SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 6-K

REPORT OF FOREIGN ISSUER

Pursuant to Rule 13a-16 or 15d-16 of the
Securities Exchange Act of 1934

KONINKLIJKE PHILIPS ELECTRONICS N.V.

(Exact name of registrant as specified in its charter)

Royal Philips Electronics

(Translation of registrant’s name into English)

The Netherlands

(Jurisdiction of incorporation or organization)

Breitner Center, Amstelplein 2, 1096 BC Amsterdam, The Netherlands

(Address of principal executive offices)

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

Form 20-F  þ                    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 Rule101(b)(1): ___

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule101(b)(7): ___

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  þ

Name and address of person authorized to receive notices
and communications from the Securities and Exchange Commission:

E.P. Coutinho
Koninklijke Philips Electronics N.V.
Amstelplein 2
1096 BC Amsterdam — The Netherlands

 

 

This report comprises a copy of the Annual Report of the Philips Group for the year ended December 31, 2006, dated February 19, 2007, as well as copy of the press release entitled:

–		“Philips appoints three new members to Group Management Committee”, dated January 30, 2007;
–		“Leading healthcare companies join in major research and development effort to prevent heart attack and stroke”, dated January 30, 2007;
–		“Philips completes acquisition of Partners in Lighting International”, dated February 6, 2007;
–		“Philips sells OM&T activities to Moser Baer of India”, dated February 6, 2007;
–		“Philips and CEC sign definitive agreement to transfer remaining Philips Mobile Phone activities to CEC”, dated February 12, 2007;
–		“Philips to propose re-appointment of Management Board members and Supervisory Board members to shareholders”, dated February 19, 2007;
–		“Philips' Green Products achieve sales of over EUR 4 billion”, dated February 19, 2007.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf, by the undersigned, thereunto duly authorized at Amsterdam, on the 19^th day of February 2007.

KONINKLIJKE PHILIPS ELECTRONICS N.V.

/s/ G.J. Kleisterlee
(President,
Chairman of the Board of Management)

/s/ P.J. Sivignon
(Chief Financial Officer,
Member of the Board of Management)

Driving change, delivering value

Annual Report 2006

The way forward

The divestment of our Semiconductors division in 2006 was a major milestone on a long journey of change for Philips. We are entering a new era as a different, much simpler company. Our commitment to improving the quality of people’s lives through meaningful innovation, however, remains undiminished.

Now we can tighten our focus – addressing the need for better healthcare and well-being, the demand for energy-efficient solutions, particularly in lighting, and the desire for enjoyable consumer lifestyle experiences.

Philips Annual Report 2006     3

Forward-looking statements

This document contains certain forward-looking statements with respect to the financial condition, results of operations and business of Philips, in particular in the Outlook section of the chapter The Philips Group. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. Readers are cautioned not to place undue reliance on forward-looking statements as a number of factors could cause actual future results and events to differ materially from that expressed in the forward-looking statement.

Use of non-US GAAP information

In presenting and discussing the Philips Group’s financial position, operating results and cash flows, management uses certain non-US GAAP financial measures like: comparable growth; earnings before interest, tax and amortization; net operating capital; net debt (cash); and cash flow before financing activities. These non-US GAAP financial measures should not be viewed in isolation as alternatives to the equivalent US GAAP measures. A reconciliation of such measures to the most directly comparable US GAAP measures can be found in the chapter Reconciliation of non-US GAAP information.

Fair value information

In presenting the Philips Group’s financial position, fair values are used for the measurement of various items in accordance with the applicable accounting standards. Readers are cautioned that these values are subject to changes over time and are only valid at balance sheet date.

Please refer to the introduction to the Management discussion and analysis section of the chapter The Philips Group for further explanation of the forward-looking statements, non-US GAAP information and fair value measurements.

This Annual Report is available online at

® www.philips.com/annualreport2006

It can be downloaded in full or per chapter in PDF; key financials are also available as Excel downloads.

4     Philips Annual Report 2006

54 The Philips sectors      86 Risk management      100 Report of the Supervisory Board      110 Financial Statements

Contents

Philips Annual Report 2006     5

Financial highlights

all amounts in millions of euros unless otherwise stated			20041)				20051)				2006
Sales			24,855				25,775				26,976
Earnings before interest and tax and amortization2)			1,864				1,577				1,382
as a % of sales			7.5				6.1				5.1
Earnings before interest and tax			1,156				1,472				1,183
as a % of sales			4.7				5.7				4.4
Results relating to equity-accounted investees			1,464				1,754				(157	)
Net income			2,836				2,868				5,383
per common share in euros
- basic			2.22				2.29				4.58
- diluted			2.21				2.29				4.55
Dividend paid per common share in euros			0.36				0.40				0.44
Net operating capital2)			4,524				5,679				8,724
Cash flows before financing activities2)			2,757				2,828				(2,469	)
Stockholders’ equity			14,860				16,666				22,997
per common share in euros			11.60				13.87				20.78
Net debt: group equity ratio2)			1 : 99				(5) : 105				(10):110
Employees at December 313)			161,586				159,226				121,732

6     Philips Annual Report 2006

Philips Annual Report 2006     7

Message from the President

8     Philips Annual Report 2006

“We made no fewer than seven strategically aligned acquisitions and continued to invest heavily in innovation, design and the Philips brand.”

Dear shareholder,

2006 was a year of decisive action and profound change for Philips. Executing our strategy to create value through sustained profitable growth in healthcare, lifestyle and technology, we successfully concluded the divestment of a majority stake in our Semiconductors division. More importantly in shaping the future of our company, we made no fewer than seven strategically aligned acquisitions and continued to invest heavily in innovation, design and the Philips brand. We also continued the disposal of non-core activities.

Our four main divisions delivered on their objectives, generating returns well in excess of their cost of capital. Still, performance in some business lines is not yet where we want it to be, so there are ample opportunities for further improvement. The clean-up of the Other Activities sector and the decisions we took to reduce Unallocated costs will significantly increase the transparency of our results and help to unlock the full value of our businesses.

We redeployed capital in a disciplined way, spending a total of EUR 2.5 billion on value-creating acquisitions in 2006 as we strengthened our businesses in line with our chosen strategic direction. We also cancelled over 173 million shares, 102 million of which were repurchased in 2006, thereby returning EUR 3.3 billion to shareholders, including the annual dividend.

With our portfolio now more sharply focused, we have made major strides in creating an organization and a way of working that should allow us to capture growth opportunities arising from the trends that are set to define global economic development in the coming years. These include the need for more and better healthcare, the demand for energy-efficient solutions, particularly in lighting, and the desire for rewarding consumer lifestyle experiences.

Going forward, we will build upon the growth and value creation momentum we have developed over the past few years. We will do this by offering customers and end-users compelling value propositions based on real insights into what they need and want, by harnessing the outstanding array of talent in our organization, and by pursuing simplicity in everything we do.

Financial performance in 2006

With Semiconductors accounted for as a discontinued operation, sales amounted to almost EUR 27 billion, a comparable increase of 6% and a step up from the 4% achieved in 2005.

Earnings before interest and tax (EBIT) amounted to EUR 1,183 million, which corresponds to an EBIT margin of 4.4% for the year, impacted by an incidental charge of EUR 256 million, net of insurance recoveries, for asbestos-related liabilities. Our EBIT margin of 8.2% in the fourth quarter underlines the performance improvement realized in 2006 and has created the momentum we require to achieve our profitability target of over 7.5% EBITA in 2007.

Group net income totaled EUR 5,383 million on the back of the gain on the sale of a majority stake in our Semiconductors division.

The desire to increase shareholder value is what drives our actions. The book value of stockholders’ equity has more than doubled over the past three years, from EUR 10 per share in 2003 to almost EUR 21 by the end of 2006.

Philips today is a different company and a different value proposition for shareholders. Having adjusted our dividend policy last year, we are again increasing the average annual pay-out ratio this year, to 40-50% of continuing net income. Consistent with this revised

Philips Annual Report 2006     9

dividend policy, we are proposing to the upcoming General Meeting of Shareholders to increase the dividend for the third year in a row, taking it to EUR 0.60 per share.

Driving change, delivering value

Focusing strongly on Group-wide value creation, our 2006 Management Agenda defined a number of priority actions. How did we perform on these?

Realize 5-6% top-line growth and a 7-10% EBIT margin as from the end of 2006

In 2006 we realized comparable top-line growth of 6% year-on-year, a marked increase on the 4% achieved in 2005 and well in line with our target. Comparable sales grew at all main divisions, led by DAP (11%) and Lighting (8%); Medical Systems (7%) and Consumer Electronics (5%) also achieved good growth. Sales in the sector Other Activities decreased by 7% on a comparable basis, in nominal terms a decline of 24%, reflecting the ongoing divestment of non-core businesses.

EBIT at Medical Systems, DAP and Lighting increased compared to 2005, as did EBIT at CE when excluding the 2005 gain on the TPV transaction. Our strong performance in the last quarter of the year reinforces our confidence that we will realize our EBITA target in 2007. Referencing EBITA will make the underlying performance of our businesses more transparent by factoring out the amortization of intangible assets, which occurs when acquisitions are consolidated. Our EBITA margin in 2006 would have been 5.1% for the year and 9.1% in the last quarter.

Continue to grow healthcare as part of the portfolio

As a consequence of our portfolio changes, professional and consumer healthcare now represents some 27% of sales, compared with 21% in 2005. Organic growth in our Medical Systems division remains strong and steady, and in 2006 we made further value-adding acquisitions, including key component supplier Intermagnetics and cardiology healthcare company Witt Biomedical.

In the field of medical IT, our 2005 acquisition of Stentor has proved a resounding success, with sales of our iSite PACS solution doubling since the takeover. iSite’s data-integration capabilities make a significant contribution to the delivery of high-quality patient care.

We also made progress with our ambitions to build a sizeable consumer health and wellness business, acquiring mother and babycare products company Avent and emergency response provider Lifeline Systems. Given their different characteristics, we subsequently decided to split this initiative into a retail/product business and a service business, with the former continuing in DAP as part of the Health & Wellness business (which includes Avent, Sonicare and Skin Care) and the latter as part of Consumer Healthcare Solutions in the Innovation & Emerging Businesses sector, which has replaced the Other Activities sector as of January 2007.

Our Ambient Experience solutions continue to gain ground. In February 2006 the world’s first Ambient Experience catheterization lab was opened at the Catharina Hospital in Eindhoven, Netherlands.

In Asia Pacific, the first exports from the Philips-Neusoft venture in China – established in 2004 for the development and worldwide supply of economically priced imaging equipment – took place in 2006 with the release and shipment of dual and single-slice CT scanners, radiology systems and remote-control fluoroscopy systems.

10     Philips Annual Report 2006

54 The Philips sectors           86 Risk management           100 Report of the Supervisory Board           110 Financial Statements

“Going forward, we will build upon the growth and value creation momentum we have developed over the past few years.”

Accelerate movement to become a simpler, market-oriented organization

During 2006 we took a number of important steps to further simplify Philips and base our actions on true customer and market insights.

First of all, we extended our approach to organize ourselves around our customers in professional healthcare, professional lighting and consumer retail.

We expanded our international key account management in retail from our top 7 accounts to our top 20. This top 20 represents 18% of our total sales, and in 2006 showed 12% sales growth compared to 2005. We also deployed this successful approach deeper into the organization. Under the leadership of the International Retail Board, every country now has a set of key national accounts on which divisions work together to ensure a simpler customer experience and higher sales.

Furthermore, we took out a complete regional management layer, reducing the distance between our global businesses and their local markets. On a country level, we integrated country management with local marketing and sales management.

In 2007 we will see our key account system evolve to its next stage. In our top 20 national markets the consumer activities will further align their consumer retail approach in a collaborative model; in all other, mostly smaller markets, the consumer activities’ sales forces will be integrated. This will make our combined Philips footprint in local markets stronger and more professional, so that we are easier and more attractive for our customers to deal with.

In 2006 we rolled out the next wave of our “sense and simplicity” brand campaign, highlighting the benefits offered by simplicity, as well as allowing customers to directly experience simplicity first hand by means of experiential marketing. These brand investments are paying off, with our brand value gaining 14% to an estimated USD 6.7 billion, moving us into the top 50 global brands as ranked by leading brand consultant Interbrand.

Set up a separate legal structure for Semiconductors and create value by pursuing strategic options

This goal was achieved in full thanks to a tremendous effort by all concerned – a true case of speed and teamwork. Not only did we set up a separate legal structure for Semiconductors in a record nine months, we also completed an exhaustive review of the strategic options available. This led to the sale, in September, of a majority stake in the business to a private equity consortium. Valuing our Semiconductors division at EUR 8.3 billion, I believe the deal represents good business for Philips.

Increase the number of entrepreneurial business leaders with broad-based experience

It is vital that our future leaders have a broad base of experience across multiple aspects of Philips’ businesses. I am glad to say that of all the top potentials who move to another position, now some two-thirds are moving to another business or functional area, a significant increase compared to previous years.

Our acquisitions of relatively young, fast-growing small and medium-sized enterprises also make an important contribution in bringing new entrepreneurial business leaders into the company, with some of them being promoted to more senior positions within Philips.

Over the past two years we have conducted an objective assessment and benchmark program among our senior executives to ensure we have the right people in the right places and – via our talent pool – effective succession planning. Our leadership programs place heavy emphasis on business development, e.g. in emerging markets or our Incubators, which are an ideal environment for the development of entrepreneurial talent.

Philips Annual Report 2006     11

Exceed our EUR 500 million overall cost-reduction target within two to three years

We are fully on track to exceed the targeted EUR 500 million cost reduction by the end of 2007. In 2006 we made substantial progress in our drive to simplify our organization and reduce costs by working together more efficiently. In supply management and IT we have been able to work together as One Philips in a more structured and harmonized way while ensuring that quality improved and costs went down.

In addition to our existing programs, we will realize a further EUR 75 million reduction on a run-rate basis in 2007, driven by a simpler country management structure, the removal of a regional management layer and a lean corporate center, reflecting the divestment of our Semiconductors business.

Taking value creation to the next level

Philips is now a much simpler company focused around the brand and driven by innovation. We are well positioned to benefit from major trends that will determine global GDP development in the coming decade, i.e. the need of a growing and longer-living population for more and affordable healthcare, the demand for energy-efficient solutions (e.g. in lighting) and developments in the consumer space. Today, we are seeing the rise of the experience economy. For Philips, this is a very promising growth area, which is in an early stage of development. Through our Ambient Experience solutions we want to be a strong force in the ecosystem of this emerging economy.

Capturing the market opportunities presented by these trends should enable us to create even greater value for our stakeholders. Our Growth, Talent and Simplicity programs, which will be continued in 2007, remain key to the fulfillment of this ambition.

Growth

In 2007 and beyond we will continue on the growth path we have been following in recent years – redirecting resources to high-growth opportunities, leveraging our brand and competencies, expanding key account management, stimulating new business development, making value-creating acquisitions, growing in emerging markets, and innovating and marketing for further organic growth.

The key to profitable growth is to create and retain more happy customers. While we had a wealth of data in the organization on customer satisfaction, product quality, etc., we did not, until this past year, have a single key metric across the organization. In 2006 we adopted the ‘Net Promoter Score’ (NPS), a simple but powerful concept that measures the answer to just one question: “How likely is it that you would recommend this company/product to a friend or colleague?” This metric will provide a tangible measure of progress, which will help to focus minds and actions in this vital area.

Talent

Having talented, engaged people in the right place throughout the company is vital for lasting success. Like satisfied customers, engaged employees are a pre-requisite for growth. It is the task of leadership to provide our employees – at every level of the organization – with an inspiring environment to work in, one where they can contribute fully and feel valued for their talents.

The extent to which we succeed in doing so is measured through our annual employee engagement survey. And while we see progress year to year, we are still some way off the high-performance benchmark. This represents probably the biggest untapped improvement potential for the company and therefore ranks high in our priorities for 2007.

Simplicity

Simplicity – everyone knows what it is, but it can be hard to define. For us, simplicity is the ease with which people can access or control the benefits that technology has to offer. It is our touchstone, a constant reminder to stop and ask ourselves ‘Will this make life simpler?’... or ... ‘Is there an easier way to do this?’ It is a way of thinking that is permeating the entire fabric of our company as we seek to deliver on technology’s promise to improve life.

At the 2006 Philips Simplicity Event held in London in October, we unveiled new and innovative concepts based on our “sense and simplicity” brand positioning. We also revealed a number of potential products nearing market readiness that have evolved from earlier Simplicity concepts.

12     Philips Annual Report 2006

54 The Philips sectors           86 Risk management           100 Report of the Supervisory Board           110 Financial Statements

The 15 simplicity-led design concepts that were demonstrated illustrate the progress we are making across the company in designing and developing solutions that meet the everyday needs of end-users, enabling them to benefit from new technology and innovations.

Moving forward, we will continue to reduce complexity, not only in our products and services, but also in our market focus and the way we work.

Management Agenda 2007

Our management agenda for this year again comprises a number of clearly defined goals and actions aimed at increasing shareholder value:

•

Maintain annual average sales growth of 5-6% and achieve above 7.5% EBITA

•

Continue to redeploy capital in a disciplined way through value-creating acquisitions, share buy-backs and dividends

•

Drive a culture of superior customer experience by delivering on the brand promise and implementing the Net Promoter Score measure in the company

•

Be an exciting place to work and bring employee engagement to a high-performance benchmark level within 2 to 3 years

This agenda reflects our focus on securing sustainable profitable growth. Underpinning this, we will continue to drive forward our talent and simplicity programs. I believe that with full and effective implementation of our plans, 2007 will see us continue to grow and deliver value – in every sense of the word.

I would like to take this opportunity to thank the employees of our former Semiconductors division for all the effort they put into our company over the years. Saying goodbye is never easy, but I am convinced that under the inspiring leadership of Frans van Houten and his team they too are entering an exciting new era that will bring considerable success.

I would also like to thank Jouko Karvinen, who left the company in December, for his substantial contribution in building up our healthcare activities over the last few years. I wish his successor, Steve Rusckowski, good luck with the next phase of growth and expansion at Medical Systems.

Lastly, on behalf of my colleagues on the Board of Management, I would like to express my thanks to you, our shareholders, for the support you continue to give us. I am delighted we have again been able to increase the value of your company – also with our ongoing share repurchase and cancellation program – and to raise the dividend once again. I also wish to thank our other stakeholders, and in particular our customers, for the trust they have placed in us, as well as our employees for their unstinting efforts over the past year.

Gerard Kleisterlee
President

Philips Annual Report 2006     13

6  Financial highlights		8  Message from the President		14  Our leadership		20  The Philips Group

Our leadership

The executive management of Philips is entrusted to its Board of Management under the supervision of the Supervisory Board. The Group Management Committee is the highest consultative body within Philips. This chapter presents the Board of Management, the Group Management Committee and the Supervisory Board as of December 31, 2006.

Board of Management

The Board of Management operates under the chairmanship of the President/Chief Executive Officer. The members of the Board of Management have collective powers and responsibilities. They share responsibility for the management of Koninklijke Philips Electronics N.V. (the ‘Company’), the deployment of its strategy and policies, and the achievement of its objectives and results. The Board of Management has, for practical purposes, adopted a division of responsibilities reflecting the functional and business areas monitored and reviewed by the individual members. According to the Company’s corporate objectives and Dutch law, the Board of Management is guided by the interests of the Company and its affiliated enterprises within the Group, taking into consideration the interests of the Company’s stakeholders, and is accountable for the performance of its assignment to the Supervisory Board and the General Meeting of Shareholders. The Rules of Procedure of the Board of Management are published on the Company’s website (www.philips.com/investor).

The Supervisory Board has decided to propose to the 2007 General Meeting of Shareholders to re-appoint Mr Kleisterlee as President/CEO and member of the Board of Management and to appoint Mr Steve Rusckowski (1957, American), CEO of the Company’s Medical Systems division, as member of the Board of Management, effective April 1, 2007.

Corporate governance

A full description of the Company’s corporate governance structure is published in the chapter Corporate governance of this Annual Report and on the Company’s website.

Gerard Kleisterlee

1946, Dutch

President/Chief Executive Officer (CEO) and Chairman of the Board of Management and the Group Management Committee

President/CEO and Chairman of the Board of Management since April 2001, member of the Board of Management since April 2000 and member of the Group Management Committee since January 1999

Corporate responsibilities: Communications, Internal Audit, Legal, Human Resources Management, Strategy, Technology Management, Consumer Healthcare Solutions

After graduating in electronic engineering at Eindhoven University of Technology, Gerard Kleisterlee started his career with Philips in 1974 at Medical Systems. In 1981 he became General Manager of Professional Audio Systems. In 1986 he joined Philips Components and, after becoming General Manager of Philips Display Components for Europe, he was appointed Managing Director of Philips Display Components worldwide in 1994. He became President of Philips Taiwan and Regional Manager for Philips Components in Asia Pacific in 1996. He was also responsible for the activities of the Philips Group in China from September 1997 to June 1998. From January 1999 to September 2000 he was President/CEO of the former Philips Components division. Gerard Kleisterlee is also Chairman of the Supervisory Board of Eindhoven University of Technology, member of the Supervisory Board of the Dutch Central Bank and holds an honorary doctorate from the Catholic University of Leuven, Belgium.

Pierre-Jean Sivignon

1956, French

Executive Vice-President and Chief Financial Officer (CFO)

CFO and member of the Board of Management and the Group Management Committee since June 2005

Corporate responsibilities: Control, Treasury, Fiscal, Mergers & Acquisitions, Investor Relations, Information Technology, Pensions, Real Estate, Corporate Investments, Supply Management

Pierre-Jean Sivignon graduated from the Ecole Superieure des Sciences Economiques in Paris, where he studied economics and business administration. After graduating he enrolled as an officer in the French Navy in 1978. Upon completion of his military services, he took a position as an external auditor for the firm Peat Marwick Mitchell and worked there until 1982. From 1982 until early 2001, he worked for the Schlumberger Group, where he held a variety of positions. These included Financial Controller for Dowell Schlumberger Oilfield Services (in Europe and Africa), General Manager of the Bank & Industry Division in Paris, and Group Treasurer in Paris and New York. In 2001, he moved to Faurecia SA, a leading supplier of automotive equipment listed on the Paris Stock Exchange, to become its CFO.

14     Philips Annual Report 2006

54 The Philips sectors		86 Risk management		100 Report of the Supervisory Board		110 Financial Statements

Gottfried Dutiné

1952, German

Executive Vice-President

Member of the Board of Management since April 2002 and member of the Group Management Committee since February 2002

Corporate responsibilities: Regions and Countries, Government Relations, Corporate Alliances, Strategic Initiatives, Emerging Markets

Gottfried Dutiné holds a degree in electrical engineering and a Ph.D. in communications technology from the University of Darmstadt, Germany. He began his career at Rockwell Collins in Frankfurt, where he was appointed Director of Engineering. In 1984 he joined Motorola as Group Director in charge of engineering and marketing of their European communications business. He went on to the Bosch group in 1989, where he held several positions. These included Managing Director of Blaupunkt GmbH and President Mobile Communications Division of Robert Bosch GmbH. At the end of 1997 he left for Alcatel in Paris and became Vice-President of the Telecom Board Committee and Area President Central & Eastern Europe and Russia.

Rudy Provoost

1959, Belgian

Executive Vice-President

Member of the Board of Management since April 2006 and member of the Group Management Committee since August 2003 and CEO of the Consumer Electronics division since 2004

Corporate responsibilities: Consumer Electronics, International Retail Board Management, LG.Philips LCD

Rudy Provoost holds degrees in psychology and business administration & management from the University of Gent. He began his career in 1984 with Procter & Gamble Benelux. In 1987 he joined Canon Belgium, in the fields of Sales and Marketing, becoming General Manager of Marketing for all business operations in 1989. In 1992 he joined Whirlpool Belgium as Managing Director, going on to become Vice-President Whirlpool Brand Group Europe in 1999. He joined Philips in October 2000, when he was appointed Executive Vice-President of Philips Consumer Electronics in Europe. He was appointed CEO of Philips Consumer Electronics Global Sales and Services in 2003. Rudy Provoost is also Chairman of LG.Philips LCD.

Theo van Deursen

1946, Dutch

Executive Vice-President

Member of the Board of Management since April 2006 and member of the Group Management Committee since April 2003 and CEO of the Lighting division since 2003

Corporate responsibilities: Lighting, Quality Policy Board,

Technology New Business Development Board

Theo van Deursen joined Philips in 1973 after graduating in electronics and business administration at Eindhoven University of Technology. In 1985 he graduated from IMD’s Executive MBA program and later complemented this study with an Executive MBA from the University of Virginia. Since then, he has held a number of key management positions, including CEO of the Lighting Electronics and Automotive & Special Lighting business groups. In 2002 he was entrusted with responsibility for the dissolution of the Components division.

Andrea Ragnetti

1960, Italian

Executive Vice-President

Member of the Board of Management since April 2006 and member of the Group Management Committee since January 2003, Chief Marketing Officer since 2003 and CEO of the Domestic Appliances and Personal Care division since 2005 Corporate responsibilities: Domestic Appliances and Personal Care, Global Marketing Management, Design, Lifestyle New Business Development Board

Andrea Ragnetti holds a degree in political science from Perugia University. He began his career in Marketing at Procter & Gamble in 1987. In 1993 he joined Joh. A. Benckiser, becoming Marketing Vice-President, a position he held until 1997. He joined Telecom Italia in 1998 as Executive Vice-President of Marketing for its Mobile division and took up a similar position with its Fixed Line division a year later.

Philips Annual Report 2006     15

6 Financial highlights		8 Message from the President		14 Our leadership		20 The Philips Group

Group Management Committee

The Group Management Committee consists of the members of the Board of Management and certain key officers. Members other than members of the Board of Management are appointed by the Supervisory Board. The task of the Group Management Committee, the highest consultative body within Philips, is to ensure that business issues and practices are shared across Philips and to implement common policies.

Mr Gerard Ruizendaal (1958, Dutch), Chief Strategy Officer and Group Controller, and Mr Eric Coutinho (1951, Dutch), Chief Legal Officer and Company Secretary, were appointed as members of the Group Management Committee as of February 1, 2007.

Also, as of February 1, 2007, Mr Hayko Kroese (1955, Dutch) succeeded Mr Tjerk Hooghiemstra as global head of Human Resources Management and was appointed as member of the Group Management Committee on the same date.

Barbara Kux

1954, Swiss

Member of the GMC since October 2003
and Chief Procurement Officer since 2003

Corporate responsibilities: Supply Management, Sustainability

Barbara Kux holds an MBA (Hons) from INSEAD. She began her career with Nestlé Germany as Marketing Manager in 1979. In 1984 she joined McKinsey as Management Consultant and Engagement Manager for Global Strategies and Business Transformations. Five years later she joined ABB as Vice President responsible for building up the company’s business in Central and Eastern Europe. In 1993 she returned to Nestlé as Vice President of the Central and Eastern European businesses. In 1999 she was appointed Executive Director by Ford of Europe responsible for European businesses and the capturing of substantial post merger synergies across all businesses, brands and functions, including procurement. She is a Member of the Board of Directors of INSEAD.

Tjerk Hooghiemstra

1956, Dutch

Member of the GMC since April 2000; responsible for Human Resources Management (HRM) since 2000 Corporate responsibilities: Human Resources Management

Tjerk Hooghiemstra graduated in economics from Erasmus University in Rotterdam in 1982. He spent three years with the Amro Bank before joining the Hay Group in 1986, becoming a member of its European Executive Board and a Partner of the Hay Group Exempted Partnership. Joining Philips in 1996, he was appointed Managing Director of HRM for the Consumer Electronics division.

Rick Harwig

1949, Dutch

Member of the GMC and Chief Technology Officer since April 2006 Corporate responsibilities: Technology Management, Research, Applied Technologies, Incubators, Intellectual Property & Standards, Molecular Diagnostics, PIC Bangalore

After finishing his PhD research in 1977, Rick Harwig joined Philips Research in 1978 to develop processes for integrated circuits on silicon. In 1984, he became manager of the Integrated Circuits advanced development in a joint program between Research and Semiconductors. In 1991, he became director of the Advanced Systems Laboratories of Consumer Electronics, charged with development of digital media applications. In 1977 he returned to Research as head of Access and Interaction Systems. From August 2000 to February 2007, he led the management of Philips Research at the High Tech Campus, Eindhoven. He was appointed Chief Executive Officer of Philips Research on January 1, 2004.

Daniel Hartert

1958, German

Member of the GMC since August 2003 and Chief Information Officer (CIO) since 2002
Corporate responsibilities: Information Technology

Daniel Hartert graduated in computer science and business administration in 1986. In the first six years of his professional career he held various technical positions with Robert Bosch GmbH and VLSI Technology GmbH in Munich. In 1992 he joined Bertelsmann AG as IT Director of its European music business. In 1995 he moved to New York as International CIO of Bertelsmann Music Group, before returning to Germany four years later to become Bertelsmann CIO and member of the Executive Board of Bertelsmann’s Direct Group. In 2001 he was appointed to the Executive Board of Arvato, the Services Division of Bertelsmann.

Steve Rusckowski

1957, American

Member of the GMC and CEO of Philips Medical Systems since November 2006

Corporate responsibilities: Medical Systems,
Healthcare New Business Development Board

Steve Rusckowski holds a Bachelor of Science in Mechanical Engineering from Worcester Polytechnic Institute and a Master’s degree in management science from the Massachusetts Institute of Technology (MIT). Before joining Philips he held numerous management positions with the healthcare division of Hewlett-Packard/Agilent Technologies. He was the General Manager of Agilent’s Healthcare Solutions Group when Philips acquired this business in 2001. Steve Rusckowski was previously the CEO of the Imaging Systems business group of Philips Medical Systems. He was appointed CEO of Philips Medical Systems in 2006.

16     Philips Annual Report 2006

54 The Philips sectors		86 Risk management		100 Report of the Supervisory Board		110 Financial Statements

In an interview with CNN.com’s World Business, Gerard Kleisterlee shared some insights into leadership, and how it is practiced at Philips.

“ We’ve tried to develop a vision for Philips that creates the kind of engagement, enthusiasm and creativity that a successful organization needs.”

“ Things happen in the front line, they happen with customers, they happen in our sales organizations where our operations are, and that’s where we like to spend our time, because it keeps us connected ... customers are always a great source of inspiration.”

“ Candor is important for any successful organization that wants to build sustainable success. Challenging people for their own opinions and in particular getting diversity into your workforce so that you have people from other walks of life and different perspectives on how things can and should be done — that’s important to maintain a certain tension that drives performance.”

“ What I find most important in leaders is that they have the humility to know that they don’t know everything and the ability to continually learn from others, and that they use the skills and the know-how of others to become better leaders themselves.”

Philips Annual Report 2006     17

6 Financial highlights		8 Message from the President		14 Our leadership		20 The Philips Group

Supervisory Board

The Supervisory Board supervises the policies of the executive management (the Board of Management) and the general course of affairs of Philips and advises the executive management thereon. The Supervisory Board, in the two-tier corporate structure under Dutch law, is a separate and independent body from the Board of Management. The Rules of Procedure of the Supervisory Board are published on the Company’s website.

The Supervisory Board will propose to the 2007 General Meeting of Shareholders to appoint Mr Heino von Prondzynski (1949, German) as member of the Supervisory Board as of March 29, 2007. Mr Von Prondzynski is a former member of the Corporate Executive Committee of the F. Hoffman-La Roche Group and former CEO of the Division Diagnostics Roche.

For more details on the activities of the Supervisory Board, see the chapter Report of the Supervisory Board of this Annual Report.

L. Schweitzer

1942, French***

Vice-Chairman and Secretary

Member of the Supervisory Board since 1997;
third term expires in 2009

Former CEO of Renault and Renault-Nissan BV. Chairman of the Board of Renault and AstraZeneca. Non-executive director of BNP Paribas, Electricité de France, Veolia Environnement, Volvo AB and L’Oréal.

Sir Richard Greenbury

1936, British**

Member of the Supervisory Board since 1998;
third term expires in 2010

Former Chairman and CEO of Marks & Spencer and former Director of Lloyds TSB, British Gas, ICI, Zeneca and Electronics Boutique Plc.

W. de Kleuver

1936, Dutch** ***

Chairman

Member of the Supervisory Board since 1998;
third term expires in 2010

Former Executive Vice-President of Royal Philips Electronics.

J-M. Hessels

1942, Dutch*

Member of the Supervisory Board since 1999;
second term expires in 2007

Former CEO of Royal Vendex KBB and currently Chairman of the Supervisory Board of Euronext, member of the Supervisory Boards of Heineken and Fortis and member of the International Advisory Board of Blackstone Group.

18     Philips Annual Report 2006

54 The Philips sectors		86 Risk management		100 Report of the Supervisory Board		110 Financial Statements

Prof. K.A.L.M. van Miert

1942, Belgian*

Member of the Supervisory Board since 2000;
second term expires in 2008

Former Vice-President of the European Commission and former President of Nyenrode University, member of the Supervisory Boards of RWE, Agfa Gevaert, De Persgroep, Munich Re, Anglo American, Vivendi Universal, Sibelco and Solvay and member of the Advisory Board of Goldman Sachs, Uni-Credito and FITCH.

E. Kist

1944, Dutch*

Member of the Supervisory Board since 2004;
first term expires in 2008

Former Chairman of the Executive Board of ING Group and currently member of the Supervisory Boards of the Dutch Central Bank, DSM and Moody’s Investor Services.

C.J.A. van Lede

1942, Dutch**

Member of the Supervisory Board since 2003;
first term expires in 2007

Former Chairman of the Board of Management of Akzo Nobel and currently Chairman of the Supervisory Board of Heineken, member of the Supervisory Boards of Akzo Nobel, AirFrance/ KLM, Reed Elsevier, Sara Lee Corporation, Air Liquide, Chairman of the Board of Directors of INSEAD and Senior Advisor JP Morgan Plc.

J.J. Schiro

1946, American*

Member of the Supervisory Board since 2005;
first term expires in 2009

CEO of Zürich Financial Services and Chairman of the Group Management Board. Also serves on various boards of private and listed companies including PepsiCo as Chairman of the Audit Committee and member of the Supervisory Board, Chairman of the Swiss American Chamber of Commerce.

J.M. Thompson

1942, Canadian**

Member of the Supervisory Board since 2003;
first term expires in 2007

Former Vice-Chairman of the Board of Directors of IBM, and director of Hertz and Robert Mondavi; currently Chairman of the Board of Toronto Dominion Bank and a Director of Thomson Corporation.

Wong Ngit Liong

1941, Singaporean

Member of the Supervisory Board since 2005;
first term expires in 2009

Chairman and CEO of Venture Corporation. Also serves on the boards of various listed and private companies, including DBS Bank and DBS Group Holdings and SIA Engineering Company. Chairman of the National University of Singapore Board of Trustees.

Philips Annual Report 2006     19

6 Financial highlights		8 Message from the President		14 Our leadership		20 The Philips Group

						The Philips Way

The Philips Way

Philips has been improving the quality of life with pioneering innovations for over 115 years, ever since the company was founded as a manufacturer of lamps in 1891. We have simplified and enriched people’s lives with key advances in the fields of medical imaging, television, lighting, optical technology and integrated circuits, to name but a few.

To remain viable and competitive, however, every company must embrace change. So, while celebrating our rich heritage, we have in recent years been engaged in a process of fundamental transformation — one designed to turn Philips into a market-driven company capable of delivering sustained profitable growth, thereby creating value for our stakeholders.

2006 saw a major step on this journey of change with the divestment of a majority stake in our Semiconductors division. This move was driven by the firm belief that it represented the best course of action for both Philips and Semiconductors/NXP. Philips no longer needs to own a semiconductor manufacturer to have access to state-of-the-art semiconductor solutions, while the transfer gives NXP the increased flexibility it requires to invest, grow and build scale in the highly competitive semiconductor market.

The way forward

Today, Philips is a much simpler company focused on the market, centered around the brand and driven by innovation. The emergence of the experience economy is creating a new market space with considerable growth potential for Philips. It is one in which we can leverage our competencies in design, technology and branding to capture value from some of the major economic, social and demographic trends, e.g. the growing demand for healthcare, the desire for a greater sense of well-being — in the broadest sense of the word — and the need for energy efficiency.

Our mission remains to improve the quality of people’s lives through the timely introduction of meaningful innovations. In an increasingly complex world, we strive to bring the power of human insight and experience to technology. We believe that technology should enable people to live life to the full. Applying our deep understanding of people’s needs and desires and delivering on our promise of simplicity, we empower our customers with solutions that are advanced, yet designed around them and easy to experience.

Our solutions promote health and well-being and enhance the spaces in which people live, work and play, e.g. by offering them improved diagnostic experiences or greater control over their surroundings. Increasingly, these solutions are intelligent (sensing, learning and adapting), connected and easy to interact with.

Based on insights into what consumers really need and want, and supported by advances in miniaturization and interaction design, our focus is gradually evolving towards embedded functionality as an enabler of experiences. In this way, we can help create appealing ambiences and experiences in the home, offices, hotels, public spaces, sports venues, etc., making life simpler, more enjoyable and more productive.

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54 The Philips sectors		86 Risk management		100 Report of the Supervisory Board		110 Financial Statements

“The emergence of the experience economy is creating a new market space with considerable growth potential for Philips. It is one in which we can leverage our competencies in design, technology and branding to capture value from some of the major economic, social and demographic trends.”

Our enablers

Our brand promise

Our “sense and simplicity” brand promise guides us in everything we do. It expresses a commitment to put people at the center of our thinking, to eliminate unnecessary complexity, and to emphasize the meaningful benefits of technology. It also expresses how we want to be perceived by all our stakeholders: open and transparent, approachable, easy to do business with.

Our adoption of the ‘Net Promoter Score’ (NPS), which measures people’s willingness to recommend a company/product to a friend or colleague, will tell us just how well we are progressing in this regard.

Our mindset and way of working — One Philips

The concept of One Philips is central to becoming a focused, market-driven company that can deliver sustained profitable growth. One Philips is all about unlocking synergies by leveraging competencies and resources across the company. It expresses the belief that by working together we can create more value than the sum of the parts and achieve further growth at the
points where our application domains converge.

Our talent

Ultimately, the quality of our people will determine whether we fulfill our mission and deliver on our promises to our external stakeholders. Accordingly, we are strengthening our talent management in order to secure the quality of leadership required to take our company forward — leaders who pursue market insight, create innovative strategies, inspire commitment, leverage capabilities, champion people’s growth and drive for results.

Leadership is very much about securing employee engagement. This requires the creation of a diverse and inclusive working environment, where all employees are aligned and energized to contribute. We will be driving this forward on various fronts.

Innovation

We leverage our multi-disciplinary research and development capabilities to create new technologies and sustain our strong intellectual property position. And we are maintaining our investment in technology leadership, e.g. at our Incubators, which act as seedbeds for the transformation of promising innovations into winning business propositions.

Design

We continue to enrich our design process by integrating established design skills with input from other disciplines such as the human sciences, technology and business — and always with a clear people focus. It is our intention to design solutions based on in-depth user research, which harness technology to improve the quality of people’s lives.

Philips Annual Report 2006     21

6 Financial highlights		8 Message from the President		14 Our leadership		20 The Philips Group

						The Philips Way

Sustainability

Social and environmental performance is a driver of innovation and value propositions, helping to keep our business sustainable in both the short and long term. In parallel and complementary to this Annual Report 2006, we have published our Sustainability Report 2006.

Our strategy

We have defined six strategic drivers to enable us to attain our goals:

•		Increase profitability through re-allocation of resources towards opportunities offering more consistent and higher returns
•		Leverage the Philips brand and our core competencies in healthcare, lifestyle and technology to grow in selected categories and geographies
•		Build partnerships with key customers and suppliers, both in the business-to-business and business-to-consumer areas
•		Continue to invest in maintaining world-class innovation and leverage our strong intellectual property position
•		Strengthen our leadership competencies
•		Drive productivity through business transformation and operational excellence

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Our structure and businesses

Koninklijke Philips Electronics N.V. (the ‘Company’ or ‘Royal Philips Electronics’) is the parent company of the Philips Group (‘Philips’ or the ‘Group’). Its shares are listed on the stock markets of Euronext Amsterdam and the New York Stock Exchange. The executive management of the Company is entrusted to the Board of Management under the supervision of the Supervisory Board. The Board of Management leads the Group as a ‘strategic controller’ and driver of synergy value. The Group Management Committee, consisting of the members of the Board of Management and certain key officers, is the highest consultative body within Philips and the main platform for policy alignment, deployment and implementation. Its tasks are to ensure that business issues and practices are shared across Philips, to implement common policies and to foster the spirit of collaboration required to unlock Philips’ full potential.

Philips’ activities are organized on a divisional basis, with each operating division — Medical Systems, Domestic Appliances and Personal Care, Consumer Electronics and Lighting — being responsible for the management of its businesses worldwide. The businesses are the primary point of accountability and source of value creation; they are provided with effective and efficient support through shared service centers.

Country management supports value creation, connecting Philips with key stakeholders, especially its employees, customers, government and society.

At the end of 2006, Philips had approximately 130 production sites in 26 countries, sales and service outlets in approximately 150 countries, and some 121,700 employees.

As of January 2007, the main activities within the Other Activities sector have been repositioned as the Innovation & Emerging Businesses group. By leveraging Philips’ brand, technology base and distribution network, the Company aims, through this group, to invest in projects that are not currently part of its operating divisions, but which will lead to additional organic growth or create value through future spin-offs. Innovation & Emerging Businesses includes Corporate Research, Philips’ Business Incubators and Intellectual Property & Standards, as well as Consumer Healthcare Solutions. Also effective January 2007, the sector Unallocated has been renamed Group Management & Services, which includes the global service units, corporate and regional costs, pension costs and corporate investments in the Philips brand.

Philips Annual Report 2006     23

54 The Philips sectors		86 Risk management		100 Report of the Supervisory Board		110 Financial Statements

						The Philips Way

Enhancing healthcare

In the healthcare and wellness area in particular, Philips can have a direct positive impact on people’s quality of life. That’s why we are expanding our already highly successful healthcare business further. Our solutions enable healthcare professionals to enhance the quality and efficiency of care and empower people to manage their own health and maintain a healthy lifestyle.

Philips Annual Report 2006     25

54 The Philips sectors		86 Risk management		100 Report of the Supervisory Board		110 Financial Statements

New lifestyle experiences

The Philips brand promise — “sense and simplicity” — is all about liberating people from the constraints of technology, so that they can create a richer, less complex world for themselves. Building upon our understanding of consumers’ needs, desires and aspirations, we are driving the ‘new convergence’ — in both the lifestyle and health & wellness domains — to offer them novel, more satisfying experiences.

Philips Annual Report 2006     27

54 The Philips sectors		86 Risk management		100 Report of the Supervisory Board		110 Financial Statements

						The Philips Way

Technology as value enabler

Philips has a long and rich tradition of meaningful innovation. Today, advanced embedded technology is at the heart of our user-focused healthcare and lifestyle products. We are committed to Open Innovation — teaming up with industrial and academic partners to speed up the creation and adoption of technologies that make life easier, more enjoyable and more productive.

Philips Annual Report 2006     29

6 Financial highlights		8 Message from the President		14 Our leadership		20 The Philips Group

						Management discussion and analysis

Management discussion and analysis

The following discussion is based on the US GAAP consolidated financial statements and should be read in conjunction with these statements. The section which analyzes the 2005 financial results compared to 2004, and the section critical accounting policies, have not been included in this Annual Report. These sections are included in Philips’ Form 20-F for the financial year 2006, which is filed electronically with the US Securities and Exchange Commission.

Forward-looking statements

This document contains certain forward-looking statements with respect to the financial condition, results of operations and business of Philips and certain of the plans and objectives of Philips with respect to these items, in particular the Outlook section of the chapter The Philips Group in this Annual Report. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those projected or implied in these forward-looking statements. These factors include, but are not limited to, levels of consumer and business spending in major economies, changes in consumer tastes and preferences, changes in law, the performance of the financial markets, pension costs, the levels of marketing and promotional expenditures by Philips and its competitors, raw materials and employee costs, changes in exchange and interest rates, changes in tax rates and future business combinations, acquisitions or divestments and the rate of technological changes, political and military developments in countries where Philips operates, and industry consolidation.

Statements regarding market share, including those on Philips’ competitive position, contained in this document are based on outside sources such as specialized research institutes, industry and dealer panels in combination with management estimates. Where full-year information regarding 2006 is not yet available to Philips, those statements may also be based on estimates and projections prepared by outside sources or management. Rankings are based on sales unless otherwise stated.

Fair value information

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

Non-US GAAP measures

Koninklijke Philips Electronics N.V. (the ‘Company’) believes that an understanding of sales performance is enhanced when the effects of currency movements and acquisitions and divestments (changes in consolidation) are excluded. Accordingly, in addition to presenting ‘nominal growth’, ‘comparable growth’ is also provided. Comparable sales exclude the effects of currency movements and changes in consolidation. As indicated in the Accounting Policies, sales and income are translated from foreign currencies into the Company’s reporting currency, the euro, at the exchange rate on transaction dates during the respective years. As a result of significant currency movements during the years presented, the effects of translating foreign currency sales amounts into euros had a material impact that has been excluded in arriving at the comparable sales in euros. Currency effects have been calculated by translating previous years’ foreign currency sales amounts into euros at the following year’s exchange rates in comparison with the sales in euros as historically reported. Years under review were characterized by a number of acquisitions and divestments, as a result of which activities were consolidated or deconsolidated. The effect of consolidation changes has also been excluded in arriving at the comparable sales. For the purpose of calculating comparable sales growth, when a previously consolidated entity is sold or contributed to a venture that is not consolidated by the Company, relevant sales are excluded from impacted prior-year periods. Similarly, when an entity is acquired, relevant sales are excluded from impacted periods.

The Company uses the term earnings before interest, tax and amortization (EBITA) to evaluate the performance of the Philips Group and its operating divisions. Referencing EBITA will make the underlying performance of our businesses more transparent by factoring out the amortization of intangible assets, which arises when acquisitions are consolidated. EBITA represents income from continuing operations excluding results attributable to minority interest holders, results relating to equity-accounted investees, income taxes, financial income and expenses, and amortization.

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

The total net debt position as a percentage of the sum of total group equity (stockholders’ equity and minority interests) and net debt is presented to express the financial strength of the Company. This measure is widely used by investment analysts and is therefore included in the disclosure.

Cash flows before financing activities, being the sum total of net cash from operating activities and net cash from investing activities, are presented separately to facilitate the reader’s understanding of the Company’s funding requirements.

A reconciliation of non-US GAAP information, as set out above, to the most directly comparable US GAAP financial measures is given in the chapter Reconciliation of non-US GAAP information.

GAAP measures

The term earnings before interest and tax (EBIT) has the same meaning as Income from operations (IFO), and is used to evaluate the performance of the Philips Group and its operating divisions.

The term ‘equity-accounted investees’ was previously referred to as ‘unconsolidated companies’; the meaning however is the same.

Reclassification

Philips completed the sale of a majority stake in its Semiconductors division on September 29, 2006. Previous years have been restated to present the Semiconductors division as a discontinued operation.

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“The Simplicity Event is designed to exist just outside of our current realm of activity, and thus be slightly provocative, so that we are forced to ask ourselves the urgent questions that relate to our future. What will people care about in the coming years? What new business opportunities will exist? Which of these opportunities should Philips pursue?”

Lisa Stuardi, Director of Brand Strategy, Philips Global Marketing Management

More than 5,000 people – including media, design experts, customers, marketing gurus and industry thought leaders – have visited Simplicity Events in Paris, Amsterdam, New York and London, helping Philips explore its vision of simplicity and people-centric innovation.

Philips Annual Report 2006     31

6 Financial highlights		8 Message from the President		14 Our leadership		20 The Philips Group

						Management discussion and analysis

Management summary

The year 2006

•		2006 was a landmark year in the history of Philips, one that included the sale of a majority stake in the Semiconductors division, the further disposal of cyclical, non-core activities and a number of strategically-aligned acquisitions, targeted at high-growth, high-profit areas.
•		Continuation of the share repurchase program resulted in total cash returned to shareholders of over EUR 3.3 billion in 2006, including the annual dividend.
•		Full-year sales in 2006 increased by 5% nominally and 6% comparably to EUR 26,976 million.
•		EBIT amounted to EUR 1,183 million in 2006, compared with EUR 1,472 million in 2005, reflecting – amongst other things – a EUR 256 million charge for asbestos-related product liabilities, net of insurance recoveries, in 2006 as well as a EUR 136 million gain on the TPV transaction and a EUR 170 million release of a post-retirement medical benefits provision, both in 2005.
•		Results relating to equity-accounted investees decreased as the 2005 results included a EUR 1,545 million profit from the sale of several investments.
•		Income from discontinued operations of EUR 4,464 million included both Semiconductors’ operational result and the EUR 4,283 million gain on the sale of the majority stake in the division.
•		Net income amounted to EUR 5,383 million, compared to EUR 2,868 million in 2005, primarily as a result of the sale of a majority stake in the Semiconductors division.

Key data

in millions of euros unless otherwise stated

		20041)				20051)				2006
Sales			24,855				25,775				26,976
% increase, nominal			3				4				5
% increase, comparable			8				4				6
EBITA			1,864				1,577				1,382
as a % of sales			7.5				6.1				5.1
EBIT			1,156				1,472				1,183
as a % of sales			4.7				5.7				4.4
Net income			2,836				2,868				5,383
Net operating capital (NOC)			4,524				5,679				8,724
Cash flows before financing activities			2,757				2,828				(2,469	)
Employees (FTEs)			161,586				159,226				121,732
of which discontinued operations			35,116				37,417				—

Sales in 2006 increased by 6% on a comparable basis compared to 2005 (5% nominally). Medical Systems (+7%), Domestic Appliances and Personal Care (DAP) (+11%), Consumer Electronics (CE) (+5%) and Lighting (+8%) all posted significant comparable sales growth. Nominal sales growth of 5% was mainly driven by DAP (+21%, boosted by the acquisitions of Lifeline and Avent) and Lighting (+14%, boosted by the acquisition of Lumileds). The overall sales increase in the main operating sectors was partly offset by a 24% nominal sales decline in Other Activities, affected by the divestments of Optical Storage, Philips Business Communications and Philips Enabling Technologies Group. On a comparable basis, sales of Other Activities declined by 7%.

Gross margin of EUR 8,295 million increased by EUR 354 million compared to 2005, driven by the sales growth. Gross margin as a percentage of sales slightly declined, from 30.8% in 2005 to 30.7% in 2006. The sales-driven improvement was partly offset by a EUR 256 million charge, primarily related to an accrual for unasserted potential future claims in respect of asbestos-related product liabilities, net of insurance recoveries.

For further details on asbestos-related product liabilities, see note 27 to the consolidated financial statements in this Annual Report.

As a percentage of sales, selling expenses (17.3%) and research and development (R&D) expenses (6.2%) were the same as in 2005. General and administrative (G&A) expenses, however, increased both in nominal terms (+ EUR 180 million) and as a percentage of sales, to 3.7%. In 2006, additional implementation costs related to compliance with section 404 of the US Sarbanes-Oxley Act were required, while 2005 included a EUR 121 million release of a postretirement medical benefits provision.

EBITA of EUR 1,382 million decreased by EUR 195 million compared to 2005. Amortization charges of EUR 199 million increased by EUR 94 million, mainly due to acquisitions in Medical Systems (Intermagnetics and Witt Biomedical), DAP (Lifeline and Avent) and Lighting (Lumileds).

EBIT decreased by EUR 289 million, impacted by the following significant incidental items:

•

in 2006, a EUR 256 million charge, primarily related to an additional accrual for asbestos-related product liabilities, net of insurance recoveries, included in the EBIT of Other Activities;

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•		in 2005, a EUR 170 million release of a postretirement medical benefits provision, of which EUR 116 million was included in Unallocated;
•		in 2005, a EUR 136 million gain on the sale of certain parts of CE’s monitors and FlatTV business to TPV Technology.

EBIT as a percentage of sales decreased from 5.7% to 4.4%, despite EBIT increases achieved by Medical Systems, DAP and Lighting.

Medical Systems generated EBIT of EUR 795 million (2005: EUR 679 million), benefiting from 7% comparable sales growth and improved gross margins, partly offset by acquisition-related charges.

DAP improved its EBIT by EUR 28 million to EUR 386 million. The sales-driven EBIT increase was partly offset by acquisition-related charges and a EUR 18 million loss in the newly set-up Consumer Healthcare Solutions.

CE achieved EBIT of EUR 416 million in 2006, compared to EUR 506 million in 2005, which benefited from a EUR 136 million gain on the TPV transaction. The severe margin erosion in the first half of 2006, due to intense competition, eased off in the second half of the year. However, the beginning of 2007 is expected to be challenging, due to continuing pressure on margins as supply of FlatTV outstrips market demand.

Lighting’s EBIT increased to EUR 635 million (2005: EUR 556 million), mainly driven by profitable sales growth, lower non-manufacturing costs and the inclusion of Lumileds for the full year.

Other Activities’ EBIT loss of EUR 448 million was affected by the aforementioned EUR 256 million charge for asbestos-related product liabilities, partly offset by gains on the sale of businesses.

The Unallocated sector generated a negative EBIT of EUR 601 million (2005: negative EUR 471 million). The main reason for the lower EBIT was the fact that 2005 benefited from a EUR 116 million release of the postretirement medical benefits provision, which was partly offset by lower pension and other postretirement benefits costs in 2006.

Net income in 2006 amounted to EUR 5,383 million compared to EUR 2,868 million in 2005. The increase is largely attributable to the after-tax gain of EUR 4,283

“We are proud to win, but most of all, to show how working together helps us learn, improve and grow our business. When we boost quality, it’s good for Philips and our customers.”

Yujin Zheng, project leader

Engaged talent is vital for an organization’s success. The workforce of Philips Lighting has a passion for improvement, as evidenced by the annual Quality Improvement Competition. In 2006, over 2,600 teams from across the globe took part. The winners showed what dedication to teamwork and problem-solving can achieve. Through improved manufacturing and inspection techniques, a team from China, working with colleagues in Turnhout, Belgium, cut wastage in the production of UHP lamps for digital projection systems. The number of loose burner defects dropped to virtually zero, delighting key customer Sony, which recognized this consistent high quality by naming Philips ‘best-performing supplier of the year’.

Philips Annual Report 2006     33

6 Financial highlights		8 Message from the President		14 Our leadership		20 The Philips Group

						Management discussion and analysis

Together with the Catharina Hospital in Eindhoven, Netherlands, Philips introduced the first Ambient Experience Catheterization Lab, putting patient well-being at the center of the hospital experience. Ambient Experience solutions combine lighting and consumer electronics to create an environment that is both friendly and reassuring for patients and more effective for physicians, thus improving the quality of healthcare.

million on the sale of the majority stake in the Semiconductors division and lower income tax, partly offset by the lower operational result of LG. Philips LCD. Net income in 2005 included a EUR 1,778 million gain on the sale of several financial holdings, partly offset by a EUR 416 million impairment charge for LG. Philips Displays.

Cash flows before financing activities provided by continuing operations decreased from EUR 2,828 million in 2005 to a cash outflow of EUR 2,469 million in 2006, which was mainly due to several acquisitions and higher pension contributions in the United Kingdom and United States. Cash flows in 2005 were positively affected by the sale of several financial holdings, mainly in NAVTEQ, TSMC and LG.Philips LCD.

In 2006, Philips cancelled over 173 million shares. During the year, 102 million shares were repurchased, thereby returning EUR 3.3 billion to shareholders including the annual dividend.

Performance of the Group

Income statement

in millions of euros unless otherwise stated

		20041)				20051)				2006
Sales			24,855				25,775				26,976
Earnings before interest and tax			1,156				1,472				1,183
as a % of sales			4.7				5.7				4.4
Financial income and expenses			216				108				34
Income tax expense			(230	)			(506	)			(137	)
Results of equity-accounted investees			1,464				1,754				(157	)
Minority interests			(22	)			3				(4	)
Income from continuing operations			2,584				2,831				919
Discontinued operations			252				37				4,464
Net income			2,836				2,868				5,383
Per common share (in euro) – basic			2.22				2.29				4.58
Per common share (in euro) – diluted			2.21				2.29				4.55

Sales

In percentage terms, the composition of the growth in sales in 2006, compared with 2005, was as follows:

Sales growth composition 2006 versus 2005¹⁾

in %

		com-								consoli-
		parable				currency				dation				nominal
		growth				effects				changes				growth
Medical Systems			7.3				(1.1	)			0.1				6.3
DAP			11.2				(0.1	)			9.4				20.5
Consumer Electronics			5.4				0.1				(4.0	)			1.5
Lighting			8.3				(0.3	)			6.5				14.5
Other Activities			(6.8	)			(0.4	)			(17.0	)			(24.2	)
Philips Group			6.1				(0.3	)			(1.1	)			4.7

Sales in 2006 increased by 4.7% on a nominal basis and 6.1% on a comparable basis, to EUR 26,976 million. The net effect of acquisitions, divestments and currency movements resulted in a net decline of 1.4%. On a comparable basis, sales growth was particularly strong in DAP and Lighting.

The robust comparable growth at DAP was primarily driven by Shaving & Beauty, Oral Healthcare and Domestic Appliances, each of which showed double-digit growth. The Lighting increase was attributable to double-digit comparable growth in Luminaires and Automotive, Special Lighting & UHP. Medical Systems achieved sales growth

34     Philips Annual Report 2006

54 The Philips sectors		86 Risk management		100 Report of the Supervisory Board		110 Financial Statements

across all categories except MedQuist. Growth was most visible in Computed Tomography and Nuclear Medicine, each of which generated above 10% sales growth. In CE, the sales increase was driven by double-digit growth in Connected Displays and Peripherals & Accessories, partly offset by declines in Entertainment Solutions and Home Networks. Other Activities recorded a nominal sales decrease mainly due to the divestment of non-core activities within Corporate Investments.

Earnings before interest and tax

The following overview shows sales and EBIT per sector.

Sales and EBIT 2006

in millions of euros unless otherwise stated

										as a % of
		sales				EBIT				sales
Medical Systems			6,742				795				11.8
DAP			2,645				386				14.6
Consumer Electronics			10,576				416				3.9
Lighting			5,466				635				11.6
Other Activities			1,547				(448	)			(29.0	)
Unallocated			—				(601	)			—
Philips Group			26,976				1,183				4.4

Sales and EBIT 2005¹⁾

in millions of euros unless otherwise stated

										as a % of
		sales				EBIT				sales
Medical Systems			6,343				679				10.7
DAP			2,194				358				16.3
Consumer Electronics			10,422				506				4.9
Lighting			4,775				556				11.6
Other Activities			2,041				(156	)			(7.6	)
Unallocated			—				(471	)			—
Philips Group			25,775				1,472				5.7

Total EBIT decreased from 5.7% to 4.4% of sales in 2006, mainly due to a EUR 256 million charge for asbestos-related product liabilities, net of insurance recoveries, in 2006, while the results in 2005 benefited from a EUR 136 million gain on the sale of certain activities within CE to TPV Technology and a EUR 170 million release of the postretirement medical benefits provision.

Medical Systems’ EBIT increased by 17% over 2005. The 2006 results reflected the impact of higher sales and enhanced cost controls, which more than offset post-merger integration costs and purchase-accounting charges (totaling EUR 78 million) related to Witt Biomedical and Intermagnetics. 2005 included a EUR 87 million loss for MedQuist, including EUR 50 million charges for customer accommodation payments.

DAP’s EBIT improved by 8%, primarily due to strong sales growth and an improved gross margin. EBIT as a percentage of sales declined slightly compared to 2005, due to acquisition-related charges for Avent (EUR 14 million) and Lifeline Systems (EUR 16 million) as well as investments in Consumer Healthcare Solutions.

CE’s EBIT decreased from EUR 506 million in 2005 to EUR 416 million in 2006. The 2005 result included a EUR 136 million gain related to the sale of certain parts of CE’s monitors and FlatTV business to TVP Technology. Excluding the aforementioned TPV transaction gain in 2005, EBIT as a percentage of sales increased from 3.6% in 2005 to 3.9% as a result of the ongoing focus on margin management, despite difficult market conditions in the first half of 2006.

Lighting’s EBIT improved by 14% over 2005, mainly as a consequence of the strong sales growth. The 2005 result included a loss of EUR 11 million for the acquired Lumileds business (mainly acquisition-related charges), while results in 2006 included a EUR 43 million acquisition-related charge.

EBIT of Other Activities

in millions of euros

		2004				2005				2006
Corporate Technologies			(323	)			(219	)			(205	)
Corporate Investments			102				(58	)			14
Other			587				121				(257	)
			366				(156	)			(448	)

The result of Other Activities in 2006 was negatively impacted by the EUR 256 million charge in respect of asbestos-related product liabilities, net of insurance recoveries. Results improved at Corporate Technologies, aided by a gain on the sale of CryptoTec (EUR 31 million), whereas 2005 included a loss for the divested PolyLED. Corporate Investments’ result included a gain on the sale of businesses totaling EUR 44 million. The EBIT of Other Activities was further affected by gains on the sale of real estate totaling EUR 54 million, compared to EUR 122 million in 2005. The sale of the Philips Pension Competence Center in 2005 resulted in a gain of EUR 42 million.

Philips Annual Report 2006     35

6 Financial highlights		8 Message from the President		14 Our leadership		20 The Philips Group

						Management discussion and analysis

The sector Unallocated mainly reflects costs of the corporate and regional organizations, pension and other postretirement costs, and investments in the global brand campaign. The total loss for Unallocated increased by EUR 130 million over 2005, mainly due to a release of a postretirement medical benefits provision in 2005 (EUR 116 million) and higher costs in the corporate center in 2006. The increased overhead costs were mainly due to implementation costs related to compliance with section 404 of the US Sarbanes-Oxley Act.

Pensions

Net periodic pension costs of defined-benefit pension plans amounted to EUR 75 million in 2006 (2005: EUR 157 million). The contributions to defined-contribution pension plans amounted to EUR 80 million (2005: EUR 59 million).

Total pension (costs) / benefits

The new accounting rule for pensions and other postretirement benefits (SFAS No. 158) requires Philips to post the funded status of pensions and other postretirement benefit plans on the balance sheet. As a consequence, actuarial gains and losses will directly affect stockholders’ equity through changes in other comprehensive income, while there will no longer be any additional minimum pension liability. These changes resulted in a net reduction of stockholders’ equity of EUR 477 million in 2006.

This new accounting standard has no impact on the Company’s income statement.

Restructuring and impairment charges

During 2006, a net charge of EUR 116 million was included in EBIT for restructuring and impairments.

Restructuring and impairment charges

in millions of euros

		20041)				20051)				2006
Restructuring:
- Medical Systems			3				2				15
- DAP			8				4				13
- Consumer Electronics			140				67				12
- Lighting			35				35				48
- Other Activities			35				26				—
Release of excess provisions			(18	)			(8	)			(5	)
Total restructuring			203				126				83
Asset impairment:
- Lighting			30				—				—
- Other Activities			23				15				—
Write-off of in-process R&D			—				6				33
Total asset impairment			53				21				33
Goodwill impairment:
- Medical Systems			590				—				—
- Other Activities			2				—				—
Total goodwill impairment			592				—				—
Total restructuring and impairment			848				147				116

The most significant new restructuring projects in 2006 were:

•		Medical Systems: transfer of the production of SPECT cameras from Milpitas to Cleveland;
•		DAP: restructuring of the Klagenfurtsite (Austria), reduction of the fixed cost base and the creation of a more diverse and flexible supply base;
•		Lighting: reallocation of parts of the activities in Weert, Netherlands, to low-cost areas, the relocation in Mexico of all Juarez plant activities to the Monterrey plant and the relocation of the standard Lead in Wire business in Deurne, Netherlands, to Poland.

The Company’s remaining restructuring in 2006 covered a number of smaller projects.

36     Philips Annual Report 2006

54 The Philips sectors		86 Risk management		100 Report of the Supervisory Board		110 Financial Statements

The write-off of in-process R&D of EUR 33 million in 2006 relates to the acquisitions of Intermagnetics (EUR 29 million) and Witt Biomedical (EUR 4 million). In 2005, there was an in-process R&D charge of EUR 6 million related to Lumileds.

The Company performed the annual goodwill impairment tests, resulting in zero charge to EBIT.

Net restructuring and impairment charges in 2005 amounted to EUR 147 million, consisting of gross charges totaling EUR 155 million, partly offset by releases of EUR 8 million.

The most significant projects in 2005 were the closing of the Audio/Video Innovation Center and the restructuring of the Mobile Infotainment business in CE. Furthermore, within Lighting, rationalization took place in Lamps through downsizing of excess capacity and the transfer of production to low-wage countries. Within Other Activities, a number of activities were prepared for disentanglement or divestment. The remaining restructuring in 2005 for the Philips Group covered a number of smaller projects.

For further details of restructuring charges, see note 4 to the consolidated financial statements in this Annual Report.

Financial income and expenses

A breakdown of the financial income and expenses is shown in the table below.

Financial income and expenses

in millions of euros

		2004				2005				2006
Interest expense (net)			(258	)			(197	)			(183	)
Sale of securities			440				233				—
Other			34				72				217
			216				108				34

The net interest expense was EUR 14 million lower than in 2005, mainly as a result of higher average cash positions and higher average interest rates applied to these cash positions during 2006, compared to 2005. This was offset by increased interest expenses on derivatives related to hedging of the Group’s foreign-currency-denominated cash and intercompany funding positions.

“Simplicity is a place between too little and too much. It is quality and value, whether it be in your time, your space or the products that you use. If one reduces unnecessary clutter, the mind perceives simplicity. In medical equipment, we need the essentials – enough technology to obtain an accurate analysis – without a lot of extra options that clutter and confuse.”

Peggy Fritzsche, former President of the Radiology Society of North America and member of the Philips Simplicity Advisory Board

More is often not better. In fact, it’s often too much. Determined to deliver to the healthcare community on its brand promise of “sense and simplicity”, Philips resolutely avoids technological overkill, offering physicians advanced medical equipment that is designed around their needs, to enable them to make the best diagnosis possible.

Philips Annual Report 2006     37

6 Financial highlights		8 Message from the President		14 Our leadership		20 The Philips Group

						Management discussion and analysis

In India, Philips launched a pilot project for rural dwellers with limited access to electricity, involving two rechargeable lighting products – a weatherproof, portable lamp for general illumination and a hand-held, hand-cranked LED flashlight.

Income from the sale of securities

in millions of euros

		2004				2005				2006
Gain on sale of Atos Origin shares			—				185				—
Gain on sale of Great Nordic shares			—				48				—
Gain on sale of ASML shares			140				—				—
Gain on sale of Vivendi Universal shares			300				—				—
			440				233				—

During 2006, there were no sales of securities, whereas in 2005 a gain of EUR 233 million was recognized on the sale of the remaining shares in Atos Origin and Great Nordic.

Other financial income of EUR 217 million in 2006 included a cash dividend of EUR 223 million from TSMC, a gain of EUR 97 million upon the designation of the TSMC stock dividend as trading securities, and a gain of EUR 29 million as a result of an increase in the fair value of these trading securities. This was partly offset by losses of EUR 77 million resulting from an impairment of the available-for-sale holding in TPO Display Corp. and EUR 61 million due to a decline in the fair value of the share option within a convertible bond received from TPV Technology Ltd.

In 2006, the investment in TSMC was no longer accounted for using the equity method, since Philips is no longer able to exercise significant influence as a result of the reduction in both the shareholding and the number of Philips board members.

Income taxes

Income taxes amounted to EUR 137 million, compared to EUR 506 million in 2005. Income taxes in 2005 included EUR 240 million of withholding taxes related to the transfer of TSMC shares to the Company from its fully owned subsidiary Philips Electronics Industries Taiwan, partly offset by tax gains of EUR 109 million relating to final agreements on prior-year taxes in the US. Income taxes in 2006 were positively impacted by a reduction of the Dutch corporate tax rate (EUR 70 million) and tax gains of EUR 40 million relating to final agreements on prior-year taxes in various jurisdictions.

The tax burden in 2006 corresponded to an effective tax rate of 11.3% on the pre-tax income. The effective tax rate in 2006 was affected by tax-exempt items such as TSMC dividends, as well as the gains and losses resulting

38     Philips Annual Report 2006

54 The Philips sectors		86 Risk management		100 Report of the Supervisory Board		110 Financial Statements

from changes in the fair value of TSMC stock and TPV bond options. Non-taxable items in 2005 were the sale of shares in Atos Origin and Great Nordic (in total EUR 233 million) and part of the gain on the TPV transaction.

For 2007, the effective tax rate on pre-tax income is expected to be in the mid-20% range.

Results from equity-accounted investees

The results from equity-accounted investees decreased by EUR 1,911 million to a loss of EUR 157 million in 2006, a breakdown of which is shown in the table below.

Results from equity-accounted investees

in millions of euros

		20041)				20051)				2006
Company’s participation in income			1,033				513				(180	)
Results on sale of shares			185				1,545				79
Gains arising from dilution effects			254				165				14
Investment impairment and guarantee charges			(8	)			(469	)			(70	)
			1,464				1,754				(157	)

The Company’s participation in the net income of equity-accounted investees declined from a gain of EUR 513 million in 2005 to a loss of EUR 180 million, primarily due to lower results at LG.Philips LCD and the change in accounting treatment of TSMC.

Excluding the 2005 sale of shares, LG.Philips LCD’s operational result in 2006 declined by EUR 342 million compared to 2005, resulting in a loss of EUR 196 million as price pressure and oversupply impacted results.

In 2005, the TSMC operational profit of EUR 380 million was recorded under results relating to equity-accounted investees. In 2006, a gain of EUR 223 million related to the receipt of the TSMC cash dividend was recognized in financial income and expenses. Further to this, a gain of EUR 97 million upon the designation of a TSMC stock dividend as trading securities and a gain of EUR 29 million as a result of an increase in the fair value of these trading securities were included in financial income and expenses.

Results on the sale of shares in 2006 were primarily attributable to the EUR 76 million non-taxable gain on the sale of the remaining 8.4 million shares of common stock in FEI Company, reducing Philips’ shareholding from 24.8% to zero.

In 2005, a total gain of EUR 1,545 million was recognized, mostly related to the sale of shares in NAVTEQ, TSMC and LG.Philips LCD.

Gains and losses arising from dilution effects in 2006 were mainly due to a EUR 14 million dilution gain recorded for TPV following the IPO in the first quarter and a further share issue in the second quarter. As a consequence, Philips’ shareholding in TPV was reduced by 1.2 percentage points to 13.8%. This dilution gain increased the book value of Philips’ investment in TPV.

Gains and losses arising from dilution effects in 2005 included a EUR 189 million dilution gain recorded for LG.Philips LCD as a result of the secondary offering of shares and a dilution loss of EUR 24 million related to TSMC as Philips’ shareholding was diluted due to the issue of new shares in grants to employees.

On a per-country basis, agreements with LG.Philips Displays for voluntary payments (social contributions and environmental clean-up) were reached in the first quarter of 2006. As a consequence, a total loss of EUR 61 million was recognized in 2006, largely related to social costs in France, Germany, the Netherlands and the UK.

In 2005, an impairment charge of EUR 416 million related to the investment in LG.Philips Displays and a charge of EUR 42 million for the existing guarantee provided to LG. Philips Displays’ banks were recorded.

Minority interests

The share of minority interests in the income of group companies reduced income by EUR 4 million in 2006, compared to an increase of EUR 3 million in 2005. The main driver behind the decrease in income was the reduced shareholding in the venture Philips BenQ Digital Storage.

Discontinued operations

Following an announcement of a binding letter of intent between Philips and Toppoly Optoelectronics Corporation of Taiwan in November 2005, the merger of Mobile Display Systems (MDS) with Toppoly was completed in June 2006. An after-tax transaction gain of EUR 29 million was recognized. As a consequence of this transaction, Philips holds a 17.5% stake in TPO.

On September 29, 2006, the Company sold a majority stake in its Semiconductors division to a private equity consortium led by Kohlberg Kravis Roberts & Co. (KKR). The transaction consisted of the sale of the division for

Philips Annual Report 2006     39

6 Financial highlights		8 Message from the President		14 Our leadership		20 The Philips Group

						Management discussion and analysis

Motiva, a TV-based platform for remote patient management, was launched on the US and European markets in 2006. Besides vital-sign monitoring, Motiva engages patients with personalized interactive content, helping care managers reach more patients, influence long-term behavior and lower healthcare costs.

a total consideration of EUR 7,913 million and a simultaneous acquisition of a minority interest in the recapitalized organization at a cost of EUR 854 million. A gain of EUR 4,283 million was recorded on the sale, net of costs directly associated with this transaction of approximately EUR 367 million.

The Company’s ownership interest in the recapitalized organization, now named NXP Semiconductors, was recorded at its fair value of EUR 854 million. Philips’ ownership consists of 19.9% of the preferred shares and 17.5% of the common shares.

The Company reported its stake in the recapitalized NXP Semiconductors under other non-current financial assets.

In this Annual Report, Philips reports the results of the MDS and Semiconductors businesses separately as discontinued operations. Consequently, the results of the MDS and Semiconductors businesses, including transaction gains, are shown separately in the financial statements as results from discontinued operations. In 2005, Semiconductors was reported as part of the Philips Group while MDS was classified as a discontinued operation. In accordance with the applicable accounting principles, previous years have been restated.

Net income

Net income amounted to EUR 5,383 million (EUR 4.58 per common share), of which income from continuing operations was EUR 919 million and EUR 4,464 million related to discontinued operations. In 2005, net income amounted to EUR 2,868 million, of which EUR 2,831 million was income from continuing operations.

Performance by region

Sales per region

in millions of euros

		20041)				20051)				2006
Europe and Africa			11,703				11,520				12,140
North America			6,944				7,502				7,885
Latin America			1,376				1,804				1,970
Asia Pacific			4,832				4,949				4,981
			24,855				25,775				26,976

EBIT per region

in millions of euros

		20041)				20051)				2006
Europe and Africa			884				1,089				1,083
North America			38				153				(159	)
Latin America			51				92				62
Asia Pacific			183				138				197
			1,156				1,472				1,183

In 2006, sales in Europe showed a strong increase of 8% on a comparable basis, with divestments having a downward effect of 3%. Comparable sales growth was visible in all sectors, led by double-digit growth rates at DAP and CE (both 10%), followed by Lighting and Medical Systems with sales increases of 8% and 6% respectively. Other Activities’ sales declined by 21% in nominal terms, entirely due to divestments, while sales were stable on a comparable basis.

Comparable sales in the emerging markets in Eastern Europe showed a 19% increase, with double-digit growth rates evident in all operating sectors, notably in Medical Systems with 33%. Russia and Ukraine, accounting for around 40% of the Company’s sales in Eastern Europe, showed strong sales growth of 27% and 57% respectively.

Sales in North America increased by 5%, both nominally and comparably, and were particularly strong in DAP, with a growth rate of 11%, predominantly attributable to sales

40     Philips Annual Report 2006

54 The Philips sectors		86 Risk management		100 Report of the Supervisory Board		110 Financial Statements

of Oral Healthcare products. Sales of CE and Medical Systems improved by 7% and 6% respectively, while Lighting posted 2% growth in comparable terms. Other Activities’ sales declined, both nominally and comparably, with divestments having an 11% downward impact.

Asia Pacific posted 2% comparable sales growth in 2006. Strong increases in DAP (15%), Medical Systems (14%) and Lighting (13%) were partly offset by an 11% comparable decline in CE sales, largely attributable to the performance of Mobile Phones, and lower sales of Other Activities, mainly due to Optical Storage.

Sales in Latin America grew by 8% comparably, with strong double-digit sales growth in most of the countries, and a 5% sales increase in Brazil. All sectors reported increased sales, led by 14% comparable sales growth in DAP and 10% in Lighting, followed by CE (8%) and Medical Systems (3%).

Earnings in Europe slightly declined as 2005 results benefited from a release of the postretirement medical benefits provision, due to the termination of the SFAS No. 106 plan in the Netherlands and the TPV transaction gain. EBIT in North America was impacted by the EUR 256 million asbestos-related charge in 2006. The result in Latin America declined, largely due to difficult market conditions for CE. The EBIT increase in Asia Pacific was mainly due to the increased share of high-margin businesses (Medical Systems, DAP) in this region in 2006.

Research and development

Philips’ research and development expenditures totaled EUR 1.7 billion, or 6.2% of sales, the same percentage as in 2005.

“By working together with many industrial, academic and clinical partners, we offer challenging opportunities for creative, innovative people with an entrepreneurial spirit who enjoy pre-clinical research and translate it into advanced medical applications that improve people’s lives.”

Anne Riesewijk, manager of the Life Sciences Facilities, Philips Research

The Life Sciences Facilities at the High Tech Campus Eindhoven, Netherlands, provide biological, chemical and technical infrastructure and expertise for multidisciplinary R&D in the field of molecular medicine. This new approach to healthcare endeavors to identify diseases in an early stage at cellular and molecular level, even before the patient suffers from the symptoms. In this way, personalized treatment can be started more rapidly and therefore more effectively, and with less risk of side effects.

Philips Annual Report 2006     41

6 Financial highlights		8 Message from the President		14 Our leadership		20 The Philips Group

						Management discussion and analysis

Philips underlined its growing presence in gaming with demonstrations of its new amBX technology and PC peripherals at IFA 2006. Philips’ amBX technology is licensed across the gaming industry and offers a full ‘sensory surround experience’ by empowering developers to use light, color, sound, heat and even airflow during gameplay – creating an ambient intelligence environment in the process.

Investments in innovative technologies increased especially in the areas of Healthcare & Wellness and Lighting & Visual Experiences to 42% and 20% respectively.

In 2006, 53% of the group’s sales came from newly introduced products. A significant increase in sales from new products compared to 2005 was visible in CE, Lighting and DAP. Medical Systems’ sales from new products remained well above the group level of 53%. Philips aims to increase the share of new products in total sales further above 50%, while at the same time focusing on the profitability of new products.

Research and development expenditures per sector

in millions of euros

		20041)				20051)				20062)
Medical Systems			477				526				575
DAP			134				139				174
Consumer Electronics			475				419				385
Lighting			175				212				269
Other Activities			654				587				571
Inter-sector eliminations			(300	)			(281	)			(306	)
Philips Group			1,615				1,602				1,668

In 2006, increased research and development investment within Medical Systems, Lighting and DAP was offset by a reduction in R&D expense at CE as a consequence of increased outsourcing. Increased research and development investments within Corporate Technologies, mainly to set up the Healthcare and Lifestyle Incubators, were partly offset by the divestment of several businesses.

Medical Systems’ R&D spend increased by EUR 49 million due to additional investments in new sensor technologies and magnetic resonance imaging, as well as the write-off of in-process R&D following the acquisition of Witt Biomedical and Intermagnetics. Lighting increased its investment in solid-state lighting solutions, while DAP increased the development spend across all businesses, especially in Health & Wellness. Research and development expenditure also increased in the research incubators for healthcare, lifestyle and technology, the breeding grounds for new, innovative product concepts.

42     Philips Annual Report 2006

54 The Philips sectors		86 Risk management		100 Report of the Supervisory Board		110 Financial Statements

Employment

Employment

in FTEs

		2004				2005				2006
Position at beginning of year			164,438				161,586				159,226
Consolidation changes:
- new consolidations			2,374				1,795				4,834
- deconsolidations			(2,792	)			(2,552	)			(44,085	)
- comparable change			(2,434	)			(1,603	)			1,757
Position at year-end			161,586				159,226				121,732

Excluding discontinued operations (MDS and Semiconductors), the total number of employees of the Philips Group was 121,732 at the end of 2006 compared to 121,809 at the end of 2005.

The main employee increase in 2006 was in DAP (due to the acquisition of Lifeline and Avent), Lighting (due to the inclusion of Feixin and Bodine) and Medical Systems (due to the acquisition of Witt Biomedical and Intermagnetics). The largest reduction in 2006 occurred in Other Activities (due to divestments within Corporate Investments).

Employees by sector

in FTEs at year-end

		2004				2005				2006
Medical Systems			30,790				30,978				32,843
DAP			8,205				8,203				10,953
Consumer Electronics			16,993				15,537				14,486
Lighting			44,004				45,649				47,739
Other Activities			23,869				19,050				13,347
Unallocated			2,609				2,392				2,364
Discontinued operations			35,116				37,417				—
			161,586				159,226				121,732

The Semiconductors division had a strong presence in Asia. Following the sale of the majority stake in the Semiconductors division, the number of Philips employees in the Asia Pacific region was significantly reduced.

Employees by geographic area

in FTEs at year-end

		2004				2005				2006
Netherlands			20,476				20,068				17,510
Europe (excl. Netherlands)			35,492				34,860				34,446
USA and Canada			25,172				25,362				28,809
Latin America			13,497				13,692				13,194
Africa			409				404				389
Asia Pacific			31,424				27,423				27,384
			126,470				121,809				121,732
Discontinued operations			35,116				37,417				—
			161,586				159,226				121,732

Sales per employee increased from EUR 209,000 in 2005 to EUR 218,000 in 2006, an increase of 4%. The increase was evident particularly at CE, followed by DAP, Medical Systems and Lighting.

Philips seeks to maintain constructive relationships with the labor unions.

Philips Annual Report 2006     43

6 Financial highlights		8 Message from the President		14 Our leadership		20 The Philips Group

						Liquidity and capital resources

Liquidity and capital resources

Cash flows

Condensed consolidated statements of cash flows for the years ended December 31, 2004, 2005 and 2006 are presented below:

Condensed cash flow statements
in millions of euros

		2004		1)		2005		1)		2006
Cash flows from operating activities:
Net income			2,836				2,868				5,383
Income from discontinued operations			(252	)			(37	)			(4,464	)
Adjustments to reconcile net income to net cash provided by operating activities			(1,149	)			(1,690	)			(577	)
Net cash provided by operating activities			1,435				1,141				342
Net cash provided by (used for) investing activities			1,322				1,687				(2,811	)
Cash flows before financing activities			2,757				2,828				(2,469	)
Net cash used for financing activities			(2,145	)			(2,589	)			(3,715	)
Cash provided by (used for) continuing operations			612				239				(6,184	)
Net cash provided by discontinued operations			710				546				7,111
Effect of changes in exchange rates on cash positions			(45	)			159				(197	)
Cash and cash equivalents at beginning of year			3,072				4,349				5,293
Cash and cash equivalents at end of year			4,349				5,293				6,023

Cash flows before financing activities

Net cash from operating activities amounted to EUR 342 million in 2006 compared to a cash flow of EUR 1,141 million in 2005. The decrease was caused by higher working capital requirements, mainly driven by additional and accelerated pension contributions in the UK and the US. In 2006, further to the normal annual contribution to pension plans, EUR 582 million was paid to the UK pension plan following a change in regulation. In the US, an accelerated contribution of EUR 101 million was made to the local pension fund.

Net capital expenditures totaled EUR 697 million, EUR 191 million higher than in 2005, mainly driven by investments related to new acquisitions, notably Lumileds within Lighting. Including the investments related to Lumileds, Lighting was the most capital-intensive sector in 2006, with EUR 319 million total expenditure.

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In 2005, net capital expenditures amounted to EUR 506 million, mainly attributable to Lighting and Medical Systems.

Continuing operations recorded a cash outflow from investing activities of EUR 2,811 million compared to an inflow of EUR 1,687 million in 2005.

During the year, a total of EUR 2,498 million was used for acquisitions, notably Intermagnetics (EUR 993 million), Avent (EUR 689 million), Lifeline (EUR 583 million) and Witt Biomedical (EUR 110 million).

In 2006, EUR 318 million cash was generated from the divestment of several businesses within Other Activities, notably CryptoTec, Philips Enabling Technologies Group, Philips Business Communications, Optical Storage, and the sale of the entire stake in FEI company. In addition, EUR 62 million was received in relation to maturing currency hedges.

In 2005, acquisitions totaling EUR 1,107 million included the acquisition of a 47.25% share in Lumileds, which had a cash impact of EUR 788 million, and the acquisition of Stentor for EUR 194 million. In addition, cash payments of EUR 46 million were made for maturing currency hedges. Cash proceeds of EUR 3,346 million, mainly related to the sale of shares in NAVTEQ (EUR 932 million), TSMC (EUR 770 million), Atos Origin (EUR 554 million), LG.Philips LCD (EUR 938 million) and Great Nordic (EUR 67 million) were recognized.

Cash flows from financing activities

Net cash used for financing activities in 2006 was EUR 3,715 million. The impact of changes in debt was a reduction of EUR 437 million, including a EUR 208 million scheduled bond repayment. Philips’ shareholders were paid EUR 523 million in dividend. Additionally, cash outflows for share repurchases totaled EUR 2,899 million. This included EUR 414 million final repurchases related to the EUR 1.5 billion share repurchase program announced in August 2005 that was completed in February 2006, a total of EUR 118 million related to hedging of obligations under the long-term employee incentive and employee stock purchase programs and a total of EUR 2,367 million of share repurchases for cancellation between July and December 2006. Offsetting the cash outflows in part was a net cash inflow of EUR 144 million due to the exercise of stock options.

Net cash used for financing activities in 2005 amounted to EUR 2,589 million. The impact of changes in debt was a reduction of EUR 324 million, including EUR 251 million of scheduled bond repayments. Philips’ shareholders were paid EUR 504 million in dividend. Additionally, EUR 1,836 million was used to acquire approximately 84 million shares as part of the Company’s share repurchase programs. The first share repurchase program, which was completed in June 2005, resulted in a total cash outflow of EUR 750 million. Of this, EUR 250 million was related to the hedging of obligations under the long-term employee incentive and employee stock purchase programs, with the remaining EUR 500 million of shares repurchased for cancellation. The second share repurchase program, which began in August 2005, resulted upon completion in a total of EUR 1.5 billion worth of shares repurchased for cancellation. Offsetting these amounts in part was a cash inflow due to the exercise of stock options for an amount of EUR 75 million.

Cash flow from discontinued operations

In 2006, net cash generated by discontinued operations amounted to EUR 7,111 million, predominantly related to the sale of a majority stake in the Semiconductors division, amounting to EUR 7,059 million.

Philips Annual Report 2006     45

6 Financial highlights		8 Message from the President		14 Our leadership		20 The Philips Group

Financing

The condensed balance sheet for the years 2006, 2005 and 2004 is presented below

Condensed balance sheet
in millions of euros

		2004		1)		2005		1)		2006
Cash and cash equivalents			4,349				5,293				6,023
Receivables			8,136				8,976				9,726
Assets of discontinued operations			4,198				3,973				—
Inventories			2,500				2,797				2,880
Equity-accounted investees			5,284				5,342				2,978
Other non-current financial assets			956				730				8,056
Property, plant and equipment			2,792				3,019				3,099
Intangible assets			2,524				3,775				5,735
Total assets			30,739				33,905				38,497
Accounts payable and other liabilities			7,188				8,498				8,175
Liabilities of discontinued operations			1,346				1,385				—
Provisions			2,673				2,710				3,325
Debt			4,513				4,487				3,869
Minority interests			159				159				131
Stockholders’ equity			14,860				16,666				22,997
Total liabilities and equity			30,739				33,905				38,497

Cash and cash equivalents

In 2006, cash and cash equivalents increased by EUR 730 million to EUR 6,023 million at year-end. Cash proceeds from divestments amounted to EUR 7,218 million, including a net cash inflow of EUR 7,059 million as a result of the sale of Semiconductors. The share buy-back programs led to a cash outflow of EUR 2,899 million. There were further cash outflows for acquisitions of EUR 2,498 million, including EUR 583 million for the acquisition of Lifeline, EUR 689 million for Avent, EUR 993 million for Intermagnetics and EUR 110 million for Witt Biomedical. Furthermore, a dividend of EUR 523 million was paid. Currency changes during 2006 decreased cash and cash equivalents by EUR 197 million.

In 2005, cash and cash equivalents increased by EUR 944 million to EUR 5,293 million at year-end. Cash proceeds from divestments amounted to EUR 3,652 million, while the share repurchase programs led to a cash outflow of EUR 1,836 million. There were further cash outflows for acquisitions of EUR 1,395 million, including Stentor and Lumileds for a total of EUR 982 million. Currency changes during 2005 increased cash and cash equivalents by EUR 159 million.

Debt position

Total debt outstanding at the end of 2006 was EUR 3,869 million, compared with EUR 4,487 million at the end of 2005.

Changes in debt
in millions of euros

		2004				2005				2006
New borrowings			258				74				106
Repayments			(1,925	)			(398	)			(543	)
Consolidation and currency effects			304				298				(181	)
Total changes in debt			(1,363	)			(26	)			(618	)

During the year, total debt decreased by EUR 618 million. Philips repaid EUR 208 million in a scheduled bond repayment. The remaining repayments consisted of bank facilities of EUR 277 million, capital lease transactions for EUR 8 million and EUR 50 million resulting from reductions in other debt. New borrowings of EUR 106 million included EUR 97 million from increased short-term borrowings. Other changes resulting from consolidation and currency effects led to a reduction of EUR 181 million.

In 2005, total debt decreased by EUR 26 million to EUR 4,487 million. Philips repaid EUR 251 million in scheduled bond repayments. A further EUR 53 million was repaid or converted under convertible personnel debentures and staff savings plans, repayments of bank facilities and capital lease transactions totaled EUR 78 million and the remaining repayments of EUR 16 million resulted from reductions in other debt. New borrowings of EUR 74 million include EUR 35 million for convertible personnel debentures and staff savings plans, a further EUR 24 million for capital lease transactions with the remaining EUR 15 million split over other types of debt. Other changes resulting from consolidation and currency effects led to an increases of EUR 298 million.

Philips had one ‘putable’ bond outstanding at year-end 2006 for USD 103 million, issued at 7.125%, due 2025, carrying an option of each holder to put the bond to the Company on May 15, 2007 upon notice received between March 15 and April 15, 2007.

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Assuming investors require repayment at the relevant put dates, the average remaining tenor of the total outstanding long-term debt was 3.7 years at year-end 2006, compared to 3.8 years in 2005. However, assuming the ‘putable’ bonds will be repaid at maturity, the average remaining tenor at the end of 2006 was 4.1 years compared to 5.0 years at the end of 2005.

Long-term debt as a proportion of the total debt stood at 78% at the end of 2006, compared to 74% at the end of 2005.

Net debt

The Company had a net cash position (cash and cash equivalents, net of debt) of EUR 2,154 million at the end of 2006, compared to a net cash position at the end of 2005 of EUR 806 million.

Stockholders’ equity

Stockholders’ equity increased by EUR 6,331 million to EUR 22,997 million at December 31, 2006. Net income contributed EUR 5,383 million, while unrealized gains on available-for-sale securities had an upward effect of EUR 4,291 million, mainly related to the changed accounting treatment of TSMC. The unrealized gain on the value of TSMC was partly offset by EUR 2,899 million due to the share repurchase programs for both capital reduction purposes and the hedging of long-term incentive and employee stock purchase programs, and by EUR 523 million due to the dividend payment to shareholders in 2006. There was a net decrease of EUR 263 million related to pension liabilities including the effect of adoption of SFAS No. 158.

Philips’ new fuel-efficient and virtually smokeless woodstove could benefit hundreds of millions of families in the world’s poorest regions. The woodstove allows faster, easier cooking and significantly reduces smoke and thus dangerous toxic emissions. It’s better for people, and better for the planet.

In 2005, stockholders’ equity increased by EUR 1,806 million to EUR 16,666 million. The increase was primarily driven by net income of EUR 2,868 million and an increase in other comprehensive income of EUR 1,137 million, mainly related to the positive change of currency translation differences (EUR 1,521 million), partly offset by the effect of the sale of available-for-sale securities (EUR 184 million).

The number of outstanding common shares of Royal Philips Electronics at December 31, 2006 was 1,107 million (2005: 1,201 million). During 2006 a total of 173 million shares were cancelled.

At the end of 2006, the Company held 35.9 million shares in treasury to cover the future delivery of shares in connection with the 65.5 million rights outstanding at year-end 2006 under the Company’s long-term incentive

Philips Annual Report 2006     47

6 Financial highlights		8 Message from the President		14 Our leadership		20 The Philips Group

						Liquidity and capital resources

plan and convertible personnel debentures. At year-end 2005, 43.0 million shares were held in treasury against rights outstanding of 69.0 million. At the end of 2005, the Company held 71.7 million shares for cancellation. Treasury shares are accounted for as a reduction of stockholders’ equity.

Liquidity position

Including the Company’s net cash position, listed available-for-sale securities, trading securities and listed equity-accounted investees, as well as its USD 2.5 billion commercial paper program supported by the revolving credit facility, the Company had access to net available liquidity resources of EUR 13,576 million as of December 31, 2006, compared to EUR 14,167 million one year earlier.

Liquidity position
in millions of euros

		2004				2005				2006
Cash and cash equivalents			4,349				5,293				6,023
Long-term debt			(3,552	)			(3,320	)			(3,006	)
Short-term debt			(961	)			(1,167	)			(863	)
Net cash (debt)			(164	)			806				2,154
Available-for-sale securities at market value			662				113				6,529
Trading securities			—				—				192
Main listed investments in equity- accounted investees at market value			10,288				11,139				2,803
Net available liquidity			10,786				12,058				11,678
Revolving credit facility / CP program1)			1,838				2,109				1,898
Net available liquidity resources			12,624				14,167				13,576

The fair value of the Company’s listed available-for-sale securities, based on quoted market prices at December 31, 2006, amounted to EUR 6,529 million, of which EUR 6,395 million related to TSMC and EUR 62 million related to JDS Uniphase. The Company also held a total of EUR 192 million of trading securities in TSMC based on quoted market prices as at December 31, 2006.

Philips’ shareholdings in its main listed equity-accounted investees had a fair value of EUR 2,803 million based on quoted market prices at December 31, 2006, and consisted primarily of the Company’s holdings in LG.Philips LCD and TPV with values of EUR 2,673 million and EUR 126 million respectively. The Company has a lock-up period associated with the sale of shares in TPV that expires in September 2008. Furthermore, the LG.Philips LCD shareholders agreement with LG Electronics includes an agreement that both companies will maintain a holding of at least 30% each until July 2007.

Philips has a USD 2.5 billion commercial paper program, under which it can issue commercial paper up to 364 days in tenor, both in the US and in Europe, in any major freely convertible currency. There is a panel of banks, six in Europe and five in the US, that support the program. When Philips wants to fund through the commercial paper program, it contacts the panel of banks. The interest is at market rates prevailing at the time of issuance of the commercial paper. There is no collateral requirement in the commercial paper program. There are no limitations on Philips’ use of the program, save for market considerations, e.g. that the commercial paper market itself is not open. If this were to be the case, Philips’ USD 2.5 billion committed revolving credit facility could act as back-up for short-term financing requirements that normally would be satisfied through the commercial paper program. The USD 2.5 billion revolving credit facility does not have a material adverse change clause, has no financial covenants and does not have credit-rating-related acceleration possibilities. As of December 31, 2006, Philips did not have any commercial paper outstanding.

As at December 31, 2006 the company had total cash and cash equivalents of EUR 6,023 million; the company pools cash from subsidiaries in the extent legally and economically feasible. Cash in subsidiaries is not necessarily freely available for alternative uses due to possible legal or economic restrictions. The amount of cash not immediately available is not considered material for the company to meet its cash obligations. The Company had a total debt position of EUR 3,869 million at the year end.

Guarantees and contractual cash obligations

Guarantees

Guarantees issued or modified after December 31, 2002 having characteristics defined in FASB Interpretation No. 45 ‘Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others’ (FIN45), are measured at fair value and recognized on the balance sheet. At the end of 2006, the total fair value of guarantees recognized by the Company was EUR 4 million.

Guarantees issued before December 31, 2002 and not modified afterwards, and guarantees issued after

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54 The Philips sectors		86 Risk management		100 Report of the Supervisory Board		110 Financial Statements

December 31, 2002, which do not have characteristics defined in FIN45, remain off-balance sheet.

Philips’ policy is to provide only written letters of support; Philips does not stand by other forms of support. The following table outlines the total outstanding off-balance sheet credit-related guarantees and business-related guarantees provided by Philips for the benefit of unconsolidated companies and third parties as at December 31, 2006.

Expiration per period
in millions of euros

		total
		amounts				less than								after
		committed				1 year				1-5 years				5 years
2006
Business-related guarantees			466				151				80				235
Credit-related guarantees			42				14				2				26
			508				165				82				261
2005
Business-related guarantees			512				148				87				277
Credit-related guarantees			57				13				2				42
			569				161				89				319

Contractual cash obligations

Presented below is a summary of the Group’s contractual cash obligations, contingent obligations resulting from guarantees provided, and the capital resources available to fund the cash requirements.

Cash obligations at December 31, 2006
in millions of euros

		payments due by period
						less
						than 1				1-3				3-5				after 5
		total				year				years				years				years
Long-term debt1)			3,154				184				1,710				874				386
Capital lease obligations1)			59				23				10				7				19
Short-term debt1)			656				656				—				—				—
Operating leases1)			803				152				246				155				250
Bond interest			887				171				262				153				301
Total contractual cash obligations			5,559				1,186				2,228				1,189				956

The Company has a number of commercial agreements such as supply agreements, that provide that certain penalties may be charged to the Company if the Company does not fulfil its commitments.

Based on past operating performance and current prospects, supported by the company’s balance sheet and unused borrowing capacity, Philips believes that working capital is sufficient for the company’s present requirements. Furthermore, the Company has no material commitments for capital expenditures.

The company had total amounts payable in relation to accrued interest on debt of EUR 118 million as at December 31, 2006.

The Company sponsors pension plans in many countries in accordance with legal requirements, customs and the local situation in the countries involved. The majority of employees in Europe and North America are covered by defined-benefit plans.

Contributions are made by the Company, as necessary, to provide sufficient assets to meet future benefits payable to plan participants. These contributions are determined based upon various factors, including funded status, legal and tax considerations and local customs.

The Company currently expects considerable cash outflows in relation to employee benefits, which are estimated to amount to EUR 433 million in 2007 (2006: EUR 1,086 million), including EUR 288 million employer contributions to defined-benefit pension plans, EUR 80 million employer contributions to defined-contribution plans and EUR 65 million expected cash outflows in relation to unfunded pension plans.

The expected cash outflows in 2007 and subsequent years are uncertain and may change substantially as a consequence of statutory funding requirements as well as changes in actual versus currently assumed discount rates, estimations of compensation increases and returns on pension plan assets.

For further details about cash obligations related to pension plans, see note 20 of the consolidated financial statements in this Annual Report.

Philips Annual Report 2006     49

6 Financial highlights		8 Message from the President		14 Our leadership		20 The Philips Group

						- Acquisitions
						- Other information

Acquisitions

During 2006, the Company completed six strategically-aligned acquisitions, totaling EUR 2.5 billion, while simultaneously divesting a majority stake in its Semiconductors division as well as a number of other cyclical, non-core activities, primarily within Corporate Investments.

In the healthcare sector four key acquisitions took place during 2006, underlining the strategic objective to grow in this sector.

In professional healthcare, the Company acquired Witt Biomedical, the largest independent supplier of hemodynamic monitoring and clinical reporting systems used in cardiology catheterization laboratories. This acquisition will position the Company as a leader in the growing market for integrated Cath Lab solutions in which cardiologists increasingly demand that Cath Labs be fully integrated into a hospital’s IT infrastructure. Hemodynamic monitors measure and monitor a patient’s ECG, blood pressure and other vital signs associated with a Cath Lab procedure.

In the key market of magnetic resonance imaging (MRI), the Company acquired Intermagnetics, the world’s leading MRI components and accessories manufacturer. Intermagnetics develops, manufactures and markets highfield superconducting magnets used in MRI systems and is viewed as the technological innovator in this market. Through this acquisition, the Company expects to greatly strengthen the overall performance and innovation capability of its magnetic resonance imaging business. Intermagnetics will be fully integrated into the Company’s existing MR business.

In consumer healthcare, Philips acquired Lifeline Systems, a leader in personal emergency response services. US-based Lifeline Systems has a broad market presence in the United States and Canada. It markets its services through a network of more than 2,500 hospitals and other healthcare providers and serves a subscriber base of around 520,000 people. The Company believes that the acquisition of Lifeline will strengthen the Company’s position in the evolving home healthcare market. The aging of the population and the expectation that seniors as a percentage of the total population will double over the next 25 years in Western Europe and the US, makes the Company aim to become a global player in this market.

Also in the consumer healthcare area, the Company acquired Avent, a leading provider of baby and infant feeding products in the United Kingdom and the United States, with sales in more than 60 countries. Through this acquisition, the Company seeks to build on its leading position in Europe in baby monitors to become a leading provider of products in this market which is expected to grow strongly in the next years driven by a higher spending per baby in both developed and emerging markets.

In the professional lighting sector, the Company acquired Bodine, a leading manufacturer of emergency lighting applications. This acquisition will position Philips in the niche emergency ballast market, while enabling it to enter strategic new market segments involving building networks.

In the fast-growing and high-margin area of electronics peripherals and accessories, the Company acquired Power Sentry, a market leader in the plug-in power surge protector market in the US, which represents 80% of the global market. Through this acquisition, the Company aims to become a top three global player in the audiovisual, PC and mobility accessory market, building on its earlier acquisition of the US accessories supplier Gemini.

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Other information

Share repurchase programs

In February 2006, the Company completed the EUR 1.5 billion share repurchase program which had been initiated in August 2005. Under this share repurchase program a total of 62,457,613 shares were acquired during 2005 and 2006 at an average market price of EUR 24.01 per share, totaling EUR 1.5 billion.

On July 17, 2006, the Company started another EUR 1.5 billion share repurchase program, which was expanded to a maximum of EUR 2.5 billion in October and completed in December 2006. Under this share repurchase program a total of 86,472,494 shares were acquired at an average market price of EUR 27.37 per share, eventually totaling EUR 2,367 million.

On January 22, 2007, the Company started a EUR 1,633 million share repurchase program through a second trading line on Euronext Amsterdam. Under this program shares are repurchased from shareholders who are tax-exempt or are able to achieve tax compensation. The Company expects to complete this share repurchase program by the end of 2007. The mechanics of the second trading line are published on the Company’s website.

The programs started on July 17, 2006 and January 22, 2007 will together complete the return of EUR 4 billion to the Company’s shareholders, as announced on August 3 and October 16, 2006.

In accordance with Dutch law, the Company has informed the Netherlands Authority for the Financial Markets of its holdings of Philips shares. All transactions in Philips shares under these share repurchase programs have been and will be reported on the Company’s website.

Capital reduction

In 2006, the Company’s issued share capital was reduced by a total of 173,268,629 shares, which were acquired pursuant to the share repurchase programs initiated in 2005 and 2006. The capital reduction was executed by way of two share cancellations.

The first share cancellation was approved by the 2006 Annual General Meeting of Shareholders and completed in July 2006. A total of 86,796,135 shares were cancelled, resulting in a reduction of Philips’ issued share capital by 6.6%.

The second share cancellation was approved by the 2006 Extraordinary General Meeting of Shareholders and completed in December 2006. A total of 86,472,494 shares were cancelled, resulting in a further reduction of Philips’ issued share capital by 7.0%.

Litigation

The Company is involved as plaintiff or defendant in litigation relating to such matters as competition issues, commercial transactions, product liability and environmental pollution. Although the ultimate disposition of asserted claims and proceedings cannot be predicted with certainty, it is the opinion of the Company’s management that the outcome of any such claims, either individually or on a combined basis, will not have a material adverse effect on the Company’s consolidated financial position, but could be material to the consolidated results of operations of the Company for a particular period.

For a description of certain legal proceedings please refer to note 27 to the consolidated financial statements in this Annual Report.

Philips Annual Report 2006     51

6 Financial highlights		8 Message from the President		14 Our leadership		20 The Philips Group

						- Proposed dividend to shareholders
						- Outlook

Proposed dividend to shareholders of Royal Philips Electronics

A proposal will be submitted to the 2007 Annual General Meeting of Shareholders to declare a dividend of EUR 0.60 per common share, which, dependent on the progress of the current share repurchase program, will result in an expected dividend of EUR 630 million. In 2006, a dividend was paid of EUR 0.44 per common share (EUR 523 million) in respect of the financial year 2005.

Pursuant to article 33 of the articles of association of Royal Philips Electronics, and with the approval of the Supervisory Board, the remainder of the income for the financial year 2006 has been retained by way of reserve. The balance sheet presented in this report, as part of the consolidated financial statements for the period ended December 31, 2006, is before dividend, which is subject to shareholder approval after year-end.

52     Philips Annual Report 2006

54 The Philips sectors		86 Risk management		100 Report of the Supervisory Board		110 Financial Statements

Outlook

A strong performance in the last quarter of 2006 enabled us to meet our objectives for both profitability and sales growth, reinforcing our confidence that we will realize our targets – annual average top-line growth of 5-6% and EBITA of at least 7.5% – in 2007. In the coming year, we look forward to introducing a number of exciting new products that will further support our growth ambitions. We will continue the reallocation of capital by reducing our financial holdings, pursuing value-creating acquisitions consistent with our strategic direction and returning cash to shareholders. We will also continue our drive to simplify Philips, reducing the cost of our organization while stepping up our efforts to improve talent management. With rigorous execution of these plans, we expect 2007 to be a good year of continued growth and increased profitability.

Amsterdam, February 19, 2007

Board of Management

Philips Annual Report 2006      53

6 Financial highlights		8 Message from the President		14 Our leadership		20 The Philips Group

In 2006, Philips unveiled the GEMINI PET/CT scanner with Truflight technology, which provides 20% better spatial and contrast resolution, resulting in faster and more sensitive scanning than conventional PET. It is the first PET system to use atomic particle time-measurements to deliver increased image quality and consistency, helping earlier disease detection, regardless of patient size.

54     Philips Annual Report 2006

54 The Philips sectors		86 Risk management		100 Report of the Supervisory Board		110 Financial Statements

Medical Systems

Philips Medical Systems is a global provider of innovative healthcare solutions designed to address the needs of patients as well as healthcare professionals. It aims to improve access to healthcare with products and services at every stage of care. The division continued to grow in 2006 as Medical Systems expanded its service offerings – through organic growth and acquisitions – to better meet the requirements of its customers.

Medical Systems offers – through its respective businesses – advanced solutions for:

•		imaging: X-ray, magnetic resonance (MR), computed tomography (CT) and nuclear medicine
•		ultrasound and monitoring: patient monitoring, ultrasound systems, defibrillators and other cardiac care technologies
•		healthcare informatics: picture archiving and communications systems (PACS) and other information systems
•		medical transcription services (MedQuist)
•		customer services: supporting the optimization of workflow and maintenance in all markets served.

Products and services are sold to healthcare providers around the world, including academic, enterprise and stand-alone institutions, clinics, physicians and consumer retailers.

Medical Systems’ development and innovation program broadens its product and service portfolio and enables it to gain preferred-supplier positions with leading hospitals. Increasing the speed of innovation is a strong business driver.

Medical Systems has approximately 33,000 employees in over 100 countries around the globe.

Key developments

In 2006, Medical Systems made a number of significant advances in the areas of diagnostic imaging, healthcare informatics, cardiology and clinical decision support, through acquisitions as well as the introduction of products and services. The division continued to build upon its current portfolio with acquisitions that complement and enhance its market offerings. These included Witt Biomedical, a world-renowned supplier of hemodynamic monitoring and clinical reporting systems, and Intermagnetics, a leading manufacturer of high-field superconducting magnets and radio-frequency coils for magnetic resonance imaging systems.

In order to ensure alignment with its customers and markets and drive future growth, Medical Systems simplified its operations in 2006 by creating a single global sales and service organization, while also strengthening a number of processes to improve talent management.

Progress against targets

The Annual Report 2005 set out a number of key targets for Medical Systems in 2006. The advances made in addressing these are outlined below.

Change the future of patient care with innovations throughout the care cycle

Cardiology

Medical Systems offers innovative solutions designed to improve patient outcomes throughout the entire course of care – from early detection, through diagnostic testing and monitoring in different care settings, to the delivery of optimal therapy. In 2006, Medical Systems focused on improving the delivery of clinical information by integrating technologies across its product portfolio.

In the field of cardiology, for example, the Brilliance CT scanner and Allura Xper flat detector cardiovascular X-ray system are integrated to optimize efficiency in the cardiac catheterization lab. Clinicians use computed tomography (CT) with improved visualization together with Allura’s interventional cardiac functionality to guide treatment delivery. In the field of electrophysiology, Medical Systems introduced the EP Navigator, a unique tool for catheter ablation procedures. Using CT and other Philips imaging modalities, the EP Navigator collects information from various sources, enabling clinicians to perform catheterization more easily and efficiently.

Building upon technology obtained through the acquisition of Witt Biomedical, Medical Systems launched a new Integrated Catheterization Lab solution in 2006, bringing greater efficiency and clinical relevance to the cardiac workflow. This solution integrates advanced cardiovascular X-ray, physiomonitoring & reporting and cardiovascular information management systems to improve decision-making for members of the extended cardiology care team.

Oncology

Medical Systems released the GEMINI TF, the industry’s first time-of-flight PET/CT system (PET: positron emission tomography). This system delivers a new level of PET and CT performance, enabling the detection of smaller lesions, faster scans and lower doses of radiopharmaceuticals.

Philips Annual Report 2006     55

6 Financial highlights		8 Message from the President		14 Our leadership		20 The Philips Group

Acute care

Medical Systems continued to lead the market in state-of-the-art monitoring for acute care units with its IntelliVue portfolio, introducing highly advanced clinical decision-support applications. New functionality was also added to the CareVue Chart clinical information system, further addressing the need for assimilated, combined and cross-referenced clinical information.

In 2006 a new portfolio of flexible monitors was introduced, the SureSigns VM series, specifically designed for basic healthcare delivery in emerging markets as well as lower-acuity care settings such as clinics and office-based surgery centers.

Women’s health

Product innovation in obstetrics continued as Medical Systems introduced Avalon FM20 and FM30 fetal and maternal monitors that improve care for mother and child. Avalon offers ergonomic features including touchscreen, information management functions and breakthrough clinical functionality like triplets monitoring.

Neurology

At Tokai University Hospital in Japan, Philips installed MRXO, the world’s first combined MR, X-ray, CT and operating theater suite with floating patient transport, which enables improved efficiency when transferring a patient between diagnostic modalities during neurosurgery.

Build and leverage healthcare IT to create the integrated digital hospital of the future

In 2006, Philips installed a full iSite Picture Archiving and Communication System (PACS) at St. Franciscus Hospital in Rotterdam, Netherlands – a first for Europe. Offering exceptional image quality and greatly improved productivity, iSite’s data integration capabilities make a significant contribution to the delivery of high-quality patient care. Since Philips acquired Stentor in August 2005, orders for iSite have more than doubled.

Also introduced in 2006, Medical Systems’ Xcelera R2.1 cardiovascular workstation combines examination results from key cardiology specialties. Direct access to images and information across the care cycle enables the care team to diagnose more efficiently and make better-informed treatment decisions.

Continue to grow faster than the market

The worldwide market for Medical Systems is estimated to have grown by 5% in 2006. Market growth was led by healthcare informatics (>15%), imaging systems (5%), and ultrasound and monitoring (3%). Growth on the healthcare informatics market was mainly driven by PACS, supported by the trend towards digitalization.

Equipment order intake at Medical Systems in 2006 increased by 4% on a currency-comparable basis. Adjusted for 2005’s exceptional EUR 173 million order for the Royal Belfast Hospitals, equipment order intake grew by 6%. This was mainly attributable to a doubling of orders for iSite products (Healthcare Informatics) and X-ray, partly offset by a decline at Nuclear Medicine and flat order intake for CT.

Market growth is expected to return to long-term levels of approximately 4% from a period of faster growth. The slowdown of the market is mainly due to expected flatness in key markets in the EMEA region, the impact of the Deficit Reduction Act in the US and the lack of technological innovation in CT, which stimulated market growth in 2005/2006.

Medical Systems’ goal is to grow slightly faster than the market. Foundations have been established for further growth, with an ongoing increase in contract penetration at Customer Services, a prominent position in PACS and the transformation from stand-alone clinical functions to a total ‘care cycle’ approach.

Improve the EBIT margin by 1-2% over the next few years

Improvements are expected to continue, driven by further integration of the supply chain, especially at Imaging Systems, and the integration of Intermagnetics in MR. In addition, lower IT operating costs and a stronger focus on profitable growth, coupled with strict cost control across all businesses, will support stronger margins.

Markets

Driven by a growing and longer-living world population, the availability of new technologies for earlier and better diagnoses as well as the possibility of minimally or non-invasive procedures, the medical market showed strong growth in 2006. This was largely due to increased demand in North America and Asia Pacific. Europe and Latin America also showed growth, but at a slower rate. Healthcare reforms in some countries and increased price competition among major players may have a medium-term impact on future market growth.

56     Philips Annual Report 2006

54 The Philips sectors		86 Risk management		100 Report of the Supervisory Board		110 Financial Statements

Medical Systems

Medical Systems will maintain its high level of product innovation and strengthen its sales and distribution channels, with particular emphasis on North America, China, Japan and Europe.

The United States is the largest healthcare market, currently representing 50% of the global market, with Japan and Germany representing the second- and third-largest markets respectively. Medical Systems is positioned to address both the Japanese and Chinese markets, anticipating that a rapidly growing Chinese healthcare market will be the second-largest market by the end of the decade. The first exports from the Philips-Neusoft venture in China – established in 2004 for the development and worldwide supply of economically priced imaging equipment – took place in 2006 with the release and shipment of dual and single-slice CT scanners, radiology systems and remote-control fluoroscopy systems.

The medical systems market has partial seasonality as a relatively large proportion of revenue is recognized in the fourth quarter, mainly reflecting public/governmental budget spending.

2006 financial performance

Sales remained strong in 2006, showing nominal growth of 6% and comparable growth of 7%. Medical Systems’ comparable sales growth was driven by all businesses except MedQuist. Strong double-digit growth was visible in Imaging Systems (notably Computed Tomography, Nuclear Medicine and X-ray) and Healthcare Informatics (iSite). Ultrasound & Monitoring achieved single-digit growth, reflecting market opportunities. Customer Services posted strong growth across all segments, mainly due to the successful implementation of the strategy to increase contract penetration. All regions contributed to the growth in sales, especially Asia Pacific. Japan and China led the sales growth in Asia Pacific.

EBIT improved from EUR 679 million in 2005 to EUR 795 million, driven by Computed Tomography, Patient Monitoring & Cardiac Care, Customer Services and MedQuist. The negative impact of acquisition-related and integration charges for Intermagnetics (EUR 65 million) and Witt Biomedical (EUR 13 million) was largely offset by the prior-year EUR 50 million customer accommodation payments related to MedQuist. An EBIT margin of 11.8% represents an improvement of 1.1 percentage points compared to 2005.

Philips introduced a new release of its integrated cardiovascular information solution, the Xcelera R2.1, which provides clinicians with access to relevant images, documentation, quantification and reporting tasks and other detailed patient information from a single workspace.

Cash flows included payments of EUR 993 million and EUR 110 million for Intermagnetics and Witt Biomedical respectively. 2005 included a net cash outflow of EUR 194 million for the Stentor acquisition. Excluding these acquisition-related disbursements, cash flows before financing activities (EUR 732 million) were slightly below 2005 (EUR 760 million) due to higher net capital investments. This was partly offset by higher cash flows from operating activities.

For 2007, Medical Systems expects to achieve 14-15% EBITA. The realignment of the North American sales organization will tighten customer focus and simplify sales processes.

Leading industry awards

Medical Systems won a number of major awards in 2006. The Philips Practix Convenio mobile X-ray system, for example, was one of several products selected for the 2006 iF Product Design Award in the Medicine category. It also won the I.D. Design Award 2006.

Philips ranked number one in the annual IMV customer survey of overall service performance in Patient Monitoring Systems and Ultrasound All Systems, comprising Radiology/ OB-Gyn and Cardiology instruments.

Philips Annual Report 2006     57

6 Financial highlights		8 Message from the President		14 Our leadership		20 The Philips Group

Philips also received the American Heart Association’s Cor Vitae Award, given each year to a member of the corporate community who enhances the quality of life in the community through innovation, philanthropy, vision and leadership. The company was also named best-in-class winner in the 2006 MS-HUG Annual Awards for the Clinical/Patient Information Systems category. This award recognizes the breakthrough contribution being made by healthcare organizations and individuals to drive efficiencies across the healthcare system.

Sourcing

Medical Systems sources sub-assembly units from a limited number of global suppliers. The drive towards supplier consolidation continues, with Medical Systems on target to procure 80% of its bill of materials from fewer than 100 preferred suppliers by mid-2007.

A strong focus on early supplier involvement and value engineering allowed Medical Systems to weather the volatility of the metal commodity market during 2006. In addition to early supplier involvement and value engineering, Medical Systems continues its focus on sourcing in low-cost countries, with bill of materials spending in these countries increasing by 7% in 2006.

In support of Philips’ strong position in sustainability, Medical Systems actively monitors existing and potential new suppliers in identified high-risk countries.

Distribution channels

Marketing, sales and service channels are mainly direct. In certain geographical areas Medical Systems works with third-party specialized system integrators and distributors.

Regulatory requirements

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

Continuous clinical innovation and breakthroughs, in combination with collaborative customer relationships, drive growth and profitability. However, the success of clinical innovation is often dependent upon appropriate reimbursement. In the US, concern over rapid and sustained growth in imaging services has attracted increased scrutiny by the Federal government and commercial payers. This has resulted in the adoption of new strategies designed to curb growth that could

Key data
in millions of euros

		2004				2005				2006
Sales			5,884				6,343				6,742
Sales growth
% increase (decrease), nominal			(2	)			8				6
% increase, comparable			4				7				7
EBITA			715				770				936
as a % of sales			12.2				12.1				13.9
EBIT			35				679				795
as a % of sales			0.6				10.7				11.8
Net operating capital (NOC)			2,862				3,400				4,332
Cash flows before financing activities			677				566				(371	)
Employees (FTEs)			30,790				30,978				32,843