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, 2008, dated February 23, 2009, as well as a copy of the press release entitled “Philips publishes 2008 Annual Report”.

 

 

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 23^rd day of February 2009.

KONINKLIJKE PHILIPS ELECTRONICS N.V.

/s/ E.P. Coutinho
(General Secretary)

Annual Report 2008

Financial, social and environmental performance

2008 Welcome to the Philips Annual Report

... their needs drive our actions

At Philips, we seek to improve people’s lives with timely innovations that enhance their health and well-being. We want to help people live a healthy, fulfilled life.

Our health and well-being focus also extends beyond the individual, reflecting a commitment to the sustainability of our communities, our societies, our world.

This report

Simplifying our external annual reporting in order to better meet the needs of our stakeholders, this year’s Annual Report covers both our financial and our social and environmental performance in a single volume. This reflects the fact that sustainability is no mere adjunct to, but rather embedded in the very fabric of our business operations. Our Annual Report 2008 will also be the last to be based on both US GAAP (Generally Accepted Accounting Principles in the United States) and IFRS (International Financial Reporting Standards): as of 2009 we will apply IFRS only.

www.philips.com/annualreport2008

We care about our performance

We remain tightly focused on our financial and sustainability performance.

We care about our customers’ needs

We integrate technology and design into people-centric solutions based on fundamental end-user insights and the brand promise of “sense and simplicity”.

We care about global challenges

We believe we can make a difference in enabling efficient energy use and in making healthcare available and affordable – turning global challenges into business opportunities.

We care about our people, our planet and our partners

Improving the quality of life of people inside and outside our company, as well as the quality of the world we live in, is vital if we are to realize our ambitions for sustainable growth.

6 Performance highlights

8 Message from the President

14 Who we are

18 We care about...

42 Our group performance

Performance highlights

The year’s performance at a glance

Message from the President

Gerard Kleisterlee looks to the challenges and opportunities ahead

Our group performance

Analysis of our 2008 performance fi nancial, social and environmental

www.philips.com/annualreport2008

This Annual Report is available online — in dynamic interactive form — at the address above. Key financial data are available as Excel downloads. The Report can also be downloaded in full or per chapter in PDF.

70 Our sector performance

94 Risk management

110 Our leadership

114 Supervisory Board report

122 Performance statements

Contents
6		Performance highlights
8		Message from the President
14		Who we are
18		We care about
18		The global healthcare challenge
22		Helping consumers to enjoy a healthy lifestyle
26		The energy efficiency imperative
30		Capturing opportunities in emerging markets
34		Our people, our planet, our partners
42		Our group performance
42		Management discussion and analysis
56		Liquidity and capital resources
62		Sustainability
68		Proposed distribution to shareholders
69		Outlook
70		Our sector performance
72		Healthcare
78		Consumer Lifestyle
84		Lighting
90		Innovation & Emerging Businesses
93		Group Management & Services
94		Risk management
110		Our leadership
114		Supervisory Board report
Performance statements
123		Notes overview
124		US GAAP financial statements
180		Sustainability performance
192		IFRS financial statements
244		Company financial statements
250		Reconciliation of non-US GAAP information
254		Corporate governance
262		Ten-year overview
266		Investor information

Please refer to page 44 for more information about forward-looking statements, third-party market share data, fair value information, US GAAP basis of preparation, use of non-US GAAP information, statutory financial statements and management report, and revisions and reclassifi cations.

Statutory financial statements and management report

The chapters IFRS financial statements and Company financial statements contain the statutory financial statements. The introduction to the chapter IFRS financial statements sets out which parts of this Annual Report form the management report within the meaning of Section 2:391 of the Dutch Civil Code (and related Decrees).

6 Performance highlights

8 Message from the President

14 Who we are

18 We care about...

42 Our group performance

Performance highlights

Financial table

all amounts in millions of euros unless otherwise stated		2006		1)		2007		1)		2008
Sales			26,682				26,793				26,385
EBITA2)			1,383				2,054				931
as a % of sales			5.2				7.7				3.5
EBIT			1,198				1,841				317
as a % of sales			4.5				6.9				1.2
Financial income and expenses			28				2,613				(225	)
Results relating to equity- accounted investees			(157	)			763				19
Income (loss) from continuing operations			899				4,593				(178	)
Income (loss) from discontinued operations			4,482				(433	)			(8	)
Net income (loss) per common share in euros			5,381				4,160				(186	)
- basic			4.58				3.83				(0.19	)
- diluted			4.55				3.79				(0.19	)
Net operating capital2)			8,473				10,529				14,867
Free cash flows2)			(358	)			821				773
Stockholders’ equity			22,963				21,642				16,243
Net debt : group equity ratio2)			(10):110				(32):132				3:97
Employees at December 313)			121,732				123,801				121,398

6     Philips Annual Report 2008

70 Our sector performance

94 Risk management

110 Our leadership

114 Supervisory Board report

122 Performance statements

€ 773 million

free cash flow

12%

comparable sales growth for Healthcare in emerging markets

€ 0.70

per share proposed distribution to shareholders in 2009

Philips Annual Report 2008      7

6 Performance highlights

8 Message from the President

14 Who we are

18 We care about...

42 Our group performance

Message from the President

Dear stakeholder

2008 was not exactly the year of progress that you and I had envisaged for Philips 12 months ago. Our company’s transformation over the last few years has definitely produced a balanced, stronger and more resilient set of businesses active in the field of health and well-being, and these continued to improve their position in the market in 2008. But the acceleration of the economic downturn in the course of the year, particularly in the fourth quarter, took an increasing toll on several of our businesses that are sensitive to early cycle effects, especially those with direct or indirect consumer market exposure, requiring us to take decisive action.

Nevertheless there has been progress on several fronts. With the successful integration of the two largest acquisitions in Philips’ history — Respironics and Genlyte — more than 50% of our revenue is generated from businesses with global leadership positions; up from less than 40% in 2007. And a steady 31% of our sales continues to come from emerging markets. All that supported by a quality brand that gained 8% in value in 2008 alone and a workforce reaching high-performance benchmark engagement levels.

Performance

The increased strength and resilience of our business portfolio was particularly evident in Healthcare, which, in a very challenging operating environment, achieved excellent results — higher comparable sales and an improvement in underlying EBITA — and is on the way to becoming our largest sector.

The strong downturn in the latter part of 2008 affected the Group’s top line, particularly at Consumer Lifestyle and in our OEM businesses in Lighting, partly offset by continued healthy growth at Healthcare, leading to a moderate overall sales decline of 2.7%.

EBITA was down on 2007, largely due to a decline in sales-driven earnings at Consumer Lifestyle and Lighting, as well as an asbestos-related settlement charge. We also extended and accelerated the restructuring and change programs across our Healthcare, Consumer Lifestyle and Lighting sectors, further impacting EBITA. These programs are on track to deliver cost savings of approximately EUR 400 million on an annual basis, with effect from the second half of 2009.

We also moved quickly to extend our cash management initiatives, including rigorous management of working capital. This enabled us to end the year with a robust balance sheet supported by strong operating cash flows of almost EUR 1.5 billion.

Furthermore, we continued with the responsible sell-down of our non-core financial holdings by divesting our final holding in TSMC, as well as further reducing our stake in LG Display. The economic malaise affected the market value of our remaining financial stakes, causing us to write down EUR 1.4 billion on the value of our current financial holdings.

The road ahead

We remain fully committed to our primary financial objective of doubling EBITA per share, and will continue to drive forward our plans in this respect. However, the rapid and severe deterioration in the business environment means we no longer expect to be able to realize this goal in 2010.

We remain fully committed to our primary financial objective — to double EBITA per share

For the mature markets in Western Europe and the US — and most emerging markets — we foresee very difficult conditions throughout 2009. Nonetheless, I firmly believe that the overall strength of our business portfolio, coupled with our strong balance sheet and tight focus on cost and cash management, will enable us to weather the current turmoil and make the most of the economic upturn when it comes.

69%

Employee Engagement Index

8      Philips Annual Report 2008

70 Our sector performance

94 Risk management

110 Our leadership

114 Supervisory Board report

122 Performance statements

6 Performance highlights

8 Message from the President

14 Who we are

18 We care about...

42 Our group performance

Return to shareholders

We completed EUR 3.3 billion of the current EUR 5 billion share repurchase program announced in December 2007. However, in view of the risks and opportunities presented by the economic downturn and the turbulence on the financial markets, we decided that the most responsible course of action was to stop the share repurchase program until further notice and to maintain our financial flexibility.

In common with many in our peer group, our share price followed the downward trend of the market in 2008. Disappointing as this is, I remain confident that when better economic times return our share price will respond to reflect the intrinsic quality of our health and well-being portfolio.

At our General Meeting of Shareholders in March 2008 we increased the dividend for the fourth year in a row. We are proposing to the upcoming General Meeting of Shareholders to make a distribution of EUR 0.70 per common share — equal to last year’s dividend — resulting in an increased yield (as of December 31, 2008) of 5.1% for shareholders.

How did we do against our Management Agenda 2008?

Let me update you on how we performed on the objectives we set ourselves last year.

Integrate and leverage recent acquisitions, delivering anticipated return on investment

The two main integration processes concerned Respironics in our Healthcare sector and Genlyte in Lighting. Both contributed positively to sales and earnings, in line with expectation.

... positive contribution from integrated acquisitions ...

The acquisition of leading North American luminaire manufacturer Genlyte not only gives us the leading position in the US market for professional lighting applications, but also makes us the only player with a truly global platform for its lighting applications and solutions.

The acquisition of Respironics — a leading US-based global provider of innovative respiratory and sleep therapy solutions for hospital and home use — is part of our strategy to create a global leadership position in the fast-growing home healthcare solutions market. In December, we further solidified this position with the acquisition of the aerosol therapy business of Medel SpA in Italy. The hospital activities of Respironics are now part of our integrated offering of Clinical Care Solutions, and we are well on our way with the creation of an integrated approach to sleep care involving our Lifestyle sector.

10      Philips Annual Report 2008

70 Our sector performance

94 Risk management

110 Our leadership

114 Supervisory Board report

122 Performance statements

Take decisive steps to structurally deal with unsatisfactory EBITA margins in Connected Displays (Television)

In North America we entered into a five-year minimum brand licensing agreement with Funai Electric Company of Japan, under which Funai will assume responsibility for all Philips-branded consumer television activities in the United States and Canada. Toward the end of the year this agreement was extended, adding audio-video categories in the US and TV and audio-video categories in Mexico.

... decisive action to address profitability ...

We drove further portfolio reductions around the world, for instance in Australia, New Zealand and South Africa, and announced our withdrawal from plasma-based TVs. We also signed a letter of intent regarding our PC Monitors business, creating a brand licensing agreement with TPV Technology for the global distribution and marketing of IT Display products.

Given the current economic turmoil, we will continue to evaluate whether more action is required in 2009. Going forward, we have a solid TV business — with leadership positions in selected geographic markets — that is driven by innovation and margin rather than volume.

Improve productivity as a driver for margin expansion

Our progress on this point was limited as our efficiency programs were mitigated by lower earnings in our operational sectors due to the economic downturn. The restructuring and change programs across our sectors will put us in a stronger position, but productivity remains a key focus point for management.

Step up resource investment in developing markets to accelerate growth in excess of 2x GDP

In 2008, we further increased our talent, marketing and R&D investments towards the emerging markets. In addition, we made a number of acquisitions in Brazil, China and India, designed to strengthen our position in healthcare in emerging markets.

... emerging market sales growth of 12% and 8% in Healthcare and Lighting respectively ...

Excluding Television, which we manage for margin instead of volume, our sales growth in emerging markets amounted to 6%, approximately in line with the latest 2x world GDP growth estimates. I am particularly pleased with the way our Healthcare and Lighting businesses weathered the economic downturn, with comparable sales growth of 12% and 8% respectively in the emerging markets for the year.

Increase innovation focus in support of Philips’ growth ambition

In 2008, sales of innovative products — i.e. products introduced within the last year (for B2C products) or three years (for B2B products) — amounted to 58% of total sales, again up 2 percentage points and more than double the 2003 level, but still not giving us the amount of new business we are looking for.

In difficult economic times like these, innovation is more crucial than ever to provide a competitive edge. In 2009 we will therefore — notwithstanding our focus on cash management — sustain our spending levels on R&D and marketing, while intensifying our efforts to increase the speed and productivity of innovation.

Sustainability continues to be a key driver of innovation. Sales of Green Products rose to 23% of overall sales, up from 20% in 2007, representing an important, growing part of our revenue stream. Our investment in Green Innovations amounted to over EUR 280 million in 2008, on track for a cumulative amount of EUR 1 billion to be invested by 2012.

Continue to drive a culture of superior customer experience

Ensuring a superior customer experience is absolutely crucial to the realization of our ambitions. The Net Promoter Score (NPS) is our single key metric of customer experience. NPS measures the answer to one simple question: “How likely is it that you would recommend this company/product to a friend or colleague?” Compared to 2007, we achieved NPS leadership in an additional 4% of our businesses on a comparable basis. During 2008, we also expanded the NPS measurement to now cover all our strategic areas, and at present 47% of our key businesses have industry-leading scores. Especially notable is our strong performance in the emerging markets such as Brazil, Russia, India and China. We are still committed to reach our 2010 NPS target and to this end we will drive customer experience improvement and execute strategic moves to continue to secure leading NPS positions.

We also realized 8% growth of our total brand value in the annual ranking of the top-100 global brands compiled by Interbrand — the fifth increase in a row. In 2004, when we launched our “sense and simplicity” brand campaign, Philips’ total brand value was USD 4.4 billion. This has steadily increased to a total value of USD 8.3 billion in 2008. Such consistent improvement clearly illustrates that our “sense and simplicity” brand promise, founded on deep, validated insights into customer and end-user needs, continues to resonate with customers.

23%

of sales came from Green Products

58%

of sales came from innovative products introduced in the last three years

Philips Annual Report 2008      11

6 Performance highlights

8 Message from the President

14 Who we are

18 We care about...

42 Our group performance

Bring employee engagement to high-performance benchmark

I am very pleased to report that we have made significant advances in Employee Engagement — our measure of the progress of our people initiatives.

... strong progress in employee engagement ...

The results of our 2008 survey exceeded expectations. Our overall Philips score leaped from 64% to 69% favorable — two points above our target for the year, and closing in on the high-performance benchmark. Our People Leadership Index, which measures the effectiveness of our leaders in engaging people, also rose by five points to a score of 69%.

‘because health and well-being matters to people’

People’s needs remain the starting point for everything we do. By tracking trends in society and obtaining deep insights into the issues confronting people in their daily lives, we are able to identify opportunities and develop innovative solutions that are easy to access and relevant to people’s needs and aspirations.

Philips must continue to stand for “sense and simplicity”. That is what our customers should experience, each and every day, in dealing with us. Now more than ever, we need to redouble efforts to fully understand our customers and markets, so that we can identify and compete boldly — and successfully — for new opportunities as they arise.

... further grow Philips as the leading brand in health and well-being ...

We aim to further grow Philips as the leading brand in the health and well-being market space. Health and well-being is a theme that is becoming increasingly relevant for society around the world, and it will be a major driver of growth when the financial and economic turbulence has subsided. It is also the glue that bonds our businesses within Healthcare, Consumer Lifestyle and Lighting.

Our Healthcare sector is a great example of how we are building growth-orientated businesses with strong leadership positions in both clinical and home healthcare, as well as a growing presence in emerging markets.

In Consumer Lifestyle, we are focusing the business on innovative lifestyle solutions for personal well-being. We will continue to build upon existing market-leading positions based on differentiation and profitability, rather than scale. In addition, we will enter new, higher-margin value spaces with a particular focus on platforms such as healthy living, personal care and home life.

In Lighting, we have established leading positions in fast-growing areas such as LEDs and energy-efficient lighting with a segment-based marketing approach. Our task now is to strengthen our global leadership by driving the transition to application-based solutions to fuel future growth. Our strong IP position across the solid-state lighting value chain — and the licensing opportunities it brings — will further reinforce this leadership.

... continue to embed sustainability throughout our operations ...

We will also continue to embed sustainability throughout our operations. Moving to this integrated financial, social and environmental annual report clearly illustrates this unified approach.

Staying the course

We are convinced that the strategic choices we have made are the right ones. Our goals are ambitious and they have become more challenging with the deterioration in the macro-economic climate. However, these difficult times call at most for a change of tactic, not a change of strategy.

Therefore, our Management Agenda 2009 is all about staying the course through this downturn. Its three themes — Drive performance, Accelerate change and Implement strategy — reflect the current reality, where the prime focus will be on managing cash flow and cost, while continuing to capture opportunities to strengthen our position in the market. Pursuing these goals — with a heightened sense of urgency — will ensure the long-term health, growth and profitability of our company. We have the strategy, portfolio, financial strength and talent to succeed.

12      Philips Annual Report 2008

70 Our sector performance

94 Risk management

110 Our leadership

114 Supervisory Board report

122 Performance statements

Final thoughts

I would like to thank our employees, including our many new employees from our acquisitions, for their hard work over the past 12 months. Time and again, they have demonstrated the resilience and drive to rise to a challenge. And I know I can count on their continued dedication and effort in the face of this latest hurdle.

I would also like to thank our other stakeholders, and in particular our customers, for the loyalty and confidence they have shown toward us in 2008.

Finally, on behalf of my colleagues on the Board of Management, let me thank our shareholders for their continued support in these difficult times. We remain wholly committed to increasing the value of the company.

Gerard Kleisterlee
President

Management Agenda 2009

Drive performance

•		Relentlessly manage cash
•		Proactively align cost structure with market conditions and increase productivity
•		Manage risks and opportunities in a balanced way to strengthen our market positions

Accelerate change

•		Organize around customers and markets, thereby improving Net Promoter Score
•		Increase Employee Engagement to high-performance level and implement ‘Leading to Win’
•		Accelerate sector transformation programs

Implement strategy

•		Further build the brand in the Health and Well-being space
•		Continue to re-allocate resources to growth opportunities and emerging markets, including selective mergers and acquisitions
•		Increase revenue derived from leadership positions

Philips Annual Report 2008      13

6 Performance    highlights		8 Message from the    President		14 Who we are		18 We care about...		42 Our group performance

Our company

Our company was founded in Eindhoven (Netherlands) in 1891 by Anton and Gerard Philips to manufacture incandescent lamps and other electrical products. Ever since then, our innovations have been making people’s lives simpler, more enjoyable and more productive.

Based on a deep understanding of what people really need and want, and delivering on our promise of simplicity, we empower our customers — both healthcare and lighting professionals and end-consumers — with solutions that are advanced, yet designed around them and easy to experience.

We see exciting opportunities in both mature and emerging markets and apply our competence in marketing, design and technology to capture value from major economic, social and demographic trends, for example the growing demand for better healthcare at lower cost, consumer empowerment, the rise of emerging markets and the need for energy efficiency.

At the same time, we are committed to enhancing economic prosperity, environmental quality and social equity wherever we operate.

Our mission

We improve the quality of people’s lives through the timely introduction of meaningful innovations.

Our vision

In a world where complexity increasingly touches every aspect of our daily lives, we will lead in bringing sense and simplicity to people.

Our brand promise

We empower people to benefit from innovation by delivering on our brand promise of “sense and simplicity”. This brand promise encapsulates our commitment to deliver solutions that are advanced, easy to use, and designed around the needs of all our users.

Our organization

Headquartered in Amsterdam, Netherlands

•		Healthcare
•		Consumer Lifestyle
•		Lighting

14      Philips Annual Report 2008

70 Our sector      performance		94 Risk      management		110 Our leadership		114 Supervisory        Board report		122 Performance        statements

Our strategy

Through our strategy, we aim to fuel growth by making Philips the leading brand in health and well-being. Our strategy further positions Philips as a market-driven, people-centric company with a structure that reflects the needs of its customer base, while also increasing shareholder value.

Our ways of working

1

We are a people-centric company that organizes around customers and markets

2

We invest in a strong brand and consistently deliver on our brand promise of “sense and simplicity”, in our actions, products and services

3

We deliver innovation by investing in world-class strengths in end-user insights, technology, design and superior supplier networks

4

We develop our people’s leadership, talent and engagement and align ourselves with high-performance benchmarks

5

We invest in high-growth and profitable businesses and emerging geographies to achieve market leadership positions

6

We are committed to sustainability and focus on making the difference in efficient energy use

7

We drive operational excellence and quality to best-in-class levels, allowing us the above-mentioned strategic investments in our businesses

Vision 2010

On December 4, 2008, we confirmed that we continue to execute on our Vision 2010 strategy. However, given the current economic environment, the financial targets set as part of Vision 2010 are not expected to be met by the end of 2010, as originally planned, due to the continuing economic slowdown and resulting declining demand in key markets. We remain fully committed to our strategy, and will update the market on the realization of our financial objectives when economic visibility improves.

Our ambitions

Our financial targets

•		Double EBITA per common share from 2007 level
•		Group EBITA margin of 10-11% Sector EBITA targets:           Healthcare 15-17%           Consumer Lifestyle 8-10%           Lighting 12-14%
•		Comparable sales growth of 6% average per year
•		Return on invested capital of 12-13%

Our EcoVision4 targets
over the period 2007 — 2012

•		Double revenues from Green Products to 30% of total sales
•		Double investment in Green Innovations to a cumulative EUR 1 billion
•		Improve our operational energy efficiency by 25% and reduce CO2 emissions by 25%

Philips Annual Report 2008      15

6 Performance    highlights		8 Message from the    President		14 Who we are		18 We care about...		42 Our group performance

16      Philips Annual Report 2008

70 Our sector      performance		94 Risk      management		110 Our leadership		114 Supervisory        Board report		122 Performance        statements

Philips Annual Report 2008      17

6 Performance    highlights		8 Message from the    President		14 Who we are		18 We care about...		42 Our group performance

The global healthcare challenge

Healthcare is one of the most pressing issues of our time. The global population is aging and there are more and more people living with chronic disease. This is causing costs to continue to rise and increasing the demand for advanced healthcare, particularly in developing countries.

At Philips we see these challenges as opportunities. We focus on the needs of patients and their care providers throughout the care cycle, wherever that care occurs. And we apply our insights and innovation to improve healthcare quality and reduce cost.

For some patients, this means faster, more accurate diagnosis and greater comfort and satisfaction, for others access to healthcare for the first time. For care providers, it means improved patient care and more time to focus on disease management.

“We work to simplify and improve healthcare for people’’

“Our people-focused approach brings meaningful innovation to simplify healthcare and to give people the best care possible. This includes new ways to empower patients to manage their own health for more independent living at home.”

Steve Rusckowski, CEO Philips Healthcare

18      Philips Annual Report 2008

70 Our sector     performance		94 Risk     management		110 Our leadership		114 Supervisory        Board report		122 Performance        statements

Philips Annual Report 2008      19

6 Performance    highlights		8 Message from the    President		14 Who we are		18 We care about...		42 Our group performance

$100 billion
economic impact of sleep disorders in the US

Sleep well, live well

Recognizing the importance of a good night’s rest, the 19th century philosopher Ralph Waldo Emerson wrote, “Health is the first muse, and sleep is the condition to produce it.” Today’s medical science proves him right.

Research in recent years has shown that those who suffer from the sleep disorder Obstructive Sleep Apnea (OSA) — characterized by the repeated cessation of breathing during sleep — are at possible increased risk of high blood pressure, heart disease and heart attack, stroke, diabetes as well as fatigue-related motor vehicle and work accidents.

“I was depressed so I talked to my doctor”.

One woman’s story

Denise, a 55 year-old former bank employee from the United States, didn’t know anything about OSA, but she did know that her heavy snoring drove her husband of 35 years to sleep in the guest room. Loud snoring may be a sign of sleep apnea, which can be a life-threatening condition.

“I was depressed so I talked to my doctor,” she explains. “He prescribed anti-depressants, which didn’t help at all.” That’s when doctors suggested an overnight sleep study. The results were startling. “They told me I had stopped breathing 46 times an hour while I was asleep!” This caused low blood oxygen levels, which meant her heart had to work harder, and Denise felt sleepy during the day.

Sleep therapy

That all changed when Denise began using Philips Respironics’ continuous positive airway pressure (CPAP) therapy when she sleeps. The CPAP machine and mask for her face increase air pressure in Denise’s throat so that her airway does not collapse when she breathes in.

Philips Respironics’ products are designed to be simple to use and natural and easy to live with - providing Denise with the essential treatment she needs, and allowing her and her husband, Russ, a restful night’s sleep.

Home Healthcare

It is estimated that in the United States alone there are 18-20 million sufferers of moderate or severe OSA, of which only 15-20% have been diagnosed. Our acquisition of Respironics is a significant step in strengthening our Home Healthcare business, giving us a leading position in the fast-growing areas of sleep management, respiratory care and non-invasive ventilation.

Left: Obstructive Sleep Apnea
Right: normal breathing

20      Philips Annual Report 2008

70 Our sector      performance		94 Risk      management		110 Our leadership		114 Supervisory        Board report		122 Performance        statements

Designed for emerging markets

Our series of new portable, compact patient monitors provides a reliable and affordable means to observe and care for patients. Introduced in India, the new Philips SureSigns VM3 is the first Philips patient monitor designed for emerging markets.

Rapidly changing healthcare services

With a growing per capita income and the adoption of new lifestyles, healthcare services in India are rapidly changing. To meet the increasing demand for quality care, people in urban areas have seen the construction of new, state-of-the-art hospitals and associated satellite facilities, while others are increasingly seeking care at smaller nursing homes and clinics. This has fueled demand for healthcare equipment including patient monitors. Our objective is to garner a market share of 40% by 2010 through our diverse range of patient monitoring equipment.

Access to more affordable equipment

High-end patient monitors are out of reach for many small to mid-sized clinics, forcing doctors and nurses to decide upon treatment only based on visible symptoms. Sometimes this means they must wait for a patient’s condition to deteriorate before changing treatment. With access to more affordable patient monitoring equipment, clinicians are able to observe a patient’s vital signs and make more informed, timely decisions about patient care.

Versatile, cost-effective solutions

In 2008, Philips introduced the latest additions to its HD ultrasound family of products, the Philips HD7 and Philips HD15.

The HD7 was introduced to Europe in March at the European Congress of Radiology (ECR) in Vienna. It draws upon an array of features and capabilities available on high-end Philips systems and puts them into an affordable, mobile unit that is well-suited for a wide variety of clinical settings.

“Now it no longer requires a major investment for a medical office, clinic or small hospital to get the same kind of key capabilities, performance features and high-definition imaging found in higher-priced ultrasound systems.”

Anne LeGrand, senior vice president, Ultrasound, Philips Healthcare

Developed with clinicians in mind, the ergonomic, easy-to-use system can meet the demands for high-volume use in a wide range of clinical applications.

Superb imaging and workflow performance in a cost-effective system

The Philips HD15 ultrasound system is a new platform designed to deliver an advanced level of image clarity and broad application support for everyday use in small hospitals, clinics and private practices.

The system may be used as a primary system for some users, particularly those in emerging markets who require a feature-rich system but may not need all of the features of a high-end ultrasound solution.

>450
products and services offered in over 100 countries

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Helping consumers to enjoy a healthy lifestyle

“The design of our products and services reflects the fact that consumer choices are increasingly driven by emotional and social factors rather than simply functionality.”

Andrea Ragnetti, CEO Philips Consumer Lifestyle

The pursuit of personal well-being is a universal trend — we all want to feel and look our best, and to enjoy a healthy life balance. This trend also represents a significant and fast-growing segment of total global consumer spend.

Our Consumer Lifestyle sector illustrates Philips’ evolution from a technology business to one that improves the quality of people’s lives by focusing on their health and well-being.

Starting from validated consumer insights, and guided by our brand promise of “sense and simplicity”, we offer consumers lifestyle experiences that are enjoyable and fulfilling.

“We focus on consumer experiences”

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Philips Annual Report 2008      23

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Wide awake — the natural way

Sleep can play a positive role in consumers’ lifestyles, and in enhancing well-being in particular. “We can all identify with the benefit of a good night’s sleep, but also the ‘feel good’ factor of waking naturally, feeling refreshed,” says Ena Voute, leader of the Beauty & Vita-Light category within Consumer Lifestyle. “We took this as the starting point for developing the Philips Wake-up Light, which is designed to gently wake the body the way nature intended — with light.”

Most of us know that getting a good night’s sleep is a good thing, but we now know a lot more about the benefits of enabling the kind of sleep pattern nature intended us to have.

Half an hour before the required wake-up time, the Wake-up Light switches on with a very low level of light intensity, gradually increasing it over the following 30 minutes to simulate the rising sun. A choice of ambient noises — like bird song — can add to the experience, as well as more conventional early morning stimuli, like a conventional alarm or radio.

“Most people will agree that being woken abruptly — especially during winter, when it’s cold and dark outside — is not a pleasant way to come-to in the morning,” notes Ena. “We know that light stimulates the senses, energizing the body and helping in making us feel less lethargic. The Wake-up Light gently prepares the body for waking. As a result, you not only feel refreshed but also more alert.”

Founded on fact

Philips’ own insights have been underpinned by scientific research, which has revealed more about the ‘natural’ clock within us all. “Our ancestors would sleep according to the availability of natural light,” says Ena. “The introduction of artificial light changed that, as people were effectively able to control sunrise and sunset themselves. However, research has made direct links between sleep cycles and other physiological factors, such as our metabolism, blood pressure, cardiovascular system, and the release of stress hormones.”

Before launching the Wake-up Light, Philips applied a rigorous process of consumer validation to underpin the insight behind the product. Consumer testing resulted in extremely positive feedback. “I have more energy and get up without any stress,” wrote one consumer.

“My boyfriend and I noticed that, since we have the Wake up Light, we have more energy throughout the day. Our productivity is higher and we feel that our daily rhythm is smoother.”

Following the success of its first-generation Wake-up Light, Philips introduced a new model in 2008. “Nine out of ten customers who bought our first model said they found it a more pleasant method of waking than traditional alarms on clocks, radios or mobile phones,” says Christophe Melle, Consumer Marketing Director for Vita-Light. “These results were highly encouraging, and also gave us a lot of positive end-user experience to draw on in developing our second-generation model.”

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SimplicityLabs — a virtual lab for people-focused innovation

In August 2008, Philips Research presented its new online research environment — SimplicityLabs. This virtual environment allows people worldwide to experiment with new software-based product concepts in the comfort of their own homes. An extension of Philips’ consumer-focused research, SimplicityLabs enables Philips Research to harness end-user feedback at a very early stage in the innovation process and validate new concepts in a way that is fast, efficient and cost-effective.

“What’s new about SimplicityLabs is that people can join in the experiments at any time, from anywhere. We expect this will boost take-up rates and provide faster and richer consumer feedback in the early phases of product concept development.”

This feedback is both explicit (people fill in a questionnaire about the concept) and implicit (the system records how people actually interact with the mock-up or prototype). “Once we’ve gathered and interpreted this data, we can make all the improvements necessary to turn the online product concept into a real, consumer-focused product that, we expect, people will love,” says Fred Boekhorst, Senior Vice-President Philips Research and Program Manager Lifestyle.

The next step in ‘experience’ research

Like Philips Research’s ExperienceLab, SimplicityLabs places the consumer at the very heart of the innovation process. “In the longer term, we expect SimplicityLabs will make a significant contribution to steering our innovation process and to ensuring that products in our portfolio are based on existing, wide-ranging consumer needs,” says Boekhorst.

One million and counting

Our conscious decision to make people’s needs the starting point for everything we do is clearly resonating with consumers, as evidenced by the fact that — supported by our Healthy living initiative — we sold our one millionth whole-fruit juicer in 2008.

With this product, we took a fundamental insight — that parents the world over want their children to get all the nutritional goodness they need — and applied our development and design competence to produce an innovative solution that fulfilled this universal aspiration.

Fantastically healthy

There is nothing more delicious and healthy than freshly squeezed juice — it is one of the staples of a healthy breakfast and a great way to enjoy the delicious taste of fruit and vegetables. Drinking juice also cleanses, flushes, alkalizes and revitalizes the body. But juicing can often be messy and ineffective — and rather than an ideal way to get your recommended daily allowance of vital vitamins and minerals, it can become a hassle and a chore.

The Philips Juicer changes this forever. With its powerful motor, this innovative appliance can instantly turn any fruit or vegetable — chopped or whole — into juice, with no pips or unwanted pulp.

#1

power toothbrush recommended by dental professionals — Philips Sonicare

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The energy efficiency imperative

Global climate change and rising energy costs – these are major issues that people really care about. At Philips, we embraced the energy challenge early on, seeing it as a business opportunity that could benefit society at large.

With lighting, for instance, accounting for 19% of all electricity consumed throughout the world, we can make a significant impact. As the global market leader, we are committed to meeting people’s lighting needs by promoting and supplying energy-efficient and sustainable solutions and applications based on innovative new technologies, such as solid-state lighting.

“It’s a simple switch ...
with benefits all round”

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>3.5 million

people pledge to change to energy-efficient lighting via our website

Partnering for sustainability

In 2008, Philips and UK-based Gazeley Ltd announced a partnership agreement under which they will join forces to realize the most sustainable warehouse facilities by applying state-of-the-art energy-efficient lighting solutions.

Gazeley is a global provider of sustainable logistics space. It is committed to delivering environmental initiatives as part of its standard specification, at no extra cost to its customers.

“...working with Philips will enable us to significantly reduce our global footprint ...”

Significant benefits

By applying Philips’ energy-efficient lighting solutions across its operations, Gazeley will cut energy consumption and CO₂ emissions by up to 45% and reduce waste by as much as 83%. This will also yield cost-reduction benefits for occupiers — thanks to lower energy bills and the need for less maintenance activity — while the superior light quality will provide employees with a more pleasant working environment.

Smaller footprint, lower costs

At the signing of the partnership agreement, Jonathan Fenton-Jones, Global Procurement & Sustainability Director for Gazeley commented: “This partnership marks a major step forward in our strategy to deliver cutting-edge sustainability standards to our customers worldwide. To be able to work with a recognized partner such as Philips, which is at the forefront of environmental change, is an important business development for Gazeley and will enable us to significantly reduce our global footprint whilst providing customers with increased operational cost savings.”

Sustainable energy solutions for Africa

In 2008, Philips and the Dutch Government signed a public/private partnership agreement, which will see the development of a new generation of sustainable — solar-powered — lighting solutions for Sub-Saharan Africa.

Entitled ‘Sustainable Energy Solutions for Africa’ (SESA), this project is linked to the UN Millennium Development Goals. It aims to provide 10 million people in Sub-Saharan Africa with affordable, appropriate and sustainable energy solutions — for lighting, cooking and water purification — by 2015.

A brighter future

Today an estimated 500 million Africans live without electricity. For them, night-time means either darkness or the flickering light of a candle or kerosene lamp. However, very few can afford the kerosene they need. As a result, at sundown life simply comes to a halt for hundreds of millions of people.

Lighting solutions like our solar-powered Solar Uday lantern and self-powered Dynamo Multi LED flashlight can really make a difference. The Solar Uday, for example, is cheaper to run than kerosene lamps and provides far more and higher quality light. It is also safer, as there is no fire risk, and better for health, as smoke is avoided.

There are economic and social benefits to being able to undertake activities in the evening hours. And these products also offer an environmental benefit, as they use a sustainable natural commodity — sunlight or manpower — to generate electricity.

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Lighting the National – dramatic impact

Philips and the National Theatre in London are some 20 months into a five-year lighting partnership program to replace the landmark venue’s lighting scheme with a state-of-the-art dynamic and energy efficient design.

...offering Londoners and visitors the chance to see world-class theatre, whilst lowering the carbon impact...

Londoners and tourists have already seen a dramatic enhancement of the exterior of the iconic Thames-side building. Our LED lighting solution provides an endless color palette with which to paint the building, creating a spectacular and welcoming aura. New, smaller light fittings will help maintain the architectural integrity of the Grade 2 listed building.

Easy on the eye, easy on the environment

In addition to the immediate visual enhancements, upon completion Philips’ lighting technology will deliver a 70% reduction in the energy needed to illuminate the building’s iconic ‘flytowers’ and ultimately an estimated £100,000 annual saving for the National Theatre!

After the initial phase concentrating on the exterior, the focus switched to the interior and backstage areas of the theater. The public areas front-of-house have been fitted with lower-energy, higher-efficiency fittings. Here, the National Theatre believes this has reduced their lighting electricity consumption by more than 130,000 kWh every year! Similar fittings have been installed in the vast corridors, workshops and rehearsal rooms.

The Mayor of London at the time of the announcement of the partnership, Ken Livingstone, said: “Tackling climate change doesn’t mean we have to stop enjoying ourselves, but it does mean that every sector of London life has to consider its impact on global warming. The work the National Theatre and Philips are doing is the perfect example of the kind of leadership we need right across London, continuing to offer Londoners and visitors the chance to see world-class theater, whilst lowering its carbon impact.”

Lasting contribution

The partnership between Philips and the National Theatre is not a ‘fit and forget’ operation. As Philips introduces new lighting technology, improvements will be installed to deliver ever-greater energy savings and further enhance the environment for everyone coming into contact with one of London’s most recognizable buildings.

“This partnership will enable us to spend more on putting on plays and performances and less on electricity and maintenance. It’s an investment that would be justified on economic grounds, but it’s hard for arts organizations to find the money. Thanks to this partnership we can do so. We are immensely grateful for Philips’ far-sighted approach.”

Nick Starr, Executive Director of the National Theatre

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Capturing opportunities in emerging markets

“Through our technology, know-how, products and services, we are capturing growth opportunities by providing sustainable solutions to the challenges and needs of people in emerging markets.”

Gottfried Dutiné, Member of the Board of Management

Within the emerging markets there is a fast-growing middle class, but also the majority of the world population who live on less than $2 a day. For both groups, smart products and solutions tailored to their needs can really improve their lives.

We have a long-established presence, strong brand awareness and a large workforce in the emerging economies. Together with our increasing resource investment, this gives us the home-grown insights needed to produce appropriate and relevant solutions. We have developed innovative technologies and approaches to address particular healthcare and lighting issues, for instance our SureSigns patient monitors and Uday solar-powered lanterns. And we provide market-specific consumer products in response to unique customer needs. For example, the rice cooker range for the Asian market, the water purifier for India and the Maté kettle in countries such as Brazil and Argentina.

“THE potential is tremendous”

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€1.6 billion

invested in R&D in 2008

Addressing indoor air quality

While the effects of outdoor air pollution have been well documented, relatively little attention has been paid to the quality of indoor air. Figures released by the World Health Organization in 2007 claimed that in a number of countries — including several emerging economies — indoor air pollution is responsible for a total of 1.2 million deaths a year. Children, WHO noted, were impacted even more than adults in succumbing to acute respiratory conditions attributed to indoor air pollution.

These alarming statistics played a significant part in the creation of Philips’ new Water & Air category.

“More than 70% of consumers feel that the air quality will impact their long-term health,” says Sridhar Kumaraswamy, the Water & Air category leader. “This same research also indicated that about half of households are not satisfied with their indoor air quality. We have chosen to address its provision with a very market-specific approach for our Clean Air Systems range, based on different priorities in each market.”

European air quality under threat

Philips’ insight has shown that Europeans are mostly concerned about the amount of dust and especially allergens in indoor air. “55% say they have a problem with it, even though only 5% of European households own an air cleaner,” says Sridhar. Europe’s growing city populations — two-thirds of Europeans will be city dwellers by 2050 — are being increasingly exposed to a whole range of pollutants, from harmful gases, viruses and bacteria, to fine dust, pollen and cooking waste. The design and construction of modern homes is also less effective in dispersing indoor pollutants.

“With more people than ever before living in cities in both the developed world and in emerging markets, there is greater concern about the impact city living has on health and well-being.”

Emerging markets facing environmental challenges

In emerging markets like China, the situation is somewhat different: “People living in China’s cities face the same indoor air pollution issues as anywhere else — like dust, chemical emissions, pollen, tobacco smoke, bacteria and viruses,” says Sridhar. “However, the expanding economy has created additional environmental challenges as a result of things like construction projects and increased car ownership.”

Awareness of domestic air quality in China is growing, and interest in buying an air cleaner is high (around 85% of households). In China, Philips has focused on addressing family health with its Clean Air Systems. “In a big city like Shanghai,” notes Sridhar, “people might be inhaling over 50 million particles with every breath. Since children breathe even more air than adults — up to twice as much — they will inhale even higher levels of airborne contaminants. So, every breath that a child takes, at home and outdoors, can affect his or her growth and development.”

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Providing a sustainable healthcare infrastructure

2008 marked the completion of the installation phase of a six-year program to modernize the healthcare infrastructure of the Republic of Zambia. Part of the Dutch government’s ORET international development initiative, the project has seen substantial improvements made to 71 hospitals across the country. It also has included the training of over 200 local hospital staff, creating a sustainable skills base to ensure a brighter future for the provision of healthcare in the country.

The EUR 25 million project included the installation and maintenance of diagnostic imaging equipment including mobile X-ray, fluoroscopy, ultrasound scanners, operating theaters and dental treatment systems. Funding was provided by the Dutch and Zambian governments, each contributing 50% of the project’s costs.

Working with partners

With overall responsibility for project implementation, we partnered with education provider Fontys to train a local workforce of radiologists, laboratory technicians, nurses, midwives and other medical staff. We partnered with Simed, a provider of turnkey healthcare solutions, to provide surgical and dental solutions for the project.

We will continue to maintain the equipment we installed, and with Fontys we have implemented a train-the-trainer program to ensure that the project’s benefits continue to be realized for years to come.

Healthy people, healthy living, healthy planet

At the Philips Simplicity Event 2008 held on Moscow’s Red Square, Philips unveiled a range of innovative concepts addressing people’s need to be healthy and to live a healthy lifestyle while maintaining a sustainable environment.

The concepts presented at this fourth edition focused on the responsible domestic use of resources, harnessing renewable energy and the responsible consumption of goods.

Ongoing co-creation

The simplicity-led design concepts are not intended for introduction to the market in exactly the form seen at the Event. Instead, as part of our innovation enrichment strategy, they exist to promote dialogue, to allow people to experience our ideas, to trigger reactions, and to ‘test the water’ for potential products.

“The Simplicity Event brings into sharp focus the positive impact that Philips can have on people’s lives — on their health, environment, security and sense of well-being.”
Geert van Kuyck, Chief Marketing Officer

All are technologically viable within a three- to five-year time frame and are designed to address the needs and aspirations of people and society.

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Our people, our planet, our partners

“We work to improve the health and well-being of people inside and outside our company, as well as the quality of the world we live in.”

Gerard Kleisterlee, President

We do this both through what we do — the products and services we bring to the market — as well as the way we work: engaging our employees; focusing our social investment in communities on education in energy efficiency and healthy lifestyles; reducing the environmental impact of our products and processes; and driving sustainability throughout our supply chain.

We develop our people’s talents and encourage them to make the most of themselves both at work and in their personal lives.

With a set of measurable targets, we are driving revenues from Green Products, increasing investment in Green Innovations, and raising the energy efficiency of our operations. Green Product development and innovation also means reducing the chemical content of our products and designing them more effectively for collection and recycling.

And we consider our suppliers as partners in our sustainability initiatives, taking care of the environment and of workers’ lives.

“It’s about all of us and the environment”

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121,000

Philips employees focus on improving people’s lives through timely innovations

Engaging for success

Engaged people with a winning spirit are essential if we are to achieve our growth ambitions. Our aim is to develop our business further by creating products that improve people’s lives. At the same time, we believe in improving our own people’s lives by creating a fulfilling and exciting work environment.

We believe engagement is about creating an inclusive and high-energy working environment.

Empowering people

We are committed to enabling our people to grow, empowering them to be creative in a culture of trust and confidence. That’s why we continue to focus on boosting engagement and improving talent development.

At Philips, we believe engagement is about creating an inclusive and high-energy working environment, where all employees are aligned and energized to contribute to our business success. An engaged workforce delivers a competitive advantage — our people are highly motivated to give their best every day.

Our engagement process

Engagement can be stimulated but it cannot be mandated. Getting there is a journey and — like every journey — to reach our destination we need a road map. Our engagement process is just that a foundation for a road map that allows us to check where we are and where we are headed.

On a regular basis, we measure where we are in our engagement journey. Through the Engagement Survey, we ask our employees to give confidential feedback on 44 items. This enables us to continually strive for even higher levels of employee satisfaction and loyalty as well as referral to and pride in the company.

Taking action

Results are distributed throughout the organization, and teams are encouraged to get together to talk about the results in ‘Deep Dive’ sessions. Strengths and weaknesses are discussed in an open and honest dialogue; the root causes of any issues that have arisen from the survey are addressed and corrective actions put in place.

Action can be taken at various levels — company, sector, country, function, business, team and even at individual manager level.

Responsible restructuring

In 2008 the global economy took an unforeseen, unprecedented downturn. Unfortunately this has necessitated job cuts throughout the entire Philips organization. In this regard we follow one principle: we first inform and consult works councils and employees before making public announcements on specific programs and details on a case by case basis. As a people-centric organization we are doing everything within our power to support those affected with the utmost responsibility and respect. This includes looking for alternative employment within the company for colleagues who face being laid off, providing social plans where applicable, organizing work-to-work trajectories and assigning outplacement coaches. These measures may vary depending on local work conditions and regulations.

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Diversity and inclusion initiative evolves

We recognize and appreciate the wide variety of people who work for us. Each individual is unique, with his or her own background, culture, characteristics, skills and ambitions. Our customers are equally unique, and thanks to our diversity we can better understand them and meet their needs.

Achieving our target for 2008, women now comprise nearly 10% of executives across the company. That’s more than double the figure of 5% in 2005. Next we want to increase that number to 15% by 2012. Further, we want to get more talented local people into key positions in our growth markets.

Understanding female customers

Since it was founded in 2004 our women’s network, WINergy, has focused on support and mentoring. WINergy’s scope expanded in 2008 as the network took steps to evolve into an in-house consultancy to reach out to female customers.

Thanks to our diversity we can better understand our customers and meet their needs.

Women representing our sectors and various functional areas attended workshops in the Netherlands and the United States to learn more about our end-users. Now marketers can reach out to WINergy members to help them generate consumer insights during the product creation process.

GLBT

We have been working with a GLBT (gay, lesbian, bisexual and transgender) focus group to decide if we should create a network, and if so what kind of activities we should develop on behalf of and driven by our GLBT community. We have established Philips Pride, our network for gays and lesbians. Additionally, we joined the Company Pride Platform in 2008 with a number of other multinational companies and co-sponsored its annual conference in Amsterdam.

Philips General Business Principles

The Philips General Business Principles (GBP) are defined to ensure integrity and transparency in our activities and to our stakeholders. Our work on business ethics is dynamic, featuring ongoing communications and updates of our GBP Directives.

Increasing awareness

We launched a communications program to strengthen employees’ awareness of the principles, as well as their importance and how they underpin business integrity. Targeting all employees, the program consists of modules that enable sector and regional leaders to deliver the message, illustrating managerial commitment at the local level. The communications package features a range of tools — from simple e-mails and printed media to online messaging including intranet videos.

Our work on business ethics is dynamic.

A thorough updating process

Our mid-2008 update of the GBP Directives is based on many factors. It takes into account experience gained with the previous GBP Directives, trends in legislation and society, and developments in major codes of conduct like the Electronics Industry Code of Conduct. Also included are demands of key accounts and business ethics issues that experience shows require further elaboration into concrete directives to ensure adequate compliance.

15%

women executives by 2012

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Reducing our environmental footprint

We continuously work on improving the environmental performance of our products across their entire lifespan by investing in EcoDesign, green technologies and measures to further reduce our environmental footprint.

We make these investments because we recognize the importance of considering, as architect and designer William McDonough says, “all children, all species, for all time.” We believe that our products will not only become increasingly environmentally friendly but also even more useful and attractive for our customers.

The global warming challenge

Climate change has been recognized globally as one of the most serious human-made threats to our civilization. Today, however, as author George Monbiot puts it, the risk is not that climate change is not a subject of debate anymore but rather that we keep on talking.

Commitment and action is required by all parts of society including authorities, business and consumers. In Tokyo in July 2008, the G8 leaders pledged “to move to a carbon-free society” through cutting global emissions by 50% in 2050.

At Philips we are convinced that we can contribute to the required transition to a low-carbon world, not only with environmentally sound products, services and technologies, but also by actively seeking the dialogue with all stakeholders including our customers and suppliers.

With the launch of our latest EcoVision program in 2007, we have therefore committed to reduce CO₂ emissions with a sharp focus on energy-efficient products, green innovation and energy efficient day-to-day operations.

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EcoVision4

Green Products

We use the Philips Green logo to identify an increasing number of our Green Products, making it simple for our customers and end-users to make responsible choices.

With increasing concern about the impact of CO₂ emissions on the climate, we will continue to ensure that our products offer superior energy efficiency. We also remain committed to giving our full attention to all relevant environmental and social dimensions, including the chemical content of products and reliable as well as effective collection and recycling.

In 1994 we were at the forefront when we developed procedures for Environmentally Conscious Product Design — what we call EcoDesign. To support this process, we introduced our Green Focal Areas (shown far right) in 1998.

Today Green Products represent a significant share of our revenues in all of the markets we serve.

Green Innovations

Sustainability is recognized as a strategic driver for innovation at Philips. With our commitment to Green Innovations we are looking at today and tomorrow — what we can simply categorize as now (roadmap development), soon (adjacencies, which can also be outside the scope of our current portfolio) and later (breakaway innovations). Our research portfolio is regularly reviewed from a sustainability angle to ensure that we are on track to deliver on our EcoVision commitments.

Operational energy efficiency

Focusing on operational energy efficiency is not only essential to reduce our greenhouse-gas emissions, including CO₂, it also drives overall efficiency and savings.

In this context we have identified a number of strategic initiatives driven by dedicated teams to further strengthen the energy efficiency of our operations and reduce our greenhouse-gas emissions including CO₂. All initiatives are sponsored by senior executives and progress is closely monitored.

Examples include systematic energy scans at our manufacturing sites globally, Green IT, Green Logistics, Green Facility management and Green Supply Chain. While some of these initiatives may primarily have a financial impact, others engage our employees, influencing them to make simple switches that have a big impact, and some, like the examples below, offer both.

We have identified a number of strategic initiatives to further strengthen the energy efficiency of our operations and reduce our greenhouse-gas emissions.

Our Green IT initiative addresses our use of computers and accompanying peripherals, as well as IT infrastructure. Elements of the project include providing employees with green computing tips and allowing them to submit their ideas, as well as encouraging them to be energy educators. Green IT power scan results are published weekly, illustrating the declining percentage of PCs online at night in each region.

To reduce business travel, we have introduced a new video-conferencing system available via the intranet that is as easy as face-to-face and is available for virtual team-gatherings around the world.

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Product stewardshipm

With a deep understanding that our influence on the environmental performance of our products does not end at the time of sale, we are committed to continuously improve their ecological impact throughout their lifespan. We believe that this also will make our products truly better, creating value for people, the planet and the company.

Cradle to Cradle

Our engineers, marketers and designers are inspired by the concept of Cradle to Cradle. This paradigm encourages a mindset shift from ‘being less bad’ to ‘doing good’ for the environment. It sets a vision of a world based on renewable energy, full of materials continually recycled and applied with safety and health in mind.

For Philips, the ongoing exploration of Cradle to Cradle means the search for innovative products, processes and services that use materials and energy effectively. Eight project teams from Consumer Lifestyle have conducted feasibility studies, and pilots are now in progress.

We featured the Circle of Life at our Simplicity Day Event in Moscow. This concept for delivering responsible goods invites people to co-create and make choices based on the entire chain of the product’s life, including the phases before purchase and after disposal.

We are committed to manage our collection and recycling initiatives to continuously advance in this area.

Collection and recycling

Society increasingly expects companies to take action for products at their end-of-life. In areas where regulation is in place, such as Europe or the United States, people look to companies to step up their efforts to increase collection ratios. Similar expectations are surfacing in countries where legislation is still in development.

To do just that, we are working to:

•		minimize environmental impact through EcoDesign of our products, which includes design for recycling
•		support the development of legislation to create a level playing field, also enabling collection and recycling of old products whose brand has disappeared from the market
•		drive expansion of collection and recycling services, for example by starting up voluntary activities in India and Brazil in 2008
•		drive the development of environmentally friendly recycling systems and technologies with sufficient economies of scale
•		support the education of consumers on the subject of collection and recycling, and communicating clearly and consistently to all stakeholders.

Chemical content of products

The European REACH legislation is concerned with the Registration, Evaluation, Authorization and Restriction of Chemical substances. Underpinned by the precautionary principle, the aim of REACH is to further improve the protection of human health and the environment through the better and earlier identification of certain chemical substances.

To ensure compliance and no interruption in the supply flow, we have asked our chemicals suppliers to pre-register chemicals supplied to us. The limited number of chemicals that we produce ourselves have been pre-registered with the European Chemicals Agency (ECHA). Additionally, we have requested information on relevant chemicals from our component or finished products suppliers.

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Supplier sustainability

We believe achieving a sustainable supply base is a matter of taking care of workers’ lives and the environment. As a member company of the Electronic Industry Citizenship Coalition (EICC) we share the organization’s goal to improve conditions in the electronics supply chain.

Our approach

The Philips Supplier Sustainability Program is built on five pillars. We clearly set out our requirements, build understanding and agreement, and monitor identified risk suppliers through audits, nearly 60% of which are now conducted by specialized external auditing bodies. We work with suppliers to resolve issues quickly and engage stakeholders in the chain.

We seek constructive dialogue and the opportunity to engage in specific projects with all relevant stakeholders in the chain.

To determine where to focus our efforts, we have developed an approach based on a risk profile related to spend, country of production, business risk and type of supplier relationship. In 2008, the integration of new acquisitions included training their Supply Management staff and then analyzing their supply bases with regard to sustainability risk. Where risk has been identified we conduct awareness training with suppliers to prepare for third-party audits.

Resolving issues quickly is a key component of our approach. Corrective action plans are agreed upon within one month of an audit. One of our sustainability officers follows up monthly and will escalate the issue to the responsible purchasing manager as necessary to ensure zero-tolerance issues are resolved within three months. In this way all zero-tolerances from 2007 and those from the first three quarters of 2008 have been resolved.

With three years of audit experience we have developed a list of topics that need to be addressed with our suppliers. Continual conformance audits show that a multi-year approach to training and auditing is essential to engrain sustainability in the supply chain.

Sustainable NPR procurement and supply

As part of our ongoing efforts to minimize our environmental impacts, as well as meet our EcoVision4 targets, our commodity teams have a number of projects under way. These projects include the previously mentioned Green Supply Chain initiative, as well as continuing sustainable procurement in marketing and sales.

Working with stakeholders

We seek constructive dialogue and the opportunity to engage in specific projects with all relevant stakeholders in the chain. Much of this work is done via the EICC and bilateral meetings with investors and NGOs. One example is a project in Dongguan, China, focusing on working hours, which is the most frequent labor issue found during audits. We believe that cooperation with the EICC and local governments is the only way to truly achieve sustainable change.

Philips is also an active member of other EICC working groups to resolve specific issues at industry level, including the Global e-Sustainability Initiative on the health and well-being of people working in the mining industry.

Philips Annual Report 2008     41

6 Performance    highlights		8 Message from    the President		14 Who we are		18 We care about...		42 Our group performance      Management discussion      and analysis

42     Philips Annual Report 2008

70 Our sector       performance		94 Risk management		110 Our leadership		114 Supervisory Board       report		122 Performance       statements

•

2008 was impacted by the most globally significant economic downturn in many years. For Philips, this led to a 3% decline in comparable sales and lower earnings. In response, we proactively expanded and accelerated restructuring programs across all sectors and stepped up our focus on costs and cash management.

•

2008 was nevertheless a year of strategic progress. We continued the reshaping of our portfolio by investing EUR 5.3 billion in high-growth, high-margin businesses such as Respironics and Genlyte, and divesting unprofitable activities such as Television in North America and non-core businesses such as Set-Top Boxes and PC Monitors.

•

Healthcare sales grew by 6% on a comparable basis; all businesses contributed to this growth. Lighting achieved 3% comparable sales growth, driven by energy-efficient lighting solutions. Consumer Lifestyle sales on a comparable basis, declined 8% compared to 2007, reflecting the severe economic downturn in consumer markets in the second half of 2008.

•

Emerging markets remained a major focal point and delivered 4% comparable growth in 2008 — with Healthcare and Lighting growing by 12% and 8% respectively. Additionally, we announced and/or finalized five strategic Healthcare acquisitions in China, Brazil and India.

•

EBIT included EUR 1.1 billion of charges related to restructuring and change programs across all sectors (EUR 520 million), an asbestos-related settlement charge (EUR 239 million), a non-cash goodwill impairment charge for Lumileds (EUR 232 million) and acquisition-related charges, mainly in Healthcare and Lighting (EUR 146 million), which were partially offset by EUR 164 million of gains on the sale of businesses and real estate.

Key data
in millions of euros unless otherwise stated

		20061)				20071)				2008
Sales			26,682				26,793				26,385
EBITA2)			1,383				2,054				931
as a % of sales			5.2				7.7				3.5
EBIT			1,198				1,841				317
as a % of sales			4.5				6.9				1.2
Financial income and expenses			28				2,613				(225	)
Income tax expense			(166	)			(619	)			(286	)
Results of equity-accounted investees			(157	)			763				19
Minority interests			(4	)			(5	)			(3	)
Income (loss) from continuing operations			899				4,593				(178	)
Income (loss) from discontinued operations			4,482				(433	)			(8	)
Net income (loss)			5,381				4,160				(186	)
Per common share — basic			4.58				3.83				(0.19	)
Per common share — diluted			4.55				3.79				(0.19	)
Net operating capital (NOC)2)			8,473				10,529				14,867
Cash flows before financing activities			(2,472	)			5,449				(1,606	)
Employees (FTEs)			121,732				123,801				121,398
of which discontinued operations			6,640				5,703				—

•

We generated strong cash flows from operations of EUR 1,495 million despite lower earnings, driven by rigorous working capital management. In addition, in March we structurally refinanced our debt — prior to the collapse of the financial markets — providing Philips with a strong balance sheet and a solid liquidity position to help weather the turbulent economic situation.

•

We reduced our shareholding in LG Display and sold our remaining stake in TSMC, generating EUR 2.5 billion in cash proceeds and realizing a gain of just under EUR 1.2 billion. The economic downturn led us to take a non-cash value adjustment of EUR 1.4 billion on the majority of our remaining financial holdings.

•

We completed EUR 3.3 billion of the EUR 5 billion share buy-back program announced in 2007, which was subsequently stopped in January 2009 until further notice. Additionally, we returned EUR 720 million to shareholders in the form of our annual dividend payment.

Philips Annual Report 2008     43

6 Performance    highlights		8 Message from    the President		14 Who we are		18 We care about....		42 Our group performance       Management discussion       and analysis

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 Our group performance in this Annual Report. Examples of forward-looking statements include statements made about our strategy, estimates of sales growth, future EBITA and future developments in our organic business. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances and there are many factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements.

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

Third-party market share data

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

Fair value information

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

US GAAP basis of presentation

The financial information included in this document is based on US GAAP, unless otherwise indicated. As used in this document, the term EBIT has the same meaning as Income from operations (IFO).

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; EBITA; NOC; net debt (cash); free cash flow; 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.

Further information on non-US GAAP information and 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.

Statutory financial statements and management report The chapters IFRS financial statements and Company financial statements contain the statutory financial statements. The introduction to the chapter IFRS financial statements sets out which parts of this Annual Report form the management report within the meaning of Section 2:391 of the Dutch Civil Code (and related Decrees).

Revision and reclassifications

Philips has revised prior-year financials to reflect immaterial adjustments of intercompany profit eliminations on inventories in the Healthcare sector. Philips has determined that those adjustments were not material for each of the individual prior years. Further information is provided in the chapter Significant accounting policies in the section Revisions and reclassifications.

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

Analyses of 2007 compared to 2006

The analysis of the 2007 financial results compared to 2006, and the discussion of the critical accounting policies, have not been included in this Annual Report. These sections are included in Philips’ Form 20-F for the financial year 2008, which is filed electronically with the US Securities and Exchange Commission.

44     Philips Annual Report 2008

70 Our sector      performance		94 Risk management		110 Our leadership		114 Supervisory Board       report		122 Performance       statements

In percentage terms, the composition of sales growth in 2008, compared to 2007, was as shown in the table on the right.

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

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

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

Sales growth composition 2008 versus 2007
in %

		com-								consoli-
		parable				currency				dation				nominal
		growth				effects				changes				growth
Healthcare			5.6				(4.5	)			14.1				15.2
Consumer Lifestyle			(8.5	)			(2.7	)			(5.2	)			(16.4	)
Lighting			2.6				(3.8	)			17.8				16.6
I&EB			(26.6	)			(0.9	)			(9.6	)			(37.1	)
GM&S			(24.2	)			(0.5	)			—				(24.7	)
Philips Group			(2.7	)			(3.3	)			4.5				(1.5	)

Sales, EBIT and EBITA 2008
in millions of euros unless otherwise stated

		sales				EBIT				%				EBITA1)				%
Healthcare			7,649				638				8.3				863				11.3
Consumer Lifestyle			11,145				265				2.4				281				2.5
Lighting			7,106				165				2.3				538				7.6
I&EB			337				(226	)			(67.1	)			(226	)			(67.1	)
GM&S			148				(525	)			—				(525	)			—
Philips Group			26,385				317				1.2				931				3.5

Sales, EBIT and EBITA 2007²⁾
in millions of euros unless otherwise stated

		sales				EBIT				%				EBITA1)				%
Healthcare			6,638				713				10.7				862				13.0
Consumer Lifestyle			13,330				832				6.2				848				6.4
Lighting			6,093				675				11.1				722				11.9
I&EB			535				(82	)			(15.3	)			(81	)			(15.1	)
GM&S			197				(297	)			—				(297	)			—
Philips Group			26,793				1,841				6.9				2,054				7.7

Philips Annual Report 2008     45

6 Performance    highlights		8 Message from    the President		14 Who we are		18 We care about....		42 Our group performance      Management discussion      and analysis

Philips DayWave is the first LED-based luminaire for functional office lighting. Incorporating cool and warm-white LEDs and an innovative optical system, this graceful, curving fixture has been specifically conceived to create a more natural, inspiring ambience, in order to enhance staff well-being and performance. Subtle variations and nuances of light level and tone create an effect more in tune with people’s natural rhythms, contributing to their feeling of well-being.

“No other form could better express the flexibility of LED technology.”
Architectenkrant, April 2008, issue 216

Earnings

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

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

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

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

The overview on the previous page shows sales, EBIT and EBITA according to the 2008 sector classification.

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

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

46     Philips Annual Report 2008

70 Our sector      performance		94 Risk management		110 Our leadership		114 Supervisory Board        report		122 Performance       statements

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

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

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

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

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

For further information regarding the performance of the sectors, see the Our sector performance chapter, starting on page 70 of this Annual Report.

Pensions

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

Restructuring and impairment charges
in millions of euros

		2006				2007				2008
Restructuring:
Healthcare			14				1				68
Consumer Lifestyle			25				8				171
Lighting			43				24				132
I&EB			—				1				18
GM&S			—				4				17
Reduction of excess provisions			(5	)			(5	)			(2	)
Total restructuring			77				33				404
Asset impairment:
Healthcare			—				—				1
Consumer Lifestyle			—				—				24
Lighting			5				4				91
I&EB			—				—				—
GM&S			—				—				—
Total asset impairment			5				4				116
Goodwill impairment:
Lighting			—				—				234
Total goodwill impairment			—				—				234
Total restructuring and impairment			82				37				754

Restructuring and impairment charges

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

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

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

Philips Annual Report 2008     47

6 Performance    highlights		8 Message from    the President		14 Who we are		18 We care about....		42 Our group performance      Management discussion      and analysis

Financial income and expenses
in millions of euros

		2006				2007				2008
Interest expense (net)			(189	)			(43	)			(106	)
Sale of securities			—				2,549				1,197
Value adjustments on securities			(77	)			(36	)			(1,296	)
Other			294				143				(20	)
			28				2,613				(225	)

Sale of securities
in millions of euros

		2006				2007				2008
Gain on sale of TSMC shares			—				2,528				1,082
Gain on sale of LG Display shares			—				—				83
Gain on sale of D&M shares			—				—				16
Gain on sale of Nuance shares			—				31				—
Loss on sale of JDS Uniphase shares			—				(10	)			—
Others			—				—				16
			—				2,549				1,197

Value adjustments on securities
in millions of euros

		2006				2007				2008
NXP			—				—				(599	)
LG Display			—				—				(596	)
TPO Display			(77	)			—				(71	)
Pace Micro Technology			—				—				(30	)
JDS Uniphase			—				(36	)			—
			(77	)			(36	)			(1,296	)

Results of equity-accounted investees
in millions of euros

		2006				2007				2008
Company’s participation in income (loss)			(180	)			271				81
Results on sale of shares			79				514				(2	)
Gains arising from dilution effects			14				—				12
Investment impairment and guarantee charges			(70	)			(22	)			(72	)
			(157	)			763				19

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

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

For further details of restructuring charges, see note 4 of the US GAAP financial statements.

Financial income and expenses

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

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

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

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

Income taxes

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

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

48     Philips Annual Report 2008

70 Our sector      performance		94 Risk management		110 Our leadership		114 Supervisory Board       report		122 Performance       statements

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

For further information, please refer to note 6 of the US GAAP financial statements.

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

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

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

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

Minority interests

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

Discontinued operations

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

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

The power to do more

Every day, radiologists and cardiologists are asked to do more in less time, meeting heightened expectations across a wider range of patients and conditions. Philips brings much-needed simplicity to this complex process. The latest innovation in computed tomography, Philips Brilliance iCT offers an impressive combination of speed, power and coverage to improve image quality while incorporating the latest dose-reduction technology.

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

Net income

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

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

Philips Annual Report 2008     49

6 Performance    highlights		8 Message from    the President		14 Who we are		18 We care about....		42 Our group performance      Management discussion      and analysis

Saving energy with style

Our new range of sleek, stylish kettles is designed to help you reduce energy consumption by boiling only the water you actually need. The water-level indicators clearly show when the kettle has just enough water for either one or two cups, enabling you to cut your kettle’s energy usage by up to 66% (boiling 250 ml. vs. 1 liter each time).

Acquisitions and divestments

In 2008, Philips continued its journey to become a health and well-being company by investing in high-growth, high-margin businesses that are leaders in their respective fields. In line with this vision, Philips acquired, or announced the intention to acquire, 10 strategic companies during the year while divesting several non-core, or unprofitable, business interests. This further increased the proportion of overall sales generated by businesses leading in their markets and increased sales in emerging markets.

Acquisitions

Within Healthcare, we acquired nine notable companies. In February, Philips acquired VISICU, a clinical IT system maker which enables critical-care medical staff to actively monitor patients in hospital intensive care units (ICUs) from remote locations. In March, we acquired Respironics in what is the company’s largest acquisition to date. Respironics is a global leader in the treatment of Obstructive Sleep Apnea (OSA), and its acquisition has helped form a solid foundation for the Home Healthcare Solutions business. Furthermore, TOMCAT and Medel SpA were acquired later in 2008, complementing our Healthcare IT and Home Healthcare Solutions businesses respectively. Additionally, within emerging markets, five strategic acquisitions were made and/or announced: Dixtal Biomédica e Tecnologia in Brazil; Shenzhen Goldway in China; within India, Alpha X-Ray Technologies was acquired while the intention to acquire Meditronics was announced; and in an acquisition related to the Medel acquisition, Philips acquired a strategically important manufacturing facility in Guangdong, China for nebulizer compressor systems.

Within Lighting, Philips completed the acquisition of North American luminaires company Genlyte, a leader in the North American construction luminaires market. This has further solidified Philips’ position as the global leader in lighting, with touch-points across the entire global value chain.

In 2008, acquisitions led to integration and purchase accounting charges totaling EUR 146 million, of which EUR 131 million impacted EBITA. Within the operating sectors, Healthcare incurred charges totaling EUR 95 million, of which EUR 90 million impacted EBITA, and Lighting incurred EUR 51 million of charges, EUR 41 million of which impacted EBITA.

In 2007, acquisitions led to integration and purchase accounting charges totaling EUR 54 million, EUR 41 million of which impacted EBITA, primarily at Lighting and Healthcare.

Divestments

In 2008, Philips also sold, or decided to sell, several non-core business interests. These divestments included the sale of the Set-Top Boxes and Connectivity Solutions activities; the brand license agreement with respect to the North America television, audio and video businesses; the sale of Philips Speech Recognition Services (PSRS); the divestment of High Tech Plastic – Optics; the sale of Philips’ approximate 70% ownership stake in MedQuist; and a brand licensing agreement, expected to close in the first half of 2009, with regard to the PC Monitors and digital signage business.

In total, net gains from the sale of businesses amounted to EUR 106 million in 2008. There were no significant net proceeds from the sale of businesses in 2007.

50     Philips Annual Report 2008

70 Our sector      performance		94 Risk management		110 Our leadership		114 Supervisory Board        report		122 Performance        statements

Performance by market cluster

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

•

Key emerging markets, including China, India, and Latin America

•

Other emerging markets, including emerging markets in Central and Eastern Europe, Russia, Ukraine and Central Asia, the Middle East and Africa, Turkey and ASEAN zone

•

Mature markets, including Western Europe, North America, Japan, Korea, Israel, Australia, and New Zealand.

In 2008, sales declined 3% comparably as growth in key emerging markets, and relatively stable sales in other emerging markets were more than offset by a decline in mature markets, largely as a result of the economic downturn in the second half of the year in Western Europe and North America. Overall, emerging markets grew 4% on a comparable basis and accounted for 31% of total sales in 2008, a slight increase over 2007.

Key emerging markets saw single-digit sales growth, mainly attributable to double-digit growth in India (principally Healthcare and Lighting) and Latin America (largely Healthcare and Consumer Lifestyle), as well as single-digit growth in China.

Other emerging markets’ comparable sales in 2008 were broadly in line with 2007, as solid growth in Lighting and Healthcare was partially offset by a decline in Consumer Lifestyle, mainly due to Television.

The comparatively lower sales in mature markets were largely due to lower Consumer Lifestyle sales within Western Europe, mainly Television, which more than offset growth in both Healthcare and Lighting. In North America, lower comparable sales were mainly seen in Consumer Lifestyle and Lighting, partially offset by sales growth at Healthcare, particularly in Imaging Systems and Healthcare Informatics and Patient Monitoring.

EBITA in key emerging markets improved EUR 7 million compared to 2007. However, this was more than offset by a EUR 965 million decline in mature markets, mainly due to lower sales-driven earnings and higher restructuring charges in Consumer Lifestyle. In addition, a EUR 239 million asbestos-related settlement charge was recorded in North America. Other emerging markets were also EUR 165 million below 2007, mainly due to lower sales-driven earnings within Consumer Lifestyle.

EBITA per market cluster¹⁾
in millions of euros

		20062)				20072)				2008
Western Europe			953				1,281				439
North America			20				304				233
Other mature markets			32				41				(11	)
Total mature markets			1,005				1,626				661
Key emerging markets			125				209				216
Other emerging markets			253				219				54
			1,383				2,054				931

EBIT per market cluster
in millions of euros

		20062)				20072)				2008
Western Europe			944				1,215				414
North America			(154	)			160				(288	)
Other mature markets			32				41				(11	)
Total mature markets			822				1,416				115
Key emerging markets			123				206				209
Other emerging markets			253				219				(7	)
			1,198				1,841				317

Philips Annual Report 2008     51

6 Performance    highlights		8 Message from    the President		14 Who we are		18 We care about....		42 Our group performance      Management discussion      and analysis

Research and development expenditures per sector ¹⁾²⁾
in millions of euros

		2006				2007				2008
Healthcare			572				592				642
Consumer Lifestyle			553				492				407
Lighting			269				276				305
I&EB			265				269				268
Philips Group			1,659				1,629				1,622

Philips’ brand promise of “sense and simplicity” continues to drive innovation and customer experience across all customer touch-points. As a result, in 2008 Philips again achieved significant growth in its total brand value. Interbrand reported an estimated value of USD 8.3 billion, an 8% increase over 2007. The Interbrand measurement also confirmed the important role the Philips brand continues to play in the purchase decision of customers across Philips businesses.

In 2008, total worldwide Philips marketing expenses as percentage of sales were 3.6%, just below the 2007 level, largely as a result of the planned ramp-down of the now largely complete global brand campaign. Investments in this campaign declined by EUR 47 million in 2008 to EUR 64 million. On a geographic basis, Philips is shifting a significant portion of its commercial investment from mature to higher- growth markets, while also increasing the focus and effectiveness of these investments.

As part of the 2008/9 marketing campaign, Philips is running a major advertising and thought leadership program on health and well-being issues with ‘A Level’ media owners such as CNN, CNBC, FT and The Economist Group. The ultimate aim is to become the brand of first choice among influencers, professionals and consumers, a brand which stands for “sense and simplicity” in the area of health and well-being.

Developing solutions and products based on best- in-class insight into the real needs and wants of our customer and consumers is increasingly becoming a competitive advantage for Philips. Over half of our value propositions score above industry benchmarks, with over 30% rated in the top 20% of all products in their class, giving us confidence that our final solutions will be highly competitive in the marketplace.

52     Philips Annual Report 2008

70 Our sector      performance		94 Risk management		110 Our leadership		114 Supervisory Board        report		122 Performance        statements

Research & development

The ability of our Research & Development teams to create innovative, meaningful products and solutions for customers is a critical driver of Philips’ competitiveness in its markets. Through substantial R&D investments, Philips has created a vast knowledge and intellectual property base. Early involvement of customers in new technologies, as well as in product and business concepts, ensures deep insight into their needs — the foundation for our innovations. Starting in 2009, in an effort to generate more profitable growth and new product and market development from our R&D investments, Philips will redirect EUR 250 million of innovation spending from mature to emerging market areas. The redirection of innovation is guided by the newly-formed Philips Innovation board, chaired by Philips’ CEO, and the Company’s chief officers of Technology, Strategy, Marketing and Design.

In 2008, Philips’ investment in R&D activities amounted to EUR 1,622 million (6.1% of sales), compared with EUR 1,629 million (6.1% of sales) in 2007. Higher expenditures at Healthcare and Lighting were fully offset by lower expenditures at Consumer Lifestyle. Also, investments in innovative technologies increased in areas such as energy-efficient and solid-state lighting solutions as well as in the areas of health and wellness. These increases were offset by lower expenditures in more mature technologies, such as lamps and television.

Healthcare R&D expenditures increased in 2008, mainly due to the acquisition of Respironics. Lighting’s expenditures were also above 2007 as a result of the acquisition of Genlyte and higher investments in energy-efficient and solid-state lighting solutions. The lower R&D expenditures within Consumer Lifestyle were mainly due to lower expenditures in maturing product categories, such as Television. Furthermore, R&D investments at Innovation & Emerging Businesses were on par with 2007, as higher investments in the Incubator activities were offset by lower external contract research.

Philips’ strong innovation pipeline contributed positively to the Company’s sales in 2008, as 58% of Group sales came from newly introduced products — products introduced within the last year (for B2C products) or three years (for B2B products). Compared to last year, a 2% improvement was seen thanks to above-average contributions from Healthcare and Consumer Lifestyle. Philips aims to maintain its new-product-to-sales ratio above 50%, while at the same time focusing on the profitability of new products and reallocating innovation spend more towards new business creation.

Meeting the needs of the city

UrbanLine is a flexible, energy-efficient LED urban lighting solution that delivers a visually comfortable white light for the residential outdoor market. Urban-Line enables energy savings of up to 50% compared with conventional street lighting solutions — thanks to efficient LED technology and smart street lighting optics — while preventing light pollution. The longer-life LEDs also reduce maintenance costs.

Philips Annual Report 2008     53

6 Performance    highlights		8 Message from    the President		14 Who we are		18 We care about....		42 Our group performance      Management discussion      and analysis

Employees per sector
in FTEs at year-end

		2006				2007				2008
Healthcare			27,223				29,191				35,551
Consumer Lifestyle			24,419				23,397				17,346
Lighting			47,739				54,323				57,166
I&EB			8,832				5,888				5,324
GM&S			6,879				5,299				6,011
			115,092				118,098				121,398
Discontinued operations			6,640				5,703				—
			121,732				123,801				121,398

Supply management

The Supply Management function has been designed to create value for Philips by leveraging the scale of the company, thereby creating a single point of management and accountability for our supply base.

Our approach in turbulent markets

Given the turbulent global economic climate in 2008, proactive risk management and mitigation strategies aimed at ensuring continuity of supply and competitiveness of sourcing were essential. Initiatives included enhanced monitoring of the financial stability of the key supplier base and, where necessary, early intervention to reduce Philips’ exposure.

Supply Management also assisted in managing the sourcing risk through a pro-active approach towards key and sole source suppliers, as well as supporting sector-specific initiatives such as a dual-sourcing strategy for LCD panels and electronic manufacturing services (EMS) in the Consumer Lifestyle sector.

Additionally, Supply Management teams protected Philips from significant raw material price fluctuations in 2008, mainly through the use of forward commodity contracts. Also, 2008 saw progress towards further outsourcing of bill-of-material (BOM) spending: over 50% of Philips’ BOM spending is now outsourced, albeit to a smaller, but more focused, number of suppliers.

Our supplier network

The Global Supplier Rating System (GSRS) was further deployed in 2008, providing structured measurement of supplier performance and rigorous tracking of improvement actions. GSRS covered 85% of Philips’ total spend in 2008. Key supplier scores improved 9% in the year to reach a solid overall rating of 78%.

In 2008, Philips continued to develop the Partners for Growth strategic supplier network, bringing together its top 30 suppliers to identify and exploit joint business opportunities. This initiative was combined with our supplier sustainability initiative, which ensures mandatory auditing of all suppliers with spend above EUR 100,000 in risk areas. This involves tracking all sustainability issues in risk areas and, where necessary, a highly accelerated resolution of identified issues.

54     Philips Annual Report 2008

70 Our sector      performance		94 Risk management		110 Our leadership		114 Supervisory Board        report		122 Performance        statements

Employment

Excluding discontinued operations (MedQuist in 2007), the total number of employees of the Philips Group was 121,398 at the end of 2008, compared to 118,098 at the end of 2007. Approximately 47% were employed in the Lighting sector, due to the still relatively strong vertical integration in this business. Some 29% were employed in the Healthcare sector and approximately 14% of the workforce was employed in the Consumer Lifestyle sector.

The main increase in employee numbers in 2008 was due to acquisitions, which added 12,673 employees. The main acquisition-related increases were within Healthcare (mainly Respironics) and Lighting (Genlyte).

This increase was partially reduced by the divestments in Consumer Lifestyle, primarily the North America television activities and the sale of Set-Top Boxes. Additionally, restructuring and business optimization projects resulted in personnel reductions across all sectors, mainly within Consumer Lifestyle and Lighting.

Approximately 58% of Philips’ workforce is located in mature markets, with 42% in emerging markets. In 2008, the number of employees in mature markets increased, largely as a result of the Genlyte and Respironics acquisitions. This increase was partly offset by restructuring programs across all sectors. Key emerging markets saw a reduction in employee numbers as additional headcount from the Healthcare acquisitions in China, India and Brazil was offset by the divestment of HTP Optics, the sale of the Television factory in Juarez (Mexico) and a reduction of employees due to lower factory production. The employee decrease in other emerging markets was largely due to low year-end production volumes in Hungary and the Lamps and Lighting Electronics factory in Poland.

Sales per employee decreased from EUR 224,000 in 2007 to EUR 209,000 in 2008, affected by 3% unfavorable currency movements compared to 2007.

Adjusted for the 3% adverse foreign currency impact in 2008, sales per employee declined 4%, largely due to Consumer Lifestyle, caused by a sharp decline in sales in the second half of the year, as well as Healthcare and Innovation & Emerging Businesses. The decline was partly mitigated by increases in Lighting and Group Management & Services.

Employees per market cluster
in FTEs at year-end

		2006				2007				2008
Western Europe			39,722				40,244				37,452
North America			22,169				21,682				31,336
Other mature markets			1,831				1,850				1,633
Total mature markets			63,722				63,776				70,421
Key emerging markets			31,893				33,377				32,084
Other emerging markets			19,477				20,945				18,893
			115,092				118,098				121,398
Discontinued operations			6,640				5,703				—
			121,732				123,801				121,398

Employment
in FTEs

		2006				2007				2008
Position at beginning of year			159,226				121,732				123,801
Consolidation changes:
- new consolidations			4,834				6,654				12,673
- deconsolidations			(44,085	)			(3,535	)			(1,571	)
Comparable change			1,757				(1,050	)			(13,505	)
Position at year-end			121,732				123,801				121,398
of which:
continuing operations			115,092				118,098				121,398
discontinued operations			6,640				5,703				—

Philips Annual Report 2008     55

6 Performance    highlights		8 Message from    the President		14 Who we are		18 We care about....		42 Our group performance      Liquadity and      capital resources

Condensed consolidated cash flow statements
in millions of euros

		2006				2007				2008
Cash flows from operating activities:
Net income (loss)			5,381				4,160				(186	)
(Income) loss from discontinued operations			(4,482	)			433				8
Adjustments to reconcile net income to net cash provided by operating activities			(569	)			(3,074	)			1,673
Net cash provided by operating activities			330				1,519				1,495
Net cash (used for) provided by investing activities			(2,802	)			3,930				(3,101	)
Cash flows before financing activities			5,449				(1,606	)
Net cash used for financing activities			(3,715	)			(2,368	)			(3,575	)
Cash (used for) provided by continuing operations			(6,187	)			3,081				(5,181	)
Net cash provided by (used for) discontinued operations			7,114				(115	)			(37	)
Effect of changes in exchange rates on cash and cash equivalents			(197	)			(112	)			(39	)
Total change in cash and cash equivalents			730				2,854				(5,257	)
Cash and cash equivalents at the beginning of year			5,293				6,023				8,877
Less cash and cash equivalents at the end of year — discontinued operations			137				108				—
Cash and cash equivalents at the end of year — continuing operations			5,886				8,769				3,620

Please refer to the consolidated statements of cash flows which are part of the chapter US GAAP financial statements.

Liquidity and capital resources

Cash flows provided by continuing operations

Condensed consolidated statements of cash flows for the years ended December 31, 2006, 2007 and 2008 are presented on the left.

Cash flows from operating activities

Net cash from operating activities amounted to EUR 1,495 million in 2008, slightly lower than the EUR 1,519 million cash flows generated in 2007. A decline in sales-driven earnings in Consumer Lifestyle was largely offset by lower working capital requirements in most sectors and the positive cash contributions from acquisitions.

Cash flows from investing activities

Cash flows from investing activities were an outflow of EUR 3,101 million in 2008, due to EUR 5,316 million cash used for acquisitions and EUR 722 million used for net capital expenditures, partly offset by EUR 2,937 million of inflows received mainly from the sale of other non-current financial assets (mainly TSMC).

2007 cash flows from investing activities amounted to an inflow of EUR 3,930 million as a result of EUR 6,130 million of proceeds, mainly from the sale of other non-current financial assets (notably TSMC) and businesses (notably LG Display), partly offset by cash used for acquisitions (EUR 1,502 million) and net capital expenditures (EUR 698 million).

Net capital expenditures

Net capital expenditures totaled EUR 722 million in 2008, EUR 24 million higher than in 2007, mainly due to acquisition-driven investment increases in Healthcare, as well as higher investments in solid-state lighting at Lighting. These higher investments were partly offset by higher proceeds from the sale of real estate within Group Management & Services.

56     Philips Annual Report 2008

70 Our sector      performance		94 Risk management		110 Our leadership		114 Supervisory Board        report		122 Performance        statements

Acquisitions

In 2008, a total of EUR 5,316 million cash was used for acquisitions, mainly for Respironics (EUR 3,196 million), Genlyte (EUR 1,805 million) and VISICU (EUR 198 million).

In 2007, cash disbursements amounting to EUR 1,502 million were used for acquisitions, notably for PLI (EUR 561 million) and Color Kinetics (EUR 515 million), as well as for DLO, Health Watch, TIR Systems, Raytel Cardiac Services and Emergin.

Divestments and derivatives

Cash proceeds of EUR 1,831 million and EUR 37 million were received from the final sale of stakes in TSMC and D&M Holdings respectively. Additionally, the sale of shares in LG Display generated EUR 670 million cash. The maturing of derivatives led to a net cash inflow of EUR 337 million.

In 2007, EUR 4,105 million in cash was received from the sale of other non-current financial assets, primarily related to TSMC, while EUR 1,640 million cash was generated by the sale of interests in businesses, including the sale of 46.4 million shares in LG Display. The maturing of currency hedges led to a net cash inflow of EUR 385 million.

Cash flows from financing activities

Net cash used for financing activities in 2008 was EUR 3,575 million. The impact of changes in debt was an increase of EUR 380 million, including the issuance of EUR 2,053 million of bonds, offset by bond repayments amounting to EUR 1,691 million. Also, Philips’ shareholders were paid EUR 720 million in the form of a dividend payment. Additionally, net cash outflows for share repurchases totaled EUR 3,257 million. This included a total of EUR 3,298 million related to the repurchases of shares for cancellation. The cash outflows were partially offset by a net cash inflow of EUR 41 million due to the exercise of stock options.

In 2007, net cash used for financing activities totaled EUR 2,368 million. The impact of changes in debt was a reduction of EUR 281 million, including a EUR 113 million repayment of long-term bank borrowings. Furthermore, Philips’ shareholders were paid EUR 659 million as a dividend payment. Net cash outflows for share repurchases totaled EUR 1,448 million. This included EUR 810 million related to hedging of obligations under the long-term employee incentive and employee stock purchase programs and a total of EUR 823 million related to the repurchases of the shares for cancellation. These cash outflows were partially offset by a net cash inflow of EUR 161 million due to the exercise of stock options.

Condensed consolidated balance sheet information
in millions of euros

		2006				2007				2008
Intangible assets			5,536				6,289				11,676
Property, plant and equipment			3,084				3,180				3,484
Inventories			2,834				3,146				3,371
Receivables			9,651				9,500				9,275
Accounts payable and other liabilities			(8,129	)			(7,799	)			(8,625	)
Provisions			(3,281	)			(3,089	)			(3,969	)
Other non-current financial assets			8,055				3,183				1,331
Equity-accounted investees			2,974				1,886				284
Assets of discontinued operations			431				333				—
Liabilities of discontinued operations			(169	)			(157	)			—
			20,986				16,472				16,827
Cash and cash equivalents			5,886				8,769				3,620
Debt			(3,869	)			(3,557	)			(4,158	)
Net cash (debt)			2,017				5,212				(538	)
Minority interests			(40	)			(42	)			(46	)
Stockholders’ equity			(22,963	)			(21,642	)			(16,243	)
			(20,986	)			(16,472	)			(16,827	)

Please refer to the consolidated balance sheets for 2007 and 2008 which are part of the chapter US GAAP financial statements.

Changes in debt
in millions of euros

		2006				2007				2008
New borrowings			(106	)			(29	)			(2,088	)
Repayments			543				310				1,708
Consolidation and currency effects			181				31				(221	)
Total changes in debt			618				312				(601	)

Cash flows from discontinued operations

In 2008, EUR 37 million cash was used by discontinued operations, the majority of which related to tax payments in connection with the 2006 sale of Philips’ majority stake in the Semiconductors business.

In 2007, EUR 115 million cash was used by discontinued operations, the majority of which was due to tax payments related to the Semiconductors business and operating cash flows of MedQuist in 2007.

Consolidated balance sheet information for the years 2008, 2007 and 2006 is presented above.

Philips Annual Report 2008     57

6 Performance      highlights		8 Message from    the President		14 Who we are		18 We care about....		42 Our group performance      Liquidity and      capitla resources