Edgar Filing: ERICSSON LM TELEPHONE CO

Form 20-F

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 20-F

¨	Registration statement pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934

x	Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2009

¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from/to

¨	Shell company report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of event requiring this shell company report:

Commission file number 000–12033

TELEFONAKTIEBOLAGET LM ERICSSON

(Exact Name of Registrant as Specified in Its Charter)

LM ERICSSON TELEPHONE COMPANY

(Translation of Registrant’s Name Into English)

Kingdom of Sweden

(Jurisdiction of Incorporation or Organization)

SE-164 83 Stockholm, Sweden

(Address of Principal Executive Offices)

Roland Hagman, Vice President Group Function Financial Control

Telephone: +46 8 719 53 80, Facsimile: +46 8 719 42 22

SE-164 83 Stockholm, Sweden

(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Each Exchange on Which Registered
American Depositary Shares		The NASDAQ Stock Market LLC
B Shares*		The NASDAQ Stock Market LLC

*	Not for trading, but only in connection with the registration of the American Depositary Shares representing such B Shares pursuant to the requirements of the Securities and Exchange Commission

Securities registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

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


B shares (SEK 5.00 nominal value)		3,011,595,752
A shares (SEK 5.00 nominal value)		261,755,983
C shares (SEK 1.00 nominal value)		0

Indicate by check mark if the registrant is a well-seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

x Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer

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

US GAAP ¨ International Financial Reporting Standards as issued by the International Accounting Standards Board x Other ¨

Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 x Item 18 ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

CONTENTS


Form 20-F 2009 Cross Reference Table		i

2009 Milestones		1

2009 Snapshot		3

Letter from the CEO		6

Five-Year Summary		10

Letter from the Chairman		11

Board of Directors’ Report		12

Report of Independent Registered Public Accounting Firm		43

Consolidated Financial Statements		44

Notes to the Consolidated Financial Statements		49

Risk Factors		142

Forward-Looking Statements		150

Share Information		152

Market Trends		159

Information on the Company		167

Remuneration		180

Shareholder Information		188

Corporate Governance Report 2009		190

Uncertainties in the Future		217

Management’s Report on Internal Control Over Financial Reporting		218

Supplemental Information		219

Financial Terminology and Glossary		234

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

FORM 20-F 2009 CROSS REFERENCE TABLE

Our Annual Report on Form 20-F consists of the Swedish Annual Report for 2009, with certain adjustments to comply with U.S. requirements, together with certain other information required by Form 20-F which is set forth under the heading Supplemental Information. The following cross reference table indicates where information required by Form 20-F may be found in this document.


Form 20-F Item Heading			Location in this document	Page Number
PART I
1	Identity of Directors, Senior Management and Advisers		Not applicable

2	Offer Statistics and Expected Timetable		Not applicable

3	Key Information
	A	Selected Financial Data	Five-Year Summary	10
	B	Capitalization and Indebtedness	Not applicable
	C	Reason for the Offer and Use of Proceeds	Not applicable
	D	Risk Factors	Risk Factors	142

4	Information on the Company
	A	History and Development of the Company	Board of Directors’ Report
			Business Drivers 2009	13
			Capital Expenditures (capex)	24
			Notes to the Consolidated Financial Statements
			Note C26 Business Combinations	119
			Note C32 Events After the Balance Sheet Date	140
			Information on the Company
			Company History and Development	167
			General Facts on the Company	170
	B	Business Overview	Board of Directors’ Report
			Sustainability and Corporate Responsibility	35
			Notes to the Consolidated Financial Statements
			Note C3 Segment Information	70
			Risk Factors	142
			Information on the Company
			Company History and Development	167
			Market Environment	171
			Segment Overview	173
			Supplemental Information
			Operating Results	219
	C	Organizational Structure	Information on the Company
			General Facts on the Company	170
			Supplemental Information
			Investments	232
	D	Property, Plants and Equipment	Information on the Company
			Sourcing, Manufacturing and Supply and Availability of Materials	175

ERICSSON ANNUAL REPORT ON FORM 20-F 2009


Form 20-F Item Heading			Location in this document	Page Number
			Notes to the Consolidated Financial Statements
			Note C11 Property, Plant and Equipment	84
			Note C27 Leasing	124
			Board of Directors’ Report
			Capital Expenditures (capex)	24

4A	Unresolved staff comments		Not applicable

5	Operating and Financial Review and Prospects
	A	Operating Results	Market Trends	159
			Board of Directors’ Report
			Business Results	25
			Supplemental Information
			Operating Results	219
			Restructuring in 2008 and 2009	221
			Notes to the Consolidated Financial Statements
			Note C1 Significant Accounting Policies	49
			Note C2 Critical Accounting Estimates and Judgments	66
			Note C20 Financial Risk Management and Financial Instruments	108
			Risk Factors	142
			Board of Directors’ Report
			Risk Management	37
	B	Liquidity and Capital Resources	Board of Directors’ Report
			Financial Position	20
			Cash Flow	23
			Capital Expenditures	24
			Risk Management	37
			Notes to the Consolidated Financial Statements
			Note C19 Interest-bearing Liabilities	107
			Note C20 Financial Risk Management and Financial Instruments	108
			Note C25 Statement of Cash Flows	117
	C	Research and Development, Patents and Licenses, etc	Five-Year Summary	10
			Board of Directors’ Report
			Financial Results of Operations	17
			Consolidated Balance Sheet	46
			Information on the Company
			Technology and Services Leadership	168
	D	Trend Information	Board of Directors’ Report
			Business Results	25
			Market Trends	159
	E	Off-Balance Sheet Arrangements	Board of Directors’ Report
			Sony Ericsson Borrowings Guaranteed	23
			Off Balance Sheet Arrangements	23

ERICSSON ANNUAL REPORT ON FORM 20-F 2009


Form 20-F Item Heading			Location in this document	Page Number
			Notes to the Consolidated Financial Statements
			Note C24 Contingent Liabilities	117
	F	Tabular Disclosure of Contractual Obligations	Board of Directors’ Report
			Material Contracts	33
			Notes to the Consolidated Financial Statements
			Note C33 Contractual Obligations	141

6	Directors, Senior Management and Employees
	A	Directors and Senior Management	Corporate Governance Report 2009
			Members of the Board of Directors	203
			Members of the Group Management Team	209
	B	Compensation	Board of Directors’ Report
			Corporate Governance	33
			Corporate Governance Report 2009
			Board of Directors	195
			Company Management	207
			Notes to the Consolidated Financial Statements
			Note C17 Post-Employment Benefits	98
			Note C29 Information Regarding Members of the Board of Directors, Management and Employees	126
	C	Board Practices	Corporate Governance Report 2009
			Board of Directors	195
			Members of the Board of Directors	203
			Members of the Group Management Team	209
			Notes to the Consolidated Financial Statements
			Note C29 Information Regarding Members of the Board of Directors, Management and Employees	126
	D	Employees	Five-Year Summary	10
			Board of Directors’ Report
			Financial Results of Operations	17
			Notes to the Consolidated Financial Statements
			Note C29 Information Regarding Members of the Board of Directors, Management and Employees	126
	E	Share Ownership	Share Information
			Shareholders	155
			Corporate Governance Report 2009
			Members of the Board of Directors	203
			Members of the Group Management Team	209

iii

ERICSSON ANNUAL REPORT ON FORM 20-F 2009


Form 20-F Item Heading			Location in this document	Page Number
			Notes to the Consolidated Financial Statements
			Note C29 Information Regarding Members of the Board of Directors, Management and Employees	126

7	Major Shareholders and Related Party Transactions
	A	Major Shareholders	Share Information
			Shareholders	155
	B	Related Party Transactions	Notes to the Consolidated Financial Statements
			Note C30 Related Party Transactions	137
	C	Interests of Experts and Counsel	Not applicable

8	Financial Information
	A	Consolidated Statements and Other Financial Information	Consolidated Financial Statements	44
		Consolidated Statements and Other Financial Information	Please see also Item 17 cross references
			Report of Independent Registered Public Accounting Firm	43
			Notes to the Consolidated Financial Statements
			Note C4 Net Sales	75
			Board of Directors’ Report
			Legal and Tax Proceedings	32
			Supplemental Information
			Dividends	222
	B	Significant Changes	Board of Directors’ Report
			Post-Closing Events	42
			Notes to the Consolidated Financial Statements
			Note C32 Events after the Balance Sheet Date	140
9	The Offer and Listing
	A	Offer and Listing Details	Share Information
			Offer and Listing Details	153
	B	Plan of Distribution	Not applicable
	C	Markets	Share Information
			Stock Exchange Trading	152
	D	Selling Shareholders	Not applicable
	E	Dilution	Not applicable
	F	Expenses of the Issue	Not applicable

10	Additional Information
	A	Share Capital	Not applicable
	B	Memorandum and Articles of Association	Supplemental Information
			Memorandum and Articles of Association	222
	C	Material Contracts	Board of Directors’ Report
			Material Contracts	33

ERICSSON ANNUAL REPORT ON FORM 20-F 2009


Form 20-F Item Heading			Location in this document	Page Number
			Notes to the Consolidated Financial Statements
			Note C33 Contractual Obligations	141
	D	Exchange Controls	Supplemental Information
			Exchange Controls	225
	E	Taxation	Supplemental Information
			Taxation	225
	F	Dividends and Paying Agents	Not applicable
	G	Statement by Experts	Not applicable
	H	Documents on Display	Information on the Company
			General Facts on the Company	170
	I	Subsidiary Information	Not applicable

11	Quantitative and Qualitative Disclosures About Market Risk
	A	Quantitative Information about Market Risk	Board of Directors’ Report
			Risk Management	209
			Notes to the Consolidated Financial Statements
			Note C20 Financial Risk Management and Financial Instruments	108
	B	Qualitative Information about Market Risk	Board of Directors’ Report
			Risk Management	209
			Notes to the Consolidated Financial Statements
			Note C20 Financial Risk Management and Financial Instruments	108
	C	Interim Periods	Not applicable
	D	Safe Harbor	Not applicable
	E	Small Business Issuers	Not applicable

12	Description of Securities Other than Equity Securities		Not applicable
	A	Debt Securities	Not applicable
	B	Warrants and Rights	Not applicable
	C	Other Securities	Not applicable
	D	American Depositary Shares	Supplemental Information
			Depositary Fees and Charges	230
PART II

13	Defaults, Dividend Arrearages and Delinquencies		Not applicable

14	Material Modifications to the Rights of Security Holders and Use of Proceeds		Not applicable

15	Controls and Procedures
	A	Disclosure Controls and Procedures	Corporate Governance Report 2009
			Disclosure Controls and Procedures	214
	B	Management’s annual report on internal control over financial reporting	Management’s Report on Internal Control Over Financial Reporting	218

ERICSSON ANNUAL REPORT ON FORM 20-F 2009


Form 20-F Item Heading			Location in this document	Page Number
	C	Attestation report of the registered public accounting firm	Report of Independent Registered Public Accounting Firm	43
	D	Changes in internal control over financial reporting	Corporate Governance Report 2009
		Changes in internal control over financial reporting	Disclosure Controls and Procedures	214

16	Reserved
	A	Audit Committee Financial Expert	Corporate Governance Report 2009
			The Audit Committee	199
	B	Code of Ethics	Corporate Governance Report 2009
			An Ethical Business	191
	C	Principal Accountant Fees and Services	Notes to the Consolidated Financial Statements
			Note C31 Fees to Auditors	140
			Corporate Governance Report 2009
			Audit Committee Pre-Approval Policies and Procedures	200
	D	Exemptions from the Listing Standards for Audit Committees	Corporate Governance Report 2009
			Independence of the Directors	196
	E	Purchase of Equity Securities by the Issuer and Affiliated Purchasers	Not applicable
	F	Change in Registrant’s Certifying Accountant	Not applicable
	G	Corporate Governance	Corporate Governance Report 2009
			Independence of the Directors	196
			Supplemental Information
			Independence Requirements	230

PART III

17	Financial Statements		Consolidated Income Statement	44
			Consolidated Statement of Comprehensive Income	45
			Consolidated Balance Sheet	46
			Consolidated Statement of Cash Flows	47
			Consolidated Statement of Changes in Equity	48
			Notes to the Consolidated Financial Statements	49
			Report of Independent Registered Public Accounting Firm	43

18	Financial Statements		Not applicable

19	Exhibits
	Exhibit 1		Articles of Association
	Exhibit 2		Not applicable
	Exhibit 3		Not applicable
	Exhibit 4		Not applicable
	Exhibit 5		Not applicable
	Exhibit 6		Please see Notes to the Consolidated Financial Statements, Note C1 Significant Accounting Policies	49

ERICSSON ANNUAL REPORT ON FORM 20-F 2009


Form 20-F Item Heading		Location in this document	Page Number
	Exhibit 7	For definitions of certain ratios used in this report, please see Financial Terminology	234
	Exhibit 8	Please see Supplemental Information, Investments	232
	Exhibit 9	Not applicable
	Exhibit 10	Not applicable
	Exhibit 11	Our Code of Business Ethics and Conduct is included on our web site at http://www.ericsson.com/ericsson/corporateresponsibility/employees/code_businessethics.shtml
	Exhibit 12	302 Certifications
	Exhibit 13	906 Certifications
	Exhibit 14	Not applicable
	Exhibit 15.1	Consent of Independent Registered Public Accounting Firm
	Exhibit 15.2	Consolidated Financial Statements of Sony Ericsson Mobile Communications AB
	Exhibit 15.3	Consent of Independent Registered Public Accounting Firm

vii

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

2009 MILESTONES

JANUARY-MARCH

•

Verizon Wireless chose Ericsson as one of two primary suppliers to build its LTE network infrastructure. Verizon Wireless will be the first operator to offer commercial LTE services in the United States. Later in the year, Metro-PCS chose Ericsson as the sole supplier of its LTE network buildout. Both operators are new Ericsson customers.

•

China Unicom selected Ericsson to supply 3G networks and services for 15 Chinese provinces and to upgrade its GSM networks to support 2G/3G interoperability in 10 provinces.

•

The ST-Ericsson joint venture was launched as a leading supplier of semiconductors and platforms for mobile devices to four of the top five handset manufacturers.

•

With Ericsson as its partner for mobile learning, the BBC World Service Trust uses the creative power of media to reduce poverty and promote human rights in Bangladesh. The Financial Times reported that more than 300,000 people had already signed up to learn English over their mobile phones.

APRIL-JUNE

•

In the first agreement of its kind in Africa, leading mobile operator Zain awarded Ericsson the management responsibility for more than 4,000 sites across Nigeria, including network operations, field operations and business support systems.

•

In support of the initiative Caring for Climate of the UN Global Compact, Ericsson’s CEO Carl-Henric Svanberg addressed the UN Secretary General Ban-Ki Moon during the World Business Summit on Climate Change. The message was that a modernized telecommunications infrastructure can significantly contribute to the creation of a carbon-lean economy.

•

The world’s largest upgrade of a live mobile network was accomplished at a record pace for Vodafone Essar in India. Ericsson replaced more than 10,500 of the operator’s GSM radio sites in just 13 months, reaching a peak rate of one site every minute and without disrupting service to more than 13 million subscribers.

JULY-SEPTEMBER

•

Ericsson’s first major services contract in North America is also the world’s largest, valued at USD 4.5–5 billion over seven years. Operator Sprint and its 50 million customers benefit from Ericsson’s leadership and best-in-class economies of scale in network services.

•

Ericsson signed framework agreements worth USD 1.7 billion for 2G/3G mobile communication equipment and related services for 2009 with two major Chinese telecom operators: China Mobile and China Unicom.

•

All three telecom operators in China selected Ericsson to provide fixed broadband access to millions of consumers in nine provinces.

•

Ericsson was selected by AT&T as one of two domain suppliers of wireline access products and services. This breakthrough win for Ericsson in North America significantly accelerates AT&T’s ability to bring new broadband services to the market.

OCTOBER-DECEMBER

•

With the acquisition of Nortel’s CDMA and LTE business, Ericsson became the largest supplier of infrastructure and services in North America, based on Ericsson reported sales and publicly reported sales and estimated sales for Ericsson’s main competitors.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

•

Shipments of Ericsson’s mobile broadband modules almost reached 1.5 million units. Asus, the inventor of the netbook, started to use Ericsson’s embedded modules and Ericsson is now a supplier to 3 of the top 5 PC manufacturers.

•

Ericsson announced low-cost mobile broadband for the world’s three billion GSM subscribers through a software upgrade. The EDGE evolution upgrade lets people enjoy the benefits of 3G performance – a great opportunity in countries where the mobile phone is the most affordable way to access the internet.

•

Swedish TV network TV4 outsourced the operation of its nationwide playout services. Addressing the broadcasting industry substantially expands Ericsson’s opportunities—not only for managed services, but also for the multimedia product portfolio.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

2009 SNAPSHOT

THIS IS ERICSSON

Founded in 1876, Ericsson is a leading provider of communications networks, related services and multimedia solutions. Through our joint ventures ST-Ericsson and Sony Ericsson, we are also a major provider of handsets. Our experience building networks in more than 175 countries gives us unique customer and consumer insights, and our extensive portfolio of telecommunications solutions and intellectual property (patents) offer a true business advantage. We are committed to working with our customers and partners to expand the borders of telecommunications for the benefit of people everywhere.

Our operations have been divided into segments that create competitive advantage and best meet the needs of our global customer base.

•

NETWORKS

Technology leadership, a broad product portfolio and scale enable Ericsson to excel in meeting the coverage, capacity and network evolution needs of fixed and mobile operators. We provide products for all major standards as well as all essential elements of a network on an end-to-end solutions basis.

•

SERVICES

Expertise in network design, rollout, integration, operation and customer support, combined with a global structure and robust local capabilities, enables us to understand and respond to the unique challenges of each customer. As a result we are able to capitalize on the trend for operators to outsource a broader range of activities.

•

MULTIMEDIA

Innovative application platforms, service delivery and revenue management solutions, combined with leading content developer and application provider relationships, enable Ericsson to help customers create exciting and differentiating multimedia services.

•

SONY ERICSSON

The complementary strength of Sony Ericsson further enhances our consumer perspective for superior end-to-end offerings. Sony Ericsson offers exciting consumer experience through phones, accessories, content and applications.

•

ST-ERICSSON

ST-Ericsson represents the link between infrastructure and handsets in Ericsson’s offering. They provide a market-leading portfolio of wireless platforms and semiconductors.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

LOGO

Performance

In a progressively more challenging environment during the year, Ericsson’s market shares were well maintained, adjusted operating margin¹⁾ was slightly improved, and cash conversion was well above target.

Grow faster than the market

In the economic slowdown, the market for GSM/WCDMA network equipment and related services is estimated to have declined by more than 10%. Ericsson’s sales for comparable units were down 9%, adjusted for currency effects²⁾ . A decline in Networks in line with the market was partly offset by an increase in Professional Services, driven by strong growth in managed services. Reported Multimedia sales increased by 5% for comparable units. The Multimedia market is still too fragmented to make relevant overall market growth estimates.

Best-in-class operating margins

Operating margin, excluding JV results and restructuring, improved slightly to 12% (11%) despite lower volumes and remained the highest among major listed competitors. Multimedia showed the greatest improvement, up significantly from breakeven levels in 2008.

Cash conversion of more than 70%

Cash conversion was well above the target at 117% (92%), reflecting management’s ongoing focus on improving working capital efficiency as well as a lower level of turnkey projects.

KEY DEVELOPMENTS

•

Two billion subscribers supported by Ericsson 24 hours a day, 7 days a week.

•

Ericsson provides managed services to network operators which together serve 370 million subscribers.

1)	Excluding restructuring charges and share in earnings of JVs.

2)	The impact of foreign currency is calculated based on exchange rate changes in 2009 compared to 2008. Releases under hedge accounting in 2008 and 2009 have also been excluded.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

•

North America set to become Ericsson’s largest and fastest growing market.

•

Ericsson’s presence in North America elevated—Chief Technology Officer relocated to Silicon Valley.

•

Ericsson is the only supplier selected to participate in all major 4G/LTE projects.

•

A new brand launched with the value proposition: “Innovating to Empower”.

•

Both joint ventures make progress on returning to report profits.


FINANCIAL RESULTS IN SHORT

NET SALES		NET CASH

SEK 206.5 billion		SEK 36.1 billion (Dec. 31, 2009)

OPERATING INCOME*

SEK 24.6 billion		EARNINGS PER SHARE

OPERATING MARGIN*		SEK 1.14

12 percent

*	Excluding restructuring charges and share in earnings of JVs

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

LETTER FROM THE CEO

LOOKING BACK

Dear fellow shareholders,

While the current economic environment affects all parts of society the longer-term fundamentals for our industry remain solid. Over the past decade the number of mobile subscriptions in the world has grown from some 700 million to over 4.5 billion. Mobile telephony is reaching a penetration beyond all expectations. Ten years ago it was all 2G; today 3G is the prevailing technology, mobile broadband is a reality and telecom is literally changing the world.

Ericsson has played a vital role in bringing the benefits of mobile broadband to the majority of the world’s population. What we do greatly improves people’s lives and society at large—in short, what we do shapes people’s lives and the world around us. One of my strongest memories is from the day we launched the network in Dertu, one of the Millennium Villages. Their chief, one of the camel drivers, came up to me and said, “Today our village is reborn”. People are now able to share ideas and information and accomplish things that were not possible before.

In the past ten years the telecom industry and Ericsson have transformed; from focus on voice to focus on internet, from hardware to software and from providing network equipment to providing solutions including services.

During the same period, many of our competitors have been forced to leave the arena and new ones have entered. We work harder than ever to outperform them and match our customers’ needs.

We have extended our leadership in mobile communications by building a highly successful services business which today accounts for almost 40 percent of our total Group sales. With less hardware, increased network complexity, and the move to all-IP, today is very much about making it work and supporting our customers in running and maintaining networks and realizing business models and rollout plans. During 2009 we captured additional strategic contracts in the services area and we now manage networks with 370 million subscribers.

The acquisition of Nortel’s CDMA business during 2009, on the heels of important breakthrough contract wins in North America, positioned Ericsson as the leading provider of telecoms technology and services in the United States and Canada. We have also firmly established ourselves in Silicon Valley where much of the internet development takes place.

We also gained strategic contracts for the radio standard LTE (Long-Term Evolution) which offers even greater network speeds and in December 2009 we passed another significant milestone with the worlds’ first commercial launch of an LTE network in Sweden.

“IN THE PAST TEN YEARS THE TELECOM INDUSTRY AND ERICSSON HAVE TRANSFORMED.”

The industry has changed and our ability to change with it, and indeed to lead the change, is perhaps our most important asset. New and compelling challenges lie ahead and as a company Ericsson must continue to drive the transformation of our industry.

My years as President and CEO of Ericsson have been the best of my professional career. Telecom is one of the most exciting industries to work in—so dynamic, challenging and competitive. I truly believe that telecom

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

and the entire Information and Communication Technology (ICT) sector, particularly broadband networks, will form the backbone of the digital 21st century infrastructure, helping industries with the necessary reductions in their carbon footprint.

In closing, I will continue to follow and be involved in Ericsson’s development in my role as a Board member. I am proud and grateful to have had the opportunity to be at the helm of this great company and I will remember all the extraordinary people I have had the honor to work with, customers, partners and colleagues alike.

Carl-Henric Svanberg

Former President and CEO

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

“IN THIS SEA OF CONNECTIVITY WE TAKE THE ROLE OF NAVIGATOR.”

LOOKING FORWARD

Dear shareholders,

2009 was a year of mixed trends and with varied operator investment behavior. Some markets were impacted by the financial climate while others continued to show growth.

Our Group sales for the full year, however, were flat and the operating margin increased slightly. Despite the challenging economic environment we maintained market shares, cash flow was good and our financial position remained strong. During the year we undertook significant cost reduction activities. These, in combination with large losses in our joint ventures, affected our earnings negatively. However, cost reductions will result in reduced cost base going forward and our joint ventures remain on track to return to profit.

It is now 2010 and we have a new decade ahead of us. A decade of new opportunities and new challenges. Telecoms is no longer about voice only. We do not just connect places and people. We also connect machines and devices. We connect the developing world to the developed world, rural areas to urban areas. Telecoms is the nervous system of the world.

In Ericsson we have a vision for this new decade—that there will be 50 billion connected devices. We will connect people with for example heart problems to remote monitoring systems so they can stay in the comfort of their homes, and we will connect our cars and trucks to smart road systems for safer driving and better fuel economy. Broadband networks will be the backbone of our smart cities, where houses will be connected so we can monitor and manage power consumption.

In this world the challenge will lie in dealing with the complexity of connecting all these devices. And we cannot fail. Patients must be able to rely on their health monitoring services. Transport companies must be sure that they can minimize gas consumption by smart routing and up-to-date traffic information.

In this sea of connectivity we take the role of navigator. We must support our customers and show them the way. This will require us to always put our customers first. Always have the best competence and drive innovation throughout the customer relationship.

Our business is about both technology and services. We have to be consultants; we have to be able to develop complex network management systems, we have to be able to integrate systems and solutions from many different suppliers and vendors. In addition, we should be able to deliver the best revenue management solutions and multimedia applications the consumers have ever seen. Everything must be based on IP software.

This new decade requires a lot from us. We will have to change our ways of working. Our success will be determined by our ability to see beyond technology, stay ahead of our customers and solve problems before they even arise.

In preparing ourselves to be successful in this new decade, we will need to continuously adjust to changing economic and competitive conditions while staying the course to our longer-term objectives. We will continue to proactively take actions to safeguard our financial position, leading technology and customer relationships. In order to drive shareholder value we focus on four financial targets; we want to grow the Company faster than the market, maintain best-in-class operating margins, have a healthy cash generation and grow earnings in the JVs.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

We have exciting developments ahead. The future will require us to be agile, brave and focused on performance in all we do.

I am proud and honored to lead Ericsson into a new decade where we will undoubtedly break new ground. Even more people and devices will share information across the world.

Hans Vestberg

President and CEO

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

FIVE-YEAR SUMMARY

For definitions of the financial terms used, see Glossary and Financial Terminology on page 234.


SEK million	2009		Change		2008		2007		2006		2005
Income statement items
Net sales	206,477		–1	%	208,930		187,780		179,821		153,222
Operating income	5,918		–64	%	16,252		30,646		35,828		33,084
Financial net	325		–67	%	974		83		165		251
Net income	4,127		–65	%	11,667		22,135		26,436		24,460

Year-end position
Total assets	269,809		–6	%	285,684		245,117		214,940		209,336
Working capital	99,079		–1	%	99,951		86,327		82,926		86,184
Capital employed	181,680		—		182,439		168,456		142,447		133,332
Net cash	36,071		4	%	34,651		24,312		40,728		50,645
Property, plant and equipment	9,606		–4	%	9,995		9,304		7,881		6,966
Stockholders’ equity	139,870		–1	%	140,823		134,112		120,113		101,622
Minority interests	1,157		–8	%	1,261		940		782		850
Interest-bearing liabilities and post-employment benefits	40,653		—		40,354		33,404		21,552		30,860

Other information
Earnings, per share, basic, SEK	1.15		–68	%	3.54		6.87		8.27		7.67
Earnings, per share, diluted, SEK	1.14		–68	%	3.52		6.84		8.23		7.64
Cash dividends per share, SEK	2.00	¹⁾	8	%	1.85		2.50		2.50		2.25
Stockholders’ equity per share, SEK	43.79		–1	%	44.21		42.17		37.82		32.03
Number of shares outstanding (in millions)
—end of period, basic	3,194		—		3,185		3,180		3,176		3,173
—average, basic	3,190		—		3,183		3,178		3,174		3,169
—average, diluted	3,212		—		3,202		3,193		3,189		3,181
Additions to property, plant and equipment	4,006		–3	%	4,133		4,319		3,827		3,365
Depreciation and write-downs/impairments of property, plant and equipment	3,502		13	%	3,105		2,914		3,038		2,438
Acquisitions/capitalization of intangible assets	11,413		—		1,287		29,838		18,319		2,250
Amortization and write-downs/impairments of intangible assets	8,621		55	%	5,568		5,459		4,479		3,364
Research and development expenses	33,055		–2	%	33,584		28,842		27,533		24,059
—as percentage of net sales	16.0	%	—		16.1	%	15.4	%	15.3	%	15.7	%

Ratios
Operating margin excluding joint ventures	6.5	%	—		8.0	%	12.5	%	16.7	%	20.1	%
Operating margin	2.9	%	—		7.8	%	16.3	%	19.9	%	21.6	%
EBITDA margin	8.7	%	—		11.9	%	20.8	%	24.1	%	25.4	%
Cash conversion	117	%	—		92	%	66	%	57	%	47	%
Return on equity	2.6	%	—		8.2	%	17.2	%	23.7	%	26.7	%
Return on capital employed	4.3	%	—		11.3	%	20.9	%	27.4	%	28.7	%
Equity ratio	52.3	%	—		49.7	%	55.1	%	56.2	%	49.0	%
Capital turnover	1.1		—		1.2		1.2		1.3		1.2
Inventory turnover days	68		—		68		70		71		74
Trade receivables turnover	2.9		—		3.1		3.4		3.9		4.1
Payment readiness, SEK million	88,960		5	%	84,917		64,678		67,454		78,647
—as percentage of net sales	43.1	%	—		40.6	%	34.4	%	37.5	%	51.3	%

Statistical data, year-end
Number of employees	82,493		5	%	78,740		74,011		63,781		56,055
—of which in Sweden	18,217		–10	%	20,155		19,781		19,094		21,178
Export sales from Sweden, SEK million	94,829		–13	%	109,254		102,486		98,694		93,879

1)	For 2009, as proposed by the Board of Directors.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

LETTER FROM THE CHAIRMAN

DEAR SHAREHOLDER,

As we head into 2010 and a new decade, we should consider the phenomenal transformation of the telecoms industry over the past decade, including the convergence of the telecom, IT and media industries. Through this and the explosive development in fixed and mobile internet usage, mobile communications has had a remarkable growth, with the number of subscribers increasing from 700 million in 2000 to more than 4.5 billion in 2009. Significant consolidation has occurred among operators as well as equipment suppliers.

I would like to express my sincere thanks to Carl-Henric Svanberg for his outstanding helmsmanship during his time with the Company. Ericsson’s key to success during these years has been Carl-Henric Svanberg’s willingness to seek opportunity through change and proactively address challenges.

The Board’s work in 2009 had a significant focus on strategic matters. Ericsson’s strategy to leverage its leading position and technological prowess to invest in future growth areas remains unchanged.

The key future opportunity for the industry and Ericsson will be the increased traffic generated by mobile broadband, driven by internet and social media, and a shift from connecting places and people to connecting devices and applications. Systems integration skills and application enablers will play an increasingly important role in this market development. The Company intends to build a strong position in these areas to complement the current leadership in network technologies and operations.

Operator and consumer sensitivity to the macro-economy is an important factor closely monitored by the Board. During 2009, Ericsson was affected in the second half by the economic downturn as many operators reduced their network investments. This was largely offset by good sales in the first half and by increasing sales of services and multimedia solutions. The Board also addressed the Company’s restructuring program, the Nortel acquisition, and the expanded presence in Silicon Valley to support acceleration of the move to all-IP technology. Through key contract wins and the acquisition of parts of Nortel, Ericsson became the largest supplier of network technology and services in North America.

Ericsson’s joint ventures Sony Ericsson and ST-Ericsson were strongly affected by the market decline, and forceful actions have been taken to restore their profitability.

That said, I believe Ericsson remains well positioned in relation to its peers, with sustained revenues and margins and in certain areas increased market shares, a healthy balance sheet and a strong cash position. This enables the Company to pursue emerging opportunities created by the market situation.

The debate around executive compensation has intensified. Benchmarking with global companies similar to Ericsson shows that we have a conservative but competitive compensation structure that rewards performance and effectively aligns employees’ longer-term interests with those of shareholders’.

I am confident that these principles remain appropriate and reasonable.

Looking to the future, I welcome Hans Vestberg as our new CEO and wish him all the best in his new role. The Board and I are convinced that Hans has the qualities it takes to lead Ericsson, and we give him and his new team our full support.

Change and challenge seem to be the by-words for the world today. If embracing change and proactively addressing challenges brings rewards, then the coming years certainly look exciting for Ericsson.

I sincerely appreciate your support during the year.

Michael Treschow

Chairman of the Board

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

BOARD OF DIRECTORS’ REPORT 2009

This Board of Directors’ Report is based on Ericsson’s consolidated financial statements, prepared in accordance with IFRS as issued by the IASB. The application of reasonable but subjective judgments, estimates and assumptions to accounting policies and procedures affects the reported amounts of assets and liabilities and contingent assets and liabilities at the balance sheet date as well as the reported amounts of revenues and expenses during the reporting period. These amounts could differ materially under different judgments, assumptions and estimates. Please see Note C2—“Critical Accounting Estimates and Judgments” (p. 66).

Also non-IFRS measures are used to provide meaningful supplemental information to the IFRS results. Non-IFRS measures are designed to facilitate analysis by indicating Ericsson’s underlying performance, however, these measures should not be viewed in isolation or as substitutes to the IFRS measures. A reconciliation of non-IFRS measures with the IFRS results can be found on page 17.

This report includes forward-looking statements subject to risks and uncertainties. Actual developments could differ materially from those described or implied. Please see “Forward-Looking Statements” (p. 150) and “Risk Factors” (p. 142).

The external auditors review the quarterly interim reports, perform audits of the Annual Report and report their findings to the Board and its Audit Committee.

The terms “Ericsson”, “the Group”, and unless the context reasonably requires otherwise, also “the Company”, all refer to Telefonaktiebolaget LM Ericsson and its subsidiaries. Unless otherwise noted, numbers in parentheses refer to the previous year (i.e. 2008).

CONTENTS


Business Drivers 2009		13
Operational Goals and Results		14
Vision and Strategy		16
Financial Results of Operations		17
Financial Position		20
Cash Flow		23
Business Results		25
Legal and Tax Proceedings		32
Material Contracts		33
Corporate Governance		33
Sustainability and Corporate Responsibility		35
Risk Management		37
Parent Company		40
Post-Closing Events		42
Board Assurance		42

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

LOGO

BUSINESS DRIVERS 2009

Five major trends affected our markets and operations in 2009:

•

Accelerated mobile data growth

Data traffic in developed markets is increasing dramatically, generating sales for additional network capacity.

•

Network modernization and IP

Many operators started migration to all-IP core networks.

•

Technology shift—2G/3G/4G

In 2009, Ericsson’s 3G sales surpassed 2G, however not yet offsetting the decline in GSM. The first commercial LTE (Long-Term Evolution) network was launched.

•

Impact from economic conditions

Demand for telecom infrastructure started to decline mid-2009, affecting sales in Networks—particularly in some developing markets, where the general economic downturn was exacerbated by weak currencies.

•

Operator focus on efficiency

Sales of services increased, not only managed services but also consulting and systems integration, driven by higher network complexity and operator focus on cost reductions.

North America

During 2009, Ericsson significantly strengthened its position in North America. A number of key contracts were won: LTE with Verizon and Metro PCS, the largest managed services contract ever with Sprint and a domain supplier agreement with AT&T for wireline access products. The Company also acquired Nortel’s CDMA and LTE businesses in North America.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

Tough times for the JVs

Both Sony Ericsson and ST-Ericsson were impacted by the decline in handset demand in 2009. Sony Ericsson’s situation was worsened by an aging product portfolio. Both JVs reported losses and initiated aggressive cost restructuring programs and are on track to return to report profits. New CEOs and chairmen of the Boards were appointed in both JVs.

ICT and the climate

In 2009, climate change was on the agenda for governments. During the year, Carl-Henric Svanberg addressed the UN, promoting that a focused utilization of ICT solutions could reduce CO₂ emissions by 15-20 percent. The ICT industry in itself contributes less than 2 percent to the emissions.

Telecom is a long-term growth industry

The Company is convinced that the factors driving industry growth are robust and should result in continued increased demand. The growth will be driven by the combined effects of the following:

•

Subscriber growth in emerging markets, supported by cheaper handsets.

•

Increased coverage and use.

•

Ever faster mobile broadband communications, improving user efficiency and experiences.

•

Data traffic driven by IP-based mobile broadband; in developed markets driven by the convenience of mobility, and in emerging markets by the lack of fixed broadband access.

•

New multimedia applications and communication between various new devices.

Competition

Competition remained intense. After the consolidation in recent years, there are fewer vendors—all with comprehensive product portfolios. Ericsson has maintained or increased its market shares during the year.

OPERATIONAL GOALS AND RESULTS

Ericsson aims to be the preferred business partner to its customers with an ultimate goal of sustainable long-term value creation. Faster than market sales growth, a best-in-class operating margin and a healthy cash conversion are key to the fulfillment of this goal.

As a market leader, Ericsson combines leading technology and services skills to develop superior solutions that deliver competitive advantage. Ericsson believes that highly satisfied customers and empowered and motivated employees are key to success. Several annual key performance indicators are used regarding shareholder value creation, customer satisfaction and employee engagement.

Shareholder value creation

Although margins in 2009 remained below historic levels, the Company strengthened its market position in strategically important areas, such as: LTE/4G technology and commercial contracts, market share in the US and managed services. This combined with a strong balance sheet, efficient and leaner processes after ambitious restructuring, and continued strong customer relations provided the means for value creation also in the macro-economic headwind. The share price increased during the year and a dividend was paid for a total shareholder return of 15 percent in 2009.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

Management uses several metrics to monitor performance:

•

Faster than market sales growth

Ericsson’s sales for comparable units decreased by 9 percent, adjusted for currency and hedging effects. Due to the effects of the economic slowdown and to weaker demand for GSM equipment, the market for GSM/WCDMA equipment and related services is estimated to have declined by more than 10 percent in USD terms. Segment Networks’ sales for comparable units in constant currencies declined in line with the market. Based on external analyses and reported results by Ericsson and its main competitors, the Company believes its market shares were well maintained. A number of breakthrough contracts were signed which should enable the Company to grow faster than the market. Sales in Professional Services grew by 8 percent in local currencies. Sales for comparable parts of Multimedia grew by 5 percent. The overall market growth for Multimedia is difficult to assess, as the segment is very fragmented.

•

Best-in-class operating margin

Based on reported results for 2009, the operating margin for the Group, excluding joint ventures and restructuring charges, was 12 (11) percent and remains the highest among the Company’s main competitors that are publicly listed.

•

Cash conversion of over 70 percent

The cash conversion rate for 2009 was 117 (92) percent, reflecting a strong focus on cash flow with a significant reduction in operating assets.

Customer satisfaction and employee engagement

In the annual independent customer satisfaction survey, approximately 9,700 employees from 380 operators around the world were polled to assess their satisfaction with Ericsson compared to its main peers. In 2009, Ericsson maintained a level of excellence.

An employee survey is also independently conducted every year. In 2009, 91 percent of employees participated in the survey. The Human Capital Index, which measures employee contribution in adding value for customers and meeting business goals, remained at a high level.

LOGO

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

VISION AND STRATEGY

Ericsson’s vision of an all-communicating world is rapidly becoming a reality as the convergence of the telecom, internet and media sectors gains momentum. Ericsson envisions continued evolution, from having connected some 1.5 billion places to connecting more than 5 billion people and 50 billion devices. The Company envisions that anything that can benefit from being connected will be connected, mainly via IP-based wireless communications.

Mobile broadband at the forefront

Following the unprecedented growth of mobile telephony is a rapidly expanding range of mobility-based devices and applications. The accelerating penetration of smartphones and mobile broadband usage are early signs of this development. Extending network coverage and increasing data speeds, combined with devices that have large screens, intuitive user interfaces and multimedia capabilities, enhances the user experience and stimulates demand for mobile-broadband services. Once areas have ubiquitous coverage, machine-to-machine communication enables a large variety of existing services to be enhanced, such as media, governmental, utilities, industry automation, banking and transport.

Spurring socio-economic development

Ericsson’s mission is to empower people, business and society through innovation, industry leadership and a long- term commitment to the vision of an all-communicating world. In the course of making people’s lives easier and more productive, Ericsson is spurring socio-economic development and a better environment which brings the Company’s vision ever closer to reality.

Leveraging the competitive dynamics

The Company’s strategy is driven by the competitive dynamics of the telecom market and Ericsson’s position, the combination of which gives rise to three strategic imperatives:

•

Economies of scale and scope are prerequisites for sustainable value creation. Industry standards govern product design and functionality, making it challenging for equipment suppliers to differentiate on product capabilities alone. Therefore, the Company strives to combine technology leadership with leadership in services.

•

The bargaining power of equipment suppliers depends primarily on their installed base. Operators not only look for the best products but also for long-term business partnerships that they can rely on to deliver end-to-end solutions for lower total cost of ownership, the ability to minimize time-to-market, strong professional services capabilities, and access to world-class subject matter experts.

•

Primary end-to-end suppliers with well-entrenched local presence, backed up by global resources and a proven track record, have a competitive advantage. The Company seeks to be a full systems solutions house with a broad but integrated product portfolio combined with superior technical competence, for example in systems integration.

Guiding principles

The guiding principles for attainment of the Company’s strategic imperatives include:

•

customer intimacy; highly qualified employees working closely with the customer to create effective solutions

•

continuous process improvements and innovation

•

scale in delivery and technical solutions.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

FINANCIAL RESULTS OF OPERATIONS

SEK billion

Non-IFRS
measures
2009

Non-IFRS
measures
2008

Percent
change

Restructuring
charges 2009

Restructuring
charges 2008

IFRS
2009

IFRS
2008

Net sales

206.5

208.9

–1

206.5

208.9

Cost of sales

–132.1

–132.1

–4.2

–2.5

–136.3

–134.6

Gross income

74.4

76.8

–3

–4.2

–2.5

70.2

74.3

Gross margin %

36.0

36.8

34.0

35.5

Operating expenses

–52.9

–56.4

–6

–7.1

–4.2

–60.0

–60.6

Operating expenses as % of sales

25.6

27.0

29.0

Other operating income and expenses

3.1

3.0

3.1

3.0

Operating income before share in earnings of JVs and associated companies

24.6

23.4

–11.3

–6.7

13.3

16.7

Operating margin % before share in earnings of JVs and associated companies

11.9

11.2

6.5

8.0

Share in earnings of JVs and associated companies

–6.1

0.4

–1.3

–0.9

–7.4

–0.4

Operating income

18.5

23.9

–22

–12.6

–7.6

5.9

16.3

Operating margin %

9.0

11.4

2.9

7.8

Financial income and expense, net

0.3

1.0

Taxes

–2.1

–5.6

Net income

4.1

11.7

EPS diluted (SEK)

1.14

3.52

Non-IFRS measures are used in the table above as supplemental information to the IFRS results. Since there were significant restructuring costs during 2008 and 2009, but with relatively little benefit in 2008 and consequently significant impact on reported results and margins both years, non-IFRS measures excluding restructuring charges are presented to facilitate analysis by indicating Ericsson’s underlying performance. However, these measures should not be viewed in isolation or as substitutes to the IFRS measures. For more details on the restructuring activities and corresponding charges, please see Note C5—“Expenses by Nature”.

Sales sustained in weaker market

Increased sales in the first half of 2009 were offset in the second half by impact from the economic slowdown. Overall, sales declined marginally from last year to SEK 206.5 billion. Sales for comparable units were stable year over year, i.e. excluding SEK 2.7 billion of sales from the acquired Nortel business in North America in the fourth quarter and SEK 5.2 billion in 2008 from the divested PBX and mobile platform operations. Adjusted also for effects of exchange rates and hedging, sales declined 9 percent. Lower sales in Networks were largely offset by higher sales in Professional Services and Multimedia. The economic downturn coupled with tighter credit supply impacted operator spending, in particular in certain emerging markets.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

LOGO

The demand varied considerably between markets. Among our largest markets, the US, China, UK and Turkey had good sales increases. Australia, India and Japan were stable, whereas sales in Brazil, Indonesia, Italy, Pakistan and Spain declined. Several important contracts were won in 2009: four LTE contracts, the appointment as fixed access domain supplier to AT&T and a services contract with Sprint in the US.

Gross margin stable excluding restructuring charges

Gross margin declined only slightly as effects of price pressure, increased share of services sales, and the initial transition costs for the Sprint contract were largely offset by cost cutting and restructuring efforts.

Operating expenses excluding restructuring charges were reduced

Operating expenses declined year-over-year as a result of restructuring activities and the spin-off of mobile platforms. The Company continues to focus on innovations and R&D. however, spending as a percentage of sales was 13 percent compared to 15 percent in 2008 due to cost reductions and efficiency gains.

Operating margin excluding share in earnings of JVs and restructuring charges increased slightly

Restructuring and other cost reduction measures have lowered the breakeven point. The operating margin in Multimedia increased significantly, reflecting a more narrow business focus.

Share in earnings of JVs and associated companies declined SEK 6.5 billion year-over-year

Both Sony Ericsson and ST-Ericsson were adversely affected by the lower handset sales during the economic downturn. Both companies have undertaken ambitious restructuring activities, and Sony Ericsson is improving its product portfolio focusing on mid- to high-end phones.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

Under new management, both JVs are well on track to return to report profits.

Restructuring increased and will continue into 2010

In the beginning of the year, a program to reduce annual run rate of costs by SEK 10 billion was launched, following the 2008 program aiming at SEK 6–7 billion. In the third quarter, additional SEK 5–6 billion of savings were targeted with anticipated costs of the same magnitude. Full effects are expected to be achieved in the second half of 2010, assuming current level of operations. This year’s restructuring charges were SEK 11.3 (6.8) billion, relating to activities to reduce production costs, reduce product variants and platforms, increase the re-use of software, consolidate R&D activities, and improve administrative processes. This resulted in fewer platforms and solutions and was coupled with write-downs of capitalized development costs and acquired IPR assets for affected products.

Earnings per share (EPS) diluted down 68 percent

EPS diluted declined from SEK 3.52 last year to SEK 1.14 this year, largely driven by the losses in our JVs and the restructuring program.

Employees increased by net 3,750 in 2009

Headcount increased to 82,500 (78,750), largely as a result of new managed services contracts. About 2,500 employees from the acquired Nortel CDMA and LTE operations will be included from 2010. The additions were partly offset by reductions due to restructuring and the transfer of mobile platforms to ST-Ericsson. The competence and capabilities of the workforce is increasingly service and software oriented.

LOGO

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

FINANCIAL POSITION


December 31, SEK billion	2009	2008
ASSETS
Non-current assets, total	87.4	87.2
—of which intangible assets	*48.2*	48.2
—of which property, plant and equipment	*9.6*	10.0
—of which financial assets	*15.3*	14.1
—of which deferred tax assets	*14.3*	14.9
Current assets, total	182.4	198.5
—of which inventory	*22.7*	27.8
—of which trade receivables	*66.4*	75.9
—of which other receivables/financing	*16.6*	19.8
—of which short-term investments, cash and cash equivalents	*76.7*	75.0
Total assets	269.8	285.7

EQUITY AND LIABILITIES
Equity	141.0	142.1
Non-current liabilities	43.3	39.5
—of which post-employment benefits	*8.5*	9.9
—of which borrowings	*30.0*	24.9
—of which other non-current liabilities	*4.8*	4.7
Current liabilities	85.5	104.1
—of which provisions	*12.0*	14.0
—of which current borrowings	*2.1*	5.5
—of which trade payables	*18.9*	23.5
—of which other current liabilities	*52.5*	61.0
Total equity and liabilities¹⁾	269.8	285.7

1)	Of which interest-bearing liabilities and post-employment benefits SEK 40.7 billion (SEK 40.4 billion in 2008).

In 2009, despite the strategic investments in ST-Ericsson and the Nortel operations and a difficult macro-economic business environment, a healthy capital structure and equity ratio were maintained and the debt maturity profile was significantly improved.

Intangible assets flat with acquisitions offset by amortizations and write-downs

Added intangible assets from the Nortel acquisition of SEK 8.8 billion were offset by amortizations and impairment losses. Impairment losses on acquired intangibles were SEK 4.3 (0) billion in 2009, attributable to restructuring.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

Property, plant and equipment slightly down

The Company’s assets are largely related to test equipment for in-house manufacturing, R&D and services, including our network operations centers. A large share of manufacturing and IT operations are outsourced and most properties are leased.

LOGO

Financial assets up slightly

Financial assets increased slightly, with the investment in ST-Ericsson partially offset by the reduced value of investments in JVs, attributable to their reported losses.

Customer financing did not increase and deferred tax assets were slightly reduced with utilization of tax loss carryforwards.

Strong reductions in receivables and inventory

Considerable progress was made in the second half to achieve stable days sales outstanding (DSO) at 106 and inventory days at 68. However, targeted levels have not yet been reached and the improvement efforts will be continued.

Cash remained strong at SEK 77 (75) billion

Due to a strong cash flow, a good level of cash and short-term investments was maintained. A strong liquidity is deemed important to keep flexibility for volatility in sales and cash flows and to be able to take advantage of opportunities in the market.

Equity down SEK 1.1 billion

Stockholders’ equity decreased by SEK 1.1 billion. The net income of SEK 4.1 billion and a capital increase of SEK 0.7 billion, attributable to the employee stock purchase plan, were more than offset by the dividend of SEK 6.3 billion. However, the equity ratio was maintained at a healthy level of 52 (50) percent.

Return on equity 2.6 (8.2) percent

The decline in return on equity (ROE) was primarily a consequence of JV losses and the restructuring charges.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

Return on capital employed 4.3 (11.3) percent

The return on capital employed (ROCE) declined to 4.3 percent. Excluding restructuring charges, ROCE would have been 11.2 (15.5) percent.

Pension liabilities down SEK 1.4 billion after employer contributions

Post-employment benefits related to defined benefit plans declined to SEK 8.5 (9.9) billion in 2009. A liability increase of SEK 1.2 billion, due to lower interest rates, was more than offset by higher values of plan assets of SEK 1.2 billion and employer contributions of SEK 2.1 billion to trust funds. The funded ratio (plan assets as percentage of defined benefit obligations) increased to 76 (68) percent.

Provisions declined due to larger cash outlays

The total amount for provisions declined to SEK 12.4 (14.4) billion, largely attributable to SEK 4.7 billion of larger cash outlays than last year, of which SEK 2.5 billion related to restructuring.

LOGO

Trade payables declined by SEK 4.6 billion

The number of payable days improved some from 55 to 57 days, close to the target of 60 days or more, despite the macroeconomic conditions, where some suppliers have had to be supported with shorter payment terms in a tight credit market.

Debt maturity profile improved

During the year, the Company increased borrowings by SEK 1.7 billion and considerably improved the maturity profile. Debt maturing in 2009 of USD 0.5 billion and in 2010 of EUR 0.5 billion were replaced with a 7-year loan of USD 0.6 billion and a 4-year loan of EUR 0.6 billion. In addition to borrowings, the Company also has unutilized committed credit facilities of USD 2.0 billion available, maturing in 2014.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

Credit Ratings

Credit ratings were unchanged during 2009, remaining at “solid investment grade”: Moody’s at Baa1 and Standard & Poor’s at BBB+.

Sony Ericsson borrowings guaranteed

Ericsson and SONY have on a 50/50 basis guaranteed EUR 350 million of borrowings for general business purposes, as improved liquidity was needed following Sony Ericsson’s weak results and the restructuring program. The amount guaranteed is not deemed significant, considering Ericsson’s financial position.

Off-balance sheet arrangements

There are currently no material off-balance sheet arrangements that have, or would be reasonably likely to have, a current or anticipated effect on the Company’s financial condition, revenues, expenses, result of operations, liquidity, capital expenditures or capital resources.

CASH FLOW

JANUARY–DECEMBER


SEK billion	2009		2008
Net income	4.1		11.7
Income reconciled to cash	21.0		26.0
Changes in operating net assets	3.5		–2.0
Cash flow from operating activities	24.5		24.0
Cash flow from investing activities	–37.5		–8.5
—of which capital expenditures, sales of PP&E, product development	*–4.9*		–4.1
—of which acquisitions/divestments, net	*–18.1*		1.8
—of which short-term investments for cash management purposes and other investing activities	*–14.5*		–6.2
Cash flow before financing activities	–13.0		15.5
Cash flow from financing activities	–1.7		–7.2

Cash conversion (Cash flow from operating activities divided by income reconciled to cash)	117	%	92	%

Gross cash (Cash, cash equivalents and short-term investments)	76.7		75.0

Net Cash (Gross cash less interest-bearing liabilities and post-employment benefits)	36.1		34.7

Cash flow from operations stable at SEK 24.5 billion

A lower net income was offset by non-cash items, such as the losses in JVs, depreciation, amortization of intangibles, largely related to restructuring, and strong working capital reductions, resulting in a similar cash flow from operations as in 2008.

Cash out from investing activities SEK –37.5 billion

Cash outlays for recurring investing activities increased slightly to SEK –4.9 billion.

Acquisitions/divestments during the year were net SEK –18.1 billion, with the major items being the formation of the ST-Ericsson joint venture, the minority stake in LHS and Nortel’s CDMA and LTE businesses.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

Cash outflow for short-term investments for cash management purposes and other investing activities was net SEK –14.5 billion, largely attributable to SEK –17.1 billion of short-term investments driven by the strong cash flow from operations.

Cash flow from financing activities SEK –1.7 billion

Dividends paid of SEK –6.3 billion were partly offset by increased borrowings of SEK 4.3 billion and other financing activities of SEK 0.2 billion.

Strong cash conversion at 117 (92) percent

The cash conversion rate was 117 (92) percent, well above the target level of 70 percent. The percentage increase was largely attributable to the strong improvement in operating net assets and the lower income reconciled to cash.

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Restricted cash

Cash balances in certain countries with restrictions on transfers of funds to the Parent Company as cash dividends, loans or advances amounted to SEK 8.9 (8.2) billion.

Capital expenditures

Amounts for annual capital expenditures are normally around two percent of sales. This level corresponds to the needs for keeping and maintaining the current capacity level, including the continuous introduction of new technology and methods. The expenditures are largely related to test equipment in R&D units and network operations centers and to production and test equipment in manufacturing and repair operations.

The Board reviews the Company’s investment plans and proposals.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

CAPITAL EXPENDITURES 2005–2009


SEK billion	2009		2008		2007		2006		2005
Capital expenditures	4.0		4.1		4.3		3.8		3.4
—of which in Sweden	*1.3*		1.6		1.3		1.0		1.0
as percent of net sales	1.9	%	2.0	%	2.3	%	2.2	%	2.2	%

Capital expenditures in relation to sales are expected to remain at about two percent. The Company has sufficient cash and cash generation capacity to fund expected capital expenditures as well as the acquisitions of the Nortel/GSM operations and Pride Spa and the contribution to the Swedish pension trust fund without external borrowings.

We believe that the Company’s property, plant and equipment and the facilities that the Company now occupies are suitable for its present needs in most locations. As of December 31, 2009, no material land, buildings, machinery or equipment were pledged as collateral for outstanding indebtedness.

BUSINESS RESULTS

Operator investments are increasing in mobile broadband, driven by a strong ramp up of data traffic. The broadband growth has not yet offset the decline in GSM sales, which in 2009 was accelerated due to the current economic climate. Operator investment patterns varied significantly between regions and countries. A number of developing markets became increasingly cautious, while others, including large markets such as China and the US, showed good growth. There was a continued strong demand for services targeting our customers’ operational efficiency.

Regional overview

SALES PER REGION AND SEGMENT 2009



SEK billion	Net- works		Prof. Services		Multi- media		Total		Percent change
Western Europe	23.8		18.3		2.4		44.6		–14	%
CEMA¹⁾	32.7		12.9		5.1		50.7		–4	%
Asia Pacific	50.5		12.2		3.1		65.8		4	%
Latin America	13.0		5.9		1.1		20.1		–13	%
North America	17.1		6.7		1.6		25.4		41	%
Total	137.1		56.1		13.3		206.5		–1	%

Share of total	66.4	%	27.2	%	6.4	%	100	%
Percent Change	–3	%	15	%	5	%	–1	%

1)	Central and Eastern Europe, Middle East and Africa.

Sales in Western Europe decreased by –6 (–2) percent for comparable units with growth of professional services and broadband more than offset by lower GSM sales. The growing demand for mobile broadband and professional services is expected to continue, as is the decline for GSM. The macro-economic development led to a weaker demand for replacement handsets but mobile phone usage appeared to be largely unaffected and mobile broadband traffic continued to show strong growth.

In Central and Eastern Europe, Middle East and Africa (CEMA), sales decreased by –4 (+9) percent, despite continued network buildouts in a number of markets, as the region has been more affected than most by the macroeconomic development. Many countries within the CEMA region have low penetration levels and consumer demand remains robust even if some operators are currently unable or unwilling to invest at healthy levels. A similar situation is seen in other emerging markets such as Latin America and Asia Pacific.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

Asia Pacific remained Ericsson’s largest region with a sales increase of +4 (+16) percent, fuelled by continued good demand in China and India. The Company has a leading position in India, where subscribers are expected to ultimately exceed one billion from the current 496 million. Auctions for 3G licenses in India were postponed to 2010. Although Chinese suppliers have significantly increased their domestic market share, Ericsson maintains a strong market position in China. Political unrest and effects of the economic slowdown negatively affected sales growth in certain countries, such as Indonesia, Pakistan and Bangladesh.

Latin American sales decreased by –13 (+25) percent, reflecting lower demand across the region compared to strong growth over the last couple of years. Demand for mobile broadband continues to develop well, but delays in licensing of new spectrum are causing operators to hold back investments in new technologies and applications.

North American sales increased by +41 (+34) percent, mainly driven by demand for mobile broadband and professional services. With a number of breakthrough contracts for LTE, fixed access and services and the acquisition of Nortel’s CDMA and LTE businesses, the Company is well positioned for continued growth and is now the largest supplier of technology and services to network operators in the region.

Market shares were well maintained and the Company retains its ambition to grow faster than the market.

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Networks

Overall operator demand for mobile GSM/WCDMA network equipment and related services is estimated to have declined by more than 10 percent in 2009. At the same time consumer demand continued to grow, the number of mobile subscriptions increased to a total of almost 4.6 billion and data traffic accelerated.

Network sales were down by –3 (+10) percent to SEK 137.1 (142.0) billion. Sales for comparable units declined by 5 percent, i.e. excluding SEK 2.7 billion of sales from acquired Nortel operations. Adjusted also for currency and hedge effects, sales declined in line with the market. Lower GSM sales, particularly in high-growth markets such as China, contributed to the decline. Sales in WCDMA continued to show good growth driven by demand for mobile broadband.

GSM shipments reached their all-time-high volume in 2008. This year, Ericsson’s WCDMA sales surpassed that of GSM for the first time. WCDMA growth did not offset the GSM decline.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

Mobile broadband continues to be in focus as more and more networks are being upgraded. Smartphones, netbooks and notebooks drive data traffic and revenues for operators, resulting in demand for network expansions and upgrades.

The global network coverage from WCDMA is still less than half of that of GSM. In China, the 3G licenses were awarded early 2009. Ericsson participated in China Unicom’s WCDMA rollout, the largest and fastest ever. Another achievement was the world’s largest live network upgrade in record time for Vodafone Essar in India, reaching a peak replacement rate of one radio base station every minute. India is expected to award 3G licenses in 2010.

For the next generation wireless technology, 4G/LTE, Ericsson won key contracts with Verizon, Metro PCS, NTT DoCoMo and TeliaSonera. The industry support for LTE is very strong and this technology is expected to play an important role in many markets with suitable spectrum. Ericsson is leading the transformation and convergence of the core network with the largest installed base of all-IP networks based on Softswitch and IP Multimedia System (IMS) technology.

The LTE core network is all-IP. To meet the demand for this new all-IP core, Ericsson has introduced the industry’s most comprehensive Evolved Packet Core portfolio which will support LTE network introduction. The portfolio is built on Ericsson’s existing packet core products and new functionality will be introduced through software upgrades.

The increased data traffic driven by mobile broadband continues to create demand for transmission capacity for mobile backhaul. Ericsson offers a wide range of solutions to remove bottlenecks in the transport network. Successful mobile backhaul networks were completed in Turkey, Sweden, Canada and the US in 2009. Sales of optical and microwave transmission solutions to fixed as well as mobile operators developed in line with the market.

In the fixed access area, the Company had break-in wins for fiber (GPON) connection in the Americas and in China.

Operators are evolving from legacy circuit-switched networks to all-IP, in both fixed and mobile networks, and this creates opportunities for Ericsson. A new Silicon Valley campus has been established with the intention of driving the convergence of IP and mobile networks and reaching out to new partners in mobile broadband markets. The Company remains optimistic regarding growth opportunities for all-IP networks with IP routing, IMS and transmission.

With the acquisition of the Nortel assets for CDMA and LTE, the Company strengthened its ability to serve North America’s mobile operators. The acquisition significantly expands Ericsson’s footprint in this market, particularly as operators in this region are emerging as early adopters of LTE technology. The agreement also includes certain patents and patent licenses relating to CDMA and LTE. Going forward, R&D expenses are expected to be relatively low in CDMA compared with other technologies.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

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Professional Services

Professional Services sales continued to show good growth, increasing by 15 (14) percent to SEK 56.1 (49.0) billion. Growth measured in local currencies amounted to 8 (13) percent. However, sales were negatively affected by the reduced scope of a managed services agreement and somewhat lower sales of project-related services, reflecting the slowdown in network sales. Managed services was one of the main drivers for the sales increase, growing by 22 (17) percent to SEK 17.4 (14.3) billion, significantly outpacing the market. More than 60 percent of revenues in Professional Services are now of a recurring nature.

As the professional services market develops, there are many opportunities for project business, but operators are also seeking longer-term partnerships for a competitive edge. Combined with an expanding managed services market, this should help sustain a healthy level of recurring business for Ericsson.

Ericsson is the clear leader in managed services and at year end 2009 Ericsson-managed network operations served over 370 (250) million users. Despite a higher proportion of managed services sales from new contracts with associated start-up costs, Professional Services’ operating margin remained in the mid-teens at 15 (16) percent. This is due to increased efficiency in the delivery organization.

Ericsson won several milestone contracts for managed services during the year. These include Sprint and Zain, the first full-scope managed services contracts in North America and Africa—not only firsts for Ericsson but also for the industry. The acquisition of Nortel’s CDMA and LTE businesses creates opportunities for synergies in the services operations in North America.

Consulting and systems integration also had encouraging developments during the year, particularly in revenue assurance and support systems transformation, exemplified by a multi-country contract for revenue assurance with Mobilkom Group of Austria and a service assurance contract with Wataniya in Algeria. Operational consulting is also an area of growth, exemplified by a contract with Claro in Guatemala (fixed and wireless).

Common challenges faced by operators today are business growth, operational efficiency and network evolution towards IP. In a converging communications world, new complexity in business models must also be added to the challenges. Services expertise and experience, in combination with technology leadership and business understanding, enable the Company to take on a prime integrator role in complex deployment and transformation projects.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

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Multimedia

Multimedia sales increased 5 percent for comparable units with revenue management negatively affected during the second half of the year by lower network deployments. The segment continues to have attractive prospects for sales growth to network operators and service providers and the Company is well positioned to benefit from a market rebound.

Operating margin improved to 8 (0) percent while EBITDA margin doubled to 16 percent with stringent cost control and the operational benefits of a more concentrated business, i.e. excluding PBX systems and mobile platforms, focusing on TV solutions, business support systems and revenue management.

Solution area TV performed well during 2009 in what proved to be a challenging market environment. The Company strengthened its position in the IPTV market with a number of wins for its industry-leading IMS-enabled middleware, where full systems integration and solutions delivery is also provided. The product range in the Video on Demand and Content Management area was extended and a new generation of encoding platforms was introduced, redefining the achievable limits of compression performance. Industry recognition of market leadership was reinforced by three prestigious awards at IBC: Best IPTV solution, Best Content Management solution and Best Compression solution.

As operators modernize and transform their networks to all-IP, with more and more services added, the importance of business support systems increases. Ericsson’s business support systems enable management of subscribers, provisioning of services and subscriptions, collection of usage data, charging and invoicing for services used and settlements with business partners in the service value chain. Business support systems presence was increased by leveraging the strong market position in Networks and Professional Services, especially systems integration, with a broad solutions portfolio in revenue management, provisioning and service delivery.

More than 800 million subscriptions have been activated through Ericsson’s provisioning and service delivery platforms and 1 billion subscribers are now charged and billed through Ericsson’s Revenue Management solutions. A Dynamic Discount Solution (DDS), the first telecom yield management system, was launched and deployed in a number of high-growth markets.

Ericsson advanced its leadership in mobile payment solutions and is first with a global solution to power application stores with mobile web payment capabilities. An Online Payment service was launched with great success through 60 operators in 15 markets. Ericsson was awarded the Best Transactions Provider Award—Mobile Entertainment 2009 and received a high ranking in the Forrester Messaging Wave Report.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

There are opportunities for network operators and service providers to increase the value of their offerings toward consumers by taking advantage of the transformation to all-IP. Ericsson’s introduction of the two IP-based applications Rich Communication Suite and Business Communication Suite has attracted significant market interest. They enable Ericsson’s customers to provide services regardless of handset model or operating system. Ericsson also reinforced its leading position in Location Based Services with a number of new contracts. In addition, a Real Time Traffic Information service was launched in Europe and Asia.

The Company is making good progress in building a strong portfolio of applications enabling network operators and service providers to grow revenues and expand into new value chains beyond traditional telecom services. Ericsson continues to invest in new multimedia opportunities which may affect profitability on occasion. Most earlier investments are starting to pay off.

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Joint Ventures

Sony Ericsson

The global handset market is believed to have declined by 10 percent in unit shipments, mainly due to weakening demand for mid- to high-end feature phones—an important segment for Sony Ericsson with its higher than average market share exposure. As a consequence, Sony Ericsson’s market share decreased from ~7 percent to less than 5 percent.

Units shipped declined by 41 percent to 57.1 (96.6) million while the average selling price increased by 3 percent to EUR 119 (116). Sales decreased by 40 percent from EUR 11.2 billion to 6.8 billion. Gross margin declined significantly year-on-year but improved during the year as benefits of cost reductions and new products started to materialize.

Income before taxes, excluding restructuring charges, was a loss of EUR 878 million. The income gradually improved during the year from an improved gross margin and reduced operating expenses. Ericsson’s share in Sony Ericsson’s income before taxes was SEK –5.7 billion.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

In the second half of the year, borrowing facilities of EUR 455 million were secured to improve liquidity. The parent companies guaranteed EUR 350 million of these facilities on a 50/50 basis without joint responsibility. EUR 255 million were utilized and EUR 200 million remain available as a backup facility. The net cash position was EUR 620 million at year end.

Programs initiated 2008 to lower annual operating expenses by EUR 880 million will continue, with full benefits expected in the second half of 2010. Restructuring charges are estimated to be well within the previously announced EUR 500 million.

Sir Howard Stringer, Chairman, CEO and President of SONY Corporation succeeded Carl-Henric Svanberg as Chairman of the Board and Bert Nordberg, Executive Vice President and Head of Ericsson Silicon Valley, succeeded Dick Komiyama as President and CEO.

ST-Ericsson

Proforma sales declined 25 percent from USD 3.6 billion to 2.7 billion. Sales grew progressively during the year, mainly due to good performance in Asia. The joint venture remains a key supplier to four of the five largest mobile phone manufacturers in the world.

Adjusted operating losses for the full year amounted to USD 440 million but results improved progressively during the year. The first quarter saw a proforma loss of USD 149 million. This was followed by losses of USD 165 million in the second quarter, USD 77 million in the third quarter and USD 50 million in the fourth quarter. The improvements reflect a tight control of product costs and operating expenses as well as the positive effects of cost reduction activities.

ST-Ericsson is reporting in US-GAAP. Ericsson’s share in ST-Ericsson’s income before tax, adjusted to IFRS, was SEK –1.8 billion. Adjustments for IFRS-compliance mainly consist of capitalization of R&D expenses for hardware development.

The cost reduction programs are on schedule and target USD 595 million savings per year, of which USD 250 million were achieved by end of 2009. The full effects of the cost-reduction activities are expected in the second half of 2010.

A new product roadmap for market leadership has been established by combining the strengths of parent companies STMicroelectronics and Ericsson. ST-Ericsson’s market position was further enhanced by securing leadership in the fast growing TD-SCDMA technology for the Chinese market and the announcement of a close cooperation with Nokia to deliver platforms for new smartphones.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

Wireless microelectronics industry veteran Gilles Delfassy succeeded Alain Dutheil as President and CEO after the successful integration of the JV operations. Hans Vestberg succeeded Carl-Henric Svanberg as Chairman of the Board.

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LEGAL AND TAX PROCEEDINGS

In the fall of 2007, Ericsson was named a defendant in three putative class action suits filed in the United States District Court for the Southern District of New York. The complaints alleged violations of US securities laws in connection with Ericsson’s October 2007 profit warning. In February 2008, the court consolidated the three class actions into one. In June 2008, Ericsson filed a motion to dismiss the complaint. In December, the court granted the motion and dismissed the case. In early January 2009, the plaintiffs appealed the decision to dismiss the case. On October 8, 2009, the Second Circuit affirmed the district court and dismissed the case. Consequently, there are no pending legal actions that relate to Ericsson’s October 2007 profit warning.

In October 2005, Ericsson filed a complaint with the European Commission requesting that it investigate and stop US-based Qualcomm’s anti-competitive conduct in the licensing of essential patents for 3G mobile technology. In November 2009, the complaints were withdrawn and the investigation closed.

Together with most of the mobile communications industry, Ericsson has been named a defendant in two class action lawsuits in the US, where plaintiffs allege that adverse health effects could be associated with mobile phone usage. The cases are currently pending in the federal court in Pennsylvania and the Superior Court of the District of Columbia. In September 2008, the federal court in Pennsylvania dismissed plaintiffs’ claims as preempted by federal law. Plaintiffs are appealing this decision to the Third Circuit Court of Appeals. The District of Columbia case is stayed pending the outcome of an appeal in a related case.

In April 2007, an Australian company, QPSX Developments Pty Ltd., filed a patent infringement lawsuit against Ericsson and other defendants in the US, alleging that Ericsson infringed a patent related to asynchronous transfer mode (ATM) technology. Currently, all of the asserted patent claims have been rejected as invalid by an examiner in the US Patent and Trademark Office in connection with a reexamination proceeding. QPSX is appealing that decision. On August 27, 2009, the court granted Ericsson’s motion to stay pending the outcome of the reexamination proceeding.

Swedish fiscal authorities have disallowed deductions for sales commission payments via external service companies to sales agents in certain countries. Most of the taxes have already been paid. The decision covering the fiscal year 1999 was appealed. In December 2006, the County Administrative Court in Stockholm rendered a

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judgment in favor of the fiscal authorities. The Administrative Court of Appeal in Stockholm affirmed the County Administrative Court’s judgment. The judgment has been appealed to the Administrative Supreme Court.

For more information on risks related to litigations, see chapter Risk Factors.

MATERIAL CONTRACTS

Material contractual obligations are outlined in Note C33 “Contractual obligations”. These are primarily related to operating leases for office and production facilities, purchase contracts for outsourced manufacturing, R&D and IT operations, and the purchase of components for the Company’s own manufacturing.

Ericsson is party to certain agreements, which include provisions that may take effect or be altered or invalidated by a change in control of the Company as a result of a public takeover offer. However, none of the agreements currently in effect would entail any material consequence to Ericsson due to a change in control of the Company.

CORPORATE GOVERNANCE

In accordance with the Swedish Code of Corporate Governance (the Code), a separate Corporate Governance Report including an Internal Control section has been prepared. The Company is committed to complying with best-practice corporate governance standards on a global level wherever possible. This includes continued compliance with the corporate governance provisions expressed by the Code.

An ethical business

Ericsson’s Code of Business Ethics summarizes the Group’s fundamental policies and directives governing its relationships internally, with its stakeholders and with others. It also sets out how the Group works to achieve and maintain its high standards. There have been no amendments or waivers to Ericsson’s Code of Business Ethics for any Director, member of management or other employee.

Board of Directors 2009/2010

The Annual General Meeting on April 22, 2009, re-elected Michael Treschow as Chairman of the Board and Roxanne S. Austin, Sir Peter L. Bonfield, Börje Ekholm, Ulf J. Johansson, Sverker Martin-Löf, Nancy McKinstry, Anders Nyrén, Carl-Henric Svanberg, and Marcus Wallenberg as Directors of the Board. Anna Guldstrand, Jan Hedlund and Karin Åberg were appointed as union representatives with Monica Bergström, Pehr Claesson and Kristina Davidsson as deputies.

Management

In 2009, Hans Vestberg was appointed new President and CEO, succeeding Carl-Henric Svanberg as of January 1, 2010. The President and CEO is supported by the Group Management Team which, in addition to the President and CEO, consists of heads of Group Functions and heads of business units.

A management system is implemented to ensure that the business is well managed and able to fulfill the objectives of major stakeholders within established risk limits. The system also monitors internal control and compliance with applicable laws, listing requirements and governance codes.

Remuneration

Fees to the members of the Board of Directors and the remuneration of management as well as the 2009 guidelines for remuneration to senior management are reported in Notes to the Consolidated Financial Statements—Note C29, “Information Regarding Members of the Board of Directors, the Management and Employees”.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

As of December 31, 2009, there were no loans outstanding from and no guarantees issued to or assumed by Ericsson for the benefit of any member of the Board of Directors or senior management.

All relevant information regarding remuneration can be found in chapter Remuneration Report.

The Board of Directors’ proposal for guidelines for remuneration to senior management

The Board of Directors proposes the following guidelines for remuneration and other employment terms for the senior management for the period up to the 2011 Annual General Meeting. Compared to the guidelines resolved by the 2009 Annual General Meeting, these guidelines have been restructured and rephrased to better demonstrate the basic principles for remuneration within the Ericsson Group.

Details of how we deliver on our principles and policy, including information on previously decided long-term variable remuneration that has not yet become due for payment, can be found in the Remuneration Report and in Note C29, “Information regarding Members of the Board of Directors, the Management and Employees” in the Annual Report 2009.

2010 Remuneration Policy

Remuneration at Ericsson is based on the principles of performance, competitiveness and fairness. These principles and good practice in Sweden guide our policy to:

•

Attract and retain highly competent, performing and motivated people that have the ability, experience and skill to deliver on the Ericsson strategy.

•

Encourage behavior consistent with Ericsson’s culture and core values of professionalism, respect and perseverance.

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Ensure fairness in reward by delivering total remuneration that is appropriate but not excessive.

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Ensure a total compensation mix of fixed and variable remuneration and benefits that reflects the Company´s principles and is competitive where Ericsson competes for talent.

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Encourage variable remuneration which, first, aligns employees with clear and relevant targets, second, reinforces performance and, third, enables flexible remuneration costs.

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Ensure that all variable remuneration plans have maximum award and vesting limits.

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Encourage employees to deliver sustained performance and build up a personal shareholding in Ericsson, aligning the interests of shareholders and employees.

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Communicate clearly to both employees and shareholders how Ericsson translates remuneration principles and policy into practice.

Group Management

For senior management consisting of the Executive Leadership Team, including the President and CEO, in the following referred to as the “Group Management”, total remuneration consists of fixed salary, short- and long-term variable remuneration, pension and other benefits. Furthermore, the following guidelines apply for Group Management:

•

Variable remuneration is through cash and stock-based programs awarded against specific business targets derived from the long-term business plan approved by the Board of Directors. Targets may include financial targets at either corporate or unit level, operational targets, employee motivation targets and customer satisfaction targets.

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•

With the current composition of Group Management, the Company’s cost during 2010 for the variable remuneration of Group Management can, at a constant share price, amount to between 0 and 140 percent of the aggregate fixed salary cost, all excluding social security costs.

•

All benefits, including pension benefits, follow the competitive practice in the home country taking total compensation into account. The retirement age is normally 60 to 65 years of age.

•

By way of exception, additional arrangements can be made when deemed required. Such additional arrangement shall be limited in time and shall not exceed a period of 36 months and two times the remuneration that the individual concerned would have received had no additional arrangement been made.

•

The mutual notice period may be no more than six months. Upon termination of employment by the Company, severance pay amounting to a maximum of 18 months fixed salary is paid. Notice of termination given by the employee due to significant structural changes, or other events that in a determining manner affect the content of work or the condition for the position, is equated with notice of termination served by the Company.

SUSTAINABILITY AND CORPORATE RESPONSIBILITY

The Company has implemented strong social, environmental and ethical standards supporting risk management and value creation. This commitment generates positive business impacts that benefit society.

Ericsson’s approach to Sustainability and Corporate Responsibility (CR) is integrated into its core business operations and in its relationships with stakeholders. The Board of Directors considers these aspects in governance decision-making. Group level policies and directives ensure consistency across global operations.

Ericsson publishes an annual Sustainability and CR Report which provides additional information.

Minimizing risk

Responsible business practices

Ericsson supports the UN Global Compact and endorses its ten principles regarding human and labor rights, anti-corruption and environmental protection. The Ericsson Group Management System includes policies and directives that cover responsible business practices, such as the Code of Business Ethics, Code of Conduct (CoC), anti-corruption and environmental management. It is reinforced by training, workshops and monitoring, including a global assessment program run by an external assurance provider in which CR criteria represent approximately 20 percent of the total areas assessed.

Supply chain

Suppliers must comply with Ericsson’s CoC and Environmental Requirements. The Company performs regular audits and works with suppliers to ensure measurable and continuous improvements. Priorities from a risk model include network roll- out, tower manufacturing and logistics. Findings are followed up to ensure that lasting improvements are made. One common finding is suppliers’ insufficient routines for ensuring compliance to the CoC requirements in their supply chain.

Design for Environment

Controls are in place to ensure compliance with environmental regulations, e.g. the EU regulation for Registration, Evaluation, Authorization and restriction of Chemicals (REACH). Ericsson’s List of Banned and Restricted Substances was updated in 2009. The Company has to date produced more than 10 million lead-free soldered printed board assemblies with reliability equal to lead-soldered boards.

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Take-back

Ericsson Ecology Management and Product Take-back is a global initiative to take responsibility of products at the end of their life. Close to 100 percent of decommissioned equipment is recycled, exceeding the Waste from Electronic and Electrical Equipment Directive (WEEE) stipulation of 75 percent. During 2009 more than 5,300 tons were collected.

Radio waves and health

Ericsson provides public information on radio waves and health, and supports independent research to further increase knowledge in this area. Ericsson currently co-sponsors about 40 ongoing research projects related to electromagnetic fields, radio waves and health; over 90 studies have been supported since 1996. Independent expert groups and public health authorities, including the World Health Organization, have reviewed the total amount of research and consistently concluded that the balance of evidence does not demonstrate any health effects associated with radio wave exposure from either mobile phones or radio base stations.

Creating value

The environmental opportunity

Information and Communication Technology (ICT) represents about two percent of global CO₂ emissions, but can potentially offset a significant portion of the remaining 98 percent from other sectors. Ericsson takes active measures to ensure that its own carbon footprint will be reduced. A carbon footprint reduction target was set in 2008 to reduce emissions relative to products sold by 40 percent over five years, from in-house activities and the life-cycle impacts of products. In 2009, Ericsson exceeded the annual 10 percent reduction target by:

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A 20 percent reduction in direct emissions from Ericsson activities, through reducing product weight, increasing the share of surface mode transports to 60 percent, and by reducing business travel by approximately 10 percent globally. This led to a 200,000 ton CO₂ reduction.

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A 15 percent reduction in indirect emissions from products in operation was achieved. Reducing the energy consumption of products sold will lead to a 3.5 million ton CO₂ reduction over the product lifetime.

In addition, part of Ericsson’s sustainability strategy is to focus on the role that broadband can play in helping to offset global CO₂ emissions. In 2009, Ericsson focused on sustainable city solutions, and partnered with WWF Sweden to assess the positive impact that ICT has in the creation of low-carbon economies, co-publishing recommendations for policy makers.

Sony Ericsson launched its Greenheart phone, with an in-phone manual, recycled plastics, energy efficient display and waterbased paints decreasing the overall CO₂ emissions of the phone by 15 percent.

Meeting the Millennium Development Goals

Mobile connectivity fuels economic growth, which is particularly vital for the billions of people living at the base of the economic pyramid—the markets of the future. Ericsson is committed to using its technology and competence to help achieve the UN Millennium Development Goals (MDGs), and customer engagement is part of its strategy to meet this aim.

In 2009, a monitoring and evaluation study, conducted in cooperation with Columbia University, revealed that access to mobile communications in the Millennium Villages has concretely contributed to the achievement of the MDGs. It also showed that mobile applications are especially well suited for collecting information and monitoring critical areas such as health, education, security and small business development.

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Ericsson Response

Ericsson Response is a global employee volunteer initiative to rapidly roll out communication solutions and provide telecoms experts to assist disaster relief operations. Ericsson Response cooperates with the UN Office for the Coordination of Humanitarian Affairs, the UN World Food Programme and the International Federation of Red Cross and Red Crescent Societies (IFRC).

In 2009, support was provided to relief workers in saving children in Southern Sudan and after heavy flooding in Panama. Continued support was given to the UN in establishing operations in the Central African Republic and in the Democratic Republic of Congo.

In recognition of performance

The Millennium Villages Project received a Global Telecoms Business Innovation Award.

Ericsson China was named the “China Green Benchmark Company” for the second year in a row. Ericsson was also recognized as the “Green Pioneer” at the 2009 “Korea-EU Industrial Cooperation Day”. In the UK Brand Emissions Leaders survey, Ericsson was named one of the brand leaders in reducing its carbon emissions.

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RISK MANAGEMENT

Ericsson’s Board of Directors is actively engaged in the Company’s risk management. Risks related to set long-term objectives are discussed and strategies formally approved by the Board as part of the annual strategy process. Risks related to annual targets for the Company are also reviewed by the Board and then monitored continuously during the year.

Operational risk management is integrated within the Ericsson Group Management System to ensure effectiveness, efficiency, business continuity and compliance with corporate governance, legal and other requirements. Certain transactional risks require specific Board approval, e.g. material acquisitions, management remuneration, borrowing or customer finance in excess of pre-defined limits.

For more information on risks related to Ericsson’s business, see chapter Risk Factors.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

Strategic and tactical risks

In the annual strategy and target setting process, objectives are set for the next five years, risks and opportunities are assessed and strategies are developed to achieve the objectives. To ensure that actions are taken to realize the strategies, focus areas are identified in target setting and planning for the coming year.

In 2009, the general economic downturn in 2008–2009 and the consequences for the business were assessed in relation to both strategy and target setting. For the setting of long-term objectives, important industry and market fundamentals were analyzed and risks and opportunities evaluated. Near-term, a continued focus on cost management and a strong liquidity were emphasized due to the increased difficulties of forecasting customer demand.

Risks and opportunities were identified and analyzed in the following balanced scorecard perspectives:

Financial perspective

•

Top line growth: the decline caused by reduction in 2G spend has yet to be offset by growth in 3G and LTE driven by data traffic in mobile broadband networks. Ericsson will focus on converged solutions, IMS, multi-standard radios and services plus opportunities in transmission and evolved EDGE.

•

Margin improvement: addressed by platform consolidation, software reuse, reduced number of sites and rapid transformation of transferred managed services operations and integration of acquired Nortel units.

•

Cash flow: continued focus on working capital improvements. A strong cash position is deemed important for flexibility to execute on potential market opportunities.

•

JVs: continued cooperation with JVs and co-owners needed to make them profitable again as soon as possible.

Customer perspective

•

Convergence of the telecom, datacom and media industries results in new forms of competition and customers. Ericsson will focus on competitive offerings for mobile broadband, converged core solutions, network management systems and systems integration.

•

The competitive landscape is constantly changing, as consolidation continues among customers and vendors. Continued investments in R&D for premium, cost-effective and future-proof solutions are essential. Customer intimacy for network planning and migration is key for forging customer partnerships.

•

Ericsson’s installed base is an important asset for sales of upgrades, network convergence and systems integration. Now also Nortel’s US customer base is added, providing additional opportunities in CDMA and LTE.

•

Continuous follow-up of quality of delivered products and services to be maintained to ensure customer satisfaction.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

Market position perspective

•

Continued strong competition in the market is addressed through cost reductions and premium end-to-end solutions, based on continued leadership in R&D and services.

•

Market leadership is being safeguarded through rapid technological development and establishment of a key player position in network transformation—IP, mobile broadband, multimedia and consulting.

•

Backhaul demand is growing, driven by strong data traffic. Ericsson will seize this opportunity by harvesting its leading microwave position.

•

The Company will also leverage the broader product portfolio created through acquisitions, promote OneVoice and IMS for LTE networks, and continue its strong Design for Environment program to lower operators’ cost of ownership and drive a positive environmental impact.

•

The Company will capitalize on the dramatic improvement of its US footprint and its Silicon Valley presence.

•

The joint ventures will need to execute their restructuring programs and also address multiple operating systems and new market players, e.g. Google/Android. Sony Ericsson will focus its product portfolio more on high-end handsets.

Operations and people perspectives

•

Restructuring and other activities have been defined for margin protection, including industrialization of managed services.

•

Continued focus in R&D on shortened lead times for product/solution development.

•

Increased flexibility and responsiveness will be achieved through efforts to shorten lead times also for delivery of hardware and software.

•

The Company must ensure it has top competence in key technology areas and systems integration.

•

Empowerment and remuneration are important aspects to continue to be a competitive and attractive employer.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

Operational and financial risks

Operational risks are owned and managed by operational units. Risk management is embedded in various process controls, such as decision tollgates and approvals. Certain cross-process risks, such as information security/IT, corporate responsibility and business continuity as well as insurable risks are centrally coordinated. Financial risk management is governed by a Group policy and carried out by the Treasury and Customer Finance functions, both supervised by the Finance Committee of the Board of Directors. The policy governs risk exposures related to foreign exchange, liquidity/ financing, interest rates, credit risk and market price risk in equity instruments. For further information on financial risk management, see Notes to the Consolidated Financial Statements – Note C14, “Trade Receivables and Customer Finance”, Note C19, “Interest-Bearing Liabilities” and Note C20, “Financial Risk Management and Financial Instruments”.

Compliance risks

Ericsson has implemented Group policies and directives to ensure compliance with applicable laws and regulations, including a Code of Business Ethics. Risk management is integrated in the Company’s business processes. Policies and controls are implemented to ensure compliance with financial reporting standards and stock market regulations, e.g. the US Sarbanes-Oxley Act.

Monitoring and audits

Company management monitors the compliance with policies, directives and processes through internal self-assessment within all units. This is complemented by internal and external audits. External financial audits are performed by PricewaterhouseCoopers, and ISO/management system audits by Det Norske Veritas, DNV.

PARENT COMPANY

The Parent Company business consists mainly of corporate management, holding company functions and internal banking activities as well as customer credit management, performed on a commission basis by Ericsson Credit AB.

The Parent Company is the owner of a substantial part of Ericsson’s intellectual property rights. It manages the patent portfolio, including patent applications, licensing and cross-licensing of patents and defending of patents in litigations.

The Parent Company has 6 (7) branch offices. In total, the Group has 65 (62) branch and representative offices.

Financial information

Net sales for the year amounted to SEK 0.3 (5.1) billion and income after financial items was SEK 8.1 (19.4) billion.

Effective January 1, 2009, the right to all license revenues from third parties related to patent licenses was transferred to Ericsson AB, a wholly owned subsidiary, and consequently net sales in 2009 were insignificant compared to 2008. TEMS SWEDEN AB was sold during the year.

Exports accounted for 100 (70) percent of net sales. The Parent Company had no sales in 2009 or 2008 to subsidiaries, while 45 (46) percent of total purchases of goods and services were from such companies.

Major changes in the Parent Company’s financial position for the year include:

•

Investments in the joint venture ST-Ericsson of SEK 8.6 billion.

•

Decreased current and non-current receivables from subsidiaries of SEK 10.1 billion.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

•

Decreased other current receivables of SEK 2.0 billion.

•

Increased cash, cash equivalents and short-term investments of SEK 3.2 billion.

•

Increased current and non-current liabilities to subsidiaries of SEK 5.0 billion.

•

Decreased other current liabilities of SEK 7.4 billion.

At year end, cash, cash equivalents and short-term investments amounted to SEK 62.4 (59.2) billion.

Share information

In the second quarter, as decided by the Board of Directors with authorization from the Annual General Meeting, a stock issue and a subsequent repurchase was made for the share-based employee remuneration program. 27 million Class C shares were issued and later repurchased as treasury stock. The shares were converted into Class B shares. The quotient value of the repurchased shares was SEK 135.0 million, representing less than 1 percent of capital stock, and the acquisition cost was SEK 135.1 million.

As per December 31, 2009, the total number of shares was 3,273,351,735, of which 261,755,983 Class A shares, each carrying one vote, and 3,011,595,752 Class B shares, each carrying one-tenth of one vote. The two largest shareholders at year end were Investor and Industrivärden holding 19.33 and 13.62 percent respectively of the voting rights in the Parent Company.

In accordance with the conditions of the Long-Term Variable Remuneration Program (LTV) for Ericsson employees, 9,087,564 treasury shares were sold or distributed to employees in 2009. The quotient value of these shares was SEK 45.4 million, representing less than 1 percent of capital stock, and compensation received amounted to SEK 213.2 million. The holding of treasury stock at December 31, 2009, was 78,978,533 Class B shares. The quotient value of these shares is SEK 394.9 million, representing 2 percent of capital stock, and the related acquisition cost amounts to SEK 672.4 million.

Proposed disposition of earnings

The Board of Directors proposes that a dividend of SEK 2.00 (1.85 in 2008) per share be paid to shareholders duly registered on the record date April 16, 2010, and that the Parent Company shall retain the remaining part of non-restricted equity. The Class B treasury shares held by the Parent Company are not entitled to receive a dividend. Assuming that no treasury shares remain on the record date, the Board of Directors proposes that earnings be distributed as follows:


Amount to be paid to the shareholders		SEK 6,546,703,470
Amount to be retained by the Parent Company		SEK 35,406,164,930

Total non-restricted equity of the Parent Company		SEK 41,952,868,400

As a basis for its dividend proposal, the Board of Directors has made an assessment in accordance with Chapter 18, Section 4 of the Swedish Companies Act of the Parent Company’s and the Group’s need for financial resources as well as the Parent Company’s and the Group’s liquidity, financial position in other respects and long-term ability to meet their commitments. The Group reports an equity ratio of 52 (50) percent and a net cash amount of SEK 36.1 (34.7) billion.

The Board of Directors has also considered the Parent Company’s result and financial position and the Group’s position in general. In this respect, the Board of Directors has taken into account known commitments that may have an impact on the financial positions of the Parent Company and its subsidiaries.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

The proposed dividend does not limit the Group’s ability to make investments or raise funds, and it is our assessment that the proposed dividend is well-balanced considering the nature, scope and risks of the business activities as well as the capital requirements for the Parent Company and the Group.

POST-CLOSING EVENTS

In an auction on November 25, 2009, Ericsson acquired certain assets relating to Nortel’s GSM business in North America for a cash purchase price of USD 70 million. Closing is expected by March 31, 2010, subject to approval by US and Canadian bankruptcy courts and satisfying normal regulatory conditions.

On January 12, 2010, Ericsson announced an agreement to acquire Pride Spa, an Italian systems integration company with approximately 1,000 employees.

On January 18, 2010, the Company appointed Rima Qureshi and Magnus Mandersson as heads of business unit CDMA and Global Services respectively. Both are members of the Executive Leadership Team.

In January 2010, as per the trust’s funding requirements, the Company made an employer contribution payment of SEK 730 million to the Swedish pension trust fund.

On February 8, 2010, the Company announced the appointment of Mats H. Olsson and Angel Ruiz as members of the Executive Leadership Team as well as a reorganization of its 23 market units into ten regions.

On March 31, 2010, Ericsson announced that Marita Hellberg, Senior Vice President and Head of Group Function Human Resources and Organization will take over as Head of Human Resources of Ericsson’s new region China and North East Asia from July 1st.

On April 1, 2010 Ericsson announced that the acquisition of substantially all the assets of Nortel’s GSM business had been completed, effective March 31. The closing follows the announcement on November 25, 2009, that Ericsson had entered into an asset purchase agreement for the assets of Nortel’s GSM business in North America.

On April 21, 2010, the Company announced that it had entered into a share purchase agreement to acquire Nortel’s majority shareholding (50%+1 share) in LG-Nortel, the joint venture of LG Electronics and Nortel Networks. Purchase price is USD 242 million on a cash and debt free basis. The transaction is subject to customary regulatory approvals.

BOARD ASSURANCE

The Board of Directors and the President declare that the consolidated financial statements have been prepared in accordance with IFRS, as issued by the IASB, and give a fair view of the Group’s financial position and results of operations. The financial statements of the Parent Company have been prepared in accordance with generally accepted accounting principles in Sweden and give a fair view of the Parent Company’s financial position and results of operations.

The Board of Directors’ Report for the Ericsson Group and the Parent Company provides a fair view of the development of the Group’s and the Parent Company’s operations, financial position and results of operations and describes material risks and uncertainties facing the Parent Company and the companies included in the Group.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders of Telefonaktiebolaget LM Ericsson (publ)

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, shareholders equity and cash flows present fairly, in all material respects, the financial position of Telefonaktiebolaget LM Ericsson and its subsidiaries at December 31, 2009 and December 31, 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board and in conformity with International Financial Reporting Standards as adopted by the European Union. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in item 15(b) of the Annual Report on Form 20-F. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As described in Management’s Report on Internal Control Over Financial Reporting included in Item 15 (b), management has excluded Nortel from its assessment of internal control over financial reporting as of December 31, 2009 because it was acquired by the Company in a purchase business combination on November 13, 2009. We have also excluded Nortel from our audit of internal control over financial reporting.

The Nortel operation is part of the Network segment whose total assets and total revenues represent 0,6% and 1,3%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2009.

Stockholm, April 21, 2010

PricewaterhouseCoopers AB

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

CONSOLIDATED INCOME STATEMENT


Years ended December 31, SEK million	Notes	2009		2008		2007
Net sales	C3, C4	206,477		208,930		187,780
Cost of sales		–136,278		–134,661		–114,059

Gross income		70,199		74,269		73,721
Gross margin %		34.0	%	35.5	%	39.3	%

Research and development expenses		–33,055		–33,584		–28,842

Selling and administrative expenses		–26,908		–26,974		–23,199

Operating expenses		–59,963		–60,558		–52,041

Other operating income and expenses	C6	3,082		2,977		1,734

Operating income before shares in earnings of joint ventures and associated companies		13,318		16,688		23,414
Operating margin before shares in earnings of joint ventures and associated companies (%)		6.5	%	8.0	%	12.5	%

Share in earnings of joint ventures and associated companies	C12	–7,400		–436		7,232

Operating income		5,918		16,252		30,646
Financial income	C7	1,874		3,458		1,778
Financial expenses	C7	–1,549		–2,484		–1,695

Income after financial items		6,243		17,226		30,729
Taxes	C8	–2,116		–5,559		–8,594

Net income		4,127		11,667		22,135

Net income attributable to:
Stockholders of the Parent Company		3,672		11,273		21,836
Minority interest		455		394		299

Other information
Average number of shares, basic (million)¹⁾	C9	3,190		3,183		3,178
Earnings per share attributable to stockholders of the Parent Company, basic (SEK)¹⁾²⁾	C9	1.15		3.54		6.87
Earnings per share attributable to stockholders of the Parent Company, diluted (SEK)¹⁾²⁾	C9	1.14		3.52		6.84

1)	A reverse split 1:5 was made in June 2008. Comparative figures are restated accordingly.

2)	Based on Net income attributable to stockholders of the Parent Company.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME


Years ended December 31, SEK million	Notes	2009	2008	2007
Net income		4,127	11,667	22,135

Other comprehensive income
Actuarial gains and losses, and the effect of the asset ceiling, related to pensions	C16	–605	–4,015	1,208
Revaluation of other investments in shares and participations Fair value remeasurement	C16	–2	–7	2
Cash Flow hedges
Gains/losses arising during the period	C16	672	–5,080	584
Reclassification adjustments for gains/losses included in profit or loss	C16	3,850	1,192	–1,390
Adjustments for amounts transferred to initial carrying amount of hedged items	C16	–1,029	—	—
Changes in cumulative translation adjustments	C16	–1,361	8,528	–797
Tax on items relating to components of OCI	C16	–1,040	2,330	–73

Total other comprehensive income		485	2,948	–466

Total comprehensive income		4,612	14,615	21,669

Total Comprehensive Income attributable to:
Stockholders of the Parent Company		4,211	13,988	21,371
Minority interest		401	627	298

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

CONSOLIDATED BALANCE SHEET


December 31, SEK million	Notes	2009	2008
ASSETS
Non-current assets
Intangible assets	C10
Capitalized development expenses		2,079	2,782
Goodwill		27,375	24,877
Intellectual property rights, brands and other intangible assets		18,739	20,587

Property, plant and equipment	C11, C26, C27	9,606	9,995
Financial assets
Equity in joint ventures and associated companies	C12	11,578	7,988
Other investments in shares and participations	C12	256	309
Customer finance, non-current	C12	830	846
Other financial assets, non-current	C12	2,577	4,917
Deferred tax assets	C8	14,327	14,858

		87,367	87,159
Current assets
Inventories	C13	22,718	27,836

Trade receivables	C14	66,410	75,891
Customer finance, current	C14	1,444	1,975
Other current receivables	C15	15,146	17,818

Short-term investments	C20	53,926	37,192
Cash and cash equivalents	C25	22,798	37,813

		182,442	198,525
Total assets		269,809	285,684

EQUITY AND LIABILITIES
Equity
Stockholders’ equity	C16	139,870	140,823
Minority interest in equity of subsidiaries	C16	1,157	1,261

		141,027	142,084
Non-current liabilities
Post-employment benefits	C17	8,533	9,873
Provisions, non-current	C18	461	311
Deferred tax liabilities	C8	2,270	2,738
Borrowings, non-current	C19, C20	29,996	24,939
Other non-current liabilities		2,035	1,622

		43,295	39,483
Current liabilities
Provisions, current	C18	11,970	14,039
Borrowings, current	C19, C20	2,124	5,542
Trade payables	C22	18,864	23,504
Other current liabilities	C21	52,529	61,032

		85,487	104,117
Total equity and liabilities¹⁾		269,809	285,684

1)	Of which interest-bearing liabilities and post-employment benefits SEK 40,653 million (SEK 40,354 million in 2008).

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

CONSOLIDATED STATEMENT OF CASH FLOWS


January–December, SEK million	Notes	2009	2008	2007
Operating activities
Net income		4,127	11,667	22,135
Adjustments to reconcile net income to cash	C25	16,856	14,318	7,172

		20,983	25,985	29,307

Changes in operating net assets
Inventories		5,207	–3,927	–445
Customer finance, current and non-current		598	549	365
Trade receivables		7,668	–11,434	–7,467
Trade payables		–3,522	4,794	–1,558
Provisions and post-employment benefits		–2,950	3,830	–4,401
Other operating assets and liabilities, net		–3,508	4,203	3,409

		3,493	–1,985	–10,097

Cash flow from operating activities		24,476	24,000	19,210

Investing activities
Investments in property, plant and equipment	C11	–4,006	–4,133	–4,319
Sales of property, plant and equipment		534	1,373	152
Acquisitions of subsidiaries and other operations	C25, C26	–19,321	–74	–26,292
Divestments of subsidiaries and other operations	C25, C26	1,239	1,910	84
Product development	C10	–1,443	–1,409	–1,053
Other investing activities		2,606	944	396
Short-term investments		–17,071	–7,155	3,499

Cash flow from investing activities		–37,462	–8,544	–27,533

Cash flow before financing activities		–12,986	15,456	–8,323

Financing activities
Proceeds from issuance of borrowings		14,153	5,245	15,587
Repayment of borrowings		–9,804	–4,216	–1,291
Sale of own stock and options exercised		69	3	94
Dividends paid		–6,318	–8,240	–8,132
Other financing activities		199	–	–

Cash flow from financing activities		–1,701	–7,208	6,258

Effect of exchange rate changes on cash		–328	1,255	406
Net change in cash		–15,015	9,503	–1,659

Cash and cash equivalents, beginning of period		37,813	28,310	29,969

Cash and cash equivalents, end of period	C25	22,798	37,813	28,310

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY


	Capital stock	Additional paid in capital	Revaluation of other investments in shares and participations	Cash flow hedges	Cumulative translation adjustments	Retained earnings	Stockholders’ equity	Minority interests	Total equity
January 1, 2009	16,232	24,731	–1	–2,356	2,124	100,093	140,823	1,261	142,084

Total comprehensive income	—	—	–3	2,434	–1,461	3,241	4,211	401	4,612

Transactions with owners
Stock issue	135	—	—	—	—	—	135	—	135
Sale of own shares	—	—	—	—	—	75	75	—	75
Repurchase of own shares	—	—	—	—	—	–135	–135	—	–135
Stock Purchase and Stock Option Plans	—	—	—	—	—	658	658	—	658
Dividends paid	—	—	—	—	—	–5,897	–5,897	–421	–6,318
Business combinations	—	—	—	—	—	—	—	–84	–84

December 31, 2009	16,367	24,731	–4	78	663	98,035	139,870	1,157	141,027


January 1, 2008	16,132	24,731	5	307	–6,345	99,282	134,112	940	135,052

Total comprehensive income	—	—	–6	–2,663	8,469	8,188	13,988	627	14,615

Transactions with owners
Stock issue	100	—	—	—	—	—	100	—	100
Sale of own shares	—	—	—	—	—	88	88	—	88
Repurchase of own shares	—	—	—	—	—	–100	–100	—	–100
Stock Purchase and Stock Option Plans	—	—	—	—	—	589	589	—	589
Dividends paid	—	—	—	—	—	–7,954	–7,954	–286	–8,240
Business combinations	—	—	—	—	—	—	—	–20	–20

December 31, 2008	16,232	24,731	–1	–2,356	2,124	100,093	140,823	1,261	142,084


January 1, 2007	16,132	24,731	3	877	–5,569	83,939	120,113	782	120,895

Total comprehensive income	—	—	2	–570	–776	22,715	21,371	298	21,669

Transactions with owners
Sale of own shares	—	—	—	—	—	62	62	—	62
Stock Purchase and Stock Option Plans	—	—	—	—	—	509	509	—	509
Dividends paid	—	—	—	—	—	–7,943	–7,943	–189	–8,132
Business combinations	—	—	—	—	—	—	—	49	49

December 31, 2007	16,132	24,731	5	307	–6,345	99,282	134,112	940	135,052

ERICSSON ANNUAL REPORT ON FORM 20-F 2008

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

CONTENTS


C1	Significant Accounting Policies	49
C2	Critical Accounting Estimates and Judgments	66
C3	Segment Information	70
C4	Net Sales	75
C5	Expenses by Nature	76
C6	Other Operating Income and Expenses	77
C7	Financial Income and Expenses	77
C8	Taxes	78
C9	Earnings per Share	80
C10	Intangible Assets	81
C11	Property, Plant and Equipment	84
C12	Financial Assets, Non-Current	86
C13	Inventories	88
C14	Trade Receivables and Customer Finance	89
C15	Other Current Receivables	92
C16	Equity and Other Comprehensive Income	93
C17	Post-Employment Benefits	98
C18	Provisions	106
C19	Interest-bearing Liabilities	107
C20	Financial Risk Management and Financial Instruments	108
C21	Other Current Liabilities	116
C22	Trade Payables	117
C23	Assets Pledged as Collateral	117
C24	Contingent Liabilities	117
C25	Statement of Cash Flows	117
C26	Business Combinations	119
C27	Leasing	124
C28	Tax Assessment Values in Sweden	125
C29	Information Regarding Members of the Board of Directors, the Management and Employees	126
C30	Related Party Transactions	137
C31	Fees to Auditors	140
C32	Events after the Balance Sheet Date	140
C33	Contractual Obligations	141

C1 SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements comprise Telefonaktiebolaget LM Ericsson, the Parent Company, and its subsidiaries (“the Company”) and the Company’s interests in joint ventures and associated companies. The Parent Company is domiciled in Sweden at Torshamnsgatan 23, SE-164 83 Stockholm.

The consolidated financial statements for the year ended December 31, 2009, have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the EU and RFR 1.2 “Additional rules for Group Accounting”, related interpretations issued by the Swedish Financial Reporting Board (Rådet för Finansiell Rapportering), and the Swedish Annual Accounts Act. Further, the Company’s financial statements are prepared in accordance with IFRS as issued by IASB.

The financial statements were approved by the Board of Directors on February 26, 2010. The balance sheets and income statements are subject to approval by the annual meeting of shareholders.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

New standards, amendments of standards and interpretations, effective as from January 1, 2009, changing presentation or disclosure:

•

IAS 1 (Revised), “Presentation of Financial Statements”. The revised standard requires all non-owner changes in equity to be shown in a performance statement. The Company therefore presents two statements, the Income Statement and a Statement of Comprehensive Income. Also, to improve the understanding of the Company’s financial performance, a new subtotal line has been added in the Income Statement, “Operating income before share in earnings of joint ventures and associated companies”. This is to distinguish between operating income from operations consolidated and from shares in earnings of joint ventures and associated companies accounted for using the equity method.

•

IFRS 7 “Financial instruments—Disclosures” (amendment). The amendment requires enhanced disclosures about fair value measurement and liquidity risk. In particular, the amendment requires disclosure of fair value measurements by level of a fair value measurement hierarchy. As the change in accounting policy only results in additional disclosure, there is no impact on earning per share.

•

IFRS 8 “Operating Segments”. This standard replaces IAS 14 “Segment Reporting” and requires a “management approach”, under which segment information is presented on the same basis as that used for internal reporting to the Chief Operating Decision Maker (CODM). In Ericsson, the Group Management Team is defined as the CODM function. The new standard has not resulted in any changes of the reportable segments, except for changes in the content of disclosures in note C3 Segment Information.

New standards, amendments of standards and interpretations, effective as from January 1, 2009, changing financial result and position and disclosures:

•

IFRS 2 (amendment), “Share-based payment” deals with vesting conditions and cancellations. It clarifies that vesting conditions are service conditions and performance conditions only. Other features of a share-based payment are not vesting conditions. These features would need to be included in the grant date fair value for transactions with employees and others providing similar services. In the period when an employee takes a refund of previously made contributions (and stops making further contributions) all remaining compensation expense is recognized. Non-vesting conditions would not impact the number of awards expected to vest or valuation thereof subsequent to grant date. The amendment has not had a material impact on the Company’s financial statements.

•

Revised IAS 23, “Borrowing Costs” and “Improvements to IFRSs”, (May 2008). In respect of borrowing costs relating to qualifying assets for which the commencement date for capitalization is on or after January 1, 2009, the Company capitalizes borrowing costs directly attributable to the acquisition, design, construction or production of a qualifying asset as part of the cost of that asset. Previously the Company immediately recognized all borrowing costs as an expense. The change in IAS 23 has not had a material impact on the Company’s financial statements. Any capitalization of borrowing costs would normally relate to internally generated intangible assets (see note C10).

The following amendments and IFRIC:s have not had any material impact on the Company’s financial statements:

•

IAS 32 and IAS 1 (Amendments) “Puttable Financial Instruments” and “Obligations Arising on Liquidation”.

•

IAS 39 (Amendment) “Financial instruments: Recognition and Measurement—Eligible hedged Items.”

•

Amendments to IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

•

Amendments to IFRIC Interpretation 9 and IAS 39. Reassessment of Embedded Derivatives.

•

IFRIC 13 “Customer Loyalty Programmes” addresses the accounting by companies that operate, or otherwise participate in, customer loyalty programmes for their customers.

•

IFRIC 15 “Agreements for Construction of Real Estate”. In note C4 Net Sales the Company discloses the split between revenue related to IAS 11 and IAS 18.

•

IFRIC 16 “Hedges of a Net Investment in a Foreign Operation”.

•

IFRIC 18 “Transfers of Assets from Customers”.

•

Improvements to IFRSs, published in May 2008 and effective from January 1, 2009

•

Improvements to IFRSs, published in April 2009 and effective from January 1, 2010.

For information on “New standards and interpretations not yet adopted” please see page 65.

Changes in financial reporting structure

The joint venture ST-Ericsson was formed on February 3, 2009. By merging STMicroelectronics’ wireless business and Ericsson Mobile Platforms, a large company in the semiconductor industry was created. ST-Ericsson is reported as a separate operating segment, accounted for using the equity method.

Definition of Other comprehensive income (OCI)

OCI comprises items of income and expense (including reclassification adjustments) that are not recognized in the income statement as required or permitted by IFRS. See also comments under IAS 1 above.

Basis of presentation

The financial statements are presented in millions of Swedish Krona (SEK). They are prepared on a historical cost basis, except for certain financial assets and liabilities that are stated at fair value: derivative financial instruments, financial instruments held for trading, financial instruments classified as available-for-sale and plan assets related to defined benefit pension plans.

Basis of consolidation

The consolidated financial statements are prepared in accordance with the purchase method. Accordingly, consolidated stockholders’ equity includes equity in subsidiaries, joint ventures and associated companies earned only after their acquisition.

Subsidiaries are all companies in which Ericsson has an ownership interest, directly or indirectly, including effective potential voting rights, has the power to govern the financial and operating policies generally associated with ownership of more than one half of the voting rights or in which Ericsson by agreement has control. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

Intra-group balances and any unrealized income and expense arising from intra-group transactions are fully eliminated in preparing the consolidated financial statements. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.

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Business combinations

At the acquisition of a business, the cost of the acquisition, being the purchase price, is measured as the fair value of the assets given, and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. The acquisition cost is allocated to acquired assets, liabilities and contingent liabilities based upon appraisals made, including assets that were not recognized on the acquired entity’s balance sheet, for example intangible assets such as customer relations, brands and patents. Goodwill arises when the purchase price exceeds the fair value of recognizable acquired net assets. Final amounts must be established within one year after the transaction date at the latest.

Minority interest

The Company treats transactions with minority interests as transactions with external parties. Disposals of minority interests are recognized as gains and losses in the income statement. Purchases from minority interests result in goodwill if there is a difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary.

Joint ventures and associated companies

Investments in joint ventures and associated companies, i.e. where voting stock interest, including effective potential voting rights, is at least 20 percent but not more than 50 percent, or where a corresponding influence is obtained through agreement, are accounted for in accordance with the equity method. Under the equity method, the investment in an associate is initially recognized at cost and the carrying amount is increased or decreased to recognize the investor’s share of the profit or loss of the investee after the date of acquisition.

Ericsson’s share of income before taxes is reported in item “Share in earnings of joint ventures and associated companies”, included in Operating Income. This is due to that these interests are held for operating rather than investing or financial purposes. Ericsson’s share of income taxes related to joint ventures and associated companies is reported under the line item Taxes in the income statement.

Unrealized gains on transactions between the Company and its associated companies and joint ventures are eliminated to the extent of the Company’s interest in these entities. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

Shares in earnings of joint ventures and associated companies included in consolidated equity which are undistributed are reported in Retained earnings in the balance sheet.

Impairment testing as well as recognition or reversal of impairment of investments in each joint venture is performed in the same manner as for intangible assets other than goodwill. The entire carrying amount of each investment, including goodwill, is tested as a single asset. See also description under “Intangible assets other than goodwill” below.

Foreign currency remeasurement and translation

Items included in the financial statements of each entity of the Company are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Swedish Krona (SEK), which is the Parent Company’s functional and presentation currency.

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Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement, unless deferred in OCI under the hedge accounting practices as described below.

Changes in the fair value of monetary securities denominated in foreign currency classified as available-for-sale are analyzed between translation differences resulting from changes in the amortized cost of the security and other changes in the carrying amount of the security. Translation differences related to changes in the amortized cost are recognized in profit or loss, and other changes in the carrying amount are recognized in OCI.

Translation differences on non-monetary financial assets and liabilities are reported as part of the fair value gain or loss.

Group companies

The results and financial position of all the group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

•

assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;

•

income and expenses for each income statement are translated at average exchange rates; and

•

all resulting net exchange differences are recognized as a separate component of OCI.

On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are accounted for in OCI. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in OCI are recognized in the income statement as part of the gain or loss on sale.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

There is no significant impact due to a currency of a hyperinflationary economy.

Statement of cash flows

The statement of cash flow is prepared in accordance with the indirect method. Cash flows in foreign subsidiaries are translated at the average exchange rate during the period. Payments for subsidiaries acquired or divested are reported as cash flow from investing activities, net of cash and cash equivalents acquired or disposed of, respectively.

Cash and cash equivalents consist of cash, bank, and short-term investments that are highly liquid monetary financial instruments with a remaining maturity of three months or less at the date of acquisition.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Revenue recognition

The Company offers a comprehensive portfolio of telecommunication and data communication systems, multimedia solutions and professional services, covering a range of technologies.

The contracts are of four main types:

•

delivery-type.

•

contracts for various types of services, for example multi-year managed services contracts.

•

license agreements for the use of the Company’s technology or intellectual property rights, not being a part of another product.

•

construction-type.

The majority of the Company’s products and services are sold under delivery-type contracts including multiple elements, such as base stations, base station controllers, mobile switching centers, routers, microwave transmission links, various software products and related installation and integration services. Such contract elements generally have individual item prices in agreed price lists per customer.

Sales are recorded net of value added taxes, goods returned, trade discounts and rebates. Revenue is recognized with reference to all significant contractual terms when the product or service has been delivered, when the revenue amount is fixed or determinable, and when collection is reasonably assured. Specific contractual performance and acceptance criteria may impact the timing and amounts of revenue recognized.

The profitability of individual contracts is periodically assessed, and provisions for any estimated losses are made immediately when losses are probable.

For sales between consolidated companies, associated companies, joint ventures and segments, the Company applies arm’s length pricing.

Definitions of contract types and related more specific revenue recognition criteria

Different revenue recognition methods, based on either IAS 18 “Revenue” or IAS 11 “Construction contracts”, are applied based on the solutions provided to customers, the nature and sophistication of the technology involved and the contract conditions in each case.

The contract types that are accounted for in accordance with IAS 18 are:

•

Delivery-type contracts, i.e. contracts for delivery of a product or a combination of products to form a whole or a part of a network as well as delivery of stand-alone products. Medium-size and large delivery type contracts generally include multiple elements. Such elements are normally standardized types of equipment or software as well as services, such as network rollout.

Revenue is recognized when risks and rewards have been transferred to the customer, normally stipulated in the contractual terms of trade. For delivery-type contracts with multiple elements, revenue is allocated to each element based on relative fair values. If there are undelivered elements essential to the functionality of delivered elements, the Company defers recognition of revenue until all elements essential to the functionality have been delivered.

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•

Contracts for services include various types of services such as: training, consulting, engineering, installation, multi-year managed services and hosting. Revenue is generally recognized when the services have been provided. Revenue for managed service contracts and other services contracts covering longer periods is recognized pro rata over the contract period.

•

Contracts generating license fees from third parties for the use of the Company’s technology or intellectual property rights. Revenue is normally recognized based on sales of products sold to the customer/ licensee.

The contract type that is accounted for in accordance with IAS 11 is:

•

Construction-type contracts. In general, a construction-type contract is a contract where the Company supplies to a customer, a complete network, which to a large extent is based upon new technology or includes major components which are specifically designed for the customer. Revenues from construction-type contracts are recognized according to stage of completion, generally using the milestone output method.

Earnings per share

Basic earnings per share are calculated by dividing net income attributable to stockholders of the Parent Company by the weighted average number of shares outstanding (total number of shares less treasury stock) during the year.

Diluted earnings per share are calculated by dividing net income attributable to stockholders of the Parent Company, when appropriate adjusted by the sum of the weighted average number of ordinary shares outstanding and dilutive potential ordinary shares. Potential ordinary shares are treated as dilutive when, and only when, their conversion to ordinary shares would decrease earnings per share.

Stock options and rights to matching shares are considered dilutive when the actual fulfillment of any performance conditions as of the reporting date would give a right to ordinary shares. Furthermore, stock options are considered dilutive only when the exercise price is lower than the period’s average share price.

Financial assets

Financial assets are recognized when the Company becomes a party to the contractual provisions of the instrument. Regular purchases and sales of financial assets are recognized on the settlement date.

Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Separate assets or liabilities are recognized if any rights and obligations are created or retained in the transfer.

The Company classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables, and available for sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.

Financial assets are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognized at fair value, and transaction costs are expensed in the income statement.

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The fair values of quoted financial investments and derivatives are based on quoted market prices or rates. If official rates or market prices are not available, fair values are calculated by discounting the expected future cash flows at prevailing interest rates. Valuations of FX options and Interest Rate Guarantees (IRG) are made by using a Black-Scholes formula. Inputs to the valuations are market prices for implied volatility, foreign exchange and interest rates.

Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling or repurchasing in the near term.

Derivatives are classified as held for trading, unless they are designated as hedges. Assets in this category are classified as current assets.

Gains or losses arising from changes in the fair values of the “financial assets at fair value through profit or loss”—category (excl derivatives) are presented in the income statement within Financial income in the period in which they arise. Derivatives are presented in the income statement either as cost of sales, other operating income, financial income or financial expense, depending on the intent with the transaction.

Loans and receivables

Receivables are subsequently measured at amortized cost using the effective interest rate method, less allowances for impairment charges. Trade receivables include amounts due from customers. The balance represents amounts billed to customer as well as amounts where risk and rewards have been transferred to the customer but the invoice has not yet been issued.

Collectibility of the receivables is assessed for purposes of initial revenue recognition.

Available-for-sale financial assets

Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date.

Dividends on available-for-sale equity instruments are recognized in the income statement as part of financial income when the Company’s right to receive payments is established.

Changes in the fair value of monetary securities denominated in a foreign currency and classified as available-for-sale are analyzed between translation differences resulting from changes in amortized cost of the security and other changes in the carrying amount of the security. The translation differences on monetary securities are recognized in profit or loss; translation differences on non-monetary securities are recognized in OCI. Changes in the fair value of monetary and non-monetary securities classified as available-for-sale are recognized in OCI. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments previously recognized in OCI are included in the income statement.

Impairment

At each balance sheet date, the Company assesses whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a

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significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the security is impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss—is removed from OCI and recognized in the income statement. Impairment losses recognized in the income statement on equity instruments are not reversed through the income statement.

An assessment of impairment of receivables is performed when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivable. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognized in the income statement within selling expenses. When a trade receivable is finally established as uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited to selling expenses in the income statement.

Financial Liabilities

Financial liabilities are recognized when the Company becomes bound to the contractual obligations of the instrument.

Financial liabilities are derecognized when they are extinguished, i.e. when the obligation specified in the contract is discharged, cancelled or expires.

Borrowings

Borrowings are initially recognized at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the income statement over the period of the borrowings using the effective interest method.

Borrowings are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

Trade payables

Trade payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method.

Derivatives at fair value through profit or loss

Certain derivative instruments do not qualify for hedge accounting and are accounted for at fair value through profit or loss. Changes in the fair value of these derivative instruments that do not qualify for hedge accounting are recognized immediately in the income statement either as cost of sales, other operating income, financial income or financial expense, depending on the intent of the transaction.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Derivative financial instruments and hedging activities

Derivatives are initially recognized at fair value at trade date and subsequently re-measured at fair value. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Company designates certain derivatives as either:

fair value hedge: a hedge of the fair value of recognized liabilities;

cash flow hedge: a hedge of a particular risk associated with a highly probable forecast transaction; or

net investment hedge: a hedge of a net investment in a foreign operation.

At the inception of the hedge, the Company documents the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Company also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.

The fair values of various derivative instruments used for hedging purposes are disclosed in Note C20, “Financial Risk Management and Financial Instruments”. Movements in the hedging reserve in OCI are shown in Note C16, “Equity and OCI”.

The fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months, and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Trading derivatives are classified as current assets or liabilities.

Fair value hedges

Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The Company only applies fair value hedge accounting for hedging fixed interest risk on borrowings. Both gains and losses relating to the interest rate swaps hedging fixed rate borrowings and the changes in the fair value of the hedged fixed rate borrowings attributable to interest rate risk are recognized in the income statement within Financial expenses. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortized to profit or loss over the remaining period to maturity.

Cash flow hedges

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in OCI. The gain or loss relating to an ineffective portion is recognized immediately in the income statement within financial income or expense.

Amounts deferred in OCI are recycled in the income statement in the periods when the hedged item affects profit or loss (for example, when the forecast sale that is hedged takes place), either in Net Sales or Cost of Sales. When the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory or fixed assets), the gains and losses previously deferred in OCI are transferred from OCI and included in the initial measurement of the cost of the asset. The deferred amounts are ultimately recognized in Cost of Sales in case of inventory or in Depreciation in case of fixed assets. When a hedging instrument expires or is

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sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss which at that time remains in OCI is recognized in the income statement when the forecast transaction is ultimately recognized. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in OCI is immediately transferred to the income statement within financial income or expense.

Net investment hedges

Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognized in OCI. A gain or loss relating to an ineffective portion is recognized immediately in the income statement within financial income or expense. Gains and losses deferred in OCI are included in the income statement when the foreign operation is partially disposed of or sold.

Financial guarantees

Financial guarantee contracts are initially recognized at fair value (i.e. usually the fee received). Subsequently, these contracts are measured at the higher of:

•

the amount determined as the best estimate of the net expenditure required to settle the obligation according to the guarantee contract, and

•

the recognized contractual fee less cumulative amortization when amortized over the guarantee period, using the straight-line-method.

The best estimate of the net expenditure comprises future fees and cash flows from subrogation rights.

Inventories

Inventories are measured at the lower of cost or net realizable value on a first-in, first-out (FIFO) basis.

Risks of obsolescence have been measured by estimating market value based on future customer demand and changes in technology and customer acceptance of new products.

Intangible assets

Intangible assets other than goodwill

Intangible assets other than goodwill comprise capitalized development expenses and acquired intangible assets, such as patents, customer relations, trademarks and software. At initial recognition, capitalized development expenses are stated at cost while acquired intangible assets related to business combinations are stated at fair value. Subsequent to initial recognition, both capitalized development expenses and acquired intangible assets are stated at initially recognized amounts less accumulated amortization and any impairment. Amortization and any impairment losses are included in Research and development expenses, mainly for capitalized development expenses and patents, in Selling and administrative expenses, mainly for customer relations and brands, and in Cost of sales.

Costs incurred for development of products to be sold, leased or otherwise marketed or intended for internal use are capitalized as from when technological and economical feasibility has been established until the product is available for sale or use. These capitalized expenses are mainly generated internally and include direct labor and directly attributable overhead. Amortization of capitalized development expenses begins when the product is available for general release. Amortization is made on a product or platform basis according to the straight-line

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method over periods not exceeding five years. Research and development expenses directly related to orders from customers are accounted for as a part of Cost of sales. Other research and development expenses are charged to income as incurred.

Amortization of acquired intangible assets, such as patents, customer relations, brands and software, is made according to the straight-line method over their estimated useful lives, not exceeding ten years.

The Company has not recognized any intangible assets with indefinite useful life other than goodwill.

Impairment tests are performed whenever there is an indication of possible impairment. However, intangible assets not yet available for use are tested annually. An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. The recoverable amount is the higher of the value in use and the fair value less costs to sell. In assessing value in use, the estimated future cash flows after tax are discounted to their present value using an after-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Application of after tax amounts in calculation, both in relation to cash flows and discount rate is applied due to that available models for calculating discount rate include a tax component.

Corporate assets have been allocated to cash-generating units in relation to each unit’s proportion of total net sales. The amount related to corporate assets is not significant. Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amounts and if the recoverable amount is higher than the carrying value. An impairment loss is reversed only to the extent that the asset’s carrying amount after reversal does not exceed the carrying amount, net of amortization, which would have been reported if no impairment loss had been recognized.

Goodwill

As from the acquisition date, goodwill acquired in a business combination is allocated to each cash-generating unit (CGU) of the Company expected to benefit from the synergies of the combination. Ericsson’s five operating segments have been identified as CGUs. Goodwill is assigned to three of them, Networks, Professional Services and Multimedia.

An annual impairment test for the CGUs to which goodwill has been allocated is performed in the fourth quarter, or when there is an indication of impairment. Impairment testing as well as recognition of impairment of goodwill is performed in the same manner as for intangible assets other than goodwill, see description under “Intangible assets other than goodwill” above. An impairment loss in respect of goodwill is not reversed.

Additional disclosure is required in relation to goodwill impairment testing, see Note C2, “Critical Accounting Estimates and Judgments” below and in Note C10, “Intangible Assets”.

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses.

Depreciation is charged to income, generally on a straight-line basis, over the estimated useful life of each component of an item of property, plant and equipment, including buildings. Estimated useful lives are, in general, 25–50 years for buildings, 20 years for land improvements, 3–10 years for machinery and equipment, and up to 5 years for equipment on lease. Depreciation and any impairment charges are included in Cost of sales, Research and development or Selling and administrative expenses.

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The Company recognizes in the carrying amount of an item of property, plant and equipment the cost of replacing a component and derecognizes the residual value of the replaced component.

Impairment testing as well as recognition or reversal of impairment of property, plant and equipment is performed in the same manner as for intangible assets other than goodwill, see description under “Intangible assets other than goodwill” above.

Gains and losses on disposals are determined by comparing the proceeds less cost to sell with the carrying amount and are recognized within Other operating income and expenses in the income statement.

Leasing

Leasing when the Company is the lessee

Leases on terms in which the Company assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that type of asset, although the depreciation period must not exceed the lease term.

Other leases are operating leases, and the leased assets under such contracts are not recognized on the balance sheet. Costs under operating leases are recognized in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term of the lease.

Leasing when the Company is the lessor

Leasing contracts with the Company as lessor are classified as finance leases when the majority of risks and rewards are transferred to the lessee, and otherwise as operating leases. Under a finance lease, a receivable is recognized at an amount equal to the net investment in the lease and revenue is recognized in accordance with the revenue recognition principles.

Under operating leases the equipment Is recorded as property, plant and equipment and revenue as well as depreciation is recognized on a straight-line basis over the lease term.

Income taxes

Income taxes in the consolidated financial statements include both current and deferred taxes. Income taxes are reported in the income statement unless the underlying item is reported directly in equity or OCI. For those items, the related income tax is also reported directly in equity or OCI. A current tax liability or asset is recognized for the estimated taxes payable or refundable for the current year or prior years.

Deferred tax is recognized for temporary differences between the book values of assets and liabilities and their tax values and for tax loss carry forwards. A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the deductible temporary differences and tax loss carry forwards can be utilized. Deferred tax is not recognized for the following temporary differences: goodwill not deductible for tax purposes, for the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and for differences related to investments in subsidiaries when It Is probable that the temporary difference will not reverse in the foreseeable future.

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Deferred tax is measured at the tax rate that is expected to be applied to the temporary differences when they reverse, based on the tax laws that have been enacted or substantively enacted by the reporting date. An adjustment of deferred tax asset/liability balances due to a change in the tax rate is recognized in the income statement, unless it relates to a temporary difference earlier recognized directly in equity or OCI, in which case the adjustment is also recognized in equity or OCI.

The measurement of deferred tax assets involves judgment regarding the deductibility of costs not yet subject to taxation and estimates regarding sufficient future taxable income to enable utilization of unused tax losses in different tax jurisdictions. All deferred tax assets are subject to annual review of probable utilization. The largest amounts of tax loss carry forwards relate to Sweden, with indefinite period of utilization.

Provisions

Provisions are made when there are legal or constructive obligations as a result of past events and when it is probable that an outflow of resources will be required to settle the obligations and the amounts can be reliably estimated. When the effect of the time value of money is material, discounting is made of estimated outflows. However, the actual outflows as a result of the obligations may differ from such estimates.

The provisions are mainly related to warranty commitments, restructuring, customer projects and other obligations, such as unresolved income tax and value added tax issues, claims or obligations as a result of patent infringement and other litigations, supplier claims and customer finance guarantees.

Product warranty commitments consider probabilities of all material quality issues based on historical performance for established products and expected performance for new products, estimates of repair cost per unit, and volumes sold still under warranty up to the reporting date.

A restructuring obligation is considered to have arisen when the Company has a detailed formal plan for the restructuring (approved by management), which has been communicated in such a way that a valid expectation has been raised among those affected.

Project related provisions include estimated losses on onerous contracts, contractual penalties and undertakings. For losses on customer contracts, a provision equal to the total estimated loss is recorded when a loss from a contract is anticipated and possible to estimate reliably. These contract loss estimates include any probable penalties to a customer under a loss contract.

Other provisions include provisions for unresolved income tax issues, value added tax issues, litigations, supplier claims, customer finance and other provisions. The Company provides for estimated future settlements related to patent infringements based on the probable outcome of each infringement. The ultimate outcome or actual cost of settling an individual infringement may vary from the Company’s estimate.

The Company estimates the outcome of any potential patent infringement made known to the Company through assertion and through the Company’s own monitoring of patent-related cases in the relevant legal systems. To the extent that the Company makes the judgment that an identified potential infringement will more likely than not result in an outflow of resources, the Company records a provision based on the Company’s best estimate of the expenditure required to settle with the counterpart.

In the ordinary course of business, the Company is subject to proceedings, lawsuits and other unresolved claims, including proceedings under laws and government regulations and other matters. These matters are often

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

resolved over a long period of time. The Company regularly assesses the likelihood of any adverse judgments in or outcomes of these matters, as well as potential ranges of possible losses. Provisions are recognized when it is probable that an obligation has arisen and the amount can be reasonably estimated based on a detailed analysis of each individual issue.

Certain present obligations are not recognized as provisions as it is not probable that an economic outflow will be required to settle the obligation or the amount of the obligation cannot be measured with sufficient reliability. Such obligations are reported as contingent liabilities. For further detailed information, see Note C24, “Contingent liabilities”.

Post-employment benefits

Pensions and other post-employment benefits are classified as either defined contribution plans or defined benefit plans. Under a defined contribution plan, the Company’s only obligation is to pay a fixed amount to a separate entity (a pension trust fund) with no obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits. The related actuarial and investment risks fall on the employee. The expenditures for defined contribution plans are recognized as expenses during the period when the employee provides service. Under a defined benefit plan, it is the Company’s obligation to provide agreed benefits to current and former employees. The related actuarial and investment risks fall on the Company.

The present value of the defined benefit obligations for current and former employees is calculated using the Projected Unit Credit Method. The discount rate for each country is determined by reference to market yields on high-quality corporate bonds that have maturity dates approximating the terms of the Company’s obligations. In countries where there is no deep market in such bonds, the market yields on government bonds are used. The calculations are based upon actuarial assumptions, assessed on a quarterly basis, and are as a minimum prepared annually. Actuarial assumptions are the Company’s best estimate of the variables that determine the cost of providing the benefits. When using actuarial assumptions, it is possible that the actual results will differ from the estimated results or that the actuarial assumptions will change from one period to another. These differences are reported as actuarial gains and losses. They are for example caused by unexpectedly high or low rates of employee turnover, changed life expectancy, salary changes, changes in the discount rate and differences between actual and expected return on plan assets. Actuarial gains and losses are recognized in OCI in the period in which they occur. The Company’s net liability for each defined benefit plan consists of the present value of pension commitments less the fair value of plan assets and is recognized net on the balance sheet. When the result is a net benefit to the Company, the recognized asset is limited to the total of any cumulative past service cost and the present value of any future refunds from the plan or reductions in future contributions to the plan.

The net of return on plan assets and interest on pension liabilities is reported as financial income or expense, while the current service cost and any other items in the annual pension cost are reported as operating income or expense.

Payroll taxes related to actuarial gains and losses are included in determining actuarial gains and losses.

Share-based compensation to employees and the Board of Directors

Share-based compensation is related to remuneration to employees, including key management personnel and the Board of Directors. Under IFRS, a company shall recognize compensation costs for share-based compensation programs based on a measure of the value to the company of services received under the plans.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Compensation to employees

Stock option plans

In accordance with IFRS 1 and IFRS 2, Ericsson has chosen not to apply IFRS 2 to equity instruments granted before November 7, 2002.

IFRS 2 is applied to the equity settled employee option program granted after November 7, 2002 (i.e. on program where the vesting period ended 2005). Ericsson recognizes compensation costs representing the fair value at grant date of the outstanding employee options. In the balance sheet, the corresponding amounts are accounted for as equity. The fair value of the options is calculated using an option-pricing model. The total costs are recognized during the vesting period, i.e. the period during which the employees had to fulfill vesting requirements. When the options are exercised, social security charges are to be paid in certain countries on the value of the employee benefit; generally based on the difference between the market price of the share and the strike price. Such social security charges are accrued during the vesting period.

Stock purchase plans

For stock purchase plans, compensation costs are recognized during the vesting period, based on the fair value of the Ericsson share at the employee’s investment date. The fair value is based upon the share price at investment date, adjusted for the fact that no dividends will be received on matching shares prior to matching and other features that are non-vesting conditions. The employee pays a price equal to the share price at investment date for the investment shares. The investment date is considered as the grant date. In the balance sheet, the corresponding amounts are accounted for as equity. Vesting conditions are non-market based and affect the number of shares that Ericsson will match. Other features of a share-based payment are not vesting conditions. These features would need to be included in the grant date fair value for transactions with employees and others providing similar services. In the period when an employee takes a refund of previously made contributions (and stops making further contributions) all remaining compensation expense is recognized. Non-vesting conditions would not impact the number of awards expected to vest or valuation thereof subsequent to grant date. When calculating the compensation costs for shares under performance-based matching programs, the Parent Company at each reporting date assesses the probability that the performance targets are met. Compensation expenses are based on estimates of the number of shares that will match at the end of the vesting period. When shares are matched, social security charges are to be paid in certain countries on the value of the employee benefit. The employee benefit is generally based on the market value of the shares at the matching date. During the vesting period, estimated amounts for such social security charges are accrued.

Compensation to the Board of Directors

During 2008, the Parent Company introduced a share-based compensation program as a part of the remuneration to the Board of Directors. The program gives non-employed Directors elected by the General Meeting of Shareholders a right to receive part of their remuneration as a future payment of an amount which corresponds to the market value of a share of class B in the Parent Company at the time of payment, as further disclosed in Note C29, “Information Regarding Members of the Board of Directors, the Management and Employees”. The cost for cash settlements is measured and recognized based on the estimated costs for the program on a pro rata basis during the service period, being one year. The estimated costs are remeasured during and at the end of the service period.

Segment reporting

An operating segment is a component of a company whose operating results are regularly reviewed by the Company’s chief operating decision maker, (CODM), to make decisions about resources to be allocated to the segment and assess its performance. Within the Company, the Group Management Team is defined as the CODM function.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The segment presentation, as per each segment is based on the accounting policies as disclosed in this note. The arm’s length principle is applied in transactions between the segments.

The Company’s segment disclosure about geographical areas is based on in which country transfer of risks and rewards occur.

Borrowing costs

The Company capitalizes borrowing costs in relation to qualifying assets, for the Company normally being internally generated intangible assets as capitalized development expenses. All other borrowing costs are expensed as incurred.

Government grants

Government grants are recognized when there is a reasonable assurance of compliance with conditions attached to the grants and that the grants will be received.

For the Company, government grants are linked to performance of research or development work or to capital expenditures that are subsidized as governmental stimulus to employment or investments in a certain country or region. Government grants linked to research and development are normally deducted in reporting the related expense, whereas grants related to assets are accounted for deducting the grant when establishing the acquisition cost of the asset.

New standards and interpretations not yet adopted

A number of issued new standards, amendments to standards and interpretations are not yet effective for the year ended December 31, 2009, and have not been applied in preparing these consolidated financial statements:

•

IAS 27 (revised), ‘Consolidated and separate financial statements’, (effective from July 1, 2009). The revised standard requires the effects of all transactions with non-controlling interests to be recorded in OCI if there is no change in control and these transactions will no longer result in goodwill or gains or losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is remeasured to fair value, and a gain or loss is recognized in profit or loss. The Company will apply IAS 27 (revised) prospectively to transactions with non-controlling interests from January 1, 2010.

•

IFRS 3 (revised), ‘Business combinations’ (effective from July 1, 2009). The revised standard continues to apply the acquisition method to business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the income statement. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs should be expensed as incurred. The Company will apply IFRS 3 (revised) prospectively from January 1, 2010. Acquisition-related costs incurred prior to the adoption of IFRS 3 (R) have been treated as a part of the purchase price, as required by IFRS 3. These costs amount to SEK 53 million as per December 31, 2009.

•

IFRS 2 (amendments), ‘Group cash-settled share-based payment transactions’ (effective from January 1, 2010). In addition to incorporating IFRIC 8, ‘Scope of IFRS 2’, and IFRIC 11, ‘IFRS 2—Group and

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

treasury share transactions’, the amendments expand on the guidance in IFRIC 11 to address the classification of group arrangements that were not covered by the interpretation. The new guidance is not expected to have a material impact on the Group’s financial statements. The EU has not yet endorsed.

•

Improvements to IFRSs, published in April 2009 and effective from January 1, 2010. None of these improvements are expected to have a material impact on the Company’s financial statements. The EU has not yet endorsed.

•

Amendment to IAS 32 Classification of Rights Issues (published in October 2009 and effective for periods beginning after February 1, 2010). This amendment prescribes the accounting treatment of a contract that will or may be settled in the Company’s own equity instruments. The amendment is not expected to have a significant impact on the Company’s financial statements and is planned to be applied as from January 1, 2011.

•

IFRIC 17,”Distributions of Non-cash Assets to Owners”. This interpretation is not expected to have a material impact on the Company’s financial statements.

•

Amendments to IFRIC 14, ‘Prepayment of a minimum funding requirement’ (effective from January 1, 2011). These new amendments are not expected to have a material impact on the group’s financial statements. The EU has not yet endorsed.

•

IFRIC19, ‘Extinguishing financial liabilities with equity instruments’ (effective for periods beginning after July 1, 2010). This new IFRIC is not expected to have a material impact on the group’s financial statements. The EU has not yet endorsed.

•

IAS 24 (revised) ‘Related party disclosures’ (effective from January 1, 2011). This amendment only impact disclosures. The EU has not yet endorsed.

•

IFRS 9 ‘Financial Instruments’ (effective from January 1, 2013). The objective of this IFRS is to establish principles for the financial reporting of financial assets that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of the entity’s future cash flows. The Company has not yet evaluated the impact of this new standard. The EU has not yet endorsed.

C2 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

The preparation of financial statements and application of accounting standards often involve management’s judgment and the use of estimates and assumptions deemed to be reasonable at the time they are made. However, other results may be derived with different judgments or using different assumptions or estimates, and events may occur that could require a material adjustment to the carrying amount of the asset or liability affected. Following are the accounting policies subject to such judgments and the key sources of estimation uncertainty that the Company believes could have the most significant impact on the reported results and financial position.

The information in this note is grouped as per:

•

Key sources of estimation uncertainty.

•

Judgments management has made in the process of applying the Company’s accounting policies.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Revenue recognition

Key sources of estimation uncertainty

Estimates are necessary in evaluation of contractual performance and estimated total contract costs for assessing whether any loss provisions are to be made or if customers will reach conditional purchase volumes triggering contractual discounts to be given.

Judgments made in relation to accounting policies applied

Parts of the Company’s sales are generated from large and complex customer contracts. Managerial judgment is applied regarding, among other aspects, conformance with acceptance criteria and if transfer of risks and rewards to the buyer has taken place to determine if revenue and costs should be recognized in the current period, degree of completion and the customer credit standing to assess whether payment is likely or not to justify revenue recognition.

Trade and customer finance receivables

Key sources of estimation uncertainty

The Company monitors the financial stability of its customers and the environment in which they operate to make estimates regarding the likelihood that the individual receivables will be paid. Total allowances for estimated losses as of December 31, 2009, were SEK 1.7 (1.8) billion or 2.4 (2.2) percent of gross trade and customer finance receivables.

Credit risks for outstanding customer finance credits are regularly assessed as well, and allowances are recorded for estimated losses.

Inventory valuation

Key sources of estimation uncertainty

Inventories are valued at the lower of cost and net realizable value. Estimates are required in relation to forecasted sales volumes and inventory balances. In situations where excess inventory balances are identified, estimates of net realizable values for the excess volumes are made. Inventory allowances for estimated losses as of December 31, 2009, amounted to SEK 3.0 (3.5) billion or 12 (11) percent of gross inventory.

Investments in joint ventures and associated companies

Key sources of estimation uncertainty

Impairment testing is performed after initial recognition whenever there is an indication of impairment.

At December 31, 2009, the amount of joint ventures and associated companies amounted to SEK 11.6 (8.0) billion.

Deferred taxes

Key sources of estimation uncertainty

Deferred tax assets are recognized for temporary differences between the carrying amounts for financial reporting purposes of assets and liabilities and the amounts used for taxation purposes and for tax loss carry-forwards. The largest amounts of tax loss carry-forwards are reported in Sweden, with an indefinite period of utilization (i.e. with no expiry date). The valuation of tax loss carry-forwards, deferred tax assets and the Company’s ability to utilize tax losses is based upon management’s estimates of future taxable income in different tax jurisdictions. For further detailed information, please refer to note C8, “Taxes”.

At December 31, 2009, the value of deferred tax assets amounted to SEK 14.3 (14.9) billion. The deferred tax assets related to loss carryforwards are reported as non-current assets.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Accounting for income-, value added- and other taxes

Key sources of estimation uncertainty

Accounting for these items is based upon evaluation of income-, value added- and other tax rules in all jurisdictions where we perform activities. The total complexity of rules related to taxes and the accounting for these require management’s involvement in judgments regarding classification of transactions and in estimates of probable outcomes of claimed deductions and/or disputes.

Capitalized development expenses

Key sources of estimation uncertainty

Impairment testing is performed after initial recognition whenever there is an indication of impairment. Intangible assets not yet available for use are tested annually. The impairment testing amounts are based on estimates of future cash flows for the respective products.

At December 31, 2009, the capitalized development expenses amounted to SEK 2.1 (2.8) billion. An impairment charge of SEK 0.2 (0.5) billion was recognized as a part of the restructuring program. Under this program decisions where taken to phase out certain products. The impairment charge relates to balances for these products.

Judgments made in relation to accounting policies applied

Development costs that meet IFRS’ intangible asset recognition criteria for products that will be sold, leased or otherwise marketed as well as those intended for internal use are capitalized. The starting point for capitalization is based upon management’s judgment that technological and economical feasibility is confirmed, usually when a product development project has reached a defined milestone according to the Company’s established project management model. Capitalization ceases and amortization of capitalized development costs begins when the product is available for general release.

The definition of amortization periods and the evaluation of impairment indicators also require management’s judgment.

Acquired intellectual property rights and other intangible assets, including goodwill

Key sources of estimation uncertainty

At initial recognition, future cash flows are estimated, to ensure that the initial carrying values do not exceed the expected discounted cash flows for the items of this type of assets. After initial recognition impairment testing is performed whenever there is an indication of impairment, except for goodwill for which impairment testing is performed at least once per year. Negative deviations in actual cash flows compared to estimated cash flows as well as new estimates that indicate lower future cash flows might result in recognition of impairment charges. One source of uncertainty related to future cash flows is long-term movements in exchange rates.

The market capitalization of the Company as per year-end 2009 well exceeded the value of the Company’s net assets.

For further discussion on goodwill, see Note C1, “Significant Accounting Policies” and C10, “Intangible Assets”. Estimates related to acquired intangible assets are based on similar assumptions and risks in assumptions as for goodwill.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

At December 31, 2009, the amount of acquired intellectual property rights and other intangible assets amounted to SEK 46.1 (45.5) billion, including goodwill of SEK 274 (24.9) billion. An impairment charge of SEK 4.3 billion was recognized as a part of the restructuring program. Under this program decisions where taken to phase out certain products. The impairment charge relates to balances for these products.

Judgments made in relation to accounting policies applied

At initial recognition and subsequent remeasurement, management judgments are made, both for key assumptions and regarding impairment indicators. In the purchase price allocation made for each acquisition, the purchase price shall be assigned to the identifiable assets, liabilities and contingent liabilities based on fair values for these assets. Any remaining excess value is reported as goodwill. This allocation requires management judgment as well as the definition of cash generating units for impairment testing purposes. Other judgments might result in significantly different results and financial position in the future.

Provisions

Warranty provisions

Key sources of estimation uncertainty

Provisions for product warranties are based on current volumes of products sold still under warranty and on historic quality rates for mature products as well as estimates and assumptions on future quality rates for new products and estimates of costs to remedy the various qualitative issues that might occur. Total provisions for product warranties as of December 31, 2009, amounted to SEK 2.5 (1.9) billion.

Provisions other than warranty provisions

Key sources of estimation uncertainty

Provisions, other than warranty provisions, mainly comprise amounts related to contractual obligations and penalties to customers and estimated losses on customer contracts, restructuring, risks associated with patent and other litigations, supplier or subcontractor claims and/or disputes, as well as provisions for unresolved income tax and value added tax issues. The estimates related to the amounts of provisions for penalties, claims or losses receive special attention from the management. At December 31, 2009, provisions other than warranty commitments amounted to SEK 9.9 (12.4) billion. For further detailed information, see Note C18, “Provisions”.

Judgments made in relation to accounting policies applied

Whether a present obligation is probable or not requires judgment. The nature and type of risks for these provisions differ and management’s judgment is applied regarding the nature and extent of obligations in deciding if an outflow of resources is probable or not.

Pension and other post-employment benefits

Key sources of estimation uncertainty

Accounting for the costs of defined benefit pension plans and other applicable post-employment benefits is based on actuarial valuations, relying on key estimates for discount rates, expected return on plan assets, future salary increases, employee turnover rates and mortality tables. The discount rate assumptions are based on rates for high-quality fixed-income investments with durations as close as possible to the Company’s pension plans.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Expected returns on plan assets consider long-term historical returns, allocation of assets and estimates of future long-term investment returns. At December 31, 2009, defined benefit obligations for pensions and other post-employment benefits amounted to SEK 30.7 (28.0) billion and fair value of plan assets to SEK 23.2 (19.0) billion. For more information on estimates and assumptions, see Note C17, “Post-Employment Benefits”.

Financial instruments, hedge accounting and foreign exchange risks

Key sources of estimation uncertainty

Foreign exchange risk in highly probable sales and purchases in future periods are hedged using foreign exchange derivative instruments designated as cash-flow hedges. Forecasts are based on estimations of future transactions, a forecast is therefore per definition uncertain to some degree.

Judgments made in relation to accounting policies applied

Establishing highly probable sales volumes involves gathering and evaluating sales and purchases estimates for future periods as well as analyzing actual outcome versus estimates on a regular basis in order to fulfill effectiveness testing requirements for hedge accounting. Changes in estimates of sales and purchases might result in that hedge accounting is discontinued.

For further information regarding risks in financial instruments see, Note C20, “Financial Risk Management and Financial Instruments”.

C3 SEGMENT INFORMATION

Operating segments

The Company has the following five operating segments:

Networks delivers products and solutions for mobile and fixed broadband access, core networks and transmission as well as related network rollout services. The offering includes:

•

Radio access solutions interconnect with devices such as mobile phones, notebooks and PCs, supporting different standardized mobile technologies, such as GSM and WCDMA on the same platform.

•

Fixed access solutions; increase the customers’ ability to modernize fixed networks to enable new IP-based services with higher bandwidth.

•

Ericsson’s core network solutions include industry leading softswitches, IP infrastructure for EDGE- and core routing, IP Multimedia Subsystem (IMS) and media gateways.

•

Transmission/backhaul; micro-wave and optical transmission solutions for mobile and fixed networks.

•

Related network rollout services.

•

Network management tools; supporting operator activities for management of existing networks as well as for introduction of new network architectures, technologies and services.

GSM and WCDMA share a common core network, preserving investments. IMS is a platform that enables converged services to be transparently provided independent of the type of access used.

Professional Services delivers managed services, systems integration, consulting, education and general customer support services. The offering includes:

•

Managed services comprise network operations (the management of day-to-day operations of customer networks) and hosting of service layer platforms and applications.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

•

Systems integration; Ericsson integrates equipment from multiple suppliers and handles technology change programs as well as design and integration of new solutions.

•

Consulting; experts in business and technology strategy provide support (decision making, planning and execution) to customers in improving and growing their business.

•

Education; tailored programs to ensure operator personnel have the right skills and competence to manage their increasingly complex systems.

•

Customer support services; staff world-wide provide around-the-clock support and advice to ensure network uptime and performance.

Multimedia provides enablers and applications enabling operators to deliver a rich user experience seamlessly on any device, any time and anywhere. The offering includes:

•

TV solutions; end-to-end solutions for operators, service providers, advertisers and content providers.

•

Customer and business applications; multimedia solutions for the consumer and enterprise markets.

•

Multimedia brokering solutions which facilitate payment and distribution of content.

•

Service delivery and provisioning platforms enabling operators and service providers to create, sell and manage multimedia offerings and multi-play offerings.

Sony Ericsson, consisting of the joint venture Sony Ericsson Mobile Communications. Sony Ericsson delivers innovative and feature-rich mobile phones and accessories.

ST-Ericsson, consisting of the joint venture ST-Ericsson. ST-Ericsson is an industry leader in design, development, and creation of cutting-edge mobile platforms and wireless semiconductors. ST-Ericsson was formed on February 2, 2009, by merging ST-NXP Wireless and Ericsson Mobile Platforms.

Unallocated

Some revenues, costs, assets and liabilities are not identified as part of any operating segment and are therefore not allocated. Examples of such items are costs for corporate staff, IT costs and general marketing costs.

Geographical areas

The Company operates world-wide and reports its operations divided in five geographical areas: (1) Western Europe, (2) Central and Eastern Europe, Middle East and Africa, (3) Asia Pacific, (4) North America and (5) Latin America.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Major customers

The Company does not have any customer for which revenues from transactions have exceeded 10 percent of the Company’s total revenues for the years 2009, 2008 or 2007.

OPERATING SEGMENTS

2009

Networks

Professional
Services

Multi-
media

Sony
Ericsson

ST-
Ericsson

Total
Segments

Unallo-
cated

Elimi-
nations³⁾

Group

Segment sales

136,312

56,065

12,996

71,984

13,535

290,892

—

–85,519

205,373

Inter–segment sales

770

276

164

5,731

6,999

—

–5,895

1,104

Net sales

137,082

56,123

13,272

72,148

19,266

297,891

—

–91,414

206,477

Operating income

6,879

²⁾

6,990

¹⁾

655

–10,820

–2,615

1,089

–855

5,684

5,918

Operating margin (%)

–15

–14

—

Financial income

1,874

Financial expenses

–1,549

Income after financial items

6,243

Taxes

–2,116

Net income

4,127

Other segment items

Share in earnings of joint ventures and associated companies

–1

–5,693

–1,762

–7,386

–14

—

–7,400

Amortization

–2,673

–574

–910

–165

–828

–5,150

—

941

–4,209

Depreciation

–2,768

–627

–155

–1,124

–997

–5,671

—

2,121

–3,550

Impairment losses

–4,333

²⁾

—

–80

—

–46

–4,459

—

–4,413

Reversals of impairment losses

—

Restructuring expenses

–8,748

²⁾

–2,044

–385

–1,754

–890

–13,821

–82

1,322

–12,581

Gains/losses from divestments

777

¹⁾

—

875

–32

—

843

Total assets

116,226

33,515

17,650

33,586

22,187

223,164

92,101

–45,456

269,809

1)	In Q2 2009, the TEMS business was divested, resulting in a capital gain of SEK 0.8 billion.

2)	Including impairment losses related to restructuring activities of SEK 4.3 billion.

3)	Sony Ericsson and ST-Ericsson are accounted for in accordance with the equity method. The difference between what is reported to the CODM and externally is eliminated.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

GEOGRAPHICAL AREAS


2009	Net sales	Non-current assets¹⁾
Western Europe	44,579	56,118
—of which Sweden	4,096	43,574
Central and Eastern Europe, Middle East and Africa	50,725	1,202
Asia Pacific	65,770	1,630
—of which China	18,455	903
—of which India	15,252	225
North America	25,350	8,359
—of which United States	21,538	8,100
Latin America	20,053	2,066

Total	206,477	69,375
—of which EU	49,313	49,158

1)	Total non-current assets excluding financial instruments, deferred tax assets, and post-employement benefit assets.

For employee information, see Note C29, “Information Regarding Members of the Board of Directors, the Management and Employees”.

OPERATING SEGMENTS

2008

Networks

Professional
Services

Multi-
media¹⁾

Sony
Ericsson

Total
Segments

Unallo-
cated

Elimi-
nations²⁾

Group

Segment sales

142,031

48,940

12,614

108,492

312,077

—

–108,492

203,585

Inter-segment sales

5,288

261

5,606

—

–261

5,345

Net sales

142,050

48,978

17,902

108,753

317,683

—

–108,753

208,930

Operating income

11,145

6,346

–118

–1,094

16,279

–618

591

16,252

Operating margin (%)

–1

—

Financial income

3,458

Financial expenses

–2,484

Income after financial items

17,226

Taxes

–5,559

Net income

11,667

Other segment items

Share in earnings of joint ventures and associated companies

–25

-503

–436

—

–436

Amortization

–3,210

–368

–1,429

–53

–5,060

–5,006

Depreciation

–2,347

–532

–228

–1,138

–4,245

–1

1,138

–3,108

Impairment losses

–547

—

–19

—

–566

—

–566

Reversals of impairment losses

—

Restructuring expenses

–5,131

–1,272

–337

–1,692

–8,432

–20

846

–7,606

Gains/losses from divestments

–16

992

—

985

113

—

1,098

Total assets

131,127

³⁾

32,099

³⁾

20,891

48,837

232,954

94,873

–42,143

285,684

1)	Multimedia figures include the Mobile Platforms business which from 2009 is part of ST-Ericsson.

2)	Sony Ericsson is accounted for in accordance with the equity method. The difference between what is reported to the CODM and externally is eliminated.

3)	Amounts for 2007 and 2008 have been restated to be consistent with asset allocation method applied as from 2009.

ERICSSON ANNUAL REPORT ON FORM 20-F 2009

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

GEOGRAPHICAL AREAS


2008	Net sales	Non-current assets¹⁾
Western Europe	51,570	53,019
—of which Sweden	8,876	46,458
Central and Eastern Europe, Middle East and Africa	53,080	1,178
Asia Pacific	63,307	1,436
—of which China	15,068	688
—of which India	15,176	156
North America	17,925	8,917
—of which United States	14,132	8,829
Latin America	23,048	1,676

Total	208,930	66,226