Impairment  charges  closure costs  costs 
 
150mm fab plan  —   (2)  (27)  (29)
2005 restructuring initiatives  —   (6)  (3)  (9)
2007 restructuring plan  (11)  (62)  —   (73)
FMG deconsolidation  (1,107)  —   (5)  (1,112)
Other  (5)  —   —   (5)
                 
Total
  (1,123)  (70)  (35)  (1,228)
                 
•  $100 million for the STE restructuring plan for on-going termination benefits for involuntary leaves pursuant to the closure of certain locations in Europe, the Unites States of America and Asia.
•  $101 million for the 2007 restructuring plan primarily related to closure costs and one-time termination benefits to be paid to employees who render services until the complete closure of the Carrollton (Texas) and Phoenix (Arizona) fabs.
•  $55 million restructuring charges related to former committed restructuring initiatives. These restructuring charges consisted primarily of termination benefits in Asia and voluntary termination arrangements in certain European locations. Additionally, the Company paid $39 million related to the restructuring plan announced upon the integration of NXP wireless business, as described in Note 7. The amounts paid were charged against the liability recorded in 2008 in the purchase price allocation.
In 2008, the Company incurred restructuring charges and other related closure costs for $191 million relating primarily to:
 
•  $87 million for the 2007 restructuring plan primarily related to $75 million accrued one-time termination benefits for employees who provide services beyond the legal retention period until the complete closure of the manufacturing sites of Carrollton (Texas) and Phoenix (Arizona) and $12 million of other costs in Morocco and France.
•  $26 million of restructuring charges related to FMG disposal consisting primarily in phase-out costs.
•  $78 million of other restructuring initiatives, consisting primarily of $69 million in termination benefits for voluntary leaves and early retirement arrangements in certain European locations and $9 million final costs relating to the former restructuring plans of the Company.
•  In connection with the integration of Genesis and of the wireless business from NXP, the Company launched in 2008 new restructuring initiatives aimed at rationalizing its operations and its worldwide workforce. The restructuring provisions related to the newly integrated businesses amounted to $46 million at acquisition date, of which $44 million recorded on the ST-NXP business combination. The latter represented estimated redundancy costs that will be incurred to achieve the rationalization of the combined organization as anticipated as part of the transaction. It covers approximately 500 people includingsub-contractors. The plan affects mainly employees in Belgium, China, Germany, India, the Netherlands, Switzerland and the United States.
In 2007, the company incurred restructuring charges and other related closure costs for $105 million relating primarily to:
•  $62 million for the 2007 restructuring plan
•  $5 million of other related closure costs incurred as a result of the FMG deconsolidation
•  $38 million on other restructuring initiatives (150 mm fab plan and the 2005 headcount reduction plan)


F-49F-57

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in millions of U.S. dollars, except share and per share amounts)
                 
           Total impairment,
 
           restructuring
 
           charges and other
 
     Restructuring
  Other related
  related closure
 
Year ended December 31, 2006
 Impairment  charges  closure costs  costs 
 
150mm fab plan  (1)  (7)  (14)  (22)
2005 restructuring initiatives  (1)  (36)  (8)  (45)
Other  (10)  —   —   (10)
Total  (12)  (43)  (22)  (77)
                 
                 
           Total impairment,
 
           restructuring
 
           charges and other
 
     Restructuring
  Other related
  related closure
 
Year ended December 31, 2005
 Impairment  charges  closure costs  costs 
 
150mm fab plan  —   (4)  (9)  (13)
2005 restructuring initiatives  (66)  (46)  (2)  (114)
Other  (1)  —   —   (1)
Total  (67)  (50)  (11)  (128)
                 
Impairment charges
In 2007, the Company recorded impairment charges as follows:
• $1,106 million impairment as a result of the signing of the definitive agreement for the FMG deconsolidation and upon meeting FAS 144 criteria for assets held for sale, to adjust the value of the to-be-contributed assets to fair value less costs to sell. Fair value less costs to sell was based on the net consideration provided for in the agreement and significant estimates. The final impairment charge could be different subject to further adjustments due to business and market evolution prior to the closing of the transaction;
• $1 million impairment charge on certain specific equipment that could not be transferred as part of FMG deconsolidation and for which no alternative future use could be found in the Company;
• $11 million impairment on certain tangible assets, mainly equipment, that the Company identified without alternative future use following its commitment to the closure of two front-end sites and one back-end site as part of the 2007 restructuring plan;
• $2 million impairment on technologies without any alternative future use based on the Company’s products’ roadmap;
• $3 million other-than-temporary impairment charge on a minority equity investment carried at cost. The impairment loss was based on the valuation for the underlying investment of a new round of third party financing
In 2006, the Company recorded impairment charges as follows:
• $6 million impairment of goodwill pursuant to the decision of the Company to cease product development from technologies inherited from Tioga business acquisition. The Company reports Tioga business as part of the Application Specific Product Groups (“ASG”) product segment. Following this decision, the Company recorded the full write-off of Tioga goodwill carrying amount.
• $4 million impairment on technologies purchased as part of Tioga business acquisition, which were determined to be without any alternative use;
• $1 million impairment on equipment and machinery pursuant to the decision of the Company to discontinue a production line in one of its back-end sites;
• $1 million impairment on equipment and machinery identified without any alternative use in one of the Company’s European 150 mm sites.

F-50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
 
 
In 2005, the Company recorded impairment charges as follows:
• $39 million impairment of goodwill pursuantChanges to the decision of the Company to reduce its Access technology products for Customer Premises Equipment (“CPE”) modem products. The Company reports CPE business as part of the Access reporting unit, included in the Application Specific Products Group (“ASG”). Following the decision to discontinue a portion of this reporting unit, the Company, in compliance with FAS 142 reassessed the allocation of goodwill between the Access reporting unit and the business to be disposed of according to their relative fair values using market comparables;
• $22 million of purchased technologies were identified without any alternative use following the discontinuation of CPE product lines;
• $6 million for technologies and other intangible assets pursuant to the decision of the Company to close its research and development design centre in Karlsruhe (Germany), the discontinuation of a development project in Singapore, the optimization of its EWS (wafer testing) in the United States and other intangibles determined to be obsolete.
The long-lived assets affected by the restructuring plans are owned by the Company and were assessed for impairment using the held-for-use model defined in FAS 144 when they did not satisfy all of the criteria required for held-for-sale status. In 2007, apart from assets held for sale within FMG deconsolidation, the Company did not identify any significant tangible asset to be disposed of by sale. In 2006, the Company identified certain machinery and equipment to be disposed of by sale in one of its back-end sites in Morocco, following the decision of the Company to disengage from SPG activities as part of its latest restructuring initiatives. These assets did not generate any impairment charge and were reflected at their carrying valueprovisions recorded on the line “Other receivables and assets” of the consolidated balance sheet as at December 31, 2006. These assets were soldof the company in 2007, which generated a gain amounting to $2 million reported on the line “Other income2009 and expenses, net” in the consolidated statements of income for the year ended December 31, 2007.
In January 2007, NXP Semiconductors B.V. announced that it would withdraw from the alliance the Company operates jointly with Freescale Semiconductor, Inc. for certain research and development activities and the operation of a 300mm wafer pilot line fab in Crolles (France) (“Crolles2 alliance”). Therefore, the Crolles2 alliance expired on December 31, 2007. Freescale Semiconductor, Inc. had also notified the Company that it would terminate its participation to the Crolles2 alliance as of such date.
Restructuring charges and other related closure costs in 2007, 2006 and 20052008 are summarized as follows:
 
                             
  150mm fab plan     2005
  2007
     Total restructuring
 
     Other related
     restructuring
  restructuring
  FMG
  & other related
 
  Restructuring  closure costs  Total  initiatives  plan  disposal  closure costs 
 
Provision as at December 31, 2004
  36   1   37   —       3   40 
Charges incurred in 2005  10   9   19   48       —   67 
Reversal of provision  (6)      (6)              (6)
Amounts paid  (23)  (10)  (33)  (21)      (2)  (56)
Currency translation effect  (4)  —   (4)  —       —   (4)
                             
Provision as at December 31, 2005
  13   —   13   27   —   1   41 
                             
Charges incurred in 2006  7   14   21   44       —   65 
Amounts paid  —7   —14   —21   —54       —1   —76 
Currency translation effect  1   —   1   1       —   2 
                             
Provision as at December 31, 2006
  14   —   14   18   —   —   32 
                             
Charges incurred in 2007  4   27   31   9   62   5   107 
Reversal of provision  (2)  —   (2)  —   —   —   (2)
Amounts paid  (4)  (27)  (31)  (19)  (2)  (3)  (55)
                             
Provision as at December 31, 2007
  12   —   12   8   60   2   82 
                             
                     
  STE
  2007
     Other
    
  Restructuring
  Restructuring
  FMG
  restructuring
    
  plan  plan  disposal  initiatives  Total 
 
Provision as at December 31, 2007
  —   60   2   20   82 
Charges incurred in 2008  —   87   51   78   216 
Provision on business combinations  —   —   —   46   46 
Amounts paid  —   (34)  (33)  (43)  (110)
Provision as at December 31, 2008
  —   113   20   101   234 
Charges incurred in 2009  100   101   —   55   256 
Amounts paid  (17)  (156)  (20)  (103)  (296)
Provision as at December 31, 2009
  83   58   —   53   194 
                     


F-51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
150mm fab plan:
Restructuring charges incurred in 2007 on this plan amounted to $31 million, primarily related to transfer, maintenance and decontamination associated with the closure and transfer of production for the sites of Rousset (France) and Agrate (Italy). In 2007, the Company reversed a $2 million provision recorded in 2003 to cover the Company’s legal obligation to pay penalties to the French governmental institutions related to the closure of Rennes production site since the French authorities decided in 2007 to waive the payment of such penalties.
Restructuring charges incurred in 2006 amounted to $7 million termination benefits, and $14 million of other closure costs mainly related to maintenance and decontamination incurred in Agrate (Italy) and Rousset (France) sites.
Restructuring charges incurred in 2005 amounted to $10 million, mainly related to termination benefits, and $9 million of other related closure costs for transfers of production. In 2005 management decided to continue a specific back-end fabrication line in Rennes (France), which had originally been designated for full closure. This decision resulted in a $6 million reversal of the restructuring provision.
2005 restructuring initiatives:
In 2007, the Company recorded a total restructuring charge amounting to $9 million, detailed as follows: (i) $6 million corresponded to workforce reduction initiatives in Europe; and (ii) $3 million was related to reorganization actions aiming at optimizing the Company’s EWS activities.
In 2006, the Company recorded a total restructuring charge amounting to $44 million, of which $37 million corresponded to workforce reduction initiatives in Europe and $7 million were related to reorganization of its EWS activities as part of the plan of reorganization and optimization of its activities as defined in 2005.
In 2005, the Company commenced these restructuring initiatives and recorded the following charges:
• Pursuant to the decision of reducing its Access technology products for Customer Premises Equipment (“CPE”) modem products, the Company committed to an exit plan in Zaventem (Belgium) and recorded in 2005 $4 million of workforce termination benefits.
• In order to streamline its research and development sites, the Company decided to cease its activities in two locations, Karlsruhe (Germany) and Malvern (U.S.A.). The Company incurred in 2005 $1 million restructuring charges corresponding to employee termination costs and of $1 million of unused lease charges related to the closure of these two sites.
• In addition, charges totalling $2 million were paid in 2005 by the Company for voluntary termination benefits for certain employees. The Company also incurred a $2 million charge in 2005 related to additional restructuring initiatives, mainly in the United States and Mexico.
• The Company recorded a total restructuring charge amounting to $38 million related to termination incentives for two of the Company’s subsidiaries in Europe, who accepted special termination arrangements.
2007 restructuring plan:
The Company recorded a total restructuring charge for its latest restructuring plan amounting to $62 million, mainly related to termination benefits for involuntary leaves. This total charge includes the provision for contractual, legal and past practice termination benefits to be paid for an estimated number of employees primarily in the United States, France and Morocco amounting to $37 million, and $25 million corresponding to one-time termination benefits established by the restructuring plan as communicated in the United States, which specifies certain retention and completion bonuses to be paid to employees who are required to render service until full closure of the manufacturing sites.
FMG disposal:
In 2007, the Company recorded $5 million restructuring charges related to FMG disposal group of assets, mainly related to transfer, maintenance and decontamination costs.


F-52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
 
Total impairment, restructuring charges and other related closure costs:costs
 
The 2003 restructuring150mm fab plan and related manufacturing initiatives were largelyfully completed in 2007. Of the total $330 million2008. The expected pre-tax charges to be incurred under the plan $345were estimated to total $330 million, have beenwhile $347 million were incurred as of December 31, 2007 ($29 million in 2007, $22 in 2006, $13 million in 2005, $76 million in 2004 and $205 million in 2003).2008.
 
The 2005 headcount reduction plan, which was nearly fully completed as at December 31, 2007,2008, was originally expected to result in pre-tax charges of $100 million, out of which $95while $102 million have beenwere incurred as at December 31, 2007 ($9 million in 2007, $45 in 2006 and $41 million in 2005).2008.
 
The 2007 restructuring plan is expected to result in pre-tax charges in the range of $270 to $300 million, of which $62$250 million have been incurred as of December 31, 2007.2009. This plan is expected to be completed in the second half of 2010.
The STE restructuring plan, which is expected to result in a total pre-tax charge in the range of $135 million to $155 million, registered a total charge of $100 million as of December 31, 2009. This plan is expected to be completed by end of 2010.
 
In 2007,2009, total amounts paid for restructuring and related closure costs amounted to $55$296 million. The total actual costs that the Company will incur may differ from these estimates based on the timing required to complete the restructuring plan, the number of people involved, the final agreed termination benefits and the costs associated with the transfer of equipment, products and processes.
 
22 — INTEREST INCOME (EXPENSE), NET
20.  INTEREST INCOME, NET
 
Interest income, (expense), net consisted of the following:
 
                        
 Year Ended
 Year Ended
 Year Ended
  Year Ended
 Year Ended
 Year Ended
 
 December 31,
 December 31,
 December 31,
  December 31,
 December 31,
 December 31,
 
 2007 2006 2005  2009 2008 2007 
Income  156   143   53   59   132   156 
Expense  (73)  (50)  (19)  (50)  (81)  (73)
              
Total
  83   93   34   9   51   83 
              
 
No borrowing cost was capitalized in 20072009, 2008 and 2006, while capitalized interest was $2 million in 2005.2007. Interest income on floating rate notes classified asavailable-for-sale marketable securities amounted to $8 million for the year ended December 31, 2009, $37 million for the year ended December 31, 2008 and to $41 million for the year ended December 31, 2007. Interest income on auction rate securities totaled $7 million, $14 million and $24 million for the years ended December 31, 2009, 2008 and 2007 andrespectively. Interest income on Numonyx long term notes classified asavailable-for-sale amounted to $5$16 million for the year ended December 31, 2006. Interest income on auction rate securities amounted to $24 million2009 and $9$11 million for the yearsyear ended December 31, 2007 and 2006 respectively.2008.


F-58

In 2005, the Company invested available cash in credit-linked deposits issued by several primary banks, which maturity was scheduled before year-end. Interest income on these marketable securities for the years ended December 31, 2005 amounted to $18 million.
 
23 — INCOME TAXNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
 
21.  INCOME TAX
Income (loss) before income tax expense is comprised of the following:
 
             
  Year Ended
  Year Ended
  Year Ended
 
  December 31,
  December 31,
  December 31,
 
  2007  2006  2005 
 
Income (loss) recorded in The Netherlands  (54)  (12)  (60)
Income from foreign operations  (440)  776   335 
             
Income before income tax expense  (494)  764   275 
             
             
  Year Ended
  Year Ended
  Year Ended
 
  December 31,
  December 31,
  December 31,
 
  2009  2008  2007 
 
Loss recorded in The Netherlands  (376)  (1,232)  (54)
Income (loss) from foreign operations  (1,120)  409   (440)
             
Loss before income tax expense  (1,496)  (823)  (494)
             
 
STMicroelectronics N.V. and its subsidiaries are individually liable for income taxes in their jurisdictions. Tax losses can only offset profits generated by the taxable entity incurring such loss.


F-53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
 
Income tax benefit (expense) is comprised of the following:
 
                        
 Year Ended
 Year Ended
 Year Ended
  Year Ended
 Year Ended
 Year Ended
 
 December 31,
 December 31,
 December 31,
  December 31,
 December 31,
 December 31,
 
 2007 2006 2005  2009 2008 2007 
The Netherlands taxes — current  (4)  (7)  (6)  4   (1)  (4)
Foreign taxes — current  (121)  (47)  (33)  (54)  (25)  (121)
              
Current taxes  (125)  (54)  (39)  (50)  (26)  (125)
Foreign deferred taxes  148   74   31   145   69   148 
              
Income tax benefit (expense)  23   20   (8)
Income tax benefit  95   43   23 
              
 
The principal items comprising the differences in income taxes computed at the Netherlands statutory rate of 25.5% in 2007, 29.6% in 20062009, 2008 and 34.5% in 20052007, and the effective income tax rate are the following:
 
                        
 Year Ended
 Year Ended
 Year Ended
  Year Ended
 Year Ended
 Year Ended
 
 December 31,
 December 31,
 December 31,
  December 31,
 December 31,
 December 31,
 
 2007 2006 2005  2009 2008 2007 
Income tax expense computed at statutory rate  126   (226)  (95)
Permanent and other differences  (20)  (27)  (26)
Income tax benefit computed at statutory rate  382   210   126 
Non-deductible, non-taxable and other permanent differences, net  (34)  —   (20)
Loss on equity investment  (84)  (139)  — 
Valuation allowance adjustments  (1)  (8)  —   (56)  (18)  (1)
Impact of prior years adjustments  (17)  63   28   21   48   (17)
Effects of change in enacted tax rate on deferred taxes  (21)  —   —   (7)  —   (21)
Current year credits  63   49   20   76   66   63 
Other tax and credits  (3)  (1)  (2)  (4)  2   (3)
Benefits from tax holidays  122   134   48   2   34   122 
Current year tax risk  (23)  (31)  — 
Impact of FMG deconsolidation  (113)  —   —   —   (77)  (113)
Earnings of subsidiaries taxed at different rates  (113)  36   19   (178)  (52)  (113)
              
Income tax benefit (expense)  23   20   (8)  95   43   23 
              
 
The linelines “Impact of prior years’ adjustments” includesand “Current year tax risk” include amounts that are further disclosed at “Changes to the uncertain tax positions of prior years” in the uncertain tax position reconciliation table included in this note.
 
TheAs detailed in Note 2.6, following the passage of the French Finance Act for 2008, which included several changes to the research tax credit regime, beginning on January 1, 2008, French research tax credits that in prior years were accounted for as a reduction in income tax expense were deemed to be grants in substance. These tax credits, totaling $146 million and $161 million, were reported as a reduction of research and development expenses in the statement of income for the years ended December 31, 2009 and 2008, respectively.
In 2009 and 2008, the line “Earnings of subsidiaries taxed at different rates” includes a decrease of $123 million and $99 million, respectively, related to significant losses in countries subject to tax holidays. In 2007, this line includes a $97 million decrease related to the FMG deconsolidation for amounts that were deductible in tax jurisdictions with statutory tax rates substantially below the Netherlands statutory rate. In 2009, the Company


F-59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
 
In 2006, asreceived $121 million for research tax credits for the resultperiod prior to January 1, 2009 resulting in a decrease in deferred tax assets of favourable events that occurred in that year, the Company recognized approximately $23 million in tax benefits related to Research and Development Credits and Extraterritorial Income Exclusions in the United States for prior periods. In addition the Company reversed $90 million in income tax provisions related to a previously received tax assessment in the United States based on a final settlement upon appeals.same amount.
 
The tax holidays represent a tax exemption period aimed to attract foreign technological investment in certain tax jurisdictions. The effect of the tax benefits on basic earnings per share was $0.14, $0.15,$0.00, $0.04, and $0.05$0.14 for the years ended December 31, 2007, 2006,2009, 2008, and 2005,2007, respectively. These agreements are present in various countries and include programs that reduce up to and including 100% of taxes in years affected by the agreements. The Company’s tax holidays expire at various dates through the year ending December 31, 2019.


F-54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
 
Deferred tax assets and liabilities consisted of the following:
 
                
 December 31,
 December 31,
  December 31,
 December 31,
 2007 2006  2009 2008
Tax loss carryforwards and investment credits  213   159   639   460 
Inventory valuation  38   25   34   29 
Impairment and restructuring charges  76   18   95   102 
Fixed asset depreciation in arrears  61   81   53   64 
Receivables for government funding  169   116   18   189 
Tax allowances granted on past capital investments  1,054   975   1,096   1,086 
Pension service costs  24   29   41   39 
Stock awards  11   26 
Commercial accruals  10   11   7   9 
Other temporary differences  67   52   62   45 
     
Total deferred tax assets  1,712   1,466   2,056   2,049 
Valuation allowances  (1,123)  (1,039)  (1,337)  (1,283)
     
Deferred tax assets, net  589   427   719   766 
     
Accelerated fixed asset depreciation  (110)  (118)  (66)  (86)
Acquired intangible assets  (11)  (8)  (31)  (61)
Advances of government funding  (24)  (25)  (13)  (17)
Other temporary differences  (27)  (30)  (35)  (32)
     
Deferred tax liabilities  (172)  (181)  (145)  (196)
     
Net deferred income tax asset  417   246   574   570 
     
For a particular tax-paying component of the Company and within a particular tax jurisdiction, all current deferred tax liabilities and assets are offset and presented as a single amount, similarly to non-current deferred tax liabilities and assets. The Company does not offset deferred tax liabilities and assets attributable to different tax-paying components or to different tax jurisdictions.
 
As of December 31, 2007,2009, the Company and its subsidiaries have gross deferred tax assets on tax loss carryforwards and investment credits that expire starting 2008,2010, as follows:
 
       
Year
     
2007  1 
2008  10 
2009  9 
2010  21   9 
2011  23 
2012  57 
2013  16 
Thereafter  172   534 
      
Total  213   639 
      
 
The valuation allowance for a particular tax jurisdiction is allocated between current and non-current deferred tax assets for that jurisdiction on a pro rata basis. The “Tax allowances granted on past capital investments” mainly related to a 2003 agreement granting the Company certain tax credits for capital investments purchased through the year ending December 31, 2006. Any unused tax credits granted under the agreement will continue to increase yearly by a legal inflationary index (currently 7%1.45% per annum). The credits may be utilized through 2020 or later depending on the Company meeting certain program criteria. In addition to this agreement, starting in 2007 the


F-60

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
Company will continuecontinues to receive tax credits on future years’the yearly capital investments, which may be used to offset that year’s tax liabilities and increases by the legal inflationary rate. However, pursuant to the inability to utilize these credits currently and in future years, the Company did not recognize any deferred tax asset on such tax allowance. As a result, there is no financial impact to the net deferred tax assets of the Company.
 
Tax loss carryforwards include $59 million in net operating losses acquired in business combinations, which continue to be fully provided for at December 31, 2007. Any eventual use of these tax loss carryforwards would result in a reduction of the goodwill recorded in the original business combination.
The amount of deferred tax expensebenefit (expense) recorded as a component of other comprehensive income (loss) was ($8)3) million and $7$17 million in 20072009 and 20062008 respectively and related primarily to the tax effects of the recognized unfunded status on defined benefits plans and unrealized gains on derivatives. The amount of deferred tax expense recorded as a component of other comprehensive income (loss) was $6 million in 2005 and related primarily to the tax effects of unrealized gains (losses) on derivatives as well as minimum pension liability adjustments.


F-55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
 
With the adoption of FIN 48 in the first quarter of 2007, the Company applies a two-step process forFor the evaluation of uncertain income tax positions based on a “more likely than not” threshold, the Company applies a two-step process to determine if a tax position will be sustained upon examination by the taxing authorities. The recognition threshold in step one permits the benefit from an uncertain position to be recognized only if it is more likely than not, or 50 percent assured that the tax position will be sustained upon examination by the taxing authorities. The measurement methodology in step two is based on “cumulative probability”, resulting in the recognition of the largest amount that is greater than 50 percent likely of being realized upon settlement with the taxing authority.
 
The Company recorded as of the adoption date an incremental tax liability of $8 million for the difference between the amounts recognized under its previous accounting policies and the income tax benefits determined under the new guidance. Total unrecognized tax benefits as of the date of adoption amounts to $82 million, of which $74 million correspond to tax exposure provisions recorded under accounting principles applicable prior to FIN 48 adoption. The cumulative effect of the change in the accounting principle that the Company applied to uncertain income tax positions was recorded in the first quarter of 2007 as an adjustment to retained earnings. A reconciliation of the 2009 beginning and ending amount of unrecognized tax benefits is as follows:
 
        
Balance at January 1, 2007
 $82 
Balance at December 31, 2008
 $153 
Additions based on tax positions related to the current year  4 �� 38 
Additions for tax positions of prior years  72   10 
Reductions for tax positions of prior years  (25)  (9)
Settlements  (6)  — 
Reductions for lapse of statute of limitations  (28)  — 
Foreign currency translation  1 
      
Balance at December 31, 2007
 $99 
Balance at December 31, 2009
 $193 
      
The reconciliation of unrecognized tax benefits in 2008 was as follows:
     
Balance at December 31, 2007
 $99 
Additions based on tax positions related to the current year  20 
Additions for tax positions of prior years  58 
Reductions for tax positions of prior years  (18)
Settlements  (3)
Reductions for lapse of statute of limitations  — 
Foreign currency translation  (3)
Balance at December 31, 2008
 $153 
 
The total amount of these unrecognized tax benefits would affect the effective tax rate, if recognized. It is reasonably possible that certain of the uncertain tax positions disclosed in the table above could increase by up to $64$71 million based upon tax examinations that are expected to be completed within the next 12 months.
 
Additionally, the Company elected to classify accrued interest and penalties related to uncertain tax positions as components of income tax expense in its consolidated statements of income. Interest and penalties are not material for the year or on a cumulative basis.
 
The tax years that remain open for review in the Company’s major tax jurisdictions are from 19961997 to 2007.
24 — COMMITMENTS
The Company’s commitments as of December 31, 2007 were as follows:
                             
  Total  2008  2009  2010  2011  2012  Thereafter 
  In million U.S.$    
 
Operating leases  300   57   41   30   25   18   129 
Purchase obligations  1,200   1,100   65   30   5         
of which:                            
Equipment and other asset purchase
  683   683                     
Foundry purchase
  266   266                     
Software, technology licenses and design
  251   151   65   30   5         
Other obligations  622   463   92   37   9   8   13 
                             
Total
  2,122   1,620   198   97   39   26   142 
                             
As a consequence of the Company’s July 10 announcement, the future shutdown of the Company’s plants in the United States will lead to negotiations with some of the Company’s suppliers. As no final date has been set, none of the contracts as reported above have been terminated nor do the reported amounts take into account any termination fees. This concerns approximately $51 million commitments (operating leases and purchasing obligations.)2009.


F-56F-61

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in millions of U.S. dollars, except share and per share amounts)
 
22.  COMMITMENTS
The Company’s commitments as of December 31, 2009 were as follows:
                             
  Total  2010  2011  2012  2013  2014  Thereafter 
  In million US$ 
 
Operating leases $481  $131  $98  $68  $43  $26  $115 
Purchase obligations  741   604   62   37   20   18   — 
of which:                            
Equipment purchase
  267   267   —   —   —   —   — 
Foundry purchase
  182   182   —   —   —   —   — 
Software, technology licenses and design
  292   155   62   37   20   18   — 
Other obligations  532   263   135   125   6   2   1 
                             
Total
  1,754   998   295   230   69   46   116 
                             
As a consequence of the Company’s July 10, 2007 announcement concerning the planned closures of certain of its manufacturing facilities, the shutdown of its plants in the United States is ongoing and negotiations with some of its suppliers continue. As no final date has been set, some of the contracts as reported above have been terminated. The termination fees for the sites still in operation have not been taken into account.
Operating leases are mainly related to building and equipment leases. The amount disclosed is composed of minimum payments for future leases from 2010 to 2014 and thereafter. The Company leases land, buildings, plants and equipment under operating leases that expire at various dates under non-cancellable lease agreements. Operating lease expenseexpenses was $174 million, $92 million and $62 million $56 million and $61 million in 2007, 2006 and 2005, respectively.
As described in Note 4,for the Company and Hynix Semiconductor signed on November 16, 2004 a joint-venture agreement to build a front-end memory-manufacturing facility in Wuxi City, Jiangsu Province, China. The business license was obtained in April 2005 and the Company paid $213 million, including $1 million of deal-related expenses in 2006 and $38 million of capital contributions in 2005. The Company has also entered into a debt guarantee agreement with a third party financial institution which will loan up to $250 million to the joint venture. Repayment of the loan by the joint venture is guaranteed by a deposit from the Company to the bank in an offsetting amount. As ofyears ended December 31, 2009, 2008 and 2007, $250 million has been loaned to the joint venture and a deposit placed by the Company with the bank in a like amount. Furthermore, the Company has contingent future loading obligations to purchase products from the joint venture, which have not been included in the table above because at this stage the amounts remain contingent and non-quantifiable.respectively.
 
Purchase obligations are primarily comprised of purchase commitments for equipment, and other assets, for outsourced foundry wafers and for software licenses. Following the termination of the Crolles2 alliance with Freescale Semiconductor and NXP Semiconductors, the Company signed an agreement with its two partners to commit to purchasing their300-mm equipment during 2008. The timing of the purchase has been agreed on the basis of the Company’s current visibility of the loading for the wafer fab. The contracts provide for the following schedule of purchases of the equipment: $140 million on March 14, 2008; $135 million on April 18, 2008; and, $129 million on June 30, 2008.
 
Other obligations primarily relate to firm contractual firm commitments with respect to partnership and cooperation agreements. Following the agreement signed on December 11, 2007 to acquire Genesis Microchip Inc. (“Genesis Microchip”), the Company committed to a cash tender offer to purchase all of the outstanding shares of Genesis Microchip for $8.65 per share, net to the holder in cash, for a total amount of $345 million approximately. Transaction has been completed in January 2008.
 
Other commitments
 
The Company has issued guarantees totalling $785$733 million related to its subsidiaries’ debt. Furthermore, the Company has umbrella facilities for an amount of $480 million extendable to its subsidiaries on a fully guaranteed basis. In addition, the Company and Intel have each granted in favor of Numonyx, in which the Company holds a 48.6% equity investment, a 50% guarantee not joint and several, for indebtedness related to the financing arrangements entered into by Numonyx for a $450 million term loan and a $100 million committed revolving credit facility.
 
25 — CONTINGENCIESSubject to the terms of the revolving facility agreement signed on December 4, 2009 between the Company and Telefonaktiebolaget LM Ericsson as lenders on one side and ST-Ericsson SA as borrower on the other side, the Company committed itself to make available to the borrower the amount of $25 million as a revolving facility.
23.  CONTINGENCIES
 
The Company is subject to the possibility of loss contingencies arising in the ordinary course of business. These include but are not limited to: warranty cost on the products of the Company, breach of contract claims, claims for unauthorized use of third partythird-party intellectual property, tax claims beyond assessed uncertain tax positions as well as claims for environmental damages. In determining loss contingencies, the Company considers the likelihood of a loss of an asset or the incurrence of a liability as well as the ability to reasonably estimate the amount of such loss or liability. An estimated loss is recorded when it is probable that a liability has been incurred and when the amount of the loss can be reasonably estimated. The Company regularly reevaluates claims to determine whether provisions need to be readjusted based on the most current information available to the Company. Changes in these evaluations could result in an adverse material impact on the Company’s results of operations, cash flows or its financial position for the period in which they occur.


F-62

 
26 — CLAIMS AND LEGAL PROCEEDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
24.  CLAIMS AND LEGAL PROCEEDINGS
 
The Company has received and may in the future receive communications alleging possible infringements, in particular in the case of patents and similar intellectual property rights of others. Furthermore, the Company periodically conducts patent cross license discussions with other industry participants. The Company may become involved in costly litigation brought against the Company regarding patents, mask works, copy-rights, trade-marks or trade secrets. In the event that the outcome of any litigation would be unfavorable to the Company, the Company may be required to license the underlyingpatentsand/or other intellectual property rightrights at economically unfavorable terms and conditions, and possibly pay damages for prior useand/or face an injunction, all of which individually or in the aggregate could have a material adverse effect on the Company’s results of operations, cash flows or financial position and ability to compete.
 
The Company is otherwise also involved in various lawsuits, claims, investigations and proceedings incidental to the normal conduct of its operations, other than external patent utilization. These matters mainly include the risks associated


F-57

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)business and operations.
 
with claims from customers or other parties and tax disputes beyond assessed uncertain tax positions. The Company is currently one amongst several co-defendants to legal proceedings initiated with the International Trade Commission (the “ITC”) by Tessera Technologies, Inc (“Tessera”). See “ Item 8. Financial Information — Legal Proceedings.”
On December 4, 2009 the Company has accruedreceived from the International Chamber of Commerce the notification of a request for thesearbitration filed by NXP Semiconductors Netherlands BV “NXP” against the Company, claiming in excess of $46 million in alleged compensation for so called underloading costs, pursuant to a Manufacturing Services Agreement entered into between NXP and ST-NXP Wireless, at the time of the creation of the Company’s wireless semiconductor products joint venture with NXP, in August 2008. The Company is contesting this claim vigorously and filed its answer with the ITC on February 12, 2010. The arbitration tribunal has been constituted but has yet to meet.
The Company accrues loss contingencies when thea loss is probable and can be estimated. The Company regularly evaluates claims and legal proceedings together with their related probable losses to determine whether they need to be adjusted based on the current information available to the Company. Legal costs associated with claims are expensed as incurred. In the event of litigation which is adversely determined with respect to the Company’s interests, or in the event the Company needs to change its evaluation of a potential third-party claim, based on new evidence or communications, a material adverse effect could impact its operations or financial condition at the time it were to materialize.
The As of December 31, 2009 provisions have been recorded by the Company is currently a partywith respect to legal proceedings with SanDisk Corporation (“SanDisk”)when it is probable that a liability has been incurred and Tessera Technologies, Inc (“Tessera”). Based on management’s current assumptions made with support of the Company’s outside attorneys, the Company is not currently in a position to evaluate any probable loss, which may arise out of such litigation.associated amount can be reasonably estimated.
25.  FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
 
27 — FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
27.125.1 Financial risk factors
 
The Company is exposed to changes in financial market conditions in the normal course of business due to its operations in different foreign currencies and its ongoing investing and financing activities. The Company’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The Company’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company’s financial performance. The Company uses derivative financial instruments to hedge certain risk exposures.
 
Risk management is carried out by a central treasury department (Corporate Treasury) reporting to the Chief Financial Officer. Simultaneously, a Treasury Committee, was created to steerchaired by the CFO, steers treasury activities and to ensureensures compliance with corporate policies approved by the Board of Directors. Treasury activities are thus regulated by the Company’s policies, which define procedures, objectives and controls. The policies focus on the management of financial risk in terms of exposure to market risk, credit risk and liquidity risk. Treasury controls are subject to internal audits. Most treasury activities are centralized, with any local treasury activities subject to oversight from head treasury office. Corporate Treasury identifies, evaluates and hedges financial risks in close cooperation with the Company’s operating units. It provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and investment of excess liquidity. The majority of cash and cash equivalent is held in U.S. dollars and Euro and is placed with financial institutions rated at least a single “A” long term rating from two of the major rating agencies, meaning at least A3 from Moody’s Investor Service and A- from Standard & Poor’s and Fitch Ratings. Marginal amounts are held in other currencies. Foreign


F-63

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
currency operations and hedging transactions are performed only to hedge exposures deriving from industrial and commercial activities.
 
Market risk
 
Foreign exchange risk
 
The Company conducts its business on a global basis in various major international currencies. As a result, the Company is exposed to adverse movements in foreign currency exchange rates, primarily with respect to the Euro. Foreign exchange risk mainly arises from future commercial transactions and recognized assets and liabilities at the Company’s subsidiaries.
 
Management has set up a policy to require the Company’s subsidiaries to hedge their entire foreign exchange risk exposure with the Company through financial instruments transacted by Corporate Treasury. To manage their foreign exchange risk arising from recognizedforeign-currency-denominated assets and liabilities, entities in the Company use forward contracts and purchased currency options, transacted by Corporate Treasury. Foreign exchange risk arises when recognized assets and liabilities are denominated in a currency that is not the entity’s functional currency. These instruments do not qualify as hedging instruments. In addition, forward contracts and currency options are also used by the Company to reduce its exposure to U.S. dollar fluctuations in Euro-denominated forecasted intercompany transactions that cover a large part of its research and development, selling general and administrative expenses


F-58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
as well as a portion of its front-end manufacturing production costs of semi-finished goods. The derivative instruments used to hedge these forecasted transactions meet the criteria for designation as cash flow hedge. The hedged forecasted transactions are all highly probable of occurrence for hedge accounting purposes.
 
It is the Company’s policy to keep the foreign exchange exposures in all the currency pairs hedged month by month against the monthly standard rate. Each month end, the forecasted flows for the coming month are hedged together with the fixing of the new standard rate. For this reason the hedging transactions will have an exchange rate very close to the standard rate at which the forecasted flows will be recorded on the following month. As such, the foreign exchange exposure of the Company, which consists in the balance sheet positions and other contractually agreed transactions, is always equivalent to zero and any movement of the foreign exchange rates will not therefore influence the exchange effect on consolidated statements of income items. Any discrepancy from the forecasted values and the actual results is constantly monitored and prompt actions are eventually taken.taken, as needed.
 
Derivative Instruments Not Designated as a Hedge
 
As described above, the Company enters into foreign currency forward contracts and currency options to reduce its exposure to changes in exchange rates and the associated risk arising from the denomination of certain assets and liabilities in foreign currencies at the Company’s subsidiaries. These include receivables from international sales by various subsidiaries in foreign currencies, payables for foreign currency denominated purchases and certain other assets and liabilities arising in intercompany transactions.
 
The notional amount of these financial instruments totalled $254$717 million, $232$505 million and $1,461$254 million at December 31, 2007, 20062009, 2008 and 2005,2007, respectively. The principal currencies covered are the Euro, the Singapore dollar, the Japanese yen, the Swiss franc, the Swedish krona, the British pound and the Malaysian ringgit.
 
The risk of loss associated with forward contracts is equal to the exchange rate differential from the time the contract is entered into until the time it is settled. The risk of loss associated with purchased currency options is equal to the premium paid when the option is not exercised.
 
Foreign currency forward contracts and currency options not designated as cash flow hedge outstanding as of December 31, 20072009 have remaining terms of 24 days to 53 months, maturing on average after 2735 days.
 
Derivative Instruments Designated as a Hedge
 
To further reduce its exposure to U.S. dollar exchange rate fluctuations, the Company hedges certain Euro-denominated forecasted transactions that cover at year-end a large part of its research and development, selling, general and administrative expenses, as well as a portion of its front-end manufacturing costs of semi-finished goods through the use of currency forward contracts and currency options. The maximum length of time over which the Company hedges its exposure to the variability of cash flows for forecasted transactions is 12 months.


F-64

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
 
For the year ended December 31, 2009 the Company recorded a reduction in cost of sales and operating expenses of $29 million and $42 million, respectively, related to the realized gain incurred on such hedged transactions. For the year ended December 31, 2008 the Company recorded a reduction in cost of sales of $4 million and an increase of operating expenses of $3 million related to the realized gain (loss) incurred on such hedged transactions. For the year ended December 31, 2007 the Company recorded a reduction in cost of sales and operating expenses of $16 million and $20 million, respectively, related to the realized gain incurred on such hedged transactions. ForNo significant ineffective portion of the year ended December 31, 2006hedge was recorded on the Company recorded a reduction in cost of sales and operating expenses of $5 million and $14 million, respectively, related to the realized gain incurred on such hedged transactions. In addition, no cash flow hedge transaction was discontinued in 2007 and 2006 and, as such, no amount was reclassified asline “Other income and expenses, net” intoof the consolidated statements of income from Accumulated other comprehensive income. Forfor the yearyears ended December 31, 2005 the Company recorded as cost of sales2009, 2008 and operating expenses $51 million and $30 million, respectively, related to the realized loss incurred on hedged transactions. In addition, after determining that it was not probable that certain forecasted transactions would occur by the end of the originally specified time period, the Company discontinued in 2005 certain of its cash flow hedges and reclassified a net loss of $37 million as “Other income and expenses, net” into the consolidated statements of income from Accumulated other comprehensive income.2007.
 
The notional amount of foreign currency forward contracts and currency options designated as cash flow hedges totalled $482, $593$1,354, $763 and $745$482 million at December 31, 2007, 20062009, 2008 and 20052007, respectively. The forecasted transactions hedged at December 31, 20072009 were determined to be probable of occurrence.
 
As of December 31, 2007, $122009, $6 million of deferred gains on derivative instruments, net of tax of $1 million, included in Accumulated“Accumulated other comprehensive incomeincome/(loss)” were expected to be reclassified as earnings during the next sixtwelve months based on the monthly forecasted research and development expenses, corporate costs and semi-finished manufacturing costs. No amount was reclassified as “Other income and expenses, net” into the consolidated statements of income from “Accumulated other comprehensive income/(loss)” in the consolidated statement of equity. As of December 31, 2006,2008, $13 million of deferred gains on derivative instruments, net of tax


F-59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
of $2 million, included in Accumulated other comprehensive income were expected to be reclassified as earnings during the next six months based on the monthly forecasted research and development expenses, corporate costs and semi-finished manufacturing costs. As of December 31, 2005, $13 million of deferred losses on derivative instruments, net of tax of $1 million, included in Accumulated other comprehensive income wereincome/(loss) have been reclassified as earnings during the next six months based on the monthly forecasted research and development expenses, corporate costs and semi-finished manufacturing costs.
 
Foreign currency forward contracts and currency options designated as cash flow hedges outstanding as of December 31, 20072009 have remaining terms of 98 days to 511 months, maturing on average after 43119 days.
As at December 31, 2009, the Company had the following outstanding derivative instruments that were entered into to hedge Euro-denominated forecasted transactions:
         
  Notional amount for
  
  hedge on R&D and other
 Notional amount for
  operating expense
 hedge on manufacturing
  forecasted costs forecasted costs
  In millions of Euros
 
Forward contracts  388   272 
Currency options  120   160 
 
Cash flow and fair value interest rate risk
 
The Company’s interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Company to cash flow interest rate risk. Borrowings issued at fixed rates expose the Company to fair value interest rate risk.
 
The Company analyses its interest rate exposure on a dynamic basis. Various scenarios are simulated taking into consideration refinancing, renewal of existing positions, alternative financing and hedging. Since all the liquidity of the Company is invested in floating rate instruments, the Company’s interest rate risk arises from the mismatch of fixed rate liabilities and floating rate assets.
 
In 2006, the Company entered into cancellable swaps with a combined notional value of $200 million to hedge the fair value of a portion of the convertible bonds due 2016 carrying a fixed interest rate. The cancellable swaps convertconverted the fixed rate interest expense recorded on the convertible bond due 2016 to a variable interest rate based upon adjusted LIBOR. As of December 31, 2007 and 2006 the cancellable swaps met the criteria for designation as a fair value hedge and, as such, both the swaps and the hedged portion of the bonds arewere reflected at their fair values in the consolidated balance sheets.sheet. The criteria for designating a derivative as a hedge include evaluating whether the instrument is highly effective at offsetting changes in the fair value of the hedged item attributable to the hedged risk. Hedged effectiveness iswas assessed on both a prospective and retrospective basis at each reporting period. At December 31, 2007 and 2006 the cancellable swaps are highly effective at hedging the change in fair value of the hedged bonds attributable to changes in interest rates. Any ineffectiveness of the hedge relationship iswas recorded as a gain or loss on derivatives as a component of “Other income and expenses, net” in the consolidated statements of income. If the hedge becomes no longer highly effective, the hedged portion of the bonds will discontinue being marked to fair value while the changes in the fair value of the cancellable swaps will continue to be recorded in the consolidated statements of income. The net lossgain (loss) recognized in “Other income and expenses, net” for the year ended December 31, 2007 as a result of the ineffective portion of this fair value hedge amounted to $1 million while itgain and $1 million loss for the years ended December 31, 2008 and 2007, respectively.


F-65

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
At December 31, 2008 the cancellable swaps were not designated as fair value hedge and were reported asheld-for-trading financial assets on the line “Other receivables and assets” of the consolidated balance sheet, as described in Note 6. The Company determined that the swaps had been no longer effective at offsetting changes in the fair value of the hedged bonds since November 1, 2008 and the fair value hedge relationship was consequently discontinued on that date. Unrealised gain recognized in earnings from discontinuance date totalled $15 million and was reported on the line “Gain(loss) on financial assets” of the consolidated statements of income for the year ended December 31, 2008. The swaps were sold in 2009, as described in Note 6.
Information on fair value of derivative instruments and their location in the consolidated balance sheets as at December 31, 2009 and December 31, 2008 is presented in the table below:
             
  As at December 31, 2009  As at December 31, 2008 
  Balance sheet
 Fair
  Balance sheet
 Fair
 
Asset Derivatives
 location value  location value 
  In millions of U.S. dollars 
 
Derivatives designated as hedging instruments:            
Foreign exchange forward contracts Other receivables and assets  24  Other receivables and assets  19 
Currency options Other receivables and assets  9  Other receivables and assets  8 
             
Total derivatives designated as hedging instruments    33     27 
             
Derivatives not designated as hedging instruments:            
Foreign exchange forward contracts Other receivables and assets  3  Other receivables and assets  10 
Currency options Other receivables and assets  —  Other receivables and assets  — 
Cancellable swaps    —  Other receivables and assets  34 
             
Total derivatives not designated as hedging instruments:    3     44 
             
Total Derivatives    36     71 
             


F-66

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
             
  As at December 31, 2009  As at December 31, 2008 
  Balance sheet
 Fair
  Balance sheet
 Fair
 
Liability Derivatives
 location value  location value 
  In millions of U.S. dollars 
 
Derivatives designated as hedging instruments:            
Foreign exchange forward contracts Other payables and accrued liabilities  (19) Other payables and accrued liabilities  (3)
Currency options Other payables and accrued liabilities  (8) Other payables and accrued liabilities  (1)
             
Total derivatives designated as hedging instruments    (27)    (4)
             
Derivatives not designated as hedging instruments:            
Foreign exchange forward contracts Other payables and accrued liabilities  (7) Other payables and accrued liabilities  (1)
Currency options Other payables and accrued liabilities  —  Other payables and accrued liabilities  — 
Total derivatives not designated as hedging instruments:    (7)    (1)
             
Total Derivatives    (34)    (5)
             
The effect on the consolidated statements of income for the year ended December 31, 2009 and December 31, 2008 of derivative instruments designated as fair value hedge is presented in the table below:
           
    Amount of gain
    (loss) recognized in
  Location of gain (loss)
 earnings on derivative
  recognized in earnings
 December 31,
 December,
  on derivative 2009 2008
  In millions of U.S. dollars
 
Cancellable swaps Interest income, net  3   — 
  Other income and expenses, net  —   1 
  Gain(loss) on financial assets  (8)  15 
The effect on the consolidated statements of income for the year ended December 31, 2009 and December 31, 2008 and on the Other comprehensive income (“OCI”) as reported in the statement of changes in equity as at

F-67

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
December 31, 2009 and December 31, 2008 of derivative instruments designated as cash flow hedge is presented in the table below:
                   
  Gain (loss) deferred in
 Location of gain
    
  OCI on derivative (loss) reclassified
 Gain (loss) reclassified from OCI into earnings
  December 31,
 December 31,
 from OCI into
 December 31,
 December 31,
  2009 2008 earnings 2009 2008
  In millions of U.S. dollars
 
Foreign exchange forward contracts  2   11  Cost of sales  31   6 
Foreign exchange forward contracts  1   2  Selling, general and administrative  7   (3)
Foreign exchange forward contracts  6   4  Research and development  38   (5)
Currency options  (1)  1  Cost of sales  (2)  (2)
Currency options  —   —  Selling, general and administrative  (1)  1 
Currency options  (1)  —  Research and development  (2)  4 
Total  7   18     71   1 
No significant ineffective portion of the cash flow hedge relationships and no amount excluded from effectiveness assessment was recorded on the line “Other income and expenses, net” of the consolidated statements of income for year ended December 31, 2009 and December 31, 2008.
The effect on the consolidated statements of income for the year ended December 31, 2009 and December 31, 2008 of derivative instruments not materialdesignated as a hedge is presented in 2006.the table below:
           
    Gain (Loss) Recognized in
 
    Earnings 
  Location of Gain Recognized in
 December 31,
  December 31,
 
  Earnings 2009  2008 
  In millions of U.S. dollars 
 
Foreign exchange forward contracts Other income and expenses, net  20   (36)
 
Credit risk
 
The Company selects banksand/or financial institutions that operate with the group based on the criteria of long term rating from at least two major Rating Agencies and keeping a maximum outstanding amount per instrument with each bank group within a thresholdnot to exceed 20% of 20%.the total.
 
Due to the credit market turmoil, the Company has decided to further tighten the counterparty concentration and credit risk profile. The maximum outstanding counterparty risk has been reduced and currently does not exceed 15% for major international banks with large market capitalization.
 
The Company monitors the creditworthiness of its customers to which it grants credit terms in the normal course of business. If certain customers are independently rated, these ratings are used. Otherwise, if there is no independent rating, risk control assesses the credit quality of the customer, taking into account its financial position, past experience and other factors. Individual risk limits are set based on internal and external ratings in accordance with limits set by management. The utilisation of credit limits is regularly monitored. Sales to customers are primarily settled in cash. At December 31, 20072009 and 2006,2008, one customer, the Nokia Group of companies, represented 26.9%20.8% and 26.2%16.7% of trade accounts receivable, net respectively. Any remaining concentrations of credit risk with respect to trade receivables are limited due to the large number of customers and their dispersion across many geographic areas.


F-60

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
 
Liquidity risk
 
Prudent liquidity risk management includes maintaining sufficient cash and cash equivalents, short-term deposits and marketable securities, the availability of funding from an adequate of committed credit facilities and the ability to close out market positions. The Company’s objective is to maintain a significant cash position and a low debt to


F-68

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
equity ratio, which ensure adequate financial flexibility. Liquidity management policy is to finance the Company’s investments with net cash provided from operating activities.
 
Management monitors rolling forecasts of the Company’s liquidity reserve on the basis of expected cash flows.
 
27.225.2 Capital risk management
 
The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, or issue new shares.
 
Consistent with others in the industry, the Company monitors capital on the basis of thedebt-to-equity ratio. This ratio is calculated as the net financial position of the Company, defined as the difference between total cash position (cash and cash equivalents, marketable securities — current and non-current-, short-term deposits and restricted cash) net of total financial debt (bank overdrafts, current portion of long-term debt and long-term debt), divided by total equity attributable to the shareholders of the Company.
 
27.3 —25.3 Fair value estimationmeasurement
 
The fair values of quoted financial instruments are based on current market prices. The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Company is the bid price. If the market for a financial asset is not active and if no observable market price is obtainable, the Company measures fair value by using significant assumptions and estimates. In measuring fair value, the Company makes maximum use of market inputs and relies as little as possible on entity-specific inputs.
 
                 
  2007  2006 
  Carrying
  Estimated
  Carrying
  Estimated
 
  Amount  Fair Value  Amount  Fair Value 
 
Long-term debt
                
— Bank loans (including current portion)  472   465   478   466 
— Senior Bonds  736   734   659   655 
— Convertible debt  1,012   965   993   1,010 
Marketable securities
                
— Floating-rate notes  1,014   1,014   460   460 
— Auction rate securities  369   369   304   304 
Other receivables and assets
                
— Foreign exchange forward contracts and currency options  13   13   14   14 
Other investments and other non current assets
                
— Cancellable swaps designated as fair value hedge  8   8   4   4 
— Equity securities classified as available-for-sale  5   5   5   5 
Other payables and accrued liabilities
                
— Foreign exchange forward contracts and currency options  1   1   1   1 
The table below details financial assets (liabilities) measured at fair value on a recurring basis as at December 31, 2009:
                 
    Fair Value Measurements Using
    Quoted Prices in
    
    Active Markets for
 Significant Other
 Significant
  December 31,
 Identical Assets
 Observable Inputs
 Unobservable Inputs
  2009 (Level 1) (Level 2) (Level 3)
 
Description
                
In millions of U.S. dollars                
Available-for-sale marketable debt securities
  1,032   1,021   —   11 
Available-for-sale non-current marketable debt securities
  42   —   —   42 
Available-for-sale long term subordinated notes
  173   —   —   173 
Available-for-sale equity securities
  10   10   —   — 
Equity securities held for trading  7   7   —   — 
Derivative instruments designated as cash flow hedge  6   6   —   — 
Derivative instruments not designated as hedge  (4)  (4)  —   — 


F-69

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
For assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3), the reconciliation between January 1, 2009 and December 31, 2009 is presented as follows:
Fair Value
Measurements Using
Significant
Unobservable Inputs
(Level 3)
In millions of U.S. dollars
January 1, 2009421
Increase in fair value included in OCI foravailable-for-sale marketable securities
15
Other-than-temporary impairment charge and losses on auction-rate securities included in earnings on the line“Other-than-temporary impairment charge on financial assets”
(140)
Paid-in-kind interest on Numonyx subordinated notes
16
Change in fair value on Numonyx subordinated notes — pre-tax(11)
Settlements and redemptions(75)
December 31, 2009
226
Amount of total losses for the period included in earnings attributable to assets still held at the reporting date72
The table below details financial and non financial assets (liabilities) measured at fair value on a nonrecurring basis as at December 31, 2009:
                 
    Fair Value Measurements Using
    Quoted Prices in
    
    Active Markets for
 Significant Other
 Significant
  December 31,
 Identical Assets
 Observable Inputs
 Unobservable Inputs
  2009 (Level 1) (Level 2) (Level 3)
 
Description
                
In millions of U.S. dollars                
Investments in equity securities carried at cost  29   —   —   29 
Numonyx equity investment  193   —   —   193 
Assets held for sale  31   —   31   — 
Total
  253   —   31   222 
For assets (liabilities) measured at fair value on a non recurring basis using significant unobservable inputs (Level 3), the reconciliation between January 1, 2009 and December 31, 2009 is presented as follows:
Fair Value
Measurements Using
Significant
Unobservable Inputs
(Level 3)
In millions of U.S. dollars
January 1, 2009528
Investments in equity securities carried at cost(3)
Impairment in Numonyx equity(200)
Equity share in Numonyx loss(103)
December 31, 2009
222
Amount of total losses for the period included in earnings attributable to assets still held at the reporting date(303)


F-70

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
The following table includes additional fair value information on other financial assets and liabilities recorded at amortized cost as at December 31, 2009:
                 
  2009 2008
  Carrying
 Estimated Fair
 Carrying
 Estimated Fair
Description
 Amount Value Amount Value
    In millions of U.S. dollars  
 
Long-term debt
                
— Bank loans (including current portion)  829   829   938   937 
— Senior Bonds  720   712   703   580 
— Convertible debt  943   918   1,036   918 
Total
  2,492   2,459   2,677   2,435 
The table below details securities that currently are in an unrealized loss position. The securities are segregated by investment type and the length of time that the individual securities have been in a continuous unrealized loss position as of December 31, 2009.
                         
  December 31, 2009 
  Less than 12 months  More than 12 months  Total 
  Fair
  Unrealized
  Fair
  Unrealized
  Fair
  Unrealized
 
Description
 Values  Losses  Values  Losses  Values  Losses 
 
Senior debt floating rate notes  105   (2)  209   (7)  314   (9)
Long-term subordinated notes  173   (11)  —   —   173   (11)
                         
Total  278   (13)  209   (7)  487   (20)
                         
 
The methodologies used to estimate fair value are as follows:
Marketable securities
The fair value of floating rate notes is estimated based upon quoted market prices for the identical instruments. For Lehman Brothers senior unsecured bonds, fair value measurement was reassessed in 2008 from a Level 1 fair value measurement hierarchy to a Level 3 following Lehman Brothers Chapter 11 filing. Fair value measurement for these debt securities relies on an information received from a major credit rating entity based on historical recovery rates.
For auction rate securities, which are debt securities without available observable market price, the Company establishes fair value by reference to public available indexes of securities with the same rating and comparable or similar underlying collaterals or industries’ exposure, as described in details in Note 3.
Foreign exchange forward contracts and currency options
The fair value of these instruments is estimated based upon quoted market prices for identical instruments.
Cancellable swaps held for trading
The fair value of these instruments was estimated based on inputs other than quoted prices received from two market counterparties which held the derivative contracts, which the Company estimates reflected the orderly exit price of the instruments when correlated to other observable market data such as interest rates and yield curves observable at commonly quoted intervals.
Equity securities classified asavailable-for-sale
The fair values of these instruments are estimated based upon market prices for the same or similar instruments.
Equity securities held for trading
The fair value of these instruments is estimated based upon quoted market prices for the same instruments.
Equity securities carried at cost
The non-recurring fair value measurement was based on the valuation of the underlying investments on a new round of third party financing or upon liquidation.


F-71

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
Numonyx equity investment
The non-recurring fair value measurement was based upon a combination of an income approach, using discounted cash flows, and a market approach, using metrics of comparable public companies, which the Company assesses as a fair approximation of the orderly exit value in the current market.
Subordinated notes received in Numonyx transaction
The fair value of these instruments is estimated based on publicly available fixed interest swap rates for instruments with similar maturities, taking into account the credit risk feature of the issuer of the debt securities.
Long-term debt and current portion of long-term debt
The fair value of long-term debt was determined based on quoted market prices, and by estimating future cash flows on aborrowing-by-borrowing basis and discounting these future cash flows using the Company’s incremental borrowing rates for similar types of borrowing arrangements.
 
Cash and cash equivalents, accounts receivable, bank overdrafts, short-term borrowings, and accounts payable
 
The carrying amounts reflected in the consolidated financial statements are reasonable estimates of fair value due to the relatively short period of time between the origination of the instruments and their expected realization.


F-61

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
Marketable securities
The fair value of floating rate notes is estimated based upon quoted market prices for the same or similar instruments.
For auction rate securities, which are debt securities without available observable market price, the Company establishes fair value by reference to public available indexes of securities with the same rating and comparable or similar underlying collaterals or industries’ exposure, using “mark to market” bids and “mark to model” valuations received from the structuring financial institutions.
Long-term debt and current portion of long-term debt
The fair values of long-term debt were determined based on quoted market prices, and by estimating future cash flows on aborrowing-by-borrowing basis and discounting these future cash flows using the Company’s incremental borrowing rates for similar types of borrowing arrangements.
Foreign exchange forward contracts and currency options
The fair values of these instruments are estimated based upon quoted market prices for the same or similar instruments.
Cancellable swaps
The fair values of these instruments are estimated based upon market prices for similar instruments.
Equity securities classified as available-for-sale
The fair values of these instruments are estimated based upon market prices for the same instruments.
28 — RELATED PARTY TRANSACTIONS
26.  RELATED PARTY TRANSACTIONS
 
Transactions with significant shareholders, their affiliates and other related parties were as follows:
 
                        
 December 31,
 December 31,
 December 31,
  December 31,
 December 31,
 December 31,
 2007 2006 2005  2009 2008 2007
Sales & other services  272   118   158   356   325   272 
Research and development expenses  (68)  (43)  (48)  (201)  (63)  (68)
Other purchases  (85)  (70)  (16)  (167)  (77)  (85)
Other income and expenses  (11)  (21)  (12)  —   (7)  (11)
Accounts receivable  44   20   29   58   63   44 
Accounts payable  40   20   12   60   65   40 
Other assets  2   —   11   —   —   2 
 
For the years ended December 31, 2007,2009, December 31, 20062008 and 2005,2007, the related party transactions were primarily with significant shareholders of the Company, or their subsidiaries and companies in which management of the Company perform similar policymaking functions. These include, but are not limited to: Commissariat à l’Energie Atomique (LETI) Areva, France Telecom Equant, Orange, Finmeccanica, Cassa Depositi e Prestiti, Flextronics, Oracle and Thomson. For 2007, theThe related party transactions presented in the table above also include transactions with Flextronics, Oraclebetween the Company and KLA-Tenkor. its equity investments as listed in Note 11.
Since the formation of ST-Ericsson, the Company purchases R&D services from ST-Ericsson AT (“JVD”), a significant equity investment of the Company. For the year ended December 31, 2009, the total R&D services purchased from ST-Ericsson AT amounted to $150 million and outstanding trade payables amounted to $30 million as at December 31, 2009.
Upon FMG deconsolidation and the creation of Numonyx, the Company performed until November 2008 certain purchasing, service and revenue on-behalf of Numonyx. The Company had a net payable balance of $7 million as at December 31, 2008 as the result of these transactions. Additionally the Company recorded in 2007 costs amounting to $26 million to create the infrastructure necessary to prepare Numonyx to operate immediately following the FMG deconsolidation. These costs were reimbursed by Numonyx in 2008 following the closing of the transaction. Upon creation, Numonyx also entered into financing arrangements for a $450 million term loan and a $100 million committed revolving credit facility from two primary financial institutions. Intel and the Company have each granted in favor of Numonyx a 50% debt guarantee not joint and several. This debt guarantee is described in details in Note 11. The final terms at the closing date of the agreements on assets to be contributed included rights granted to Numonyx by the Company to use certain assets retained by the Company. The Company recorded a provision amounting respectively to $65 million and $87 million, as at December 31, 2009 and 2008, to reflect the value of such rights granted to its equity investment. The parties also retained the obligation to fund the severance payment (“trattamento di fine rapporto”) due to certain transferred employees which qualifies as a defined benefit


F-72

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
plan and was classified on the line “Other non-current liabilities”. The liability amounted to respectively $31 million and $35 million as at December 31, 2009 and 2008. Finally, the Company recorded in 2008 a net long-term receivable amounting to $6 million corresponding to a tax credit Numonyx will pay back to the Company once cashed-in from the relevant taxing authorities. As at December 31, 2009, this receivable is still outstanding.
Additionally the Company incurred in 2008 and 2007 and 2006 significant amounts fromon transactions with Hynix Semiconductor Inc., with which the Company hashad until March 30, 2008 a significant equity investment, Hynix Numonyx joint venture (formerly Hynix ST joint venture,venture), described in detail in note 4.Note 11. In 2007 and 2006, Hynix Semiconductor Inc. increased its business transactions with the Company in order to supply products on behalf of the joint venture, which was not ready to fully produce and supply the volumes of specific products as requested by the Company. The amount of purchases and other expenses from Hynix Semiconductor Inc. was $161 million in 2007 and $161 million in 2006.2007. The amount of sales and other services made in 2007 was $2 million. These transactions significantly decreased in 2008 upon the transfer of the joint venture to Numonyx, as described in Note 11. The amount of purchases and other expenses and the amount of sales and other services from Hynix Semiconductor Inc. was $2 million and $5 million in 2008, respectively. The Company had no significant payable or receivable balance as at December 31, 2008, while it had a payable amount ofamounting to $18 million as at December 31, 2007 and $13 million as at December 31, 2006.towards Hynix Semiconductor Inc.
 
Additionally, as detailed in note 8, the Company recorded costs amounting to $26 million to create the infrastructure necessary to prepare Numonyx to operate immediately following the FMG deconsolidation, for which the Company has paid and will be reimbursed by Numonyx following the closing of the transaction.


F-62

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
In addition,Besides, the Company participates in an Economic Interest Group (“E.I.G.”) in France with Areva and France Telecom to share the costs of certain research and development activities, which are not included in the table above. The share of income (expense) recorded by the Company as research and development expenses incurred by E.I.G was not material in 2009 and amounted to $1$9 million income in 2008 and 1 million expense in 2007 and 2006 and to $5 million expense in 2005. At2007. As at December 31, 20072009, 2008 and 2006,2007, the Company had no receivable or payable amount. At December 31, 2005, the Company had a net receivable amount of $1 million.
 
The Company made no contribution in 2009 and contributed cash amounts totalling $1 million, for the years ended December 31, 2007, 20062008 and 20052007 to the ST Foundation, a non-profit organization established to deliver and coordinate independent programs in line with its mission. Certain members of the Foundation’s Board are senior members of the Company’s management.
 
In addition, pursuant to the Supervisory Board’s approval, the Company paid in 2005 a special contribution amounting to $4 million to a non-profit charitable institution in the field of sustainable development and social responsibility on behalf of its former President and Chief Executive Officer.
29 — SEGMENT INFORMATION
27.  SEGMENT INFORMATION
 
The Company operates in two business areas:  Semiconductors and Subsystems.
 
In the Semiconductors business area, the Company designs, develops, manufactures and markets a broad range of products, including discrete memories and standard commodity components, application-specific integrated circuits (“ASICs”), full custom devices and semi-custom devices and application-specific standard products (“ASSPs”) for analog, digital, and mixed-signal applications. In addition, the Company further participates in the manufacturing value chain of Smartcard products through its Incard division, which includes the production and sale of both silicon chips and Smartcards.
Beginning with the first quarter of 2005, the Company reported until December 31, 2006 its semiconductor sales and operating income in three segments:
• Application Specific Product Groups (“ASG”) segment, comprised of three product lines — Home, Personal and Communication (“HPC”), Computer Peripherals (“CPG”) and new Automotive Product (“APG”);
• Memory Products Group (“MPG”) segment; and
• Micro, Power, Analog (“MPA”) segment.
In an effort to better align the Company to meet the requirements of the market, together with the pursuit of strategic repositioning in Flash Memory, the Company announced in December 2006 a reorganization of its product segments into three main segments:
• Application Specific Product Groups (“ASG”) segment;
• Industrial and Multisegment Sector (“IMS”) segment; and
• Flash Memory Group (“FMG”) segment.
ASG segment includes the existing APG and CPG product lines and the newly created Mobile, Multimedia and Communications Group and Home, Entertainment and Display Group. IMS segment contains the Microcontrollers, Memories and Smartcards Group and the Analog, Power and MEMS Group. FMG segment incorporates all Flash Memory operations, including research and development and product-related activities, front- and back-end manufacturing, marketing and sales. The new product segments became effective on January 1, 2007. The Company has restated its results in prior periods for illustrative comparisons of its performance by product segment. The preparation of segment information according to the new segment structure requires management to make significant estimates, assumptions and judgments in determining the operating income of the segments for the prior reporting periods. However management believes the 2006 quarter’s presentation is representative of 2007 and is using these comparatives when managing the Company.
The Company’s principal investment and resource allocation decisions in the Semiconductor business area are for expenditures on research and development and capital investments in front-end and back-end manufacturing facilities. These decisions are not made by product segments, but on the basis of the Semiconductor Business area.


F-63

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
All these product segments share common research and development for process technology and manufacturing capacity for most of their products.
 
In the Subsystems business area, the Company designs, develops, manufactures and markets subsystems and modules for the telecommunications, automotive and industrial markets including mobile phone accessories, battery chargers, ISDN power supplies and in-vehicle equipment for electronic toll payment. Based on its immateriality to its business as a whole, the Subsystems segment does not meet the requirements for a reportable segment as defined in Statementthe U.S. GAAP guidance.
Since March 31, 2008, following the creation with Intel of Financial Accounting Standards No. 131,Disclosures about SegmentsNumonyx, a new independent semiconductor company from the key assets of an Enterpriseits and Related Information(“FAS 131”Intel’s Flash memory business (“FMG deconsolidation”), the Company has ceased reporting under the FMG segment.
Starting August 2, 2008, as a consequence of the creation of the joint venture company with NXP, the Company reorganized its groups. A new segment was created to report wireless operations; the product line Mobile, Multimedia & Communications Group (“MMC”) which was part of segment Application Specific Groups (“ASG”) was abandoned and its divisions were reallocated to different product lines. The remaining part of ASG is now comprised of Automotive Consumer Computer and Telecom Infrastructure Product Groups (“ACCI”).
The new organization is as follows:
• Automotive Consumer Computer and Communication Infrastructure (“ACCI”), comprised of four product lines:
• Home Entertainment & Displays (“HED”),
• Automotive Products Group (“APG”);
• Computer and Communication Infrastructure (“CCI”); and


F-73

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
• Imaging (“IMG”, starting January 1, 2009).
• Industrial and Multisegment Sector (“IMS”), comprised of:
• Analog, Power and Micro-Electro-Mechanical Systems (“APM”); and
• Microcontrollers, non-Flash, non-volatile Memory and Smart Card products (“MMS”).
• Starting February 3, 2009, as a consequence of the merger of ST-NXP Wireless and Ericsson Mobile Platforms to create ST-Ericsson with Ericsson, the Wireless sector (“Wireless”) has been adjusted and is comprised of:
• Wireless Multi Media (“WMM”);
• Connectivity & Peripherals (“C&P”);
• Cellular Systems (“CS”);
• Mobile Platforms (“MP”);
in which, since February 3, 2009, the Company reports the portion of sales and operating results ofST-Ericsson as consolidated in the Company’s revenue and operating results, and
• Other Wireless, in which the Company reports manufacturing margin, R&D revenues and other items related to the wireless business but outside the ST-Ericsson JVS.
The Company has restated its results in prior periods for illustrative comparisons of its performance by product segment. The preparation of segment information according to the new segment structure requires management to make significant estimates, assumptions and judgments in determining the operating income of the segments for the prior reporting periods. Management believes that the restated 2008 and 2007 presentation is consistent with 2009 and is using these comparatives when managing the Company.
Starting January 1, 2010 there was a new organization change within the Wireless sector, which is now comprised of the following lines:
• 2 GE TD-SCDMA & Connectivity;
• 3G Multimedia & Platforms;
• LTE & 3G Modem Solutions;
in which the Company reports the portion of sales and operating results of ST-Ericsson as consolidated in the Company’s revenue and operating results, and
• Other Wireless, in which the Company reports manufacturing margin, R&D revenues and other items related to the wireless business but outside the ST-Ericsson JVS.
The Company’s principal investment and resource allocation decisions in the Semiconductor business area are for expenditures on research and development and capital investments in front-end and back-end manufacturing facilities. These decisions are not made by product segments, but on the basis of the Semiconductor Business area. All these product segments share common research and development for process technology and manufacturing capacity for most of their products.
 
The following tables present the Company’s consolidated net revenues and consolidated operating income by semiconductor product segment. For the computation of the Groups’ internal financial measurements, the Company uses certain internal rules of allocation for the costs not directly chargeable to the Groups, including cost of sales, selling, general and administrative expenses and a significant part of research and development expenses. Additionally, in compliance with the Company’s internal policies, certain cost items are not charged to the Groups, including impairment, restructuring charges and other related closure costs,start-up costs of new


F-74

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
manufacturing facilities, some strategic and special research and development programs or other corporate-sponsored initiatives, including certain corporate levelcorporate-level operating expenses and certain other miscellaneous charges.
 
Net revenues by product segment
 
             
  December 31,
  December 31,
  December 31,
 
  2007  2006  2005 
 
In million of U.S dollars            
Net revenues by product segment:
            
Application Specific Product Groups segment  5,439   5,395   4,991 
Industrial and Multisegment Sector segment  3,138   2,842   2,482 
Flash Memory Group segment  1,364   1,570   1,351 
Others(1)
  60   47   58 
             
Total consolidated net revenues
  10,001   9,854   8,882 
             
             
  December 31,
  December 31,
  December 31,
 
  2009  2008  2007 
  In million of U.S dollars 
 
Net revenues by product segment:
            
Automotive Consumer Computer and Communication Infrastructure (ACCI)  3,198   4,129   3,944 
Industrial and Multisegment Sector (IMS)  2,641   3,329   3,138 
Wireless  2,585   2,030   1,495 
Flash Memory Group (FMG)  —   299   1,364 
Others(1)
  86   55   60 
             
Total consolidated net revenues
  8,510   9,842   10,001 
             
 
 
(1)Includes revenues from sales of subsystems and other products not allocated to product segments.
 
Operating income (loss)Net revenues by product segment and by product line
 
             
  December 31,
  December 31,
  December 31,
 
  2007  2006  2005 
 
Application Specific Product Groups segment  303   439   355 
Industrial and Multisegment Sector segment  469   441   336 
Flash Memory Group segment  (51)  (53)  (199)
Total operating income of product groups
  721   827   492 
Others(1)
  (1,266)  (150)  (248)
             
Total consolidated operating income (loss)
  (545)  677   244 
             
             
  December 31,
  December 31,
  December 31,
 
  2009  2008  2007 
  In million of U.S dollars 
 
Net revenues by product lines:
            
Automotive Products Group (“APG”)  1,051   1,460   1,419 
Computer and Communication Infrastructure (“CCI”)  932   1,077   1,123 
Home Entertainment & Displays (“HED”)  787   1,086   963 
Imaging (“IMG”)  417   499   439 
Others  11   7   — 
Automotive Consumer Computer and Communication Infrastructure (ACCI)
  3,198   4,129   3,944 
Analog, Power and Micro-Electro-Mechanical Systems (“APM”)  1,887   2,393   2,313 
Microcontrollers, non-Flash, non-volatile Memory and Smart Card products (“MMS”)  752   936   825 
Others  2   —   — 
Industrial and Multisegment Sector (IMS)
  2,641   3,329   3,138 
Cellular Systems (“CS”)(1)
  748   321   — 
Connectivity & Peripherals (“C&P”)  416   416   207 
Mobile Platforms (“MP”)  300   —   — 
Wireless Multi Media (“WMM”)  1,110   1,293   1,288 
Others  11   —   — 
Wireless
  2,585   2,030   1,495 
Others
  86   55   60 
Flash Memory Group (FMG)
  —   299   1,364 
Total consolidated net revenues
 $8,510  $9,842  $10,001 
 
 
(1)Cellular Systems includes the largest part of the revenues contributed by NXP Wireless and, as such, there are no comparable numbers available for 2007.


F-75

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
Operating income (loss) by product segment
             
  December 31,
  December 31,
  December 31,
 
  2009  2008  2007 
  In million of U.S dollars 
 
Automotive Consumer Computer and Communication Infrastructure (ACCI)  (91)  136   198 
Industrial and Multisegment Sector (IMS)  113   482   469 
Wireless  (356)  (65)  105 
Flash Memory Group (FMG)  —   16   (51)
             
Total operating income of product groups
  (334)  569   721 
Others(1)
  (689)  (767)  (1,266)
             
Total consolidated operating loss
  (1,023)  (198)  (545)
             
(1)Operating income (loss)loss of “Others” includes items such as unused capacity charges, impairment, restructuring charges and other related closure costs,start-up costs, and other unallocated expenses such as: strategic or special research and development programs, acquired In-Process R&D, certain corporate-levelcorporate level operating expenses, certain patent claims and litigations,litigation, and other costs that are not allocated to the product segments, as well as operating earnings or losses of the Subsystems and Other Products Group.Group, including, beginning in the second quarter of 2008, the remaining FMG costs. The 2008 “Others” also includes non-recurring purchase accounting items.


F-64

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
 
Reconciliation to consolidated operating income (loss):
 
            
             December 31,
 December 31,
 December 31,
 
 December 31,
 December 31,
 December 31,
  2009 2008 2007 
 2007 2006 2005  In million of U.S dollars 
Total operating income of product groups  721   827   492   (334)  569   721 
              
Strategic R&D and other R&D programs  (20)  (12)  (28)
Start-up costs
  (24)  (57)  (56)
Strategic R&D, other R&D programs and R&D funding  (22)  (24)  (20)
Phase-out andstart-up costs
  (39)  (17)  (24)
Impairment & restructuring charges  (1,228)  (77)  (128)  (291)  (481)  (1,228)
Unused capacity charges  (322)  (57)  — 
Subsystems and Other Products Group  6   (1)  1   —   3   6 
One-time compensation and special contributions(1)
          (22)
Acquired In-Process R&D and other non-recurring purchase accounting(1)
  —   (185)  — 
Seniority awards  (21)          —   —   (21)
Other non-allocated provisions(2)
  21   (3)  (15)  (15)  (6)  21 
              
Total operating loss Others(3)
  (1,266)  (150)  (248)
Total operating loss Others(3)
  (689)  (767)  (1,266)
Total consolidated operating income (loss)
  (545)  677   244   (1,023)  (198)  (545)
              
 
 
(1)One-time compensationIn 2008 non-recurring purchase accounting items were related to Genesis business combination with In-Process R&D charge for $21 million and special contributions to the Company’s former CEOWireless business acquisition from NXP for $164 million, composed of $76 million as In-Process R&D charge and other executives were not allocated to product groups.$88 million as inventorystep-up charge.
 
(2)Includes unallocated expenses such as certain corporate level operating expenses and other costs. .
 
(3)Operating income (loss)loss of “Others” includes items such as unused capacity charges, impairment, restructuring charges and other related closure costs,start-up costs, and other unallocated expenses such as: strategic or special research and development programs, acquired In-Process R&D, certain corporate-levelcorporate level operating expenses, certain patent claims and litigations,litigation, and other costs that are not allocated to the product groups,segments, as well as operating earnings or losses of the Subsystems and Other Products Group. Certain costs, mainly R&D, formerlyGroup, including, beginning in the “Others” category, have been allocated tosecond quarter of 2008, the groups since 2005; comparable amounts reported in this category have been reclassified accordingly in the above table.remaining FMG costs.
 
The following is a summary of operations by entities located within the indicated geographic areas for 2007, 20062009, 2008 and 2005.2007. Net revenues represent sales to third parties from the country in which each entity is located. Long-lived assets consist of property, plant and equipment, net (P,P(PP&E, net) and intangible assets, net including goodwill.. A significant portion of property, plant and equipment expenditures is attributable to front-end and back-end facilities, located in the different countries in which the Company operates. As such, the Company mainly allocates capital spending resources according to geographic areas rather than along product segment areas.
Net revenues
             
  December 31,
  December 31,
  December 31,
 
  2007  2006  2005 
 
The Netherlands  3,123   3,114   2,864 
France  223   240   268 
Italy  220   230   203 
USA  1,027   1,030   1,066 
Singapore  4,795   4,698   4,041 
Japan  483   400   306 
Other countries  130   142   134 
             
Total
  10,001   9,854   8,882 
             


F-65F-76

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in millions of U.S. dollars, except share and per share amounts)
Net revenues
             
  December 31,
  December 31,
  December 31,
 
  2009  2008  2007 
  In million of U.S dollars 
 
The Netherlands  1,553   2,737   3,123 
France  139   178   223 
Italy  121   185   220 
USA  798   1,032   1,027 
Singapore  4,697   4,939   4,795 
Japan  300   492   483 
Other countries  902   279   130 
             
Total
  8,510   9,842   10,001 
             
 
Long-lived assets
 
        
             December 31,
 December 31,
 
 December 31,
 December 31,
 December 31,
  2009 2008 
 2007 2006 2005  In million of U.S dollars 
The Netherlands  413   318   333   24   14 
France  1,906   1,781   1,618   1,623   1,728 
Italy  1,265   1,745   1,698   850   1,000 
Other European countries  193   204   176   158   229 
USA  393   470   458   74   217 
Singapore  735   1,642   1,684   546   675 
Malaysia  288   356   321   264   306 
Other countries  379   344   332   542   570 
            
Total
  5,572   6,860   6,620   4,081   4,739 
            
Payment for purchase of tangible assets
             
  December 31,
  December 31,
  December 31,
 
  2009  2008  2007 
  In million of U.S dollars 
 
The Netherlands  8   5   4 
France  242   462   396 
Italy  44   138   279 
Other European countries  29   66   53 
USA  6   2   47 
Singapore  27   106   180 
Malaysia  35   104   99 
Other countries  60   100   82 
             
Total
  451   983   1,140 
             


F-66F-77

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
Depreciation and amortization
             
  December 31,
  December 31,
  December 31,
 
  2009  2008  2007 
  In million of U.S. dollars 
 
The Netherlands  37   47   60 
France  430   497   432 
Italy  249   287   327 
Other European countries  186   93   56 
USA  62   81   102 
Singapore  207   195   284 
Malaysia  83   79   75 
Other countries  113   87   77 
             
Total
  1,367   1,366   1,413 
             
28.  SUBSEQUENT EVENTS
On February 10, 2010, the Company announced that, together with its partners Intel Corporation and Francisco Partners, has entered into a definitive agreement with Micron Technology Inc. (“Micron”), pursuant to which Micron will acquire Numonyx in an all-stock transaction. Upon the closing of the transaction, which is subject to customary regulatory approvals, and based on Micron’s closing stock price on February 9, 2010 of $9.08 per share, the Company will receive — in exchange for our 48.6% stake in Numonyx and the cancellation of the30-year note due to the Company by Numonyx — approximately 66.6 million shares of Micron common stock (taking into account a payable of $77.8 million due by the Company to Francisco Partners). At closing, Numonyx will repay the full amount of its outstanding $450 million term loan, while simultaneously terminating the Company’s $225 million guarantee of its debt. There is no guaranty as to when, or if, the transaction will close.


F-78

NUMONYX HOLDINGS B.V.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2009
AND THE NINE MONTH PERIOD ENDED DECEMBER 31, 2008


F-79

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations
F-82
Consolidated Statements of Comprehensive Loss
F-83
Consolidated Balance Sheets
F-84
Consolidated Statements of Cash Flows
F-85
Consolidated Statements of Changes in Shareholders’ Equity
F-86
INDEX TO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page
The Company
F-87
Accounting Policies
F-88
Equity Investments
F-93
Trade Accounts Receivable, Net
F-94
Inventories, Net
F-94
Assets Held for Sale
F-94
Other Receivables and Current Assets
F-95
Intangible Assets
F-95
Property, Plant and Equipment
F-96
Other Investments and Non-Current Assets
F-97
Other Payables and Accrued Liabilities
F-97
Post-Retirement and Other Long Term Employee Benefits
F-97
Share Based Compensation
F-100
Long Term Debt and Debt Obligations to Related Parties
F-101
Other Non Current Liabilities
F-102
Shareholders’ Equity
F-102
Other Income and Expenses, Net
F-103
Impairment and Restructuring Charges
F-103
Interest Income and Expenses
F-104
Income Taxes
F-104
Financial Instruments and Risk Management
F-107
Commitments
F-108
Related Party Transactions
F-108
Subsequent Events
F-111


F-80

(PRICEWATERHOUSECOOPERS LOGO)
Report of Independent Registered Public Accounting Firm
To the Board of Directors of Numonyx Holdings B.V.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive loss, cash flows and changes in shareholders’ equity present fairly, in all material respects, the financial position of Numonyx Holdings B.V and its subsidiaries at December 31, 2009 and December 31, 2008, and the results of its operations and its cash flows for the year ended December 31, 2009 and the period from March 30, 2008 to December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers SA
Rolf JohnerKenneth Postal
Geneva, February 28, 2010


F-81

 
NUMONYX HOLDINGS B.V.

CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended December 31, 2009 and nine month period ended December 31, 2008
In thousands of US dollars
         
  2009  2008 
 
Net sales $1,760,703  $1,623,189 
Other revenues  305   456 
         
Net revenues
  1,761,008   1,623,645 
Cost of sales  (1,421,017)  (1,280,463)
         
Gross profit
  339,991   343,182 
Selling, general, and administrative expenses  (203,599)  (223,984)
Research and development expenses  (273,002)  (207,685)
Impairment and restructuring charges  (27,404)  (74,350)
Other income and expenses, net  607   (37,547)
         
Operating loss
  (163,407)  (200,384)
Interest expense, net  (74,449)  (57,060)
Income from equity investment  11,605   5,748 
         
Loss before income taxes
  (226,251)  (251,696)
Income tax expense  (20,529)  (19,125)
         
Net loss
 $(246,780) $(270,821)
         
The accompanying notes are an integral part of these consolidated financial statements.


F-82

NUMONYX HOLDINGS B.V.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the year ended December 31, 2009 and nine month period ended December 31, 2008
In thousands of US dollars
         
  2009  2008 
 
Net loss $(246,780) $(270,821)
Other comprehensive (loss) / income, net of tax:        
Foreign currency translation adjustments  (463)  6,720 
Defined benefit pension plans:        
Actuarial loss during the period  (2,916)  (414)
         
Other comprehensive (loss) / income  (3,379)  6,306 
         
Comprehensive Loss
 $(250,159) $(264,515)
         
The accompanying notes are an integral part of these consolidated financial statements.


F-83

NUMONYX HOLDINGS B.V.

CONSOLIDATED BALANCE SHEETS
As of December 31, 2009 and December 31, 2008
In thousands of US dollars
         
  2009  2008 
 
Assets
        
Current assets:
        
Cash and cash equivalents $546,979  $476,810 
Restricted cash  4,972   4,991 
Trade accounts receivable, net  173,738   230,901 
Inventories  511,000   582,140 
Assets held for sale  78,000   — 
Deferred tax assets  7,506   5,386 
Other receivables and assets  81,760   159,058 
         
Total current assets
  1,403,955   1,459,286 
Intangible assets, net  149,641   208,322 
Property, plant and equipment, net  365,901   563,725 
Restricted cash  20,620   24,795 
Deferred tax assets  33,228   79,100 
Equity investment  314,529   303,371 
Other non-current assets  233,688   132,819 
         
   1,117,607   1,312,132 
         
Total assets
  2,521,562   2,771,418 
         
Liabilities and shareholders’ equity
        
Current liabilities:
        
Debt obligations to related parties  78,000   — 
Current portion of long-term debt  941   — 
Trade accounts payable  214,744   245,645 
Other payables and accrued liabilities  140,148   146,091 
Deferred tax liabilities  1,962   3,995 
         
Total current liabilities
  435,795   395,731 
Long-term debt  451,616   450,000 
Debt obligations to related parties  296,297   341,822 
Pension liability  31,290   28,941 
Long-term deferred tax liabilities  —   3,640 
Other non-current liabilities  45,862   40,423 
         
Total Liabilities
  1,260,860   1,260,557 
Commitments and contingencies (Note 22)        
Share Capital:
        
Common stock (Ordinary shares: 250,000,000 shares authorized, 210,700,758 shares issued)  332,703   332,703 
Preferred stock (Preferred A shares: 14,204,545 shares authorized and issued, PreferredA-1 shares: 142,045 shares authorized, none issued)
  22,429   22,429 
Additional paid-in capital  1,420,244   1,420,244 
         
   1,775,376   1,775,376 
Accumulated deficit  (517,601)  (270,821)
Accumulated other comprehensive income  2,927   6,306 
         
Shareholders’ equity
  1,260,702   1,510,861 
         
Total liabilities and shareholders’ equity
 $2,521,562  $2,771,418 
         
The accompanying notes are an integral part of these consolidated financial statements.


F-84

NUMONYX HOLDINGS B.V.

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31, 2009 and nine month period ended December 31, 2008
In thousands of US dollars
         
  2009  2008 
 
Cash flows from operating activities:
        
Net loss $(246,780) $(270,821)
Adjustments to reconcile net loss to cash flows generated from / (used in) operating activities:        
Depreciation and amortization  243,048   171,349 
Amortization of debt guarantees  36,999   27,750 
Non-cash interest expense  32,475   22,734 
Changes in deferred income taxes  1,979   (18,446)
Income from equity investment  (11,605)  (5,748)
Impairment and restructuring charges, net of cash payments  17,942   70,541 
Gain on sale of other non-current assets  (1,157)  (2,770)
Other non-cash items  6,445   (8,965)
Changes in assets and liabilities:
        
Trade accounts receivable, net  57,163   (230,901)
Inventories  71,140   (1,035)
Trade accounts payable  (30,901)  58,052 
Other assets and liabilities, net  (24,075)  171,738 
         
Net cash generated from / (used in) operating activities
  152,673   (16,522)
Cash flows from investing activities:
        
Payment for purchase of tangible assets  (66,907)  (78,100)
Proceeds from sales of tangible assets  5,984   4,579 
Investments in intangible assets  (16,500)  (48,600)
Changes in restricted cash  (4,194)  (29,786)
         
Net cash used in investing activities
  (81,617)  (151,907)
Cash flows from financing activities:
        
Proceeds from borrowings, net of issuance costs  —   444,410 
Proceeds from issuance of preference shares  —   131,155 
Proceeds from issuance of related party loan note  —   19,087 
Cash received as part of business combination  —   50,587 
Repayments of debt  (887)  — 
         
Net cash (used in) / provided by financing activities
  (887)  645,239 
Net cash increase
 $70,169  $476,810 
Cash and cash equivalents at beginning of the period
  476,810   — 
         
Cash and cash equivalents at end of the period
 $546,979  $476,810 
         
Supplemental disclosure of cash flow information:
        
Interest paid  (5,500)  (11,847)
Income taxes paid  (22,040)  (12,300)
Supplemental disclosure of non-cash investing and financing activities:
        
Upon formation, Numonyx Holdings B.V. acquired the contributed assets of Intel        
Corporation’s NOR flash business. Details of the transaction were as follows:        
Value of non cash assets contributed by Intel Corporation  —   771,313 
Common stock issued  —   (677,472)
Related party note issued  —   (144,428)
The accompanying notes are an integral part of these consolidated financial statements.


F-85

NUMONYX HOLDINGS B.V.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the year ended December 31, 2009 and nine month period ended December 31, 2008
In thousands of US dollars
                                 
                    Accumulated
    
     Common
     Preferred
  Additional
     Other
  Total
 
  Common
  Stock
  Preferred
  Stock
  Paid in
  Accumulated
  Comprehensive
  Shareholders’
 
  Stock  (Shares)  Stock  (Shares)  Capital  Deficit  income  Equity 
 
Balance at March 30, 2008
 $172,531   109,263,907          $794,218          $966,749 
Issuance of common stock  160,172   101,436,851           517,300           677,472 
Issuance of preferred stock         $22,429   14,204,545   108,726           131,155 
Net loss                     $(270,821)      (270,821)
Other comprehensive income                         $6,306   6,306 
                                 
Balance at December 31, 2008
 $332,703   210,700,758  $22,429   14,204,545  $1,420,244  $(270,821) $6,306  $1,510,861 
                                 
Net loss                      (246,780)      (246,780)
Other comprehensive loss                          (3,379)  (3,379)
                                 
Balance at December 31, 2009
 $332,703   210,700,758  $22,429   14,204,545  $1,420,244  $(517,601) $2,927  $1,260,702 
                                 


F-86

NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.  THE COMPANY
Numonyx Holdings B.V. (“Numonyx” or “the Company”) is a global manufacturer of non-volatile memory solutions (also commonly referred to as flash memory products). Numonyx focuses on supplying non-volatile memory solutions for a variety of consumer and industrial devices including cellular phones, MP3 players, digital cameras, computers and other high-tech equipment. The Company was formed in 2008 to be the holding company for the combination of the entire flash memory business of ST Microelectronics (‘STM’), of part of the NOR flash memory business of Intel Corporation (‘Intel’), and a cash investment from a private equity firm, Francisco Partners (‘FP’). STM, Intel and FP own 48.6%, 45.1% and 6.3% voting ownership in Numonyx, respectively.
Since the Company’s formation, to support the establishment and stabilization of Numonyx, STM and Intel provided certain services to Numonyx including supply chain, procurement, site manufacturing, information technology, human resource, and finance &’ accounting services. Numonyx compensated STM and Intel for such services in accordance with the terms of the Transition Services Agreements’ which govern the provision of these services. Details of these transactions are included within Note 23, ‘Related Party Transactions’, in the consolidated financial statements.
In accordance with US GAAP, the formation of Numonyx was considered a business combination and STM was considered the accounting acquirer. The impact of this determination is that Numonyx recorded assets contributed by STM at net book value, and assets contributed by Intel at fair market value.
On March 30, 2008 the Company acquired the contributed NOR flash business of Intel in exchange for a 45.1% equity interest in the Company, representing 101,436,851 ordinary shares of Numonyx Holdings B.V. and an interest-bearing long-term loan note in the principal amount of $144.4 million. The results of these operations have been included in the consolidated financial statements since that date.
The aggregate purchase price of the business from Intel was $822 million. The value of the business was determined based on third party valuations of the contributed business performed using a combination of discounted cash flows and market comparable data.
The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition.
     
  2008 
 
At March 30, 2008 (In Millions)
    
Cash $51 
Inventory  239 
Fixed assets  356 
Intangible assets  114 
Fair value of favorable operating lease  70 
Liabilities assumed  (8)
     
Total
 $822 
     
Of the $114 million of acquired intangible assets, $5 million was assigned to research and development assets that were written off at the date of acquisition in accordance with US GAAP. Those write-offs are included in research and development expenses. The remaining $109 million of acquired intangible assets have a weighted-average useful life of approximately 3 years. The intangible assets that make up that amount include a loan guarantee of $79 million(4-year useful life), supply agreement of $19 million(9-month useful life) and product and process technology of $11 million(3-year and7-year useful lives respectively).
There was no goodwill associated with this business combination.
Given the Company’s inception on March 30, 2008, the 2008 financial statements include only the 9 month period ended December 31, 2008.


F-87

NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.  ACCOUNTING POLICIES
The accounting policies of the Company conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”). All balances and values in the current period are shown in thousands of US dollars unless otherwise stated.
2.1 — Principles of Consolidation
The consolidated financial statements include the accounts of Numonyx Holdings B.V. and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated. The Company uses the equity method to account for equity investments in instances in which it owns common stock or similar interests and has the ability to exercise significant influence, but not control, over the investee. The Company’s share in its equity investment’s profit and loss is recognized in the consolidated statement of operations as ‘Income from equity investment’ and in the consolidated balance sheet as an adjustment against the carrying amount of the investment.
Certain amounts for prior years have been reclassified to conform with the current year financial statement presentation.
2.2 — Use of Estimates
The preparation of consolidated financial statements and disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and revenues and expenses during the reporting period. The primary areas that require significant estimates and judgments by management include sales returns and allowances, allowance for doubtful accounts, inventory reserves and normal manufacturing thresholds to determine costs capitalized in inventory, restructuring charges, assumptions used in calculating pension obligations and deferred income tax assets and liabilities including required valuation allowances. The actual results experienced by the Company could differ materially and adversely from management’s estimates.
2.3 — Foreign Currency
The U.S. dollar is the reporting currency of the Company. The U.S. dollar is the currency of the primary economic environment in which the Company operates since the worldwide semiconductor industry uses the dollar as a currency of reference for actual pricing in the market. The U.S. dollar is the functional currency for the Company and its subsidiaries. The Company’s equity investment has a functional currency other than the US dollar. Monetary transactions and accounts denominated innon-U.S. currencies, such as cash or payables to vendors, have been remeasured to the U.S. dollar at current exchange rates; non-monetary items such as inventory and fixed and intangible assets, are remeasured at historical exchange rates.
2.4 — Revenue Recognition
In accordance with U.S. GAAP, revenue from products sold to customers is recognized when all of the following conditions have been met: (a) persuasive evidence of an arrangement exists; (b) delivery has occurred; (c) selling price is fixed or determinable; and (d) collection is reasonably assured. This usually occurs at the time of shipment except for sales to certain distribution customers.
During 2008, STM and Intel sold products to, and invoiced customers on behalf of the Company. Billings and related returns and provisions information was then communicated to the Company and recorded in the Company’s financial systems. Revenue was therefore generated in accordance with the terms and conditions of sale of STM and Intel, and recognized in accordance with STM and Intel’s existing policies and procedures. In December 2008, the arrangement with STM ceased and Numonyx began to bill customers directly, in accordance with the Company’s own established terms and conditions.
During 2009, in addition to revenue generated directly by Numonyx, Intel continued to sell products to customers, invoice customers and collect monies due from customers on behalf of the Company. Billings and related returns and provisions information was then communicated to the Company and recorded in the Company’s financial systems. The revenue generated through Intel continued to be generated in accordance with the terms and conditions of sale of Intel, and therefore continued to be recognized in accordance with Intel’s existing policies and


F-88

NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
procedures. Differences exist between Numonyx terms and conditions of sale and those of Intel. These are described below.
Consistent with standard business practice in the memory industry, price protection is granted to distribution customers on their existing inventory of the Company’s products to compensate them for declines in market prices. For revenue generated directly by Numonyx to distribution customers which relates primarily to revenues assumed from the legacy STM business, revenue is recorded when inventory is shipped. At the time revenue is recorded, the Company records estimated reductions to sales based upon historical experience of product returns, and the impact of price protection. In order to make such estimates, the Company analyzes historical returns, current economic conditions, customer demand and any relevant specific customer information. If the Company is unable to reasonably estimate the level of product returns or other revenue allowances, it could have a significant impact on revenue recognition, potentially requiring deferral of the recognition of additional sales until customers sell the products to their end customers.
For revenue generated through Intel for distribution customers, the Company is unable to reasonably estimate the level of product returns and the impact of price protection based on the terms and conditions of arrangements entered into between Intel and our customers. The Company defers revenue and its related cost of sales, under agreements allowing price protection and /or right of return until the distributors sell the merchandise to their end customers. The net amount is recorded as deferred income on shipments to distributors and is included within ‘Other payables and accrued liabilities’ in the consolidated balance sheet.
Pricing allowances, including discounts based on contractual arrangements with customers, are recorded when revenue is recorded as a reduction to both accounts receivable and revenue.
The Company’s customers occasionally return products for technical reasons. The Company’s standard terms and conditions of sale provide that, if the Company determines that the products are non-conforming, the Company will repair or replace the non-conforming products, or issue a credit or rebate of the purchase price. The Company estimates returns at the time of sale and records the accrued amounts as a reduction of revenue.
The Company includes shipping charges billed to customers in net sales, and includes the related shipping costs in cost of sales.
2.5 — Other revenue
Other revenues consist primarily of sales of materials or scrap product.
2.6 — Research and Development
Research and development costs are charged to expense as incurred. The amortization recognized on technologies and licenses acquired to facilitate the Company’s research is recorded as research and development expenses. Funding for research and development is obtained from governmental agencies and the amounts are recorded as a reduction to research and development expenses.
2.7 — Property, Plant and Equipment
Property, plant, and equipment contributed from STM and Intel upon the formation of the Company were initially stated at carrying value for the assets contributed by STM, and at fair value for the assets contributed by Intel, consistent with the treatment of the formation of the Company as a business combination in accordance with U.S. GAAP and with the determination of STM being the accounting acquirer in the business combination. These assets are being depreciated over their respective remaining useful lives at the time of the transaction. Property, plant and equipment purchased since the formation of the Company are stated at historical cost.
Additions and major improvements are capitalized, minor replacements and repairs and maintenance are charged to operations in the period in which they are incurred.


F-89

NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Land is not depreciated. Depreciation on fixed assets acquired after the formation of the Company is computed using the straight-line method over the following estimated useful lives:
Buildings33 years
Facilities and Leasehold Improvements5-10 years
Machinery and Equipment6 years
Computer and Research & Development Equipment3-7 years
Reviews are performed if facts and circumstances indicate that the carrying amount of assets may not be recoverable or that the useful life is shorter than originally estimated. If an impairment indicator exists, the Company assesses the recoverability of its assets held for use by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining estimated useful lives against their respective carrying amounts. Impairment, if any, is measured on the excess of the carrying amount over the fair value of those assets. If the Company determines that the useful lives are shorter than originally estimated, the net book values of the assets are depreciated prospectively over the newly determined remaining useful lives.
Property, plant and equipment is reclassified as held for sale and depreciation ceases to be recorded when an asset or asset group meets the held for sale criteria as defined under U.S. GAAP. An impairment charge may be taken against the assets if the estimated selling price is less than the carrying value of the assets.
When property, plant and equipment are retired, sold, or otherwise disposed of, the net book value of the assets is removed from the Company’s books and the net gain or loss is included in ‘Other income and expenses, net’ in the consolidated statement of operations.
Leasing agreements in which a significant portion of the risks and rewards of ownership are retained by the Company are classified as finance leases. These leases are included in ‘Property, Plant and Equipment’ and depreciated over the shorter of the estimated useful life or the lease term. Leasing agreements classified as operating leases are arrangements in which the lessor retains a significant portion of the risks and rewards of ownership of the leased asset. Payments made under operating leases are charged to the consolidated statement of operations on a straight-line basis over the period of the lease.
2.8 — Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is based on the weighted average cost by adjusting standard cost to approximate actual manufacturing costs over the average period of inventory holding; the cost is therefore dependent on the Company’s manufacturing performance. In the case of underutilization of manufacturing facilities, the costs associated with the excess capacity are not included in the valuation of inventories but charged directly to cost of sales in the period incurred. Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.
The Company continuously evaluates the net realizable value of inventory and writes off inventory which has the characteristics of slow-moving, old production date and technical obsolescence. Additionally, the Company evaluates product inventory to identify obsolete or slow-selling stock and records a specific provision if the Company estimates the inventory will eventually become obsolete. Provisions for obsolescence are estimated for excess uncommitted inventory based on the previous quarter and anticipated future sales, order backlog and production plans.
2.9 — Income Taxes
The provision for incomes taxes represents the income taxes expected to be paid or the benefit expected to be received related to the current year income or loss in each tax jurisdiction. Deferred tax assets and liabilities are recorded for all temporary differences arising between the tax and book basis of assets and liabilities and for the benefits of tax credits and operating loss carryforwards. Deferred income tax is determined using tax rates and laws that are enacted on the balance sheet date and that are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized in full but the Company assesses whether it is more likely than not that future taxable profit will be available against which the temporary differences will be utilized. A valuation allowance is provided where necessary to reduce deferred tax assets to the amount for which management considers the possibility of recovery to be more likely than not.


F-90

NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.10 — Cash and Cash Equivalents
Cash and cash equivalents represent cash on hand with external financial institutions with an original maturity of less than ninety days.
2.11 — Restricted Cash
Restricted cash includes collateral deposits used as security for the provision of certain services to the Company, lease deposits on office space and deposits required by customs authorities. The restricted cash is held in highly liquid funds placed with financial institutions.
2.12 — Trade Accounts Receivable
Trade accounts receivable are recognized at their sales value, net of allowances for doubtful accounts and sales returns. The Company maintains an allowance for doubtful accounts for potential estimated losses resulting from its customers’ inability to make required payments. The Company bases its estimates on historical collection trends and records a provision accordingly. When a trade receivable is uncollectible, it is written-off against the allowance account for trade receivables. Subsequent recoveries, if any, of amounts previously written-off are credited against ‘Selling, general and administrative expenses’ in the consolidated statement of operations.
In addition to revenue generated directly by Numonyx, during 2009 Intel sold products to customers, invoiced customers and collected monies due from customers on behalf of the Company, under the terms of the Transition Services Agreement between Numonyx and Intel. Trade accounts receivable disclosed on the balance sheet related to revenue generated by Intel represent monies owed from end customers which have not been collected by Intel, and therefore not yet remitted to Numonyx.
2.13 — Intangible Assets
Details of intangible assets held by the Company, and the related amortization periods, are detailed below:
Loan guarantees4 years
Loan arrangement fees4 years
Contributed technology3-7 years
Software and licenses3-5 years
The carrying value of intangible assets subject to amortization is evaluated whenever changes in circumstances indicate that the carrying amount may not be recoverable.
The Company evaluates the remaining useful life of intangible assets at each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization.
2.14 — Employee Benefits
Pension Obligations
The Company sponsors various pension schemes for its employees. These schemes conform to local regulations and practices in the countries in which the Company operates. They are generally funded through payments to insurance companies or trustee-administered funds, determined by periodic actuarial calculations. Such plans include both defined benefit and defined contribution plans. A defined benefit plan is a pension plan that defines the amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. A defined contribution plan is a pension plan under which the Company pays fixed contributions into a separate entity. The Company has no legal or constructive obligations to pay further contributions for a defined contribution plan if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods.
The Company accounts for the overfunded and underfunded status of defined benefit plans in its consolidated financial statements as at December 31, 2009. The overfunded or underfunded status of the defined benefit plans are calculated as the difference between the fair value of plan assets and the projected benefit obligations.
For defined contribution plans, the Company pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Company has no further payment obligations


F-91

NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
once the contributions have been paid. The contributions are recognized as employee benefit expense when they are due. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in the future payments is available.
Termination Benefits
Termination benefits are payable when an employee is involuntarily terminated, or whenever an employee accepts voluntary termination in exchange for these benefits. All termination benefits payable by the Company relate to one-time benefit arrangements. A one time benefit arrangement is one that is established by a termination plan that applies to a specified termination event or for a specified future period. These one-time involuntary termination benefits are recognized as a liability when the termination plan meets certain criteria and has been communicated to employees.
Stock Options
During 2008, an equity incentive plan was established by the Company but no equity grants were made. During 2009, the first restricted stock unit grants were issued from the plan. Under the terms of the plan, vesting is contingent upon a qualified public offering of shares in the Company, or other change in control of the Company occurring. As at December 31, 2009, a qualified public offering was not imminent and a change in control of the Company was not considered probable and therefore no stock based compensation expense has been recorded in the consolidated statement of operations for the year ended December 31, 2009.
2.15 — Long Term Debt and Debt Obligations to Related Parties
Bank loans are recognized at historical cost. Debt obligations to related parties relate to long-term loan notes issued to shareholders in partial consideration for the assets contributed upon the formation of Numonyx, plus the interest accrued to date. The bank loan is classified as a long term liability as it is not repayable, either in part or fully, before December 31, 2010. The element of debt obligations to related parties which is expected to be repaid before December 31, 2010 is classified as a short term liability, the remainder are classified as long term liabilities.
2.16 — Share Capital
Ordinary shares and preference shares are classified as equity.
2.17 — Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity of a business during a period except those changes resulting from investment by or distributions to shareholders. In the accompanying consolidated financial statements, ‘Accumulated other comprehensive loss’ consists of the after tax effects of foreign currency translation adjustments relating to the Company’s equity investment and the impact of recognizing the underfunded status of defined benefit plans.
2.18 — Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued ASC 810 (originally issued as SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”. Among other items, ASC 810 responds to concerns about the application of certain key provisions of FIN 46(R), including those regarding the transparency of the involvement with variable interest entities. ASC 810 is effective for calendar year companies beginning on January 1, 2010. The Company does not believe the adoption of ASC 810 will have a significant impact on its financial position, results of operations, cash flows, or disclosures.
On September 23, 2009, the FASB ratified Emerging Issues Task Force IssueNo. 08-1, “Revenue Arrangements with Multiple Deliverables”(EITF 08-1).EITF 08-1 updates the current guidance pertaining to multiple-element revenue arrangements included in ASC Subtopic605-25, which originated primarily fromEITF 00-21, also titled “Revenue Arrangements with Multiple Deliverables.”EITF 08-1 will be effective for annual reporting periods beginning January 1, 2011 for calendar-year entities. The Company does not believe the adoption ofEITF 08-1 will have a significant impact on its financial position, results of operations, cash flows, or disclosures.


F-92

NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has evaluated subsequent events through February 28, 2010, the date the Company’s consolidated financial statements were issued.
3.  EQUITY INVESTMENT
Hynix Numonyx Semiconductor Ltd.
Upon the formation of Numonyx, STM transferred a 17% equity interest it had in a venture which it established with Hynix Semiconductor Inc. This venture was originally established in 2004 via a signed agreement between STM and Hynix Semiconductor Inc. to build a front-end memory-manufacturing facility in Wuxi City, Jiangsu Province, China. Upon transfer of the interest to Numonyx, the venture was renamed Hynix Numonyx Semiconductor Ltd.
Numonyx’ equity interest in the venture decreased to 16% during the fourth quarter of 2008, due to an additional investment made by a new investor in the venture, Hynix Semiconductor Wuxi Ltd. Since then, Numonyx has invested an additional $100 million in the joint venture ($50 million investment made in both 2008 and 2009) to increase the Company’s equity interest. However, at the balance sheet date, Numonyx had not received final approval from the Chinese authorities for these increases in equity investment. As such, the $100 million investment is recorded as a long term prepayment within ‘Other non-current assets’ in the consolidated balance sheet. Once approval is obtained, the investment will be recorded as an increase to ‘Equity investment’, and Numonyx’ interest will increase to 21%. In 2008, the $50 million investment made was originally recorded within ‘Other current receivables and assets’ in the consolidated balance sheet. Due to the length of time being taken to obtain approval, and absent a definitive date of when approval will be obtained, the $50 million investment was reclassified to ‘Other non-current assets’.
Under the terms of the joint venture, Numonyx has the option to purchase from Hynix Semiconductor Inc. an additional $150 million in share capital to increase the Company’s interest in the venture to approximately 25%. The members of the joint venture also have certain put and call rights (i.e., the right to “put” and sell their interest to the other member or to “call” and purchase the other member’s interest), with the price being based on the book value, less liabilities, times the applicable ownership percentage. In the case of the contemplated change in control of Numonyx as described in Note 24, ‘Subsequent events’, Numonyx would have the right to “put” its interest to Hynix and this would also trigger the ability of Hynix to “call” the Numonyx interest. In addition, as happened with the transfer of STM’s interest to Numonyx upon formation of the Company, Hynix could be requested to agree to the change of control and Numonyx’s interest could be transferred to the new controlling entity, Micron Technology Inc. Such changes are also subject to and contingent upon multiple levels of Chinese governmental approvals. The Company believes that there is no fair value associated with these options.
Although the Company does not currently own 20% of the venture, the Company uses the equity method to account for this investment based on the fact that it has the ability to exercise significant influence, but not control, over this investee coupled with the future ability to own more than 20% of this investment.
Summarized financial information of the Company’s equity investment is shown below:
         
  2009  2008 
 
Operating results:
        
Revenues $1,557,184  $1,772,070 
Net profit  74,392   14,442 
Balance sheet:
        
Assets $3,732,933  $4,103,446 
Liabilities  1,691,583   2,168,779 


F-93

NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4.  TRADE ACCOUNTS RECEIVABLE, NET
Trade accounts receivable, net consisted of the following:
         
  2009  2008 
 
Trade accounts receivable $175,993  $233,340 
Less allowance for doubtful accounts  (2,255)  (2,439)
         
Total
 $173,738  $230,901 
         
Bad debt expense in 2009 was $2.2 million (2008: $2.4 million).
5.  INVENTORIES
Inventories consisted of the following:
         
  2009  2008 
 
Raw materials $3,612  $2,712 
Work in process  403,337   478,728 
Finished goods  104,051   100,700 
         
Total
 $511,000  $582,140 
         
6.  ASSETS HELD FOR SALE
On December 30, 2009, an option agreement was signed by the Company, granting STM the option to acquire the majority of the assets at the Company’s facility in Catania, Italy, including the factory building, office building and the majority of the tools and equipment located in the plant. In addition, a number of employees would transfer to STM upon execution of the option, along with all contracts related to the facilities and any other assets, liabilities and rights relating to the facilities. The agreement also specifies that the tax carrying amount of assets and any non-operating losses would also be transferred as part of the sale. Upon execution of the option, the consideration payable would be the cancellation of $78 million of long term notes held by STM. The option agreement expires on June 30, 2010, with an option to extend by a further three months, subject to agreement by the Company.
As a result of entering into this agreement, and upon meeting the held for sale criteria as defined under U.S. GAAP, the Company reclassified the assets to be sold from their original balance sheet classification to ‘Assets held for Sale’ and adjusted the values of these assets to fair value less costs to sell at December 31, 2009, recording the charge within ‘Impairment and restructuring charges’ in the consolidated statement of operations. Fair value less costs to sell was based on the net consideration provided for in the option agreement.
Assets held for sale consisted of the following:
         
  2009  2008 
 
Property, plant and equipment $45,733   — 
Long term deferred tax assets  36,114   — 
Less impairment charge  (3,847)  — 
         
Total
 $78,000   — 
         
As required by U.S. GAAP, the Company has ceased to record depreciation on the property, plant and equipment classified as held for sale.


F-94

NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7.  OTHER RECEIVABLES AND CURRENT ASSETS
Other receivables and current assets consisted of the following:
         
  2009  2008 
 
Receivables from related parties $1,622  $2,491 
Receivables from government agencies  54,460   65,716 
Prepayments, advances and other debtors  25,678   90,851 
         
Total
 $81,760  $159,058 
         
In 2008, Prepayments, advances and other debtors included $50 million relating to a payment made to increase the Company’s equity stake in Hynix Numonyx Semiconductor Ltd. but for which approval from Chinese authorities had not been obtained, as described in Note 3, ‘Equity Investment’. During 2009, this payment was reclassified to ‘Other investments and non-current assets’ as approval had still not been obtained and the date of final approval is not known.
8.  INTANGIBLE ASSETS
Intangible assets consisted of the following as at December 31, 2009:
             
     Accumulated
    
  Gross Value  Amortization  Net Value 
 
Loan guarantees $148,000  $(64,749) $83,251 
Loan arrangement fees  6,750   (2,954)  3,796 
Product and process technology  10,800   (3,752)  7,048 
Software development and licenses  77,767   (22,221)  55,546 
             
December 31, 2009
 $243,317  $(93,676) $149,641 
             
During 2009, the Company capitalized $16.5 million (2008: $48.6 million) of software and licenses and software development costs related to significant system implementations and changes that the Company has undertaken since its formation. In addition the Company fully impaired self developed software of $14.9 million during the year. The software was contributed by STM upon the formation of Numonyx and had never been put into use by the Company. The impairment is recorded within ‘Impairment and restructuring charges’ in the consolidated statement of operations.
Intangible assets consisted of the following as at December 31, 2008:
             
     Accumulated
    
  Gross Value  Amortization  Net Value 
 
Loan guarantees $148,000  $(27,750) $120,250 
Loan arrangement fees  6,750   (1,266)  5,484 
Product and process technology  10,800   (1,608)  9,192 
Software development and licenses  76,256   (2,860)  73,396 
Supply agreement  18,982   (18,982)  — 
             
December 31, 2008
 $260,788  $(52,466) $208,322 
             
In March 2008, the Company obtained a $450 million bank loan plus $100 million revolving credit facility from financial institutions. These facilities are repayable in full on March 25, 2012. STM and Intel agreed to act as guarantors of the facilities, each company guaranteeing 50% of the outstanding balance in the event that Numonyx defaults on repayment. Both guarantees were recorded as intangible assets in order to recognize the fair value of the benefit to Numonyx of these guarantees. The guarantees were recorded at fair value at the date of issuance and are being amortized over the term of the loan, 4 years. The amortization is recorded as interest expense.
Loan arrangement fees are costs directly related to the securing of the debt financing described above. These fees are also being amortized over the 4 year period of the loan and are recorded as part of ‘Interest expense, net’ in the consolidated statement of operations.


F-95

NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Product and process technology relates to technologies contributed by Intel to Numonyx upon formation of the Company. The technologies were recorded at fair value and are being amortized over their expected useful lives, 3 and 7 years respectively, within cost of sales in the consolidated statement of operations.
Software development and licenses consist of costs relating to the development of IT systems and software and of software and related licenses acquired. Software development costs include external consulting costs and payroll costs directly associated with development of the system infrastructure. These costs were capitalized in accordance with U.S. GAAP. Software and licenses are currently amortized over a period of between 3 and 5 years and amortization is recorded primarily within ‘Selling, general and administrative expenses’ within the consolidated statement of operations, starting when the software is placed in operation.
The aggregate amortization expense in 2009 was $60.2 million (2008: $52.5 million).
The estimated amortization of the existing intangible assets for the following years is:
     
  Amortization
 
Year
 Expense 
 
2010 $64,000 
2011  60,000 
2012  15,000 
2013  5,000 
2014  4,000 
     
Total
 $148,000 
     
9.  PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consist of the following:
         
  2009  2008 
 
Land $570  $2,515 
Buildings, facilities and leasehold improvements  56,967   89,582 
Machinery and Equipment  637,602   597,187 
Computer and R&D Equipment  18,938   16,951 
Other Tangible Assets  3,046   2,123 
Construction in progress  7,276   2,000 
         
Total Gross Cost
 $724,399  $710,358 
Total Accumulated Depreciation
 $(358,498) $(146,633)
         
Total Net Cost
 $365,901  $563,725 
         
Depreciation expense for 2009 was $219.8 million (2008: $146.6 million). There is no depreciation expense on construction in progress.
During 2008, the Company determined that due to changes in market conditions the carrying value of its partially constructed building in Catania, Italy should be re-assessed. This building, in order to be placed into service, requires a significant investment of additional capital to purchase and install tools and equipment which cannot be currently justified. The Company determined that the value at which this building was recorded was in excess of a reasonable assessment of its fair market value. The fair market value is based on a range of values from a third party with the experience of valuing such assets and its own assessment. The resultant impairment charge recorded on this asset in 2008 was $62 million which is included within ‘Impairment and restructuring charges’ in the consolidated statement of operations.
As at December 31, 2009, Property Plant and Equipment totaling $43.8 million (comprising $45.7 million original net book value less $1.9 million impairment) were reported as a component of the line ‘Assets held for Sale’ on the consolidated balance sheet, relating to the Company’s facility in Catania, Italy for which a sale option agreement was signed, as explained in Note 6, ‘Assets Held for Sale’.


F-96

NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10.  OTHER INVESTMENTS AND NON-CURRENT ASSETS
         
  2009  2008 
 
Payments for additional equity investment $100,000  $— 
Fair value of the favorable operating lease  64,511   67,420 
Long term receivable related to tax refund  42,128   40,423 
Related party receivable  24,048   24,527 
Deposits  3,001   449 
         
Total
 $233,688  $132,819 
         
The investment in related party relates to payments made to Hynix Numonyx Semiconductor Ltd., to increase the Company’s equity stake in the Company, but which have not yet been approved by Chinese authorities, as explained in Note 3, ‘Equity Investment’. This includes $50 million which in 2008 was recorded within ‘Other receivables and current assets’ and which was reclassified to ‘Other investments and non-current assets’ during 2009.
The favorable operating lease relates to the Company’s manufacturing facility in Israel. This relates to the fair value of the future minimum lease payments that were included as part of the assets contributed by Intel upon the formation of Numonyx. This is being amortized over the period of the lease, 24 years.
The long term receivable related to tax refund is a tax credit in Italy which was generated through the operations of STM Italy, before the operations were contributed to Numonyx. Upon the formation of Numonyx, a long term liability was established as the amounts received from the Italian government will be reimbursed to STM. Such amount is included within ‘Other non-current liabilities’ in the consolidated balance sheet.
The related party receivable relates to an end of employment liability in Italy, for employees transferred from STM Italy to Numonyx Italy and for which STM have agreed to reimburse Numonyx. The payable portion of this balance is also included within pension liability in the consolidated balance sheet.
Deposits relate mainly to rental deposits on leased office buildings and deposits paid to service providers.
11.  OTHER PAYABLES AND ACCRUED LIABILITIES
         
  2009  2008 
 
Taxes other than income tax $12,327  $33,360 
Salaries, wages and social charges  66,960   37,747 
Provision for restructuring  4,041   8,541 
Deferred income on shipments to distributors  12,649   4,525 
Current portion of pension liability  2,268   2,155 
Accrued income tax  9,350   13,035 
Other accrued liabilities  32,553   46,728 
         
Total
 $140,148  $146,091 
         
Within current portion of pension liability above, $1.4 million (2008: $2.1 million) relates to the Italy end of employment fund. This amount is shown also as a receivable from related party within ‘Other investments and non-current assets’ as the amount will be reimbursed to Numonyx by STM.
12.  POST-RETIREMENT AND OTHER LONG-TERM EMPLOYEE BENEFITS
The Company has a number of defined benefit pension plans covering employees in various countries. The plans provide for pension benefits, the amounts of which are calculated based on factors such as years of service and employee compensation levels. Eligibility is generally determined in accordance with the local statutory requirements. The Company’s major defined benefit pension plans and long-term employee benefit plans are in Israel, Italy, Switzerland, Japan, Korea, and Philippines.
The Company adopted the provisions of U.S. GAAP which require that the funded status of defined benefit post-retirement plans be recognized on the consolidated balance sheet, and changes in the funded status be reflected


F-97

NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in comprehensive income. U.S. GAAP also requires the measurement date of the plan’s funded status to be the same as the Company’s financial year-end. The measurement date for all plans was the Company’s financial year end.
On December 31, 2009, the Company adopted changes issued by the FASB to employers’ disclosures about postretirement benefit plan assets. These changes provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. This guidance is intended to ensure that an employer meets the objectives of the disclosures about plan assets in an employer’s defined benefit pension or other postretirement plan to provide users of financial statements with an understanding of the following: how investment allocation decisions are made; the major categories of plan assets; the inputs and valuation techniques used to measure the fair value of plan assets; the effect of fair value measurements using significant unobservable inputs on changes in plan assets; and significant concentrations of risk within plan assets. Other than the required disclosures, the adoption of these changes had no impact on the consolidated financial statements.
Funding Policy
The Company’s practice is to fund the various pension plans in amounts at least sufficient to meet the minimum requirements of applicable local laws and regulations. The assets of the various plans are invested in corporate equities, corporate debt securities, government debt securities, and other institutional arrangements. The portfolio of each plan depends on plan design and applicable local laws. Depending on the design of the plan, local customs, and market circumstances, the liabilities of a plan may exceed qualified plan assets.
Benefit Obligation and Plan Assets
The changes in the benefit obligation and plan assets for the plans described above were as follows:
         
  2009  2008 
 
Change in projected benefit obligation:
        
Benefit obligation at beginning of period $60,165  $30,175 
Service cost  5,018   4,149 
Interest cost  3,143   2,703 
Plan participant contributions  397   278 
Actuarial (gain)/loss  3,521   (119)
Benefits paid  (6,305)  (5,375)
Benefit obligation of acquired business  —   38,203 
Currency exchange impact  5,138   (9,849)
Other  (89)  — 
         
Ending projected benefit obligation
 $70,988  $60,165 
         
         
  2009  2008 
 
Change in plan assets:
        
Fair value of the assets at beginning of the period $29,069  $— 
Actual return on plan assets  3,184   176 
Employer contributions  7,977   7,925 
Plan participants’ contributions  397   278 
Benefits paid  (6,305)  (5,375)
Plan assets of acquired business  —   31,161 
Currency impact  1,486   (5,096)
Other  1,622   — 
         
Ending fair value of plan assets
 $37,430  $29,069 
         


F-98

NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts recognized in the consolidated balance sheet are as follows:
         
  2009  2008 
 
Current liabilities $2,268  $2,155 
Non-current liabilities  31,290   28,941 
         
Total
 $33,558  $31,096 
         
Amounts recognized in accumulated other comprehensive income / (loss) net of taxes are as follows:
         
  2009  2008 
 
Net actuarial loss $(2,916) $(414)
         
Total
 $(3,327) $(417)
         
The estimated amounts that will be amortized from ‘Accumulated other comprehensive loss’ at December 31, 2009 into net periodic benefit cost (pre-tax) in 2010 is $0.1 million.
Change in accumulated other comprehensive income (loss) net of taxes are as follows:
         
  2009  2008 
 
Net actuarial loss at beginning of the period $(417) $— 
Amortization of actuarial loss  370   — 
Current year actuarial loss  (3,280)  (417)
         
Total
 $(3,327) $(417)
         
Included in the aggregate data in the tables below are the amounts applicable to our pension plans with accumulated benefit obligations in excess of plan assets, as well as plans with projected benefit obligations in excess of plan assets. Amounts related to such plans were as follows:
         
  2009  2008 
 
Plans with accumulated benefit obligations in excess of plan assets:
        
Accumulated benefit obligations $69,420  $56,950 
Fair value of plan assets $37,430  $28,863 
Plans with projected benefit obligations in excess of plan assets:
        
Projected benefit obligations $70,988  $60,165 
Fair value of plan assets $37,430  $29,069 
Assumptions
Weighted-average assumptions used in the determination of the benefit obligations were as follows:
         
  2009  2008 
 
Discount rate  5.09%  5.19%
Average increase in compensation  3.90%  3.24%
Weighted-average actuarial assumptions used to determine costs for the plans were as follows:
         
  2009  2008 
 
Discount rate  5.19%  5.64%
Expected long term rate on plan assets  4.88%  5.35%
Average increase in compensation  3.24%  4.30%
The discount rate was determined by analyzing long term corporate AA bond rates and matching the bond maturity with the average duration of the pension liabilities. In certain markets where there are not corporate bonds, government bond rates are used.


F-99

NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net Periodic Benefit Cost
The net periodic benefit cost for the plans included the following components:
         
  2009  2008 
 
Service cost $5,018  $4,149 
Interest cost  3,143   2,703 
Expected return on plan assets  (1,581)  (1,322)
Other  (632)  678 
         
Net periodic pension cost
 $5,948  $6,208 
         
Plan Assets
The plans’ investments are managed predominantly by insurance companies, and to a lesser extent by third-party trustees, or pension funds consistent with regulations or market practice of the country where the assets are invested. Investments that are managed by qualified insurance companies or pension funds under standard contracts follow local regulations, and the Company is not actively involved in the investment strategy. In general, the investment strategy followed is designed to accumulate a diversified portfolio among markets, asset classes, or individual securities in order to reduce market risk and assure that the pension assets are available to pay benefits as they come due. Alternatively, individual plan members may decide on individual investment strategies for their plan. As such, the Company does not set target allocations of plan assets and does not measure actual allocations of plan assets versus target allocations.
The fair value of plan assets by asset type as at December 31, 2009 are summarized below:
                 
     Quoted Prices
       
     in Active
       
     Markets for
  Significant
  Significant
 
     Identical
  Observable
  Unobservable
 
     Assets
  Inputs
  Inputs
 
Asset Category
 Total  (Level 1)  (Level 2)  (Level 3) 
 
Insurance contracts $37,430   —  $37,430   — 
                 
Total
 $37,430   —  $37,430   — 
                 
Funding Expectations
Expected funding for the plans during 2010 is approximately $7 million.
Estimated Future Benefit Payments
Estimated benefits to be paid from the Company’s pension plans through 2019 are as follows:
     
Years
 Pension Benefits 
 
2010  4,192 
2011  4,909 
2012  4,610 
2013  5,225 
2014  5,628 
From 2015 to 2019  28,324 
13.  SHARE BASED COMPENSATION
During 2008, an equity incentive plan was established by the Company, but no equity grants were made. 25 million stock units are available for issuance under the plan. During 2009, the first restricted stock unit grants were issued from the plan. The stock units vest over 3 or 4 years from the grant date. However, vesting is also contingent upon a change in control of the Company taking place. The vesting of certain grants made to Executive Officers of the Company are contingent on certain performance targets being met each year and the change in control provision noted above.


F-100

NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As the share capital of the Company is not currently traded on any Exchange, the value assigned to stock grants is based on the fair value of the equity of the Company at the time the grants were made.
Under the terms of the equity incentive plan, vesting is contingent upon a qualified public offering of shares in the Company, or other change in control of the Company occurring. As at December 31, 2009, because any change in control was contingent upon circumstances beyond the Company’s control, no stock based compensation expense has been recorded in the consolidated statement of operations for the year ended December 31, 2009.
Restricted stock unit activity during 2009 is detailed below (no restricted stock units were issued in 2008):
         
     Weighted
 
(In thousands, except weighted average fair value amounts)
 Number of Shares  Average Fair Value 
 
As at December 31, 2008
  —  $— 
Granted  11,180   2.83 
Vested  —   — 
Forfeited  (468)  2.83 
         
As at December 31, 2009
  10,712  $2.83 
         
Expected to vest as of December 31, 2009
  10,712  $2.83 
         
14.  LONG-TERM DEBT AND DEBT OBLIGATIONS TO RELATED PARTIES
Debt obligations to related parties
Upon the formation of Numonyx, long-term notes were issued to STM, Intel, and FP valued at $155,572, $144,428 and $19,087 respectively. The notes are payable upon the earlier of liquidation of the Company, or March 31, 2038. The interest rate applied to these notes is 9.5% and is payable in the form of additional notes until 2015. Interest also accrues, at the same rate, on the new notes issued. After 2015, the interest is payable in the form of cash. Interest on these notes is recorded as interest expense in the consolidated statement of operations. Total interest accrued during the year ended December 31, 2009 was $32.5 million (2008: $22.7 million) and is included within ‘Debt obligations to related parties’ in the consolidated balance sheet.
The long-term loan notes include covenants which prevent the Company and its subsidiaries from taking on additional debt in excess of $100 million if the total existing debt recorded on the balance sheet is $1,250 million or less, or additional debt in excess of $50 million if the total existing debt recorded on the balance sheet is more than $1,250 million. In addition, the Company may not issue new equity or securities exchangeable into equity that would rank senior to or on parity with the long-term loan notes and may not make dividend distributions other than distributions between subsidiaries of the Company and distributions on the preferred shares. Repayment of the debt obligations to related parties is subordinated to repayment of debt obligations to third parties.
On December 30, 2009 an option agreement was signed by Numonyx and STM, granting STM the option to acquire from Numonyx the majority of the assets held at the Company’s facility in Catania, Italy. In consideration for the assets, STM agreed that $78 million of the notes issued to them by Numonyx would be cancelled on completion of the sale. As the option agreement expires on June 30, 2009 with an option to extend by a further three months, these loan notes have been reclassified to short term debt on the consolidated balance sheet.
Debt obligations to third parties
Long term debt obligations to third parties consisted of the following as at December 31, 2009:
         
  2009  2008 
 
Bank loan $450,000  $450,000 
Finance lease obligations  1,616   — 
         
Total
 $451,616  $450,000 
         
Upon formation, the Company entered into a dollar term loan facility in the amount of $450 million and a multicurrency revolving loan facility in the amount of $100 million. As at December 31, 2009, the $100 million revolving facility had not been drawn down. The facilities are repayable in full on March 25, 2012. Interest of three-


F-101

NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
month LIBOR + 60 basis points is payable every 3 months and is recorded within interest expense in the consolidated statement of operations.
Covenants on the loan facility include a mandatory prepayment of 50% of the facility by the borrowers if the credit rating of either Intel or STM were to be downgraded to a rating by Moody’s that is below Baa3 or by Standard and Poor’s that is below BBB-. In addition, should Intel or STM take on debt at or in excess of $500 million, then the facility would become immediately repayable.
The assessment of fair value of the debt obligation to third parties would require the determination of an appropriate credit spread over the benchmark rates for a facility similar to that held by the Company and the application of an adjustment factor for, amongst other factors, illiquidity. The Company has not sought additional similar funding since formation, particularly given market conditions impacting the availability of credit.
Finance lease obligations relate to Machinery and Equipment purchased by the Company during the year. The short term element of finance lease obligations is recorded within ‘Current portion of long-term debt’ in the consolidated balance sheet.
Aggregate future maturities of total long term debt outstanding (including current portion) are as follows:
         
  2009  2008 
 
2010 $78,941   — 
2011  1,077   — 
2012  450,539   450,000 
2013  —   — 
2014  —   — 
Thereafter  296,297   341,822 
         
Total
 $826,854  $791,822 
         
15.  OTHER NON-CURRENT LIABILITIES
         
  2009  2008 
 
Related party payable $42,489  $40,423 
Other  3,373   — 
         
Total
 $45,862  $40,423 
         
The related party payable relates to a tax credit in Italy. This tax credit, which is also shown as a long term receivable in the consolidated balance sheet of Numonyx, was generated through the operations of STM Italy, before the operations were contributed to Numonyx. Since the tax credit was generated by STM, when the tax credit is paid by the Italian authorities to Numonyx, the Company will reimburse STM.
16.  SHAREHOLDERS’ EQUITY
Outstanding Shares
The authorized share capital of the Company amounts to EUR 264,205,965. It is divided into:
• 250,000,000 ordinary shares of one Euro each;
• 14,204,545 convertible preferred shares ‘A’ of one Euro each; and
• 142,045 preferred shares ‘A-1’ of one eurocent (EUR 0.01) each.
As at December 31, 2009, 210,700,758 ordinary shares were issued.
Preference Shares
As at December 31, 2009, the Company had issued 14,204,545 convertible preferred shares ‘A’ to FP. These preference shares entitle the holder to full voting rights and to a preferential right to distributions upon liquidation or change in control of the Company. Specifically the holders are entitled to a repayment of 1.85 times the original issue price of the shares. The preferred shares ‘A’ may be converted into preferred shares ‘A-1’ or ordinary shares,


F-102

NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
on terms agreed between the Company and the holders of the preferred shares ‘A’. Such terms must be unanimously approved at a General Meeting of the shareholders.
The preferred shares ‘A-1’ entitle holders to a repayment of 1.85 times the original issue price of the shares and also to an amount out of the annual profits equal to 1% of the weighted average of the par value of their shares during the financial year. The dividend preference is non-cumulative. The shares also carry voting rights. No preferred shares ‘A-1’ had been issued at the balance sheet date.
17.  OTHER INCOME AND EXPENSES, NET
Other income and expenses, net, consisted of the following:
         
  2009  2008 
 
Start up costs $—  $39,433 
Foreign exchange gains  (1,777)  (986)
Gain on sale of other non-current assets, net  (1,157)  (2,770)
Other  2,327   1,870 
         
Total
 $(607) $37,547 
         
Start up costs relate to costs incurred in the formation of Numonyx in 2008.
18.  IMPAIRMENT AND RESTRUCTURING CHARGES
Impairment and restructuring charges consisted of the following:
         
  2009  2008 
 
Impairment charges $18,703  $62,000 
Restructuring charges  8,701   12,350 
         
Total
 $27,404  $74,350 
         
The impairment charges are explained in Note 6, ‘Assets held for Sale’ and Note 8, ‘Intangible Assets’.
During 2008, the Company recorded charges of $8.6 million in employee severance costs related to a workforce reduction action in our California Technology Center and $3.4 million in employee severance costs related to personnel at Pudong, China which was originally to be part of the assets contributed by Intel to Numonyx upon formation, but which the Company decided not to acquire. These charges were incurred due to the termination of approximately 700 employees. The Company may incur additional restructuring charges in the future for employee severance and benefit arrangements, and facility-related or other exit activities.
In 2009, the Company reversed $3.7 million of the provision related to the action in the California Technology Center as a result of a subsequent decision to retain a number of employees that were previously expected to be terminated.
During 2009, the Company incurred charges of $8.1 million in employee severance costs related to a workforce reduction action across multiple sites, as part of a program to reduce costs in response to the global economic crisis. These charges were incurred due to the termination of approximately 130 employees. The Company also incurred an additional $4.3 million in employee severance costs related to personnel at Pudong, China.
The Company may incur additional restructuring charges in the future for employee severance and benefit arrangements, and facility-related or other exit activities.


F-103

NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restructuring charges incurred during 2009 and 2008 are summarized as follows:
         
  2009  2008 
 
Provision as at January 1, 2009 $8,541  $— 
Charges incurred during the period  8,701   12,350 
Change in estimate related to reduction in force  (3,739)  — 
Amounts paid  (9,462)  (3,809)
         
Provision as at December 31, 2009
 $4,041  $8,541 
         
19.  INTEREST INCOME AND EXPENSES
Interest income and expense consisted of the following:
         
  2009  2008 
 
Amortization of loan guarantees $36,999  $27,750 
Interest on debt obligations to related parties  32,475   22,734 
Interest on long-term debt  5,488   11,847 
Other interest  827   1,266 
         
Total interest expense
  75,789   63,597 
Interest income  1,340   6,537 
         
Total interest expense, net
 $74,449  $57,060 
         
20.  INCOME TAXES
The provision for income taxes consists of the following components:
         
  2009  2008 
 
Current:        
Netherlands $—  $— 
Foreign  20,800   22,229 
         
Total current  20,800   22,229 
Deferred:        
Netherlands  —   — 
Foreign  (271)  (3,104)
         
Total deferred  (271)  (3,104)
         
Total provision for income taxes
 $20,529  $19,125 
         
The loss before provision for income taxes included a loss from the Netherlands of approximately $57.6 million (2008: $273.8 million) and losses of approximately $168.7 million from other foreign subsidiaries during fiscal year 2009 (2008: income of $84.2 million).


F-104

NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for income taxes differs from the amount estimated by applying the statutory Netherlands income tax rate of 25.5% to income before provision for income taxes as follows:
         
  2009  2008 
 
Provision computed at Dutch statutory rate $(57,694) $(64,182)
Foreign rate differential  (2,040)  171 
Permanent differences  463   3,534 
Research and development tax credits  (2,055)  (3,427)
Current year losses not benefited  78,319   84,184 
Others  3,536   (1,155)
         
Provision for income taxes
 $20,529  $19,125 
         
Effective tax rate
  (9.1)%  (7.6)%
         
The components of deferred tax assets and liabilities consisted of the following:
         
  2009  2008 
 
Deferred tax assets:        
Accrued compensation $2,820  $5,106 
Other reserves and accruals  —   658 
Accounts receivable  157   — 
Fixed assets  60,438   118,280 
Inventory  4,854   — 
Unrealized foreign exchange loss  182   660 
Research and development credit carryover  2,618   987 
Net operating loss carryover  99,850   96,678 
Others  1,607   5,332 
         
Total deferred tax assets  172,526   227,701 
Less: valuation allowance  (129,626)  (142,229)
         
Net deferred tax assets
  42,900   85,472 
Deferred tax liabilities:        
Accrued compensation  (1,643)  — 
Fixed assets  (2)  (3,640)
Inventory  (169)  (1,776)
Accounts receivable  (352)  (3,205)
Unrealized foreign exchange gain  (822)  — 
Others  (1,140)  — 
         
Total deferred tax liabilities
  (4,128)  (8,621)
         
Total net deferred tax assets
 $38,772  $76,851 
         
In addition to the net deferred tax assets shown above, $36.1 million of deferred tax assets relating to the Company’s facilities in Catania, Italy are recorded within ‘Assets held for Sale’ on the consolidated balance sheet.
In evaluating its ability to utilize its deferred tax assets in future periods, the Company considered all available positive and negative factors. The Company considered various sources of taxable income including future reversals of existing taxable temporary differences, taxable income in prior carryback years if carryback is permitted under the tax law, tax planning strategies that would, if necessary, be implemented to prevent a loss carryforward or tax credit carryforward from expiring unused and predictions of future taxable income exclusive of reversing temporary differences and carryforwards. As a result, the Company determined a valuation allowance of $129.6 million was required as at December 31, 2009 (2008: $142.2 million). After consideration of the valuation allowance, the Company had total net deferred tax assets of approximately $74.9 million as at December 31, 2009 ($36.1 million of which is classified as ‘Assets held for sale’) and $76.9 million as at December 31, 2008. The net deferred tax assets


F-105

NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
are primarily comprised of net operating loss carryforwards and future deductible amounts relating primarily to fixed assets.
As at December 31, 2009, the Company had net operating loss and capital allowance carryforwards of approximately $339 million combined for The Netherlands and Switzerland (2008: $270 million), $125 million in Singapore (2008: $160 million), $25 million in Italy (2008: $48 million) and $l million in the Philippines. For the carryforwards related to The Netherlands and Switzerland, the Company currently estimates that 100% relate to The Netherlands. This assumption may change. The Company, however, has recorded a full valuation allowance against this portion of the carryforwards. In addition in 2008, the Company had approximately $23 million of operating loss and capital allowances carryforwards in Malaysia, but these have been absorbed by profits earned during 2009. The net operating loss carryforwards in The Netherlands and Italy can be carried forward for 9 years and 5 years respectively. The net operating loss carryforwards in the Philippines can be carried forward for 3 years and the net operating loss carryforwards in Singapore can be carried forward indefinitely.
The expiration of the tax losses carried forward as at December 31, 2009, on which no deferred tax has been recognized, is summarized below:
         
Expires by:
 2009  2008 
 
2010 $—  $— 
2011  23,768   — 
2012  1,937   — 
2013  —   48,000 
2014  —   — 
After 2014  463,897   453,000 
         
Total
 $489,602  $501,000 
         
Unrecognized tax credits  436   — 
         
The valuation allowances are mainly provided against net deferred tax assets in the Netherlands, Italy and Singapore. In the event that all of the deferred tax assets become realizable, the reversal of the valuation allowance would result in a $129.6 million reduction in income tax expense.
Unrecognized Tax Benefits
The changes in the gross amount of unrecognized tax benefits are as follows:
         
  2009  2008 
 
Beginning of the year $2,369  $— 
Gross amount of the decrease in unrecognized tax benefits of tax positions taken during a prior year  (629)  — 
Gross amount of the increases in unrecognized tax benefits as a result of tax positions taken during the current year  3,460   2,369 
         
End of year
 $5,200  $2,369 
         
As at December 31, 2009, $5.2 million (2008: $2.4 million) of unrecognized tax benefits would, if recognized, reduce the effective tax rate.
No significant changes in unrecognized taxed benefits are anticipated within the next 12 months. The Company will re-evaluate its income tax positions on a quarterly basis to consider factors such as changes in facts or circumstances, changes in or interpretations of tax law, effectively settled matters under audit, and new audit activity. Such a change in recognition or measurement would result in recognition of a tax benefit or an additional charge to the tax provision.
Upon adoption of ASC 740 the Company adopted an accounting policy to classify interest and penalties on unrecognized tax benefits as income tax expense. The total amount of interest and penalties recognized in the consolidated statement of operations during fiscal 2009 was $0.4 million (2008: $0). The Company has filed its initial tax returns in most of its jurisdictions. The Company’s major jurisdictions include the Netherlands,


F-106

NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Switzerland, U.S., Japan, Singapore, Israel, Italy, Malaysia, and Philippines, all of which are subject to exam by income tax authorities for 2009.
The Netherlands statute of limitations will remain open until December 31, 2013. The Switzerland statute of limitations will remain open until December 31, 2018. The U.S. and Israel statutes of limitations will remain open until three years after the returns are filed. In certain instances, Israel may extend its statute of limitations. The Japan, Singapore, and Malaysia statutes of limitations will remain open until December 31, 2014. The Italy statute of limitations will remain open until December 31, 2014. The Philippines provides no statute of limitations with regard to transfer pricing. Therefore, the Philippines return will remain open indefinitely.
21.  FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Financial Risk Factors
The Company is exposed to changes in financial market conditions in the normal course of business due to its operations in different foreign currencies and its ongoing investing and financing activities. The Company’s activities expose it to a variety of financial risks: market risk (including currency risk, interest rate risk, and price risk), credit risk and liquidity risk. The Company’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize the volatility on the Company’s financial performance. The Company uses forward exchange contracts and currency options to hedge certain risk exposures.
Risk management is carried out by a central Corporate Treasury Department, reporting to the Chief Financial Officer. Corporate Treasury identifies, evaluates and hedges financial risks in close cooperation with the Company’s operating units. Treasury activities are regulated by the Company’s policies, which define procedures, objectives and controls. The policies focus on the management of financial risk in terms of exposure to market risk, credit risk and liquidity risk. Most treasury activities are centralized, with any local activities subject to oversight from the Company. The majority of cash and cash equivalents is held in US dollars and is deposited with financial institutions. Marginal amounts are held in Euro, Japanese Yen and Singapore Dollar.
Foreign currency hedging transactions are performed only to hedge exposures deriving from industrial and commercial activities.
Foreign exchange risk
The Company conducts its business on a global basis in various major international currencies. Foreign exchange risk arises when recognized assets and liabilities as well as cash flows are denominated in a currency that is not the Company’s functional currency. The majority of these transactions relate to purchases and certain other assets and liabilities arising in intercompany transactions denominated in foreign currencies.
Management has established a policy to hedge significant foreign exchange risk exposure through financial instruments transacted by Corporate Treasury. Foreign currency hedging transactions are performed only to hedge exposures deriving from industrial and commercial activities. The Company uses forward exchange contracts and options to hedge certain balance sheet risk exposures. These instruments do not qualify as hedging instruments and as such are accounted for at fair value with changes in fair value accounted for in the consolidated statement of operations. The notional value of these instruments at December 31, 2009 totaled $100.8 million (2008: $14.4 million). All of the transactions were entered into during the fourth quarter of 2009 and the currencies covered were the Euro, the Israeli Shekel, the Singapore Dollar and the Swiss Franc. During 2009, the Company realized net losses of $0.6 million for contracts settled during the year. The losses are recorded within ‘Other income and expenses, net’ in the consolidated statement of operation. In 2008, there were no contracts settled during the period and therefore no realized losses or gains. The amounts recorded in the consolidated balance sheets as at December 31, 2009 and December 31, 2008 were $0 in both years.
Interest rate risk
Interest rate risk is minimized as the Company’s bank borrowings and deposits are held on a floating rate basis.


F-107

NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Credit risk
The Company selects banksand/or financial institutions that operate with the group based on the criteria of long term rating from at least two of the major Rating Agencies and keeping within prescribed diversification and limit guidelines.
The Company monitors the credit worthiness of its customers to which it grants credit terms in the normal course of business. For sales made by Intel on behalf of Numonyx, in line with the ‘Transition Services Agreements’, this monitoring was performed by Intel on behalf of Numonyx. If certain customers are independently rated, these ratings are used. Otherwise, if there is no independent rating, the Company assesses the credit quality of the customer, taking into account its financial position, past experience and other factors. Individual risk limits are set based on internal and external ratings in accordance with limits set by management. The utilization of credit limits is regularly monitored. Reserves are provided for estimated amounts of accounts receivable that may not be collected.
At December 31, 2009, two customers represented approximately 35% of trade accounts receivable, net. Any remaining concentrations of credit risk with respect to trade receivables are limited due to the large number of customers and their dispersion across many geographic areas.
Liquidity risk
Prudent liquidity risk management includes maintaining sufficient cash and cash equivalents, short term deposits, and availability of funding from an adequate amount of committed credit facilities. The Company’s objective is to maintain sufficient funds in instruments that can be easily converted to cash.
22.  COMMITMENTS
The Company’s commitments as at December 31, 2009 were as follows:
                             
  Total  2010  2011  2012  2013  2014  Thereafter 
 
Operating Leases $63,739  $8,032  $7,654  $6,405  $6,380  $5,147  $30,121 
Purchase Commitments  486,556   320,608   54,631   53,623   32,125   25,569   — 
of which:                            
Equipment and other asset purchases
  29,060   28,762   298   —   —   —   — 
Transition Service and Supply Agreement Fees
  2,988   2,988   —   —   —   —   — 
Other operational expenses
  454,508   288,858   54,333   53,623   32,125   25,569   — 
                             
Total
 $550,295  $328,640  $62,285  $60,028  $38,505  $30,716  $30,121 
                             
The Company leases land, buildings and equipment under operating leases that expire at various dates under non-cancellable operating leases. Operating lease expense was approximately $10 million in 2009 (2008: $13 million).
Purchase commitments consist primarily of purchases of tangible fixed asset and goods and services under non-cancellable contracts and of fees payable to Intel under the Transition Services Agreement.
23.  RELATED PARTY TRANSACTIONS
As described in Note 1, ‘The Company’ STM, Intel and FP own 48.6%, 45.1% and 6.3% voting ownership in Numonyx, respectively. The Company has an eight member governing body (“Supervisory Board”) which is composed of three members nominated by STM, three members nominated by Intel and two members nominated by FP. Each shareholder unilaterally nominates its chosen members to the Supervisory Board as long as there are no significant changes in their investment in Numonyx.
The ordinary shares in the Company are owned by STM and Intel and the Preferred Shares ‘A’ are owned by FP. The ordinary shares have the same voting rights as the preferred shares.


F-108

NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2009, and the nine month period ended December 31, 2008, Numonyx recorded sales and incurred expenses that related to business conducted with Intel, STM, and Hynix and had transactions with FP. The following tables and notes present the significant related party transactions and account balances with these related parties.
Intel:
Transactions during the year ended December 31, 2009 and period ended December 31, 2008:
         
  2009  2008 
 
Net Sales to Intel $487  $664 
Supply Agreement(1)
  96,834   141,596 
Service Agreement(2)
  14,664   28,561 
Transition Service Agreement Fees(3)
  39,814   49,664 
Period Costs(4)
  289,998   413,164 
(1)During 2008 and 2009, Numonyx purchased wafers from Intel’s facility in Ireland. These costs are recorded within cost of sales. This supply agreement ended during 2009.
(2)Intel’s Pudong facility performs research and development and assembly/test services for Numonyx. These costs are primarily recorded within cost of sales and research and development expenses. This service agreement substantially ended during 2009.
(3)These expenses include supply chain, procurement, site manufacturing, information technology, human resource, and finance and accounting services. These costs are primarily recorded within cost of sales and selling, general and administrative expenses. The transition service agreement substantially ended in 2009.
(4)Intel incurs facility-related expenses on Numonyx’ behalf for the Israel and Philippines sites. These costs are recorded primarily within cost of sales. These costs substantially ended during 2009.
Balances as at December 31, 2009 and December 31, 2008:
         
  2009 2008
 
Trade Accounts Receivable from Intel, net(1)
 $8,686  $80,105 
Prepaid operating lease with Intel(2)
  64,511   67,420 
Accounts payable to Intel(3)
  37,586   149,188 
Other receivables from Intel  1,589   4,700 
Other accrued liabilities to Intel  —   5,717 
(1)Trade accounts receivable from Intel, net represents monies outstanding from customers to Intel, and therefore not yet remitted to Numonyx, relating to revenues generated by Intel on behalf of Numonyx.
(2)See Note 10, ‘Other Investments and Non Current assets’ for an explanation of the prepaid operating lease.
(3)Accounts payable and other accrued liabilities to Intel relate to amounts payable by Numonyx for supply agreement, service agreement and other services provided by Intel under the Transition Services Agreement.
In addition, as explained in Note 14 ‘Long Term Debt and Debt Obligations to Related Parties’, Intel holds a long-term loan note from Numonyx, valued at $144.4 million plus accrued interest of $25.0 million at the balance sheet date. Intel also acted as guarantor, in conjunction with STM, of the bank loan obtained by Numonyx upon formation. The fair value of the benefit of this guarantee is recorded within ‘Intangible Assets, Net’ in the consolidated balance sheet.
STM:
Transactions during the year ended December 31, 2009 and period ended December 31, 2008:
         
  2009 2008
 
Transition Services Agreement Fees(1)
 $10,136  $29,108 
Cost sharing arrangement(2)
  29,669   54,879 
Period costs(3)
  16,198   — 


F-109

NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)These expenses include supply chain, procurement, information technology, human resource, and finance and accounting services provided by STM to Numonyx. These costs are primarily recorded within cost of sales and selling, general and administrative expenses. The transition services agreement substantially ended during 2009.
(2)The cost sharing arrangement is an agreement with STM in relation to the Company’s facility in Agrate, Italy, under which facilities and certain costs are shared between STM and Numonyx. The number disclosed above is the net costs paid by Numonyx to STM during the period.
(3)These costs relate primarily to utilities costs at shared manufacturing facilities. The costs incurred by Numonyx as disclosed above are net of recharges made by Numonyx to STM and are primarily recorded within cost of sales and selling, general and administrative expenses. Period costs in 2008 are included within Transition Services Agreement Fees in the table above.
Balances as at December 31, 2009 and December 31, 2008:
         
  2009  2008 
 
Trade accounts receivable from STM, net $—  $111,682 
Other current receivables from STM(2)
  1,622   13,200 
Other long term receivable from STM(1)
  24,048   24,527 
Accounts payable to STM(3)
  5,400   9,890 
Other long term payable to STM(4)
  42,489   40,423 
(1)The long term receivable from STM relates to the end of employment fund in Italy (see Note 10, ‘Other Investments and Non-Current Assets’).
(2)Other current receivables from STM relate to non-trade receivables.
(3)Accounts payable to STM relate to Transition Services Agreements fees and the Cost Sharing Arrangement in Italy.
(4)The long term payable to STM relates to a tax refund in Italy (see Note 10, ‘Other Investments and Non-Current Assets’ and Note 15, ‘Other Non Current Liabilities’.
In addition, as detailed in Note 14 ‘Long Term Debt and Debt Obligations to Related Parties’, STM holds a long-term loan note from Numonyx, valued at $155.6 million plus accrued interest of $26.9 million at the balance sheet date. The loan note is split into a short term element of $78 million, and a long term element of $104.5 million. STM also acted as guarantor, in conjunction with Intel, of the bank loan obtained by Numonyx upon formation. The fair value of the benefit of this guarantee is recorded within Intangible Assets, Net.
Francisco Partners:
As described in Note 1, ‘The Company’, upon formation of Numonyx on March 30, 2008, FP contributed $150 million in cash in exchange for preference shares representing a 6.3% equity interest in the newly formed Company, and a long-term loan note valued at $19.1 million, which is classified within debt obligations to related parties on the consolidated balance sheet. As at December 31, 2009, accrued interest on the loan note totaled $3.3 million.
Hynix Numonyx Semiconductor Ltd.:
As described in Note 3, ‘Equity Investments’, STM contributed their interest in a venture with Hynix Semiconductor upon formation of Numonyx.
Transactions during the year ended December 31, 2009 and period ended December 31, 2008:
         
  2009 2008
 
Purchases of semi-finished product $268,000  $77,470 
Balances as at December 31,2009 and December 31,2008:
         
  2009 2008
 
Payments for additional equity interest $100,000  $50,000 
Accounts payable to Hynix Numonyx Semiconductor Ltd.   22,680   9,635 
Other accrued liabilities to Hynix Numonyx Semiconductor Ltd  11,113   4,053 


F-110

NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24.  SUBSEQUENT EVENTS
On February 9, 2010, the Company entered into a definitive agreement with Micron Technology Inc. under which Micron has agreed to purchase the entire share capital of Numonyx in exchange for a minimum of 140 million Micron common shares. An additional 10 million common shares may be payable to Numonyx shareholders to the extent the volume weighted average price of Micron shares for the 20 trading days, ending two days prior to the close of the transaction, ranges between $7.00 and $9.00 per share. As part of deal closing, the long term related party loan notes will also be cancelled via a capital contribution. The transaction is subject to regulatory review and other customer closing conditions and is currently anticipated to close within 4 to 6 months of the date this definitive agreement was signed.


F-111

STMICROELECTRONICS N.V.
VALUATION AND QUALIFYING ACCOUNTS
 
                                        
 Balance at
   Charged to
   Balance at
  Balance at
   Charged to
   Balance
 beginning
 Translation
 costs and
   end of
 
Valuation and qualifying accounts deducted from the related asset accounts
 of period adjustment expenses Deductions period 
Valuation and Qualifying Accounts Deducted
 Beginning
 Translation
 Costs and
 Additions/
 at End of
From the Related Asset Accounts
 of Period Adjustment Expenses (Deductions) Period
 (Currency — millions of U.S. dollars)  (Currency—millions of U.S. dollars)
2009
               
Inventories  72      102   (124)  50 
Accounts Receivable  25      2   (8)  19 
Deferred Tax Assets  1,283   6   79   (31)  1,337 
2008
               
Inventories  39      108   (75)  72 
Accounts Receivable  21      1   3   25 
Deferred Tax Assets  1,123   (6)  170   (4)  1,283 
2007
                                   
Inventories  47       72   (80)  39   47      72   (80)  39 
Accounts Receivable  31       1   (11)  21   31      1   (11)  21 
Deferred Tax Assets  1,039   6   79   (1)  1,123   1,039   6   79   (1)  1,123 
2006
                    
Inventories  51       78   (82)  47 
Accounts Receivable  27   1   7   (4)  31 
Deferred Tax Assets  854   101   135   (51)  1,039 
2005
                    
Inventories  47       73   (69)  51 
Accounts Receivable  21   (1)  10   (3)  27 
Deferred Tax Assets  855   (110)  109       854 


S-1