SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 6-K

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

KONINKLIJKE PHILIPS ELECTRONICS N.V.

(Exact name of registrant as specified in its charter)

Royal Philips Electronics
(Translation of registrant’s name into English)

The Netherlands
(Jurisdiction of incorporation or organization)

Breitner Center, Amstelplein 2, 1096 BC Amsterdam, The Netherlands
(Address of principal executive offices)

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

Form 20-F þ           Form 40-F o

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule101(b)(1):     

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

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

Yes o            No þ

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

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

This report comprises a copy of the Annual Report of the Philips Group for the year ended December 31, 2007, dated February 18, 2008, as well as copy of the press releases entitled:

—		“Philips extends tender offer period to acquire Respironics”, dated February 4, 2008;

—		“Mr. Jan-Michiel Hessels to succeed Mr. Wim de Kleuver as Supervisory Board Chairman of Royal Philips”, dated February 18, 2008.

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf, by the undersigned, thereunto duly authorized at Amsterdam, on the 18^th day of February 2008.

KONINKLIJKE PHILIPS ELECTRONICS N.V.

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

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

Simpler, stronger, better

Annual Report 2007

“Philips taps teams of futurists, cultural anthropologists, designers and scientists to develop user-centered products and services.”

BusinessWeek.com, 9/10/07

BusinessWeek innovation ranking

In the BusinessWeek-Boston Consulting Group’s annual ranking of the world’s most innovative companies, Philips jumped from No. 67 in 2006 to No. 38 in 2007.

Awards

In 2007 we received over 45 design awards recognizing our commitment to people-focused solutions. These included 16 coveted iF awards. We also won two prestigious awards from the European Imaging & Sound Association (EISA). The 47PFL9732D FlatTV with Ambilight was named European Full-HD LCD TV 2007-2008, while the HTS8100 SoundBar DVD Home Theater with Ambisound technology was named European Home Theater Compact System 2007-2008.

Simplicity Event 2007

Philips’ Simplicity Events use simplicity-led design concepts to provide an insight into possible solutions three to five years ahead. The 2007 edition in London showcased how the inventive use of technology, coupled with intuitive, personalized design, can enhance care for people’s well-being at home, in the hospital and on the move.

...they are at the heart of our thinking

Live Earth / asimpleswitch.com

On July 7,2007, Philips sponsored the Live Earth concerts at eight different locations around the world, attracting an audience of two billion people. On the asimpleswitch.com website, over 600,000 people have pledged to replace a total of over 3.3 million light bulbs with energy-efficient alternatives.

56%

Sales of innovative products

In 2007,56% of our sales came from products introduced in the last three years.

500 million and counting

In May 2007 our 500 millionth shaver was produced in Drachten (Netherlands). We also ushered in the future of shaving with the launch of the revolutionary Arcitec shaver. With its ergonomic design and three independently flexing heads, Arcitec offers optimum skin contact in curved areas for a faster, closer, more efficient shave.

“Philips not only talks simplicity, it lives simplicity”

Dr Jurgen Hausler, [ILLEGIBLE]
CEO Interbrand Zintzmeyer & Lux

Interbrand ranking

Philips was one of the ten fastest-growing brands in terms of total brand value in the 2007 ranking of the top-100 global brands as compiled by leading brand consultant Interbrand. Our brand value rose 15% to an estimated USD 7.7 billion, making Philips the 42nd most valuable brand in the world.

We are inspired by people

Philips has redefined home entertainment with Aurea. The Aurea experience is like stepping into a different world, as scenes radiate an aura of light and color beyond the frame. The result is a totally immersive, ambient viewing experience.

The 256-slice Philips Brilliance iCT scanner can capture an image of the entire heart in just two beats, while reducing radiation doses by up to 80%.

Designed for offices and schools, for instance, Philips MASTER TL-D Eco fluorescent lamps save 15% energy compared to traditional T8 fluorescent lamps, of which the EU alone has an installed base of more than 1 billion.

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

www.philips.com/annualreport

In parallel and complementary to this Annual Report 2007, we have published our Sustainability Report 2007 (www.philips.com/sustainability).

Forward-looking statements

This document contains certain forward-looking statements with respect to the financial condition, results of operations and business of Philips and certain of the plans and objectives of Philips with respect to these items, in particular the Outlook section of the chapter The Philips Group in this Annual Report. Examples of forward-looking statements include statements made about our strategy, estimates of sales growth, future EBITA and future developments in our organic business. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances and there are many factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements.

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

Third-party market share data

Statements regarding market share, including those regarding Philips’ competitive position, contained in this document are based on outside sources such as specialized research institutes, industry and dealer panels in combination with management estimates. Where full-year information regarding 2007 is not yet available to Philips, those statements may also be based on estimates and projections prepared by outside sources or management. Rankings are based on sales unless otherwise stated.

Fair value information

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

US GAAP basis of presentation

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

Use of non-US GAAP information

In presenting and discussing the Philips Group’s financial position, operating results and cash flows, management uses certain non-US GAAP financial measures like: comparable growth; EBITA; NOC; net debt (cash); and cash flow before financing activities. These non-US GAAP financial measures should not be viewed in isolation as alternatives to the equivalent US GAAP measures.

Further information on non-US GAAP information and a reconciliation of such measures to the most directly comparable US GAAP measures can be found in the chapter Reconciliation of non-US GAAP information.

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

Reclassification

On November 2, 2007, Philips announced that it has decided to proceed with the sale of its approximately 70% ownership interest in MedQuist. Amongst others, in order to ensure comparison between different financial years and to achieve optimal transparency for users of the Annual Report, all consolidated financial statements of prior years have been restated to present the MedQuist business as a discontinued operation. The original consolidated financial statements of prior years are available on the Company’s website.

As of January 2007, the following key portfolio changes have been applied to the Philips Group structure: Other Activities was renamed Innovation & Emerging Businesses; Unallocated was renamed Group Management & Services; GSU activities and Miscellaneous were transferred from Innovation & Emerging Businesses to Group Management & Services; Consumer Healthcare Solutions was moved from DAP to Innovation & Emerging Businesses. Also, as of January 2007, certain Corporate/Regional/Country overhead and Corporate Intellectual Property costs were allocated to the operating divisions to further improve transparency of the total cost structure. As a consequence of the aforementioned, prior-year financials have been restated.

6 Philips Annual Report 2007

Contents

8		Financial highlights
10		Message from the President
		The Philips Group
16		The Philips Way
34		Management discussion and analysis
48		Liquidity and capital resources
54		Acquisitions
58		Other information
60		Proposed dividend to shareholders
61		Outlook
		The Philips sectors
62		Our structure
64		Medical Systems
70		Domestic Appliances and Personal Care
76		Consumer Electronics
82		Lighting
88		Innovation & Emerging Businesses
95		Group Management & Services
98		Risk management
112		Our leadership
116		Report of the Supervisory Board
Financial statements
127		Notes overview
		Group financial statements
128		Management’s report
129		Auditors’ report
130		Consolidated statements of income
132		Consolidated balance sheets
134		Consolidated statements of cash flows
136		Consolidated statements of stockholders’ equity
137		Information by sectors and main countries
140		Significant accounting policies
146		Notes to the group financial statements
		IFRS financial statements
189		IFRS management commentary
194		Consolidated statements of income
196		Consolidated balance sheets
198		Consolidated statements of cash flows
200		Consolidated statements of equity
202		Information by sectors and main countries
205		Significant IFRS accounting policies
211		Notes to the IFRS financial statements
239		Auditor’s report
		Company financial statements
240		Balance sheets
241		Statements of income
241		Statement of equity
243		Notes to the company financial statements
245		Auditor’s report
246		Reconciliation of non-US GAAP information
250		Corporate governance
258		The Philips Group in the last ten years
260		Investor information

Philips Annual Report 2007 7

8 Financial highlights		10 Message from the President		16 The Philips Group		62 The Philips sectors

Financial highlights

all amounts in millions of euros unless otherwise stated			2005	1)			2006	1)			2007
Sales			25,445				26,682				26,793
EBITA2)			1,652				1,386				2,065
as a % of sales			6.5				5.2				7.7
EBIT			1,558				1,201				1,852
as a % of sales			6.1				4.5				6.9
Results relating to equity-accounted investees			1,754				(157	)			763
Income from continuing operations			2,879				901				4,601
Income (loss) from discontinued operations			(11	)			4,482				(433	)
Net income			2,868				5,383				4,168
per common share in euros
- basic			2.29				4.58				3.84
- diluted			2.29				4.55				3.80
Net operating capital2)			5,439				8,518				10,586
Cash flows before financing activities2)			2,841				(2,472	)			5,449
Stockholders’ equity			16,666				22,997				21,684
Net debt : group equity ratio2)			(4):104				(10):110				(32):132
Employees at December 31 3)			159,226				121,732				123,801

8 Philips Annual Report 2007

98 Risk management		112 Our leadership		116 Report of the Supervisory Board		126 Financial Statements
5%		€1.90		7.7%		€4,168
comparable sales growth		EBITA per common share		EBITA as a % of sales		net income in millions of euros

Philips Annual Report 2007     9

8 Financial highlights		10 Message from the President		16 The Philips Group		62 The Philips sectors

Message from the President

Dear shareholder,

2007 was a dynamic and exciting year for our company, with good progress on many fronts. However, this did not translate into an equally exciting share performance. Operationally, we delivered once again on our Group targets, with 5% comparable sales growth and an EBITA margin of 7.7%, thanks to good execution, a strong innovation pipeline and a balanced portfolio that proved its robustness in a weakening economic environment.

We continued to advance well in our drive to become a truly market-focused, people-centric company that is geared to creating value through sustained profitable growth.

Strategically, we made significant steps in building strong market leadership positions across the portfolio, by investing in high-growth high-margin businesses while continuing to divest some low-growth low-margin businesses, largely completing our portfolio transformation.

In particular, the announced acquisitions of Genlyte and Respironics will boost our leadership position in Lighting and Home Healthcare respectively.

At the same time, we also tightened the focus of our portfolio with, among others, the sale of our mobile phone operation, as well as the projected divestment of our set-top box activity and our ownership interest in MedQuist.

We continued to invest in strengthening our position in important emerging markets in Asia, Eastern Europe and Latin America. Across our businesses, growth in emerging markets was particularly strong in 2007, and they now account for approximately 30% of our sales. We intend to further expand our presence in these markets by growing considerably faster than their respective economies.

We also continued to invest heavily in the things that really set Philips apart — our brand and our end-user-driven innovation and design — moving us to 38th place in Business Week’s ranking of the world’s most innovative companies (up from 67th place in 2006) and further increasing our brand value by 15% (according to Interbrand).

Financially, we accelerated our disciplined redeployment of capital with the announcement of a new EUR 5 billion (tax-free) share repurchase plan, on the back of a change to Dutch tax law. At the same time, we moved forward with our program to sell down our financial holdings, lowering our stakes in TSMC and LG.Philips LCD. With our capital reallocation process now largely completed, we are well on our way to arriving at an efficient balance sheet before the end of 2009.

In 2007 we also launched our EcoVision IV program, which aims to double sales of our Green Products over the next five years to 30% of total revenues, in comparison to 15% in 2006. And we have pledged to double investments in green innovations to EUR 1 billion by 2012. Concentrating on areas where we can make an impact with our capabilities and expertise, we are focusing our sustainability efforts on two global challenges: energy efficiency and available and affordable healthcare.

Crucially, in September we announced Vision 2010, a strategic blueprint defining the company we want Philips to be — a simpler, stronger company that is better placed to meet people’s need for high-quality but affordable healthcare, energy-efficient lighting and rewarding lifestyle experiences, while at the same time providing significant shareholder value by delivering on our target to double EBITA per share by 2010.

As stated above, good progress on many fronts, though for you, our shareholder, only a flat share price performance, more or less in line with the market. With that, we rank—on three-year TSR (Total Shareholder Return) — 5th in our old peer group of 24 companies and, for the first time in our new peer group, 6th among 12

10     Philips Annual Report 2007

98 Risk management		112 Our leadership		116 Report of the Supervisory Board		126 Financial Statements

8 Financial highlights		10 Message from the President		16 The Philips Group		62 The Philips sectors

companies. Our ambition and your expectation are clearly higher, and so with our agenda for 2008 we will drive even more relentlessly for value creation and delivery.

Performance against targets

As I do every year, I would also like to update you on how we did on the things we had set out to do as part of our 2007 Management Agenda.

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

I am glad to say we achieved our Group targets of 5-6% annual average sales growth and EBITA above 7.5%.

At 5%, comparable sales growth was at the low end of the bandwidth as particularly high growth at DAP and solid growth at Lighting were offset by a flat performance at Consumer Electronics, caused by a loss of market share in the first half of the year at Connected Displays — a highly competitive business that we continue to manage for profitability — while Medical Systems’ sales growth was hampered by a declining US imaging market, triggered by the Deficit Reduction Act.

At 7.7% of sales, our EBITA margin is the highest in recent years, up from 5.2% in 2006 — an excellent starting position towards our 2010 targets. Operationally, we executed very well in our DAP and Lighting businesses, which achieved EBITA margins of 17.6% and 11.9% respectively, even though Lighting was hampered by the sharp decline in the very profitable UHP business and the closure of our LCD backlighting activity. However, we had some issues at Consumer Electronics, especially Connected Displays, with losses in the US for the whole year. Despite this, Consumer Electronics managed to exceed its target of 3% EBITA margin. At Medical Systems we were impacted by the slowdown of the US imaging market. The shortfall in the US could not be compensated entirely by a good operational performance of the non-imaging businesses and in the rest of the world, which resulted in slight under-performance against margin targets, EBITA remaining virtually stable at 13.5%.

Delivering on our 2007 objectives puts us in a good starting position to meet the more ambitious medium-term targets set as part of Vision 2010, especially as this portfolio of activities has shown resilience in earlier periods of economic downturn.

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

In 2007 we continued to further strengthen our key businesses and create true market leadership positions by means of both small ‘fill-in’ and larger’platform’ acquisitions–all high-growth high-margin businesses.

Besides our acquisition drive, which resulted in 2007 in a total cash-out of EUR 1.5 billion, we continued our policy of repurchasing shares, buying back some EUR 1.6 billion worth of shares, of which EUR 0.8 million for cancellation. Unfortunately the buy-back through the so-called ‘second trading line’ brought us only about half of the EUR 1.6 billion we had targeted. However, on the back of a change to Dutch tax law, we were able, in December, to announce a new EUR 5 billion buy-back plan, through which we will more than catch up on our target.

With our year-end announcements of the Respironics acquisition and our latest share buy-back plan, we passed the EUR 10 billion mark twice — for closed and announced acquisitions, as well as for the total of realized and intended share buy-backs. In total we have re-allocated over EUR 20 billion of capital since 2005, largely completing our capital re-allocation program and putting us well on track to deliver, as promised, an efficient balance sheet before the end of 2009.

With our strong focus on economic value added as well as return on invested capital, our projections show that

12     Philips Annual Report 2007

98 Risk management		112 Our leadership		116 Report of the Supervisory Board		126 Financial Statements

“Our sectors share a common brand that stands for innovation delivered with ‘sense and simplicity’.”

this combination of accretive acquisitions and share buy-backs is the best way to create shareholder value.

I am also pleased to announce that, consistent with our policy to pay out 40-50% of continuing net income as an annual dividend, we are proposing to the upcoming General Meeting of Shareholders to declare a dividend of EUR 0.70 per common share, an increase for the fourth year in a row and a statement of our confidence for the future.

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

In 2007, Philips was one of the ten fastest-growing brands in terms of total brand value in the annual ranking of the top-100 global brands compiled by Interbrand — a clear sign that the brand’s core messages resonate with customers. Our brand value rose 15% to an estimated USD 7.7 billion, making Philips the 42nd most valuable brand in the world.

We drove the further deployment of the Net Promoter Score (NPS) as our single key metric of customer experience. NPS measures the answer to just one question:“How likely is it that you would recommend this company/ product to a friend or colleague?” Brands with high NPS scores tend to grow faster and more profitably than their competitors. At present, close to 50% of our key businesses have industry-leading scores, and we aim to increase this figure to 70% by 2010 — a significant but vital challenge.

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

Philips is a fantastically exciting place to work. We offer our employees excellent working conditions, energizing career challenges and international development opportunities. And we are unstinting in our efforts to create a diverse and inclusive working environment, in which all employees feel valued for their talents and contribution.

We are also stimulating a culture where people are encouraged to be ambitious and take calculated risks, and where failure is understood to be part of learning.

We measure the progress of our people initiatives through our annual Employee Engagement Survey. In 2007, the response was 92%, up from 85% in 2006, and the results show definite improvement. The Employee Engagement Index figure rose to 64%, from 61% in 2006. Our goal is to reach the high-performance benchmark of 70% by 2009.

We also use the Engagement Survey to gauge how our people judge their leaders. Our People Leadership Index — measuring 12 aspects relating to one’s direct manager-rose to 64% from 59% in 2006, equally moving towards the high-performance benchmark of 70%.

Vision 2010 — creating a simpler, stronger and better company

In September 2007 we launched Vision 2010, organizing Philips in three market-oriented sectors - Healthcare, Lighting and Consumer Lifestyle — effective January 2008, with the ambition to build a company with a significantly higher shareholder value by delivering on our target to double EBITA per share by 2010 from our 2007 starting point

Vision 2010 represents a step up of ambition in our drive to become a truly market-driven, people-centric company with a well-balanced portfolio of professional and consumer businesses with attractive EBITA margins and effective business models — one that has already demonstrated resilience in a challenging economic environment

Our sectors address specific yet interlinked markets, with a strong focus on people and their health and well-being, and they share a common brand that stands for innovation delivered with “sense and simplicity”.

Philips Annual Report 2007   13

8 Financial highlights		10 Message from the President		16 The Philips Group		62 The Philips sectors

Healthcare

Our new Healthcare sector brings together Medical Systems and our growing Home Healthcare Solutions business — formerly Consumer Healthcare Solutions. We now deliver innovative solutions — based on the combination of human insights and clinical expertise-across the entire care cycle, from the hospital to the home. We believe the link bridging the hospital and the home is going to be increasingly important in delivering better patient outcomes while containing costs.

In the hospital market we strengthened our global leadership in critical care with the acquisition of VISICU, providing advanced IT solutions for monitoring of patients in the intensive care unit.

Complementary to our established leadership position in the professional healthcare technology market, our proposed acquisition of Respironics — a leading US-based global provider of innovative respiratory and sleep therapy solutions for hospital and home use — is part of our strategy to create a global leadership position in the fast-growing home healthcare solutions market as well. Given the unsustainably high healthcare costs in many markets and increased emphasis on both efficiency and patient comfort, we are seeing a gradual shift towards diagnosing, treating and monitoring patients in their homes rather than in hospitals. Demand for home healthcare is also growing due to the increasing number of elderly people and the rising incidence of chronic diseases. With our expertise in consumer insights in the consumer lifestyle space, we feel we are ideally positioned to be one of the leading companies driving this emerging trend.

Completion of this stage of our acquisition drive will create a Healthcare sector with sales of over EUR 7 billion going forward and global leadership positions in areas such as cardiac care, acute care, and now also home healthcare. We will continue to grow our business organically and further expand profitability by maintaining our focus on operational excellence and by leveraging our 2007 acquisitions.

Lighting

In both the professional and consumer domains, Philips Lighting is increasingly shifting its focus towards applications, rather than products, supported by the growing demand for energy-efficient solutions and the rise of solid-state lighting. In 2007 we underscored our ambitions by completing a number of major acquisitions — totaling EUR 1.2 billion — to boost growth and position ourselves for the future.

14      Philips Annual Report 2007

98 Risk management		112 Our leadership		116 Report of the Supervisory Board		126 Financial Statements

We completed the acquisition of Partners in Lighting International, the leading European manufacturer of home luminaires, an area where solid-state lighting (SSL) will bring major benefits in terms of creating atmospheres and reducing energy consumption.

Further lighting acquisitions included Color Kinetics, a US-based leader in innovative LED lighting systems, with a broad technology and intellectual property portfolio (controls and intelligent technology). In this way we are building a strong position through the complete SSL value chain for future growth in energy-efficient lighting solutions using LED sources.

Toward the end of the year we announced the acquisition of major North American luminaire manufacturer Genlyte, giving us the leading position in the US market for professional lighting applications.

Together, these actions have significantly strengthened our global leadership position in the market for advanced, energy-efficient lighting solutions, creating a Lighting sector with sales of over EUR 7 billion going forward. Leveraging end-user-driven innovation, marketing and supply excellence, we will drive profitability by managing for growth.

Consumer Lifestyle

Combining CE and DAP’s complementary strengths will boost Philips’ consumer lifestyle proposition as a whole, creating a new business sector based on deep end-user insight, cutting-edge design and rich consumer experiences, rather than product categories.

In Consumer Lifestyle we have chosen a strategic direction which is based on the fundamental insight that our target customer is increasingly interested in personal well-being. Exploiting Philips’ innovative capability, brand and distribution strength will enable Consumer Lifestyle to further drive the portfolio in the direction of sustainable high-margin positions in the well-being space, as well as providing us with a platform to grow into new value spaces. At the same time, the coming year will see us take decisive steps to structurally deal with the issue of unsatisfactory profitability at Connected Displays.

Focus on execution

We are close to being the Philips we envisaged when we set out to transform the company in 2001. We are no longer inward-looking, but market and customer-oriented, no longer volatile and cyclical, but ready to continue to progress in spite of economic headwind. I am convinced that unrelenting focus on the needs of the market, along with rigorous and consistent execution of our plans, will enable us to continue delivering on our promise of sustained profitable growth.This will bring us a step closer to the realization of our Vision 2010 ambition and create lasting value for all our stakeholders and in particular for you, our shareholder.

Final thoughts

On a personal note, I would like to thank Theo van Deursen, who will be retiring on April 1 this year, for his outstanding contribution over a period of some 35 years, latterly as CEO of Philips Lighting, where he has been the architect and driving force of the new, expanding Lighting sector. I wish him all the best for his retirement

With Rudy Provoost we have a good successor for Theo, one who will steer the next phase of growth and expansion at Philips Lighting, having profoundly transformed our Consumer Electronics businesses. I am also very pleased to have Andrea Ragnetti as the leader of our Consumer Lifestyle sector, where he will combine his marketing skills with the best of DAP and CE. Together with Steve Rusckowski’s in-depth knowledge and experience of Healthcare, we have three strong sector leaders working closely together with me and my colleagues Pierre-Jean Sivignon and Gottfried Dutiné to provide Philips with the leadership it needs to move to a higher performance level.

We also have to say goodbye to Wim de Kleuver, the Chairman of our Supervisory Board, whose stewardship, wisdom and experience we have always valued. I wish him the very best for the future.

Finally, on behalf of the entire Board of Management, I would like to express my thanks to you, our shareholders, for your continued support as we strive — supported by the dedication and drive of our people — to fulfil the promise of the future set out in Vision 2010.

Gerard Kleisterlee
President

Philips Annual Report 2007      15

8 Financial highlights		10 Message from the President		16 The Philips Group		62 The Philips sectors
				The Philips Way

The Philips Way

Our company was founded in Eindhoven (Netherlands) in 1891 to “manufacture incandescent lamps and other electrical products”. Ever since then, we have been simplifying and enhancing people’s lives with a steady flow of pioneering innovations, for instance in the fields of medical imaging, television, lighting, optical technology and integrated circuits. Today, we remain committed to building upon this rich heritage to make people’s lives simpler, more enjoyable and more productive.

Vision 2010

In 2001 we started out on a journey to transform Philips into a focused, market-driven company capable of delivering sustained profitable growth, and so creating value for our stakeholders. Over the course of the intervening years, we have fundamentally repositioned Philips from a rather volatile, technology-focused, vertically integrated electronics company to an applications-oriented, customer-centric and more predictable company. This involved a massive capital re-allocation, away from cyclical technology businesses and toward expansion of our high-margin core businesses through acquisitions, innovation and brand injections, as well as returning capital to shareholders through tax-efficient share buy-backs and dividends. In 2007 we took another major step forward with the announcement of our Vision 2010 strategic blueprint.

Vision 2010 places the customer at the very heart of everything we do. Accordingly, we have realigned our entire organization around the needs we see in the marketplace. Effective January 1,2008, we now have three sectors — Healthcare, Lighting and Consumer Lifestyle.

Insights and empowerment

Our mission is to improve the quality of people’s lives through the timely introduction of meaningful innovations. In a world where complexity grows to touch every aspect of our daily lives, we will lead in bringing sense and simplicity to people.

Based on a deep understanding of what people really need and want, and delivering on our promise of simplicity, we empower our customers — both healthcare and lighting professionals and end-consumers — with solutions that are advanced, yet designed around them and easy to experience. Specifically, we address these needs and desires in the four domains of my space, my body, my appearance and my mind.

As well as expressing a commitment to eliminate unnecessary complexity and to deliver the meaningful benefits of technology, our “sense and simplicity” brand promise also defines how we want to be seen by all our stakeholders — open and transparent, approachable, easy to do business with.

Today, Philips is a much simpler company focused on the market, centered around the brand and driven by innovation. We see tremendous potential in both mature and emerging markets and leverage our competencies in design, technology and marketing to capture value from some of the major economic, social and demographic trends, e.g. the growing demand for better healthcare at lower cost consumer empowerment the rise of emerging markets and the need for energy efficiency.

16      Philips Annual Report 2007

98 Risk management		112 Our leadership		116 Report of the Supervisory Board		126 Financial Statements

As we strive to enhance the quality of people’s lives, our 7 strategic drivers are helping us become a simpler stronger and better company.

Vision 2010 — ambition to significantly increase shareholder value

•		Improve the EBITA margin of our current businesses to exceed 10% by year-end 2010
		Through improved margin management, increased contribution from recent acquisitions, a better product mix, the effects of the organizational simplification and reduced corporate brand spend.
•		Drive comparable sales growth at a minimum of 6% (compound annual growth rate) for the period 2008-2010
•		Fuelled by organic growth, and through a specific focus on emerging markets and developing economies.
•		Arrive at an efficient balance sheet by the end of 2009
•		Through a combination of further value-creating acquisitions and continued return of capital to shareholders.
		Thanks to the combined effect of these measures, we expect EBITA per common share to more than double by 2010 from the 2007 level.

Management Agenda 2008

As a result of a thorough review of our 2007 achievements and remaining challenges, as well as our expectations for the development of the global economy and the competitive environment, we have adopted the following management agenda for 2008:

•		Integrate and leverage recent acquisitions, delivering the anticipated return on investment
•		Take decisive steps to structurally deal with unsatisfactory EBITA margins at Connected Displays
•		Improve productivity as a driver of margin expansion
•		Step up resource investment in emerging markets to accelerate growth in excess of 2x GDP
•		Increase innovation focus in support of Philips’ growth ambition
•		Continue to drive a culture of superior customer experience
•		Bring employee engagement to high-performance benchmark

Philips Annual Report 2007     17

Our 7 strategic drivers

1

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

Vision 2010 positions Philips as a market-driven company with an organizational structure that reflects the needs of its customer base.

Our three new sectors, Healthcare, Lighting and Consumer Lifestyle, each address different markets, but have one thing in common – the customer is at the center.

By bringing together Medical Systems and our growing Home Healthcare Solutions business, for example, we can develop solutions that deliver value throughout the complete cycle of care – from disease prevention to screening and diagnosis through to treatment, monitoring and health management.

And by combining CE and DAP, we will leverage our competencies to create competitive advantages in a challenging marketplace. Merging sales teams, for example, will create greater focus and reach within our chosen markets. Optimizing supply and service processes will improve customer-centric effectiveness. And combining consumer insights will enable us to deliver even more compelling value propositions.

2

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

The 2007 wave of our brand campaign showcased a range of simplicity solutions that empower consumers, particularly families, to manage their health and well-being. These advertisements underscore the deep consumer knowledge and insights that set Philips apart in the healthcare industry.

By investing consistently in our brand – also through activities like our Simplicity Events – we are seeing its value increase significantly, as evidenced by our fourth successive rise in the annual Interbrand top 100.

3

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

Technology continues to drive many of our innovations, and innovation is integral to everything we do. But to ensure it is relevant and meaningful, we take end-user insights as its starting point.

Product creation and development begins with an understanding of people’s needs and aspirations. We make extensive use of our Experience Labs, where we can study people interacting naturally with our product concepts. If they find the concepts too complex, we make them simpler or go on to the next innovation.

The Philips Wake-Up Light is a new, medically proven wake-up solution based on the simulation of dawn. It emits light that gradually increases to the intensity you have selected, gently preparing your body to wake up. This ‘dawn light’ positively affects your energy hormones, enabling you to rise naturally and easily, feeling energized and refreshed.

4

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

In the 2007 edition of our annual Employee Engagement Survey, almost 100,000 Philips employees – from across all sectors and functions – were invited to answer the same 39 questions on leadership, management capabilities, alignment with Philips’ vision, identification with the brand, and reward recognition.

The Employee Engagement Index figure increased to 64%, from 61% in 2006. We have set ourselves the goal of reaching the high-performance norm of 70% by 2009. So while we are on the right track, the remaining gap still needs to be closed.

5

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

We are well positioned to benefit from major trends that will determine global GDP development in the coming decade, i.e. the need of a growing and longer-living population for more and affordable healthcare, the need for energy-efficient solutions (e.g. for lighting) and developments in the consumer space. We are also well placed to realize profitable growth in emerging markets, while contributing to the sustainable development of these economies.

We continue to pursue opportunities to make value-creating acquisitions that can further our growth ambitions. The acquisitions we announced in 2007, for example, strengthened or established our leadership positions in promising markets, or gave us access to new markets. The successful integration of Partners in Lighting International, Color Kinetics and Genlyte will significantly boost our global leadership position in the market for advanced lighting solutions, while the announced acquisition of Respironics puts us firmly at the forefront of the fast-growing market for home healthcare solutions.

Now, the priority is to successfully integrate and leverage these acquisitions in order to capture their full value and so deliver the anticipated growth and margins.

6

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

Global climate change, rising energy costs and pressure to meet targets on reduction of CO₂ emissions are major issues facing the world today. Addressing these imperatives and the opportunities they present will have a major impact on global business.

Philips has a long-standing commitment to providing solutions that improve people’s lives and are environmentally sound. Now we are the industry leader in energy-efficient lighting with, for example, our state-of-the-art TL5 lamps and LED light sources, electronic gear, high-efficiency optics and energy-saving lighting controls.

We are aiming for our Green Products to generate 30% of total revenues by 2012, compared with 15% of Group sales in 2006. This commitment is part of our latest EcoVision program, which aims to double investment in green innovations to EUR 1 billion in the next five years and to increase the energy efficiency of our operations by 25%.

During 2007 we launched our Green Logo, a simple tool to help consumers find Philips’ Green Products in stores and make responsible choices.

7

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

Philips Business Excellence (PBE) provides a holistic framework for assessing an organization’s position relative to world-class performance, identifying strengths as well as improvement opportunities that support business objectives.

In few areas are the demands for manufacturing excellence higher than in the automobile industry. This drives our Automotive Lighting business, which has adopted a zero-defects policy – not as a philosophy but as a hard target.

Using the Philips Business Excellence program, our people at Automotive Lighting identify what improvements are needed, and formalize them in the management agenda. The policy is based on management attention and shop floor focus. Black Belts (process experts) and Green Belts (operational and tactical experts) lead improvement teams focused on product quality issues. Our Lighting Quality Improvement Competition provides a platform where the teams can share their experiences and learn from each other, as well as motivating and engaging our people.

I feel more secure now

Philips and healthcare

“I live on my own and have severe arthritis, which makes me fall sometimes. Now, I can get help when I need it. When I fell last week I pressed the button, and immediately my panic was gone. Within a few minutes the paramedics were here.”

Philips Lifeline is an easy-to-use personal response service that lets you summon help any time of the day or night – even if you can’t speak. All you have to do is press your personal help button, worn on a wristband or pendant, and a trained response center associate will ensure you get help fast.

Philips Annual Report 2007     23

8 Financial highlights		10 Message from the President		16 The Philips Group		62 The Philips sectors
				The Philips Way

Healthcare

Our focus is on the people at the center of healthcare – the patient and the care provider. Based on both user insights and clinical excellence, our innovative solutions simplify and improve care, and empower people to manage their own health.

Whether in the hospital or the home, we seek to improve patient outcomes throughout the entire care cycle – from prevention and screening to diagnosis, treatment, monitoring and management.

Patient comfort

The Philips Panorama HFO magnetic resonance system provides high-quality performance in a truly open configuration, allowing three times more patient space than cylindrical high-field systems. This creates a more acceptable imaging environment for claustrophobic or anxious patients.

For demanding caseloads

Philips X-ray angiography systems - such as the Allura Xper range – deliver flexibility and workflow control, while ensuring exceptional image quality and superb dose management. Designed for cardiac, vascular and neuro interventions, these systems help increase clinical efficiency.

Get closer

The Philips BrightView SPECT system offers exceptional image quality in a fast, easy-to-use package. Its BodyGuard feature automatically contours to the patient, using a customizable scan distance preset by the operator.

Anytime, anywhere

Philips iSite PACS is an enterprise-wide medical image and information management system. From an easy-to-use interface to having all images archived online and available at the click of a mouse, iSite PACS delivers the power of radiology to the point of patient care.

24     Philips Annual Report 2007

98 Risk management		112 Our leadership		116 Report of the Supervisory Board		126 Financial Statements

Addressing daily challenges

With its image quality, ease of use, automated quantification and workflow solutions, the Philips iU22 intelligent ultrasound system gives clinicians tools that increase confidence in diagnoses and improve throughput.

Quality gains

The Philips Gemini PET/CT scanner with TruFlight technology delivers 20% better spatial and contrast resolution, providing faster, more sensitive scanning than conventional PET. This facilitates earlier disease detection, regardless of patient size.

Delivering clear information

The Philips IntelliVue family of patient monitors gives care teams throughout the hospital more of the information they need right at the patient’s side. All share a common user interface and Philips’ innovative portal technology.

Superior imaging

Philips Brilliance CT systems provide the clinical advantages needed to attract referrals and the productivity advantages needed to keep them. Their appeal is powered not only by technological innovations for superior speed, accuracy and reliability, but also by advances in user interaction.

Care in the home

Philips Remote Patient Management has a comprehensive offering of telehealth products and services for monitoring of chronically ill patients after they have been discharged from hospital.

People-focused healthcare

Philips Ambient Experience integrates design and enabling technology to provide each patient with a personalized experience that eases anxiety, thereby facilitating procedures and increasing operational effectiveness.

Philips Annual Report 2007      25

·’

I can create different moods now

Philips and lighting

“My shop is constantly changing in terms of merchandise, theme, floor layout, etc. And my customers’ motivation or mood for shopping can be different at different times. Now, I can tailor the ambience to my clientele at the touch of a button, or adapt the lighting to events such as a summer sale or the launch of a new collection.”

Philips AmbiScene is a flexible lighting concept designed to help retailers create inspiring and meaningful shopping experiences. It can change the lighting in every conceivable way (e.g. color, tones of white, intensity), addressing different shopping moods and supporting retail communication strategies. AmbiScene comprises a broad portfolio of luminaires and controls, including solid-state lighting, allowing dynamic lighting and special effects.

Philips Annual Report 2007     27

8 Financial highlights		10 Message from the President		16 The Philips Group		62 The Philips Sectors
				The Philips Way

Lighting

Lighting has a major impact on our well-being, moods and emotions. It inspires, attracts, communicates, sets the scene and enhances our experience of architectural spaces.

Combining our understanding of people’s needs, desires and aspirations with our technological leadership, we are able to deliver the advanced, energy-efficient products and systems that will help us create a sustainable future.

Safer driving

A study by the independent safety research organization TÜV Rheinland showed that if all vehicles on German roads were equipped with Xenon car lights, 18% of all fatalities could be avoided, saving 1,200 lives annually.

Enjoy your stay!

Philips MASTERCIassic is a retrofit halogen bulb for hospitality applications, which cuts energy consumption by 50%, lasts three times longer than an incandescent bulb and provides outstanding sparkling white light.

Living streets

Philips CosmoPolis delivers a very high-quality white light and uses 50% less energy than the mercury-vapor street-lighting systems still in use all over the world, saving more than 100 kg of CO₂ per year per lamp.

Simply irresistible

Philips MASTERColour COM Elite’s crisp white light, high output and superior color rendering adds sparkle to retail environments, displaying merchandise to best effect and attracting consumers.

28      Philips Annual Report 2007

98 Risk management		112 Our leadership		116 Report of the Supervisory Board		126 Financial Statements

Cities for people

Offering unprecedented design freedom in terms of color, dynamics, miniaturization and energy efficiency, solid-state lighting is bringing towns and cities to life in ways we could previously only dream of.

The thrill of the action

Philips ArenaVision was the world’s first sports-lighting system specifically designed to increase dramatically the theatrical and emotional value of sports for TV audiences, spectators and players alike.

Home comforts

Philips Mini Softone is the first range of energy-saving lamps with the size, shape, warm light quality and output required for decorative lighting fixtures in the home.

Smart energy saving

Philips ActiLume is an intelligent lighting control for offices. It detects when people are present and switches the lights on or off accordingly. It also dims the lights when there is sufficient incident daylight. In this way, energy savings of up to 75% can be realized.

Philips Annual Report 2007     29

We feel healthier now

Philips and lifestyle

“As a parent, I want to know that my children are getting all the goodness they need. Now, I can easily add essential minerals and vitamins to our daily diet.”

Juicing cleanses, flushes, alkalizes and revitalizes the body. With its extra-large feeding tube and powerful motor, the Philips Juicer can turn any fruit or vegetable — chopped or whole — into juice instantly.

Philips Annual Report 2007     31

8 Financial highlights		10 Message from the President		16 The Philips Group		62 The Philips sectors
				The Philips Way

Consumer Lifestyle

Today’s empowered consumers are characterized by a desire for both wellness and pleasure. They want to enjoy a healthy life balance — to look and feel good, and to benefit emotionally from rich, pleasurable technology experiences, both at home and on the move.

Through the application of design and deep consumer insight, we develop meaningful and innovative solutions that fulfill people’s lifestyle needs and desires.

Total immersion

Philips Ambilight FlatTVs project a soft glow of light onto the walls around the TV set which automatically changes to match the colors and brightness of the picture, creating an immersive entertainment experience.

Safe to drink

The Philips Intelligent Water Purifier uses advanced UV technology and activated carbon to purify water, freeing consumers from the threat of water-borne diseases.

Entertainment on the go

Philips GoGear players can store thousands of MP3 music files, WMV videos and JPEG pictures, making it easy for consumers to enjoy their personal multimedia libraries while on the move.

One touch

Philips’ one-touch Espresso machine allows you to make a variety of coffee drinks at the push of a button.

Convenient communication

VoIP telephony has enabled millions of people to stay in touch via the Internet. Philips’ flagship DECT phone, the VOIP841, uniquely allows Skype calls from anywhere in the house without the need for a computer.

32      Philips Annual Report 2007

98 Risk management		112 Our leadership		116 Report of the Supervisory Board		126 Financial Statements

Realistic gaming

Philips’ amBX technology extends games beyond the screen, adding sensory experiences to gameplay through the use of light, color, sound, vibration and even air flow.

Fresh and confident

Philips Sonicare power toothbrushes — with patented sonic technology and innovative brush-head design — guarantee improved oral health and naturally whiter.

Music everywhere

Philips Streamium wireless music systems allow consumers to store their entire CD collections, and then stream that music throughout the home via WiFi.

A chore made easy

The Philips Wardrobe Care solution helps consumers keep their clothes looking like new with minimum effort.

Feels good

The Philips Moisturizing shaving system with integrated Nivea for Men shaving conditioner delivers an extra-comfortable shave that also conditions your skin.

Rest easy

Philips Avent DECT baby monitors are completely interference-free, offering excellent sound quality and total peace of mind.

Philips Annual Report 2007     33

8 Financial highlights		10 Message from the President		16 The Philips Group		62 The Philips sectors
				Management discussion      and analysis

Management discussion and analysis

Please refer to page 6 for more information about forward-looking statements, third-party market share data, fair value information, US GAAP basis of preparation, use of non-US GAAP information, statutory financial statements and management report, and reclassifications.

The analysis of the 2006 financial results compared to 2005, and the discussion of the critical accounting policies, have not been included in this Annual Report. These sections are included in Philips’ Form 20-F for the financial year 2007, which is filed electronically with the US Securities and Exchange Commission.

In 2007 we continued on the growth path we have been following in recent years — redirecting resources to high-growth opportunities, making acquisitions, growing in emerging markets, leveraging our brand, and innovating and marketing for further organic growth.

34      Philips Annual Report 2007

98 Risk management		112 Our leadership		116 Report of the Supervisory Board		126 Financial Statements

Management summary

The year 2007

•		2007 was a successful year for Philips. We delivered on our growth target, realizing 5% comparable sales growth, and exceeded our profit target with EBITA of 7.7%. Our strong innovation pipeline and balanced portfolio proved their robustness in a weakening economic environment.
•		In 2007 we accelerated the transformation of Philips into a market-focused, people-centric company capable of delivering sustained profits.
•		We invested a total of EUR 1.5 billion in acquiring high-growth, high-margin businesses to strengthen our leadership position in promising markets and to gain access to new markets.
•		At the end of the year, we announced the two largest acquisitions in recent company history, Genlyte and Respironics. The integration of these highly profitable companies is in line with our Vision 2010 strategy.
•		In 2007 we further reduced our shareholdings in LG. Philips LCD and TSMC to 19.9% and 5.0% respectively, generating cash inflows of EUR 5.4 billion and a gain of over EUR 3 billion.
•		We bought back shares for EUR 1.6 billion and returned EUR 0.6 billion cash to our shareholders via the annual dividend payment.
•		At the end of 2007 we announced a further EUR 5 billion share buy-back program, which we intend to largely complete by the end of 2008. In addition, we are proposing a dividend of EUR 0.70 per share in 2008, a 17% increase compared to 2007.

Key data
in millions of euros unless otherwise stated

		20051)				20061)				2007
Sales			25,445				26,682				26,793
EBITA			1,652				1,386				2,065
as a % of sales			6.5				5.2				7.7
EBIT			1,558				1,201				1,852
as a % of sales			6.1				4.5				6.9
Financial income and expenses			104				28				2,613
Income tax expense			(526	)			(167	)			(622	)
Results of equity-accounted investees			1,754				(157	)			763
Minority interests			(11	)			(4	)			(5	)
Income from continuing operations			2,879				901				4,601
Income (loss) from discontinued operations			(11	)			4,482				(433	)
Net income			2,868				5,383				4,168
Per common share (in euro) — basic			2.29				4.58				3.84
Per common share (in euro) — diluted			2.29				4.55				3.80
Net operating capital (NOC)			5,439				8,518				10,586
Cash flows before financing activities			2,841				(2,472	)			5,449
Employees (FTEs)			159,226				121,732				123,801
of which discontinued operations			44,174				6,640				5,703

In 2007 the Philips Group achieved comparable sales growth of 5%. However, because of a 3% negative currency effect and the impact of acquisitions and divestments, nominal sales remained stable compared to 2006.

		Philips Annual Report 2007			35

8 Financial highlights		10 Message from the President		16 The Philips Group		62 The Philips sectors
				Management discussion     and analysis

Comparable sales growth was realized by all divisions, with DAP (15%) and Lighting (6%) delivering particularly strong growth. Comparable sales growth at CE was limited to 1%, mainly due to market share losses in Connected Displays in the first half of 2007, especially in the US. At Medical Systems, comparable sales increased by 4%, despite a softening of the imaging market in the US, due in part to the impact of the Deficit Reduction Act, and in Japan.

Sales growth was particularly strong in emerging markets, which will continue to be increasingly important to Philips. Emerging markets, most notably China, Russia and India, contributed 60% to our comparable sales increase in value, while accounting for 30% of total revenues.

EBIT amounted to EUR 1,852 million, compared to EUR 1,201 million in 2006.

The Group’s EBITA improved by EUR 679 million and amounted to EUR 2,065 million, or 7.7% of sales, the highest margin in recent years, up from 5.2% in 2006. The higher results were primarily driven by DAP and Lighting, which achieved EBITA margins of 17.6% and 11.9% respectively. Additionally, the EUR 146 million cost reduction in the Group Management & Services sector contributed significantly to the earnings improvement. The increase in EBITA was also attributable to a EUR 256 million product liability charge in 2006.

Income from continuing operations amounted to EUR 4,601 million, an increase of EUR 3,700 million compared to 2006. The improvement was driven by EUR 651 million higher operational earnings and EUR 2,585 million increased financial income, primarily due to the sale of shares in TSMC. Income tax charges were EUR 455 million higher, at an effective tax rate of 13.9% in 2007 compared to 13.6% in 2006. Results of equity-accounted investees improved by EUR 920 million, including a EUR 508 million non-taxable gain from the sale of shares of LG.Philips LCD and a EUR 456 million improvement in that company’s operational results.

Income from discontinued operations showed a loss of EUR 433 million, mainly due to MedQuist-related impairment charges, taking into account cumulative foreign currency translation differences. In 2006, income from discontinued operations included a total gain of EUR 4,283 million from the sale of Philips’ majority stake in Semiconductors.

Net income for the Group resulted in a profit of EUR 4,168 million, or EUR 3.84 per share.

Cash flows before financing activities increased by EUR 7.9 billion, largely due to increased cash flows from operating activities, higher inflows from the sale of stakes in TSMC and LG.Philips LCD, and lower cash outflows for acquisitions.

Performance of the Group

In percentage terms, the composition of sales growth in 2007, compared to 2006, was as follows:

Sales growth composition 2007 versus 2006 ¹⁾
in%

		com-								consoli-
		parable				currency				dation				nominal
		growth				effects				changes				growth
Medical Systems			3.6				(5.2	)			1.9				0.3
DAP			15.4				(3.1	)			4.9				17.2
Consumer Electronics			1.0				(2.2	)			(0.8	)			(2.0	)
Lighting			6.0				(3.1	)			8.6				11.5
I&EB			32.2				(4.5	)			(80.6	)			(52.9	)
CMS			30.8				(2.3	)			(10.5	)			18.0
Philips Group			4.9				(3.3	)			(1.2	)			0.4

Group sales grew by 5% on a comparable basis to EUR 26,793 million in 2007. However, because of a 3% negative currency effect and a negative net impact of acquisitions and divestments, mainly due to the divestment of Optical Storage and Mobile Phones, nominal sales remained stable year-over-year.

The comparable sales growth was driven by all market clusters and all product divisions, and was particularly strong at DAP (15.4%) and Lighting (6.0%).

The robust sales increase at DAP was driven by double-digit sales growth in all businesses, most notably Domestic Appliances, and was visible throughout all market clusters, with especially strong growth rates in emerging markets. The increase in Lighting sales was mainly attributable to solid growth in energy-efficient lighting within the Lamps and Luminaires businesses.

36		Philips Annual Report 2007

98 Risk management		112 Our leadership		116 Report of the Supervisory Board		126 Financial Statements

Medical Systems’ growth (3.6%) was led by Ultrasound & Monitoring and Customer Services. Overall sales growth was tempered by a decline at Imaging Systems, primarily due to a softening of the market in the US (including the effect of the Deficit Reduction Act) and Japan. At CE, the sales increase (1.0%) was driven by all businesses, except Connected Displays, which lost market share in the first half of 2007, and was faced with fierce competition and price pressure in the Flat TV segment, particularly in the US.

In 2007, Philips’ gross margin of EUR 9,169 million, or 34.2% of sales, represented an improvement of EUR 919 million compared to 2006 (EUR 8,250 million, or 30.9%). Adjusted for the product liability charge in 2006 (EUR 256 million), gross margin improved from 31.9% of sales to 34.2%. This improvement was primarily driven by higher gross margins at Medical Systems and Lighting.

Selling expenses increased from EUR 4,655 million in 2006 to EUR 4,980 million in 2007, largely due to higher expenditures at Lighting and DAP, both partly related to acquisitions and higher sales. As a percentage of sales, selling expenses increased from 17.4% in 2006 to 18.6% in 2007, mainly attributable to Lighting (mostly due to acquisitions) and Medical Systems.

Research and development costs (EUR 1,629 million, or 6.1% of sales) declined slightly compared to 2006 (EUR 1,659 million, or 6.2% of sales), as lower expenditures at CE, mainly related to the divestment of Mobile Phones, offset increased investments in Medical Systems, Lighting, DAP and Innovation & Emerging Businesses.

General and administrative expenses (EUR 854 million) declined by 12% compared to 2006 (EUR 969 million), largely as a result of lower pension costs and reduced overhead costs in corporate and regional organizations, following the simplification of the regional management structure. As a percentage of sales, G&A costs declined from 3.6% in 2006 to 3.2% in 2007.

The following overview shows sales, EBIT and EBITA according to the 2007 sector classification.

Philips Satinelle Ice is gentle for delicate skin and sensitive body areas thanks to a hypoallergenic ceramic epilating system and a detachable ice cooler.

Sales, EBIT and EBITA 2007
in millions of euros unless otherwise stated

		sales				EBIT				%				EBITA				%
Medical Systems			6,470				743				11.5				875				13.5
DAP			2,968				510				17.2				523				17.6
Consumer Electronics			10,362				322				3.1				325				3.1
Lighting			6,093				675				11.1				722				11.9
I&EB			703				(101	)			(14.4	)			(83	)			(11.8	)
GMS			197				(297	)			—				(297	)			—
Philips Group			26,793				1,852				6.9				2,065				7.7

Sales, EBIT and EBITA 2006¹⁾
in millions of euros unless otherwise stated

		sales				EBIT				%				EBITA				%
Medical Systems			6,448				734				11.4				861				13.4
DAP			2,532				370				14.6				378				14.9
Consumer Electronics			10,576				313				3.0				314				3.0
Lighting			5,466				577				10.6				608				11.1
I&EB			1,493				(94	)			(6.3	)			(76	)			(5.1	)
GMS			167				(699	)			—				(699	)			—
Philips Group			26,682				1,201				4.5				1,386				5.2

		Philips Annual Report 2007			37

8 Financial highlights		10 Message from the President		16 The Philips Group     Management discussion     and analysis		62 The Philips sectors

Philips, together with the Dutch oil company NAM, has developed a new type of lighting for offshore oil platforms, designed to reduce the number of birds being attracted and interrupting their migration across the North Sea (often with fatal consequences).

In 2007, EBIT increased by EUR 651 million compared to 2006, to EUR 1,852 million or 6.9% of sales. Excluding the EUR 256 million product liability charge which was recognized in 2006, EBIT profitability improved by 1.4% in relation to sales, driven by the improved performance of DAP, Lighting and Group Management & Services.

Total EBITA for the Group increased from EUR 1,386 million, or 5.2% of sales, in 2006 to EUR 2,065 million, or 7.7% of sales, in 2007, exceeding the Group’s profitability target of 7.5%.

The main drivers of the year-on-year EBITA improvement were the strong, mainly sales-driven performance at DAP (EUR 145 million) and higher earnings at Lighting (EUR 114 million), as a result of higher sales across almost all businesses and a lower loss in the fluorescent-based LCD Backlighting business. Excluding the EUR 256 million negative impact of product liability charges in 2006, Group Management & Services’ result improved by EUR 146 million due to reduced corporate and regional costs as well as lower pension and brand campaign costs.

Medical Systems’ EBITA of EUR 875 million represented a slight increase compared to 2006, both in absolute value and as a percentage of sales (13.5%).

Higher earnings at Customer Services, Ultrasound & Monitoring and Healthcare Informatics were partly offset by lower earning at Imaging Systems, largely as a consequence of lower sales. However, the division fell short of its 2007 target of 14-15% EBITA profitability, almost entirely due to the challenging nature of the imaging market in 2007, especially in the US, which was affected by the Deficit Reduction Act. The 2007 EBITA included EUR 8 million acquisition-related charges for Intermagnetics, whereas EUR 78 million post-merger integration costs and purchase-accounting charges related to the acquisitions of Witt Biomedical and Intermagnetics were included in 2006.

Exceeding the targeted 15% EBITA profitability, DAP’s EBITA increase of EUR 145 million compared to 2006 was primarily driven by strong sales growth, supported by the full-year contribution of Avent, and rapid expansion in emerging markets with stable margins. In addition, effective cost management supported the EBITA profitability increase of 2.7% of sales compared to 2006. All DAP businesses supported the overall year-on-year improvement, both in nominal terms and as a percentage of sales.

CE’s EBITA reached EUR 325 million, or 3.1% of sales, compared to 3.0% in 2006, in line with the target set for the division. A sales decline and high margin pressure at Connected Displays, particularly in North America, were more than offset by higher EBITA in the other businesses, most notably Peripherals & Accessories and Entertainment Solutions.

Lighting’s EBITA improved to EUR 722 million, or 11.9% of sales, mainly due to higher earnings in Lamps, Lumileds, Luminaires and additional EBITA from the acquisition of Partners in Lighting International (PLI). The exit from the loss-making fluorescent lamp-based LCD backlighting business at the beginning of 2007 also added to the EBITA improvement.

The EBITA loss at Innovation & Emerging Businesses amounted to EUR 83 million, compared to a loss of EUR 76 million in 2006. EBITA in 2006 included an aggregated gain of EUR 76 million on the divestment of several businesses within Corporate Investments and Corporate Technologies. In 2007, EBITA improved due to EUR 44 million higher license income.

38 Philips Annual Report 2007

98 Risk management		112 Our leadership		116 Report of the Supervisory Board		126 Financial Statements

EBITA at Group Management & Services improved by EUR 402 million compared to 2006, when the EUR 256 million product liability charge was recognized. The improvement in EBITA was also driven by a EUR 146 million reduction in Corporate, Country & Regional overheads, lower pension costs and reduced investments in the brand campaign.

In 2007, net periodic pension costs of defined-benefit pension plans amounted to EUR 27 million, compared to EUR 75 million in 2006, mainly due to an increase in plan assets in 2006. The payments to defined-contribution pension plans amounted to EUR 84 million, EUR 4 million higher than in 2006, largely due to acquisitions.

The accounting rule for pensions and other postretirement benefits (SFAS No. 158) requires Philips to recognize the funded status of pensions and other postretirement benefit plans on the balance sheet. As a consequence, new actuarial gains and losses and unrecognized prior service cost resulting from plan amendments will directly affect stockholders’ equity through changes in other comprehensive income. The amortization of such costs is removed from equity in the period that they are included in the net periodic pension costs. The effect of SFAS 158 on stockholders’ equity resulted in an increase in other comprehensive income of EUR 218 million in 2007, compared to a net reduction of equity of EUR 477 million in 2006.

Restructuring charges

In 2007, EBIT included a net charge of EUR 37 million for restructuring.

Restructuring charges
in millions of euros

			2005	1)			20061	1)			2007
Restructuring:
Medical Systems			2				14				1
DAP			4				13				1
Consumer Electronics			67				12				7
Lighting			35				48				28
I&EB			26				—				1
GMS			—				—				4
Reduction of excess provisions			(8	)			(5	)			(5	)
			126				82				37

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

The Company’s remaining restructuring in 2007 covered a number of smaller projects.

The most significant restructuring projects in 2006 were Medical Systems’ transfer of the production of SPECT cameras from Milpitas to Cleveland, the restructuring of the Klagenfurt site (Austria), and a reduction of the fixed cost base and the creation of a more diverse and flexible supply base in DAP. Other projects included the reallocation of parts of the Lighting activities in Weert (Netherlands) to low-cost areas, the relocation in Mexico of all Juarez Lighting-plant activities to the Monterrey plant, and Lighting’s relocation of the standard Lead in Wire business from Deurne (Netherlands) to Poland.

		Philips Annual Report 2007			39

8 Financial highlights		10 Message from the President		16 The Philips Group     Management discussion     and analysis		62 The Philips sectors

Financial income and expenses

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

Financial income and expenses
in millions of euros

			20051)				20061)				2007
Interest expense (net)			(202	)			(189	)			(43	)
Sale of securities			233				—				2,549
Other			73				217				107
			104				28				2,613

The net interest expense in 2007 was EUR 146 million lower than in 2006, mainly as a result of the higher average cash position of the Group and higher average interest rates applied to those deposits. Additionally, interest expense decreased mainly as a result of a reduction in average debt during 2007 compared to 2006.

Sale of securities
in millions of euros

		2005						2006			2007
Gain on sale of Atos Origin shares			185					—			—
Gain on sale of Great Nordic shares			48					—			—
Gain on sale TSMC shares			—					—			2,528
Loss on sale of JDS Uniphase			—					—			(10	)
Gain on sale of Nuance			—					—			31
			233					—			2,549

In 2007, a total gain of EUR 2,549 million was recognized on the sale of shares in TSMC, Nuance and JDS Uniphase, whereas during 2006 there were no sales of securities.

Other financial income of EUR 107 million in 2007 included a cash dividend of EUR 128 million from TSMC and a EUR 12 million gain related to the revaluation of the convertible bond received from TPV Technology. This was partly offset by a EUR 36 million impairment of JDS Uniphase prior to the sale.

In 2006, other financial income of EUR 217 million included a cash dividend of EUR 223 million from TSMC, a gain of EUR 97 million upon the designation of the TSMC stock dividend as trading securities, and a gain of EUR 29 million as a result of an increase in the fair value of these trading securities.

This was partly offset by losses of EUR 77 million resulting from an impairment of the available-for-sale holding in TPO Display and of EUR 61 million due to a decline in the fair value of the share option within a convertible bond received from TPV Technology.

Income taxes amounted to EUR 622 million, compared to EUR 167 million in 2006. The tax burden in 2007 corresponded to an effective tax rate of 13.9% on pre-tax income, compared to 13.6% in 2006.

The effective tax rate in 2007 was affected by tax-exempt items such as the non-taxable gain on the sale of shares in TSMC. Non-taxable items in 2006 were the TSMC dividend, as well as the gains and losses resulting from changes in the fair value of TSMC stock and the TPV convertible bond. Income taxes in 2006 were also positively affected by a reduction in the Dutch corporate tax rate and gains resulting from final agreements on prior-year taxes in various jurisdictions.

For 2008, the effective tax rate excluding non-taxable items is expected to be around 30%, broadly in line with 2007.

For further information, please refer to note 6 of the notes to the Group financial statements.

Results of equity-accounted investees

The results relating to equity-accounted investees increased by EUR 920 million compared to 2006 and resulted in income of EUR 763 million in 2007, a breakdown of which is given in the table below.

Results of equity-accounted investees
in millions of euros

			20051)				20061)				2007
Company’s participation in income (loss)			513				(180	)			271
Results on sale of shares			1,545				79				514
Gains arising from dilution effects			165				14				—
Investment impairment and guarantee charges			(469	)			(70	)			(22	)
			1,754				(157	)			763

40		Philips Annual Report 2007

98 Risk management		112 Our leadership		116 Report of the Supervisory Board		126 Financial Statements

The Company’s participation in the net income of equity-accounted investees increased from a loss of EUR 180 million in 2006 to a profit of EUR 271 million in 2007, mainly due to higher earnings at LG.Philips LCD. Philips’ share in LG.Philips LCD’s operational result in 2007 improved by EUR 456 million compared to 2006, resulting in a profit of EUR 260 million, compared to a loss of EUR 196 million in 2006.

Earnings from the sale of shares mainly consisted of the EUR 508 million non-taxable gain on the sale of a 13% stake in LG.Philips LCD, reducing Philips’ shareholding from 32.9% to 19.9%. In 2006, a EUR 76 million non-taxable gain was recognized on the sale of the remaining 8.4 million shares of common stock in FEI, which reduced Philips’ shareholding from 24.8% to zero.

In 2006, gains and losses arising from dilution effects were mainly due to a EUR 14 million dilution gain recorded for TPV.

In 2006, investment impairment and guarantee charges primarily related to a EUR 61 million loss which was recognized as a result of agreements made with LG.Philips Displays for voluntary payments (social contributions and environmental clean-up), mainly in France, Germany, the Netherlands and the UK.

The share of minority interests in the income of Group companies reduced income by EUR 5 million, compared to EUR 4 million in 2006.

In this Annual Report, Philips reports the results of Mobile Display Systems, Semiconductors and MedQuist separately as discontinued operations. Consequently, the related results, including transaction gains and losses, are shown separately in the financial statements under discontinued operations.

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

In 2007, Philips and the German Heart Institute in Berlin (DHZB) opened the first fully integrated Philips Electrophysiology Lab. By creating a more intuitive working environment and integrating data management, workflow efficiency is greatly improved. Being able to determine the ambient environment of the lab puts patients at ease. The result — better clinical focus and a friendlier environment for patients.

In 2006, the Company sold a majority stake in its Semiconductors division to a private equity consortium. The transaction consisted of the sale of the division for a total consideration of EUR 7,913 million and the simultaneous acquisition of a minority interest in the recapitalized organization at a cost of EUR 854 million. A net gain of EUR 4,283 million was recorded on the sale.

The 2006 results of discontinued operations also included a EUR 29 million gain on the sale of Mobile Display Systems to TPO.

		Philips Annual Report 2007			41

8 Financial highlights		10 Message from the President		16 The Philips Group     Management discussion     and analysis		62 The Philips sectors

The market launch of the first dual-branded products in September made the combined strengths of Philips and Avent clearly visible to our consumers.

Net income

In 2007, income from continuing operations amounted to EUR 4,601 million, an increase of EUR 3,700 million compared with 2006. The improvement was driven by EUR 651 million higher EBIT and a EUR 2,585 million increase in financial income, primarily due to the sale of shares in TSMC.The EUR 455 million higher income tax charges were more than offset by a EUR 920 million increase in results relating to equity-accounted investees, which included a EUR 508 million gain on the sale of shares of LG.Philips LCD as well as a EUR 456 million increase in that company’s operational results.

The loss from discontinued operations amounted to EUR 433 million, mainly due to the aforementioned MedQuist-related losses, whereas 2006 included a total gain of EUR 4,283 million from the sale of a majority stake in the Semiconductors division.

Net income for the Group showed a profit of EUR 4,168 million, or EUR 3.84 per common share, compared to EUR 5,383 million, or EUR 4.58 per common share, in 2006.

Performance by market cluster

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

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

In 2007, sales growth was particularly strong in emerging markets, which will continue to be a focal area of growth for Philips. Emerging markets, most notably China, Russia and India, contributed 60% to our comparable sales increase in value, while accounting for approximately one third of total revenues.

Key emerging markets showed strong comparable growth, primarily driven by Lighting, Medical Systems and DAP, partly offset by a sales decline at CE, mainly due to Connected Displays in Latin America.

Other emerging markets delivered strong double-digit sales growth compared to 2006, driven by the outstanding performance of DAP and CE as well as robust expansion of Lighting and Medical Systems in these countries.

Sales in Western Europe showed a solid increase on a comparable basis, visible in all sectors, most notably the double-digit increase at DAP, followed by good performances by CE, Lighting and Medical Systems.

42		Philips Annual Report 2007

98 Risk management		112 Our leadership		116 Report of the Supervisory Board		126 Financial Statements

In North America, sales on a comparable basis remained stable compared to 2006. A strong performance by DAP, driven by the successful introduction of new shaving and oral healthcare products, and moderate growth at Medical Systems, despite a decline at Imaging Systems, were largely offset by lower comparable sales at CE, predominantly attributable to strong competition and price pressure in Flat TV.

EBITA in mature markets in Europe increased by EUR 328 million, driven by DAP, CE and Lighting. The EBITA improvement in North America was largely due to the EUR 256 million product liability charge in 2006. Key emerging markets generated EBITA of EUR 209 million, a EUR 84 million improvement compared to 2006, mainly driven by significantly higher EBITA at DAP and Lighting. EBITA declined in other emerging markets, largely due to CE.

EBITA per market cluster
in millions of euros

			2005	1)			2006	1)			2007
Western Europe			1,036				953				1,281
North America			296				23				315
Other mature markets			37				32				41
Total mature markets			1,369				1,008				1,637
Key emerging markets			79				125				209
Other emerging markets			204				253				219
			1,652				1,386				2,065

EBIT per market cluster
in millions of euros

			2005	1)			2006	1)			2007
Western Europe			1,034				944				1,215
North America			206				(151	)			171
Other mature markets			37				32				41
Total mature markets			1,277				825				1,427
Key emerging markets			77				123				206
Other emerging markets			204				253				219
			1,558				1,201				1,852

Marketing

Philips continues to increase its focus on insight-driven innovation to fuel growth. 2007 saw improvements in our ability to understand user needs and to translate these insights into compelling solutions. The increase in quality of our user insights is evidenced by the top-tier performance against industry benchmark of more than half our end-user insight projects, an improvement of 20% compared to 2006.

Key products and solutions launched in 2007 such as HeartStart MRx, Arcitec, Aurea and AmbiScene, are examples of products based on compelling user insights in Medical Systems, DAP, CE and Lighting respectively. Our progress in insight-driven innovation enables us to develop solutions which are truly differentiating in the perception of people using them. This puts us in a better position to maintain premium price levels and therefore to drive sustainable profitable growth.

In 2007, total Philips marketing expenditures amounted to EUR 994 million, or 3.7% of sales, compared to 3.3 % of sales in 2006. The spend increases in advertising and promotion — our largest spend categories — were partly offset by efficiency gains realized in cost of infrastructure. In addition, we invested more in marketing intelligence to strengthen our understanding of end-user and customer insights.

		Philips Annual Report 2007			43

8 Financial highlights		10 Message from the President		16 The Philips Group     Management discussion     and analysis		62 The Philips sectors

In 2007, we continued to invest in building the Philips brand, supported by a EUR 111 million investment in the global brand campaign. These efforts resulted in a substantial year-on-year increase in our brand value, as reported by Interbrand, rising from USD 6.7 billion in 2006 to USD 7.7 billion in 2007. The Philips brand was ranked the 42nd most valuable global brand in 2007, up from 48th in 2006, according to Interbrand.

The 2007 development was primarily driven by increased appreciation of our Medical Systems business, which currently has the highest brand value within the Group. The Interbrand analysis showed that 35% of sales decisions in the healthcare sector are made based on brand. This demonstrates the importance of a strong brand for driving sales in the business-to-business as well as the business-to-consumer environment. The Philips brand is strongly positioned to do so.

Research and development

Strong performance in innovation is critical for Philips to increase its market competitiveness. Through substantial investments in research & development (R&D), Philips has created a vast knowledge base. In direct response to the needs of the market, Philips has adopted a more end-user-oriented approach to innovation in recent years, in order to balance investments between projects with more apparent short-term commercial prospects and projects creating new options for medium and long-term value-creation.

Philips’ R&D activities are shared across Corporate Technologies and the operating divisions. The Chief Technology Officer (CTO) of Philips manages the enabling technologies across the Company.

Corporate Technologies, employing 2,800 people, invests in world-class competencies and technologies that are relevant to the entire Philips Group. In the operating divisions, some 7,800 employees in 26 countries are predominantly engaged in the development of products and applications.

Technology, competence and innovation management

The CTO office is focused on technology management, competence management and innovation effectiveness across Philips. Competence management in R&D is supported by a company-wide R&D core curriculum. The CTO office also runs the Innovation Excellence program, a cross-functional drive towards a market-driven alignment of all Philips-wide innovation processes.

44		Philips Annual Report 2007

98 Risk management		112 Our leadership		116 Report of the Supervisory Board		126 Financial Statements

In 2007, Philips’ invested EUR 1.6 billion, or 6.1% of sales, in research and development, slightly less than in 2006. Higher investments in Medical Systems, Lighting, DAP and Innovation & Emerging Businesses were more than offset by lower expenditures in CE, largely due to the divestment of Mobile Phones.

Research and development expenditures per sector ²⁾³⁾
in millions of euros

		20051)				20061)				2007
Medical Systems			517				566				584
DAP			139				168				171
Consumer Electronics			419				385				311
Lighting			212				269				282
I&EB			587				577				598
Inter-sector eliminations			(281	)			(306	)			(317	)
Philips Group			1,593				1,659				1,629

Medical Systems’ increase in R&D investment was primarily related to the acquisition of Intermagnetics at the end of 2006. DAP’s expenditures on research and development were on par with 2006, including investments in the new Arcitec shaver and the FlexCare toothbrush, both launched in the second half of 2007. CE reduced its R&D expenditures, primarily due to the divestment of the Mobile Phones business. Lighting’s research and development costs increased slightly compared to 2006, primarily due to acquisitions. Research and development expenditures at Innovation & Emerging Businesses increased year-on-year, primarily due to higher R&D investments in the Healthcare and Lifestyle Incubators within Corporate Technologies.

In 2007, investments in innovative technologies increased, especially in energy-efficient and solid-state lighting solutions as well as in the areas of healthcare and wellness.

Philips’ strong innovation pipeline contributed significantly to the Company’s sales growth in 2007, as 56% of Group sales came from newly introduced products, mainly driven by above-average contributions from CE and Medical Systems. Philips aims to maintain its new-product-to-sales ratio above 50%, while at the same time focusing on the profitability of new products.

At the Izmir Sirinyer Hippodrome in Turkey, a new lighting installation featuring state-of-the-art Philips ArenaVision floodlights has been commissioned to allow night-time racing for the very first time.

Philips Annual Report 2007       45

8 Financial highlights		10 Message from the President		16 The Philips Group		62 The Philips sectors
				Management discussion
				and analysis

Opening at Schiphol Airport, Amsterdam, in early 2008, the first implementation of Philips’ ‘One Star is Born’concept by hotel chain citizenM has been developed to offer guests’affordable luxury’. Integrating multiple functionalities, this innovative solution puts the consumer at the heart of the hotel experience and enables hotel owners to optimize operating costs.

Employment

Employment
in FTEs

		2005				2006				2007
Position at beginning of year			161,586				159,226				121,732
Consolidation changes:
- new consolidations			1,795				4,834				6,654
- deconsolidations			(2,552	)			(44,085	)			(3,535	)
Comparable change			(1,603	)			1,757				(1,050	)
Position at year-end			159,226				121,732				123,801
of which:
continuing operations			115,052				115,092				118,098
discontinued operations			44,174				6,640				5,703

Excluding discontinued operations (MedQuist in 2007 and Semiconductors in 2006), the total number of employees of the Philips Group was 118,098 at the end of 2007, compared to 115,092 at the end of 2006. Approximately 46% were employed in the Lighting sector, due to the strong vertical integration of this business, and about 23% at Medical Systems. The consumer businesses DAP and CE accounted for 20% of Philips’ workforce.

The main employee increase in 2007 came from acquisitions made in Lighting (Partners in Lighting International, Color Kinetics), CE (Digital Lifestyle Outfitters) and in Innovation & Emerging Businesses (Health Watch and Raytel Cardiac Services).

The largest reductions in 2007 occurred due to the sale of business interests in Innovation & Emerging Businesses (most notably Optical Storage), in CE (primarily the Mobile Phones business) and in Group Management & Services (principally the Financial Shared Services operations).

46       Philips Annual Report 2007

98 Risk management		112 Our leadership		116 Report of the Supervisory Board		126 Financial Statements

Employees per sector
in FTEs at year-end

		2005				2006				2007
Medical Systems			24,221				26,203				27,441
DAP			8,203				9,933				9,881
Consumer Electronics			15,537				14,486				13,516
Lighting			45,649				47,739				54,323
I&EB			15,130				9,852				7,638
CMS			6,312				6,879				5,299
			115,052				115,092				118,098
Discontinued operations			44,174				6,640				5,703
			159,226				121,732				123,801

Some 60% of Philips’ workforce is located in mature markets, and some 40% in emerging markets. In 2007, key emerging markets saw a nominal employee decline compared to 2006, largely due to the sale of the Financial Shared Services operations in India and the divestment of Mobile Phones within CE. The sale of the Financial Shared Services operations in Poland and Thailand was the main reason for the employee decline in other emerging markets. In mature markets in Europe, the number of employees increased, mainly due to the acquisition of Belgium-based PLI. North America saw an increase in employees mainly related to the acquisitions of Color Kinetics, DLO, Health Watch and Raytel Cardiac Services.

Employees per market cluster
in FTEs at year-end

		2005				2006				2007
Western Europe			42,226				38,852				46,466
North America			17,455				20,501				21,682
Other mature markets			1,900				1,831				1,850
Total mature markets			61,581				61,184				69,998
Key emerging markets			32,469				31,893				30,323
Other emerging markets			21,002				22,015				17,777
			115,052				115,092				118,098
Discontinued operations			44,174				6,640				5,703
			159,226				121,732				123,801

Sales per employee decreased by 2% from EUR 228,000 in 2006 to EUR 224,000 in 2007, affected by 4% unfavorable currency movements compared to 2006.

Adjusted for the adverse foreign currency impact in 2007, average sales per employee increased by 2%. This rise was driven by the significantly improved performance in CE, DAP and Lighting, partly offset by declines in Medical Systems, primarily due to the further vertical integration related to the acquisition of Intermagnetics, and in Innovation & Emerging Businesses, related to the divestment of Optical Storage.

Philips Annual Report 2007       47

8 Financial highlights		10 Message from the President		16 The Philips Group		62 The Philips sectors
				Liquidity and
				capital resources

Liquidity and capital resources

Cash flows provided by continuing operations

Condensed consolidated statements of cash flows for the years ended December 31, 2005, 2006 and 2007 are presented below:

Condensed consolidated cash flow statements
in millions of euros

		20051)				20061)				2007
Cash flows from operating activities:
Net income			2,868				5,383				4,168
(Income) loss from discontinued operations			11				(4,482	)			433
Adjustments to reconcile net income to net cash provided by operating activities			(1,732	)			(571	)			(3,082	)
Net cash provided by operating activities			1,147				330				1,519
Net cash provided by (used for) investing activities			1,694				(2,802	)			3,930
Cash flows before financing activities			2,841				(2,472	)			5,449
Net cash used for financing activities			(2,589	)			(3,715	)			(2,368	)
Cash provided by (used for) continuing operations			252				(6,187	)			3,081
Net cash provided by (used for) discontinued operations			533				7,114				(115	)
Effect of changes in exchange rates on cash positions			159				(197	)			(112	)
Total change in cash and cash equivalents			944				730				2,854
Cash and cash equivalents at beginning of year			4,349				5,293				6,023
Less cash and cash equivalents at end of year - discontinued operations			150				137				108
Cash and cash equivalents at end of year - continuing operations			5,143				5,886				8,769

Net cash from operating activities amounted to EUR 1,519 million in 2007, compared to cash flows of EUR 330 million in 2006. This EUR 1,189 million increase was driven by higher cash generation at DAP, CE and GMS, due to increased earnings and lower working capital requirements. In addition, the improvement was related to a EUR 742 million reduction in pension contributions compared to 2006, which positively affected working capital.

Net capital expenditures totaled EUR 698 million, broadly in line with 2006. Reduced expenditures in Lighting — mainly related to higher investments in the acquired Lumileds business in 2006 — and DAP were partly offset by higher investments at Medical Systems and CE. Proceeds from the sale of fixed assets were lower than in 2006.

The EUR 4,105 million proceeds from the sale of other non-current financial assets were primarily related to the further reduction of our financial holding in TSMC, which yielded EUR 3,895 million.

48       Philips Annual Report 2007

98 Risk management		112 Our leadership		116 Report of the Supervisory Board		126 Financial Statements

Additionally, EUR 1,640 million cash was generated from the sale of interests in businesses, including the sale of 46.4 million shares in LG. Philips LCD, resulting in a cash inflow of EUR 1,547 million, as well as the divestments of the remaining parts of Optical Storage and Mobile Phones. Furthermore, a net amount of EUR 385 million cash was generated from maturing currency hedges.

During 2007, a total of EUR 1,502 million was utilized for acquisitions, notably PLI (EUR 561 million) and Color Kinetics (EUR 515 million), as well as DLO, Health Watch and Raytel Cardiac Services.

In 2006, a total of EUR 2,498 million was used for acquisitions, notably Intermagnetics (EUR 993 million), Avent (EUR 689 million), Lifeline (EUR 583 million) and Witt Biomedical (EUR 110 million). The divestment of businesses, primarily within Innovation & Emerging Businesses, generated EUR 384 million cash.

Cash flow from discontinued operations

In 2007, EUR 115 million cash was used by discontinued operations, the majority of which related to tax payments in connection with the 2006 sale of Philips’ majority stake in the Semiconductors business and operating cash flows of MedQuist in 2007.

In 2006, discontinued operations generated cash flows of EUR 7,114 million, predominantly related to the sale of a majority stake in the Semiconductors division, which generated EUR 7,059 million.

Cash flows from financing activities

Net cash used for financing activities in 2007 was EUR 2,368 million. The impact of changes in debt was a reduction of EUR 281 million, including a EUR 113 million repayment of long-term bank borrowings. Philips’ shareholders were paid EUR 659 million in dividend. Additionally, cash outflows for share repurchase totaled EUR 1,609 million. This included EUR 810 million related to hedging of obligations under the long-term employee incentive and employee stock purchase programs, and a total of EUR 823 million related to the repurchases of the shares for cancellation, offset by EUR 24 million representing dividend tax credit facility. Partially offsetting these cash outflows was a net cash inflow of EUR 161 million due to the exercise of stock options.

Net cash used for financing activities in 2006 was EUR 3,715 million. The impact of changes in debt was a reduction of EUR 437 million, including a EUR 208 million scheduled bond repayment Philips’ shareholders were paid EUR 523 million in dividend. Additionally, cash outflows for share repurchase totaled EUR 2,899 million. This included EUR 414 million final repurchases related to the EUR 1.5 billion share repurchase program announced in August 2005 that was completed in February 2006, a total of EUR 118 million related to

Philips Annual Report 2007       49

8 Financial highlights		10 Message from the President		16 The Philips Group		62 The Philips sectors
				Liquidity and
				capital resources

hedging of obligations under the long-term employee incentive and employee stock purchase programs, and a total of EUR 2,367 million of share repurchases for cancellation between July and December 2006. Offsetting the cash outflows in part was a net cash inflow of EUR 145 million due to the exercise of stock options.

Financing

The consolidated balance sheet for the years 2007,2006 and 2005 is presented below:

Condensed consolidated balance sheet
in millions of euros

		20051)				20061)				2007
Cash and cash equivalents			5,143				5,886				8,769
Receivables			8,874				9,651				9,500
Assets of discontinued operations			4,484				431				333
Inventories			2,797				2,880				3,203
Equity-accounted investees			5,338				2,974				1,886
Other non-current financial assets			729				8,055				3,183
Property, plant and equipment			2,999				3,084				3,180
Intangible assets			3,541				5,536				6,289
Total assets			33,905				38,497				36,343
Accounts payable and other liabilities			8,433				8,129				7,799
Liabilities of discontinued operations			1,627				169				157
Provisions			2,634				3,293				3,104
Debt			4,487				3,869				3,557
Minority interests			58				40				42
Stockholders’ equity			16,666				22,997				21,684
Total liabilities and equity			33,905				38,497				36,343

Cash and cash equivalents

In 2007, cash and cash equivalents from continuing operations increased by EUR 2,883 million to EUR 8,769 million at year-end. Cash proceeds from divestments amounted to EUR 5,745 million, including a net cash inflow of EUR 3,895 million as a result of the sale of shares in TSMC and EUR 1,547 million for LG. Philips LCD. The share buyback programs led to a cash outflow of EUR 1,609 million. There were further cash outflows for acquisitions of EUR 1,502 million, including EUR 561 million for Partners in Lighting International, EUR 515 million for the acquisition of Color Kinetics, EUR 94 million for Health Watch, EUR 55 million for TIR Systems, EUR 77 million for Digital Lifestyle Outfitters and EUR 74 million for Raytel Cardiac Services. Furthermore, a dividend of EUR 659 million was paid. Currency changes during 2007 decreased cash and cash equivalents by EUR 112 million.

In 2006, cash and cash equivalents from continuing operations increased by EUR 743 million to EUR 5,886 million at year-end.

Cash proceeds from divestments amounted to EUR 7,218 million, including a net cash inflow of EUR 7,059 million as a result of the sale of a majority stake in the Semiconductors division. The share buyback programs led to a cash outflow of EUR 2,899 million. There were further cash outflows for acquisitions of EUR 2,498 million, including EUR 583 million for the acquisition of Lifeline, EUR 689 million for Avent, EUR 993 million for Intermagnetics and EUR 110 million for Witt Biomedical. Furthermore, a dividend of EUR 523 million was paid. Currency changes during 2006 decreased cash and cash equivalents by EUR 197 million.

Debt position

Total debt outstanding at the end of 2007 was EUR 3,557 million, compared with EUR 3,869 million at the end of 2006.

Changes in debt
in millions of euros

		20051)				20061)				2007
New borrowings			74				106				29
Repayments			(398	)			(543	)			(310	)
Consolidation and currency effects			298				(181	)			(31	)
Total changes in debt			(26	)			(618	)			(312	)

During the year, total debt decreased by EUR 312 million. Philips repaid EUR 113 million of bank facilities; repayments under capital leases were EUR 24 million and EUR 15 million resulted from reductions in other long-term debt. Repayments under short-term debt totaled EUR 158 million. New borrowings totaled EUR 29 million. Other changes resulting from consolidation and currency effects led to a reduction of EUR 31 million.

In 2006, total debt decreased by EUR 618 million. Philips repaid EUR 208 million in a scheduled bond repayment. The remaining repayments consisted of bank facilities of EUR 277 million, capital lease transactions of EUR 8 million and EUR 50 million resulting from reductions in other debt. New borrowings of EUR 106 million included EUR 97 million from increased short-term borrowings.

50       Philips Annual Report 2007

98 Risk management		112 Our leadership		116 Report of the Supervisory Board		126 Financial Statements

Other changes resulting from consolidation and currency effects led to a reduction of EUR 181 million.

Long-term debt as a proportion of the total debt stood at 34% at the end of 2007, compared to 78% at the end of 2006.

Net debt to group equity

The Company had a net cash position (cash and cash equivalents, net of debt) of EUR 5,212 million at the end of 2007, compared to a net cash position at the end of 2006 of EUR 2,017 million.

Stockholders’ equity

Stockholders’ equity decreased by EUR 1,313 million to EUR 21,684 million at December 31,2007. The decrease was mainly attributable to share repurchase programs for both capital reduction purposes and the hedging of long-term incentive and employee stock purchase programs, which reduced equity by a total of EUR 1,633 million. The dividend payment to shareholders in 2007 further reduced equity by EUR 659 million. The decrease was offset by EUR 305 million related to re-issuance of treasury stock and share-based compensation plans and a further EUR 674 million increase related to total changes in comprehensive income net of tax.

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

The number of outstanding common shares of Royal Philips Electronics at December 31, 2007, was 1,065 million (2006:1, 107 million).

At the end of 2007, the Company held 52.1 million shares in treasury to cover the future delivery of shares in connection with the 61.4 million rights outstanding at year-end 2007 under the Company’s long-term incentive plan and convertible personnel debentures. At the end of 2007, the Company held 25.8 million shares for cancellation. At the end of 2006, the Company held 35.9 million shares in treasury to cover the future delivery of shares in connection with the 65.5 million rights outstanding at year-end 2006 under the Company’s long-term incentive plans and convertible personnel debentures. Treasury shares are accounted for as a reduction of stockholders’ equity.

Liquidity position

Including the Company’s net cash position, listed available for-sale securities, trading securities and listed equity-accounted investees, as well as its USD 2.5 billion commercial paper program supported by the revolving credit facility, the Company had access to net available liquidity resources of EUR 11,374 million as of December 31, 2007, compared to EUR 13,439 million one year earlier.

Philips Annual Report 2007       51

8 Financial highlights		10 Message from the President		16 The Philips Group		62 The Philips sectors
				Liquidity and
				capital resources

Liquidity position
in millions of euros

		20052)				20062)				2007
Cash and cash equivalents			5,143				5,886				8,769
Long-term debt			(3,320	)			(3,006	)			(1,212	)
Short-term debt			(1,167	)			(863	)			(2,345	)
Net cash			656				2,017				5,212
Available-for-sale securities at market value			113				6,529				1,776
Trading securities			—				192				—
Main listed investments in equity-accounted investees at market value			11,139				2,803				2,688
Net available liquidity			11,908				11,541				9,676
Revolving credit facility / CP program1)			2,109				1,898				1,698
Net available liquidity resources			14,017				13,439				11,374

The fair value of the Company’s listed available-for-sale securities, based on quoted market prices at December 31, 2007, amounted to EUR 1,776 million, of which EUR 1,699 million related to TSMC. Philips’ shareholdings in its main listed equity-accounted investees had a fair value of EUR 2,688 million based on quoted market prices at December 31, 2007, and consisted primarily of the Company’s holdings in LG.Philips LCD with a value of EUR 2,556 million and TPV Technology with a value of EUR 130 million. The Company has a lock-up period associated with the sale of shares in TPV that expires in September 2008 and LG.Philips LCD that expired in January 2008.

Philips has a USD 2.5 billion commercial paper program, under which it can issue commercial paper up to 364 days in tenor, both in the US and in Europe, in any major freely convertible currency. There is a panel of banks, six in Europe and five in the US, that support the program. When Philips wants to fund through the commercial paper program, it contacts the panel of banks. The interest is at market rates prevailing at the time of issuance of the commercial paper. There is no collateral requirement in the commercial paper program. There are no limitations on Philips’ use of the program, save for market considerations, e.g. that the commercial paper market itself is not open. If this were to be the case, Philips’ USD 2.5 billion committed revolving credit facility could act as back-up for short-term financing requirements that normally would be satisfied through the commercial paper program. The USD 2.5 billion revolving credit facility does not have a material adverse change clause, has no financial covenants and does not have credit-rating-related acceleration possibilities. As of December 31, 2007, Philips did not have any commercial paper outstanding.

As at December 31, 2007, the Company had total cash and cash equivalents of EUR 8,769 million; the Company pools cash from subsidiaries in the extent legally and economically feasible. Cash in subsidiaries is not necessarily freely available for alternative uses due to possible legal or economic restrictions. The amount of cash not immediately available is not considered material for the Company to meet its cash obligations. The Company had a total debt position of EUR 3,557 million at year-end 2007.

The Company expects to have significant cash outflows during 2008 that will affect the overall liquidity position of the Company. In November 2007, the Company announced the aquisition of Genlyte Group Incorporated for an expected purchase price of EUR 1.8 billion. This acquisition was completed in January 2008. During December 2007 the Company announced further acquisitions including Respironics for an expected purchase price of EUR 3.6 billion and VISICU for EUR 290 million. The Company has also announced its intention to repurchase a further EUR 5 billion of shares for cancellation, and this program is largely expected to be completed during 2008. Also included within total short-term debt is EUR 1,692 million of bonds, with EUR 130 million due to mature in February 2008 and EUR 1,562 million due to mature in May 2008. The dividend for 2008 is expected to be some EUR 715 million.

Guarantees and contractual cash obligations

Guarantees

Guarantees issued or modified after December 31,2003, having characteristics defined in FASB Interpretation No. 45 ‘Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others’ (FIN 45), are measured at fair value and recognized on the balance sheet. At the end of 2007, the total fair value of guarantees recognized by the Company was EUR 3 million.

Guarantees issued before December 31, 2003, and not modified afterwards, and guarantees issued after December 31, 2003, which do not have characteristics defined in FIN 45, remain off-balance sheet.

52       Philips Annual Report 2007

98 Risk management		112 Our leadership		116 Report of the Supervisory Board		126 Financial Statements

Philips’ policy is to provide only guarantees and other letters of support, in writing. Philips does not stand by other forms of support. The following table outlines the total outstanding off-balance sheet credit-related guarantees and business-related guarantees provided by Philips for the benefit of unconsolidated companies and third parties as at December 31,2007.

Expiration per period 2007
in millions of euros

		total				less
		amounts				than 1								after 5
		committed				year				1-5 years				years
Business-related guarantees			432				142				95				195
Credit-related guarantees			45				5				16				24
			477				147				111				219

Expiration per period 2006
in millions of euros

		total				less
		amounts				than 1								after 5
		committed				year				1-5 years				years
Business-related guarantees			466				151				80				235
Credit-related guarantees			42				14				2				26
			508				165				82				261

Contractual cash obligations

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

Cash obligations at December 31,2007 ²⁾
in millions of euros

		payments due by period
						less
						than 1				1-3				3-5				after 5
		total				year				years				years				years
Long-term debt1)			2,973				1,841				19				754				359
Capital lease obligations1)			88				8				15				8				57
Short-term debt1)			496				496				—				—				—
Operating leases1)			730				147				232				134				217
Bond interest			655				171				143				97				244
			4,942				2,663				409				993				877

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

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

The Company had total amounts payable in relation to accrued interest on debt of EUR 110 million as at December 31,2007.

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

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

The Company currently expects cash outflows in relation to employee benefits which are estimated to amount to EUR 314 million in 2008 (2007: EUR 433 million), consisting of EUR 160 million employer contributions to defined-benefit pension plans, EUR 89 million employer contributions to defined-contribution pension plans, and EUR 65 million expected cash outflows in relation to unfunded pension plans.

The expected cash outflows in 2008 and subsequent years are uncertain and may change substantially as a consequence of statutory funding requirements as well as changes in actual versus currently assumed discount rates, estimations of compensation increases and returns on pension plan assets.

for further details about cash obligations related to pension plans, see note 20 of the group financial statements.

Philips Annual Report 2007       53

8 Financial highlights		10 Message from the President		16 The Philips Group		62 The Philips sectors
				Acquisitions

Acquisitions

In the course of 2007 we completed ten strategically aligned acquisitions and announced three more acquisitions that are expected to be, or have been, completed in the first quarter of 2008. At the same time, we divested a number of non-core activities and reduced our shareholdings in cyclical businesses in a responsible manner

The Color Kinetics-illuminated London Eye is the world’s largest observation wheel at nearly 135 metres high. A new LED-based lighting system brings dynamic, visually appealing color to the structure while at the same time alleviating the maintenance costs
and requirements of the previous fluorescent system.

54       Philips Annual Report 2007

98 Risk management		112 Our leadership		116 Report of the Supervisory Board		126 Financial Statements

Medical Systems

VMI-Sistemas Medicos

In professional healthcare, Philips acquired Brazil’s leading general X-ray manufacturer, VMI-Sistemas Medicos.

XIMIS

Philips also acquired US-based healthcare IT company XIMIS, which focuses on systems to help reduce errors and streamline workflow in hospital radiology wards.

Emergin

Philips acquired Emergin, the leading US provider of software utilized to rapidly transmit medical alarm signals throughout hospitals. Through this acquisition, Philips will expand the use of information technology in healthcare — and specifically in its patient monitoring business — to improve patient outcomes and help hospitals work more efficiently.

VISICU

In December 2007, Philips announced a merger agreement with clinical IT and service provider VISICU. Based in Baltimore, USA, VISICU makes clinical IT systems that enable critical-care medical staff to actively monitor patients in hospital intensive care units (ICUs) from remote locations. VISICU’s patented clinical IT system, called the elCU program, provides real-time 24/7 patient monitoring in ICUs by centrally networking critical-care physicians and nurses to ICU beds using voice and video. Equipped with artificial intelligence algorithms, the system also offers advanced clinical support. The merger will boost the creation of products to give more clinical decision support to hospital staff, while allowing them to monitor greater numbers of critically ill patients.

Consumer Electronics

Digital Lifestyle Outfitters

In the fast-growing, high-margin area of electronics peripherals and accessories, Philips acquired US-based Digital Lifestyle Outfitters, which designs, markets and distributes accessories for mobile audio-visual devices such as MP3 and video players. Through this deal, Philips has bolstered its position as a leading player in peripherals and accessories for the mobility domain, further strengthening its contacts with key international retailers.

Lighting

Color Kinetics

In the professional lighting sector, Philips acquired Color Kinetics (EUR 515 million), based in Boston, USA. Color Kinetics is a leader in the design and marketing of innovative light-emitting diode (LED) lighting systems.

TIR Systems

We also completed the acquisition of Vancouver, Canada-based TIR Systems, a leading company in LED technology for modules that generate high-quality white light.

The acquisitions of Color Kinetics and TIR Systems will give Philips a leading position in the entire LED lighting value chain, bolstering its strong LED intellectual property portfolio and further adding to this fast-growing new segment. Philips is increasingly benefiting from its leadership position in the shift to energy-efficient lighting solutions, both in the professional and consumer domains.

Partners in Lighting International

In the consumer lighting sector, Philips completed its acquisition of Partners in Lighting International (PLI) (EUR 561 million), the leading European manufacturer of home luminaires. PLI develops, manufactures and markets a wide portfolio of more than 10,000 distinct home lighting luminaire products, currently mainly for the

Philips Annual Report 2007     55

8 Financial highlights		10 Message from the President		16 The Philips Group		62 The Philips sectors

Acquisitions

Building upon our 2006 purchase of Lifeline, in 2007 we announced a number of strategically aligned acquisitions — Respironics, Health Watch and Raytel Cardiac Services — designed to further strengthen our position in the fast-growing home healthcare solutions market.

European market. This acquisition will strengthen Philips’ presence in LEDs — especially for home lighting, where solid-state lighting (SSL) will bring major benefits in terms of creating atmospheres and reducing energy consumption.

Lighting Technologies International

In November 2007, Philips acquired Lighting Technologies International (LTI), a US-based manufacturer of high-power xenon lamps for the entertainment industry and a leading supplier of cinema projection lighting in the United States. LTI’s strong presence in applications for high-power xenon lamps will round off Philips’ portfolio of xenon lamps.

Genlyte

In January 2008, Philips completed the acquisition of North American luminaires company Genlyte, a leader in the North American construction luminaires market, for EUR 1.8 billion. Genlyte designs, manufactures and sells lighting fixtures, controls and related products for a wide variety of applications, including solid-state lighting. This acquisition builds on our earlier acquisitions of Color Kinetics, TIR Systems, Partners in Lighting International and provides us with a leading position in the North American luminaires market. Through this acquisition, Philips has established a solid platform for further profitable growth, building on Genlyte’s extensive presence in North America to speed up the adoption of energy-saving, green lighting technologies.

Consumer Healthcare Solutions

Unsustainably high healthcare costs in many markets, the aging of the population and the expectation that seniors will double as a percentage of the total population over the next 25 years in Western Europe and the US, are factors underpinning Philips’ drive to become a global player in the home healthcare market.

Health Watch

In 2007, Philips acquired personal emergency response company Health Watch, a US-based, privately-held provider of personal emergency response services. This acquisition will further strengthen our leadership position in the fast-growing market for emergency response services, building on the Lifeline Systems acquisition in 2006.

56     Philips Annual Report 2007

98 Risk management		112 Our leadership		116 Report of the Supervisory Board		126 Financial Statements

The inclusion of Health Watch increases the number of healthcare organizations and healthcare referral sources in the Philips Lifeline network, further contributing to future growth.

Raytel Cardiac Services

Philips also acquired US-based Raytel Cardiac Services, a leading US provider of home cardiac monitoring services that doctors prescribe to heart patients. Acquiring Raytel Cardiac Services represents a further step in our healthcare strategy of improving patient outcomes in specific care cycles, such as cardiology, and builds on our leading position in medical technologies for heart disease (the most common cause of death in the developed world). Philips has invested heavily over the years to become the top supplier to hospitals of medical equipment for managing heart disease.

Respironics

In December 2007, Philips announced the projected acquisition of Respironics for EUR 3.6 billion, which would be its biggest-ever acquisition. Respironics is a global leader in the treatment of Obstructive Sleep Apnea (OSA), a sleep disorder characterized by the repeated cessation of breathing during sleep. Research in recent years has shown a link between OSA, heart disease, stroke and diabetes. Additionally, Respironics has a leading position in non-invasive ventilation and has recently introduced new home oxygen technologies to serve the needs of respiratory-impaired patients in the home. The remainder of Respironics’ business is focused on the hospital channel and includes non-invasive and invasive ventilation, respiratory monitoring, neonatal products and respiratory drug delivery technologies for the treatment of respiratory diseases. The deal adds new product categories in OSA and home respiratory care to our existing businesses in this field. Respironics fits well into Philips’ strategy to become the world leader in the fast-growing home healthcare market.

Divestments

In the course of 2007, we sold, or decided to sell, several of our non-core business interests. Also, we continued to reduce our financial holdings in cyclical businesses.

On March 31, 2007, the Company completed the sale of its remaining Mobile Phones activities to China Electronics Corporation (CEC). CEC has received an exclusive license to market and sell mobile phones under the Philips brand for the coming five years.

On November 2, 2007, Philips announced that a decision has been made to proceed with the sale of its approximate 70% ownership interest in MedQuist, as the Company considers its MedQuist ownership interest as a non-core holding.

On December 19, 2007, Philips announced it has reached an agreement in principle to sell its Set-Top Boxes and Connectivity Solutions activities, currently part of its Home Networks business unit within Consumer Electronics, to Pace Micro Technology. After completion, Philips will become shareholder of some 23% in the combined business. The transaction is expected to close at February 20, 2008.

As part of a multi-phase plan to facilitate an orderly exit from the Company’s shareholding in Taiwan Semiconductor Manufacturing Company, Philips sold 2.8 billion common shares in TSMC in the course of 2007. This plan, announced on March 9, 2007, aims to reduce Philips’ holding in TSMC to zero before the end of 2010.

In line with Philips’ strategy to further reduce its holding in LG.Philips LCD in a structured and responsible manner, the Company sold 46.4 million shares of common stock in LG.Philips LCD, thereby reducing its shareholding to 19.9%. The transaction provided Philips with net proceeds of EUR 1.5 billion.

Philips Annual Report 2007     57

8 Financial highlights		10 Message from the President		16 The Philips Group		62 The Philips sectors

Other information

Other information

Share repurchase programs

On January 22, 2007, the Company started a EUR 1.6 billion share repurchase program for capital reduction purposes through a second trading line on Euronext Amsterdam. Under this program, shares are repurchased from shareholders who are tax-exempt or are able to achieve tax compensation. Under this program, a total of 25,813,898 shares were acquired worth EUR 0.8 billion. The mechanics of the second trading line and all transactions in Philips’ shares under this share repurchase program are published on the Company’s website.

On September 5, 2007, the Company started a program to repurchase approximately 15 million additional Philips shares on Euronext Amsterdam in connection with cumulative obligations resulting from its existing long-term incentive and employee stock purchase programs. These repurchases were completed in 2007 and increased the number of shares held by the Company versus shares due under the programs. The shares repurchased are held by the Company as treasury shares until they are required.

On December 19, 2007, the Company announced that it plans to repurchase up to approximately EUR 5 billion worth of Philips shares for the purpose of capital reduction, which program is expected to be largely completed by the end of 2008. This program includes the portion of the Company’s EUR 1.6 billion second trading line repurchase program that has yet to be completed. Through its second trading line program, Philips repurchased EUR 0.8 billion worth of shares for cancellation in 2007. The Company started the new repurchase program on January 2, 2008, and will enter into subsequent discretionary management agreements with one or more banks to repurchase Philips shares within the limits of relevant laws and regulations (in particular EC Regulation 2273/2003) and Philips’ articles of association. The appropriate authorizations to complete the program will be proposed to the 2008 Annual General Meeting of Shareholders.

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

Capital reduction

On January 18, 2008, the Company started the procedure for the cancellation of Philips’ shares acquired or to be acquired pursuant to the share repurchase programs for capital reduction purposes initiated in January 2007 and January 2008. The number of shares to be cancelled shall be determined by the Board of Management but shall not exceed 114,282,676 shares. Pursuant to the relevant statutory provisions, cancellation may not be effected earlier than March 18, 2008.

Legal proceedings

The Company and certain of its (former) group companies are involved as a party in legal proceedings, including regulatory and other governmental proceedings, relating to such matters as competition issues, commercial transactions, product liability, participations and environmental pollution. In respect of antitrust laws, the Company and certain of its (former) group companies are involved in investigations by competition law authorities in several jurisdictions and are engaged in litigation in this respect

58     Philips Annual Report 2007

98 Risk management		112 Our leadership		116 Report of the Supervisory Board		126 Financial Statements

Since the ultimate disposition of asserted claims and proceedings and investigations cannot be predicted with certainty, an adverse outcome could have a material adverse effect on the Company’s consolidated financial position and consolidated results of operations for a particular period.

For a description of the legal proceedings relating to asbestos, MedQuist, LG.Philips LCD and CRT investigations and other matters, please refer to note 27.

IFRS-only

Currently, Philips’ primary external and internal reporting is based on US GAAP. In addition, Philips issues quarterly and annual financial information prepared in accordance with International Financial Reporting Standards (IFRS).

The US Securities and Exchange Commission (SEC) has issued a final ruling that eliminates the requirement that ‘Foreign Private Issuers’ such as Philips file US GAAP-based financial statements (or a reconciliation thereto) and will accept reporting based solely on IFRS.

Consequently, Philips will simplify its reporting by moving to IFRS as its sole reporting standard no later than from January 1, 2009, and will discontinue the use of US GAAP as of the same date.

Philips Annual Report 2007     59

8 Financial highlights		10 Message from the President		16 The Philips Group		62 The Philips sectors

– Proposed dividend to shareholders
– Outlook

Proposed dividend to shareholders

Pursuant to article 34 of the articles of association of Royal Philips Electronics, first a dividend will be declared on preference shares out of net income. The remainder of the net income, after reservations made with the approval of the Supervisory Board, shall be available for distribution to holders of common shares subject to shareholder approval after year-end. As of December 31, 2007, the issued share capital consists only of common shares; no preference shares have been issued.

A proposal will be submitted to the 2008 Annual General Meeting of Shareholders to declare a dividend of EUR 0.70 per common share, which, dependent on the progress of the current share repurchase program, will result in an expected dividend of EUR 715 million. In 2007, a dividend was paid of EUR 0.60 per common share (EUR 659 million) in respect of the financial year 2006.

Pursuant to article 33 of the articles of association of Royal Philips Electronics, and with the approval of the Supervisory Board, the remainder of the net income for the financial year 2007 has been retained by way of reserve. The balance sheet presented in this report, as part of the consolidated financial statements for the period ended December 31, 2007, is before dividend, which is subject to shareholder approval after year-end

60     Philips Annual Report 2007

98 Risk management		112 Our leadership		116 Report of the Supervisory Board		126 Financial Statements

Outlook

With our portfolio restructuring nearing completion, and having once again delivered on our targets, we look forward with confidence. 2008 is going to be a challenging but exciting year for Philips — one in which we expect to take further solid steps towards achieving our Vision 2010 objectives.

The successful integration of acquisitions will be high on the management agenda for 2008. We completed the Genlyte acquisition in late January 2008 and expect to complete the announced acquisition of Respironics in the early part of this year. Following the completion of these acquisitions, we will be in a position to inform the market on the contribution of the sectors to the realization of our Vision 2010 plans; this will include our objective for return on invested capital.

We also expect to make substantial progress towards achieving an efficient balance sheet, which we will continue to base on an A-/A3 credit rating with both our rating agencies. We plan to continue the responsible sell-down of our remaining stakes during the year and we expect that our recently announced EUR 5 billion share repurchase program will be largely completed by the end of 2008.

While we recognize the market’s caution on 2008 macro-economic developments — particularly in North America and Europe — we are confident that our sustained growth in the emerging markets, a strong innovation pipeline, a balanced portfolio and synergies from our acquisitions will allow us to continue on our improvement path through 2008 and to meet our targets as set out in Vision 2010.

Amsterdam, February 18, 2008

Board of Management

Philips Annual Report 2007     61

8 Financial highlights		10 Message from the President		16 The Philips Group		62 The Philips sectors

The Philips sectors

Our structure

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

The businesses are the source of value creation. They are provided with effective and efficient support through shared service centers. Country management supports value creation, connecting Philips with key stakeholders, especially our employees, customers, government and society.

In 2007, Philips’ activities were organized on a divisional basis: Medical Systems, Domestic Appliances and Personal Care, Consumer Electronics, Lighting, Innovation & Emerging Businesses, and Group Management & Services.

At the end of 2007, Philips had approximately 100 production sites in 29 countries, sales and service outlets in approximately 150 countries, and some 123,800 employees.

2007

98 Risk management		112 Our leadership		116 Report of the Supervisory Board		126 Financial Statements

Philips in 2008

As of January 1, 2008, Philips’ activities are organized on a sectoral basis, with each operating sector — Healthcare, Lighting and Consumer Lifestyle — being responsible for the management of its businesses worldwide. The Healthcare sector brings together the former Medical Systems division and Home Healthcare Solutions — formerly Consumer Healthcare Solutions — which has been transferred from Innovation & Emerging Businesses. The former Consumer Electronics and Domestic Appliances and Personal Care divisions have been integrated in the Consumer Lifestyle sector.

By leveraging Philips’ brand, technology base and distribution network, the Company aims, through the Innovation & Emerging Businesses sector, to invest in projects that are not currently part of Philips’ operating sectors, but which will lead to additional organic growth or create value through future spin-offs. Innovation & Emerging Businesses includes Corporate Research, Philips’ Incubators and Intellectual Property & Standards, as well as Philips Design. The sector Group Management & Services includes the global service units, corporate and regional centers, pensions and the global brand activities.

2008

Philips Annual Report 2007     63

8 Financial highlights		10 Message from the President		16 The Philips Group		62 The Philips sectors

Medical Systems

Medical Systems

Philips’ innovative healthcare solutions are designed to make a difference in how clinicians diagnose, treat and monitor disease, and allow them to focus more on their patients.

64     Philips Annual Report 2007

98 Risk management		112 Our leadership		116 Report of the Supervisory Board		126 Financial Statements

6% currency-comparable growth of order intake at Medical Systems		“Human insight is combined with a solid clinical understanding to create integrated offerings across the cycle of care.”

Philips Medical Systems is a global provider of innovative healthcare solutions, designed to address the needs of patients as well as healthcare professionals, with a particular focus on diagnostic imaging — cardiology, oncology and women’s health — and critical care. Whether it is in the hospital or in the home, we seek to improve patient outcomes throughout the entire cycle of care — from prevention and screening to diagnosis, treatment, monitoring and management.

In order to simplify healthcare for our customers and the patients they serve, innovation at Philips is driven by gaining insight into the needs of the people who use our products. Within healthcare, this human insight is combined with a solid clinical understanding to create integrated offerings across the cycle of care that truly support clinical excellence.

In 2007 we were comprised of four areas of business*:

•		Imaging Systems — x-ray, computed tomography, magnetic resonance and nuclear medicine equipment, designed to create diagnostic images and to support minimally invasive therapy
•		Ultrasound and Monitoring Solutions — ultrasound imaging, patient monitoring and cardiac systems
•		Healthcare Informatics — picture archiving and communication systems (PACS), clinical decision-support information, cardiology IT and document services
•		Customer Services — consultancy, clinical services, education, equipment financing, asset management, as well as equipment maintenance and repair; supports the optimization of workflow and maintenance in all markets served.

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

Major drivers of the medical technology market include a growing and longer-living world population, the associated rising incidence of chronic diseases, insufficient staffing levels, and government funding and reimbursement. Healthcare reforms in some countries and increased price competition among major players may have a limiting impact on future market growth. In light of these factors, technology has a significant role to play, enabling new solutions for early and better diagnoses and less labor-intensive treatment. Therefore the technology share of the healthcare bill is set to increase more rapidly than overall healthcare spending. We believe that bridging the hospital and the home is going to be increasingly important in delivering better patient outcomes while containing costs. This conviction is driving Philips’ investment in building up a leading home healthcare business, as outlined in the Consumer Healthcare Solutions business description within Innovation & Emerging Businesses that begins on page 93 of this Annual Report.

We intend to maintain our high level of product innovation and strengthen our sales and distribution channels. The United States is the largest healthcare market, currently representing close to 50% of the global market, followed by Japan and Germany.

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

We employ approximately 27,000 employees worldwide, including 8,000 in services.

Philips Annual Report 2007     65

8 Financial highlights		10 Message from the President		16 The Philips Group		62 The Philips sectors

Medical Systems

With regard to sourcing, please refer to the business description of Philips Supply Management that begins on page 96 of this Annual Report.

Progress against targets

The Annual Report 2006 set out a number of key targets for Medical Systems in 2007. The advances made in addressing these are outlined below.

Continue to grow faster than the market

We continued to grow slightly faster than the market by: intensifying the focus on emerging market growth, resulting in double-digit order intake growth in China, India and Latin America; maintaining the solid innovation rate and further increasing service-contract penetration by slightly more than 2%; and making strategically aligned acquisitions.

In 2007 we continued to broaden our position in strategic growth areas and increased penetration into international markets through focused investments in products and channels.

The acquisition of XIMIS, a company that focuses on systems to help reduce medical errors and streamline workflow in hospitals, further expands our growing presence in the radiology informatics market. This was followed by the announcement, toward the end of the year, of the acquisitions of the US-based clinical IT specialists Emergin (closed in 2007) and VISICU (to be finalized in 2008), enhancing our capability to offer full monitoring solutions.

In line with the strategy to bolster our healthcare presence in emerging markets, we acquired Brazil’s leading general X-ray manufacturer, VMI-Sistemas Medicos, thereby expanding our position in the Latin American market. We also entered into a number of strategic agreements, e.g. with Artemis Health Institute in Gurgaon, India, to supply medical equipment and undertake integrated medical technology planning as well as research and development, enabling Philips to capture real-time scientific data.

Support care providers throughout the entire care cycle by developing disease-based product and service solutions

Cardiology

Philips innovations are driving integration of cardiology products and services, bridging previously disparate cardiac patient events, from arrival at healthcare facilities, through transfers to non-invasive, interventional intensive care. This process is supported by one of the broadest cardiology portfolios on the market, encompassing multi-disciplinary diagnoses and inclusive treatments, with fewer mistakes and repeated procedures. Our goal is the delivery of better, more efficient care through earlier diagnosis, fewer disabilities, faster recoveries and, in cases of long-term care, slower progression of disease.

By way of example, in 2007 Philips introduced its HeartStart MRx Monitor/Defibrillator, which enables paramedics to transmit patient data from the ambulance to the hospital’s emergency department. By allowing a hospital to begin organizing its resources before the patient arrives, the MRx can help reduce the time to treatment.

Another example of how Philips optimizes timely delivery of diagnosis and treatment in the cardiac care cycle is the recently introduced ultrasound transducer for Live 3D transesophageal echocardiography (Live 3D TEE), which provides views of cardiac structure and function available for the first time. Along with new advanced software, this enables 2D imaging as well as real-time 3D visualization of the heart, in particular the heart’s valves, giving clinicians the ability to carry out a complete analysis, which allows a faster, more precise diagnosis.

Oncology

Our commitment in oncology is to provide technologies and support that enable physicians to make effective treatment decisions for cancer patients at every point of care. As our collective understanding of how to detect, stage and treat cancer continues to evolve, so does our ability to detect disease earlier, to stage disease more accurately and to pursue image-guided interventional treatment techniques.

Clinical insights in the treatment of oncology patients led to the 2007 introduction of the GEMINI Big Bore PET-CT to complement the Brilliance Big Bore CT. This offering allows radiation oncologists to see both the biological cell intensity combined with anatomical tumor location in the treatment position, and where

66     Philips Annual Report 2007

98 Risk management		112 Our leadership		116 Report of the Supervisory Board		126 Financial Statements

necessary to incorporate the effects of respiratory motion with 4D for the most accurate tumor targeting. For patients undergoing treatment, this means more targeted treatment that allows healthy tissue around the tumor to be spared.

Women’s health

Advances in technology and medical science continue to transform women’s healthcare, as our understanding of screening, prevention and education evolves in parallel to improvements in disease management.

Philips maintains its long-term commitment to introducing innovations for every season of a woman’s health — from adulthood through helping seniors maintain independence later in life. Whether it is in obstetrical care, where our technologies allow vigilant and reassuring surveillance before, during and after pregnancy, or alerting medical emergency services from home when needed, Philips offers women around the globe a sense of confidence and reliability.

For breast cancer, we developed important MR technologies in 2007 — such as the Smart Exam as well as integrated MRI coils and the DynaCAD^® Workstation — to support optimal screening and early detection.

Customer loyalty

We use the Net Promoter Score to measure customer loyalty. We are investing significantly to improve our patient-and-provider focus through products that address the care cycle, better communication from our customer-facing employees and improved service performance. These initiatives are intended to increase the bond of trust we have with our customers, a leading indicator of purchase and repurchase behavior. In 2007, we implemented customer-loyalty programs to better understand how our products and services are viewed in the marketplace.

Cultivate leadership talent

In order to support our business excellence we continued to build the strategic leadership capabilities of our people. It is our goal to be one of the best places to work. Therefore we must offer energizing challenges and development opportunities for our people to fully exploit their talent.

In 2007 we deployed employee recognition programs in different parts of the organization. We also enhanced our ability to recruit, develop and retain top talent, attracting 25 senior managers from outside the company.

Philips’ MRI Breast Solution is fast, easy and accurate. It enables physicians to provide patients with the best diagnostic information and, if needed, to perform MRI-guided biopsies, helping patients avoid unnecessary stress.

Focus on operational excellence

Throughout 2007 we continued to focus on improving the key business processes.

By adopting one common logistics process for equipment and one global logistics partner for spare parts, we dramatically improved our customer delivery performance. We also deployed global project tools, resulting in more predictable and efficient installation activity. Harmonizing global order types is reducing the complexity of commercial and industrial transactions. Finally, by beginning to consolidate our industrial footprint, we have been able to focus on core competencies and on integrating acquisitions.

Process improvements remain a key focus as we simplify interfaces and gain leverage with our supply base. Initiatives built around supplier development and collaboration continue to yield improvements in the areas of early supplier involvement, accelerated time-to-market and supplier quality performance.

Philips Annual Report 2007     67

8 Financial highlights		10 Message from the President		16 The Philips Group		62 The Philips sectors

Medical Systems

Improve service satisfaction

Service satisfaction continues to be a focal area for us. Serviceability features that allow quick problem resolution have been designed-in to all product lines using a new standardized process. The process has yielded a 30% improvement in serviceability features over the last three product release cycles.

We also implemented a robust business management system designed to take operational performance to world-class level. This system is founded upon the integrated application of Philips Business Excellence/ Process Survey Tools, Six Sigma, Breakthrough Management (Hoshin) and, specifically, extensive benchmarking.

2007 financial performance

Sales in 2007 totaled EUR 6,470 million, a stable nominal performance compared to 2006. Excluding the 2% positive impact of portfolio changes and the 5% unfavorable currency effect, comparable sales growth was 4%. Particularly strong growth in Ultrasound & Monitoring and Customer Services was partly offset by the decline in Imaging Systems which was negatively affected by the continued softening of the imaging market in the US, in part a result of the impact of the Deficit Reduction Act, and in Japan.

From a regional perspective, single-digit comparable sales growth was achieved in the mature markets, including North America, which generated double-digit growth in all businesses except Imaging Systems. The key emerging markets experienced 10% comparable growth, with particularly strong performance in India (17%) and solid growth of 9% each in China and Latin America.

EBITA amounted to EUR 875 million or 13.5% of sales in 2007, compared to EUR 861 million or 13.4% in 2006. Earnings fell short of the divisional target of 14-15%, as higher earnings at Ultrasound & Monitoring, Customer Services and Healthcare Informatics were largely offset by lower sales-driven earnings at Imaging Systems, partly due to the impact of the Deficit Reduction Act.

EBIT improved from EUR 734 million in 2006 to EUR 743 million in 2007.

Cash flows before financing activities included net payments totaling EUR 70 million for the acquisitions of Emergin, VMI and XIMIS in 2007, while 2006 included acquisition-related cash outflows of EUR 1,103 million, for Intermagnetics and Witt Biomedical. Excluding these acquisition-related disbursements, cash flows before financing activities were EUR 186 million below 2006, mainly due to higher working capital requirements and increased capital expenditures.

Key data
in millions of euros

		20051)				20061)				2007
Sales			6,013				6,448				6,470
Sales growth
% increase, nominal			9				7				0
% increase, comparable			8				8				4
EBITA			768				861				875
as a % of sales			12.8				13.4				13.5
EBIT			688				734				743
as a % of sales			11.4				11.4				11.5
Net operating capital (NOC)			3,179				4,125				4,104
Cash flows before financing activities			505				(427	)			420
Employees (FTEs)			24,221				26,203				27,441

68     Philips Annual Report 2007

98 Risk management		112 Our leadership		116 Report of the Supervisory Board		126 Financial Statements