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

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

Title of Each Class:		Name of Each Exchange on Which Registered:
Common shares, nominal value €1.04 per share		New York Stock Exchange

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

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

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

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

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

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

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

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

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

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

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	•	manufacturing yields; and
	•	sales and technical support.

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

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

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

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

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

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

	Future acquisitions or divestitures may adversely affect our business.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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	We may be faced with product liability or warranty claims.

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

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

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

	Loss of key employees could hurt our competitive position.

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

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

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

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

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	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.

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

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

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

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

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

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

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

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

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

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	•	Application Specific Product Group segment;
	•	Memory Products Group segment; and
	•	Micro, Power and Analog Product Group segment.

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	Application Specific Product Group Segment

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

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

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

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

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

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

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

	Computer Peripherals Products

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	Automotive Products

	Memory Products Group Segment

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

	Micro, Power and Analog Product Group Segment

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

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

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

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

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

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

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

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

(1)	Equity Investments

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	The Semiconductor Market

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

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

	Semiconductor Classifications

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Item 5.	Operating and Financial Review and Prospects

	Critical Accounting Policies Using Significant Estimates

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

	Fiscal Year 2006

	2006 Business Overview

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

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

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	Business Outlook

	Other Developments

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

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	Segment Information

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

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		(“PSM”) division); this segment was previously known as Micro, Linear and Discrete Product Group (“MLD”), but no change has occurred in the segment’s perimeter or organization.

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

(1)	Net revenues of “Others” include revenues from sales of subsystems mainly and other products not allocated to product group segments.

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

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

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

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

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

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

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

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	Net Revenues by Location of Order Shipment

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

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

	Net Revenues by Market Segment

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

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

	Net revenues

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

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	Gross profit

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

	Selling, general and administrative expenses

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

	Research and development expenses

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

	Other income and expenses, net

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

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	Impairment, restructuring charges and other related closure costs

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

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

	Operating income

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

	Interest income (expense), net

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

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	Loss on equity investments

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

	Income tax benefit (expense)

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

	Net income

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

	Net revenues

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

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	Gross profit

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

	Selling, general and administrative expenses

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

	Research and development expenses

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

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	Other income and expenses, net

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

	Impairment, restructuring charges and other related closure costs

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

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

	Operating income

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

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	Interest income (expense), net

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

	Loss on equity investments

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

	Loss on extinguishment of convertible debt

		2005				2004
		(In millions)
Loss on extinguishment of convertible debt			—			$	(4	)

	Income tax benefit (expense)

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

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	Net income

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

	Net revenues

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

	Year-over-year comparison

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	Sequential comparison

	Gross profit

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

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	Selling, general and administrative expenses

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

	Research and development expenses

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

	Other income and expenses, net

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

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	Impairment, restructuring charges and other related closure costs

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

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

	Operating income

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

	Interest income, net

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

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	Loss on equity investments

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

	Income tax benefit (expense)

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

	Net income

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

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	Liquidity

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

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

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

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

	Capital Resources

	Net financial position

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

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

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

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	Contractual Obligations, Commercial Commitments and Contingencies

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

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

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	Off-Balance Sheet Arrangements

	Financial Outlook

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

	SuperH, Inc.

	UPEK Inc.

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	Hynix ST Joint Venture

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Item 6.	Directors, Senior Management and Employees

	Supervisory Board

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

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

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	Biographies

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	Corporate Governance at ST

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

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	Supervisory Board Committees

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

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

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	Managing Board

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	Executive Officers

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

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

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

	Biographies

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

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

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

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

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

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

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

	Employee and Managing Board Stock Option Plans

103

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Table of Contents

Tranche 3

Tranche 4

Special Grant

Tranche 5

Special Grant

Tranche 6

Special Grant

Tranche 7

Date of Supervisory Board Meeting

July 28, 1998

Sept 16, 1999

Jan 24, 2000

June 16, 2000

Sept 18, 2000

Dec 11, 2000

Dec 18, 2000

March 1, 2001

Total Number of Shares which may be purchased

3,900,000

8,878,200

150,000

5,331,250

70,000

2,019,640

26,501

113,350

Vesting Date

July 28, 2001

Sept 16, 2002

Jan 24, 2003

June 16, 2002

Sept 18, 2002

Dec 11, 2002

Dec 18, 2002

March 1, 2003

Expiration Date

July 28, 2006

Sept 16, 2007

Jan 24, 2008

June 16, 2008

Sept 18, 2008

Dec 11, 2008

Dec 18, 2008

March 1, 2009

Exercise Price

$12.03

$24.88

$55.25

$62.01

$52.88

$50.69

$44.00

$31.65

Terms of Exercise

50% on

50% on

50% on

32% on

32% on

32% on

32% on

32% on

July 28, 2001

Sept 16, 2002

Jan 24, 2003

June 16, 2002

Sept 18, 2002

Dec 11, 2002

Dec 18, 2002

March 1, 2003

50% on

50% on

50% on

32% on

32% on

32% on

32% on

32% on

July 28, 2002

Sept 16, 2003

Jan 24, 2004

June 16, 2003

Sept 18, 2003

Dec 11, 2003

Dec 18, 2003

March 1, 2004

36% on

36% on

36% on

36% on

36% on

June 16, 2004

Sept 18, 2004

Dec 11, 2004

Dec 18, 2004

March 1, 2005

Number of Shares to be acquired with Outstanding Options as of Dec 31, 2006

0

7,661,670

1,980

4,507,280

39,745

1,572,610

20,527

49,690

Held by Managing Board/ Executive Officers

0

398,400

0

187,000

0

0

0

0

104

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Table of Contents

Tranche 1

Tranche 2

Tranche 3

Tranche 4

Tranche 5

Tranche 6

Tranche 7

Date of the grant

April 27, 2001

Sept 4, 2001

Nov 1, 2001

Jan 2, 2002

Jan 25, 2002

April 25, 2002

June 26, 2002

Total Number of Shares which may be purchased

9,521,100

16,000

61,900

29,400

3,656,103

9,708,390

318,600

Vesting Date

April 27, 2003

Sept 4, 2003

Nov 1, 2003

Jan 2, 2004

Jan 25, 2003

April 25, 2004

June 26, 2004

Expiration Date

April 27, 2011

Sept 4, 2011

Nov 1, 2011

Jan 2, 2012

Jan 25, 2012

April 25, 2012

June 26, 2012

Exercise Price

$39.00

$29.70

$29.61

$33.70

$31.09

$31.11

$22.30

32% on

32% on

32% on

32% on

50% on

32% on

32% on

April 27, 2003

Sept 4, 2003

Nov 1, 2003

Jan 2, 2004

Jan 25, 2003

April 25, 2004

June 26, 2004

Terms of Exercise

32% on

32% on

32% on

32% on

50% on

32% on

32% on

April 27, 2004

Sept 4, 2004

Nov 1, 2004

Jan 2, 2005

Jan 25, 2004

April 25, 2005

June 26, 2005

36% on

36% on

36% on

36% on

36% on

36% on

April 27, 2005

Sept 4, 2005

Nov 1, 2005

Jan 2, 2006

April 25, 2006

June 26, 2006

Number of Shares to be acquired with Outstanding Options as of December 31, 2006

8,112,170

16,000

50,460

25,100

3,014,612

8,549,588

142,306

Held by Managing Board/ Executive Officers

247,000

0

0

0

93,500

280,000

0

Tranche 8

Tranche 9

Tranche 10

Tranche 11

Tranche 12

Tranche 13

Tranche 14

Tranche 15

Tranche 16

Tranche 17

Date of the grant

Aug 1, 2002

Dec 17, 2002

March 14, 2003

June 3, 2003

Oct 24, 2003

Jan 2, 2004

April 26, 2004

Sept 1, 2004

Jan 31, 2005

March 17, 2005

Total Number of Shares which may be purchased

24,500

14,400

11,533,960

306,850

135,500

86,400

12,103,490

175,390

29,200

13,000

Vesting Date

Aug 1, 2004

Dec 17, 2004

March 14, 2005

June 3, 2005

Oct 24, 2005

Jan 2, 2006

April 26, 2006

Sept 1, 2006

Jan 31, 2007

March 17, 2007

Expiration Date

Aug 1, 2012

Dec 17, 2012

March 14, 2013

June 3, 2013

Oct 24, 2013

Jan 2, 2014

April 26, 2014

Sept 1, 2014

Jan 31, 2015

March 17, 2015

Exercise Price

$20.02

$21.59

$19.18

$22.83

$25.90

$27.21

$22.71

$17.08

$16.73

$17.31

32% on

32% on

32% on

32% on

32% on

32% on

32% on

32% on

32% on

32% on

Aug 1, 2004

Dec 17, 2004

March 14, 2005

June 3, 2005

Oct 24, 2005

Jan 2, 2006

April 26, 2006

Sept 1, 2006

Jan 31, 2007

March 17, 2007

32% on

32% on

32% on

32% on

32% on

32% on

32% on

32% on

32% on

32% on

Terms of Exercise

Aug 1, 2005

Dec 17, 2005

March 14, 2006

June 3, 2006

Oct 24, 2006

Jan 2, 2007

April 26, 2007

Sept 1, 2007

Jan 31, 2008

March 17, 2008

36% on

36% on

36% on

36% on

36% on

36% on

36% on

36% on

36% on

36% on

Aug 1, 2006

Dec 17, 2006

March 14, 2007

June 3, 2007

Oct 24, 2007

Jan 2, 2008

March 14, 2008

Sept 1, 2008

Jan 31, 2009

March 17, 2009

Number of Shares to be acquired with Outstanding Options as of Dec 31, 2006

18,100

14,400

10,302,239

201,550

124,200

26,700

10,970,870

147,255

29,200

13,000

Held by Managing Board/ Executive Officers

0

0

352,000

0

31,000

0

465,000

0

0

0

105

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Table of Contents

	2006 Unvested Stock Award Plan

	2005 Unvested Stock Award Plan

	Supervisory Board Stock Option Plans

June 24, 1996

May 31, 1999

March 27, 2002

Date of Annual

Shareholders’ Meeting

Tranche 3

Tranche 1

Tranche 2

Tranche 3

Tranche 1

Tranche 2

Tranche 3

Date of the grant

July 28, 1998

Sept 16, 1999

June 16, 2000

April 27, 2001

April 25, 2002

March 14, 2003

April 26, 2004

Total Number of Shares which may be purchased

103,500

207,000

103,500

112,500

132,000

132,000

132,000

Vesting Date

July 28, 1999

Sept 16, 2000

June 16, 2001

April 27, 2002

May 25, 2002

April 14, 2003

April 26, 2004

Expiration Date

July 28, 2006

Sept 16, 2007

June 16, 2008

April 27, 2011

April 25, 2012

March 14, 2013

April 26, 2014

Exercise Price

$12.03

$24.88

$62.01

$39.00

$31.11

$19.18

$22.71

All exercisable

All exercisable

All exercisable

All exercisable

All exercisable

All exercisable

All exercisable

Terms of Exercise

after 1 year

after 1 year

after 1 year

after 1 year

after 1 year

after 1 year

after 1 year

Number of Shares to be acquired with Outstanding Options as of December 31, 2006

0

153,000

90,000

99,000

120,000

120,000

132,000

106

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

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

	Terms of Exercise

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

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

107

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	Employees

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

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

Item 7.	Major Shareholders and Related-Party Transactions

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

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

108

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

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

109

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	Shareholders’ Agreements

	STH Shareholders’ Agreement

110

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Table of Contents

	Restructuring of the Holding Companies

	Standstill

	Corporate Governance

111

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

112

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	Disposals of our Common Shares

	Re-adjusting and Re-balancing options

	Change of Control Provision

	Non-competition

	Deadlock

113

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Table of Contents

	Preference Shares

	Other Shareholders’ Agreements

	Italian Shareholders’ Pact

	Statutory Considerations

114

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Item 8.	Financial Information

115

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116

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Table of Contents

	•	Property damage and business interruption;
	•	General liability and product liability;
	•	Directors and officers liability; and
	•	Transportation risks.

117

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

Item 9.	Listing

	Our Common Shares

118

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119

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

120

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

121

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

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	Euronext

	General

	Euronext Paris

	•	Compartment A comprises the companies with market capitalizations above €1 billion;
	•	Compartment B comprises the companies with market capitalizations from €150 million and up to and including €1 billion; and
	•	Compartment C comprises the companies with capitalizations below €150 million.

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	Securities Trading in Italy

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Item 10.	Additional Information

	Applicable non-U.S. Regulations

	Applicable Dutch Legislation

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	Applicable French Legislation

	Applicable Italian Legislation

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	Articles of Association

	Purposes of the Company (Article 2)

	Company and Trade Registry

	Supervisory Board and Managing Board

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

	Compensation of our Managing Board (Article 12)

	Compensation of our Supervisory Board (Article 23)

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

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

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

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

	Shareholders’ Meetings, Attendance at Shareholders’ Meetings and Voting Rights

	Notice Convening the Shareholders’ Meeting (Articles 25, 26, 27, 28 and 29)

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	Attendance at Shareholders’ Meetings and Voting Rights (Articles 30, 31 and 33)

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

	Quorum and Majority (Articles 4, 13 and 32)

	Disclosure of Holdings

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	Share Capital as of December 31, 2006

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

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

	Securities Not Representing Our Share Capital

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

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	Changes to Our Share Capital and Stock Option Grants

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

	Liquidation Rights (Articles 42 and 43)

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

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

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

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

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

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

	Dutch Taxation

	Taxes on income and capital gains

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

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

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

	Dividend withholding tax

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

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

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

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

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

	Gift and inheritance taxes

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

	Other taxes and duties

	•	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;

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

	Dividends

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	Sale, Exchange or Other Disposition of Common Shares

	Passive Foreign Investment Company Status

	U.S. Information Reporting and Backup Withholding

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Item 11.	Quantitative and Qualitative Disclosures About Market Risk

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

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

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

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

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

Item 12.	Description of Securities Other Than Equity Securities

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Item 13.	Defaults, Dividend Arrearages and Delinquencies

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

Item 15.	Controls and Procedures

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Item 16A.	Audit Committee Financial Expert

Item 16B.	Code of Ethics

Item 16C.	Principal Accountant Fees and Services

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

	Audit Committee Pre-approval Policies and Procedures

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

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

Maximum Number

Total Number of

of Securities that

Total Number of

Securities Purchased

May yet be

Securities

Average Price Paid

as Part of Publicly

Purchased Under

Period

Purchased

per Security

Announced Programs

the Programs

2006-01-01 to 2006-01-31

—

—

—

—

2006-02-01 to 2006-02-28

—

—

—

—

2006-03-01 to 2006-03-31

—

—

—

—

2006-04-01 to 2006-04-30

—

—

—

—

2006-05-01 to 2006-05-31

—

—

—

—

2006-06-01 to 2006-06-30

—

—

—

—

2006-07-01 to 2006-07-31

—

—

—

—

2006-08-01 to 2006-08-31

—

—

—

—

2006-09-01 to 2006-09-30

—

—

—

—

2006-10-01 to 2006-10-31

—

—

—

—

2006-11-01 to 2006-11-30

—

—

—

—

2006-12-01 to 2006-12-31

—

—

—

—

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Item 17.	Financial Statements

Item 18.	Financial Statements

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

Item 19.	Exhibits

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

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

148

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

149

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	STMICROELECTRONICS N.V.

	By:	/s/ Carlo Bozotti

	Carlo Bozotti
	President and Chief Executive Officer

150

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

F-1

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F-2

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F-3

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

F-4

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

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

F-6

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

F-7

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F-8

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F-9

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F-10

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F-11

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F-12

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

F-13

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

F-14

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F-15

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F-16

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

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

F-17

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F-18

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F-19

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F-20

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F-21

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

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

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

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

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

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

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

F-24

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

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

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

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

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

F-28

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

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

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

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

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

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

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

F-31

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F-32

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F-33

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

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

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

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

		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%

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Year
2007			50
2008			3
2009			—
2010			—
Thereafter			106
Total			159

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

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

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

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	•	Application Specific Product Groups (“ASG”) segment, comprised of three product lines — Home, Personal and Communication (“HPC”), Computer Peripherals (“CPG”) and new Automotive Product (“APG”);

	•	Memory Products Group (“MPG”) segment; and
	•	Micro, Power and Analog (“MPA”) segment.

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

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

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

(1)

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

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

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

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

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

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

S-1