Edgar Filing: STMICROELECTRONICS NV

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16 UNDER

THE SECURITIES EXCHANGE ACT OF 1934

Report on Form 6-K dated August 3, 2010

Commission File Number: 1-13546

STMicroelectronics N.V.

(Name of Registrant)

39, Chemin du Champ-des-Filles

1228 Plan-les-Ouates, Geneva, Switzerland

(Address of Principal Executive Offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

Form 20-F x Form 40-F o

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

Yes o No x

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

Yes o No x

Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:

Yes o No x

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- __________

Enclosure: STMicroelectronics N.V.’s Second Quarter and First Half 2010:

· Operating and Financial Review and Prospects;

· Unaudited Interim Consolidated Statements of Income, Balance Sheets, Statements of Cash Flow, and Statements of Changes in Equity and related Notes for the three months and six months ended June 26, 2010; and

· Certifications pursuant to Sections 302 (Exhibits 12.1 and 12.2) and 906 (Exhibit 13.1) of the Sarbanes-Oxley Act of 2002, submitted to the Commission on a voluntary basis.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our Unaudited Interim Consolidated Statements of Income, Balance Sheets, Statements of Cash Flow and Statements of Changes in Equity for the three months and six months ended June 26, 2010 and Notes thereto included elsewhere in this Form 6-K, and our annual report on Form 20-F for the year ended December 31, 2009 as filed with the U.S. Securities and Exchange Commission (the “Commission” or the “SEC”) on March 10, 2010 (the “Form 20-F”). The following discussion contains statements of future expectations and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, or Section 21E of the Securities Exchange Act of 1934, each as amended, particularly in the sections “Critical Accounting Policies Using Significant Estimates”, “Business Outlook” and “Liquidity and Capital Resources—Financial Outlook”. Our actual results may differ significantly from those projected in the forward-looking statements. For a discussion of factors that might cause future actual results to differ materially from our recent results or those projected in the forward-looking statements in addition to the factors set forth below, see “Cautionary Note Regarding Forward-Looking Statements” and “Item 3. Key Information—Risk Factors” included in the Form 20-F. We assume no obligation to update the forward-looking statements or such risk factors.

Our Management’s Discussion and Analysis of Financial Position and Results of Operations (“MD&A”) is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition and cash flows. Our MD&A is organized as follows:

•	Critical Accounting Policies using Significant Estimates, which we believe are most important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.

•	Business Overview, a discussion of our business and overall analysis of financial and other relevant highlights designed to provide context for the other sections of the MD&A.

•	Business Outlook, our expectations for selected financial items for the third quarter of 2010.

•	Other Developments in the First Half of 2010.

•	Results of Operations, containing segment information as well as a sequential and year-over-year analysis of our financial results for the three months and six months ended June 26, 2010.

•	Legal Proceedings, describing the status of open legal proceedings.

•	Related-Party Transactions, disclosing transactions with related parties.

•	Discussion of the impact of changes in exchange rates, interest rates and equity prices (share hedging) on our activity and financial results.

•	Liquidity and Capital Resources, presenting an analysis of changes in our balance sheets and cash flows, and discussing our financial condition and potential sources of liquidity.

•	Backlog and Customers, discussing the level of bookings from, and sales to, our key customers.

•	Disclosure Controls and Procedures.

•	Cautionary Note Regarding Forward-Looking Statements.

Critical Accounting Policies Using Significant Estimates

The preparation of our consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions. The primary areas that require significant estimates and judgments by us include, but are not limited to:

•	sales returns and allowances;

•	determination of the best estimate of selling price for deliverables in multiple element sale arrangements;

•	inventory reserves and normal manufacturing capacity thresholds to determine costs capitalized in inventory;

•	accruals for litigation and claims;

•	valuation at fair value of acquired assets including intangibles and assumed liabilities in a business combination, goodwill, investments and tangible assets as well as the impairment of their related carrying values;

•	the assessment, in each reporting period, of events, which could trigger interim impairment testing;

•	estimated value of the consideration to be received and used as fair value for asset groups classified as assets to be disposed of by sale and the assessment of the probability of realizing the sale;

•	measurement of the fair value of debt and equity securities classified as available-for-sale, including debt securities and other financial assets, for which no observable market price is obtainable;

•	the assessment of credit losses and other-than-temporary impairment charges on financial assets;

•	the valuation of noncontrolling interests, particularly in case of a contribution in kind as part of a business combination;

•	restructuring charges;

•	assumptions used in calculating pension obligations;

•	assumptions used to measure and recognize a liability for the fair value of the obligation we assume at the inception of a guarantee;

•	the determination of the amount of taxes estimated for the full year, including deferred income tax assets and provisions.

We base the estimates and assumptions on historical experience and on various other factors such as market trends and the latest available business plans that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. While we regularly evaluate our estimates and assumptions, the actual results we experience could differ materially and adversely from our estimates. To the extent there are material differences between our estimates and actual results, future results of operations, cash flows and financial position could be significantly affected. With respect to the Wireless segment, our estimates are made under the supervision of ST-Ericsson’s CEO and CFO, who report to ST-Ericsson’s Board of Directors.

We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements:

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

Consistent with standard business practice in the semiconductor industry, price protection is granted to distributor customers on their existing inventory of our products to compensate them for declines in market prices. We accrue a provision for price protection based on a rolling historical price trend computed on a monthly basis as a percentage of gross distributor sales. This historical price trend represents differences in recent months between the invoiced price and the final price to the distributor, adjusted if required, to accommodate for a significant move in the current market price. We record the accrued amounts as a deduction of revenue at the time of the sale. The ultimate decision to authorize a distributor refund remains fully within our control. The short outstanding inventory time period, our ability to foresee changes in standard inventory product pricing (as opposed to pricing for certain customized products) and our lengthy distributor pricing history have enabled us to reliably estimate price protection provisions at period-end. If market conditions differ from our assumptions, this could have an impact on future periods. In particular, if market conditions were to deteriorate, net revenues could be reduced due to higher product returns and price reductions at the time these adjustments occur.

Our customers occasionally return our products for technical reasons. Our standard terms and conditions of sale provide that if we determine that our products are non-conforming, we will repair or replace them, or issue a credit or rebate of the purchase price. In certain cases, when the products we have supplied have been proven to be defective, we have agreed to compensate our customers for claimed damages in order to maintain and enhance our business relationship. Quality returns are not related to any technological obsolescence issues and are identified shortly after sale in customer quality control testing. We provide for such returns when they are considered likely and can be reasonably estimated. We record the accrued amounts as a reduction of revenue.

Our insurance policies relating to product liability only cover physical and other direct damages caused by defective products. We carry only limited insurance against immaterial, non-consequential damages in the event of a product recall. We record a provision for warranty costs as a charge against cost of sales based on historical trends of warranty costs incurred as a percentage of sales which we have determined to be a reasonable estimate of the probable losses to be incurred for warranty claims in a period. Any potential warranty claims are subject to our determination that we are at fault and liable for damages, and that such claims usually must be submitted within a short period following the date of sale. This warranty is given in lieu of all other warranties, conditions or terms expressed or implied by statute or common law. Our contractual terms and conditions typically limit our liability to the sales value of the products that gave rise to the claim.

We maintain an allowance for doubtful accounts for estimated potential losses resulting from our customers’ inability to make required payments. We base our estimates on historical collection trends and record a provision accordingly. Furthermore, we are required to evaluate our customers’ credit ratings from time to time and take an additional provision for any specific account that we consider doubtful. In the second quarter of 2010, we did not record any new material specific provision related to bankrupt customers other than our standard provision of 1% of total receivables based on estimated historical collection trends. If we receive information that the financial condition of our customers has deteriorated, resulting in an impairment of their ability to make payments, additional allowances could be required. Such deterioration is increasingly likely in the case of a crisis in the credit markets. While the majority of our sales agreements contain standard terms and conditions, we may, from time to time, enter into agreements that contain multiple elements or non-standard terms and conditions, which require revenue recognition judgments. In such cases, following the guidance related to revenue recognition, we allocate the revenue to different deliverables based upon the best estimate of selling price of each deliverable.

Goodwill and purchased intangible assets. The purchase method of accounting for acquisitions requires extensive use of estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired. Goodwill and intangible assets deemed to have indefinite lives are not amortized but are instead subject to annual impairment tests. The amounts and useful lives assigned to other intangible assets impact future amortization. If the assumptions and estimates used to allocate the purchase price are not correct or if business conditions change, purchase price adjustments or future asset impairment charges could be required. At June 26,

2010, the value of goodwill amounted to $1,041 million. No additional amount was recognized during the second quarter of 2010.

Impairment of goodwill. Goodwill recognized in business combinations is not amortized and is instead subject to an impairment test to be performed on an annual basis, or more frequently if indicators of impairment exist, in order to assess the recoverability of its carrying value. Goodwill subject to potential impairment is tested at a reporting unit level, which represents a component of an operating segment for which discrete financial information is available. Our reporting unit “Wireless” includes ST-Ericsson. This impairment test determines whether the fair value of each reporting unit for which goodwill is allocated is lower than the total carrying amount of relevant net assets allocated to such reporting unit, including its allocated goodwill. If lower, the implied fair value of the reporting unit goodwill is then compared to the carrying value of the goodwill and an impairment charge is recognized for any excess. In determining the fair value of a reporting unit, we usually estimate the expected discounted future cash flows associated with the reporting unit. Significant management judgments and estimates are used in forecasting the future discounted cash flows. Our evaluations are based on financial plans updated with the latest available projections of the semiconductor market evolution, our sales expectations and our costs evaluation, and are consistent with the plans and estimates that we use to manage our business. It is possible, however, that the plans and estimates used may be incorrect, and future adverse changes in market conditions or operating results of acquired businesses that are not in line with our estimates may require impairment of certain goodwill.

We did not record any goodwill impairment during the second quarter of 2010. However, many of the factors used in assessing fair values for such assets are outside of our control and the estimates used in such analyses are subject to change. We will continue to monitor the carrying value of our assets. If market and economic conditions deteriorate further, this could result in future non-cash impairment charges against income. Further impairment charges could also result from new valuations triggered by changes in our product portfolio or strategic transactions, particularly in the event of a downward shift in future revenues or operating cash flow in relation to our current plans.

Intangible assets subject to amortization. Intangible assets subject to amortization include the cost of technologies and licenses purchased from third parties, as well as from the purchase method of accounting for acquisitions, purchased software and internally developed software that is capitalized. In addition, intangible assets subject to amortization include intangible assets acquired through business combinations such as core technologies and customer relationships. Intangible assets subject to amortization are reflected net of any impairment losses and are amortized over their estimated useful life. The carrying value of intangible assets subject to amortization is evaluated whenever changes in circumstances indicate that the carrying amount may not be recoverable. In determining recoverability, we initially assess whether the carrying value exceeds the undiscounted cash flows associated with the intangible assets. If exceeded, we then evaluate whether an impairment charge is required by determining if the asset’s carrying value also exceeds its fair value. An impairment loss is recognized for the excess of the carrying amount over the fair value. We normally estimate the fair value based on the projected discounted future cash flows associated with the intangible assets. Significant management judgments and estimates are required to forecast the future operating results used in the discounted cash flow method of valuation. Our evaluations are based on financial plans updated with the latest available projections of growth in the semiconductor market and our sales expectations. They are consistent with the plans and estimates that we use to manage our business. It is possible, however, that the plans and estimates used may be incorrect and that future adverse changes in market conditions or operating results of businesses acquired may not be in line with our estimates and may therefore require us to recognize impairment of certain intangible assets. At June 26, 2010, the value of intangible assets subject to amortization amounted to $771 million.

Property, plant and equipment. Our business requires substantial investments in technologically advanced manufacturing facilities, which may become significantly underutilized or obsolete as a result of rapid changes in demand and ongoing technological evolution. We estimate the useful life for the majority of our manufacturing equipment, the largest component of our long-lived assets, to be six years, except for our 300-mm manufacturing equipment whose useful life was estimated to be ten years. This estimate is based on our experience using the equipment over time. Depreciation expense is a major element of our manufacturing cost structure. We begin to depreciate new equipment when it is placed into service.

We perform an impairment review when there is reason to suspect that the carrying value of tangible assets or groups of assets might not be recoverable. In determining the recoverability of assets to be held and used, we initially assess whether the carrying value exceeds the undiscounted cash flows associated with the tangible assets or group of assets. If exceeded, we then evaluate whether an impairment charge is required by determining if the asset’s carrying value also exceeds its fair value. We normally estimate this fair value based on market appraisals or the sum of discounted future cash flows, using market assumptions such as the utilization of our fabrication facilities and the ability to upgrade such facilities, change in the selling price and the adoption of new technologies. We also evaluate the continued validity of an asset’s useful life when impairment indicators are identified. Assets classified as held for sale are reflected at the lower of their carrying amount and fair value less selling costs and are not depreciated during the selling period. Selling costs include incremental direct costs to transact the sale that we would not have incurred except for the decision to sell.

Our evaluations are based on financial plans updated with the latest projections of growth in the semiconductor market and our sales expectations, from which we derive the future production needs and loading of our manufacturing facilities, and which are consistent with the plans and estimates that we use to manage our business. These plans are highly variable due to the high volatility of the semiconductor business and therefore are subject to continuous modifications. If future growth differs from the estimates used in our plans, in terms of both market growth and production allocation to our manufacturing plants, this could require a further review of the carrying amount of our tangible assets and result in a potential impairment loss.

Inventory. Inventory is stated at the lower of cost and net realizable value. Cost is based on the weighted average cost by adjusting the standard cost to approximate actual manufacturing costs on a quarterly basis; therefore, the cost is dependent upon our manufacturing performance. In the case of underutilization of our manufacturing facilities, we estimate the costs associated with the excess capacity. These costs are not included in the valuation of inventories but are charged directly to the cost of sales. Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses and cost of completion. As required, we evaluate inventory acquired as part of purchase accounting at fair value, less completion and distribution costs and related margin.

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

Business combination. The purchase method of accounting for business combinations requires extensive use of estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired. The amounts and useful lives assigned to other intangible assets impact future amortization. If the assumptions and estimates used to allocate the purchase price are not correct or if business conditions change, purchase price adjustments or future asset impairment charges could be required.

Restructuring charges. We have undertaken, and we may continue to undertake, significant restructuring initiatives, which have required us, or may require us in the future, to develop formalized plans for exiting any of our existing activities. We recognize the fair value of a liability for costs associated with exiting an activity when a probable liability exists and it can be reasonably estimated. We record estimated charges for non-voluntary termination benefit arrangements such as severance and outplacement costs meeting the criteria for a liability as described above. Given the significance and timing of the execution of such activities, the process is complex and involves periodic reviews of estimates made at the time the original decisions were taken. This process can require more than one year due to requisite governmental and customer approvals and our capability to transfer technology and know-how to other locations. As we operate in a highly cyclical industry, we monitor and evaluate business conditions on a regular basis. If broader or newer initiatives, which could include production curtailment or closure of other manufacturing facilities, were to be taken, we may be required to incur additional charges as well as change estimates of the amounts previously recorded. The potential impact of these changes could be material and could have a material adverse effect on our results of operations or financial condition. For the second quarter 2010, the net amount of restructuring charges and other related closure costs amounted to $12 million before taxes.

Share-based compensation. We measure our share-based compensation cost based on its fair value on the grant date of each award. This cost is recognized over the period during which an employee is required to provide service in exchange for the award or the requisite service period, usually the vesting period, and is adjusted for actual forfeitures that occur before vesting. Our share-based compensation plans may award shares contingent on the achievement of certain financial objectives, including our financial results. In order to assess the fair value of this share-based compensation, we are required to estimate certain items, including the probability of meeting market performance and financial results targets, forfeitures and employees’ service period. As a result, in relation to our nonvested Stock Award Plan, we recorded a total pre-tax expense of $9 million in the second quarter of 2010, out of which $3 million was related to the 2007 plan; $1 million to the 2008 plan; $4 million to the 2009 plan and $1 million to the 2010 plan.

Earnings (loss) on Equity Investments. We are required to record our proportionate share of the results of the entities that we account for under the equity method. This recognition is based on results reported by these entities, sometimes on a one-quarter lag, and, for such purpose, we rely on their internal controls. In the second quarter of 2010, we recognized, pursuant to a one-quarter lag, approximately $5 million of income as our proportional interest in the result recorded by Numonyx, based on our 48.6% ownership interest, net of amortization of basis differences. Moreover, we recognized a $265 million gain on the sale of the Numonyx shares. In addition, we recognized in the second quarter of 2010, a loss of approximately $7 million related to the ST-Ericsson JVD entities we account for under the equity method, net of the amortization of basis differences, and an immaterial loss related to other investments. In case of triggering events, we are required to determine the fair value of our investment and assess the classification of temporary versus other-than-temporary impairments of the carrying value. We make this assessment by evaluating the business on the basis of the most recent plans and projections or to the best of our estimates.

Financial assets. We classify our financial assets in the following categories: held-for-trading and available-for-sale. Upon the adoption of the fair value measurements guidance for financial assets and liabilities, we did not elect to apply the fair value option on any financial assets. Such classification depends on the purpose for which the investments are acquired. Management determines the classification of its financial assets at initial recognition. Unlisted equity securities with no readily determinable fair value are carried at cost. They are neither classified as held-for-trading nor as available-for-sale. Regular purchases and sales of financial assets are recognized on the trade date — the date on which we commit to purchase or sell the asset. Financial assets are initially recognized at fair value, and transaction costs are expensed in the consolidated statements of income. Available-for-sale and held-for-trading financial assets are subsequently carried at fair value. The gain (loss) on the sale of the financial assets is reported as a non-operating element on the consolidated statements of income. The fair values of quoted debt and equity securities are based on current market prices. If the market for a financial asset is not active and if no observable market price is obtainable, we measure fair value by using assumptions and estimates. For unquoted equity securities, these assumptions and estimates include the use of recent arm’s length transactions; for debt securities without available observable market price, we establish fair value by reference to publicly available indexes of securities with same rating and comparable or similar underlying collaterals or industries’ exposure, which we believe approximates the orderly exit value in the current market. In measuring fair value, we make maximum use of market inputs and rely as little as possible on entity-specific inputs. Based on the previously adopted mark to model methodology, in the second quarter of 2010 we had no additional impairment on the value of the Auction Rate Securities (“ARS”) that Credit Suisse purchased on our account contrary to our mandate. For more information about the ARS purchased by Credit Suisse contrary to our instruction, which are still accounted for and owned by us pending the execution of the favorable arbitration award against Credit Suisse Securities LLC (“Credit Suisse”) by the Financial Industry Regulatory Authority (“FINRA”) and confirmed on March 19, 2010 by the ruling of the federal district court in New York, see “Legal Proceedings”.

Income taxes. We are required to make estimates and judgments in determining income tax expense or benefit for financial statement purposes. These estimates and judgments also occur in the calculation of certain tax assets and liabilities and provisions. Furthermore, the adoption of the FASB guidance on accounting for uncertainty in income taxes requires an evaluation of the probability of any tax uncertainties and the recognition of the relevant charges.

We are also required to assess the likelihood of recovery of our deferred tax assets. If recovery is not likely, we are required to record a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable, which would increase our provision for income taxes. Our deferred tax assets have increased

substantially in recent years in light of our negative net earnings. As of June 26, 2010, we recorded in our accounts certain valuation allowances based on our current operating assumptions. However, should our operating assumptions change we may be impaired in our ability to fully recover our deferred tax assets in the future. Likewise, a change in the tax rates applicable in the various jurisdictions could have an impact on our future tax provisions in the periods in which these changes could occur.

Patent and other Intellectual Property (“IP”) litigation or claims. As is the case with many companies in the semiconductor industry, we have from time to time received, and may in the future receive, communication alleging possible infringement of patents and other IP rights of third parties. Furthermore, we may become involved in costly litigation brought against us regarding patents, mask works, copyrights, trademarks or trade secrets. In the event the outcome of a litigation claim is unfavorable to us, we may be required to purchase a license for the underlying IP right on economically unfavorable terms and conditions, possibly pay damages for prior use, and/or face an injunction, all of which singly or in the aggregate could have a material adverse effect on our results of operations and on our ability to compete. See Item 3. “Key Information — Risk Factors — Risks Related to Our Operations — We depend on patents to protect our rights to our technology” included in our Form 20-F, as may be updated from time to time in our public filings.

We record a provision when we believe that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We regularly evaluate losses and claims with the support of our outside counsel to determine whether they need to be adjusted based on current information available to us. Legal costs associated with claims are expensed as incurred. In the event of litigation that is adversely determined with respect to our interests, or in the event that we need to change our evaluation of a potential third-party claim based on new evidence or communications, this could have a material adverse effect on our results of operations or financial condition at the time it were to materialize. We are in discussion with several parties with respect to claims against us relating to possible infringement of other parties’ IP rights. We are also involved in several legal proceedings concerning such issues. See “Legal Proceedings.”

As of June 26, 2010, based on our assessment, we did not record any provisions in our financial statements relating to third party IP right claims since we had not identified any risk of probable loss that is likely to arise out of asserted claims or ongoing legal proceedings. There can be no assurance, however, that these will be resolved in our favor. If the outcome of any claim or litigation were to be unfavorable to us, we could incur monetary damages, and/or face an injunction, all of which singly or in the aggregate could have an adverse effect on our results of operation and our ability to compete.

Pension and Post Retirement Benefits. Our results of operations and our consolidated balance sheet include an amount of pension and post retirement benefits that are measured using actuarial valuations. At June 26, 2010, our pension and long-term benefit obligations net of plan assets amounted to $280 million based on the assumption that our employees will work with us until they reach the age of retirement. These valuations are based on key assumptions, including discount rates, expected long-term rates of return on funds and salary increase rates. These assumptions are updated on an annual basis at the beginning of each fiscal year or more frequently upon the occurrence of significant events. Any changes in the pension schemes or in the above assumptions can have an impact on our valuations. The measurement date we use for the majority of our plans is December 31.

Other claims. We are subject to the possibility of loss contingencies arising in the ordinary course of business. These include, but are not limited to: warranty costs on our products not covered by insurance, breach of contract claims, tax claims and provisions for specifically identified income tax exposure as well as claims for environmental damages. In determining loss contingencies, we consider the likelihood of a loss of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of such loss or liability. An estimated loss is recorded when we believe that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We regularly re-evaluate any losses and claims and determine whether our provisions need to be adjusted based on the current information available to us. In the event we are unable to estimate the amount of such loss in a correct and timely manner, this could have a material adverse effect on our results of operations or financial condition at the time such loss were to materialize.

Fiscal Year

Under Article 35 of our Articles of Association, our financial year extends from January 1 to December 31, which is the period end of each fiscal year. The first and second quarters of 2010 ended on March 27 and June 26, 2010, respectively. The third quarter of 2010 will end on September 25 and the fourth quarter will end on December 31, 2010. Based on our fiscal calendar, the distribution of our revenues and expenses by quarter may be unbalanced due to a different number of days in the various quarters of the fiscal year.

Business Overview

The total available market is defined as the “TAM”, while the serviceable available market, the “SAM”, is defined as the market for products produced by us (which consists of the TAM and excludes PC motherboard major devices such as Microprocessors (“MPUs”), dynamic random access memories (“DRAMs”), optoelectronics devices and Flash Memories).

The growth momentum of the semiconductor industry continued during the second quarter of 2010, characterized by strong demand in almost all market applications, which led to total revenues reaching a high quarterly level. As a result, on year-over-year and sequential basis, the second quarter registered a solid performance. Based on published industry data by WSTS, semiconductor industry revenues increased in the second quarter of 2010 by approximately 43% for the TAM and 31% for the SAM on a year-over-year basis to reach approximately $75 billion and $42 billion, respectively. On a sequential basis, TAM and SAM registered an increase of approximately 7% and 6%, respectively.

With reference to our business performance, during the second quarter of 2010 we continued to register strong demand from our customers, which translated in a higher level of both orders and revenues. Revenues increased to $2,531 million, a 27.0% increase over the same period in 2009, led by the ACCI and IMS product segments, while Wireless revenues decreased. On a year-over-year basis our overall performance result was below the SAM.

On a sequential basis, our second quarter 2010 revenues increased 8.9%, in line with our anticipated guidance, still driven by ACCI and IMS. Our sequential performance was above the SAM.

Our effective average exchange rate for the first half of 2010 was $1.37 for €1.00 compared to $1.33 for €1.00 for the first half of 2009. Our effective average exchange rate for the second quarter of 2010 was $1.35 for €1.00 compared to $1.39 for €1.00 for the first quarter of 2010 and $1.34 for €1.00 in the second quarter of 2009. For a more detailed discussion of our hedging arrangements and the impact of fluctuations in exchange rates, see “Impact of Changes in Exchange Rates” below.

Our second quarter 2010 gross margin was 38.3%, largely improving compared to the 26.1% registered in the year-ago period. The second quarter of 2010 benefited from the favorable impact of several factors, including (i) a more favorable industry environment, which contributed to improved sales volume and, consequently, the loading of our fabs; and (ii) overall improvement in our manufacturing efficiencies resulting from our restructuring and cost cutting measures, in particular the closing of certain fabs. However, the second quarter of 2009 was largely penalized by significant unused capacity charges associated with poor loading, accounting for approximately 6 percentage points. Sequentially, our gross margin improved 60 basis points, mainly due to higher volume, product mix improvements in both ACCI and IMS and the recognition of a technology licensing arrangement in other revenues.

Our second quarter 2010 operating result rebounded from several quarters of operating losses to reach a solid profit level. The second quarter 2010 result was an operating income of $91 million, a significant improvement compared to the $428 million loss in the second quarter of 2009, driven by higher revenues, as well as overall improvement of our manufacturing performance and control of our operating expenses. Our second quarter 2010 operating income improved sequentially from a $20 million loss in the first quarter of 2010, mainly due to higher revenues. The strengthening U.S. dollar exchange rate had a non material impact on our second quarter 2010 financial result. See “Impact of Changes in Exchange Rates”.

The second quarter of 2010 includes the exceptional gain of $265 million on the Numonyx equity divestiture, for which we received shares of Micron common stock, evaluated at $583 million at closing, as compensation.

We continued to follow the path of improving our profitability, with net income of $356 million, or $0.39 per share on a diluted basis, after having attributed $74 million of the ST-Ericsson JVS’ losses to noncontrolling interest. In summary, our profitability during the second quarter of 2010 was generated by the following factors:

•	solid performance of our revenues;

•	continued improvement of our manufacturing performances;

•	product mix improvements in both ACCI and IMS; and

•	the gain from the sale of our proportional share in Numonyx to Micron.

The aforementioned factors were partially offset by the following elements:

•	negative pricing trend; and

•	the losses of ST-Ericsson JVS, half of which were attributed to non-controlling interest.

We posted another quarter of improvement in our financial performance, with revenues, gross margin, operating income and net income all showing progressive strengthening sequentially and year-over-year.

We were particularly pleased with demand for both IMS and ACCI. In combination, IMS and ACCI delivered sales growth of 51% year-over-year and 16% sequentially. Obviously, we are not satisfied with the results in wireless. However, we are encouraged by ST-Ericsson’s progress in achieving key design-wins as well as restructuring, towards a progressive recovery.

Gross margin increased 60 basis points sequentially to 38.3% due to manufacturing efficiencies and product innovation. This improvement comes on top of the first quarter sequential increase of 70 basis points.

Net income reflected the gain on the sale of Numonyx to Micron as well as the improving profitability of our core businesses. As our results demonstrate, we are well positioned to achieve our financial targets.

Thanks to our consistent focus on cash generation we have further strengthened our net financial position to over $700 million compared to $420 million at the end of 2009. See “Liquidity and Capital Resources”.

Innovative products continue to drive revenue momentum. In the second quarter, several new product areas, including advanced 55nm set-top-box solutions that offer our customers top performance at low power and leading-edge functionality, such as 3D graphics and 3D video, 32-bit microcontrollers, as well as power and analog, grew significantly.

Important milestones and design wins were also achieved in the quarter such as our gyroscope family entering volume production. Our gyroscope technology is quite broad with target applications including smartphones, robotics, navigation, cameras, gaming and medical devices. In addition, our automotive 32-bit MCU family had continued success with major design-wins, including a body electronics platform from a leading OEM. We also enlarged our general-purpose 32-bit MCU family, sampling to lead customers the STM32L series, the industry’s first ultra-low-power ARM® CortexTM-M3 microcontroller delivering industry-leading energy-saving performance.

Business Outlook

We expect sequential revenue growth of between 2% and 7%, which equates to solid growth of 13% to 19% when compared to the year-over-year period. Gross margin should improve to about 38.8%, plus or minus 1 percentage point.

As we did in the first half of 2010, we continue to increase capacity to support the strong demand of our customers and are encouraged by the quality of our backlog.

In addition, we made significant progress during the first half of 2010 with respect to enhancing our product portfolio, improving our financial performance and strengthening our financial position. Looking ahead to the second half of the year, we expect to see further positive progression in our performance.

This outlook is based on an assumed effective currency exchange rate of approximately $1.32 = €1.00 for the 2010 third quarter, which reflects an assumed exchange rate of $1.23 = €1.00 combined with the impact of existing hedging contracts. The third quarter will close on September 25, 2010.

These are forward-looking statements that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially; in particular, refer to those known risks and uncertainties described in “Cautionary Note Regarding Forward-Looking Statements” herein and “Item 3. Key Information—Risk Factors” in our Form 20-F as may be updated from time to time in our SEC filings.

Other Developments

On January 4, 2010, we signed a joint agreement with Enel and Sharp for the manufacture of triple-junction thin-film photovoltaic panels in Italy. On August 2, 2010, we announced, together with Enel and Sharp, the signature of a binding commitment letter for a €150 million project financing agreement and our equal share joint venture, named 3Sun, began operations at the Catania, Italy factory. The Catania factory’s initial photovoltaic panel production capacity, equivalent to 160 MW per year, is to be financed through a combination of self-financing, funding from the Italian Joint Ministerial Committee for Economic planning, which recently committed €49 million to this project, and project financing provided by leading banks. We, Enel and Sharp have each underwritten one third of the joint venture’s equity, with a commitment of €70 million in cash or in tangible and intangible assets, and hold one third of its shares. Our equity commitment will be satisfied by the contribution of the M6 facility in Catania (see below) for a value of €60 million and a €10 million cash contribution. Panel production at the Catania plant is scheduled to begin in the second half of 2011.

On February 3, 2010, we announced that Tjerk Hooghiemstra joined us as Executive Vice-President, Chief Administrative Officer, reporting to our President and CEO, Carlo Bozotti. This new position was created with the aim of generating synergies among several staff organizations by optimizing the functions of Human Resources, Health & Safety, Education, Legal, Internal Communication, Security and Corporate Responsibility.

Numonyx

On February 10, 2010, we, together with our partners Intel Corporation and Francisco Partners, entered into a definitive agreement with Micron Technology Inc., in which Micron would acquire Numonyx Holdings B.V. in an all-stock transaction. On May 7, 2010, this transaction closed. In exchange for our 48.6% stake in Numonyx, we received approximately 66.88 million shares of Micron common stock, which is recorded as a financial investment. At the May 6, 2010 Micron closing share price of $8.75 per share, the value of the shares was $585.2 million. Due to the high volatility in the share price, the value of these shares could be subject to material variations and, therefore, in order to partially protect the value of the transaction, we have hedged, with certain derivative instruments, a significant portion of the 66.88 million shares. For the details of these hedging operations, refer to Note 27 to our Unaudited Interim Consolidated Financial Statements. We also have a payable of $78 million, equivalent to 10 million shares of Micron common stock, due to Francisco Partners at the end of the shares’ six month lock-up period. Also, at the closing of this transaction, the senior credit facility that was supported by our guarantee of $225 million was repaid in full by Numonyx. The overall transaction results in a gain after tax of approximately $265 million, higher than the amount previously announced, which is reported in our fiscal second quarter Consolidated Statement of Income. In connection with the divestiture of Numonyx we also received full ownership of the Numonyx M6 facility in Catania, Italy, which, as noted above, we are contributing to 3Sun, the new photovoltaic joint initiative among Enel, Sharp and us.

Under the terms of the agreement to sell Numonyx to Micron, we continue to retain the $250 million deposit with DBS Bank Ltd. in Singapore, which is intended to guarantee the Hynix-Numonyx Joint Venture’s debt financing for

such amount. Concurrent with our divestiture of Numonyx, we entered into an agreement with Micron and Numonyx that provides that, in the event Hynix exercises its right to purchase Numonyx’s interest in the Hynix joint venture following the closing of the Numonyx transaction, Numonyx will take over all or part of our obligations under the guarantee. On May 31, 2010, Numonyx notified us that on May 28, 2010, Hynix had delivered a call option exercise notice to them. Following these events, we consider it likely that our $250 million deposit in favor of the Numonyx-Hynix joint venture will be released to us upon the completion of Hynix’s purchase of Numonyx’s equity interest in the Hynix-Numonyx Joint Venture. See Note 18 to our Unaudited Interim Consolidated Financial Statements.

On March 19, 2010, in connection with our legal action to recover from Credit Suisse the amount invested in unauthorized auction rate securities against our instructions, the federal district court in New York issued a ruling affirming the unanimous arbitration award in our favor for more than $431 million, including collected interest, entered in February 2009 by FINRA. The ruling of the federal district court in New York denied Credit Suisse’s motion to vacate the award, also granting our petition to affirm the award and directing Credit Suisse to pay us the unpaid balance. Based on the ruling we should receive approximately $358 million, which include approximately $27 million of interest to date, in addition to the approximately $75 million previously received in December upon selling a portion of these securities. This ruling can be appealed by Credit Suisse to the Court of Appeals for the Second Circuit upon resolution of all post judgment motions. On March 31, 2010, the New York Court for the Southern District issued a judgment confirming the March 19, 2010 order and closing the case. On April 15, 2010 following a motion from Credit Suisse dated April 12, 2010 the New York Court for the Southern District granted a temporary stay in execution of the judgment pending resolution of Credit Suisse’s motion to amend; however, the court ordered Credit Suisse to post a full supersedeas bond to guarantee the execution of the judgment prior to ruling on Credit Suisse’s motion. The terms of the bond have not yet been agreed.

At our annual general meeting of shareholders held on May 25, 2010, the following proposals, inter alia, were approved by our shareholders:

•	Approval of our 2009 accounts reported in accordance with International Financial Reporting Standards (IFRS);

•	The reappointment for a three-year term, expiring at the 2013 Annual General Meeting, of the following members of the Supervisory Board: Mr. Raymond Bingham and Mr. Alessandro Ovi; and

•	The distribution of an annual cash dividend of $0.28 per share, to be paid in four equal quarterly installments.

Results of Operations

Segment Information

We operate in two business areas: Semiconductors and Subsystems.

In the Semiconductors business area, we design, develop, manufacture and market a broad range of products, including discrete and standard commodity components, application-specific integrated circuits (“ASICs”), full-custom devices and semi-custom devices and application-specific standard products (“ASSPs”) for analog, digital and mixed-signal applications. In addition, we further participate in the manufacturing value chain of Smartcard products through our divisions, which include the production and sale of both silicon chips and Smart cards.

The current organization is as follows:

Automotive Consumer Computer and Communication Infrastructure (“ACCI”), comprised of four product lines:

Automotive Products Group (“APG”);

Computer and Communication Infrastructure (“CCI”);

Home Entertainment & Displays (“HED”); and

Imaging (“IMG”).

Industrial and Multisegment Sector (“IMS”), comprised of:

Analog, Power and Micro-Electro-Mechanical Systems (“APM”); and

Microcontrollers, non-Flash, non-volatile Memory and Smart Card products (“MMS”).

Wireless Segment (“Wireless”), comprised of:

2G, EDGE, TD-SCDMA & Connectivity;

3G Multimedia & Platforms;

LTE & 3G Modem Solutions;

in which since February 3, 2009, we report the portion of sales and operating results of ST-Ericsson JVS as consolidated in our revenue and operating results; and

Other Wireless, in which we report other revenues, gross margin and other items related to the wireless business but outside of the ST-Ericsson JVS.

In 2010, we restated our results from prior periods for illustrative comparisons of our performance by product segment. The preparation of segment information based on the current segment structure requires us to make significant estimates, assumptions and judgments in determining the operating income of the segments for the prior reporting periods. The tables set forth below reflect the transfer of a small business unit from ACCI to IMS; accordingly, we have reclassified the prior period’s revenues and operating income results of ACCI and IMS. We believe that the restated 2009 presentation is consistent with 2010’s and we use these comparatives when managing our company.

Our principal investment and resource allocation decisions in the semiconductor business area are for expenditures on R&D and capital investments in front-end and back-end manufacturing facilities. These decisions are not made by product segments, but on the basis of the semiconductor business area. All these product segments share common R&D for process technology and manufacturing capacity for most of their products.

In the Subsystems business area, we design, develop, manufacture and market subsystems and modules for the telecommunications, automotive and industrial markets including mobile phone accessories, battery chargers, ISDN power supplies and in-vehicle equipment for electronic toll payment. Based on its immateriality to our business as a whole, the Subsystems segment does not meet the requirements for a reportable segment as defined in the guidance on disclosures about segments of an enterprise and related information.

The following tables present our consolidated net revenues and consolidated operating income by product segment. For the computation of the segments’ internal financial measurements, we use certain internal rules of allocation for the costs not directly chargeable to the segments, including cost of sales, selling, general and administrative expenses (“SG&A”) and a significant part of research and development (“R&D”) expenses. Additionally, in compliance with our internal policies, certain cost items are not charged to the segments, including unused capacity charges, impairment, restructuring charges and other related closure costs, start-up and phase out costs of certain manufacturing facilities, strategic and special R&D programs or other corporate-sponsored initiatives, including certain corporate level operating expenses, acquired IP R&D, other non-recurrent purchase accounting items and certain other miscellaneous charges.

	Three Months Ended (unaudited)				Six Months Ended (unaudited)
	June 26, 2010		June 27, 2009		June 26, 2010		June 27, 2009
			(In millions)
Net revenues by product segment:
Automotive Consumer Computer and Communication Infrastructure (“ACCI”)(1)	$	1,045	$	712	$	1,955	$	1,332
Industrial and Multisegment Sector (“IMS”)(1)		945		605		1,755		1,110
Wireless		525		650		1,112		1,169
Others(2)		16		26		34		42
Total consolidated net revenues	$	2,531	$	1,993	$	4,856	$	3,653

(1)	Following the transfer of a small business unit from ACCI to IMS, we have reclassified prior period revenues accordingly.

(2)	Includes revenues from the sales of Subsystems, assembly services and other products not allocated to product segments.

For each product segment, the following table discloses the revenues of their relevant product lines for the periods under review:

	Three Months Ended (unaudited)				Six Months Ended (unaudited)
	June 26, 2010		June 27, 2009		June 26, 2010		June 27, 2009
			(In millions)
Net revenues by product line:
Automotive Products Group (“APG”)(1)	$	342	$	221	$	651	$	404
Computer and Communication Infrastructure (“CCI”)		275		200		539		368
Home Entertainment & Displays (“HED”)		268		183		492		363
Imaging (“IMG”)		144		100		250		189
Others		16		8		23		8
Automotive Consumer Computer and Communication Infrastructure (“ACCI”)		1,045		712		1,955		1,332
Analog, Power and Micro-Electro-Mechanical Systems (“APM”)		658		428		1,224		779
Microcontrollers, non-Flash, non-volatile Memory and Smartcard products (“MMS”)(1)		286		176		530		330
Others		1		1		1		1
Industrial and Multisegment Sector (“IMS”)		945		605		1,755		1,110
2G, EDGE TD-SCDMA & Connectivity		210		260		453		457
3G Multimedia & Platforms		306		377		645		698
LTE & 3G Modem Solutions		9		5		13		5
Others		-		8		1		9
Wireless		525		650		1,112		1,169
Others		16		26		34		42
Total consolidated net revenues	$	2,531	$	1,993	$	4,856	$	3,653

(1)	Following the transfer of a small business unit from ACCI to IMS, we have reclassified prior period revenues accordingly.

	Three Months Ended (unaudited)						Six Months Ended (unaudited)
	June 26, 2010			June 27, 2009			June 26, 2010			June 27, 2009
				(In millions)
Operating income (loss) by product segment:
Automotive Consumer Computer and Communication Infrastructure (“ACCI”)	$	99		$	(71	)	$	147		$	(99	)
Industrial and Multisegment Sector (“IMS”)		137			(22	)		228			(17	)
Wireless (1)		(137	)		(126	)		(253	)		(233	)
Others(2)		(8	)		(209	)		(51	)		(472	)
Operating income (loss)	$	91		$	(428	)	$	71		$	(821	)

(1)

The majority of Wireless’ activities are run through ST-Ericsson JVS, a joint venture between us and Ericsson. In addition, the Wireless segment includes other items affecting operating results related to the wireless business. The minority interest of Ericsson in ST-Ericsson JVS’ operating results (which are 100% included in the Wireless segment) is credited in the line “Noncontrolling interest” of our Consolidated Statement of Income, which reported income of $74 million for the three months ended June 26, 2010.

(2)

Operating loss of “Others” includes items such as unused capacity charges, impairment, restructuring charges and other related closure costs, start-up and phase-out costs, and other unallocated expenses such as: strategic or special R&D programs, acquired IP R&D and other non-recurrent purchase accounting items, certain corporate level operating expenses, certain patent claims and litigation, and other costs that are not allocated to the product segments, as well as operating earnings or losses of the Subsystems and Other Products Group.

	Three Months Ended (unaudited)						Six Months Ended (unaudited)
	June 26, 2010			June 27, 2009			June 26, 2010			June 27, 2009
				(As percentage of net revenues)
Operating income (loss) by product segment:
Automotive Consumer Computer and Communication Infrastructure (“ACCI”) (1)		9.5	%		(9.9	)%		7.5	%		(7.4	)%
Industrial and Multisegment Sector (“IMS”)(1)		14.4			(3.7	)		13.0			(1.6	)
Wireless (1)		(26.1	)		(19.3	)		(22.8	)		(19.9	)
Others(2)		—			—			—			—
Total consolidated operating income (loss)(3)		3.6	%		(21.5	)%		1.5	%		(22.5	)%

(1)	As a percentage of net revenues per product group.

(2)	Includes operating income (loss) from sales of subsystems and other income (costs) not allocated to product segments.

(3)	As a percentage of total net revenues.

	Three Months Ended (unaudited)						Six Months Ended (unaudited)
	June 26, 2010			June 27, 2009			June 26, 2010			June 27, 2009
				(In millions)
Reconciliation to consolidated operating income (loss):
Total operating income (loss) of product segments	$	99		$	(219	)	$	122		$	(349	)
Unused capacity charges		-			(123	)		(1	)		(262	)
Impairment, restructuring charges and other related closure costs		(12	)		(86	)		(45	)		(142	)
Start-up / phase-out costs		(3	)		(13	)		(5	)		(34	)
Strategic and other research and development programs		(4	)		(2	)		(7	)		(7	)
Equipment write-off		-			5			-			(11	)
Sales of materials		6			3			11			5
Consulting fees related to business combinations		-			(1	)		(2	)		(8	)
Manufacturing services		1			6			2			6
Other non-allocated provisions(1)		4			2			(4	)		(19	)
Total operating loss Others		(8	)		(209	)		(51	)		(472	)
Total consolidated operating income (loss)	$	91		$	(428	)	$	71		$	(821	)

(1)	Includes unallocated income and expenses such as certain corporate level operating expenses and other costs that are not allocated to the product segments.

Net revenues by location of order shipment and by market segment

The table below sets forth information on our net revenues by location of order shipment:

	Three Months Ended (unaudited)				Six Months Ended (unaudited)
	June 26, 2010		June 27, 2009		June 26, 2010		June 27, 2009
			(In millions)
Net Revenues by Location of Order Shipment:(1)
EMEA	$	657	$	575	$	1,277	$	1,114
Americas		339		233		633		431
Greater China − South Asia		1,100		791		2,061		1,392
Japan and Korea		435		394		885		716
Total	$	2,531	$	1,993	$	4,856	$	3,653

(1)

Net revenues by location of order shipment are classified by location of customer invoiced. For example, products ordered by U.S.-based companies to be invoiced to Greater China - South Asia affiliates are classified as Greater China − South Asia revenues. Furthermore, the comparison among the different periods may be affected by shifts in order shipment from one location to another, as requested by our customers.

The table below shows our net revenues by location of order shipment and market segment application in percentage of net revenues:

	Three Months Ended (unaudited)						Six Months Ended (unaudited)
	June 26, 2010			June 27, 2009			June 26, 2010			June 27, 2009
				(As percentage of net revenues)
Net Revenues by Location of Order Shipment:(1)
EMEA		25.9	%		28.8	%		26.3	%		30.5	%
Americas		13.4			11.7			13.0			11.8
Greater China - South Asia		43.5			39.7			42.5			38.1
Japan and Korea		17.2			19.8			18.2			19.6
Total		100	%		100	%		100	%		100	%
Net Revenues by Market Segment Application(2):
Automotive		13.8	%		11.9	%		13.7	%		11.9	%
Consumer		12.7			11.5			12.4			12.4
Computer		12.2			12.6			12.3			11.9
Telecom		31.5			41.4			33.0			42.1
Industrial and Other		8.4			7.5			8.4			7.8
Distribution		21.4			15.1			20.2			13.9
Total		100	%		100	%		100	%		100	%

(1)

Net revenues by location of order shipment are classified by location of customer invoiced. For example, products ordered by U.S.-based companies to be invoiced to Greater China - South Asia affiliates are classified as Greater China - South Asia revenues. Furthermore, the comparison among the different periods may be

affected by shifts in order shipment from one location to another, as requested by our customers.

(2)	The above table estimates, within a variance of 5% to 10% in the absolute dollar amount, the relative weighting of each of our target segments.

Second Quarter of 2010 vs. Second Quarter of 2009 and First Quarter of 2010

The following table sets forth consolidated statements of operations data for the periods indicated:

	Three Months Ended (unaudited)						Three Months Ended (unaudited)
	June 26, 2010			June 26, 2010			June 27, 2009			June 27, 2009
	$ million			% of net revenues			$ million			% of net revenues

Net sales	$	2,507			99.0	%	$	1,970			98.9	%
Other revenues		24			1.0			23			1.1
Net revenues		2,531			100.0			1,993			100.0
Cost of sales		(1,563	)		(61.7	)		(1,473	)		(73.9	)
Gross profit		968			38.3			520			26.1
Selling, general and administrative		(302	)		(12.0	)		(286	)		(14.3	)
Research and development		(593	)		(23.4	)		(610	)		(30.6	)
Other income and expenses, net		30			1.2			34			1.7
Impairment, restructuring charges and other related closure costs		(12	)		(0.5	)		(86	)		(4.4	)
Operating income (loss)		91			3.6			(428	)		(21.5	)
Other-than-temporary impairment charge on financial assets		-			-			(13	)		(0.7	)
Interest income, net		1			0.0			1			0.1
Loss on equity investments and gain on investment divestiture		264			10.4			(49	)		(2.4	)
Loss on financial instruments, net		(8	)		(0.3	)		-			-
Income (loss) before income taxes and noncontrolling interest		348			13.7			(489	)		(24.5	)
Income tax benefit (expense)		(66	)		(2.6	)		62			3.1
Income (loss) before noncontrolling interest		282			11.1			(427	)		(21.4	)
Net loss attributable to noncontrolling interest		74			2.9			109			5.4
Net income (loss) attributable to parent company	$	356			14.0	%	$	(318	)		(16.0	)%

Net revenues

	Three Months Ended						% Variation
	June 26, 2010		March 27, 2010		June 27, 2009		Sequential			Year-Over-Year
			(Unaudited, in millions)
Net sales	$	2,507	$	2,311	$	1,970		8.5	%		27.2	%
Other revenues		24		14		23		—			—
Net revenues	$	2,531	$	2,325	$	1,993		8.9	%		27.0	%

Year-over-year comparison

Our revenues continued to register a strong year-over-year performance during the second quarter of 2010, posting double-digit growth in all regions and in all market segments, with the exception of Telecom. Our revenues increased 27.0%, with such performance driven entirely by an approximate 38% increase in volume compensated by an approximately 11% decline in average selling prices. Such selling price decrease was due to a negative pricing impact of approximately 5% and a less favorable product mix impact of 6% as a result of IMS’ strong volume increase and Wireless’ volume decrease.

By product segment, both IMS and ACCI registered a strong performance with an increase of approximately 56% and 47%, respectively, while Wireless sales registered a decline of approximately 19%. Within ACCI, strong results were observed in all of its served markets and the three main product groups, APG, CCI and HED, contributed with a significant rebound in volume. IMS experienced strong growth across all of its product lines, reflecting the overall

recovery in the industrial and multisegment markets and also benefitting from a more favorable product mix. The decline in demand and selling prices was the main reason for Wireless’ sales decrease. In the second quarter of 2010, we recognized $24 million in other revenues, mainly consisting of the proceeds from the licensing of CMOS technology which accounted for $17 million.

By location of order shipment, America and Greater China-South Asia were the top performers, with approximately 45% and 39%, respectively, largely exceeding the results registered by EMEA at approximately 14% and Japan and Korea at about 11%. Our largest customer, the Nokia group of companies, accounted for approximately 14% of our second quarter 2010 net revenues compared to 17% in the year-ago period.

Sequential comparison

The sequential comparison is less representative since there were more days in the second quarter of 2010 than in the prior quarter. There were approximately 6% more days in the second quarter.

Our revenues increased 8.9% sequentially, in line with the mid-point of our expectations, driven by an approximate 12% increase in volume that was partially offset by an approximate 3% decline in average selling prices.

ACCI and IMS registered an increase of about 15% and 17%, respectively, while the Wireless segment decreased approximately 11%. The sales performance was broadly accounted for in all ACCI and IMS product groups and in distribution.

On a regional basis, Americas and Greater China-South Asia recorded the biggest increases, approximately 15%. EMEA registered a more moderate increase of approximately 6%. Japan and Korea had the weakest performance, with an approximate 3% decline.

Gross profit

	Three Months Ended									% Variation
	June 26, 2010			March 27, 2010			June 27, 2009			Sequential			Year-Over-Year
	(Unaudited, in millions)
Cost of sales	$	(1,563	)	$	(1,449	)	$	(1,473	)		(7.9	)%		(6.1	)%
Gross profit		968			876			520			10.6			86.3
Gross margin (as a percentage of net revenues)		38.3	%		37.7	%		26.1	%		-			-

Second quarter 2010 gross margin reached a level of 38.3%, increasing on a year-over-year basis by over 12 percentage points. The increase in gross profit and gross margin reflected both higher revenues and improved manufacturing efficiencies and improved product mix in ACCI and IMS, as well as the absence of unused capacity charges following the return to normal fab loading. The second quarter 2009 was penalized approximately 6 percentage points by unused capacity charges. There was no material impact on second quarter 2010 gross profit from fluctuations in the U.S. dollar exchange rate.

On a sequential basis, gross margin increased 60 basis points mainly due to the manufacturing efficiencies and product innovation. Second quarter 2010 revenues from technology licensing were slightly higher than in the prior quarter and remained basically unchanged compared to the prior year period.

Selling, general and administrative expenses

			Three Months Ended							% Variation
	June 26, 2010			March 27, 2010			June 27, 2009			Sequential			Year-Over-Year
				(Unaudited, in millions)
Selling, general and administrative expenses	$	(302	)	$	(281	)	$	(286	)		(7.8	)%		(5.9	)%
As percentage of net revenue		(12.0	)%		(12.1	)%		(14.3	)%		-			-

Our selling, general and administrative expenses registered an increase on a year-over-year basis due to a broadening of our activities following the improved conditions in the market. On a sequential basis, SG&A expenses increased as well, reflecting a longer second quarter 2010 period. Our share-based compensation charges were $5 million in the second quarter of 2010, remaining at the same level as in the second quarter of 2009.

As a percentage of revenues, the ratio to sales of our selling, general and administrative expenses improved to 12.0% compared to 14.3% in the prior year period due to the higher volume of our revenues.

Research and development expenses

	Three Months Ended									% Variation
	June 26, 2010			March 27, 2010			June 27, 2009			Sequential			Year-Over-Year
				(Unaudited, in millions)
Research and development expenses	$	(593	)	$	(595	)	$	(610	)		0.4	%		2.8	%
As percentage of net revenues		(23.4	)%		(25.6	)%		(30.6	)%		-			-

The year-over-year decrease in R&D expenses was primarily due to our ongoing cost saving measures and the restructuring initiatives, mainly in the ST-Ericsson perimeter.

The second quarter of 2010 included $2 million of share-based compensation charges compared to $3 million in the second quarter of 2009. In addition, the second quarter of 2010 included $14 million related to amortization charges generated by recent acquisitions, equivalent to the prior year period. Total R&D expenses were net of research tax credits, which amounted to $36 million, basically equivalent to prior periods.

As a percentage of revenues, second quarter 2010 R&D expenses equaled 23.4%, a significant improvement compared to the year-ago period due to increasing revenues.

Other income and expenses, net

			Three Months Ended
	June 26, 2010			March 27, 2010			June 27, 2009
			(Unaudited, in millions)
Research and development funding	$	31		$	18		$	60
Start-up/phase-out costs		(3	)		(2	)		(13	)
Exchange gain (loss) net		4			(1	)		(6	)
Patent costs, net of gain from settlement		(3	)		(1	)		(7	)
Gain on sale of other non-current assets		2			−			−
Other, net		(1	)		(1	)		−
Other income and expenses, net	$	30		$	13		$	34
As a percentage of net revenues		1.2	%		0.6	%		1.7	%

Other income and expenses, net, mainly included, as income, R&D funding, exchange gain and gain on sale of other non-current assets and, as expenses, start-up and phase-out costs, and patent claim costs net of settlement agreements. Income from R&D funding was associated with our R&D projects, which, upon approval, qualify as funding on the basis of contracts with local government agencies in locations where we pursue our activities. In the second quarter of 2010 the balance of these factors resulted in other income, net of $30 million, thanks to the catch-up of certain 2010 R&D funding signed by us in France during the quarter.

Impairment, restructuring charges and other related closure costs

			Three Months Ended
	June 26, 2010			March 27, 2010			June 27, 2009
			(Unaudited, in millions)
Impairment, restructuring charges and other related closure costs	$	(12	)	$	(33	)	$	(86	)

In the second quarter of 2010, we recorded $12 million of impairment and restructuring charges and other related closure costs, which were basically related to two plans: the manufacturing plan, which will be finalized during the first half of 2011, and plans launched in 2009 that are primarily related to ST-Ericsson. The allocation was as follows:

•

$6 million related to our manufacturing restructuring plan which contemplated the closure of our Ain Sebaa (Morocco), Carrollton (Texas) and Phoenix (Arizona) sites, and was composed of one-time termination benefits, as well as other relevant charges, mainly related to Carrollton and Phoenix fabs;

•

$6 million related to the plans announced in April and December 2009 by ST-Ericsson, to be completed by mid-2010 and the end of 2010, respectively, primarily consisting of on-going termination benefits pursuant to the workforce reduction plan and the closure of certain locations in Europe.

In the first quarter of 2010, we recorded $33 million of impairment and restructuring charges and other related closure costs, including: $4 million recorded in relation to our manufacturing restructuring plan which contemplated the closure of our Ain Sebaa (Morocco), Carrollton (Texas) and Phoenix (Arizona) sites, and was composed of one-time termination benefits, as well as other relevant charges, mainly related to the Carrollton fabs; $25 million related to the plans announced in April and December 2009 by ST-Ericsson, to be completed by mid-2010 and the end of 2010, respectively, primarily consisting of on-going termination benefits pursuant to the workforce reduction plan and the closure of certain locations in Europe; and $4 million related to previously committed restructuring initiatives.

In the second quarter of 2009, we recorded impairment, restructuring charges and other related closure costs of $86 million, including: $48 million of charges related to the closure of our Ain Sebaa (Morocco), Carrollton (Texas) and Phoenix (Arizona) sites, composed of $18 million impairment charges on the Carrollton and Phoenix assets and $30 million of one-time termination benefits, as well as other relevant charges; $22 million related to a new plan announced in April 2009 by ST-Ericsson, to be completed by the second quarter of 2010, primarily consisting of on-going termination benefits pursuant to the closure of certain locations in Europe and the Unites States; and $16 million related to other ongoing and newly committed restructuring plans, consisting primarily of voluntary termination benefits and early retirement arrangements in some of our European locations, as well as workforce reduction in Asia Pacific.

Operating income (loss)

			Three Months Ended
	June 26, 2010			March 27, 2010			June 27, 2009
			(Unaudited, in millions)
Operating income (loss)	$	91		$	(20	)	$	(428	)
In percentage of net revenues		3.6	%		(0.9	)%		(21.5	)%

Second quarter 2010 operating income was $91 million, which marked a return to profitability after several quarters in a loss position. This operating income was driven by better performance in our revenues, coupled with an improvement in gross margin and cost control in our operating expenses.

Our operating result significantly improved compared to the year-ago period due to the rebound in our revenues and the benefits of our cost restructuring initiatives. In the year-ago quarter, the high level of operating losses was mainly due to the sharp drop in revenues and unused capacity charges associated with the low level of fab loading. Sequentially, the operating result improved from a loss to operating income mainly due to the increase in revenues, lower restructuring charges and a higher level of R&D funding, which were partially balanced by higher operating expenses.

Both ACCI and IMS reported a significant improvement in their operating profit compared to the year ago period, supported by their respective higher revenue performance, while Wireless incurred a higher level of losses due to declining sales. ACCI increased its operating result from a loss of $71 million to an operating profit of $99 million, equivalent to 9.5% of revenues. IMS improved from a loss of $22 million to a profit of $137 million, equivalent to 14.4% of revenues. Wireless’ operating loss increased from $126 million to $137 million and was originated by ST-Ericsson,

which is seeking to improve its cost structure through ongoing restructuring initiatives while enhancing its product portfolio. The segment “Others” significantly reduced its losses to $8 million, from $44 million in the previous quarter and $209 million in the year ago period, mainly due to significantly lower amounts of restructuring and unused capacity charges.

Other-than-temporary impairment charge on financial assets

Three Months Ended

June 26, 2010

March 27, 2010

June 27, 2009

(Unaudited, in millions)

Other-than-temporary impairment charge on financial assets

−

(13

)

There were no charges registered in the second or first quarters of 2010. The amounts registered in the second quarter of 2009 were related to other-than-temporary impairment on the portfolio of ARS purchased on our account by Credit Suisse contrary to our instruction. See “Liquidity and Capital Resources.”

Interest income, net

				Three Months Ended
	June 26, 2010				March 27, 2010		June 27, 2009
			(Unaudited, in millions)
Interest income, net	$	1			$	3	$	1

We recorded net interest income of $1 million, with no material variation compared to both prior periods. This amount consisted of $9 million in interest income, decreasing compared to the prior year period due to lower U.S. dollar denominated interest rates on liquidity investments and the extinguishment of $102 million of long-term subordinated notes received upon the creation of Numonyx, in spite of favorable cash flow, and $8 million of interest expenses, which also decreased due to the lower cost of debt following our repurchase of about 36% of our 2016 convertible bonds (“2016 Convertible Bonds”).

Loss on equity investments and gain on investment divestiture

				Three Months Ended
	June 26, 2010				March 27, 2010			June 27, 2009
			(Unaudited, in millions)
Loss on equity investments and gain on investment divestiture	$	264			$	(5	)	$	(49	)

In the second quarter of 2010, we recorded income of $264 million, of which: $265 million was gain realized on the divestiture of our proportional share in Numonyx; $5 million was income that represented our net proportional share of Numonyx’s first quarter 2010 result; and $7 million was a loss related to our proportionate share in the ST-Ericsson JVD (both results included amortization of basis difference).

Loss on financial instruments, net

				Three Months Ended
	June 26, 2010				March 27, 2010			June 27, 2009
			(Unaudited, in millions)
Loss on financial instruments, net	$	(8	)		$	(3	)	$	-

The $8 million loss on financial assets in the second quarter of 2010 was the balance between (i) a loss of $9 million related to the net premia paid on financial contracts designated to hedge part of the disposal of our share in Numonyx and (ii) a gain of $1 million related to the additional repurchase of part of our 2016 Convertible Bonds with an accreted value of $56 million for a cash consideration of $55 million. The loss of $3 million registered in the previous quarter was related to the loss of $6 million on the net premia paid on financial contracts designated to hedge part of the disposal of our share in Numonyx, partially offset by the gain of $3 million on the repurchase of our 2016 bonds with an accreted value of $215 million for total cash consideration of $212 million. See “Liquidity and Capital Resources”.

Income tax benefit (expense)

				Three Months Ended
	June 26, 2010				March 27, 2010		June 27, 2009
			(Unaudited, in millions)
Income tax benefit (expense)	$	(66	)		$	10	$	62

During the second quarter of 2010, we registered an income tax expense of $66 million, reflecting the yearly effective tax rate estimated in each of our jurisdictions and applied to the second quarter consolidated result before taxes.

Our tax rate is variable and depends on changes in the level of operating results within various local jurisdictions and on changes in the applicable taxation rates of these jurisdictions, as well as changes in estimated tax provisions due to new events. Our income tax amounts and rates depend also on our loss carryforwards and their relevant valuation allowances, which are based on estimated projected plans; in the case of material changes in these plans, the valuation allowances could be adjusted accordingly with an impact on our tax charges. We currently enjoy certain tax benefits in some countries. Such benefits may not be available in the future due to changes in the local jurisdictions; our effective tax rate could be different in future quarters and may increase in the coming years. In addition, our yearly income tax charges include the estimated impact of provisions related to potential tax positions that are uncertain.

Net loss attributable to noncontrolling interest

				Three Months Ended
	June 26, 2010				March 27, 2010		June 27, 2009
			(Unaudited, in millions)
Net loss attributable to noncontrolling interest	$	74			$	72	$	109

In the second quarter of 2010, we booked $74 million income representing the loss attributable to noncontrolling interest, which mainly included the share owned by Ericsson in the consolidated ST-Ericsson JVS. In the first quarter of 2010 and second quarter of 2009, the corresponding amounts were $72 million and $109 million, respectively, reflecting Ericsson’s share in the joint venture’s result.

All periods included the recognition of noncontrolling interest related to our joint venture in Shenzhen, China for assembly operating activities. Those amounts were not material.

Net income (loss) attributable to parent company

				Three Months Ended
	June 26, 2010				March 27, 2010			June 27, 2009
			(Unaudited, in millions)
Net income (loss) attributable to parent company	$	356			$	57		$	(318	)
As percentage of net revenues		14.0	%			2.5	%		(16.0	)%

For the second quarter of 2010, we reported net income of $356 million, a significant improvement compared to previous periods due to the aforementioned factors. The net income result was also due to the increased profitability of our ACCI and IMS product segments and the attribution of half of the Wireless segment’s losses to noncontrolling interest.

Earnings per share for the second quarter of 2010 was $0.39 per diluted share compared to a loss per share of $(0.36) in the year-ago quarter and earnings per share of $0.06 in the previous quarter.

The quarters under review were impacted by restructuring, impairment and other one-time items. In addition, the second quarter of 2010 was positively impacted by the Numonyx investment divestiture, a one-time transaction. The impact, after taxes, of the aforementioned items was estimated to be approximately $0.21 per share in the second quarter of 2010, $(0.01) per share in the first quarter of 2010 and $(0.08) per share in the second quarter of 2009.

First Half of 2010 vs. First Half of 2009

The following table sets forth consolidated statements of operations data for the periods indicated:

	Six Months Ended (unaudited)						Six Months Ended (unaudited)
	June 26, 2010			June 26, 2010			June 27, 2009			June 27, 2009
	$ million			% of net revenues			$ million			% of net revenues

Net sales	$	4,818			99.2	%	$	3,627			99.3	%
Other revenues		38			0.80			26			0.7
Net revenues		4,856			100.0			3,653			100.0
Cost of sales		(3,011	)		(62.0	)		(2,696	)		(73.8	)
Gross profit		1,845			38.0			957			26.2
Selling, general and administrative		(583	)		(12.0	)		(566	)		(15.5	)
Research and development		(1,189	)		(24.5	)		(1,168	)		(32.0	)
Other income and expenses, net		43			0.9			98			2.7
Impairment, restructuring charges and other related closure costs		(45	)		(0.9	)		(142	)		(3.9	)
Operating income (loss)		71			1.5			(821	)		(22.5	)
Other-than-temporary impairment charge on financial assets		-			-			(72	)		(2.0	)
Interest income, net		4			0.1			2			0.1
Loss on equity investments and gain on investment divestiture		259			5.2			(281	)		(7.7	)
Loss on financial instruments, net		(11	)		(0.2	)		(8	)		(0.2	)
Income (loss) before income taxes and noncontrolling interest		323			6.6			(1,180	)		(32.3	)
Income tax benefit (expense)		(55	)		(1.1	)		157			4.3
Income (loss) before noncontrolling interest		268			5.5			(1,023	)		(28.0	)
Net loss attributable to noncontrolling interest		145			3.0			163			4.5
Net income (loss) attributable to parent company	$	413			8.5	%	$	(860	)		(23.5	)%

Net revenues

	Six Months Ended				% Variation
	June 26, 2010		June 27, 2009
	(Unaudited, in millions)
Net sales	$	4,818	$	3,627		32.8	%
Other revenues		38		26		47.5
Net revenues	$	4,856	$	3,653		32.9	%

Our first half of 2010 net revenues increased in all market segments except Wireless and in all regions compared to the year-ago period, reflecting the broad based recovery in the semiconductor market and product innovation. Such sales performance was entirely driven by the increase in volume, accounting for approximately 46%, partially offset by an approximate 13% decline in average selling prices, due equally to a negative pricing impact and a less favorable product mix.

By product segment, a major increase in net revenues was registered by IMS (approximately 58%) and ACCI (approximately 47%), while Wireless sales declined by approximately 5%.

By location of order shipment, all regions were positively impacted by strong local demand from customers, ranging from the greatest revenue increases of approximately 48% and 47% in Greater China-South Asia and Americas, respectively, followed by Japan and Korea at approximately 24% and EMEA at about 15%. Our largest customer, the Nokia group of companies, accounted for approximately 14% of our first half 2010 net revenues compared to 18% in the year-ago period.

Gross profit

	Six Months Ended						% Variation
	June 26, 2010			June 27, 2009
	(Unaudited, in millions)
Cost of sales	$	(3,011	)	$	(2,696	)		(11.7	)%
Gross profit		1,845			957			92.8
Gross margin (as a percentage of net revenues)		38.0	%		26.2	%		-

Gross margin in the first half of 2010 reached a level of 38.0%, increasing by nearly 12 percentage points compared to the year ago period. The increase in gross profit and gross margin reflected both higher revenues and improved manufacturing efficiencies in the first half of 2010, while the first half of 2009 was significantly penalized by unused capacity charges (approximately 7 percentage points).

Unused capacity charges in the first half of 2010 were $1 million, significantly lower than the $262 million registered in the first half of 2009.

Selling, general and administrative expenses

	Six Months Ended						% Variation
	June 26, 2010			June 27, 2009
	(Unaudited, in millions)
Selling, general and administrative expenses	$	(583	)	$	(566	)		(3.1	)%
As percentage of net revenue		(12.0	)%		(15.5	)%		-

Our selling, general and administrative expenses increased on a year-over-year basis due to increased activity and unfavorable dollar exchange rate impact. The first half of 2010 amount also benefited from a new law enacted in France related to the business tax, which allows the reclassification of the relevant amount ($11 million in the first half of 2010) as income tax, while in previous periods it was accounted as an SG&A expense. Our share-based compensation charges were $9 million in the first half of 2010, compared to $10 million in the first half of 2009.

The ratio to sales of our selling, general and administrative expenses was mainly driven by the volume of our revenues. As a percentage of revenues, the ratio improved to 12.0% compared to 15.5% in the prior year’s first half.

Research and development expenses

	Six Months Ended						% Variation
	June 26, 2010			June 27, 2009
	(Unaudited, in millions)
Research and development expenses	$	(1,189	)	$	(1,168	)		(1.8	)%
As percentage of net revenues		(24.5	)%		(32.0	)%		-

The year-over-year increase in R&D expenses was primarily due to a larger range of activities and the negative impact of the U.S. dollar exchange rate.

The first half of 2010 included $5 million of share-based compensation charges compared to $7 million in the first half of 2009. In addition, the first half of 2010 included $27 million related to amortization charges generated by recent acquisitions, equivalent to the first half of 2009. Total R&D expenses were net of research tax credits, which amounted to $72 million, compared to $77 million in the prior period.

As a percentage of revenues, first half of 2010 R&D equaled 24.5%, an improvement compared to the year-ago period due to increasing revenues.

Other income and expenses, net

	Six Months Ended
	June 26, 2010			June 27, 2009
	(Unaudited, in millions)
Research and development funding	$	49		$	131
Start-up/phase-out costs		(5	)		(34	)
Exchange gain (loss) net		3			13
Patent costs, net of gain from settlement		(4	)		(12	)
Gain on sale of other non-current assets		2			−
Other, net		(2	)		−
Other income and expenses, net		43			98
As a percentage of net revenues		0.9	%		2.7	%

Other income and expenses, net, mainly included, as income, R&D funding, exchange gain and gain on sale of other non-current assets and, as expenses, start-up and phase-out costs and patent claim costs net of settlement agreements. Income from R&D funding was associated with our R&D projects, which, upon approval, qualify as funding on the basis of contracts with local government agencies in locations where we pursue our activities. In the first half of 2010, thanks to the catch-up of certain 2010 R&D funding signed by us in France, the balance of these factors resulted in other income, net of $43 million; however, that amount was a large decrease compared to the previous period, which included the recognition of certain 2008 projects contractually signed in early 2009. Furthermore, the first half of 2010 registered a significantly lower charge relating to start-up and phase-out.

Impairment, restructuring charges and other related closure costs

	Six Months Ended
	June 26, 2010			June 27, 2009
	(Unaudited, in millions)
Impairment, restructuring charges and other related closure costs	$	(45	)	$	(142	)

In the first half of 2010, we recorded $45 million of impairment and restructuring charges and other related closure costs, which were mainly related to two plans: the manufacturing plan, which will be finalized during the first half of 2011, and plans launched in 2009 that are primarily related to ST-Ericsson:

•

$11 million recorded in relation to our manufacturing restructuring plan which contemplated the closure of our Ain Sebaa (Morocco), Carrollton (Texas) and Phoenix (Arizona) sites, and was composed of one-time termination benefits, as well as other relevant charges, mainly related to Carrollton and Phoenix fabs;

•

$31 million related to the plans announced in April and December 2009 by ST-Ericsson, to be completed by mid-2010 and the end of 2010, respectively, primarily consisting of on-going termination benefits pursuant to the workforce reduction plan and the closure of certain locations in Europe; and

•

$3 million related to other restructuring initiatives.

In the first half of 2009, we recorded impairment, restructuring charges and other related closure costs of $142 million of which: $91 million related to the closure of our Ain Sebaa (Morocco), Carrollton (Texas) and Phoenix (Arizona) sites, of which $66 million of one-time termination benefits as well as other relevant charges and $25 million impairment charges on the fair value of Carrollton and Phoenix assets; $22 million related to the new plan announced in April 2009 by ST-Ericsson, to be completed by the second quarter of 2010 primarily consisting of on-going termination benefits pursuant to the closure or downsizing of certain locations in Europe and the United States; $23 million related to other ongoing and newly committed restructuring plans, consisting primarily of voluntary termination benefits and early retirement arrangements in some of our European locations, as well as workforce reduction in Asia Pacific; and $6 million as impairment on certain goodwill.

Operating income (loss)

	Six Months Ended
	June 26, 2010			June 27, 2009
	(Unaudited, in millions)
Operating income (loss)	$	71		$	(821	)
In percentage of net revenues		1.5	%		(22.5	)%

Operating income in the first half of 2010 was $71 million, which included $45 million of restructuring charges. Our operating result improved significantly compared to the year ago period due to the rebound in our revenues and improved manufacturing efficiencies associated with negligible unused capacity charges. The year-ago period was characterized by the very difficult market conditions, with a sharp drop in revenues and the significant unused capacity charges associated with the low level of fab loading.

Both ACCI and IMS reported a significant improvement in their operating profit compared to the year ago period, mainly driven by the growth in revenues, improved manufacturing efficiencies and product mix, while Wireless incurred a higher level of losses due to weak demand from its customers and declining selling prices. ACCI moved from a $99 million loss in the first half of 2009 to a $147 million operating profit in the first half of 2010. Similarly, IMS improved from a loss of $17 million in the prior year’s first half to a profit of $228 million in this year’s first half. Wireless’ losses increased from $233 million to $253 million and were originated by ST-Ericsson, which is seeking to improve its cost structure through ongoing restructuring initiatives, while enhancing its product portfolio. The segment “Others” significantly reduced its losses to $51 million from $472 million in the year ago period, mainly due to significantly lower amounts of restructuring charges and unused capacity charges.

Other-than-temporary impairment charge on financial assets

	Six Months Ended
	June 26, 2010		June 27, 2009
	(Unaudited, in millions)
Other-than-temporary impairment charge on financial assets	$	-	$	(72	)

There were no charges registered in the first half of 2010. The amounts registered in the first half of 2009 were related to other-than-temporary impairment on the portfolio of ARS purchased on our account by Credit Suisse contrary to our instruction. See “Liquidity and Capital Resources.”

Interest income, net

	Six Months Ended
	June 26, 2010		June 27, 2009
	(Unaudited, in millions)
Interest income, net	$	4	$	2

We recorded net interest income of $4 million, with no material variation compared to the first half of 2009. This amount consisted of $19 million in interest income, decreasing compared to the prior year due to lower U.S. dollar denominated interest rates on liquidity investments and the extinguishment of $102 million of long-term subordinated notes received upon the creation of Numonyx, in spite of favorable cash flow, and $15 million of interest expense, which also decreased due to the lower cost of debt following our repurchase of about 36% of our 2016 Convertible Bonds.

Loss on equity investments and gain on investment divestiture

	Six Months Ended
	June 26, 2010		June 27, 2009
	(Unaudited, in millions)
Loss on equity investments and gain on investment divestiture	$	259	$	(281	)

In the first half of 2010, we recorded income of $259 million, of which: $265 million was a gain realized on the divestiture of our proportionate share in Numonyx; $7 million was income that represented our net proportional share of Numonyx’s first quarter 2010 and fourth quarter 2009 result, recognized on a one-quarter lag; and $13 million was a loss related to our proportionate share in the ST-Ericsson JVD (both results included amortization of basis difference). The prior year’s first half included a $200 million impairment related to our investment in Numonyx.

Loss on financial instruments, net

	Six Months Ended
	June 26, 2010			June 27, 2009
	(Unaudited, in millions)
Loss on financial instruments, net	$	(11	)	$	(8	)

The $11 million loss on financial instruments in the first half of 2010 was the balance between a loss of $15 million related to the net premia paid on financial contracts designated to hedge part of the disposal of our share in Numonyx and a gain of $4 million related to the repurchase of bonds with an accreted value of $271 million for a cash consideration of $267 million. In 2009, the loss was related to a sale of a cancellable swap.

Income tax benefit (expense)

	Six Months Ended
	June 26, 2010			June 27, 2009
	(Unaudited, in millions)
Income tax benefit (expense)	$	(55	)	$	157

During the first half of 2010, we registered an income tax expense of $55 million, reflecting the yearly effective tax rate estimated in each of our jurisdictions and applied to the first half consolidated result.

Net loss attributable to noncontrolling interest

	Six Months Ended
	June 26, 2010		June 27, 2009
	(Unaudited, in millions)
Net loss attributable to noncontrolling interest	$	145	$	163

In the first half of 2010, we booked $145 million income representing the loss attributable to noncontrolling interest, which mainly included the share owned by Ericsson in the consolidated ST-Ericsson JVS. In the first half of 2009, the corresponding amount was $163 million, reflecting Ericsson’s share in the joint venture’s results.

All periods included the recognition of noncontrolling interest related to our joint venture in Shenzhen, China for assembly operating activities. Those amounts were not material.

Net income (loss) attributable to parent company

	Six Months Ended
	June 26, 2010			June 27, 2009
	(Unaudited, in millions)
Net income (loss) attributable to parent company	$	413		$	(860	)
As percentage of net revenues		8.5	%		(23.5	)%

For the first half of 2010, we reported net income of $413 million, a significant improvement compared to the previous period’s loss of $860 million due to the several aforementioned factors. Earnings per share for the first half of 2010 was $0.46 per diluted share compared to a loss per share of $(0.98) in the year-ago period.

Both first halves under review were impacted by restructuring and impairment charges, and the first half of 2010 was also impacted by other-than-temporary impairment charges. Moreover, the first half of 2010 was positively impacted by the Numonyx investment divestiture, a one-time transaction. The impact of the above after taxes was estimated to be approximately $0.21 per share in the first half of 2010 compared to $(0.40) per share in the first half of 2009.

Legal Proceedings

As is the case with many companies in the semiconductor industry, we have from time to time received, and may in the future receive, communications from other semiconductor companies or third parties alleging possible infringement of patents. Furthermore, we may become involved in costly litigation brought against us regarding patents, copyrights, trademarks, trade secrets or mask works. In the event that the outcome of such IP litigation would be unfavorable to us, we may be required to take a license to patents or other IP rights upon economically unfavorable terms and conditions, and possibly pay damages for prior use, and/or face an injunction, all of which singly or in the aggregate could have a material adverse effect on our results of operations and ability to compete. See “Item 3. Key Information — Risk Factors — Risks Related to Our Operations — We depend on patents to protect our rights to our technology and may face claims of infringing the IP rights of others” in our Form 20-F.

We record a provision when, based on our best estimate, we consider it probable that a liability has been incurred and when the amount of the probable loss can be reasonably estimated. We regularly evaluate losses and claims to determine whether they need to be adjusted based on the most current information available to us and using our best judgment. There can be no assurance that our recorded reserves will be sufficient to cover the extent of our potential liabilities. Legal costs associated with claims are expensed as incurred.

We are a party to legal proceedings with Tessera, Inc.

On January 31, 2006, Tessera filed suit against us, adding us as a co-defendant, with several other semiconductor companies to a lawsuit filed by Tessera on October 7, 2005 against Advanced Micro Devices Inc. and Spansion in the United States District Court of the Northern District of California. Tessera is claiming that our BGA packages infringe certain patents owned by Tessera, and that our U.S. affiliate, ST Inc. (“ST Inc.”), has breached the terms of a license agreement with Tessera.

On May 15, 2007, Tessera filed a complaint with the International Trade Commission (“ITC”) against us, ATI Technologies, Freescale, Motorola, Qualcomm and Spansion claiming infringement of two Tessera U.S. patents, 5,892,326 and 6,433,419 (the “326” and “419” patents), and seeking an exclusion order against infringing products. Pending the completion of the proceedings relating to the ITC investigation, the proceedings filed in California in January 2006 have been stayed.

Several claims contained in the 419 and 326 patents asserted in the ITC lawsuit are under final rejection notice by the U.S. Patent and Trademark Office, and the two patents are set to expire in September 2010.

The Initial Determination from the Administrative Law Judge (“ALJ”) at the ITC ruled that the 326 and 419 patents were valid but not infringed. The ITC subsequently reversed the ALJ’s decision, ruling that the patents were valid and infringed and ordering a partial exclusion order applicable to the importation into the U.S. of “infringing

products”. We were not concerned by the ITC exclusion order because our products are imported into the United States by ST Inc., which has a preexisting license agreement with Tessera. The ITC’s ruling is currently under appeal with the Court of Appeals of the Federal Circuit (the “CAFC”). Briefing and oral arguments have been completed and the CAFC’s decision may be rendered at any time. If the CAFC were to confirm the ITC decision on the issues of both validity and infringement, our exposure to retroactive royalty payments under ST Inc.’s license with Tessera would increase.

We are a party to a dispute with Credit Suisse Securities and Credit Suisse Group concerning Auction Rate Securities.

In February 2008, we instituted arbitration proceedings against Credit Suisse Securities (“Credit Suisse”) in connection with the unauthorized purchase by Credit Suisse of collateralized debt obligations and credit-linked notes (the “Unauthorized Securities”) instead of the federally guaranteed student loan securities that we had instructed Credit Suisse to purchase. On February 12, 2009, a FINRA arbitral panel awarded us approximately $406 million in compensatory and consequential damages, plus interest, in exchange for the transfer of all of the Unauthorized Securities back to Credit Suisse. On February 17, 2009, we filed a petition in the United States District Court for the Southern District of New York (the “District Court”) seeking confirmation and enforcement of the FINRA award. Credit Suisse has responded by seeking to vacate the FINRA award. On March 19, 2010, the District Court issued an order denying Credit Suisse’s motion to vacate the FINRA arbitration award, and granting our petition to confirm such award, including the post judgment interest specified therein. On March 31, 2010, the District Court issued a judgment confirming the March 19, 2010 order and closing the case. Credit Suisse has moved to alter or amend the judgment, and further to our response and Credit Suisse’s reply, Credit Suisse’s motion remains pending before the District Court. On April 15, 2010, the District Court issued an order requiring Credit Suisse to post a full supersedeas bond. An exchange of letters with the District Court has ensued, with Credit Suisse requesting to reduce the amount of the bond. We have not objected to the lower amount of the bond being requested, but have requested certain language in the bond to which Credit Suisse is, in turn, objecting. These issues remain pending before the District Court. Upon resolution of these issues by the District Court, Credit Suisse can still appeal the final judgment.

We are a party to arbitration proceedings following a complaint filed by NXP Semiconductors.

On December 4, 2009, we were notified, by the International Chamber of Commerce, of a request for arbitration filed by NXP Semiconductors Netherlands BV (“NXP”) against us, claiming compensation for alleged “underloading costs”. Such costs are, according to NXP, due pursuant to a manufacturing services agreement entered into between NXP and ST-NXP Wireless in August 2008, at the time of the creation of the wireless semiconductor products joint venture with NXP. On February 12, 2010, we filed our answer rejecting their claim. On July 15, 2010 we received NXP’s formal statement of claim for a total amount of approximately $59 million, which we are required to answer by October 31, 2010. We will continue to vigorously contest this claim. The trial is set for the second quarter of 2011.

EU Smartcard Investigation.

On October 21, 2008, the EU Commission carried out a dawn raid at our Montrouge premises near Paris, France, based on an investigation being conducted by the EU Commission on alleged anti-competitive practices pertaining to the manufacture of integrated circuits for smartcards. The Commission believes that the main manufacturers of ICs for smartcards may have been in contact and exchanged confidential information on future pricing, prices to certain customers, future production capacities, and plans for new products during a period between January 1999 and November 2006. We have offered to support the EU in the pursuit of its investigation. We have not received any further communication from the EU since October 21, 2008.

Related-Party Transactions

One of the members of our Supervisory Board is managing director of Areva SA, which is a controlled subsidiary of CEA, one of the members of our Supervisory Board is the Chairman of France Telecom and a member of the Board of Directors of Technicolor (formerly known as Thomson), another is the non-executive Chairman of the Board of Directors of ARM Holdings PLC (“ARM”), two of our Supervisory Board members are non-executive directors of

Soitec, one of our Supervisory Board members was the CEO of Groupe Bull until May 10, 2010, one of the members of the Supervisory Board is also a member of the Supervisory Board of BESI and one of the members of our Supervisory Board is a director of Oracle Corporation (“Oracle”), Flextronics International and Dice Holdings. France Telecom and its subsidiaries Equant and Orange, as well as Oracle’s new subsidiary PeopleSoft supply certain services to our Company. We have a long-term joint R&D partnership agreement with LETI, a wholly-owned subsidiary of CEA. We have certain licensing agreements with ARM, and have conducted transactions with Soitec and BESI as well as with Technicolor, Flextronics and a subsidiary of Groupe Bull. Each of the aforementioned arrangements and transactions are negotiated without the personal involvement of our Supervisory Board members and we believe that they are made on an arms-length basis in line with market practices and conditions.

Impact of Changes in Exchange Rates

Our results of operations and financial condition can be significantly affected by material changes in the exchange rates between the U.S. dollar and other currencies, particularly the Euro.

As a market rule, the reference currency for the semiconductor industry is the U.S. dollar and product prices are mainly denominated in U.S. dollars. However, revenues for some of our products (primarily our dedicated products sold in Europe and Japan) are quoted in currencies other than the U.S. dollar and as such are directly affected by fluctuations in the value of the U.S. dollar. As a result of currency variations, the appreciation of the Euro compared to the U.S. dollar could increase, in the short term, our level of revenues when reported in U.S. dollars. Revenues for all other products, which are either quoted in U.S. dollars and billed in U.S. dollars or in local currencies for payment, tend not to be affected significantly by fluctuations in exchange rates, except to the extent that there is a lag between the changes in currency rates and the adjustments in the local currency equivalent of the price paid for such products. Furthermore, certain significant costs incurred by us, such as manufacturing, labor costs and depreciation charges, selling, general and administrative expenses, and R&D expenses, are largely incurred in the currency of the jurisdictions in which our operations are located. Given that most of our operations are located in the Euro zone and other non-U.S. dollar currency areas, including Sweden, our costs tend to increase when translated into U.S. dollars when the dollar weakens or to decrease when the U.S. dollar strengthens.

In summary, as our reporting currency is the U.S. dollar, currency exchange rate fluctuations affect our results of operations: in particular, if the U.S. dollar weakens, our results are negatively impacted since we receive a limited part of our revenues, and more importantly, we incur a significant part of our costs, in currencies other than the U.S. dollar. On the other hand, our results are favorably impacted when the dollar strengthens. As described below, our effective average U.S. dollar exchange rate weakened in the first half of 2010, particularly against the Euro, causing us to report higher expenses and unfavorably impacting both our gross margin and operating income. Our consolidated statements of income for the six months ended June 26, 2010 included income and expense items translated at the average U.S. dollar exchange rate for the period.

Our principal strategy to reduce the risks associated with exchange rate fluctuations has been to balance as much as possible the proportion of sales to our customers denominated in U.S. dollars with the amount of materials, purchases and services from our suppliers denominated in U.S. dollars, thereby reducing the potential exchange rate impact of certain variable costs relative to revenues. Moreover, in order to further reduce the exposure to U.S. dollar exchange fluctuations, we have hedged certain line items on our consolidated statements of income, in particular with respect to a portion of the costs of goods sold, most of the R&D expenses and certain selling and general and administrative expenses, located in the Euro zone. Our effective average exchange rate was $1.37 for €1.00 for the first half of 2010 compared to $1.33 for €1.00 for the first half of 2009. Our effective average exchange rate was $1.35 for €1.00 for the second quarter of 2010 and $1.39 for €1.00 for the first quarter of 2010 while it was $1.34 for €1.00 in the second quarter of 2009. These effective exchange rates reflect the actual exchange rates combined with the impact of cash flow hedging contracts that matured in the period.

As of June 26, 2010, the outstanding hedged amounts were €578 million to cover manufacturing costs and €507 million to cover operating expenses, at an average exchange rate of about $1.35 and $1.37 to €1.00, respectively (including the premium paid to purchase foreign exchange options), maturing over the period from June 29, 2010 to June 7, 2011. In the fourth quarter of 2008 we decided to extend the time horizon of our cash flow hedging contracts for manufacturing costs and operating expenses for up to 12 months. We are now considering progressively

extending the hedging period to up to 24 months. As of June 26, 2010, these outstanding hedging contracts and certain expired contracts covering manufacturing expenses capitalized in inventory represented a deferred loss of approximately $121 million after tax, recorded in “Other comprehensive income” in net equity, compared to a deferred gain of approximately $6 million after tax at December 31, 2009 and a deferred gain of approximately $58 million after tax at June 27, 2009.

In addition, in order to further reduce our exposure to fluctuations in the U.S. dollar exchange rate, we have begun hedging certain line items on our consolidated statements of income, particularly with respect to the portion of our R&D expenses incurred in Sweden. As of June 26, 2010, the outstanding hedged amounts were SEK 710 million at an average exchange rate of about SEK 7.41 to $1.00, maturing over the period from July 6, 2010 to June 7, 2011.

Our cash flow hedging policy is not intended to cover the full exposure and is based on hedging a declining percentage of exposure quarter after quarter. In the second quarter of 2010, as a result of cash flow hedging, we recorded a net loss of $36 million, consisting of a loss of $16 million to R&D expenses, a loss of $17 million to costs of goods sold and a loss of $3 million to selling, general and administrative expenses, while in the second quarter of 2009, we recorded a net gain of $8 million, consisting of a gain of $7 million to R&D expenses and a gain of $1 million to selling, general and administrative expenses. In addition, in the second quarter of 2010, as a result of cash flow hedging, we recorded a net loss of $1 million related to SEK denominated R&D expenses.

In addition, in order to mitigate potential exchange rate risks on our commercial transactions, we purchase and enter into forward foreign currency exchange contracts and currency options to cover foreign currency exposure in payables or receivables at our affiliates. We may in the future purchase or sell similar types of instruments. See Item 11, “Quantitative and Qualitative Disclosures about Market Risk” in our Form 20-F as may be updated from time to time in our public filings for full details of outstanding contracts and their fair values. Furthermore, we may not predict in a timely fashion the amount of future transactions in the volatile industry environment. Consequently, our results of operations have been and may continue to be impacted by fluctuations in exchange rates. The net effect of the consolidated foreign exchange exposure resulted in a net profit of $4 million in “Other income and expenses, net” in the second quarter of 2010.

Our treasury strategies to reduce exchange rate risks are intended to mitigate the impact of exchange rate fluctuations. No assurance may be given that our hedging activities will sufficiently protect us against declines in the value of the U.S. dollar. In each reporting period we may record a loss or gain as a result of the variation between the hedged and the actual exchange rate.

The assets and liabilities of subsidiaries are, for consolidation purposes, translated into U.S. dollars at the period-end exchange rate. Income and expenses, as well as cash flows, are translated at the average exchange rate for the period. The balance sheet impact of such translation adjustments has been, and may be expected to be, significant from period to period since a large part of our assets and liabilities are accounted for in Euros as their functional currency. Adjustments resulting from the translation are recorded directly in shareholders’ equity, and are shown as “Accumulated other comprehensive income (loss)” in the consolidated statements of changes in equity. At June 26, 2010, our outstanding indebtedness was denominated mainly in U.S. dollars and in Euros.

For a more detailed discussion, see Item 3, “Key Information — Risk Factors — Risks Related to Our Operations” in our Form 20-F.

Impact of Changes in Interest Rates

Interest rates may fluctuate upon changes in financial market conditions and material changes can affect our results from operations and financial condition, since these changes can impact the total interest income received on our cash and cash equivalents and marketable securities, as well as the total interest expense paid on our financial debt.

Our interest income, net, as reported on our consolidated statements of income, is the balance between interest income received from our cash and cash equivalent and marketable securities investments and interest expense paid on our long-term debt and bank fees (including fees on committed credit lines). Our interest income is dependent upon fluctuations in interest rates, mainly in U.S. dollars and Euros, since we invest primarily on a short-term basis; any increase or decrease in the short-term market interest rates would mean an equivalent increase or decrease in our

interest income. Our interest expenses are mainly associated with our long-term debt, comprised of Zero Coupon 2016 Convertible Bonds (with a fixed rate of 1.5%), our 2013 Floating Rate Senior Bond, which is fixed quarterly at a rate of EURIBOR plus 40bps, and European Investment Bank Floating Rate Loans at LIBOR plus variable spreads; a part of these interest expenses are at fixed rates. See Note 20 to our Unaudited Interim Consolidated Financial Statements.

In light of the put option that will likely be exercisable by bondholders on February 23, 2011 given current market conditions, we repurchased, through an unsolicited plan, a portion of our 2016 Convertible Bonds to optimize our liquidity management and yield through that date and began a program to repurchase a portion of them in December 2009. At December 31, 2009, 98,000 bonds had been repurchased, corresponding to 4,295,722 shares. During the first half of 2010, approximately 252,000 bonds had been repurchased, corresponding to 11,043,074 shares, of which approximately 52,000 in the second quarter of 2010. As of June 26, 2010, we also had $250 million of restricted cash at a fixed rate of 6.06% (Hynix Semiconductor-Numonyx JV), which partially offset the interest rate mismatch of the 2016 Convertible Bond. Our hedging policy is not intended to cover the full exposure and all risks associated with these instruments.

At June 26, 2010, our total financial resources, including cash, cash equivalents, marketable securities current and non-current and restricted cash, generated an average interest income rate of 0.96%. In the same period, our average cost of debt rate was 1.14%.

Impact of Changes in Equity Prices

As consideration for the divestiture of our share in Numonyx, we received 66.88 million Micron shares and we owe $78 million, equivalent to 10 million shares, to one of our partners. As of June 26, 2010 we booked these shares as available-for-sale and we record the variation in their value in other comprehensive income. These shares have a lock-up period and have been booked partly as current ($463 million) and partly as non-current ($189 million) marketable securities, in line with our expectations to dispose of these shares in either less than 12 months or more than 12 months. Due to the high volatility in the share price, the value of these shares could be subject to material variations and therefore, in order to partially protect the value of the transaction, we have hedged, with certain derivative instruments, a significant portion of the 66.88 million shares. For the details of the hedging operations, refer to Note 27 to our Unaudited Interim Consolidated Financial Statements.

Liquidity and Capital Resources

Treasury activities are regulated by our policies, which define procedures, objectives and controls. The policies focus on the management of our financial risk in terms of exposure to currency rates and interest rates. Most treasury activities are centralized, with any local treasury activities subject to oversight from our head treasury office. The majority of our cash and cash equivalents are held in U.S. dollars and Euros and are placed with financial institutions rated “A” or better. Part of our liquidity is also held in Euros to naturally hedge intercompany payables and financial debt in the same currency and is placed with financial institutions rated at least single A long-term rating, meaning at least A3 from Moody’s Investor Service and A- from Standard & Poor’s or Fitch Ratings. Marginal amounts are held in other currencies. See Item 11, “Quantitative and Qualitative Disclosures About Market Risk” in our Form 20-F.

Cash flow

We maintain a solid financial structure, with a significant net cash position, which provides us with adequate financial flexibility. As in the past, our cash generated by operations is our primary source of liquidity. Our cash management policy is to finance our investment needs mainly with net cash generated from operating activities. Our cash flow set forth below shows the sources and uses of cash and cash equivalents during the reporting period.

During the first half of 2010, the evolution of our cash flow resulted in a $320 million decrease in our cash and cash equivalents. Although our net cash from operating activities registered a significant improvement in line with the increasing level of profitability, we used a significant amount of cash for the purchase of tangible and intangible assets, the repurchase of the 2016 Convertible Bonds and the payment of dividends to shareholders.

The evolution of our cash flow for each period is as follows:

	Six Months Ended
	June 26, 2010			June 27, 2009
	(In millions)
Net cash from operating activities	$	754		$	142
Net cash from (used in) investing activities		(545	)		808
Net cash used in financing activities		(431	)		(259	)
Effect of change in exchange rates		(98	)		(15	)
Net cash increase (decrease)	$	(320	)	$	676

Net cash from operating activities. Net cash from operating activities is (i) net income adjusted for certain non-cash items and (ii) changes in assets and liabilities. The net cash from operating activities in the first half of 2010 largely improved compared to the prior year period due to an overall improvement in our operating performance, as evidenced by the large increase in net income adjusted by non-cash items (see “Results of Operations” for more information).

·	Net income adjusted for non-cash items generated $574 million of cash in the first half of 2010 compared to negative $54 million in the prior year period.

·	Changes in assets and liabilities totaled $180 million, basically flat on a year-over-year basis, with the main 2010 item being represented by a favorable change in trade payables, while in 2009 the main change was related to inventories.

Net cash from (used in) investing activities. Investing activities used $545 million of cash in the first half of 2010, mainly for payments for tangible assets. Additionally, such amount included net payments for the purchase of marketable securities and short-term deposits, as well as investments in intangible and financial assets. Payments for the purchase of tangible assets totaled $313 million, an increase from the $163 million registered in the prior year period as we were required to upgrade our production capacity in line with the strong increase in demand for our products. Investing activity in the first half of 2009 generated net cash of $808 million, entirely due to $1,129 million proceeds received from Ericsson as part of a business combination.

Net cash used in financing activities. Net cash used in financing activities was $431 million in the first half of 2010 increasing compared to the $259 million used in the first half of 2009, mainly due to the repurchase of our 2016 Convertible Bonds which occurred in January and May 2010 for a total cash consideration of $267 million. Moreover, the first half of 2010 amount included $88 million as dividends paid to shareholders and $73 million as a repayment of long term debt at maturity.

Free cash flow (non U.S. GAAP measure). We also present free cash flow, defined as net cash from (used in) operating activities plus (minus) net cash from (used in) investing activities, excluding payment for purchases of and proceeds from the sale of marketable securities (both current and non-current), short-term deposits and restricted cash. We believe free cash flow provides useful information for investors and management because it measures our capacity to generate cash from our operating and investing activities to sustain our operating activities. Free cash flow is not a U.S. GAAP measure and does not represent total cash flow since it does not include the cash flows generated by or used in financing activities. In addition, our definition of free cash flow may differ from definitions used by other companies. Free cash flow is determined as follows from our Unaudited Consolidated Statements of Cash Flow:

	Three Months Ended			Six Months Ended
	June 26, 2010			June 26, 2010			June 27, 2009
				(In millions)
Net cash from operating activities	$	361		$	754		$	142
Net cash from (used in) investing activities		(300	)		(545	)		808
Payment for purchase and proceeds from sale of marketable securities (current and non-current), short-term deposits and restricted cash, net		151			179			72
Free cash flow	$	212		$	388		$	1,022

We generated free cash flow of $388 million in the first half of 2010, of which $212 million was in the second quarter of 2010, supported by a significant improvement in the cash generated from operating activities. The second quarter of 2010 also included the sale, with no recourse, of $67 million of receivables by ST-Ericsson. In the first half of 2009, free cash flow was $1,022 million, mainly as a result of the $1,129 million proceeds received from Ericsson as part of a business combination. Excluding the effects of business combinations, our free cash flow increased by $482 million in the first half of 2010 compared to the corresponding 2009 period, because of the improvement in our operating results.

Net financial position (non U.S. GAAP measure). Our net financial position represents the balance between our total financial resources and our total financial debt. Our total financial resources include cash and cash equivalents, current and non-current marketable securities, short-term deposits and restricted cash, and our total financial debt includes bank overdrafts, current portion of long-term debt and long-term debt, as represented in our consolidated balance sheet. Net financial position is not a U.S. GAAP measure but we believe it provides useful information for investors because it gives evidence of our global position either in terms of net indebtedness or net cash by measuring our capital resources based on cash, cash equivalents and marketable securities and the total level of our financial indebtedness. Our net financial position has been determined as follows from our Unaudited Interim Consolidated Balance Sheets at June 26, 2010:

	As at
	June 26,			March 27, 2010			June 27,
	2010						2009
	(In millions)
Cash and cash equivalents	$	1,268		$	1,423		$	1,685
Restricted cash		250			250			250
Short-term deposits		62			-			-
Marketable securities, current (1)		1,094			1,037			759
Marketable securities, non-current (1)		57			47			170
Total financial resources		2,731			2,757			2,864
Current portion of long-term debt		(802	)		(904	)		(174	)
Long-term debt		(1,227	)		(1,287	)		(2,485	)
Total financial debt		(2,029	)		(2,191	)		(2,659	)
Net financial position	$	702		$	566		$	205

(1)

Marketable securities as current assets of $1,557 million reported in the balance sheet as of June 26, 2010 are composed of marketable securities ($1,094 million) and Micron shares ($463 million). Marketable securities as non-current assets of $246 million reported in the balance sheet as of June 26, 2010 are composed of Auction Rate Securities ($57 million) and Micron shares ($189 million).

Our financial position as of June 26, 2010 resulted in a net cash position of $702 million, a solid sequential and year-over-year improvement. The improvement was mainly generated by favorable free cash flow, partially offset by the $62 million dividend payment made in the second quarter of 2010.

As of June 26, 2010, our net financial position was comprised of $2,731 million total financial resources, in line with the previous periods, and $2,029 million total financial debt, decreasing sequentially due to the repurchase of a portion of our 2016 Convertible Bonds and long-term debt repayment.

Cash and cash equivalents amounted to $1,268 million as at June 26, 2010, the sequential decrease resulting from the repurchase of a portion of our 2016 Convertible Bonds for total cash consideration of $55 million and the $62 million dividend payment.

Restricted cash of $250 million related to the Numonyx-Hynix joint venture. After the divestiture of Numonyx and the exercise by Hynix of their call option, we consider probable that this amount will be released from any restrictions within 12 months and, as such, we have reclassified this amount from non-current to current assets in our balance sheet as at June 26, 2010. See “Other Developments in the First Half of 2010” and Note 18 to our Unaudited Interim Consolidated Financial Statements.

Short-term deposits of $62 million represent a 12-month certificate of deposit, which can be readily convertible in cash.

Marketable securities, current was composed of $708 million invested in Aaa treasury bills from the French, German and U.S. governments, $386 million invested in senior debt floating rate notes issued by primary financial institutions with an average rating of Aa3/A+ from Moody’s and S&P. Both the treasury bills and the Floating Rate Notes are classified as available-for-sale and reported at fair value. See Note 15 to our Unaudited Interim Consolidated Financial Statements. The amount of $1,094 million included in our net financial position does not take into account the $463 million of Micron shares since they are subject to certain restrictions on resale and, consequently, are not immediately available for sale, although they are reported within the $1,557 million of marketable securities presented in our balance sheet as of June 26, 2010.

Marketable securities, non-current corresponds to Auction Rate Securities, purchased by Credit Suisse contrary to our instructions, representing interests in collateralized debt obligations with a par value of $261 million, that were carried on our balance sheet as available-for-sale financial assets for $57 million, including the positive revaluation of $30 million, out of which $15 million occurred during the first half of 2010, in other comprehensive income in equity. The investments made in the aforementioned Auction Rate Securities were made without our authorization and, in 2008, we launched a legal action against Credit Suisse. For the details of the legal proceedings against Credit Suisse, see Note 15 to our Unaudited Interim Consolidated Financial Statements. The amount of $57 million included in our net financial position does not take into account the $189 million of Micron shares reported in the $246 million presented in our balance sheet as of June 26, 2010, since they are covered by hedge instruments with maturities exceeding 12 months.

Financial debt was $2,029 million as at June 26, 2010, of which $802 million was considered as the current portion and mainly related to our 2016 Convertible Bonds, for which the holders may exercise a put option in February 2011. The total financial debt included $676 million of our 2016 Convertible Bonds, $615 million of our 2013 Senior Bonds (corresponding to €500 million at issuance), $652 million in European Investment Bank loans (the “EIB Loans”), $72 million in loans from other funding programs and $14 million of capital leases. The EIB Loans represent two committed credit facilities as part of R&D funding programs. The first, for R&D in France, was fully drawn in U.S. dollars, between December 2006 and February 2008, for a total amount of $341 million, of which $69 million had been paid back as at June 26, 2010. The second for R&D projects in Italy, was fully drawn in U.S. dollars, between August and October 2008, for a total amount of $380 million. As at June 26, 2010, no amount was due according to the amortization schedule and, therefore, nothing had been paid back.

Additionally, we had unutilized committed medium term credit facilities with core relationship banks totaling $500 million. Furthermore, the aggregate amount of our total available short-term credit facilities, excluding foreign exchange credit facilities, was approximately $650 million and we also maintain uncommitted foreign exchange facilities totaling $718 million at June 26, 2010. At June 26, 2010, the amounts available under the short-term lines of credit were not reduced by any borrowing. In addition, as the parent companies, we and Ericsson have granted ST-Ericsson a $50 million committed facility. The withdrawal of that line is subject to approval of the parent companies at ST-Ericsson’s Board of Directors.

Our long-term capital market financing instruments contain standard covenants, but do not impose minimum financial ratios or similar obligations on us. Upon a change of control, the holders of our 2016 Convertible Bonds and 2013 Senior Bonds may require us to repurchase all or a portion of such holder’s bonds.

In February 2006, we issued $1,131 million principal amount at maturity zero coupon senior convertible bonds due in February 2016. The bonds are convertible by the holder at any time prior to maturity at a conversion rate of 43.833898 shares per one thousand dollar face value of the bonds corresponding to 42,694,216 equivalent shares. The holders will also be able to redeem the convertible bonds on February 23, 2011 at a price of $1,077.58, on February 23, 2012 at a price of $1,093.81 and on February 24, 2014 at a price of $1,126.99 per one thousand dollar face value of the bonds. We can call the bonds at any time after March 10, 2011 subject to our share price exceeding 130% of the accreted value divided by the conversion rate for 20 out of 30 consecutive trading days. In order to optimize our financial performance, we repurchased a portion of our 2016 Convertible Bonds during December 2009 (98,000 bonds for a total cash consideration of $103 million), January 2010 (200,174 bonds for a total cash consideration of $212 million) and May 2010 (51,756 bonds for a total cash consideration of $55 million).

In March 2006, STMicroelectronics Finance B.V. (“ST BV”), one of our wholly-owned subsidiaries, issued Floating Rate Senior Bonds with a principal amount of €500 million at an issue price of 99.873%. The notes, which mature on March 17, 2013, pay a coupon rate of the three-month Euribor plus 0.40% on June 17, September 17, December 17 and March 17 of each year through maturity. The notes have a put for early repayment in case of a change of control. The Floating Rate Senior Bonds issued by ST BV are guaranteed by ST NV.

As of June 26, 2010, we had the following credit ratings on our 2013 and 2016 Bonds:

	Moody’s Investors Service	Standard & Poor’s
Zero Coupon Senior Convertible Bonds due 2016	Baa1	BBB+
Floating Rate Senior Bonds due 2013	Baa1	BBB+

We are also rated “A–” from Fitch on an unsolicited basis.

On February 6, 2009 Standard & Poor’s Rating Services lowered our senior debt rating from “A-” to “BBB+” and Moody’s Investors Service affirmed the Baa1 senior debt ratings and changed the outlook on the ratings to negative from stable.

As of June 26, 2010, debt payments due by period and based on the assumption that the holders of the 2016 Convertible Bonds exercise their first redemption option in 2011 as follows:

	Total		2010		2011		2012		2013		2014		Thereafter
							(In millions)
Long-term debt (including current portion)	$	2,029	$	96	$	794	$	117	$	729	$	112	$	181

Financial Outlook

We are targeting a sustainable capital expenditure to sales ratio of 5% to about 7% over the course of an industry cycle. However, the increase in demand that we have broadly faced across all end markets for the past few quarters requires the acceleration of some of our capex spending in order to adapt our supply capability to this increasing level of demand. The most significant of our 2010 capital expenditure projects are expected to be: (a) for the front-end facilities: (i) the increase in capacity of our 300-mm fab in Crolles to 3,200 wafers per week and activities to prepare for the next step of increasing to 3,600 wafers per week in 2011; (ii) the establishment of a 32nm/28nm R&D capability in Crolles; (iii) the completion of the restructuring program for front-end fabs, targeting the increased capacity in the Ang-Mo-Kio (Singapore) 150mm to 18,000 wafers per day; (iv) selective programs of robustness / mix change in our 200-mm fabs, mainly by installing tools transferred from internal sources; (v) the strengthening of proprietary technologies in our 200-mm fab in Agrate; (vi) a capacity increase in proprietary technologies in our 200 mm fabs in Italy and (vii) quality, safety, security and maintenance in both 6” and 8” front end fabs; (b) for the back-end facilities, capital expenditures will mainly be dedicated to the following capacity

increases: (i) growth of our manufacturing presence in China (Longgang and Shenzhen) and the Philippines (Calamba); (ii) further consolidation of our presence in Malaysia (Muar); and (iii) specific investments in the areas of quality, environment and energy saving; and (c) an overall capacity increase in final testing and wafers probing (EWS) for all product groups.

We will continue to monitor our level of capital spending by taking into consideration factors such as trends in the semiconductor industry, capacity utilization and announced additions. We expect to have significant capital requirements in the coming years and in addition we intend to continue to devote a substantial portion of our net revenues to R&D. We plan to fund our capital requirements from cash provided by operating activities, available funds and available support from third parties, and may have recourse to borrowings under available credit lines and, to the extent necessary or attractive based on market conditions prevailing at the time, the issuing of debt, convertible bonds or additional equity securities. A substantial deterioration of our economic results and consequently of our profitability could generate a deterioration of the cash generated by our operating activities. Therefore, there can be no assurance that, in future periods, we will generate the same level of cash as in the previous years to fund our capital expenditures plans for expending/upgrading our production facilities, our working capital requirements, our R&D and industrialization costs.

On February 23, 2011, holders will be able to call for the redemption of our 2016 Convertible Bonds, which we believe is likely to occur in view of current market prices, for an amount of $672 million. Furthermore, there could be possible financial needs for temporary bridge financing by the parent companies of the ST-Ericsson joint venture, the amount of which cannot be estimated at this stage.

We believe that we have the financial resources needed to meet our business requirements for the next twelve months, including capital expenditures for our manufacturing activities, working capital requirements, dividend payments and the repayment of our debts in line with their maturity dates. We may use some of our available cash to repurchase a portion of our outstanding debt securities, including possibly our 2016 Convertible Bonds and 2013 Senior Bonds, should market conditions permit.

Contractual Obligations, Commercial Commitments and Contingencies

Our contractual obligations, commercial commitments and contingencies are mainly comprised of: operating leases for land, buildings, plants and equipment; purchase commitments for equipment, outsourced foundry wafers and for software licenses; long-term debt obligations; pension obligations and termination indemnities and other non-current liabilities.

Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements at June 26, 2010.

Backlog and Customers

During the second quarter of 2010, we continued to register a solid level of bookings (including frame orders), driven by strong demand from our customers. As a result we entered the third quarter of 2010 with a backlog higher than what we had entering the second quarter. Backlog (including frame orders) is subject to possible cancellation, push back and a lower ratio of frame orders being translated into firm orders and, thus, it is not necessarily indicative of the amount of billings or growth to be registered in subsequent periods.

In the second quarter of 2010, our largest customer, the Nokia Group of companies, accounted for approximately 14% of our revenues compared to 17% in the second quarter of 2009. There is no guarantee that the Nokia Group of companies, or any other customer, will continue to generate revenues for us at the same levels. If we were to lose one or more of our key customers, or if they were to significantly reduce their bookings, not confirm planned delivery dates on frame orders in a significant manner or fail to meet their payment obligations, our operating results and financial condition could be adversely affected.

Disclosure Controls and Procedures

We conducted an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (Disclosure Controls) as of the end of the second quarter. The controls evaluation was conducted under the supervision and with the participation of management, including our CEO and CFO. Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this Form 6-K, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our quarterly evaluation of Disclosure Controls includes an evaluation of some components of our internal control over financial reporting, and internal control over financial reporting is also separately evaluated on an annual basis.

The evaluation of our Disclosure Controls included a review of the controls’ objectives and design, our implementation of the controls and their effect on the information generated for use in this periodic report. In the course of the controls evaluation, we reviewed identified data errors, control problems or acts of fraud and sought to confirm that appropriate corrective actions, including process improvements, were being undertaken. This type of evaluation is performed at least on a quarterly basis so that the conclusions of management, including the CEO and CFO, concerning the effectiveness of the Disclosure Controls can be reported in our periodic reports on Form 6-K and Form 20-F. The components of our Disclosure Controls are also evaluated on an ongoing basis by our Internal Audit Department, which, as of January 2008, reports to our Chief Compliance Officer. The overall goals of these various evaluation activities are to monitor our Disclosure Controls, and to modify them as necessary. Our intent is to maintain the Disclosure Controls as dynamic systems that change as conditions warrant.

We rely on ST-Ericsson’s CEO and CFO certification of internal control at ST-Ericsson and their affiliates that are an integral part of our Consolidated Financial Statements but act as independent companies under the 50-50% governance structure of their two parents.

Based upon the controls evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this periodic report, our Disclosure Controls were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC, and that material information related to STMicroelectronics and its consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared.

Other Reviews

We have sent this report to our Audit Committee, which had an opportunity to raise questions with our management and independent auditors before we submitted it to the Securities and Exchange Commission.

Cautionary Note Regarding Forward-Looking Statements

Some of the statements contained in this Form 6-K that are not historical facts, particularly in “Overview Business Outlook” and in “Liquidity and Capital Resources – Financial Outlook”, are statements of future expectations and other forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 or Section 21E of the Securities Exchange Act of 1934, each as amended) that are based on management’s current views and assumptions, and are conditioned upon and also involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those in such statements due to, among other factors:

significant changes in demand in the key application markets and from key customers served by our products, which make it extremely difficult to accurately forecast and plan our future business activities. In particular, following a period of significant order cancellations, we are currently experiencing a strong surge in customer demand, which has led to capacity constraints in certain applications;

our ability to utilize and operate our manufacturing facilities at sufficient levels to cover fixed operating costs during periods of reduced customer demand, as well as our ability to ramp up production efficiently

and rapidly to respond to increased customer demand, in an intensely cyclical and competitive industry, and the financial impact of obsolete or excess inventories if actual demand differs from our expectations;

our ability to successfully integrate the acquisitions we pursue, in particular the successful integration and operation of the ST-Ericsson Wireless joint venture, which represents a significant investment and risk for our business;

failure by ST-Ericsson to complete its on-going restructuring initiatives or to successfully compete in a rapidly changing market moving from hardware to more software-driven technology solutions, which may result in significant additional impairment and restructuring charges;

our ability to compete in the semiconductor industry since a high percentage of our costs are fixed and are incurred in currencies other than U.S. dollars, especially in light of the volatility in the foreign exchange markets and, more particularly, in the U.S. dollar exchange rate as compared to the other major currencies we use for our operations;

the outcome of ongoing litigation as well as any new litigation to which we may become a defendant;

changes in our overall tax position as a result of changes in tax laws or the outcome of tax audits, and our ability to accurately estimate tax credits, benefits, deductions and provisions and to realize deferred tax assets;

the impact of intellectual property (“IP”) claims by our competitors or other third parties, and our ability to obtain required licenses on reasonable terms and conditions;

product warranty or liability claims based on epidemic failures or recalls by our customers for a product containing one of our parts;

our ability in an intensively competitive environment to secure customer acceptance and to achieve our pricing expectations for high-volume supplies of new products in whose development we have been, or are currently, investing;

availability and costs of raw materials, utilities, third-party manufacturing services, or other supplies required by our operations; and

changes in the political, social or economic environment, including as a result of military conflict, social unrest and/or terrorist activities, economic turmoil, as well as natural events such as severe weather, health risks, epidemics, earthquakes, volcano eruptions or other acts of nature in, or affecting, the countries in which we, our key customers or our suppliers, operate.

Such forward-looking statements are subject to various risks and uncertainties, which may cause actual results and performance of our business to differ materially and adversely from the forward-looking statements. Certain forward-looking statements can be identified by the use of forward-looking terminology, such as “believes”, “expects”, “may”, “are expected to”, “should”, “would be”, “seeks” or “anticipates” or similar expressions or the negative thereof or other variations thereof or comparable terminology, or by discussions of strategy, plans or intentions. Some of these risk factors are set forth and are discussed in more detail in “Item 3. Key Information — Risk Factors” in our Form 20-F. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this 6-K as anticipated, believed or expected. We do not intend, and do not assume any obligation, to update any industry information or forward-looking statements set forth in this Form 6-K to reflect subsequent events or circumstances.

Unfavorable changes in the above or other factors listed under “Risk Factors” from time to time in our Securities and Exchange Commission (“SEC”) filings, could have a material adverse effect on our business and/or financial condition.

STMICROELECTRONICS N.V.

UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

	Pages
Consolidated Statements of Income for the Three and Six Months Ended June 26, 2010 and June 27, 2009 (unaudited)	F-1
Consolidated Balance Sheets as of June 26, 2010 (unaudited) and December 31, 2009 (audited)	F-3
Consolidated Statements of Cash Flows for the Six Months Ended June 26, 2010 and June 27, 2009 (unaudited)	F-4
Consolidated Statements of Changes in Equity (unaudited)	F-5
Notes to Interim Consolidated Financial Statements (unaudited)	F-6

STMicroelectronics N.V.

CONSOLIDATED STATEMENTS OF INCOME

	Three months ended
	(Unaudited)
	June 26,			June 27,
In million of U.S. dollars except per share amounts	2010			2009

Net sales		2,507			1,970
Other revenues		24			23
Net revenues		2,531			1,993
Cost of sales		(1,563	)		(1,473	)
Gross profit		968			520
Selling, general and administrative		(302	)		(286	)
Research and development		(593	)		(610	)
Other income and expenses, net		30