As filed with the Securities and Exchange Commission on February 23, 2009

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 20-F

(Mark one)

o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

KONINKLIJKE PHILIPS ELECTRONICS N.V.

ROYAL PHILIPS ELECTRONICS

The Netherlands
(Jurisdiction of incorporation or organization)

Eric Coutinho, Chief Legal Officer & Secretary to the Board of Management
+31 20 59 77232, eric.coutinho@philips.com, Breitner Center, Amstelplein 2, 1096 BC Amsterdam, The Netherlands

Title of each class		Name of each exchange on which registered
Common Shares — par value Euro (EUR) 0.20 per share		New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act:
None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Common Shares — par value Euro (EUR) 0.20 per share
(Title of class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

Class Koninklijke Philips Electronics N.V. Common Shares par value EUR 0.20 per share		Outstanding at December 31, 2008 972,411,769 shares, including 47,577,915 treasury shares

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934.

Note-Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP   þ		International Financial Reporting Standards as issued by by the International Accounting Standards Board	o	Other   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ                     Accelerated filer o                    Non-accelerated filer o

Indicate by check mark which financial statement item the registrant has elected to follow.

o Item 17     þ Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes     þ No

 

 

Table of contents

Introduction

				Page
Part I
Item 1.		Identity of directors, senior management and advisors			4
Item 2.		Offer statistics and expected timetable			4
Item 3.		Key information			4
Item 4.		Information on the Company			8
Item 4A.		Unresolved Staff Comments			19
Item 5.		Operating and financial review and prospects			20
Item 6.		Directors, senior management and employees			66
Item 7.		Major shareholders and related party transactions			67
Item 8.		Financial information			67
Item 9.		The offer and listing			68
Item 10.		Additional information			69
Item 11.		Quantitative and qualitative disclosures about market risk			72
Item 12.		Description of securities other than equity securities			72
Part II
Item 13.		Defaults, dividend arrearages and delinquencies			72
Item 14.		Material modifications to the rights of security holders and use of proceeds			72
Item 15.		Controls and procedures			72
Item 16A.		Audit Committee Financial Expert			72
Item 16B.		Code of Ethics			72
Item 16C.		Principal Accountant Fees and Services			72
Item 16D.		Exemptions from the Listing Standards for Audit Committees			73
Item 16E.		Purchases of Equity Securities by the Issuer and Affiliated Purchasers			73
Item 16F.		Change in Registrant’s Certifying Accountant			74
Item 16G.		Differences in Corporate Governance Provisions			74
Part III
Item 17.		Financial statements			74
Item 18.		Financial statements			74
Item 19.		Exhibits			75
EX-1
EX-8
EX-12(A)
EX-12(B)
EX-13(A)
EX-13(B)
EX-15(A)
EX-15(B)
EX-15.(C)

In this report amounts are expressed in euros (“euros” or “EUR”) or in US dollars (“dollars”, “US $” or “$”).

Introduction

Specific portions of Philips’ Annual Report 2008 to Shareholders (the “2008 Annual Report”) are incorporated by reference in this report on Form 20-F to the extent noted herein. Philips’ 2008 Annual Report (except for the omitted portions thereof identified in the following sentence) is attached hereto as Exhibit 15(d). The 2008 Annual Report is furnished to the Securities and Exchange Commission for information only and the Annual Report is not filed except for such specific portions that are expressly incorporated by reference in this Report on Form 20-F. Furthermore, the Sustainability performance on pages 180 through 191 of the 2008 Annual Report, the International Financial Reporting Standards (IFRS) financial statements and related notes on pages 192 through 243 of the 2008 Annual Report, and the unconsolidated Company financial statements, including the notes thereto, also prepared on the basis of IFRS, on pages 244 through 249 of the 2008 Annual Report, have been omitted from the version of such Report being furnished as an exhibit to this Report on Form 20-F. The IFRS financial statements and Company financial statements have been omitted because Philips’ primary consolidated accounts are prepared in accordance with accounting principles generally accepted in the United States and Philips is not required to include in this Report on Form 20-F the IFRS financial statements, the Sustainability performance and Company financial statements.

In presenting and discussing the Philips Group’s financial position, operating results and cash flows, management uses certain non-US GAAP financial measures like: comparable growth; adjusted income from operations; net operating capital; net debt; cash flow before financing activities and free cash flow. These non-US GAAP financial measures should not be viewed in isolation as alternatives to the equivalent US GAAP measure and should be used in conjunction with the most directly comparable US GAAP measure(s). Unless otherwise indicated in this document, a discussion of the non-US GAAP measures included in this document and a reconciliation of such measures to the most directly comparable US GAAP measure(s) is contained under the heading “Reconciliation of non-US GAAP information” in item 5.

Forward-looking statements

Pursuant to provisions of the United States Private Securities Litigation Reform Act of 1995, Philips is providing the following cautionary statement. This document, including the portions of the 2008 Annual Report incorporated hereby, contains certain forward-looking statements with respect to the financial condition, results of operations and business of Philips and certain of the plans and objectives of Philips with respect to these items, in particular, among other statements, certain statements in Item 4 “Information on the Company” with regard to management objectives, market trends, market standing, product volumes and business risks, the statements in Item 8 “Financial Information” relating to legal proceedings, the statements in Item 5 “Operating and Financial Review and Prospects” with regard to trends in results of operations, margins, overall market trends, risk management, exchange rates and statements in Item 11 “Quantitative and Qualitative Disclosures about Market Risks” relating to risk caused by derivative positions, interest rate fluctuations and other financial exposure are forward-looking in nature. Forward-looking statements can be identified generally as those containing words such as “anticipates”, “assumes”, “believes”, “estimates”, “expects”, “should”, “will”, “will likely result”, “forecast”, “outlook”, “projects” or similar expressions. By their nature, forward-looking statements involve risk and uncertainty, because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements.

These factors include, but are not limited to domestic and global economic and business conditions, particularly in light of the ongoing recessionary condition prevailing in many markets, the successful implementation of our strategy and our ability to realize the benefits of this strategy, our ability to develop and market new products, changes in legislation, legal claims, changes in exchange and interest rates, changes in tax rates, pension costs, raw materials and employee costs, our ability to identify and complete successful acquisitions and to integrate those acquisitions into our business, our ability to successfully exit certain businesses or restructure our operations, the rate of technological changes, political, economic and other developments in countries where Philips operates, industry consolidation and competition. As a result, Philips’ actual future results may differ materially from the plans, goals and expectations set forth in such forward-looking statements. See also Item 3 “Key information — Risk factors”.

Third-party market share data

Statements regarding market share, including those regarding Philips’ competitive position, contained in this document are based on outside sources such as specialized research institutes, industry and dealer panels in combination with management estimates. Where full-year information regarding 2008 is not yet available to Philips, those statements may also be based on estimates and projections prepared by outside sources or management. Rankings are based on sales unless otherwise stated.

Fair value information

In presenting the Philips Group’s financial position, fair values are used for the measurement of various items in accordance with the applicable accounting standards. These fair values are based on market prices, where available, and are obtained from sources that are deemed to be reliable. Readers are cautioned that these values are subject to changes over time and are only valid at the balance sheet date. When an observable market value does not exist, fair values are estimated using valuation models, which we believe are appropriate for their purpose. They require management to make significant assumptions with respect to future developments which are inherently uncertain and may therefore deviate from actual developments. Critical assumptions used are disclosed in the financial statements. In certain cases, independent valuations are obtained to support management’s determination of fair values.

Part I

Item 1. Identity of directors, senior management, advisors and auditors

Not applicable.

Item 2. Offer statistics and expected timetable

Not applicable.

Item 3.		Key information Selected consolidated financial data

Selected financial data as at and for the years ended December 31,
		20041)				20051)				20061)				20071)				2008					2008(a)
in millions, except per share data and ratio data		EUR				EUR				EUR				EUR				EUR					US $
Income statement data:
Sales			24,488				25,445				26,682				26,793				26,385					37,183
Income from Operations (IFO)			1,731				1,549				1,198				1,841				317					447
Financial income and expenses-net			216				104				28				2,613				(225	)				(317	)
Income (loss) from continuing operations			3,163				2,872				899				4,593				(178	)				(251	)
Income (loss) from discontinued operations			(328	)			(11	)			4,482				(433	)			(8	)				(11	)
Net income (loss)			2,835				2,861				5,381				4,160				(186	)				(262	)
Weighted average number of common shares outstanding (in thousands)			1,280,251				1,249,956				1,174,925				1,086,128				991,420					991,420
Basic earnings per Common Share:
Income (loss) from continuing operations			2.47				2.30				0.77				4.23				(0.18	)				(0.25	)
Net income (loss)			2.22				2.29				4.58				3.83				(0.19	)				(0.26	)
Weighted average number of common shares outstanding on a diluted basis (in thousands)			1,283,716				1,253,330				1,182,784				1,097,435				997,720					997,720
Diluted earnings per Common Share: (b)
Income (loss) from continuing operations			2.46				2.29				0.76				4.19				(0.18)	2)				(0.25)	2)
Net income (loss)			2.21				2.28				4.55				3.79				(0.19)	2)				(0.26)	2)
Balance sheet data:
Total assets			30,705				33,861				38,451				36,286				33,041					46,563
Short-term debt			961				1,167				863				2,345				717					1,010
Long-term debt			3,552				3,320				3,006				1,212				3,441					4,849
Short-term provisions (c)			731				769				876				377				1,060					1,494
Long-term provisions (c)			1,896				1,853				2,405				2,712				2,909					4099
Minority interests			59				58				40				42				46					69
Stockholders’ equity			14,835				16,634				22,963				21,642				16,243					22,890
Capital stock			263				263				228				228				194					273
Cash flow data:
Net cash provided by operating activities			1,392				1,147				330				1,519				1,495					2,107
Net cash (used for) provided by investing activities			1,337				1,694				(2,802	)			3,930				(3,101	)				(4,370	)
Net cash used for financing Activities			(2,145	)			(2,589	)			(3,715	)			(2,368	)			(3,575	)				(5,038	)
Cash provided by (used for) continuing Operations			584				252				(6,187	)			3,081				(5,181	)				(7,301	)

		20041)				20051)				20061)				20071)				2008
Key Ratios:
Income from operations (in millions of euros)			1,731				1,549				1,198				1,841				317
as a % of sales			7.1				6.1				4.5				6.9				1.2
Turnover rate of net operating capital 2)			5.31				4.95				3.11				2.64				1.72
Inventories as a % of sales			10.1				10.8				10.6				11.7				12.8
Outstanding trade receivables (in days’ sales)			41				44				45				44				42
Net income (loss) as a % of stockholders’ equity			19.1				17.2				23.4				19.2				(1.1	)
Income (loss) from continuing operations as a % of stockholders’ equity (ROE)			22.7				18.4				4.3				21.0				(1.0	)
Ratio net debt : group equity 2)			2:98				(4):104				(10):110				(32):132				3:97

Definitions:

Turnover rate of net operating capital		:		sales divided by average net operating capital (calculated on the quarterly balance sheet positions)
Net operating capital*				total assets excluding assets from discontinued operations less (a) cash and cash equivalents, (b) deferred tax assets, (c) other non-current financial assets, (d) investments in equity accounted investees, and after deduction of (e) provisions excluding deferred tax liabilities, (f) accounts and notes payable, (g) accrued liabilities, (h) current/non-current liabilities and (i) trading securities.
				Philips believes that an understanding of the Philips group’s financial condition is enhanced by the disclosure of net operating capital (NOC), as this figure is used by Philips’ management to evaluate the capital efficiency of the Philips Group and its operating sectors. Net operating capital is defined as follows:

		20041)				20051)				20061)				20071)				2008
Intangible assets			2,307				3,541				5,536				6,289				11,676
Property, plant and equipment			2,768				2,999				3,084				3,180				3,484
Remaining assets*			8,776				9,681				10,712				11,333				11,136
Provisions**			(2,445	)			(2,347	)			(2,684	)			(2,417	)			(2,804	)
Other liabilities***			(7,142	)			(8,433	)			(8,129	)			(7,799	)			(8,625	)
Net operating capital			4,264				5,441				8,519				10,586				14,867

1)		Group financials have been revised to reflect immaterial adjustments of intercompany profit eliminations on inventories. For more information, see “Reclassifications and revisions” under the section “Significant accounting policies”, which is incorporated herein by reference under Item 18.
*		Remaining assets includes all other current and non-current assets on the balance sheet, except for intangible assets and property, plant and equipment and excludes deferred tax assets, cash and cash equivalents and trading securities
**		Excluding deferred tax liabilities
***		Other liabilities includes other current and non-current liabilities on the balance sheet, except for short-term and long-term debt

ROE		:		income from continuing operations as a % of average stockholders’ equity
Net debt*		:		long-term and short-term debt net of cash and cash equivalents
Group equity		:		stockholders’ equity and minority interests
Net debt: group
Equity ratio*		:		the % distribution of net debt over group equity plus net debt

Cash dividends and distributions paid per Common Share

The following table sets forth in euros the gross dividends and cash distributions paid on the Common Shares in the financial years indicated (from prior-year profit distribution) and such amounts as converted into US dollars and paid to holders of Shares of New York registry:

		2004				2005				2006				2007				2008
• In EUR			0.36				0.40				0.44				0.60				0.70
• In US $			0.44				0.51				0.54				0.80				1.09

A proposal will be submitted to the 2009 Annual General Meeting of Shareholders to declare a distribution in cash of EUR 0.70 per common share from the retained earnings. We currently estimate a distribution of approximately EUR 646 million. A loss of EUR 186 million will be accounted for in retained earnings.

In 2008 a dividend of EUR 0.70 per common share (EUR 720 million) was paid in respect of the financial year 2007.

The dollar equivalent of this cash distribution to be paid to shareholders in the year 2009 will be calculated at the euro/dollar rate of the official Amsterdam daily fixing rate (transfer rate) on the date fixed and announced for that purpose by the Company, expected to be April 2, 2009. The dollar equivalents of the prior year profit distributions paid to shareholders have been calculated at the euro/dollar rate of the official Amsterdam daily fixing rate (transfer rate) on the date fixed and announced for that purpose by the Company.

Exchange rates US $ : EUR

The following two tables set forth, for the periods and dates indicated, certain information concerning the exchange rate for US dollars into euros based on the Noon Buying Rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”). The Noon Buying Rate on February 13, 2009 was EUR 0.7765 per US $1.

calendar period		EUR per US $1
		period end				average(1)				high				low
2003			0.7938				0.8782				0.9652				0.7938
2004			0.7387				0.8014				0.8474				0.7339
2005			0.8445				0.8046				0.8571				0.7421
2006			0.7577				0.7906				0.8432				0.7504
2007			0.6848				0.7259				0.7750				0.6729
2008			0.7184				0.6844				0.8035				0.6246
2009 (through January)			0.7810				0.7810				0.7810				0.7171

		highest				lowest
		rate				rate
August 2008			0.6821				0.6423
September 2008			0.7174				0.6786
October 2008			0.8035				0.7113
November 2008			0.7984				0.7669
December 2008			0.7915				0.6965
January 2009			0.7810				0.7171

Philips publishes its financial statements in euros while a substantial portion of its net assets, earnings and sales are denominated in other currencies. Philips conducts its business in more than 50 different currencies.

Unless otherwise stated, for the convenience of the reader the translations of euros into dollars appearing in this report have been made based on the closing rate on December 31, 2008 (US $1 = EUR 0.7096). This rate is not materially different from the Noon Buying Rate on such date (US $1 = EUR 0.7184).

The following table sets out the exchange rate for US dollars into euros applicable for translation of Philips’ financial statements for the periods specified.

		EUR per US $1
		period end				average(a)				high				low
2003			0.7943				0.8854				0.9543				0.7943
2004			0.7350				0.8050				0.8465				0.7350
2005			0.8435				0.8053				0.8491				0.7613
2006			0.7591				0.7935				0.8375				0.7579
2007			0.6790				0.7272				0.7694				0.6756
2008			0.7096				0.6832				0.7740				0.6355

Risk factors

The information on risk factors required by this Item is incorporated by reference herein from pages 96 through 102 of the 2008 Annual Report under the heading “Risk categories and factors”.

It describes some of the risks that could affect Philips’ businesses. The risk factors and the cautionary statements contained in the section entitled “Introduction” on page 3 should be considered in connection with any forward-looking statements contained in Philips’ Annual Report on Form 20-F. Forward-looking statements can be identified generally as those containing words such as “anticipates”, “assumes”, “believes”, “estimates”, “expects”, “should”, “will”, “will likely result”, “forecast”, “outlook”, “projects” or similar expressions. From time to time, Philips may also provide oral or written forward-looking statements in other materials Philips releases to the public. The cautionary statements contained in “Introduction” are deemed to apply to these statements.

The risks described are not the only ones that Philips faces. Some risks are not yet known to Philips and certain risks that Philips does not currently believe to be material could later turn out to be material. All of these risks could materially affect Philips’ business, its revenues, operating income, net income, net assets and liquidity and capital resources.

Item 4. Information on the Company

The structure of the Philips Group

The information under the heading “Business Overview” in this item 4, “Discontinued operations” in item 5, the information on capital expenditure under the heading “Cash flow” in item 5, page 50 under the heading “Acquisitions and divestments” of the 2008 Annual Report, pages 254 through 261 under the heading “Corporate governance” of the 2008 Annual Report, and the information under note 2 “Acquisitions and divestments” on pages 143 through 148 of the 2008 Annual Report is incorporated herein by reference. The registered office of Royal Philips Electronics is Groenewoudseweg 1, 5621 BA Eindhoven, The Netherlands. Our phone number is +31 20 5977777.

Business Overview

The information under the heading “Operating and financial review and prospects” in item 5 is incorporated herein by reference. The description of industry terms contained in Exhibit 15(c) to this Report on Form 20-F is also incorporated herein by reference.

Philips Structure

Koninklijke Philips Electronics N.V. (the ‘Company’) is the parent company of the Philips Group (‘Philips’ or the ‘Group’). Its shares are listed on the stock markets of Euronext Amsterdam and the New York Stock Exchange. The management of the Company is entrusted to the Board of Management under the supervision of the Supervisory Board.

Philips’ activities in the field of health and well-being are organized on a sector basis, with each operating sector — Healthcare, Consumer Lifestyle and Lighting — being responsible for the management of its businesses worldwide.

The Company aims, through the Innovation & Emerging Businesses sector, to invest in projects that are not currently part of the operating sectors, but which will lead to additional organic growth or create value through future spin-offs.

The Group Management & Services sector provides the sectors with support through shared service centers. Furthermore, country management supports the creation of value, connecting Philips with key stakeholders, especially our employees, customers, government and society. This sector also includes global service units, pensions and global brand campaign activities.

At the end of 2008, Philips had approximately 155 production sites in 29 countries, sales and service outlets in approximately 100 countries, and some 121,000 employees.

Reclassifications

As of January 1, 2008, Philips’ activities are organized on a sector basis, with each operating sector — Healthcare, Consumer Lifestyle and Lighting — being responsible for the management of its businesses worldwide. The Healthcare sector brings together the former Medical Systems division and Home Healthcare Solutions (formerly Consumer Healthcare Solutions) which has been transferred from Innovation & Emerging Businesses. The former Consumer Electronics and Domestic Appliances and Personal Care divisions have been integrated in the Consumer Lifestyle sector. In addition, key financials of the segment Television, part of the sector Consumer Lifestyle, have been disclosed separately. As a consequence of the aforementioned, prior-year financials have been restated.

Product sectors and principal products

The information under the heading “Operating and financial review and prospects” in item 5 is incorporated herein by reference.

Healthcare

→   Healthcare challenges present major opportunity
→   Addressing care cycles — cardiology, oncology and women’s health
→   Home healthcare a core part of our healthcare strategy
→   Acquisition and integration of Respironics
→   Strengthened presence in emerging markets

The future of healthcare is one of the most pressing global issues of our time. Around the globe, societies are facing the growing reality and burden of increasing and in some cases aging populations, as well as the upward spiraling costs of keeping us in good health. Worldwide, many more people live longer with chronic disease — such as cardiovascular diseases, cancer, diabetes — than in the past. Aging and unhealthy lifestyles are also contributing to the rise of chronic diseases, putting even more pressure on our healthcare systems. At the same time, we are facing a global and growing deficit of healthcare professionals.
These challenges present us with an enormous opportunity. We focus our business on addressing the evolving needs of the healthcare market by developing innovative products and technologies that contribute to improved healthcare, at lower cost, around the world.

Healthcare landscape

The global healthcare market is dynamic and growing. Over the past three decades, the healthcare industry has grown faster than Western world GDP, and has also experienced high rates of growth in emerging markets such as China and India. Rising healthcare costs present a major challenge to society. The industry is looking to address this through continued innovation, both in traditional care settings and also in the field of home healthcare. This approach will not only help to reduce the burden on health systems, but will also help to provide a more comforting and therapeutic environment for patient care.

The healthcare market is not, however, immune from developments in the macro-economic environment. The recent global downturn has had a significant impact on the healthcare industry. Hospitals and other healthcare providers are struggling with reimbursement pressures and reduced direct government spending due to budgetary constraints. At the same time, tighter credit markets have resulted in greater scrutiny on capital purchases. These rapidly changing market dynamics adversely affected us and our competitors in 2008 and will continue to have an impact in 2009. In North America, for example, the availability of capital financing is expected to remain limited for the foreseeable future.

How we make a difference

Philips’ distinctive approach to healthcare starts by looking beyond the technology to the people — patients and care providers — and the medical problems they face. By gaining deep insights into how patients and clinicians experience healthcare, we are able to identify market and clinical needs. In response, we can develop more intuitive, more affordable, and in the end better technology solutions to help take some of the complexity out of healthcare. This results in better diagnosis, more appropriate treatment planning, faster patient recovery and long-term health. We try to simplify healthcare through combining our clinical expertise with human insights to develop meaningful innovations that ultimately help to improve the quality of people’s lives.

With a growing presence in cardiology, oncology, and women’s health, we focus on the fundamental health problems with which people are confronted, such as congestive heart failure, lung and breast cancers and coronary artery disease. Our focus is to deliver value across the complete cycle of care: from disease prevention to screening and diagnosis through to treatment, monitoring and health management. Philips is dedicated to making an impact wherever care happens, within the hospital — critical care, emergency care and surgery — and, as importantly, in the home.

The high-growth sector of home healthcare is a core part of Philips’ healthcare strategy. Philips Home Healthcare Solutions provides innovative products and services for the home that connect patients to their healthcare providers and support individuals at risk in the home through better awareness, diagnosis, treatment, monitoring, and management of their conditions. We provide solutions that improve the quality of life for aging adults, for people with chronic illnesses and for their caregivers, by enabling healthier, independent living at home.

About Philips Healthcare

Philips is one of the top-tier players in the healthcare technology market (based on sales) alongside General Electric (GE) and Siemens. Our new Healthcare sector brings together our former Medical Systems division and our growing Home Healthcare Solutions business. Consolidating these businesses, combined with additional acquisitions of complementary, high-growth healthcare companies, has created a Healthcare sector with sales in 2008 of more than EUR 7.6 billion. It has also created global leadership positions in areas such as cardiac care, acute care and home healthcare.

Philips Healthcare’s current activities are organized across five businesses:

•		Imaging Systems — x-ray, computed tomography (CT), magnetic resonance (MR) imaging, and nuclear medicine imaging equipment
•		Clinical Care Systems — ultrasound imaging, hospital respiratory systems, cardiac care systems and children’s medical ventures
•		Home Healthcare Solutions — sleep management and respiratory care, medical alert services, remote cardiac services, remote patient management
•		Healthcare Informatics and Patient Monitoring — healthcare informatics, patient monitoring systems and image management services
•		Customer Services — consultancy, clinical services, education, equipment financing, asset management and equipment maintenance and repair.

We are continually striving to improve the organizational structure of our Healthcare businesses, particularly in light of the current economic climate. In late 2008, we set forth a plan to help reduce complexity in the organization, streamlining the management structure and increasing our speed of execution. This will position us for a stronger future as we pursue our ambitious strategic targets.

Products and services are sold to healthcare providers around the world, including academic, enterprise and stand-alone institutions, clinics, physicians, home healthcare agencies and consumer retailers. Marketing, sales and service channels are mainly direct.

The United States is the largest healthcare market, currently representing close to 50% of the global market, followed by Japan and Germany.

The healthcare market is subject to some seasonality as a relatively large proportion of revenue is recognized in the fourth quarter (on a calendar basis), mainly reflecting public/governmental budget spending.

Philips Healthcare employs approximately 36,000 employees worldwide.

The information on the sourcing of the sector Healthcare under the heading “Operating and financial review and prospects” in item 5 is incorporated herein by reference.

Progress against targets

In 2007 a number of key targets have been set out for Philips Healthcare in 2008. The advances made in addressing these are outlined below.

Extract value from acquisitions through successful integration

In 2008, Philips took a significant step in strengthening its Home Healthcare Solutions business by acquiring Respironics, a provider of innovative respiratory and sleep therapy solutions for hospital and home use. This acquisition, the largest in Philips’ history, gives us a leading position in the fast-growing areas of sleep management, respiratory care and non-invasive ventilation. The integration process will continue in 2009, yet we have already been able to extract value, e.g. in the form of positive contributions to sales and earnings.

Philips also finalized the acquisition of VISICU Inc., a provider of remote critical care monitoring, in 2008, as well as acquiring Northern Ireland-based TOMCAT Systems Ltd., a company that offers a software solution to collect and aggregate data relating to cardiac care. Leveraging the TOMCAT platform, the Philips Cardiovascular Information System launched in the fourth quarter of 2008 helps hospitals achieve a high standard of patient care throughout the cardiovascular care continuum.

Expand presence in emerging markets

In 2008, Philips strengthened its presence in emerging markets by acquiring the following businesses: India-based Alpha X-Ray Technologies, a leading manufacturer of cardiovascular X-Ray systems targeting the economy segment of the Indian market; Brazil-based Dixtal Biomédica e Tecnologia, a manufacturer of in-hospital patient monitoring, anesthesia, ventilation equipment and electrocardiographs (ECG) as well as other sensors for vital sign measurements; and Chinese patient monitoring company Shenzhen Goldway, Inc., which brings a strong portfolio of economy- and mid-range patient monitors. Toward the end of the year, Philips announced the acquisition of India-based Meditronics, a leading manufacturer of general X-ray systems for the economy segment in India.

Cultivate leadership talent and recognize and reward top talent

In 2008, we further strengthened our focus on developing key leadership talent within Philips Healthcare. We have achieved our objective to identify and attract more than 30 new ‘top potentials’ to our talent pool. We also continued to enable personal development through stretch assignments and broadening experiences (86% of all moves of top potentials in 2008 were to a new function, new business or new country). In addition, Healthcare launched the new career compass which transparently lays out the

career paths for our key leadership talent depending on a choice to grow in either a functional area or develop on a general management track.

We have also achieved our 2008 target of having 15% of the Philips Healthcare executive pool comprised of females, up from 9% in 2004 when this goal was set. Furthermore, we have strengthened our focus on talent inflow and leadership development in our emerging markets, which will be one of the main focus areas to successfully enable our growth plans.

Healthcare also continued year-over-year improvement in employee engagement and leadership. Employee engagement improved to 67% favorable, from 64% in 2007, only three points off the external benchmark for high-performing companies. Our index measuring the leadership effectiveness of managers — as perceived by employees — also showed another year of strong improvement with 68% favorable, up five points from 2007.

Deliver on care cycle solutions from the hospital to the home

Cardiology

Philips’ cardiology solutions help simplify diagnosis, treatment and monitoring of a range of cardiac conditions. We simplify and reduce time to treatment for heart-attack victims, with innovative, time-saving offerings that span from discovery — whether in the field by a paramedic or in the emergency department by a clinician — to treatment in the catheterization lab. With our advanced 16-lead ECG, unique 3D ultrasound visualization, vivid computed tomography (CT) scans, and IT workflow solutions we provide efficient and timely triage for chronic cardiac patients. And by enabling surgeons to view live 3D ultrasound scans of the beating heart, we assist in procedure planning and help reduce the need for invasive valve replacement. Our multi-purpose catheterization labs provide advanced solutions for a wide range of minimally-invasive procedures, ranging from balloon angioplasty and stenting to structural heart repair and electrophysiology. Lastly, our remote monitoring tools and services make it possible to monitor and support chronic cardiac patients in the convenience of their own homes.

Oncology

One of the areas of focus for our Oncology segment is colorectal cancer, one of the leading causes of death globally. Death from colorectal cancer can largely be prevented; however, the central issue is that too few patients receive screening. In the US, optical colonoscopy is an approved and reimbursed procedure recommended for anyone over the age of 50, but since it is such an invasive procedure, only about one-third of people who are eligible actually have it done. Leveraging computed tomography (CT) for virtual colonoscopy, Philips is seeking to make this procedure accurate and patient-friendly, with a goal to increase screening participation. A more comfortable exam for patients, virtual colonoscopy avoids the need for sedation — meaning patients can return to work immediately after the procedure.

Women’s health

Philips is committed to developing technologies to enhance solutions for women’s specific conditions and diseases, such as breast cancer. Breast imaging, for example, benefits from a multi-modality approach. Clinicians are increasingly relying on multiple imaging technologies to screen for, diagnose and treat breast cancer. In addition to unveiling a new MRI scanner, the Achieva 3.0T TX, in 2008 Philips showcased its comprehensive portfolio of Breast Health solutions, including MammoDiagnost DR, iU22 Breast Ultrasound, MR Elite Breast and GEMINI TF Big Bore PET/CT.

Regulatory requirements

Philips Healthcare is subject to extensive regulation. It strives for full compliance with regulatory product approval and quality system requirements in every market it serves by addressing specific terms and conditions of local ministry of health or federal regulatory authorities, including agencies like the US FDA, EU Competent Authorities and Japanese MLHW. Environmental and sustainability requirements like the European Union’s Waste from Electrical and Electronic Equipment (WEEE) and Restriction of Hazardous Substances (RoHS) directives are met with comprehensive EcoDesign and manufacturing programs to reduce the use of hazardous materials.

Strategy and 2009 objectives

Philips Healthcare will play an important role in the realization of Philips’ strategic ambitions. For 2009 and beyond, Healthcare has put in place a number of specific value-creating initiatives which it will drive via the axes Drive performance, Accelerate change and Implement strategy:

•		Improve margins through acceleration of operational improvements
•		Grow faster than our markets through investments in key market segments
•		Deliver value to our customers and shareholders by effective integration of acquisitions
•		Enhance engagement of our workforce.

The information on the financial performance of the sector Healthcare under the heading “Operating and financial review and prospects” in item 5 is incorporated herein by reference.

Consumer Lifestyle

→   Consumer markets heavily impacted by downturn
→   Integration of former CE and DAP
→   Refocused approach to Television based on differentiation
→   Market and customer-driven portfolio choices

Today’s consumers want to enjoy a healthy life balance — to look and feel good, and to benefit emotionally from rich, pleasurable technology experiences, both at home and on the move.

The pursuit of personal health and well-being is a universal trend. It represents a significant proportion of the total global consumer spend and the broad consumer lifestyle market in particular, which is itself nearly three times larger than the market for our existing consumer businesses. It is creating a market in both developed and emerging economies, is growing at a faster pace than the overall consumer goods market, and therefore represents a formidable platform for sustainable growth.

Lifestyle retail landscape

The lifestyle retail landscape continues to evolve, with Brazil, China and India emerging as major retail markets and retailers driving their expansion, both into new geographies, as well as into the online segment.

Our new Consumer Lifestyle sector, launched on January 1, 2008, reflects Philips’ evolution from a technology business to one that focuses on people’s health and well-being. Through the application of design and validated consumer insight, we develop innovative solutions that help to fulfill people’s lifestyle needs and desires.

Clearly, markets around the world — both mature and emerging — were hit hard by the steep downturn in the second half of the year, with its sharp decline in consumer confidence and consumer spending, a situation that is expected to continue in 2009. This had a heavy impact on our Consumer Lifestyle sector. Now more than ever, focus, flexibility and differentiation remain key to gaining and maintaining market leadership.

About Philips Consumer Lifestyle

The Philips Consumer Lifestyle sector was launched following the integration of the former Domestic Appliances & Personal Care and Consumer Electronics divisions. The sector is organized around its markets, customers and consumers, with its businesses focused on value creation through category development, and its functions concentrating on value delivery through operational excellence, albeit with a lower fixed-cost base. A delayered management structure has increased the span of control of the sector’s leadership, creating greater employee empowerment to help drive Consumer Lifestyle forward.

The market-driven approach is applied with particular emphasis at local level, enabling the sales organizations to operate with shorter lines of communication with the sector’s six businesses. This also promotes customer-centricity in day-to-day operations. The grouping of local sales activities within three sales ‘clusters’ — Western Europe & North America, Growth (including the emerging markets of China, India, Russia, Latin America, Poland, Turkey and Ukraine) and International — with each cluster defined by the individual market characteristics, enables Consumer Lifestyle to address a variety of dynamics in both its mature and emerging markets.

In 2008 the sector consisted of the following areas of business:

•		Television — experience television (including the new Aurea II, Ambilight and ultra-thin Essence TV ranges), lifestyle television, professional and business display solutions
•		Shaving & Beauty — electric shavers, female depilation appliances, haircare and male grooming products, vitality solutions (including the Wake-Up light)
•		Audio & Video Multimedia — home and portable audio and video entertainment, including Blu-ray Disc playback, MP3 and MP4 players, and docking stations for portable entertainment devices
•		Domestic Appliances — kitchen appliances, floor care, garment care, water and air purifiers, beverage appliances
•		Health & Wellness — oral healthcare, mother and childcare, relationship care
•		Peripherals & Accessories — mobility accessories (including headphones, portable audio accessories), remote controls, PC peripherals, digital picture frames, audio and video communications (including DECT and VoIP digital cordless phones).

We also partner with leading companies from other fields, such as Sara Lee/Douwe Egberts, Nivea Beiersdorf and Swarovski, in order to deliver customer-focused appliance/consumable combinations.

Consumer Lifestyle has continued its business with international key accounts, particularly in emerging markets. The introduction of ‘flagship’ online stores for Consumer Lifestyle products has added a key touch-point to the consumer brand experience.

With our extensive product portfolio, we are able to service traditional and emerging distribution channels, e.g. general retailers, electronic retailers, mass merchants, retail specialists, online retailers, and distributors/wholesalers. We offer a broad range of products from high to low price/value quartiles, necessitating a diverse distribution model that includes mass merchants, retail chains, independents and small specialty stores often represented by buying groups.

Under normal economic conditions, the Consumer Lifestyle business experiences seasonality, with higher sales in the fourth quarter resulting from the holiday sales.

Consumer Lifestyle employs approximately 17,000 people worldwide — down by some 6,000 compared to 2007 following the integration of the former CE and DAP businesses and subsequent rebalancing of the portfolio and industrial footprint. Our global sales and service organization embraces more than 50 mature and emerging markets. In addition, we operate manufacturing and business creation organizations in the Netherlands, France, Belgium, Austria, Hungary, Singapore, Argentina, Brazil and China.

Consumer Lifestyle strives for full compliance with relevant regulatory requirements, including the European Union’s WEEE (Waste from Electrical and Electronic Equipment) directive.

The information on the sourcing of the sector Consumer Lifestyle under the heading “Operating and financial review and prospects” in item 5 is incorporated herein by reference.

Transformation program

Throughout 2008, Consumer Lifestyle has undergone a process of integration and optimization. This has involved ‘right-sizing’ the two complementary business operations from the start of the year into one that is focused on profitability and business stability with synergies and lower fixed costs. Within this framework, the sector has applied itself to making focused choices on the categories and markets in which it operates in order to create a stronger and more profitable foundation for growth.

The sector has also placed particular emphasis on ensuring the right product/market combinations exist across its portfolio, making bold choices in many markets regarding which categories to pursue and grow. For example, Television has shifted from a business based on scale to one driven by differentiation, especially in its channel/market mix. Traditional world-class competences in areas like picture quality and technical performance have been maintained, while additional focus has been placed on differentiated design and experiences.

Across many of our businesses, we tightened our focus in Europe and North America, while expanding our presence in emerging markets like Brazil, India, China and Russia. Within the North American market, Philips entered into a five-year minimum brand licensing agreement with Funai Electric Company of Japan, under which Funai will assume responsibility for all Philips-branded consumer television activities in the United States and Canada. Toward the end of the year this agreement was extended, adding audio-video categories in the US and TV and audio-video categories in Mexico. Consumer Lifestyle took a similar approach to its PC monitors and digital signage business, IT Displays, entering into a brand licensing agreement with TPV Technology Ltd for the global distribution and marketing of products in these categories. This transaction is expected to be completed in the first quarter of 2009.

Progress against targets

In 2007 a number of key targets have been set out for Philips Consumer Lifestyle in 2008. The advances made in addressing these are outlined below.

Leverage post-integration synergies

Best practices from the former Domestic Appliances & Personal Care and Consumer Electronics divisions have been implemented across the new Consumer Lifestyle sector. Marketing expertise from the previous DAP organization, for example, has been applied in the higher-volume electronics categories, and the supply chain competences of CE have been leveraged across the sector.

Open up new value spaces

Consumer Lifestyle’s application of insight and innovation has helped it open up new and emerging value spaces. With the stronger focus on consumer health and well-being, categories such as the Sonicare oral healthcare and Philips-Avent mother and child ranges have already given Consumer Lifestyle a foothold in this area. With the 2007 launch of the Water & Air category, the sector started to focus on new opportunities. In this category, the Philips brand is applied to the very basic necessities of life in emerging and mature markets where the provision of clean drinking water or purer indoor air can improve the quality of life. In 2008 the Relationship Care category was created as a platform to address a different aspect of well-being and initially, in particular, the intimate needs and interests of committed couples in the 35 to 55-year age group.

Create a unified, engaged and high-performance organization

Consumer Lifestyle brought together highly engaged employees from the former DAP and CE organizations. Integration-related communications focused on driving a single-sector mindset, an initiative running in step with the operational transition of activities into the new sector.

The sector has focused strongly on creating the right kind of empowered leadership to take it forward, with an increased span of control and greater diversity in terms of both gender and nationality. Consumer Lifestyle has recorded an increase in employee engagement levels related to its leadership, with the Philips Leadership Index — reflecting leadership effectiveness and engagement capabilities — rising by 4% over the year.

Maximize our structure to be fully market-driven

Consumer Lifestyle’s structure — in particular, its clustered sales organization — has reinforced the sector’s market-driven approach, both geographically and in terms of applying consumer insight, relevant innovation and design to drive positions of strength, such as its Shaving & Beauty, Domestic Appliances and Peripherals & Accessories businesses.

Strategy and 2009 objectives

Philips Consumer Lifestyle will play an important role in the realization of Philips’ strategic ambitions. For 2009 and beyond, Consumer Lifestyle has put in place a number of specific value-creating initiatives which it will drive via the axes Drive performance, Accelerate change and Implement strategy:

•		Further optimize the business portfolio to focus on higher growth, higher-margin product categories and to build on global and regional leadership positions
•		Selectively strengthen the portfolio through opening up new values spaces, including pursuing external opportunities such as strategic acquisitions and alliances
•		Focus on geographic areas — in particular emerging markets — with the highest return on marketing investment
•		Increase effectiveness and investment in advertising and promotion as well as research and development
•		Maintain rigorous cost and organizational discipline, measured against external and internal benchmarks.

The information on the financial performance of the sector Consumer Lifestyle under the heading “Operating and financial review and prospects” in item 5 is incorporated herein by reference.

Lighting

→   Transition to energy-efficient lighting, solid-state lighting and applications
→   Slowdown in automotive and construction sectors
→   Acquisition and integration of Genlyte
→   Major transformation program
→   Strengthened position in emerging markets

Around the world, people are increasingly concerned about the effects of climate change and rising energy costs. In many countries a substantial body of ‘green’ legislation is imminent, if not already in place — much of which has a direct impact on the future of lighting. Indeed, the European Union has decided to phase out incandescent lamps by 2012, in line with our December 2006 appeal to accelerate the switch to energy-efficient solutions. Understanding these imperatives and addressing these challenges presents us with a tremendous opportunity to help shape the future of lighting on a global scale.

Lighting accounts for 19% of global electricity consumption. Innovative lighting solutions can realistically reduce the energy consumption of today’s installed base by at least 40% (and even up to 70%, e.g. in offices), while also improving the quality of the light. We can play a significant role in encouraging and enabling the switch to energy-efficient lighting and helping combat climate change.

Lighting landscape

Overall, we see three main transitions that will affect the lighting industry in the years to come. The first is from incandescent lamps to energy-efficient light sources. Rising energy prices and increased awareness of climate change are creating a greater demand for energy-saving lighting. As a result, the market for innovative, efficient and sustainable lighting solutions is growing.

The second transition is the move from traditional vacuum-based technologies to solid-state lighting technology. Solid-state or LED lighting is the most significant development in lighting since the invention of electric light well over a century ago. Offering unprecedented freedom in terms of color, dynamics, miniaturization, architectural integration and energy efficiency, solid-state lighting is opening up exciting new possibilities.

The third transition is from the bulb and components as the point of value creation in the lighting industry to applications and solutions. Lighting expertise based on end-user insights is integrated into the application, system or solution. Increasingly, these applications and solutions will include controls, and so a key differentiator in the future will be the innovative strength to create systems and solutions that are truly customer-centric.

Like other industries, however, the lighting industry is not immune to macro-economic developments. The slowdown in the automotive and construction sectors, tighter availability of credit and weaker spending on public infrastructure projects had an impact in 2008 and the continuation of these trends in 2009 could slow the above transitions for us and many of the players in the industry.

Solutions for people’s needs

Philips Lighting is dedicated to improving people’s lives through the introduction of innovative and energy-efficient solutions or applications for lighting. Our approach is based on obtaining direct input both from customers and from end-users/consumers. Through a segment-based approach, we can assess customer needs in a targeted way, track changes over time and define new insights that fuel our innovation process and ultimately increase the success rate of new propositions introduced onto the market.

We aim to be the true front-runner in design-led, market- and consumer-driven innovation — both in conventional lighting and in solid-state lighting — while continuing to contribute to responsible energy use and sustainable growth.

About Philips Lighting

Philips Lighting is the global market leader, with recognized expertise in the development, manufacturing and application of innovative lighting solutions. We have pioneered many of the key breakthroughs in lighting over the past 100 years, laying the basis for our current position.

We address people’s lighting needs across a full range of environments. Indoors, we offer specialized lighting solutions for homes, shops, offices, schools, hotels, factories and hospitals. Outdoors, we provide lighting for public spaces, residential areas and sports arenas. We also meet people’s needs on the road, by providing safe lighting for traffic (car lights and street lighting) and elsewhere. In addition, we address people’s desire for light-inspired experiences through architectural projects. Finally, we offer specific applications of lighting in specialized areas, such as horticulture, refrigeration lighting and signage, as well as heating, air and water purification, and healthcare.

In short, our lighting business spans the entire lighting value chain — from lighting sources, electronics and controls to full applications and solutions via the following businesses:

•		Lamps: incandescent, halogen, (compact) fluorescent, high-intensity discharge
•		Consumer Luminaires: functional, decorative, lifestyle, scene-setting
•		Professional Luminaires: city beautification, road lighting, sports lighting, office lighting, shop/hospitality lighting, industry lighting
•		Lighting Electronics and Controls: electronic gear, electromagnetic gear, controls
•		Automotive Lighting: car headlights, car signaling, interior
•		Special Lighting Applications: projection, entertainment, purification, comfort heating, light & health
•		Solid-State Lighting components: LUXEON, SnapLED, SuperFlux
•		Solid-State Lighting modules: modules, retrofits, new applications

Our customers are mainly in the professional market. The Lamps business conducts its sales and marketing activities through the wholesale, OEM and consumer channels, the latter also being used by our Consumer Luminaires business. Professional Luminaires is organized in a Trade business (commodity products) and a Project solutions business (project luminaires and solutions). For the latter, the main focus is on specifiers, lighting designers, architects and urban planners. Automotive Lighting is organized in two businesses: OEM and After-market. Lighting Electronics and Controls, Special Lighting Applications and Solid-State Lighting components and modules conduct their sales and marketing through both the OEM and wholesale channels.

Regarding competition, our current global structure is centered on our Lamps and Luminaires businesses. The lamps industry is highly consolidated, with GE and Siemens/Osram as key competitors. The luminaires industry is more fragmented. Our competition varies per region and per segment. Our lighting electronics business and our automotive lighting business are again more consolidated businesses. Chinese companies are entering Western markets with energy-saving solutions, and there are a range of companies active in the transition to solid-state lighting as well as in the transition to applications and solutions.

Driving transformation

As we are the market leader in both solid-state lighting and energy-efficient solutions, the radical changes in the lighting industry give us ample opportunities to shape our own future. Our acquisition of Genlyte, completed in 2008, is particularly important in

strengthening our position in professional luminaires and in the North American lighting market. Following our recent acquisitions, we are well positioned across the entire solid-state lighting value chain.

Furthermore, we implemented a major transformation program in 2008. This has helped streamline the organization, simplify the structure, and shape our Lighting sector around future opportunities. It has involved reducing complexity as well as reallocating and reinvesting resources in R&D and marketing, with a stronger emphasis on the application side of the business as well as on emerging markets. It has also helped us accelerate the shift from traditional technologies to energy-efficient and solid-state lighting technologies, as well as to project sales.

Philips Lighting has manufacturing facilities in some 25 countries in all regions of the world and sales organizations in more than 60. Commercial activities in other countries are handled via dealers working with our International Sales organization. Lighting has approximately 57,000 employees worldwide.

Lighting strives for full compliance with relevant regulatory requirements, including the European Union’s WEEE (Waste from Electrical and Electronic Equipment) and RoHS (Restriction of Hazardous Substances) directives.

The information on the sourcing of the sector Lighting under the heading “Operating and financial review and prospects” in item 5 is incorporated herein by reference.

Progress against targets

In 2007 a number of key targets have been set out for Philips Lighting in 2008. The progress made in addressing these is discussed below.

Emerging markets and energy-efficient lighting

In 2008 we continued to strengthen our position in emerging markets, with double-digit comparable sales growth. Among a large number of high-profile projects in emerging markets, we provided a state-of-the-art lighting solution for the major bridge in Sao Paulo, Brazil, reducing energy consumption by 53%. In the SESA (Sustainable Energy Solutions for Africa) project, we partnered with the UN and national governments on a renewable energy for lighting project for 14 countries in Sub-Saharan Africa.

We have continued strongly promoting our Green value propositions and the enhanced energy savings that are possible through our systems approach and renovation focus. Energy-efficient lighting now accounts for over 53% of Lighting sales, excluding the acquired Partners in Lighting International (PLI) and Genlyte, up from just under 50% in 2007.

System solutions — professional and consumer luminaires

We have continued expanding in the direction of system solutions, especially incorporating solid-state lighting. We completed the acquisition of Genlyte, a leader in the North American professional luminaires market, in early 2008. Integration is well under way and significant synergies are being realized. The integration of PLI (acquired in 2007) is on schedule; its activities are being expanded outside Europe and it has launched major new LED-based product ranges for the home. Our other major recent acquisition, Color Kinetics, the solid-state lighting solutions company also acquired in 2007, has been fully embedded and leveraged across the value chain.

This systems approach, building on the strong position we have gained in luminaires following our recent acquisitions, is illustrated by new lighting solutions we have introduced in 2008 in all our application segments, such as shops, offices, homes, streets and hospitality.

Leadership bench

Our 2008 People Leadership Index, which measures the effectiveness of our leaders in engaging and managing people, showed a major improvement from 63% to 71%. We have increased our annual recruitment of ‘top potentials’ to 24 (up 20%).

Excellence and learning

Our 2008 Employee Engagement score also showed a significant improvement — from 64% to 72% — surpassing our benchmark index and reflecting our efforts to build a winning culture in our organization. And more than 40% of our employees are learning and developing their competences in our Quality Improvement Competition.

Streamline ways of working

The transformation program outlined above reinforced our segment marketing approach and strengthened our customer focus. We have significantly simplified the way we are organized by setting up regional commercial organizations covering the whole product portfolio. Both our sourcing and supply chain functions now have global transparency and harmonized ways of working, which has enabled us to offset a major part of the commodity price inflation in 2008.

Strategy and 2009 objectives

Philips Lighting will play an important role in the realization of Philips’ strategic ambitions. For 2009 and beyond, Lighting has put in place a number of specific value-creating initiatives which it will drive via the axes Drive performance, Accelerate change and Implement strategy.

The five value drivers that we believe will strengthen our competitive advantage and help safeguard our leading position in lighting are:

•		growth — driven by acquisitions, Green value propositions, innovative solutions, LEDs/solid-state lighting and emerging markets
•		segment leadership — by driving the development of our market segments through channels and multi-stakeholder partnerships
•		brand franchise — by leveraging category management and our brand equity
•		new business models — by creating new ways of working and new forms of revenue generation
•		intellectual property — in particular by developing the solid-state lighting market through a dedicated IP licensing program.

The information on the financial performance of the sector Lighting under the heading “Operating and financial review and prospects” in item 5 is incorporated herein by reference.

Innovation & Emerging Businesses

Introduction

The Innovation and Emerging Businesses sector is designed to stimulate growth by leveraging Philips’ brand, technology and intellectual property (IP) base. Through this sector, Philips invests in innovation and new business activities that are not currently part of the operating sectors, but which have potential to create additional organic growth or value through future spin-offs. The sector comprises Corporate Technologies, Corporate Investments, New Venture Integration and Philips Design.

Corporate Technologies

Corporate Technologies feeds the innovation pipeline, enabling its business partners — principally the three Philips operating sectors — to create new business options through new technologies, venturing and intellectual property development, to improve time-to-market efficiency and to increase innovation effectiveness via focused research and development activities. Corporate Technologies encompasses Philips Corporate Research, the Philips Incubators, Philips Intellectual Property & Standards (IP&S), the Philips Innovation Campus as well as Philips Applied Technologies. In total, Corporate Technologies employs about 4,100 professionals around the globe.

Corporate Technologies actively participates in ‘open innovation’ through relationships with academic and industrial partners, as well as via European and regional projects, in order to improve innovation efficiency and share the related financial exposure. The High Tech Campus in Eindhoven, the Philips Innovation Campus in Bangalore India, Research Shanghai China and InnoHub are prime examples of eco-systems enabling open innovation.

Philips Research is a key innovation partner for Philips’ business sectors. It has three main roles. Firstly, it creates new technologies that help to spur the growth of the Philips businesses. Secondly, it develops unique IP, which will enable longer-term business and creates standardization opportunities for Philips. Lastly, it sets up ventures that can grow into new adjacent businesses for the sectors.

In 2008, Research started to develop a novel ultrasound-based drug delivery technology that could potentially increase the effectiveness of chemotherapy treatment and reduce its side effects. Research is also working on, among other things, improved water purification technology for home use. It is compact, powerful and cost-effective, bringing clean, safe drinking water within everyone’s reach.

Philips has established three corporate venturing organizations: the Healthcare, Lifestyle and Lighting & Cleantech Incubators. The main purpose of venturing is to create strategic growth opportunities for Philips. In some cases spin-out or technology licensing will be considered. In 2008, Philips, together with Prime Technology Ventures (PTV III), arranged for the spin-out of five technology companies from the Incubators: amBX, Civolution, Intrinsic-ID, priv-ID and Serious Toys.

Philips IP&S proactively pursues the creation of new intellectual property. Its portfolio currently consists of about 55,000 patent rights, 33,000 trademarks, 49,000 design rights and 2,600 domain name registrations. Philips filed approximately 1,640 patents in 2008. Over the past five years Philips has reshaped its intellectual property portfolio in line with its new strategic focus on health and well-being. Philips believes its business as a whole is not materially dependent on any particular patent or license, or any particular group of patents and licenses.

Philips Applied Technologies supports customers both inside and outside Philips through new technologies, new business ideas, consultancy and new product introduction services. In 2008, it announced the commercial roll-out of the Ambient Experience for Hospitality concept, with the first implementation by the citizenM hotel chain, in Amsterdam — which went on to win the European Hotel Design Award as the most innovative hotel of 2008.

Corporate Investments

The remaining business within Corporate Investments — Assembléon — is a wholly owned subsidiary that develops, assembles, markets and distributes a diverse range of surface-mount technology placement equipment.

In line with Philips’ strategy to reduce its portfolio of non-core, strategically unaligned activities, the High Tech Plastics — Optics business was sold to Triumph Pan-Pacific in 2008.

New Venture Integration

The New Venture Integration group became fully operational in 2008 and focuses on the integration of newly acquired companies across all sectors.

Philips Design

Philips Design is one of the longest-established design organizations of its kind in the world. It is headquartered in Eindhoven, Netherlands, with eight branch studios in Europe, the USA and Asia Pacific. Its creative force of some 550 professionals — representing more than 30 nationalities — embraces disciplines as diverse as psychology, cultural sociology, anthropology and trend research, in addition to the more conventional design-related skills.

Philips Design’s people-centric design approach, known as High Design, is human-focused and research-based, and uses a deep understanding of people’s needs as the starting point for the design process. It also provides the framework for taking these insights and translating them into imaginative yet feasible solutions.

The information on the financial performance of the sector Innovation & Emerging Businesses under the heading “Operating and financial review and prospects” in item 5 is incorporated herein by reference.

Group Management & Services

The information on the financial performance of the sector Group Management & Services under the heading “Operating and financial review and prospects” in item 5 is incorporated herein by reference.

Organizational structure

The information concerning Philips’ significant subsidiaries in Exhibit 8 to this Annual Report on Form 20-F is incorporated herein by reference.

Property, plant and equipment

Philips owns and leases manufacturing facilities, research facilities, warehouses and office facilities in numerous countries over the world.

Philips has approximately 155 production sites in 29 countries. Philips believes that its plants are well maintained and, in conjunction with its capital expenditures for new property, plant and equipment, are generally adequate to meet its needs for the foreseeable future. For the net book value of its property, plant and equipment and developments therein, reference is made to note 15, entitled “Property, plant and equipment”, to the US GAAP financial statements on page 157 of the 2008 Annual Report incorporated herein by reference. The geographic allocation of assets employed as shown in the section entitled “Information by sectors and main country” on pages 133 through 135 of the 2008 Annual Report and incorporated herein by reference, is generally indicative of the location of manufacturing facilities. The headquarters in Amsterdam are leased. The information as shown in note 26, entitled “Contractual Obligations”, to the US GAAP financial statements on page 168 of the 2008 Annual Report, partly related to the rental of buildings, is incorporated herein by reference.

For environmental issues affecting the Company’s properties, reference is made to note 27, entitled “Contingent Liabilities”, to the US GAAP financial statements on pages 168 through 170 of the 2008 Annual Report incorporated herein by reference.

Capital expenditures in progress are generally expected to be financed through internally generated cash flows. For a description of the geographic spread of capital expenditures, reference is made to the section “Information by sectors and main country” on pages 133 through 135 of the 2008 Annual Report incorporated herein by reference.

For a description of the Company’s principal acquisitions and divestitures, reference is made to note 2 to the US GAAP financial statements on pages 143 through 148 of the 2008 Annual Report incorporated herein by reference.

Item 4A. Unresolved Staff Comments

None.

Item 5. Operating and financial review and prospects

Operating results

The year 2008...

•		2008 was impacted by the most globally significant economic downturn in many years. For Philips, this led to a 3% decline in comparable sales (2% lower on a nominal basis) and lower earnings. In response, we proactively expanded and accelerated restructuring programs across all sectors and stepped up our focus on costs and cash management.
•		2008 was nevertheless a year of strategic progress. We continued the reshaping of our portfolio by investing EUR 5.3 billion in high-growth, high-margin businesses such as Respironics and Genlyte, and divesting unprofitable activities such as Television in North America and non-core businesses such as Set-Top Boxes and PC Monitors.
•		Healthcare sales grew by 6% on a comparable basis and 15% on a nominal basis; all businesses contributed to this growth. Lighting achieved 3% comparable sales growth (and increased 16% in nominal terms compared to 2007), driven by energy-efficient lighting solutions. Consumer Lifestyle sales declined 8% on a comparable basis and 16% on a nominal basis compared to 2007, reflecting the severe economic downturn in consumer markets in the second half of 2008.
•		Emerging markets remained a major focal point and delivered 4% comparable growth in 2008 (in line with 2007 on a nominal basis), with Healthcare and Lighting comparably growing by 12% and 8% respectively (15% and 5% respectively on a nominal basis). Additionally, we announced and/or finalized five strategic Healthcare acquisitions in China, Brazil and India.
•		Income from operations (IFO) included EUR 1.1 billion of charges related to restructuring and change programs across all sectors (EUR 520 million), an asbestos-related settlement charge (EUR 239 million), a non-cash goodwill impairment charge for Lumileds (EUR 232 million) and acquisition-related charges, mainly in Healthcare and Lighting (EUR 146 million), which were partially offset by EUR 164 million of gains on the sale of businesses and real estate.
•		We generated strong cash flows from operations of EUR 1,495 million despite lower earnings, driven by rigorous working capital management. In addition, in March we structurally refinanced our debt — prior to the collapse of the financial markets — providing Philips with a strong balance sheet and a solid liquidity position to help weather the turbulent economic situation.
•		We reduced our shareholding in LG Display and sold our remaining stake in TSMC, generating EUR 2.5 billion in cash proceeds and realizing a gain of just under EUR 1.2 billion. The economic downturn led us to take a non-cash value adjustment of EUR 1.4 billion on the majority of our remaining financial holdings.
•		We completed EUR 3.3 billion of the EUR 5 billion share buy-back program announced in 2007, which was subsequently stopped in January 2009 until further notice. Additionally, we returned EUR 720 million to shareholders in the form of our annual dividend payment.

Key data

in millions of euros, except for the per common share data & FTE		2007 1)				2008
Sales			26,793				26,385
Income from operations (IFO)			1,841				317
as a % of sales			6.9				1.2
Adjusted Income from operations (Adjusted IFO) 2)			2,054				931
as a % of sales			7.7				3.5
Financial income and expenses			2,613				(225	)
Income tax expense			(619	)			(286	)
Results equity-accounted investees			763				19
Minority interests			(5	)			(3	)
Income (loss) from continuing operations			4,593				(178	)
Income (loss) from discontinued operations			(433	)			(8	)
Net income (loss)			4,160				(186	)
Per common share (in euro) — basic			3.83				(0.19	)
Per common share (in euro) — diluted			3.79				(0.19	)
Net operating capital (NOC) 2)			10,529				14,867
Cash flows before financing activities 2)			5,449				(1,606	)
Employees (FTE)			123,801				121,398
of which discontinued operations			5,703				—

1)		Group financials have been revised to reflect immaterial adjustments of intercompany profit eliminations on inventories. For more information, see “Reclassifications and revisions” under the section “Significant accounting policies”, which is incorporated herein by reference under Item 18.
2)		See “Reconciliation of non-US GAAP information” in Item 5 for a reconciliation of non-US GAAP measures to the most directly comparable US GAAP measure.

Performance of the Group

Sales

In percentage terms, the composition of sales growth in 2008, compared to 2007, was as follows:

Sales growth composition 2008 versus 2007

in %										consoli-
		comparable				currency				dation				nominal
		growth 1)				effects				changes				growth
Healthcare			5.6				(4.5	)			14.1				15.2
Consumer Lifestyle			(8.5	)			(2.7	)			(5.2	)			(16.4	)
Lighting			2.6				(3.8	)			17.8				16.6
Innovation & Emerging Businesses			(26.6	)			(0.9	)			(9.6	)			(37.1	)
Group Management & Services			(24.2	)			(0.5	)			—				(24.7	)
Philips Group			(2.7	)			(3.3	)			4.5				(1.5	)

1)		See “Reconciliation of non-US GAAP information” in Item 5 for a reconciliation of non-US GAAP measures to the most directly comparable US GAAP measure.

Group sales totaled EUR 26,385 million in 2008, a 2% decline compared to 2007. Adjusted for unfavorable currency effects of 3% and a positive net impact from portfolio changes, mainly due to the acquisition of Genlyte and Respironics, comparable sales were 3% lower than 2007. Excluding the Television business — which we manage for margin rather than scale — Group comparable sales were in line with 2007.

The decline in comparable sales was mainly due to the severe economic downturn, particularly in the consumer markets. This was predominantly felt within Consumer Lifestyle, which reported an 8% decline in comparable sales, led by a 12% sales decrease at Television, as well as lower sales in Audio & Video Multimedia and Peripherals & Accessories.

This decline was partly tempered by 6% comparable sales growth at Healthcare, with higher sales visible in emerging markets and across all businesses, notably Customer Services, Clinical Care Systems, and Healthcare Informatics and Patient Monitoring. Additionally, Lighting saw a 3% comparable sales increase, mainly attributable to strong growth in energy-efficient lighting solutions, partly offset by lower sales in OEM automotive and consumer-related lighting markets.

Earnings

The following overview shows sales, IFO and adjusted IFO according to the 2008 sector classification.

in millions of euros		2008
										as a % of
		sales				IFO				sales				adjusted IFO 1)				as a % of sales
Healthcare			7,649				638				8.3				863				11.3
Consumer Lifestyle			11,145				265				2.4				281				2.5
Lighting			7,106				165				2.3				538				7.6
Innovation & Emerging Businesses			337				(226	)			(67.1	)			(226	)			(67.1	)
Group Management & Services			148				(525	)			—				(525	)			—
Philips Group			26,385				317				1.2				931				3.5

1)		See “Reconciliation of non-US GAAP information” in Item 5 for a reconciliation of non-US GAAP measures to the most directly comparable US GAAP measure.

in millions of euros		2007 1)
										as a % of
		sales				IFO				sales				adjusted IFO 2)				as a % of sales
Healthcare			6,638				713				10.7				862				13.0
Consumer Lifestyle			13,330				832				6.2				848				6.4
Lighting			6,093				675				11.1				722				11.9
Innovation & Emerging Businesses			535				(82	)			(15.3	)			(81	)			(15.1	)
Group Management & Services			197				(297	)			—				(297	)			—
Philips Group			26,793				1,841				6.9				2,054				7.7

1)		Group and Healthcare financials have been revised to reflect immaterial adjustments of intercompany profit eliminations on inventories. For more information, see “Reclassifications and revisions” under the section “Significant accounting policies”, which is incorporated herein by reference under Item 18.
2)		See “Reconciliation of non-US GAAP information” in Item 5 for a reconciliation of non-US GAAP measures to the most directly comparable US GAAP measure.

In 2008, Philips’ gross margin was EUR 8,495 million, or 32.2% of sales, compared to EUR 9,223 million, or 34.4% of sales, in 2007. Adjusted for the 2008 asbestos-related settlement charge of EUR 239 million, gross margin declined from 34.4% of sales to 33.1%. The majority of this decline was due to EUR 275 million restructuring and asset impairment charges, attributable to most sectors.

Selling expenses increased from EUR 4,980 million in 2007 to EUR 5,501 million in 2008, largely due to additional acquisition-related selling expenses at Healthcare and Lighting, as well as EUR 154 million of restructuring charges across all sectors. These increases were partly offset by lower selling expenses at Group Management & Services. As a percentage of sales, selling expenses increased from 18.6% in 2007 to 20.8% in 2008, mainly due to the aforementioned items and the impact of lower sales at Consumer Lifestyle.

General and administrative expenses amounted to EUR 1,016 million, an increase of EUR 97 million compared to 2007, mainly due to EUR 51 million of restructuring charges, primarily within Lighting and Consumer Lifestyle, and higher costs in Consumer Lifestyle. As a percentage of sales, G&A expenses increased from 3.4% in 2007 to 3.9% in 2008, largely due to the lower sales in Consumer Lifestyle and higher restructuring charges across most sectors.

Research and development costs declined slightly from EUR 1,629 million in 2007 to EUR 1,622 million in 2008 as EUR 40 million of restructuring charges and higher spend in Lighting and Healthcare were offset by lower expenditures at Consumer Lifestyle. At 6.1% of sales, 2008 R&D expenditures were in line with 2007.

In 2008, IFO declined by EUR 1,524 million compared to 2007, to EUR 317 million, or 1.2% of sales. IFO included a EUR 232 million non-cash goodwill impairment for Lumileds as well as EUR 15 million write-off of acquired in-process R&D charges. IFO and adjusted IFO were both impacted by EUR 520 million restructuring charges and EUR 131 million of acquisition-related charges, as well as a EUR 239 million asbestos-related settlement charge. 2007 adjusted IFO included EUR 37 million of restructuring charges and EUR 41 million of acquisition-related charges.

Adjusted for the aforementioned charges, adjusted IFO declined from 8.0% of sales to 6.9% in 2008, largely due to lower sales at Consumer Lifestyle and lower license income at Innovation & Emerging Businesses.

Healthcare’s adjusted IFO of EUR 863 million was in line with 2007 and included EUR 69 million of restructuring charges and EUR 90 million of acquisition-related costs, partially offset by a EUR 45 million gain on the sale of Philips Speech Recognition Services. In 2007, acquisition-related charges were EUR 11 million. As a percentage of sales, adjusted IFO declined from 13.0% in 2007 to 11.3% in 2008. However, adjusted for the aforementioned items, adjusted IFO profitability was 12.8% in relation to sales, broadly in line with 2007.

Consumer Lifestyle’s adjusted IFO declined from EUR 848 million in 2007 to EUR 281 million in 2008, largely due to lower sales-driven earnings in all businesses except Health & Wellness and Domestic Appliances, deteriorating margins within Television, and restructuring charges of EUR 195 million. The sector’s 2008 adjusted IFO included a EUR 63 million gain on the sale of the Set-Top Boxes activity.

Adjusted IFO at Lighting declined from EUR 722 million, or 11.9% of sales, in 2007 to EUR 538 million, or 7.6% of sales, in 2008. Additional earnings from acquisitions were offset by EUR 221 million of restructuring charges, EUR 41 million of acquisition-related charges and margin compression in mature markets, partially offset by the additional earnings from acquisitions. In 2007, restructuring and acquisition-related charges were EUR 55 million.

The adjusted IFO loss at Innovation & Emerging Businesses amounted to EUR 226 million, compared to a loss of EUR 81 million in 2007. The decline was mainly due to EUR 81 million lower license income, EUR 18 million restructuring charges at Assembléon, a EUR 13 million loss on the sale of the High Tech Plastics — Optics business, and higher investments in the Healthcare and Lighting & Cleantech incubator activities.

Adjusted IFO at Group Management and Services declined EUR 228 million in 2008 to a loss of EUR 525 million, mainly due to a EUR 239 million asbestos-related settlement charge. Adjusted for this settlement, GM&S costs saw a year-on-year decline due to lower brand campaign spending.

Pensions

The net periodic pension costs of defined-benefit pension plans amounted to EUR 10 million in 2008 compared to EUR 27 million in 2007. The payments to defined-contribution pension plans amounted to EUR 96 million, EUR 12 million higher than in 2007, largely due to acquisitions and a gradual shift from defined-benefit to defined-contribution pension plans.

Restructuring and impairment charges
In 2008, IFO included net charges totaling EUR 520 million for restructuring and related asset impairments. Besides the annual goodwill impairment tests for Philips, due to the economic circumstances, trigger-based impairment tests were performed in the latter half of the year, resulting in goodwill impairment charges of EUR 234 million, mainly related to Lumileds.

Restructuring and impairment charges

in millions of euros		2007				2008
Restructuring:
Healthcare			1				68
Consumer Lifestyle			8				171
Lighting			24				132
Innovation & Emerging Businesses			1				18
Group Management & Services			4				17
Reduction of excess provisions			(5	)			(2	)
Total restructuring			33				404
Asset impairment:
Healthcare			—				1
Consumer Lifestyle			—				24
Lighting			4				91
Innovation & Emerging Businesses			—				—
Group Management & Services			—				—
Total asset impairment			4				116
Goodwill impairment:
Lighting			—				234
Total goodwill impairment			—				234
Total restructuring and impairment			37				754

The most significant restructuring projects in 2008 were related to Lighting, Consumer Lifestyle and Healthcare. Restructuring projects in Lighting — aimed at further increasing organizational effectiveness and reducing the fixed cost base — mainly centered on Lamps (principally North America and Poland), Professional Luminaires (notably Germany), Special Lighting Applications (primarily the Netherlands and Belgium), Automotive (mainly Korea and Germany) and Lighting Electronics (primarily the Netherlands).

Consumer Lifestyle’s restructuring projects were concentrated on the integration of the former Domestic Appliances and Consumer Electronics businesses, the exit of Television from North America, restructuring of the Television factory in Juarez (Mexico) and restructuring charges taken to re-align the European industrial footprint. Healthcare restructuring projects — undertaken to reduce operating costs and simplify the organization — spanned many locations, including sites in Hamburg (Germany), Helsinki (Finland) and Andover (USA).

Other restructuring projects included the restructuring of Assembléon within Innovation & Emerging Businesses and smaller projects at Group & Management Services.

The most significant restructuring projects in 2007 were related to the Lighting sector and consisted mainly of the exit from the fluorescent lamp-based LCD backlighting business and several projects in the Lamps business.

Reference is made to note 4, entitled “Restructuring and impairment”, to the US GAAP financial statements on pages 149 through 151 of the 2008 Annual Report which is incorporated herein by reference.

Financial income and expenses

Financial income and expenses consist of:

 

in millions of euros		2007				2008
Interest expenses (net)			(43	)			(106	)
Sales of securities			2,549				1,197
Value adjustments on securities			(36	)			(1,296	)
Other			143				(20	)
			2,613				(225	)

The net interest expense in 2008 was EUR 63 million higher than in 2007, mainly as a result of the lower average cash position of the Group, partly offset by lower interest costs on derivatives related to the hedging of Philips’ foreign currency funding positions.

Income (loss) from the sale of securities consists of:

 

in millions of euros		2007				2008
Income (loss) from the sale of securities:
Gain on sale TSMC shares			2,528				1,082
Gain on sale of LG Display shares			—				83
Gain on sale of D&M shares			—				16
Loss on sale of JDS Uniphase shares			(10	)			—
Gain on sale of Nuance shares			31				—
Others			—				16
			2,549				1,197

Value adjustments on securities consists of:

 

in millions of euros		2007				2008
NXP			—				(599	)
LG Display			—				(596	)
TPO Display			—				(71	)
Pace Micro Technology			—				(30	)
JDS Uniphase			(36	)			—
			(36	)			(1,296	)

In 2008, a total gain of EUR 1,197 million was recognized on the sale of stakes, mainly in TSMC, LG Display and D&M Holdings. Also, a EUR 23 million cash dividend was received from TSMC. However, these gains were more than offset by non-cash value adjustments amounting to EUR 1,296 million, notably for NXP and LG Display, as well as a EUR 37 million loss related to the revaluation of the convertible bond received from TPV Technology.

2007 included a gain of EUR 2,549 million on the sale of shares in TSMC, Nuance and JDS Uniphase, as well as a EUR 128 million cash dividend from TSMC and a EUR 12 million gain related to the revaluation of the convertible bond received from TPV Technology, partly offset by a EUR 36 million value adjustment of JDS Uniphase.

Income taxes

Income taxes amounted to EUR 286 million, compared to EUR 619 million in 2007.

The tax burden in 2008 corresponded to an effective tax rate of 311% on pre-tax income, compared to 14% in 2007. The 2008 effective tax rate was affected by non-deductible impairment and value adjustments, increased valuation allowances, higher provisions for uncertain tax positions and foreign withholding taxes for which a credit could not be realized. These were partially offset by non-taxable gains resulting from the sale of securities.

For 2009, the effective tax rate excluding non-taxable items is expected to be around 30%.

Reference is made to note 6 “Income taxes” on pages 152 through 153 of the 2008 Annual Report, which is incorporated herein by reference.

Results of equity-accounted investees

The results relating to equity-accounted investees declined by EUR 744 million in 2008 to EUR 19 million.

A breakdown is given below.

in millions of euros		2007				2008
Company’s participation in income			271				81
Results on sales of shares			514				(2	)
Gains arising from dilution effects			—				12
Investment impairment and guarantee charges			(22	)			(72	)
			763				19

Philips’ participation in the net income of equity-accounted investees declined from EUR 271 million in 2007 to EUR 81 million in 2008, which included EUR 66 million from earnings at LG Display. These earnings were partly offset by a EUR 59 million non-cash value adjustment on the equity stake in TPV Technology.

During 2008, as a result of the reduction in both Philips’ shareholding and the number of Philips board members, Philips lost significant influence, and LG Display was accounted for as an available-for-sale security instead of an equity investment.

In 2007, the EUR 514 million proceeds from the sale of shares were mainly due to the EUR 508 million non-taxable gain on the sale of a 13% stake in LG Display. The proceeds from the sale of stakes in 2008 were recorded under Financial income and expenses.

Minority interest

The share of minority interests in companies within the income of the Group reduced income by EUR 3 million in 2008, compared to EUR 5 million in 2007.

Discontinued operations

Philips reports the results of Semiconductors and the MedQuist business separately as discontinued operations. Consequently, the related results, including transaction gains and losses, are shown separately in the financial statements under Discontinued operations.

The loss from discontinued operations of EUR 8 million in 2008 was mainly due to final results related to MedQuist, which was sold in 2008 to CBAY Inc.

In 2007, discontinued operations recorded a loss of EUR 433 million, primarily attributable to a EUR 360 million impairment charge for MedQuist, taking into account EUR 325 million in cumulative foreign currency translation differences, which had previously been accumulated under equity since the date of the acquisition in 2000. In addition, a EUR 43 million loss related to the 2006 sale of a majority stake in the Semiconductors division was recognized, mainly due to pension settlements.

Net income

Income from continuing operations declined from EUR 4,593 million in 2007 to a loss of EUR 178 million in 2008. The decline was attributable to lower IFO in 2008 and lower results in financial income and expenses.

Net income for the Group including discontinued operations amounted to a loss of EUR 186 million, or EUR 0.19 per common share, in 2008, compared to a profit of EUR 4,160 million, or EUR 3.83 per common share, in 2007.

Performance by sector

Healthcare

Key data
in millions of euros, except for FTE data			2007 1)				2008
Sales			6,638				7,649
Sales growth
% increase, nominal			1				15
% increase, comparable 2)			4				6
Adjusted IFO 2)			862				863
as a % of sales			13.0				11.3
IFO			713				638
as a % of sales			10.7				8.3
Net operating capital (NOC) 2)			4,802				8,830
Cash flows before financing activities 2)			236				(2,418	)
Employees (FTEs)			29,191				35,551

1)		Healthcare financials have been revised to reflect immaterial adjustments of intercompany profit eliminations on inventories. For more information, see “Reclassifications and revisions” under the section “Significant accounting policies” on page 136 of the 2008 Annual Report, which is incorporated herein by reference under Item 18.
2)		See “Reconciliation of non-US GAAP information” in Item 5 for a reconciliation of non-US GAAP measures to the most directly comparable US GAAP measure.

Sales per market cluster
in millions of euros			2007				2008
Western Europe			1,767				1,947
North America			3,215				3,758
Other mature markets			559				675
Total mature markets			5,541				6,380
Key emerging markets			653				769
Other emerging markets			444				500
			6,638				7,649

In 2008, sales amounted to EUR 7,649 million, 15% higher than in 2007 on a nominal basis, largely thanks to the contributions from acquired companies, notably Respironics. Excluding the 14% positive impact of portfolio changes and the 5% unfavorable impact of currency effects, comparable sales grew 6%. All businesses showed positive growth, led by solid sales growth in Customer Services, Clinical Care Systems, and Healthcare Informatics and Patient Monitoring. Higher sales within Imaging Systems were supported by X-Ray and Nuclear Medicine, partly tempered by lower sales at Computed Tomography. Green Product sales amounted to EUR 1,527 million in 2008, up from EUR 1,452 million in 2007, representing 20% of sector sales.

Geographically, double-digit comparable sales growth was achieved in the key emerging markets, notably in China and Latin America, driven by growth in all businesses. Also, single-digit sales growth was recognized in the mature markets, across all businesses, notably Imaging Systems and Clinical Care Systems.

Adjusted IFO of EUR 863 million, or 11.3% of sales, was in line with 2007 adjusted IFO of EUR 862 million. Earnings included EUR 90 million of acquisition-related charges and EUR 69 million of restructuring charges, which were partly offset by a EUR 45 million gain on the sale of Philips Speech Recognition Systems. Adjusted IFO also included additional income from Respironics and higher earnings at Clinical Care Systems and Healthcare Informatics and Patient Monitoring, partly offset by lower earnings at Imaging Systems.

Compared to 2007, IFO declined EUR 75 million to EUR 638 million.

Cash flow before financing activities included net payments totaling EUR 3,456 million, mainly for the acquisitions of Respironics, VISICU, TOMCAT, Dixtal Biomédica, Shenzhen Goldway, Medel SpA and Alpha X-Ray Technologies. In 2007, acquisition-related outflows amounted to EUR 245 million, mainly for the acquisitions of Health Watch, Raytel Cardiac Services, Emergin and VMI Sistemas Medicos. Excluding these acquisition-related outflows, cash flow before financing activities was EUR 557 million higher than in 2007, largely thanks to improved working capital requirements, notably lower inventory.

Consumer Lifestyle

Key data
in millions of euros, except for FTE data			2007				2008
Sales			13,330				11,145
of which Television			6,270				4,980
Sales growth
% increase (decrease), nominal			2				(16	)
% increase (decrease), comparable 1)			4				(8	)
Sales growth excl. Television
% increase (decrease), nominal			8				(13	)
% increase (decrease), comparable 1)			10				(6	)
Adjusted IFO 1)			848				281
of which Television			(68	)			(413	)
as a % of sales			6.4				2.5
IFO			832				265
of which Television			(68	)			(413	)
as a % of sales			6.2				2.4
Net operating capital (NOC) 1)			890				728
of which Television			(255	)			(245	)
Cash flows before financing activities 1)			772				253
of which Television			(41	)			(489	)
Employees (FTEs)			23,397				17,346
of which Television			6,855				4,943

1)		See “Reconciliation of non-US GAAP information” in Item 5 for a reconciliation of non-US GAAP measures to the most directly comparable US GAAP measure.

Sales per market cluster
in millions of euros			2007				2008
Western Europe			5,739				4,705
North America			2,717				1,847
Other mature markets			351				293
Total mature markets			8,807				6,845
Key emerging markets			2,441				2,492
Other emerging markets			2,082				1,808
			13,330				11,145

2008 presented very challenging market conditions for Consumer Lifestyle. Sales amounted to EUR 11,145 million, a nominal decline of 16% compared to 2007. Adjusted for unfavorable currency effects of 3% and portfolio changes, mainly the divestment of Television in North America and the sale of the Set-Top Boxes and Mobile Phones businesses, comparable sales declined by 8%.

Year-on-year declines were seen in all businesses, except for 4% comparable growth in Domestic Appliances and Health & Wellness. Television and Audio & Video Multimedia suffered comparable double-digit declines. On a nominal basis, all businesses except Domestic Applicances reported lower sales. Green Product sales totaled 1,478 million in 2008, a nominal increase of 41% compared to 2007, amounting to 13% of sector sales.

From a geographical perspective, Western Europe and North America, which account for more than half of the sector’s sales, were heavily impacted by the economic downturn as well as by selective portfolio and margin management. Sales growth was strong in the key emerging markets, led by double-digit growth in Brazil. Growth in Asia was driven by solid double-digit growth across the countries in most businesses, mostly offset by a decline in Television. European emerging markets declined 14%.

Adjusted IFO as a percentage of sales decreased from 6.4% in 2007 to 2.5% in 2008, due to declines in nearly all businesses, mainly as a result of lower sales. Adjusted IFO was impacted by EUR 195 million of restructuring charges, partially offset by the EUR 63 million gain on the sale of Set-Top Boxes.

IFO declined from EUR 832 million (6.2% of sales) in 2007 to EUR 265 million (2.4% of sales) in 2008.

Net operating capital was reduced by EUR 162 million at the end of 2008 and amounted to EUR 728 million.

Cash flows before financing activities declined from EUR 772 million in 2007 to an inflow of EUR 253 million, primarily driven by lower earnings.

Lighting

Key data
in millions of euros, except for FTE data			2007				2008
Sales			6,093				7,106
Sales growth
% increase, nominal			11				17
% increase, comparable 1)			6				3
Adjusted IFO 1)			722				538
as a % of sales			11.9				7.6
IFO			675				165
as a % of sales			11.1				2.3
Net operating capital (NOC) 1)			3,886				5,648
Cash flows before financing activities 1)			(648	)			(1,139	)
Employees (FTEs)			54,323				57,166

1)		See “Reconciliation of non-US GAAP information” in Item 5 for a reconciliation of non-US GAAP measures to the most directly comparable US GAAP measure.

Sales per market cluster
in millions of euros			2007				2008
Western Europe			2,436				2,560
North America			1,125				1,936
Other mature markets			304				271
Total mature markets			3,865				4,767
Key emerging markets			1,216				1,255
Other emerging markets			1,012				1,084
			6,093				7,106

Sales in 2008 grew by 17% in nominal terms, mainly supported by the acquired companies: Genlyte and Color Kinetics. Adjusted for portfolio changes of 18% and unfavorable currency effects of 4%, comparable sales grew by 3% compared to 2007. This growth was driven by continued sales growth in energy-efficient lighting solutions, notably within the Lamps and Professional Luminaires businesses. Sales were broadly in line with 2007 in the remaining businesses as a result of the deteriorating economic climate in the latter part of 2008 within the automotive, consumer and construction industries. Green sales grew by 12% in 2008 compared to 2007, reaching EUR 2,970 million. This growth was supported by increased sales of solid-state lighting applications, which grew by 6% to EUR 470 million, as well as innovative product design and strong growth in application-based solutions.

Geographically, comparable sales in the mature markets slightly declined compared to 2007, as higher sales in energy-efficient lighting solutions were more than offset by the deteriorating economic climate in the automotive, consumer and construction segments in North America and Western Europe. Nominal sales in mature markets grew by 23% supported by the acquisition of Genlyte. Emerging market sales increased 8% on a comparable basis (5% higher on a nominal basis), with growth in all businesses except Special Lighting Applications, led by strong double-digit sales growth in India, Eastern Europe and the ASEAN countries.

Adjusted IFO of EUR 538 million, or 7.6% of sales, declined EUR 184 million compared to 2007 and included EUR 221 million restructuring charges and EUR 41 million of acquisition-related charges. 2008 earnings were also impacted by margin compression in mature markets as a result of slowing demand, particularly in the automotive and construction segments, partly offset by positive contributions from acquisitions. 2007 included EUR 55 million of restructuring and acquisition-related charges.

IFO amounted to EUR 165 million, compared to EUR 675 million in 2007. In 2008, a EUR 232 million non-cash goodwill impairment charge for Lumileds was recorded, primarily due to weaker demand in the automotive, displays and mobile phone segments.

Cash flow before financing activities included cash disbursements of EUR 1,826 million, mainly related to the acquisition of Genlyte, whereas in 2007 acquisition-related disbursements amounted to EUR 1,162 million, mainly in connection with the acquisitions of PLI and Color Kinetics. Excluding these acquisition-related payments, cash flow before financing activities increased by EUR 173 million compared to 2007 thanks to improved working capital requirements. Net capital expenditures increased by EUR 54 million compared to 2007, largely due to higher investments in solid-state lighting solutions.

Innovation & Emerging Businesses

Key data
in millions of euros, except for FTE data			2007				2008
Sales			535				337
Sales growth
% increase (decrease), nominal			(61	)			(37	)
% increase (decrease), comparable1)			38				(27	)
Adjusted IFO Corporate Technologies			(76	)			(172	)
Adjusted IFO Corporate Investments / Other			(5	)			(54	)
Adjusted IFO1)			(81	)			(226	)
as a % of sales			(15.1	)			(67.1	)
IFO			(82	)			(226	)
as a % of sales			(15.3	)			(67.1	)
Net operating capital (NOC) 1)			246				153
Cash flows before financing activities 1)			(164	)			(126	)
Employees (FTEs)			5,888				5,324

1)		See “Reconciliation of non-US GAAP information” in Item 5 for a reconciliation of non-US GAAP measures to the most directly comparable US GAAP measure.

In 2008, Adjsuted IFO amounted to a loss of EUR 226 million, compared to a loss of EUR 81 million in 2007, which included a EUR 6 million gain on the sale of TASS. The higher loss was mainly due to EUR 18 million restructuring charges at Assembléon, a EUR 13 million loss from the sale of High Tech Plastics — Optics, as well as higher investments in the Lighting & Cleantech and Healthcare Incubator activities and lower income from an intellectual property transaction in 2007.

Cash flow before financing activities improved by EUR 38 million to an outflow of EUR 126 million, largely thanks to higher license income receipts and lower net capital expenditures, partly offset by lower proceeds from the sale of businesses.

Group Management & Services

Key data
in millions of euros, except for FTE data			2007				2008
Sales			197				148
Sales growth
% increase (decrease), nominal			18				(25	)
% increase (decrease), comparable1)			31				(24	)
Adjusted IFO Corporate and regional costs			(156	)			(171	)
Adjusted IFO Brand campaign			(111	)			(64	)
Adjusted IFO Service Units, Pensions, Other			(30	)			(290	)
Adjusted IFO1)			(297	)			(525	)
IFO			(297	)			(525	)
Net operating capital (NOC) 1)			705				(492	)
Cash flows before financing activities 1)			5,253				1,824
Employees (FTEs)			5,299				6,011

1)		See “Reconciliation of non-US GAAP information” in Item 5 for a reconciliation of non-US GAAP measures to the most directly comparable US GAAP measure.

The sector Group Management & Services comprises the activities of the corporate center including Philips’ global management and sustainability programs, as well as country and regional overhead costs, and costs of pension and other postretirement benefit plans. Additionally, the global service units such as Philips General Purchasing, real estate, and shared financial services are reported in this sector.

In 2008, the adjusted IFO of corporate & regional overheads was EUR 15 million lower than 2007, mainly due to higher restructuring charges.

Brand campaign investments in 2008 were EUR 47 million lower than 2007 due to lower spending and higher cost reduction initiatives.

The adjusted IFO of service units, pensions, and other was impacted by a EUR 239 million asbestos-related settlement charge and higher restructuring costs. Pension and other postretirement benefit costs were in line with 2007.

Cash flows before financing activities resulted in a EUR 1,824 million inflow in 2008, compared to an inflow of EUR 5,253 million in 2007. 2008 included cash receipts related to the sale of shares in TSMC (EUR 1,831 million) and LG Display (EUR 670 million) whereas 2007 saw EUR 5.4 billion of cash proceeds from the sale of TSMC and LG Display.

Performance by market cluster

Philips monitors its performance on a geographical axis based on the following market clusters:

•		Key emerging markets, including China, India, and Latin America
•		Other emerging markets, including emerging markets in Central and Eastern Europe, Russia, Ukraine and Central Asia, the Middle East and Africa, Turkey and ASEAN zone
•		Mature markets, including Western Europe, North America, Japan, Korea, Israel, Australia, and New Zealand.

Sales and adjusted IFO per market cluster
In millions of euros		2007 1)												2008
										adjusted												adjusted
		sales				IFO				IFO 2)				sales				IFO				IFO 2)
Western Europe			10,275				1,215				1,281				9,473				414				439
North America			7,147				160				304				7,589				(288	)			233
Other mature markets			1,331				41				41				1,275				(11	)			(11	)
Total mature markets			18,753				1,416				1,626				18,337				115				661
Key emerging markets			4,435				206				209				4,623				209				216
Other emerging markets			3,605				219				219				3,425				(7	)			54
			26,793				1,841				2,054				26,385				317				931