As filed with the Securities and Exchange Commission on February 18, 2011

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 20-F

(Mark one)

o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

o		SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-05146-01

KONINKLIJKE PHILIPS ELECTRONICS N.V.

(Exact name of Registrant as specified in 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 office)

Eric Coutinho, Chief Legal Officer & Secretary to the Board of Management
+31 20 59 77232, eric.coutinho@philips.com, Breitner Center, Amstelplein 2, 1096 BC Amsterdam, The Netherlands
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

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

Title of each class		Name of each exchange on which registered
Common Shares — par value Euro (EUR) 0.20 per share		New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act:
None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None

(Title of class)

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

Class		Outstanding at December 31, 2010
Koninklijke Philips Electronics N.V.		986,078,784 shares, including
Common Shares par value EUR 0.20 per share		39,572,400 treasury shares

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

þ Yes      o No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934.

o Yes     þ No

Note-Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes     o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S–T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).¹⁾

þ Yes     o No

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

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller Reporting Company o

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

U.S. GAAP     o		International Financial Reporting Standards as issued by				Other     o
		by the International Accounting Standards Board		þ

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

o Item 17 o Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes      No

1)

This requirement does not apply to the registrant until the fiscal year ending December 31, 2011.

Contents

Introduction			2
Part 1			4
Item 1. Identity of directors, senior management, advisers and auditors			4
Item 2. Offer statistics and expected timetable			4
Item 3. Key information			5
Item 4. Information on the Company			16
Item 4A. Unresolved Staff Comments			35
Item 5. Operating and financial review and prospects			36
Item 6. Directors, senior management and employees			71
Item 7. Major shareholders and related party transactions			72
Item 8. Financial information			73
Item 9. The offer and listing			74
Item 10. Additional information			76
Item 11. Quantitative and qualitative disclosure about market risk			81
Item 12. Description of securities other than equity securities			82
Part 2			83
Item 13. Defaults, dividend arrearages and delinquencies			83
Item 14. Material modifications to the rights of security holders and use of proceeds			83
Item 15. Controls and procedures			84
Item 16A. Audit Committee Financial Expert			85
Item 16B. Code of Ethics			85
Item 16C. Principal Accountant Fees and Services			86
Item 16D. Exemptions from the Listing Standards for Audit Committees			87
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers			88
Item 16F. Change in Registrant’s Certifying Accountant			89
Item 16G. Corporate Governance			90
Part 3			92
Item 17. Financial statements			92
Item 18. Financial statements			92
Item 19. Exhibits			93
Exhibit 4(c)
Exhibit 4(d)
Exhibit 4(e)
Exhibit 4(f)
Exhibit 8
Exhibit 12(a)
Exhibit 12(b)
Exhibit 13(a)
Exhibit 13(b)
Exhibit 15(a)
Exhibit 15(b)
Exhibit 15(c)

Introduction

Specific portions of Philips’ Annual Report 2010 to Shareholders (the “2010 Annual Report”) are incorporated by reference in this report on Form 20-F to the extent noted herein. Philips’ 2010 Annual Report is attached hereto as Exhibit 15(b). The 2010 Annual Report is furnished to the Securities and Exchange Commission for information only and the Annual Report is not filed except for such specific portions that are expressly incorporated by reference in this Report on Form 20-F.

The audited consolidated financial statements as of December 31, 2010 and 2009, and for each of the years in the three-year period ended December 31, 2010, included in this Form 20-F have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union (EU). All standards and interpretations issued by the International Accounting Standards Board (IASB) and the IFRS Interpretations Committee effective year-end 2010 have been endorsed by the EU, except that the EU did not adopt some paragraphs of IAS 39 applicable to certain hedge transactions. Philips has no hedge transactions to which these paragraphs are applicable. Consequently, the accounting policies applied by Philips also comply fully with IFRS as issued by the IASB.

In presenting and discussing the Philips Group’s financial position, operating results and cash flows, management uses certain non-GAAP financial measures like: comparable growth; adjusted income from operations; net operating capital; net debt; cash flow before financing activities; net capital expenditures and free cash flow. These non-GAAP financial measures should not be viewed in isolation as alternatives to the equivalent IFRS measure and should be used in conjunction with the most directly comparable IFRS measure(s). Unless otherwise indicated in this document, a discussion of the non-GAAP measures included in this document and a reconciliation of such measures to the most directly comparable IFRS measure(s) is contained under the heading “Reconciliation of non-GAAP information” in Item 5 “Operating and financial review and prospects”.

Forward-looking statements

Pursuant to provisions of the United States Private Securities Litigation Reform Act of 1995, Philips is providing the following cautionary statement. This document, including the portions of the 2010 Annual Report incorporated hereby, 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, among other statements, certain statements in Item 4 “Information on the Company” with regard to management objectives, market trends, market standing, product volumes and business risks, the statements in Item 8 “Financial Information” relating to legal proceedings, the statements in Item 5 “Operating and financial review and prospects” with regard to trends in results of operations, margins, overall market trends, risk management, exchange rates and statements in Item 11 “Quantitative and qualitative disclosures about market risks” relating to risk caused by derivative positions, interest rate fluctuations and other financial exposure are forward-looking in nature. Forward-looking statements can be identified generally as those containing words such as “anticipates”, “assumes”, “believes”, “estimates”, “expects”, “should”, “will”, “will likely result”, “forecast”, “outlook”, “projects”, “may” or similar expressions. By their nature, forward-looking statements involve risk and uncertainty, because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those 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 and actuarial assumptions, 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, reference is made to the information under the heading “Risk Factors” in Item 3

“Key information” and the section “Risk management” on pages 104 through 115 of the 2010 Annual Report, which is incorporated herein by reference.

Third-party market share data

Statements regarding market share, contained in this document, including those regarding Philips’ competitive position, are based on outside sources such as specialized research institutes, industry and dealer panels in combination with management estimates. Where fullyear information regarding 2010 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 quoted prices or observable market values do 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.

Part 1

Item 1. Identity of directors, senior management, advisers and auditors

Not applicable.

Item 2. Offer statistics and expected timetable

Not applicable.

Item 3. Key information

Selected consolidated financial and statistical data

The selected financial data presented in Item 3 “Key information” as of and for each of the years in the five-year period ended December 31, 2010 has been prepared in accordance with IFRS as issued by the IASB. Reference is made to the information in the section entitled “Introduction” on page 2.

Selected financial data as at and for the years ended December 31,
		20061)				20071)				2008				2009				2010					20102)
in millions unless otherwise stated		EUR				EUR				EUR				EUR				EUR					USD
Income statement data:
Sales			26,682				26,793				26,385				23,189				25,419					33,964
Income from operations (IFO)			1,336				1,867				54				614				2,065					2,759
Financial income and expenses — net			29				2,849				88				(166	)			(122	)				(163	)
Income (loss) from continuing operations			1,003				5,018				(95	)			424				1,452					1,940
Income (loss) from discontinued operations			4,154				(138	)			3				—				—					—
Net income (loss)			5,157				4,880				(92	)			424				1,452					1,940
Weighted average number of common shares outstanding (in thousands after deduction of treasury shares) during the year			1,174,925				1,086,128				991,420				925,481				939,861					939,861
Basic earnings per common share:
Income (loss) from continuing operations			0.85				4.61				(0.09	)3)			0.46				1.54					2.06
Net income (loss)			4.39				4.49				(0.09	)3)			0.46				1.54					2.06
Adjusted weighted average number of common shares (in thousands after deduction of treasury shares) during the year			1,183,631				1,098,925				996,714				929,037				947,725					947,725
Diluted earnings per common share:4)
Income (loss) from continuing operations			0.85				4.56				(0.09	)			0.46				1.53					2.05
Net income (loss)			4.36				4.43				(0.09	)			0.46				1.53					2.05
Balance sheet data:
Total assets			38,650				36,381				31,910				30,527				32,269					43,117
Net assets			23,234				21,868				15,593				14,644				15,092					20,166
Short-term debt			871				2,350				722				627				1,840					2,459
Long-term debt			3,007				1,213				3,466				3,640				2,818					3,765
Short-term provisions5)			755				382				1,043				716				623					832
Long-term provisions5)			1,868				2,021				1,794				1,734				1,716					2,293
Non-controlling interests			135				127				49				49				46					61
Shareholders’ equity			23,099				21,741				15,544				14,595				15,046					20,104
Common shares issued and fully paid			228				228				194				194				197					263
Cash flow data:
Net cash provided by operating activities			639				1,752				1,648				1,545				2,156					2,881
Net cash (used for) provided by investing activities			(3,101	)			3,700				(3,254	)			(219	)			(702	)				(938	)
Net cash used for financing activities			(3,725	)			(2,371	)			(3,575	)			(545	)			(96	)				(128	)
Net cash provided by (used for) continuing operations			(6,187	)			3,081				(5,181	)			781				1,358					1,815

Key ratios
		20061)				20071)				2008				2009				2010
Income from operations (in millions of euros)			1,336				1,867				54				614				2,065
as a % of sales			5.0				7.0				0.2				2.6				8.1
Turnover rate of net operating capital2)			3.73				2.71				1.72				1.79				1.91
Inventories as a % of sales			11.0				12.0				13.2				12.6				15.2
Outstanding trade receivables (in days’ sales)			45				44				42				40				46
Income (loss) from continuing operations as a % of shareholders’ equity (ROE)			4.8				22.8				(0.5	)			2.9				9.6
Ratio net debt : group equity2)			(9):109				(31):131				4:96				(1):101				(8):108

Definitions:

Turnover rate of net operating capital:

sales divided by average net operating capital (calculated on the quarterly balance sheet positions)

Net operating capital*:

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

		2006				2007				2008				2009				2010
Intangible assets			5,964				6,635				11,757				11,523				12,233
Property, plant and equipment			3,102				3,194				3,496				3,252				3,265
Remaining assets1)			10,669				11,193				10,361				8,960				8,921
Provisions			(2,623	)			(2,403	)			(2,837	)			(2,450	)			(2,339	)
Other liabilities2)			(8,156	)			(7,817	)			(8,708	)			(8,636	)			(10,009	)
Net operating capital3)			8,956				10,802				14,069				12,649				12,071

Return on equity (ROE):

income from continuing operations as a % of average shareholders’ equity (calculated on the quarterly balance sheet positions)

Net debt*:

long-term and short-term debt net of cash and cash equivalents

Group equity:

shareholders’ equity and non-controlling interests

Net debt : group equity ratio*:

the % distribution of net debt over group equity plus net debt

Dividends and distributions per Common Share

The following table sets forth in euros the gross dividends on the Common Shares in the fiscal years indicated (from prior-year profit distribution) and such amounts as converted into US dollars and paid to holders of Shares of the New York registry:

		2006				2007				2008				2009				2010
In EUR			0.44				0.60				0.70				0.70				0.70
In USD			0.54				0.80				1.09				0.94				0.93

A proposal will be submitted to the 2011 Annual General Meeting of Shareholders to declare a dividend of EUR 0.75 per common share, in cash or in shares at the option of the shareholder, against the net income for 2010. Such dividend is expected to result in a payment of up to EUR 710 million.

Shareholders will be given the opportunity to make their choice between cash and shares between April 7, 2011 and April 29, 2011. If no choice is made during this election period, the dividend will be paid in shares. On April 29, 2011, after close of trading, the number of share dividend rights entitled to one new common share will be determined based on the volume-weighted average price of all traded common shares of Koninklijke Philips Electronics N.V. at Euronext Amsterdam on 27, 28 and 29 April 2011. The Company will calculate the number of share dividend rights entitled to one new common share, such that the gross dividend in shares will be approximately 3% higher than the gross dividend in cash. Payment of the dividend and delivery of new common shares, with settlement of fractions in cash, if required, will take place from May 4, 2011. The distribution of dividend in cash to holders of New York registry shares will be made in USD at the USD/EUR rate fixed by the European Central Bank on May 2, 2011.

Dividend in cash is in principle subject to 15% Dutch dividend withholding tax, which will be deducted from the dividend in cash paid to the shareholders. Dividend in shares paid out of earnings and retained earnings is subject to 15% dividend withholding tax, but only in respect of the par value of the shares (EUR 0.20 per share). This withholding tax in the case of dividend in shares will be borne by Philips.

In 2010, a dividend of EUR 0.70 per common share was paid in cash or shares, at the option of the shareholder. Approximately 53% elected for a share dividend resulting in the issue of 13,667,015 new common shares, leading to a 1.5% dilution. The remainder of the dividend was paid in cash (EUR 296 million) against the retained earnings of the Company.

The dollar equivalent of this dividend distribution to shareholders in the year 2011 will be calculated at the EUR/USD rate of the European Central Bank on the date fixed and announced for that purpose by the Company, expected to be May 2, 2011. The dollar equivalents of the prior year profit distributions paid to shareholders have been calculated at the EUR/USD rate of the European Central Bank on the date fixed and announced for that purpose by the Company.

Exchange rates USD : EUR

The following two tables set forth, for the periods and dates indicated, certain information concerning the exchange rate for US dollars into euros based on the Noon Buying Rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”). The Noon Buying Rate on February 11, 2011 was EUR 0.7396 per USD 1.

calendar period		EUR per USD
		period end				average1)				high				low
2005			0.8445				0.8046				0.8571				0.7421
2006			0.7577				0.7906				0.8432				0.7504
2007			0.6848				0.7259				0.7750				0.6729
2008			0.7184				0.6844				0.8035				0.6246
2009			0.6977				0.7187				0.7970				0.6623
2010			0.7536				0.7579				0.8362				0.6879

		highest				lowest
		rate				rate
August 2010			0.7904				0.7529
September 2010			0.7869				0.7332
October 2010			0.7306				0.7109
November 2010			0.7671				0.7030
December 2010			0.7640				0.7465
January 2011			0.7726				0.7291

Philips publishes its financial statements in euros while a substantial portion of its net assets, earnings and sales are denominated in other currencies. Philips conducts its business in more than 50 different currencies.

Unless otherwise stated, for the convenience of the reader the translations of euros into US dollars appearing in this report have been made based on the closing rate on December 31, 2010 (USD 1 = EUR 0.7484). This rate is not materially different from the Noon Buying Rate on such date (USD 1 = EUR 0.7536).

The following table sets out the exchange rate for US dollars into euros applicable for translation of Philips’ financial statements for the periods specified.

		EUR per USD
		period end				average1)				high				low
2005			0.8435				0.8053				0.8491				0.7613
2006			0.7591				0.7935				0.8375				0.7579
2007			0.6790				0.7272				0.7694				0.6756
2008			0.7096				0.6832				0.7740				0.6355
2009			0.6945				0.7170				0.7853				0.6634
2010			0.7484				0.7540				0.8188				0.7036

Risk factors

The risk factors and the cautionary statements contained in the section entitled “Introduction” on page 2 should be considered in connection with any forward-looking statements contained in Philips’ Annual Report on Form 20-F. Forward-looking statements can be identified generally as those containing words such as “anticipates”, “assumes”, “believes”, “estimates”, “expects”, “should”, “will”, “will likely result”, “forecast”, “outlook”, “projects”, “may” or similar expressions. From time to time, Philips may also provide oral or written forward-looking statements in other materials Philips releases to the public. The cautionary statements contained in “Introduction” are deemed to apply to these statements.

Our business, financial condition and results of operations could suffer material adverse effects due to certain risks. We have described below the main risks known to Philips and summarized them in four categories: Strategic risks, Operational risks, Compliance risks, and Financial risks.

Strategic risks and opportunities may affect Philips’ strategic ambitions. Operational risks include adverse unexpected developments resulting from internal processes, people and systems, or from external events that are linked to the actual running of each business (examples are solution and product creation, and supply chain management). Compliance risks cover unanticipated failures to implement, or comply with, appropriate policies and procedures. Within the area of Financial risks, Philips identifies risks related to Treasury, Accounting and reporting, Pensions and Tax. The risks described below and in pages 107 through 113 of the 2010 Annual Report are not the only ones we face. Additional risks not known to us or that we currently consider immaterial could ultimately have a major impact on Philips’ businesses, objectives, revenues, income, assets, liquidity, and capital resources.

Philips describes the risk factors within each risk category in order of Philips’ current view of expected significance, to give stakeholders an insight into which risks and opportunities it considers more prominent than others at present. The risk overview highlights the main risks and opportunities known to Philips, which could hinder it in achieving its strategic and financial business objectives. The risk overview may, however, not include all the risks that may ultimately affect Philips. Describing risk factors in their order of expected significance within each risk category does not mean that a lower listed risk factor may not have a material and adverse impact on Philips’ business, strategic objectives, revenues, income, assets, liquidity or capital resources. Furthermore, a risk factor described after other risk factors may ultimately prove to have more significant adverse consequences than those other risk factors. Over time Philips may change its view as to the relative significance of each risk factor. Philips does not classify the risk categories themselves in order of importance.

Strategic risks

As Philips’ business is global, its operations are exposed to economic and political developments in countries across the world that could adversely impact its revenues and income.

Philips’ business environment is influenced by economic conditions globally and in individual countries where Philips conducts business. The high degree of unemployment in certain countries, the level of public debt in the US and certain European countries, as well as uncertainties with respect to the long-term high growth stability of the Chinese economy, may result in lower demand and more challenging market environments across our Sectors. Political developments, for example Healthcare reforms in various countries — such as the US Healthcare Reform — may impose additional uncertainties by redistributing sector spending, changing reimbursement models and fiscal changes.

Numerous other factors, such as fluctuation of energy and raw material prices, as well as global political conflicts, including North Africa, the Middle East and other regions, could continue to impact macroeconomic factors and the international capital and credit markets.

Economic and political uncertainty may have a material adverse impact on Philips’ financial condition or results of operations and can also make Philips’ budgeting and forecasting more difficult.

Philips may encounter difficulty in planning and managing operations due to unfavorable political factors, including unexpected legal or regulatory changes such as foreign exchange import or export controls, increased healthcare regulation, nationalization of assets or restrictions on the repatriation of returns from foreign investments and the lack of adequate infrastructure. As emerging markets are becoming increasingly important in Philips’ operations, the above-mentioned risks are also expected to grow and could have an adverse impact on Philips’ financial condition and operating results.

Philips may be unable to adapt swiftly to changes in industry or market circumstances, which could have a material adverse impact on its financial condition and results.

Fundamental shifts in the industry, like the transition from traditional lighting to LED lighting, may drastically change the business environment. If Philips is unable to recognize these changes in good time, is too inflexible to rapidly adjust its business models, or if circumstances arise, such as pricing actions of competitors, growth ambitions, financial condition and operating results could be affected materially.

Acquisitions could expose Philips to integration risks and challenge management in continuing to reduce the complexity of the company.

Philips has recently completed acquisitions, and may continue to do so in the future, exposing Philips to integration risks in areas such as sales and service force integration, logistics, regulatory compliance, information technology and finance. Integration difficulties and complexity may adversely impact the realization of an increased contribution from acquisitions. Philips may incur significant acquisition, administrative and other costs in connection with these transactions, including costs related to the integration of acquired businesses.

Furthermore, organizational simplification and resulting cost savings may be difficult to achieve. Acquisitions may also lead to a substantial increase in long-lived assets, including goodwill. Write-downs of these assets due to unforeseen business developments may materially adversely affect Philips’ earnings, particularly in Healthcare and Lighting which have significant amounts of goodwill. Please also refer to note 8 “Goodwill” to the Group financial statements on pages 172 and 173 of the 2010 Annual Report, which is incorporated herein by reference.

Philips’ inability to secure and retain intellectual property rights for products, whilst maintaining overall competitiveness, could have a material adverse effect on its results.

Philips is dependent on its ability to obtain and retain licenses and other intellectual property (IP) rights covering its products and its design and manufacturing processes. The IP portfolio results from an extensive patenting process that could be influenced by, amongst other things, innovation. The value of the IP portfolio is dependent on the successful promotion and market acceptance of standards developed or co-developed by Philips. This is particularly applicable to Consumer Lifestyle where third-party licenses are important and a loss or impairment could adversely impact Philips’ financial condition and operating results.

Philips’ ongoing investments in the “sense and simplicity” brand campaign, with a focus on simplifying the interaction with its customers, translating awareness into preference and improving its international brand recognition, could have less impact than anticipated.

Philips has made large investments in the reshaping of the Group into a more market-driven company focusing on delivering advanced and easy-to-use products and easy relationships with Philips for its customers. The brand promise of “sense and simplicity” is important for both external and internal development. If Philips fails to deliver on its “sense and simplicity” promise, its growth opportunities may be hampered, which could have a material adverse effect on Philips’ revenue and income.

Philips’ overall performance in the coming years is dependent on realizing its growth ambitions in emerging markets.

Emerging markets are becoming increasingly important in the global market. In addition, Asia is an important production, sourcing and design center for Philips. Philips faces strong competition to attract the best talent in tight labor markets and intense competition from local companies as well as other global players for market share in emerging markets. Philips needs to maintain and grow its position in emerging markets, invest in local talents, understand developments in end-user preferences and localize the portfolio in order to stay competitive. If Philips fails to achieve this, its growth ambitions, financial condition and operating results could be affected materially.

Operational risks

Failure to achieve improvements in Philips’ solution and product creation process and/or increased speed in innovation-to-market could hamper Philips’ profitable growth ambitions.

Further improvements in Philips’ solution and product creation process, ensuring timely delivery of new solutions and products at lower cost and upgrading of customer service levels to create sustainable competitive advantages, are important in realizing Philips’ profitable growth ambitions. The emergence of new low-cost competitors, particularly in Asia, further underlines the importance of improvements in the product creation process. The success of new solution and product creation, however, depends on a number of factors, including timely and successful completion of development efforts, market acceptance, Philips’s ability to manage the risks associated with new products and production ramp-up issues, the availability of products in the right quantities and at appropriate costs to meet anticipated demand, and the risk that new products and services may have quality or other defects in the early stages of introduction. Accordingly, Philips cannot determine in advance the ultimate effect that new solutions and product creations will have on its financial condition and operating results. If Philips fails to accelerate its innovation-to-market processes and fails to ensure that end-user insights are fully captured and translated into solution and product creations that improve product mix and consequently contribution, it may face an erosion of its market share and competitiveness, which could have a material adverse affect on its financial condition and operating results.

If Philips is unable to ensure effective supply chain management, e.g. facing an interruption of its supply chain, including the inability of third parties to deliver parts, components and services on time, and if it is subject to rising raw material prices, it may be unable to sustain its competitiveness in its markets.

Philips is continuing the process of creating a leaner supply base with fewer suppliers, while maintaining dual sourcing strategies where possible. This strategy very much requires close cooperation with suppliers to enhance, amongst other things, time to market and quality. In addition, Philips is continuing its initiatives to reduce assets through outsourcing. These processes may result in increased dependency. Although Philips works closely with its suppliers to avoid supply-related problems, there can be no assurance that it will not encounter supply problems in the future or that it will be able to replace a supplier that is not able to meet its demand. Shortages or delays could materially harm its business. Philips maintains a regular review of its strategic and critical suppliers to assess financial stability.

Most of Philips’ activities are conducted outside of the Netherlands, and international operations bring challenges. For example, production and procurement of products and parts in Asian countries are increasing, and this creates a risk that production and shipping of products and parts could be interrupted by a natural disaster in that region.

Due to the fact that Philips is dependent on its personnel for leadership and specialized skills, the loss of its ability to attract and retain such personnel would have an adverse effect on its business.

The attraction and retention of talented employees in sales and marketing, research and development, finance and general management, as well as of highly specialized technical personnel, especially in transferring technologies to low-cost countries, is critical to Philips’ success. This is particularly valid in times of economic recovery. The loss of specialized skills could also result in business interruptions. There can be no assurance that Philips will continue to be successful in attracting and retaining all the highly qualified employees and key personnel needed in the future.

Diversity in information technology (IT) could result in ineffective or inefficient business management. IT outsourcing and off-shoring strategies could result in complexities in service delivery and contract management. Furthermore, we observe a global increase in IT security threats and higher levels of professionalism in computer crime, posing a risk to the confidentiality, availability and integrity of data and information.

Philips is engaged in a continuous drive to create a more open, standardized and consequently, more cost-effective IT landscape. This is leading to an approach involving further outsourcing, off-shoring, commoditization and ongoing reduction in the number of IT systems. The global increase in security threats and higher levels of professionalism in computer crime have raised the company’s awareness of the importance of effective IT security measures, including proper identity management processes to protect against unauthorized systems access. Nevertheless, Philips’ systems, networks, products, solutions and services remain potentially vulnerable to attacks, which could potentially lead to the leakage of confidential information, improper use of its systems and networks or defective products, which could in turn adversely affect Philips’ financial condition and operating results. Additionally, the integration of new

companies and successful outsourcing of business processes are highly dependent on secure and well-controlled IT systems.

Warranty and product liability claims against Philips could cause Philips to incur significant costs and affect Philips’ results as well as its reputation and relationships with key customers.

Philips is from time to time subject to warranty and product liability claims with regard to product performance and effects. Philips could incur product liability losses as a result of repair and replacement costs in response to customer complaints or in connection with the resolution of contemplated or actual legal proceedings relating to such claims. In addition to potential losses arising from claims and related legal proceedings, product liability claims could affect Philips’ reputation and its relationships with key customers, both customers for end products and customers that use Philips’ products in their production process. As a result, product liability claims could materially impact Philips’ financial condition and operating results.

Any damage to Philips’ reputation could have an adverse effect on its businesses.

Philips is exposed to developments which could affect its reputation. Such developments could be of an environmental or social nature, or connected to the behavior of individual employees or suppliers and could relate to adherence with regulations related to labor, health and safety, environmental and chemical management. Reputational damage could materially impact Philips’ financial condition and operating results.

Compliance risks

Legal proceedings covering a range of matters are pending in various jurisdictions against Philips and its current and former group companies. Due to the uncertainty inherent in legal proceedings, it is difficult to predict the final outcome.

Philips, including a certain number of its current and former group companies, is involved in legal proceedings relating to such matters as competition issues, commercial transactions, product liability, participations and environmental pollution. Since the ultimate outcome of asserted claims and proceedings, or the impact of any claims that may be asserted in the future, cannot be predicted with certainty, Philips’ financial position and results of operations could be affected materially by adverse outcomes.

For additional disclosure relating to specific legal proceedings, reference is made to note 24 “Contingent liabilities” to the Group financial statements on pages 180 through 182 of the 2010 Annual Report, which is incorporated herein by reference.

Philips is exposed to governmental investigations and legal proceedings with regard to increased scrutiny of possible anti-competitive market practices.

Philips is facing increased scrutiny by national and European authorities of possible anti-competitive market practices, especially in product segments where Philips has significant market shares. For example, Philips and certain of its (former) affiliates are involved in investigations by competition law authorities in several jurisdictions into possible anti-competitive activities in the Cathode-Ray Tubes (CRT) industry and are engaged in litigation in this respect. Philips’ financial position and results could be materially affected by an adverse final outcome of these investigations and litigation, as well as any potential claims relating to this matter. Furthermore, increased scrutiny may hamper planned growth opportunities provided by potential acquisitions. Reference is made to note 24 “Contingent liabilities” to the Group financial statements on pages 180 through 182 of the 2010 Annual Report, which is incorporated herein by reference.

Philips’ global presence exposes the company to regional and local regulatory rules which may interfere with the realization of business opportunities and investments in the countries in which Philips operates.

Philips has established subsidiaries in over 80 countries. These subsidiaries are exposed to changes in governmental regulations and unfavorable political developments, which may limit the realization of business opportunities or impair Philips’ local investments. Philips’ increased focus on the healthcare sector increases the exposure to highly regulated markets, where obtaining clearances or approvals for new products is of great importance, and the dependency on the funding available for healthcare systems. In addition, changes in reimbursement policies may affect spending on healthcare.

Philips is exposed to non-compliance with General Business Principles.

Philips’ attempts to realize its growth targets could expose it to the risk of non-compliance with the Philips General Business Principles, in particular anti-bribery provisions. This risk is heightened in emerging markets as corporate governance systems, including information structures and the monitoring of ethical standards, are less developed in emerging markets

compared to mature markets. Examples include commission payments to third parties, remuneration payments to agents, distributors, commissioners and the like (‘Agents’), or the acceptance of gifts, which may be considered in some markets to be normal local business practice. Reference is made to note 24 “Contingent liabilities” to the Group financial statements on pages 180 through 182 of the 2010 Annual Report, which is incorporated herein by reference.

Defective internal controls would adversely affect our financial reporting and management process.

The reliability of reporting is important in ensuring that management decisions for steering the businesses and managing both top-line and bottom-line growth are based on top-quality data. Flaws in internal control systems could adversely affect the financial position and results and hamper expected growth.

The correctness of disclosures provides investors and other market professionals with significant information for a better understanding of Philips’ businesses. Imperfections or lack of clarity in the disclosures could create market uncertainty regarding the reliability of the data presented and could have a negative impact on the Philips share price.

The reliability of revenue and expenditure data is key for steering the business and for managing top-line and bottom-line growth. The long lifecycle of healthcare sales, from order acceptance to accepted installation, together with the complexity of the accounting rules for when revenue can be recognized in the accounts presents a challenge to ensure there is consistency of application of the accounting rules over Philips Healthcare’s global business.

Compliance procedures have been adopted by management to ensure that the use of resources is consistent with laws, regulations and policies, and that resources are safeguarded against waste, loss and misuse. Ineffective compliance procedures relating to the use of resources could have an adverse effect on the financial condition and operating results.

Philips is exposed to non-compliance with data privacy and product safety laws.

Philips’ brand image and reputation would be adversely impacted by non-compliance with the various (patient) data privacy and (medical) product security laws. Privacy and product safety issues may arise with respect to remote access or monitoring of patient data or loss of data on customers’ systems. Philips Healthcare is further subject to various data privacy and safety laws.

Privacy and product security issues may arise, especially with respect to remote access or monitoring of patient data or loss of data on our customers’ systems, although Philips Healthcare contractually limits liability, where permitted.

Philips Healthcare operates in a highly regulated product safety and quality environment. Philips Healthcare’s products are subject to regulation by various government agencies, including the FDA (US) and comparable foreign agencies. Obtaining their approvals is costly and timeconsuming, but a prerequisite for market introduction. A delay or inability to obtain the necessary regulatory approvals for new products could have a material adverse effect on its business. The risk exists that product safety incidents or user concerns could trigger FDA business reviews which if failed could lead to business interruption which in turn could adversely affect Philips’ financial condition and operating results.

Financial risks

Philips is exposed to a variety of treasury risks including liquidity risk, currency risk, interest rate risk, commodity price risk, credit risk, country risk and other insurable risk.

Negative developments impacting the global liquidity markets could affect the ability to raise or re-finance debt in the capital markets or could also lead to significant increases in the cost of such borrowing in the future. If the market expected a downgrade or downgrades by the rating agencies or if such a downgrade has actually taken place, it could increase our cost of borrowing, reduce our potential investor base and adversely affect our business.

Philips is exposed to fluctuations in exchange rates, especially between the US dollar and the euro, because a high percentage of its business volume is conducted in the US and as exports from Europe. In addition, Philips is exposed to currency effects involving the currencies of emerging markets such as China, India and Brazil.

Philips is also exposed to interest rate risk particularly in relation to its long-term debt position; this risk can take the form of either fair value or cash flow risk. Failure to effectively hedge this risk can impact Philips’ financial condition and operating results.

Philips’ supply chain is also exposed to fluctuations in energy and raw material prices. In recent times, commodities such as oil have been subject to volatile markets and significant price increases from time to time. If Philips is not able to compensate for or pass on

its increased costs to customers, such price increases could have an adverse impact on its financial condition and operating results.

Credit risk of counterparties that have outstanding payment obligations creates exposure for Philips, particularly in relation to accounts receivable and liquid assets and fair values of derivatives and insurance contracts with financial counterparties. A default by counterparties in such transactions can have a material adverse effect on Philips’ financial condition and operating results.

For further analysis, please refer to note 33 “Details of treasury risks” to the Group financial statements on pages 196 through 198 of the 2010 Annual Report, incorporated herein by reference.

Philips is exposed to a number of different fiscal uncertainties which could have a significant impact on local tax results.

Philips is exposed to a number of different tax uncertainties which could result in double taxation, penalties and interest payments. These include, amongst others, transfer pricing uncertainties on internal crossborder deliveries of goods and services, tax uncertainties related to acquisitions and divestments, tax uncertainties related to the use of tax credits and permanent establishments, tax uncertainties due to losses carried forward and tax credits carried forward and potential changes in tax law that could result in higher tax expense and payments. Those uncertainties may have a significant impact on local tax results which in turn could adversely affect Philips’ financial condition and operating results.

The value of the losses carried forward is not only subject to having sufficient taxable income available within the loss-carried-forward period, but also subject to having sufficient taxable income within the foreseeable future in the case of losses carried forward with an indefinite carry-forward period. The ultimate realization of the Company’s deferred tax assets, including tax losses and credits carried forward, is dependent upon the generation of future taxable income in the countries where the temporary differences, unused tax losses and unused tax credits were incurred and during the periods in which the deferred tax assets become deductible. Additionally, in certain instances, realization of such deferred tax assets is dependent upon the successful execution of tax planning strategies. Accordingly, there can be no absolute assurance that all (net) tax losses and credits carried forward will be realized.

For further details, please refer to the information under the heading “Fiscal risks” in note 3 “Income taxes” to the Group financial statements on pages 165 through 166 of the 2010 Annual Report, which is incorporated herein by reference.

Philips has defined-benefit pension plans in a number of countries. The funded status and the cost of maintaining these plans are influenced by financial market and demographic developments, creating volatility in Philips’ financials.

The majority of employees in Europe and North America are covered by defined-benefit pension plans. The accounting for defined-benefit pension plans requires management to determine discount rates, expected rates of compensation and expected returns on plan assets. Changes in these variables can have a significant impact on the projected benefit obligations and net periodic pension costs. A negative performance of the financial markets could have a material impact on funding requirements and net periodic pension costs and also affect the value of certain financial assets and liabilities of the company.

For further analysis of pension-related exposure to changes in financial markets, reference is made to the information under the heading “Details of pension risks” on pages 113 through 115 and for quantitative and qualitative disclosure of pensions, please refer to note 28 “Pensions and other postretirement benefits” to the Group financial statements on pages 182 through 187 of the 2010 Annual Report, incorporated herein by reference.

Item 4. Information on the Company

The structure of the Philips Group

The information under the headings “Business Overview” in this Item 4 “Information on the Company”, “Discontinued operations” in Item 5 “Operating and financial review and prospects”, the information on capital expenditure under the heading “Net capital expenditures” in Item 5 “Operating and financial review and prospects”, the information on pages 63 and 64 under the heading “Acquisitions and divestments” of the 2010 Annual Report, pages 131 through 138 under the heading “Corporate governance” of the 2010 Annual Report, and the information under note 6 “Acquisitions and divestments” to the Group financial statements on pages 167 through 170 of the 2010 Annual Report is incorporated herein by reference. The registered office of Royal Philips Electronics is High Tech Campus 5, 5656 AE Eindhoven, The Netherlands. Our phone number is +31 20 5977777.

Business Overview

Reference is made to the information in Item 5 “Operating and financial review and prospects” and the description of industry terms contained in Exhibit 15(d) to this Report on Form 20-F.

Philips Structure

Koninklijke Philips Electronics N.V. (the ‘Company’), which started as a limited partnership with the name Philips & Co in Eindhoven, the Netherlands, in 1891 by Anton and Gerard Philips to manufacture incandescent lamps and other electrical products, is the parent company of the Philips Group (‘Philips’ or the ‘Group’), which consists of the Company and its consolidated subsidiaries. The Company was converted into the company with limited liability N.V. Philips’ Gloeilampenfabrieken on September 11, 1912. 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.

Philips’ activities in the field of health and well-being are organized on a sector basis, with each operating sector — Healthcare, Consumer Lifestyle and Lighting — being responsible for the management of its businesses worldwide.

The Group Management & Services sector provides the operating sectors with support through shared service centers. Furthermore, country management organization supports the creation of value, connecting Philips with key stakeholders, especially our employees, customers, government and society. The sector is also responsible for the pension management of the Company.

Also included under Group Management & Services are the activities through which Philips invests in projects that are currently not part of the operating sectors, but which could lead to additional organic growth or create value through future spin-offs.

At the end of 2010, Philips had 118 production sites in 27 countries, sales and service outlets in approximately 100 countries, and 119,001 employees.

For information on acquisitions and divestments in progress reference is made to the information in note 34 “Subsequent events” to the Group financial statements on page 198 of the 2010 Annual Report incorporated herein by reference.

For details on the sources and availability of raw materials and a description of the material effects of government regulations on the Company’s business reference is made to the information under the heading “Strategic risks” and “Compliance risks” in Item 3 “Key information” on pages 10 and 11, and 13 through 15 respectively.

Product sectors and principal products

Reference is made to the information in Item 5 “Operating and financial review and prospects”.

Healthcare

Introduction

•		Healthcare challenges present major opportunities in the long term
•		Addressing the care cycle — our unique differentiator
•		Home healthcare is a core part of our healthcare strategy
•		Improved market leadership in core businesses

The future of healthcare is one of the most pressing global issues of our time. Around the world, societies are facing the growing reality and burden of increasing and in some cases aging populations, as well as the upward spiraling costs of keeping us in good health. Worldwide, many more people live longer with chronic disease — such as cardiovascular diseases, cancer, diabetes — than in the past. Aging and unhealthy lifestyles are also contributing to the rise of chronic diseases, putting even more pressure on healthcare systems. At the same time the world is facing a global and growing deficit of healthcare professionals.

In the long term, these challenges present Philips with an enormous opportunity. We focus our business on addressing the evolving needs of the healthcare market by developing meaningful innovations that contribute to better healthcare, at lower cost, around the world.

Healthcare landscape

The global healthcare market is dynamic and growing. Over the past three decades, the healthcare industry has grown faster than Western world GDP, and has also experienced high rates of growth in emerging markets such as China and India. Rising healthcare costs present a major challenge to society. The industry is looking to address this through continued innovation, both in traditional care settings and also in the field of home healthcare. This approach will not only help to lighten the burden on health systems, but will also help to provide a more comforting and therapeutic environment for patient care.

People-focused, healthcare simplified

Philips’ distinctive approach to healthcare starts by looking beyond the technology to the people — patients and care providers — and the medical problems they face. By gaining deep insights into how patients and clinicians experience healthcare, we are able to identify market and clinical needs. In response, we can develop more intuitive, more affordable, and in the end more meaningful innovations to help take some of the complexity out of healthcare. This results in better diagnosis, more appropriate treatment planning, faster patient recovery and long-term health. We try to simplify healthcare by combining our clinical expertise with human insights to develop innovations that ultimately help to improve the quality of people’s lives. We believe that we are well positioned for the long term as global healthcare needs will continue to increase and our care cycle approach will drive towards better patient outcomes and reduced healthcare system costs.

With a strong presence in cardiology, oncology and women’s health, we focus on many of the fundamental health problems with which people are confronted, such as congestive heart failure, lung and breast cancers and coronary artery disease. Our focus is on understanding the complete cycle of care — from disease prevention to screening and diagnosis through to treatment, monitoring and health management — and choosing to participate in the areas where we can add significant value. Philips is dedicated to making an impact wherever care is provided, within the hospital — critical care, emergency care and surgery — and, as importantly, in the home.

The high-growth sector of home healthcare is a core part of Philips’ healthcare strategy. We provide innovative products and services for the home that connect patients to their healthcare providers and support individuals at risk in the home through better awareness, diagnosis, treatment, monitoring and management of their conditions. We also provide solutions that improve the quality of life for aging adults, for people with chronic illnesses and for their caregivers, by enabling healthier, independent living at home.

About Philips Healthcare

Philips is one of the top-tier players in the healthcare technology market (based on sales) alongside General Electric (GE) and Siemens. Our Healthcare sector has global leadership positions in areas such as cardiac care, acute care and home healthcare.

Philips Healthcare’s current activities are organized across four businesses:

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Imaging Systems: interventional X-ray, diagnostic X-ray, computed tomography (CT), magnetic resonance (MR), nuclear medicine (NM) and ultrasound imaging equipment, as well as women’s health

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Patient Care & Clinical Informatics: cardiology informatics, including diagnostic electrocardiography (ECG); enterprise imaging informatics, including radiology information systems (RIS) and picture archiving and communication systems (PACS); patient monitoring and clinical informatics;

perinatal care, including fetal monitoring and Philips Children’s Medical Ventures; and therapeutic care, which includes cardiac resuscitation, emergency care solutions, therapeutic temperature management, hospital respiratory systems, and ventilation

•		Home Healthcare Solutions: sleep management and respiratory care, medical alert services, remote cardiac services, remote patient management
•		Customer Services: consultancy, site planning and project management, clinical services, Ambient Experience, education, equipment financing, asset management and equipment maintenance and repair

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

The United States is the largest healthcare market, currently representing close to 43% of the global market, followed by Japan and Germany. Approximately 20% of our annual sales are generated in emerging markets, and we expect these to continue to grow faster than the markets in Western Europe and North America.

Sales at Healthcare are generally higher in the second half of the year largely due to the timing of new product availability and customers attempting to spend their annual budgeted allowances before the end of the year.

Philips Healthcare employs approximately 35,500 employees worldwide. Reference is made to the information on the sourcing of the sector Healthcare in Item 4 “Information on the Company” under the heading “Supply management”.

Progress against targets

The Annual Report 2009 set out a number of key targets for Philips Healthcare in 2010. The advances made in addressing these are outlined below.

Drive Performance

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Continue to drive operational excellence and improve margins: We are building on successful initiatives to structurally reduce our overall cost structure and improve our organizational effectiveness. We are improving our margins through better product reliability, improved pricing initiatives, optimization of low-cost country sourcing, and increases in our service productivity and operational efficiency. In 2010 we continued to improve the efficiency and effectiveness of our organization, not only in response to the current economic climate, but, even more importantly, to further strengthen our position for the future. We continued to manage costs and reorganize our business, both to meet customer and market demands, as well as to enable profitable growth. In addition, we continue to drive the pace of operational improvement. Our Quote to Cash program has driven fundamental changes within our organization, focusing on process standardization and simplification. A direct result of those efforts was the formation of a centralized Commercial Operations organization —with the primary goal of making it easier for our customers to do business with us.

•		Drive emerging market growth: We continue to make key acquisitions to meet the diverse and growing needs of the different markets around the world. For example, our acquisition of Shanghai Apex Electronics in 2010 provides high-quality value ultrasound transducers, enabling Philips to further support the use of ultrasound, a widely used diagnostic procedure that provides a critical yet affordable and mobile modality for early diagnosis and real-time imaging. The acquisition marks another step in Philips’ expanding presence in emerging markets, complementing the acquisition of healthcare informatics company Tecso Informatica in Brazil and the expansion of our clinical informatics portfolio with the acquisition of Wheb Sistemas, a leading Brazilian provider of clinical information systems.
•		Continue to pursue integration of our recent acquisitions: In 2010 we successfully completed steps to integrate prior-year acquisitions including InnerCool Therapies Inc., a pioneer in the field of therapeutic hypothermia, and Traxtal, a medical technology innovator in imageguided procedures. This included the launch of the Philips InnerCool RTx Endovascular System to help enhance patient care by managing therapeutic hypothermia.

Accelerate change

Our organic growth will be driven by continued expansion into emerging markets, more significant development of mid- and low-end products for customers around the world, increased brand preference, ongoing enhancement of our customer experience, and optimization of our care cycle approach.

•

Drive transformational activities to improve the customerexperience: We are leveraging our product and services portfolio in innovative ways. We offer innovative financing and business modeling solutions to our customers to simplify and ease purchasing

decisions. Additionally, we recently added consulting offerings, a further contributor to the continued growth of our Customer Services business. We have also introduced new low- and mid-range products, boosting growth in these market segments in both mature and emerging markets.

•		Organize around customers and markets to bring decisionmakingcloser to the customer: We have improvedoperational excellence and increased our customerfocus by aligning our sales and services organizations tobetter serve our customers and markets in which theyoperate. Creating smaller, more empowered teams ofsales and services professionals will help us to reactfaster to customers’ requirements and offer better,broader solutions to the marketplace.
•		Accelerate introductions of low- and mid-end products as aplatform for new growth opportunities: As part of ourefforts to better serve our customers in key markets,we are looking for ways to improve how we design,develop and deliver products. We have partnered withElectron, a leading Russian medical equipmentmanufacturer, to develop and produce innovativeimaging products for the Russian market. Thepartnership will initially focus on the development of CT scanners, with potential opportunities for futureexpansion with other healthcare products such asmagnetic resonance, X-ray and ultrasound systems.In October we completed Russia’s first installation of a domestically made CT scanner at the Hospital of War Veterans in St. Petersburg.
		We have also made significant progress in developing products that meet the varied needs of customers around the world. In fact, since 2009, companies we have acquired (primarily in emerging markets) introduced 15 new products. An example is the Allura FC catherization lab launched in India in 2010 — the first product developed and manufactured by Alpha X-ray, a recent Philips acquisition in India.

Implement strategy

•		Move toward leadership position in imaging: In 2010 we unveiled a new approach to clinical collaboration that will drive innovation and efficiency in radiology: Imaging 2.0. Just as Web 2.0 redefined the way people connect, share and use the internet, Imaging 2.0 represents a new world of possibilities for radiology science. It is about integration and collaboration, and new levels of patient focus and safety that can help clinicians achieve what was unimaginable just a few short years ago.
		The introduction of Imaging 2.0 coincided with an unprecedented number of new product introductions in radiology, all designed to facilitate innovation and collaboration, focus on patient care and safety, and improve economic value. This year, Philips introduced the Ingenuity CT platform, which is designed to provide equivalent diagnostic image quality at up to 80% less dose. This advanced technology has also been incorporated into a new hybrid imaging system, the Ingenuity PET/CT, used to conduct studies in oncology imaging, cardiac perfusion and diagnostic CT.

Other innovations in imaging include:

	-		Ingenia MR, the first digital broadband MR system that improves image quality while shortening MR exam times by up to 30%
	-		Ingenuity PET/MR, the first new imaging modality introduced in 10 years, which integrates the molecular imaging capabilities of PET with the superior soft tissue contrast of MR (magnetic resonance imaging)
	-		IntelliSpace Portal, a new multimodality, multivendor workstation that, for the first time, uses advanced networking capabilities to facilitate collaboration between radiologists and referring clinicians anytime, anywhere, no matter the modality or vendor, ultimately helping to fuel improved patient outcomes
	-		iU22 xMATRIX Ultrasound, a new ultrasound system that allows clinicians to capture twice as much clinical information in the same amount of time without moving, turning or rotating the transducer, helping clinicians make more informed care decisions, and potentially minimizing the frequent repetitive stress injuries experienced in the field of sonography.

•

Grow Home Healthcare: Philips is expanding its Home Healthcare business both by introducing new solutions, as well as by expanding its footprint around the globe.

Seniors are living longer and remaining in their own homes; however, falls have become an epidemic problem that jeopardizes their chances to live independently. In order to help enable continued independence for seniors by improving access to help in the event of a fall, we introduced the breakthrough medical alert service, Philips Lifeline with AutoAlert. Available in the US, Lifeline with AutoAlert can detect falls — with a high rate of detection and low rate of false alarms — and automatically call for help. We also announced plans to make this enhanced service available in Japan in 2011.

		Additionally, there are more than one billion people suffering from chronic respiratory diseases worldwide. Of this group, an estimated 210 million people have Chronic Obstructive Pulmonary Disease (COPD). Three million people died from COPD in 2005, and 90% of those deaths were in low and middle-income countries, where effective strategies for prevention and control are not always implemented or accessible. Philips will train 2,000 physicians in emerging markets on respiratory disease like sleep apnea and COPD. In India, Philips recently supported the set-up of sleep labs in hospitals to help diagnose sleep disorders and help get affected patients the treatment needed to live a healthier life.
•		Continue to execute our care cycle strategy around women’shealth, cardiology and oncology: we are concentrating oureffort, investment and research on some of the mostsignificant diseases and conditions within those areas. With a growing presence in these fields, we focus onthe fundamental health problems with which people areconfronted today — diseases such as congestive heartfailure, breast and other cancers, coronary arterydisease.
•		Leverage Sustainability as a driver of growth: We aremaking significant strategic investments in our industrialfootprint in emerging markets in order to drive growthby better serving local customers and to reduce ouroverall cost position. In 2010, we invested EUR 60 million in Green Innovation and the share of GreenProduct sales increased from 23% in 2009 to 25% in 2010. We continue to focus our Green Innovationprojects on lowering energy usage, weight, radiationdose, and hazardous material content. We play an active role in developing environmental legislation, such as EU legislation on chemical substances (RoHS and REACH), EcoDesign of products (e.g. energy efficiency; EuP directive) and electronic waste (WEEE).

Regulatory requirements

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

Philips Healthcare participates in COCIR, the European trade association for the Radiological, Electro-medical and Healthcare IT industry, which has committed to participate in the Energy-using Products Directive through a Self-Regulatory Initiative for imaging equipment.

Strategy and 2011 objectives

Philips Healthcare will continue to play an important role in the realization of Philips’ strategic ambitions in the domain of health and well-being.

Healthcare has defined the following key business objectives for 2011:

Drive performance

•		Deliver cost innovation and margin initiatives
•		Expand service portfolio
•		Continue to build the Philips Healthcare brand
•		Deliver on our EcoVision sustainability commitments

Improve capabilities

•		Organize around customers and markets
•		Simplify the way we work to create more customer focus
•		Improve customer business administrative process
•		Improve service delivery
•		Achieve breakthrough cost innovation in product design
•		Drive growth and leadership in oncology
•		Extend our leadership in cardiology

Implement strategy

•		Advance towards global leadership position in Imaging Systems
•		Grow Home Healthcare
•		Grow best-in-class clinical decision support, patient care and clinical informatics solution business
•		Grow in emerging markets faster than competition

Reference is made to the information on the financial performance of the sector Healthcare in Item 5 “Operating and financial review and prospects” under the heading “Performance by sector”.

Consumer Lifestyle

Introduction

•		Leading positions in categories such as male shaving and grooming, coffee appliances and oral healthcare
•		Further decisive action taken to reduce our exposure in the Television business
•		Increased focus on growth, taking a granular approach by making clear investment choices
•		Expanded business creation capabilities in emerging markets and investment in key enablers to accelerate growth

Across the world, consumers aspire to improve their health and feeling of well-being, but struggle to balance this with the increasing complexity of their lives. This trend is creating a large and growing market in the developed and especially in the emerging economies, where Consumer Lifestyle can benefit by delivering health and well-being solutions with advanced technology that meet people’s needs.

We strive to understand consumer needs and translate those insights into breakthrough, meaningful innovations. Our competitive advantage is our solutions that are easy to experience, advanced and designed around the consumer. This strength is galvanized by our powerful global brand, our understanding of the markets we operate in and the many synergies with our channels, partners and supply chain.

Lifestyle retail landscape

The fragile economic environment in 2010 continued to affect demand for many categories of consumer goods in developed markets. Whilst emerging markets saw consumer demand impacted by the economic environment, they demonstrated greater resilience.

However, underlying consumer trends driving our innovation remained stable:

•		People are increasingly appearance-conscious and want to boost their self-confidence and self-identity through health and beauty regimes
•		People want to prepare food and drinks that are healthy and of good quality, and to do so quickly and without hassle
•		More and more consumers want to take control by monitoring their health and lifestyle
•		People want to create a home ‘haven’ — a space that provides a sense of well-being and comfort
•		Consumers want to create a digital command center at home, which performs the role of a social digital hub

Helping people achieve a healthier and better life

Consumer Lifestyle makes a difference to people’s lives by making it easier for them to achieve a healthier and better lifestyle. We believe that “sense and simplicity” can be the goal of technology and apply that principle to create life-enhancing solutions.

Tracking trends and identifying opportunities

Consumer Lifestyle works together with Philips Design to monitor trends ranging from consumer tastes to design aesthetics. With its global footprint, Consumer Lifestyle is well positioned to understand emerging needs in local markets. Country organizations are our interface with the consumer, allowing us to accurately identify local needs, tastes and commercial opportunities.

Applying insights to develop innovative solutions

We apply a rigorous product development process when creating new value propositions. At its heart are validated consumer insights, which show that the propositions meet a market need. The combination of insight, simplicity and innovation differentiates us from our competition and creates a platform for sustainable business success.

Where we play

We are active in our four value spaces in health and well-being: Healthy Life, Personal Care, Home Living and Lifestyle Entertainment, complemented by Accessories. This portfolio is aligned with our brand equity and enables us to provide our retail customers with a highly relevant and attractive product portfolio. We focus on premium propositions with our differentiating brand promise of “sense and simplicity”, relevant to the target group.

In focusing on the domain of health and well-being, we are tapping into significant trends — such as consumer empowerment, growth in emerging markets and aging populations — that will have a major impact on society in the future.

Healthy Life

The Healthy Life value space takes a holistic approach to enhancing consumers’ health, addressing the needs for mental and physical health and for healthy relationships.

Personal Care

The Personal Care value space addresses the consumer need to “look and feel your best” and so helps people feel more confident.

Home Living

The Home Living value space addresses consumers’ pressing need to have more time to spend on themselves or with family and friends. We do this by creating high-quality solutions that enable quick and convenient cooking, preparation of beverages, cleaning, caring and home comfort.

Lifestyle Entertainment

Lifestyle Entertainment is about enjoying entertainment and the little events in everyday life: sharing time with family and friends, having time off from a hectic schedule, and moments of comfort, fun and caring.

About Consumer Lifestyle

The Philips Consumer Lifestyle sector is organized around its markets, customers and consumers, and is focused on value creation through category development and delivery through operational excellence.

The market-driven approach is applied with particular emphasis at local level, enabling Consumer Lifestyle to address a variety of market dynamics and allowing the sales organizations to operate with shorter lines of communication with the sector’s six businesses. This also promotes customer-centricity in day-to-day operations.

In 2010 the sector consisted of the following areas of business:

•		Health & Wellness: mother and child care, oral healthcare
•		Personal Care: shaving and grooming, female depilation, haircare, vitalight, skincare
•		Domestic Appliances: kitchen appliances, beverages/ espresso, garment care, floor care, water, air
•		Television
•		Audio & Video Multimedia: home audio, home video, home cinema sound, portable audio and video
•		Accessories: on-the-go accessories, together@home accessories, personal displays, speech processing

We also partner with leading companies from other fields, such as Sara Lee/Douwe Egberts and Beiersdorf (NIVEA), in order to deliver customer-focused appliance/ consumable combinations. Consumer Lifestyle continues to focus on international key accounts, particularly in emerging markets. We have pioneered innovative approaches in online and social media to build our brand and drive sales.

We offer a broad range of products from high to low price/value quartiles, necessitating a diverse distribution model. We are expanding our portfolio to increase its accessibility, particularly for lower-tier cities in emerging markets. We are also developing new retail channels, for instance selling our innovative Intense Pulsed Light depilation solution, Philips Lumea, in branches of Douglas, the pan-European beauty retailer.

Under normal economic conditions, the Consumer Lifestyle business experiences seasonality, with higher sales in the fourth quarter resulting from the holiday sales.

Consumer Lifestyle employs approximately 17,700 people worldwide. Our global sales and service organization covers more than 50 mature and emerging markets. In addition, we operate manufacturing and business creation organizations in the Netherlands, France, Belgium, Austria, Hungary, Singapore, Argentina, Brazil and China.

Consumer Lifestyle strives for full compliance with relevant regulatory requirements, including the European Union’s Waste from Electrical Equipment (WEEE) directive.

Reference is made to the information on the sourcing of the sector Consumer Lifestyle in Item 4 “Information on the Company” under the heading “Supply management”.

Progress against targets

The Annual Report 2009 set out a number of key targets for Philips Consumer Lifestyle in 2010. The progress made in addressing these targets is outlined below.

Drive performance

•		Further increase cash flow by aggressively managing cash targets: We strictly managed working capital, which has been negative in many recent quarters. We effectively managed our credit and risk, including significantly reducing overdue customer payments. There was an increase in the number of suppliers using supplier finance, which reduced total cost in the supply chain. As part of Philips’ drive to harmonize supplier terms, we improved overall payment terms by 7 days.
•		Continue to reduce fixed costs and improve the overall agility of the cost base: We acted fast in the downturn and are benefiting from improved gross margin and a lower cost base, supporting year-on-year adjusted IFO margin improvement. We continued to manage costs via our Earn 2 Invest Program, reinvesting savings to drive growth.
•		Strengthen excellence in execution and further develop “sense and simplicity” as a competitive edge: We have implemented an improved management decision support system with granular insight into integral performance per business, market and customer down

to product level. We are also striving to install a return on investment (ROI) culture in order to drive, and increase resources for, more effective advertising and promotional campaigns.

Accelerate change

•		Continually optimize the business portfolio, while prioritizing profitable growth and success in selected new value spaces: We have driven double-digit growth in our Health & Wellness business and high single-digit growth in Personal Care, as well as low single-digit growth in Domestic Appliances. We have taken a granular approach to ignite growth, focusing investments at a category/country level.
•		Nourish existing leadership positions, and increase leadership positions in other categories by delighting consumers and winning their preference: We have market share leadership or co-leadership positions in 45% of our businesses in emerging markets and 32% in mature markets. We have Net Promoter Score leadership — a key leading indicator for sales growth — in mother and child care, power toothbrushes and male shaving and grooming, as well as across a range of categories and countries.

Implement strategy

•		Grow Health & Wellness: The Health & Wellness business grew in every quarter of 2010. The acquisition of Discus Holdings expands our oral healthcare portfolio and creates synergies with the established dental professional relationships we have through Philips Sonicare. We continue to focus on marketing innovation and expansion in emerging markets to capture this large growth opportunity.
•		Manage TV to profitability: We successfully extended our brand licensing partnerships with Videocon (India) and TPV (China). We continued to reduce costs, and we established forward integration and co-location partnerships with TPV, LG Display and Sharp. However, due to high stock levels in retail and strong price erosion, as well as a deterioration of results in China as a consequence of a delay in closing the local licensing agreement, TV was not profitable over the full year. Year-on-year improvement in profitability generated an adjusted IFO loss of EUR 95 million, excluding restructuring charges of EUR 30 million.
•		Improve geographical coverage and strengthen position in Brazil, Russia, India and China through managerial focus and investment: We substantially increased our advertising and promotion spend in emerging markets, and continued to invest in local talent. We announced our intention to move the global headquarters of our Domestic Appliances business to Shanghai, as well as investing in local business creation capabilities for kitchen appliances across four local innovation centers. Three of these centers are located in emerging markets.
•		Accelerate excellence in key strategic capabilities: leadership, professional endorsement, new channels, online, category management and new business models: We pioneered online and social media, including the Philips AVENT support center for mothers, an impartial resource supported by healthcare professionals. We also implemented a major online and social media campaign for our Wake-up Light, which featured the residents of the most northerly town on Earth, where almost four months of darkness makes waking in the morning all that much tougher. We grew our online sales by more than 20% year-on-year.
•		Drive profitable growth through Green Products: We introduced more than 150 new Green Products to our portfolio in 2010, resulting in total Green Product sales of 34% of sector sales. While the increase in Green Product sales was achieved across all business areas, the green focal area that saw the greatest improvement was energy efficiency. We have also worked on the voluntary phase-out of polyvinyl chloride (PVC) and brominated flame retardants (BFR), enabling our Lifestyle Entertainment and Personal Care businesses to launch products which are completely free of these substances. We launched the Econova LED TV, Europe’s greenest LED TV, with a solar remote control. Named “European Green TV 2010-2011” by the European Imaging & Sound Association (EISA), the Econova LED TV addresses people’s concerns about the environment without compromising on performance. It reduces energy consumption by up to 60% — the lowest in its category — and is made from 60% recycled aluminum. Its packaging is 100% paper-based cardboard, and it is completely PVC- and BFR-free.

Strategy and 2011 objectives

Philips Consumer Lifestyle will continue to play an important role in the realization of Philips’ strategic ambitions in the domain of health and well-being.

Consumer Lifestyle has defined the following key business objectives for 2011:

Drive performance

•		Accelerate top-line growth, growing market shares and increasing market penetration in selected business/ market combinations
•		Maintain market share and optimize profitability in selected other business/market combinations
•		Increase outright leadership positions in Net Promoter Score, underpinned by a strong focus on product performance and quality

•		Drive operational excellence end-to-end through the value chain
•		Deliver on our EcoVision sustainability commitments

Improve capabilities

•		Champion consumer and retailer responsiveness, organizing around customers and markets and moving decision-making closer to markets
•		Develop new go-to-market channels and opportunities
•		Accelerate high-impact innovation relevant to local consumer needs to beat competition
•		Drive an agile organization with fast decision-making and clear accountabilities

Implement strategy

•		Grow Personal Care, Health & Wellness, Domestic Appliances and Coffee businesses
•		Continue to strengthen Television business and manage it towards profitability
•		Maintain position in Audio & Video Multimedia and Accessories while driving growth in selected business/ market combinations
•		Grow emerging markets and make China a global home, building business creation capabilities
•		Strengthen our portfolio with targeted mergers and acquisitions

Reference is made to the information on the financial performance of the sector Consumer Lifestyle in Item 5 “Operating and financial review and prospects” under the heading “Performance by sector”.

Lighting

Introduction

•		Lighting industry undergoing a radical transformation
•		Important global trends underpinning strategy
•		Winning in LED

A number of global trends are changing the way people use light. Lighting solutions are transforming urban environments, creating livable cities through the use of light to enhance safety, municipal identity and residential well-being; consumers are increasingly applying lighting to create their own ambience at home as a statement of their lifestyle; building owners and retailers are recognizing the benefits of energy-efficient lighting in reducing their operational costs; and schools are learning how lighting can improve education.

At the same time, more and more people are keen to help tackle the issues of climate change and rising energy costs. Many countries and regions have introduced legislative measures to address energy consumption and the emission of greenhouse gases, which are linked to climate change. In particular, 2010 saw further legislation to phase out old, incandescent lighting and other energy-inefficient forms of electric lighting. Philips will continue to play a significant role in encouraging and enabling the switch to energy-efficient lighting solutions, helping our customers to save on energy costs while making a positive contribution to the environment.

Another key development is the ongoing trend toward custom solutions. Increasingly aware of the possibilities beyond standard solutions, consumers, businesses and national and municipal authorities demand highly adaptable lighting solutions which they can use to customize their indoor and outdoor environments as and when they desire. Flexible and dynamic, our LED lighting solutions allow a much higher degree of customization and provide significantly greater possibilities for ambience creation than solutions based on conventional technologies.

Lighting landscape

We see three main transitions that will affect the lighting industry in the years to come. The first is a move towards energy-efficient light sources, in response to rising energy prices and increased awareness of climate change.

The second transition is the move from traditional vacuum-based technologies to solid-state lighting technology (LEDs). LED lighting is the most significant development in lighting since the invention of electric light well over a century ago. Offering unprecedented freedom in terms of color, dynamics, miniaturization, architectural integration and energy efficiency, LED lighting is opening up exciting new possibilities.

The third transition is from bulbs and components as the point of value creation to end-user-driven applications and solutions. Increasingly, these applications and solutions will include lighting controls. We believe that, going forward, a key differentiator among lighting suppliers will be the innovative strength to create systems and solutions that are truly customer-centric.

Between now and 2015, we expect the value of the global lighting market to grow by 7% on a compound annual basis, assuming global economic growth (GDP) of around 4%. The majority of the value will be in LED-based solutions and products — heading towards 50% by 2015. As one of the global leaders in LED components, applications and solutions, with a strong global presence across the LED value chain, we believe we are well positioned for the changes at hand.

The lighting industry as a whole has been recovering in 2010 from the global economic developments in 2009, though recovery is unevenly spread, with demand picking up in emerging markets in particular. For example, the Chinese authorities are expected to calibrate policy to ensure that the economy continues to grow at around 8% in 2011, despite the slowdown in the West. Emerging markets have rebounded strongly (with the exception of much of Eastern Europe, which is constrained by an ongoing public- and private-sector balance-sheet adjustment), but indicators suggest that most of the rebound is now over, with expansion expected to settle into a more sustainable trajectory.

Automotive and Lumileds markets benefited most from regained confidence and economic growth. Luminaires markets are still slow, particularly in the mature markets. Total world construction spend is expected to increase at a compound annual growth rate of about 5% over the period 2010-15. Early signs of revival in 2010 could be observed in the infrastructure sector, with 1.5% growth year-on-year.

Simply enhancing life with light

Philips Lighting is dedicated to enhancing life with light through the introduction of innovative and energy-efficient solutions or applications for lighting. Our approach is based on obtaining direct input both from customers and from end-users/consumers. Through a market segment-based approach, we can assess customer needs in a targeted way, track changes over time and

define new insights that fuel our innovation process and ultimately increase the success rate of new propositions introduced onto the market.

We aim to be the true front-runner in design-led, market and consumer-driven innovation — both in conventional lighting and in solid-state lighting — while continuing to contribute to responsible energy use and sustainable growth.

We believe the rise of LED, coupled with our global leadership, positions us well to continue to deliver on our mission to simply enhance life with light.

About Philips Lighting

Philips Lighting is a global market leader, with recognized expertise in the development, manufacturing and application of innovative lighting solutions. We have pioneered many of the key breakthroughs in lighting over the past 100 years, laying the basis for our current position.

We address people’s lighting needs across a full range of market segments. Indoors, we offer specialized lighting solutions for homes, shops, offices, schools, hotels, factories and hospitals. Outdoors, we provide lighting for public spaces, residential areas and sports arenas. We also help to make roads and streets safer for traffic and other road users (car lights and street lighting). In addition, we address the desire for light-inspired experiences through architectural projects. Finally, we offer specific applications of lighting in specialized areas, such as horticulture, refrigeration lighting and signage, as well as heating, air and water purification, and healthcare.

Philips Lighting spans the entire lighting value chain — from lighting sources, electronics and controls to full applications and solutions — via the following businesses:

•		Lamps: incandescent, halogen, (compact) fluorescent, high-intensity discharge
•		Consumer Luminaires: functional, decorative, lifestyle, scene-setting
•		Professional Luminaires: city beautification, road lighting, sports lighting, office lighting, shop/hospitality lighting, industry lighting
•		Lighting Systems & Controls: electronic and electromagnetic gear, controls, modules and drivers
•		Automotive Lighting: car headlights, car signaling, interior
•		Packaged LEDs
•		LED solutions: modules, LED replacement lamps

The Lamps business conducts its sales and marketing activities through the professional, OEM and consumer channels, the latter also being used by our Consumer Luminaires business. Professional Luminaires is organized in a trade business (commodity products) and a project solutions business (project luminaires, systems and services). For the latter, the main focus is on specifiers, lighting designers, architects and urban planners. Automotive Lighting is organized in two businesses: OEM and After-market. Lighting Systems & Controls, Special Lighting Applications and Packaged LEDs/LED solutions conduct their sales and marketing through both the OEM and professional channels.

The conventional lamps industry is highly consolidated, with GE and Siemens/Osram as key competitors. The LED lamps and fluorescent retrofit industry is in its early days, with a huge number of competitors entering the marketplace. The luminaires industry is fragmented, with our competition varying per region and per segment. Our Lighting Systems & Controls and Automotive Lighting businesses are again more consolidated. In the world of digital lighting, a wide range of new entrants are active in the transition to LED lighting as well as in the transition to applications and solutions.

Philips Lighting has manufacturing facilities in some 25 countries in all regions of the world and sales organizations in more than 60 countries. Commercial activities in other countries are handled via dealers working with our International Sales organization. Lighting has approximately 53,000 employees worldwide.

Lighting strives for compliance with relevant regulatory requirements, including the European Union’s Waste from Electrical and Electronic Equipment (WEEE), Restriction of Hazardous Substances (RoHS), Energy Performance of Buildings (EPBD) and Energy using Products (EuP) directives. The impact of the latter is described above under the heading “Introduction”.

Under normal economic conditions, the Lighting business sales are generally not materially affected by seasonality.

Reference is made to the information on the sourcing of the sector Lighting in Item 4 “Information on the Company” under the heading “Supply management”.

Progress against targets

The Annual Report 2009 set out a number of key targets for Philips Lighting in 2010. The advances made in addressing these are outlined below.

Drive performance

•		Drive our performance through capturing growth while managing cost and cash: Nominal sales grew by 15%, delivering a significant improvement in profitability and cash flow.
•		Win with customers in key markets: Our market share remained steady, and over two-thirds of our business/ market combinations have a leadership position in NPS.
•		Improve our relative position in emerging markets, especially China, India and Latin America: Comparable sales in emerging markets grew from 34% to 38% of total sales, driven by double-digit growth in China, India and Latin America.

Accelerate change

•		Further drive the transitions needed to retain the industry lead in the LED era; optimize the lamps lifecycle, expand share of leading LED solutions in professional and consumer segments: Significant progress was made in growing LED as a percentage of sales from 8% in 2009 to 13% in 2010. We also undertook significant restructuring and rightsizing efforts aimed at gearing up our organization to take full advantage of the LED-driven future opportunities in the lighting industry and adjusting our cost structure to current market conditions. We added a number of acquisitions to our portfolio to strengthen our ability to offer LED solutions across segments. These include Burton, a leading provider of specialized lighting solutions for healthcare facilities, and NCW Holdings, a leading Chinese provider of entertainment lighting and lighting control solutions.
•		Continue to invest in extending technological leadership in LED: We made significant R&D and capital investments in LED, including Lumileds, and made considerable progress in creating an integrated LED value chain across Lighting.

Implement strategy

•		Become the lighting solutions leader in the Outdoor segment: We significantly expanded our LED road lighting portfolio in all regions. We have a healthy project pipeline for LED road lighting in China and continue to invest in R&D and our sales force to enhance our offering into turnkey projects. In 2010 we also acquired Amplex’s street lighting controls business to further expand our street lighting offering.
•		Grow our Consumer Luminaires business: We made considerable progress in expanding the business outside Europe. Overall, sales remained broadly in line with 2009 due to ongoing weakness in the residential market in Europe, the business’s core market. The acquisition of Luceplan, a leading high-end design brand in consumer lighting has further strengthened our portfolio.
•		Implement our new Lighting mission, identity and sustainability story — “Simply enhancing life with light”: We have trained more than 85% of all our employees on our new Lighting mission and have seen the uptake reflected in our Employee Engagement Survey and in the positive reactions of external stakeholders, e.g. at Light + Building 2010 and our Capital Markets Day.
		In 2010 we invested EUR 230 million in Green Innovation, compared to EUR 185 million in 2009. The energy efficiency of our total product portfolio improved by 9%.

Strategy and 2011 objectives

Philips Lighting will continue to play an important role in the realization of Philips’ strategic ambitions in the domain of health and well-being.

Lighting has defined the following key business objectives for 2011:

Drive performance

•

Accelerate growth and gain market share in:

	-		LED lighting
	-		Segment-specific solutions
	-		Emerging markets

•		Enhance customer service levels
•		Increase outright NPS leadership positions and brand preference
•		Continue to optimize profit, minimize cost, maximize cash

Improve capabilities

•

Reinforce a growth culture based on:

	-		Speed
	-		Customer responsiveness
	-		Empowerment

•		Improve market impact through integral business models and end-to-end value chain execution
•		Drive innovation effectiveness

	-		Faster innovation cycles
	-		Better time-to-market
	-		Seamless strategy/design/marketing/technology cooperation

•

“Resource to win” through strategic workforce planning and by enhancing diversity, talent and competency management

Implement strategy

•		Lead in LED light sources while further optimizing conventional lighting
•		Win in LED-powered lighting solutions, focusing on:

	-		Professional applications in Outdoor, Retail, Office, and specific local priorities
	-		Philips brand expansion in consumer lighting

•		Deliver on our EcoVision sustainability ambitions
•		Strengthen emerging markets

Reference is made to the information on the financial performance of the sector Lighting in Item 5 “Operating and financial review and prospects” under the heading “Performance by sector”.

Group Management & Services

Introduction

Philips’ performance by market cluster is based on the following:

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

Group Management & Services comprises the activities of the corporate center including Philips’ global management and sustainability programs, country and regional management costs, and costs of pension and other postretirement benefit plans, as well as Corporate Technologies, Corporate Investments, New Venture Integration and Philips Design. Additionally, the global shared business services for purchasing, finance, human resources, IT, real estate and supply are reported in this sector.

Corporate Technologies

Corporate Technologies feeds the innovation pipeline, enabling its business partners — the three Philips operating sectors and external companies — to create new business options through new technologies, venturing and intellectual property development, improve time-to-market efficiency, and increase innovation effectiveness via focused research and development activities.

Corporate Technologies encompasses Corporate Research, the Incubators, Intellectual Property & Standards (IP&S), the Philips Innovation Campus as well as Applied Technologies. In total, Corporate Technologies employs about 3,900 professionals around the globe.

Corporate Technologies actively participates in ‘open innovation’ through relationships with academic and industrial partners, as well as via European and regional projects, in order to improve innovation efficiency and share the related financial exposure. The High Tech Campus in Eindhoven, the Netherlands, the Philips Innovation Campus in Bangalore, India, and Research Shanghai, China, are prime examples of environments enabling open innovation. In this way, we ensure proximity of innovation activities to emerging markets.

Philips Research is a key innovation partner for Philips’ business sectors. It has three main roles. Firstly, it creates new technologies that help to spur the growth of the Philips businesses. Secondly, it develops unique intellectual property (IP), which will enable longer-term business and creates standardization opportunities for Philips. Lastly, it prepares the ground for the creation of adjacent businesses in the sectors based on technology-enabled innovation in strategically aligned application areas.

In 2010, scientists from Philips Research developed the first-ever organic light-emitting diode (OLED) module that can be powered directly from a mains electricity supply. The prototype opens the door to OLED systems that can be directly plugged into standard power outlets without the need for bulky power management circuitry. This will reduce the bill of materials and simplify luminaire design for future OLED-based systems aimed at mass-market general illumination applications. In the Healthcare area, Philips Research is developing a Radio Frequency Ablation Cockpit, which covers preparation, planning and execution of minimally invasive tumor ablation procedures by clinicians. For therapy planning, the cockpit leverages the tumor visualization capabilities of pre-operative CT and/or PET imaging plus automated generation of target ablation plans. For targeted needle placement, it combines these with the real-time imaging capabilities of ultrasound and precision needle-tip navigation technology based on electromagnetic tracking.

Philips has three incubation organizations: the Healthcare, Consumer Lifestyle and Lighting & Cleantech Incubators. The main purpose of the Incubators is to create strategic growth opportunities for Philips. In some cases, spin-out or technology licensing is considered. In Healthcare, Philips made an anchor investment in the healthcare technology fund Gilde Healthcare III, which has a target size of EUR 200 million. In Consumer Lifestyle, DirectLife, launched in 2009, now has over 30,000 active users losing weight, getting fit and staying healthy. In the second half of 2010, a new Skin Care venture became operational to help women who are confused about their skin type and the products they should use. Our novel Crystalize imaging technology gives women factual, objective information and better knowledge about their skin so they can make smarter choices and achieve a more beautiful skin.

Philips further developed digital pathology solutions to ease the workload and support decision making in central and hospital-based pathology departments.

Philips IP&S proactively pursues the creation of new intellectual property in close co-operation with Philips’ operating sectors and the other departments within Corporate Technologies. IP&S is a leading industrial IP organization providing world-class IP solutions to Philips’ businesses to support their growth, competitiveness and profitability. Philips’ IP portfolio currently consists of about 50,000 patent rights, 36,000 trademarks, 63,000 design rights and 3,900 domain name registrations. Philips filed approximately 1,300 patents in 2010, with a strong focus on the growth areas in health and well-being. IP&S participates in the setting of standards to create new business opportunities for the Healthcare, Consumer Lifestyle and Lighting sectors. A substantial portion of revenue and costs is allocated to the operating sectors. Philips believes its business as a whole is not materially dependent on any particular patent or license, or any particular group of patents and licenses.

Applied Technologies is a showcase for our open innovation approach, supporting customers both inside and outside Philips through new technologies, new business ideas, consultancy and new product development and introduction services. Applied Technologies is an active player in solutions for the healthcare sector and energy solutions, including solar cells and energy management.

Corporate Investments

The remaining business within Corporate Investments — Assembléon — is a wholly owned subsidiary that develops, assembles, markets and distributes a diverse range of surface-mount technology placement equipment. In 2010 we announced our attention to sell a majority stake in Assembléon to H2 Equity Partners, an independent private equity firm. Philips will retain a 20% stake in Assembléon once the transaction is completed.

New Venture integration

The New Venture Integration group focuses on the integration of newly acquired companies across all sectors.

Philips Design

Philips Design is one of the longest-established design organizations of its kind in the world. It is headquartered in Eindhoven, the Netherlands, with branch studios in Europe, the US and Asia Pacific. Its creative force comprises designers, psychologists, ergonomists, sociologists, philosophers and anthropologists working together to understand people’s needs and desires, in order to generate designs which support people in accomplishing and experiencing things in natural, intuitive ways.

Philips Design’s forward-looking exploration projects deliver vital insights for new business development, supporting the transformation towards a health and well-being company.

Reference is made to the information on the financial performance of the sector Group Management & Services in Item 5 “Operating and financial review and prospects” under the heading “Performance by sector”.

Performance by key function

Marketing

Brand and NPS

A consistent focus on building brand loyalty amongst both professionals and consumers led to the 7% increase in the value of the Philips brand value to USD 8.7 billion, outpacing the average increase of 4% shown by brands measured in the 2010 Interbrand ranking. Additionally, Philips’ brand value has doubled in 6 years and it remains one of the top 50 most valuable brands in the world, measured by the Interbrand ranking of the 100 best global brands.

Philips’ total 2010 marketing expenses approximated EUR 934 million, a 16% increase compared to 2009. The additional spend was primarily to support the company’s marketing strategy of more focused growth in emerging and other strategic markets. In line with this, the company increased its 2010 marketing spend in key emerging markets by 48% compared to 2009. Additionally, the company continued its focus on organizing around customers and markets, resulting in more local marketing investment as a percentage of sales. Total 2010 marketing investment in emerging markets approximated 22% of sales, compared to 17% of sales in 2009.

Philips’ total 2009 marketing expenses declined nominally to EUR 804 million, but as percentage of sales remained broadly in line with 2008 levels. In 2009, Philips’ marketing strategy showed an increased focus on organizing around customers and markets. To that end, global investment was tailored more substantially to strategic markets.

In 2010, we have continued to expand our coverage of Net Promoter Score (NPS) program to include additional markets strategic to Philips’ growth. Philips stayed the course despite tough economic times, having improved our NPS leadership score in Consumer Lifestyle and maintaining a strong performance in Healthcare. While Lighting performance noted a decrease, it remains a clear leader in its industry. In particular, we achieved strong performance in BRIC markets and in Western Europe, most notably with BRIC outright leadership positions increasing by 18 points. Whilst we noted a decrease in North America and the rest of EMEA, Philips continues to occupy strong leadership positions in these regions. Overall, the result is stable, and 59% of our businesses currently hold industry leadership positions (60% in 2009). In line with our growth targets in Vision 2015, in 2011 we will continue to drive for further leadership in NPS in key markets. The implementation of this measure has confirmed that outstanding customer and consumer loyalty is critical to achieving growth.

Online

Philips continued to build brand loyalty and promoters via its online marketing strategies in 2010. Within the Lighting sector, the company launched a new social media-enabled platform designed to showcase the company’s leadership in the lighting industry and more importantly, drive meaningful dialog among existing and prospective customers and stakeholders.

Additionally, in 2010, the company developed several online communities, which, supported by social media capabilities, enabled the company to facilitate dialog and networking with its professional audiences in both Lighting and Healthcare. Going forward, the company will continue to drive its online marketing efforts with the use of new enabling technologies and communication platforms and leveraging the platform as a sales enabler. In 2010, Philips’ online sales reached EUR 570 million, a 41% increase from 2009 where online sales reached EUR 405 million. Online sales in from emerging markets represented approximately 30% of total online sales in 2010 and grew by 94% over the prior year.

In further support of sustainability and corporate responsibility, the company continued its efforts with asimpleswitch.com, its online platform that promotes smart energy efficiency and consumption. Since its launch in 2009, the site has gained in momentum and popularity, building an online supporter base of over 100,000 individuals by year-end.

Marketing expenses
in millions of euros unless otherwise stated		2008				2009				2010
Marketing expenses			949				804				934
as a % of sales			3.6				3.5				3.7

Research & development

R&D spending declined as a percentage of sales from 7.0% in 2009 to 6.2% in 2010. Philips has continued to expand its vast knowledge and intellectual property base. Early and continuous involvement of customers in new technologies, application and business concepts ensures deep insight into their needs — the foundation for our innovations. To better capitalize on opportunities in fast-growing emerging markets, innovation is managed at board level in the Markets & Innovation function, underlining our focus on market-driven innovation. Innovation leading to new businesses in incubators and

internal ventures is managed separately from the traditional business to ensure focus on these growth initiatives. The effectiveness of innovation has been improved by streamlining our organization in Corporate Technologies, leading to more focus, alignment and enhanced offering of value propositions. The scope of the new organization covers early innovation and pre-development activities, supplemented by small series production.

Research and development expenses
in millions of euros unless otherwise stated		2008				2009				2010
Research and development expenses			1,777				1,631				1,576
as a % of sales			6.7				7.0				6.2

Healthcare R&D expenses increased EUR 19 million in 2010, reflecting our continued investment in emerging markets and home healthcare, though declined as a percentage of sales. Lighting’s expenses were broadly in line with 2009, with an increase in digital lighting and a reduction in traditional lighting. In Consumer Lifestyle, R&D spend was lower than in 2009, mainly due to a focus on fewer, but bigger projects and lower restructuring charges. GM&S lowered its R&D expenses through discontinuation of certain activities in the field of Molecular Healthcare and in the field of 3D Displays.

In 2009, Philips’ investment in R&D activities amounted to EUR 1,631 million (7.0% of sales), compared with EUR 1,777 million (6.7% of sales) in 2008.

Research and development expenses per sector
in millions of euros		2008				2009				2010
Healthcare			672				679				698
Consumer Lifestyle			513				395				369
Lighting			345				351				355
GM&S			247				206				154
Philips Group			1,777				1,631				1,576

Our new product sales — products introduced within 2010 (for B2C products) or three years (for B2B products) — increased from 48% of total sales in 2009 to 52% in 2010. In 2009 the global recession affected demand for new products, and our new product sales — products introduced within the last year (for B2C products) or three years (for B2B products) — dropped from 58% of total sales in 2008 to 48% in 2009. Philips aims to maintain this ratio at around 50%, while at the same time focusing on the profitability of new products and reallocating innovation spend more towards new business creation.

Supply management

Executing Vision 2015 and strengthening our health and well-being leadership requires enhancing our Supply strategy and governance approach. Our vision is to create a Customer Value Chain that enables better customer solutions, boosts our NPS, and powers growth. Customer Value Chain is a series of activities that collectively provide greater value than their sum. A more integrated Supply community will ensure that every part of the value chain works seamlessly together to benefit our customers and our company.

The Supply organization encompasses three focused functions: Commercial and Service Supply Chain, Operations, and Purchasing. Collectively, they comprise approximately 58,000 Philips employees and are responsible for sourcing, making and delivering products and solutions.

Management of shortages and management of commodity price increases

The recovery of the global economy led to tight supply of especially semiconductor components in the course of 2010. The scarcity and increased commodity prices led to upward price pressure. We have been able to delay price increases and smoothened out volatility through commodity hedging and negotiations with our component suppliers. The raw material price trends have also further accelerated the wide deployment of Value Engineering throughout the company, in close cooperation between Supply and R&D.

We achieved Bill of Material (BOM) savings of 4.9% and Non Product Related (NPR) savings of 5.2%.

In order to minimize the impact on our customer service levels and sales, a number of initiatives have been taken. Actions have been taken to rapidly improve our forecast reliability and sales and operational planning processes, both short term and longer term, in order to reduce such risks for the future. Additional investments were made in the emerging markets to ensure optimal local presence of the supply function.

Concentration and consolidation of supply base

In line with our brand promise of “sense and simplicity”, Philips Supply continued its focus on leveraging the supply base by bringing more spend to fewer, selected suppliers. In the area of BOM the number of suppliers has been reduced by approximately 25%, whereas in the area of NPR approximately 15% reduction has been realized. Creating long term strategic partnerships with suppliers is an important enabler of Philips’ growth ambitions. In 2010 the number of suppliers to cover 80% of spend has been

reduced by approximately 10% on BOM and by approximately 25% on NPR. Standardization of payment terms has helped us to create uniformity and positively influence Days Payable Outstanding.

Supplier risk management

We are monitoring our top 400 suppliers on a constant basis. Risks are measured and, if required, contingency plans are prepared.

Innovation with the supply base

Philips is putting a lot of emphasis on Open Innovation programs by increasingly using the innovative power of our suppliers. In the Supplier Forum 2010 with our top suppliers Open Innovation was one of the key themes. Combining Philips innovation with the innovative capabilities and capacities of the supply base is expected to deliver acceleration of profitable growth.

Sustainability in the supply chain

Philips remains focused on improving working conditions and environmental performance in its supply chain and encourages its suppliers to have the same focus.

Employment

Change in number of employees
in FTEs		2008				2009				2010
Position at beginning of year			123,801				121,398				115,924
Consolidation changes:
- new consolidations			12,673				2,432				1,457
- deconsolidations			(1,571	)			(276	)			(307	)
Comparable change			(13,505	)			(7,630	)			1,927
Position at year-end			121,398				115,924				119,001

The total number of employees of the Philips Group was 119,001 at the end of 2010, compared to 115,924 at the end of 2009. Approximately 45% were employed in the Lighting sector, due to the continued relatively strong vertical integration in this business. Some 30% were employed in the Healthcare sector and approximately 15% of the workforce was employed in the Consumer Lifestyle sector.

At the end of 2009, the total number of employees of the Philips Group was 115,924, compared to 121,398 at the end of 2008. Approximately 45% were employed in the Lighting sector, due to the still relatively strong vertical integration in this business. Some 30% were employed in the Healthcare sector and approximately 16% of the workforce was employed in the Consumer Lifestyle sector.

Employees per sector
in FTEs		at the end of
		2008				2009				2010
Healthcare			35,551				34,296				35,479
Consumer Lifestyle			17,145				18,389				17,706
Lighting			57,367				51,653				53,888
GM&S			11,335				11,586				11,928
			121,398				115,924				119,001

The increase in headcount in 2010 was mainly attributable to acquisitions and an increase in temporary employees in Lighting to support higher levels of activity. The number of employees increased in all sectors except Consumer Lifestyle, which was lower, mainly due to a reduction of temporary employees in Television.

The decrease in headcount in 2009 was mainly due to organizational right-sizing to align with the challenging economic conditions. The declines were partly offset by acquisitions, mainly at Consumer Lifestyle. Group Management & Services headcount was slightly higher than in 2008 due to a gradual shift of support functions such as IT from the operating sectors.

Employees per market cluster
in FTEs		at the end of
		2008				2009				2010
Western Europe			36,966				35,496				34,613
North America			31,336				27,069				27,883
Other mature markets			2,119				3,095				3,046
Total mature markets			70,421				65,660				65,542
Emerging markets			50,977				50,264				53,459
			121,398				115,924				119,001

Approximately 55% of the Philips workforce is located in mature markets, and about 45% in emerging markets. In 2010, the number of employees in mature markets slightly declined as additional headcount from acquisitions was more than offset by headcount reduction from organizational right-sizing projects. Emerging market headcount increased by 3,195, mainly from increases at Lighting to support higher factory production.

At the end of 2009, approximately 57% of Philips’ workforce was located in mature markets, and about 43% in emerging markets. The number of employees in mature markets decreased, largely as a result of organizational right-sizing. Emerging markets also saw a reduction in employee numbers as the additional headcount from Healthcare acquisitions in China, India and Brazil was

offset largely by the sale of the Television factory in Juarez (Mexico) and a headcount reduction due to lower factory production within Lighting.

Despite the lower sales in 2009, employee productivity for the Group improved compared to 2008, driven by the positive effect of ongoing efficiency and transformation programs in all sectors.

Organizational structure

The information concerning Philips’ subsidiaries in Exhibit 8 to this Annual Report on Form 20-F is incorporated herein by reference.

Property, plant and equipment

Philips owns and leases manufacturing facilities, research facilities, warehouses and office facilities in numerous countries over the world.

Philips has approximately 118 production sites in 27 countries. Philips believes that its plants are well maintained and, in conjunction with its capital expenditures for new property, plant and equipment, are generally adequate to meet its needs for the foreseeable future. For the net book value of its property, plant and equipment and developments therein, reference is made to note 7, entitled “Property, plant and equipment”, to the Group financial statements on page 171 of the 2010 Annual Report incorporated herein by reference. The geographic allocation of assets employed as shown in the section entitled “Information by sector and main country” on pages 151 through 153 of the 2010 Annual Report and incorporated herein by reference, is generally indicative of the location of manufacturing facilities. The headquarters in Amsterdam are leased. The information as shown in note 23, entitled “Contractual obligations”, to the Group financial statements on page 180 of the 2010 Annual Report, partly related to the rental of buildings, is incorporated herein by reference.

For environmental issues affecting the Company’s properties, reference is made to note 24, entitled “Contingent liabilities”, to the Group financial statements on pages 180 through 182 of the 2010 Annual Report incorporated herein by reference. Additionally, reference is made to note 19, entitled “Provisions”, to the Group financial statements on page 178 through 179 of the 2010 Annual Report incorporated herein by reference.

Capital expenditures in progress are generally expected to be financed through internally generated cash flows. For a description of the geographic spread of capital expenditures, reference is made to the section “Information by sector and main country” on pages 151 through 153 of the 2010 Annual Report incorporated herein by reference.

For a description of the Company’s principal acquisitions and divestitures, reference is made to note 6 “Acquisitions and divestments” to the Group financial statements on pages 167 through 170 of the 2010 Annual Report incorporated herein by reference.

Item 4A. Unresolved Staff Comments

None.

Item 5. Operating and financial review and prospects

Operating results

The year 2010

•		In 2010, despite experiencing a recovery in certain markets, overall worldwide market conditions remained challenging, particularly in developed countries. We recorded moderate 4% comparable sales growth; however, as a result of continued focus on cost management, significant improvements in IFO, adjusted IFO and Net income were achieved. Additionally, our cash flow from operating activities was higher than in 2009.
•		IFO of EUR 2,065 million, or 8.1% of sales, was significantly higher than the EUR 614 million, or 2.6% of sales, achieved in 2009. Significant IFO improvement, led by Lighting, was achieved in all sectors. As a percentage of sales, 2010 IFO and adjusted IFO were at the highest levels since 2000.
•		Following a strong rebound in the first six months of the year, sales growth slowed in the second half, ending at 10% nominal for the full year. Adjusted for favorable currency effects, comparable sales were 4% higher than in 2009, attributable to growth in all sectors, notably Lighting. Within Lighting, growth in automotive and LED markets was strong, partly mitigated by limited growth at Professional Luminaires due to weak construction markets in the US and Western Europe; Healthcare sales grew 4%, supported by 6% growth in all businesses except Imaging Systems, which was broadly in line with 2009. Growth at Consumer Lifestyle was limited to 1%, as solid growth at Health & Wellness and Personal Care was tempered by limited growth at Television and sales declines at Audio & Video Multimedia and Accessories.
•		12% comparable sales growth was achieved in emerging markets, while mature markets grew 1%. Emerging markets accounted for 33% of total sales, up from 30% in 2009.
•		We continued to invest in strategically aligned, high-growth companies to strengthen our portfolio. In 2010, we completed 11 acquisitions, contributing to all three sectors, notably Discus Holdings in Consumer Lifestyle. The cash outflow related to acquisitions amounted to EUR 239 million.
•		During the year, particularly in the first three quarters, Television showed a significant year-on-year improvement in adjusted IFO. However, with high inventory in retail, and severe price erosion in the fourth quarter, the Television business did not achieve break-even for the year. To improve profitability in the business and reduce exposure, we concluded brand licensing agreements in India and China. We will take further action to address the profitability issue in the business in 2011.
•		We generated EUR 2.2 billion of cash flow from operating activities, EUR 611 million higher than in 2009. Our cash flows before financing activities were EUR 128 million higher than 2009, as higher cash flow from operating activities was partly offset by lower proceeds from the sale of stakes.

Key data
in millions of euros unless otherwise stated		2009				2010
Sales			23,189				25,419
Income from operations (IFO)			614				2,065
as a % of sales			2.6				8.1
Adjusted Income from operations (adjusted IFO)1)			1,050				2,552
as a % of sales			4.5				10.0
Financial income and expenses			(166	)			(122	)
Income tax expense			(100	)			(509	)
Results of investments in associates			76				18
Income (loss) from continuing operations			424				1,452
Income (loss) from discontinued operations			—				—
Net income (loss)			424				1,452
Net income (loss):
Per common share — basic			0.46				1.54
Per common share — diluted			0.46				1.53
Net operating capital (NOC)1)			12,649				12,071
Cash flows before financing activities1)			1,326				1,454
Employees (FTEs)			115,924				119,001

Performance of the Group

Sales

The composition of sales growth in percentage terms in 2010, compared to 2009, is presented in the table below.

Sales growth composition 2010 versus 2009
in %		compa-								consoli-
		rable				currency				dation				nominal
		growth1)				effects				changes				growth
Healthcare			3.9				6.0				(0.2	)			9.7
Consumer Lifestyle			1.2				4.7				(0.7	)			5.2
Lighting			8.7				6.0				0.7				15.4
GM&S			6.4				3.0				(2.6	)			6.8
Philips Group			4.3				5.5				(0.2	)			9.6

Group sales amounted to EUR 25,419 million in 2010, 10% nominal growth compared to 2009. Excluding a 6% favorable currency effect, comparable sales were 4% above 2009. Comparable sales were 9% higher at Lighting and 4% higher at Healthcare, though were tempered by 1% higher sales at Consumer Lifestyle.

Healthcare sales amounted to EUR 8,601 million, which was 4% higher than in 2009 on a comparable basis, driven by 6% growth at Patient Care & Clinical Informatics, Home Healthcare Solutions, and Customer Services. Sales at Imaging Systems were broadly in line with 2009, as growth in emerging markets was largely offset by lower sales in North America.

Consumer Lifestyle reported sales of EUR 8,906 million, which was EUR 439 million higher than in 2009, or 1% higher on a comparable basis. We achieved double-digit growth at Health & Wellness and high single-digit growth at Personal Care. This was tempered by 1% comparable growth at Television and year-on-year sales declines at Audio & Video Multimedia and Accessories.

Lighting sales amounted to EUR 7,552 million, which was EUR 1 billion higher than in 2009, or 9% higher on a comparable basis. Growth was largely driven by double-digit growth at Lumileds, Automotive Lighting, and Lighting Systems & Controls. Ongoing weakness in residential and commercial construction markets meant our Luminaires businesses yielded little growth.

Earnings

In 2010, Philips’ gross margin was EUR 9,546 million, or 37.6% of sales, compared to EUR 8,079 million, or 34.8% of sales, in 2009. Gross margin in 2010 included EUR 111 million restructuring and acquisition-related charges, whereas 2009 included EUR 268 million of restructuring and acquisition-related charges and net asbestos-related recoveries of EUR 57 million. Gross margin percentage was higher than in 2009 in all operating sectors, notably Lighting.

Selling expenses increased from EUR 5,159 million in 2009 to EUR 5,246 million in 2010. 2010 included EUR 88 million of restructuring and acquisition-related charges, compared to EUR 185 million in 2009. The year-on-year increase was mainly attributable to higher expenses aimed at supporting higher sales, and increased investments in advertising and promotion. In relation to sales, selling expenses decreased from 22.2% to 20.6%. Expenses were lower than in 2009 in all sectors.

General and administrative expenses amounted to EUR 735 million in 2010, compared to EUR 734 million in 2009. As a percentage of sales, costs improved from 3.2% in 2009 to 2.9%.

Research and development costs declined from EUR 1,631 million in 2009 to EUR 1,576 million in 2010. The year-on-year decline was largely attributable to lower restructuring and acquisition-related charges, which amounted to EUR 13 million in 2010, compared to EUR 73 million in 2009, and to the discontinuation of certain activities in the field of Molecular Healthcare and 3D Displays. As a percentage of sales, research and development costs decreased from 7.0% in 2009 to 6.2%.

The following overview shows sales, IFO and adjusted IFO according to the 2010 sector classifications.

Sales, IFO and adjusted IFO 2010
in millions of euros unless otherwise stated										as a % of				adjusted				as a % of
		sales				IFO				sales				IFO1)				sales
Healthcare			8,601				922				10.7				1,186				13.8
Consumer Lifestyle			8,906				595				6.7				639				7.2
Lighting			7,552				695				9.2				869				11.5
Group Management & Services			360				(147	)			—				(142	)			—
Philips Group			25,419				2,065				8.1				2,552				10.0

Sales, IFO and adjusted IFO 2009
in millions of euros unless otherwise stated										as a % of				adjusted				as a % of
		sales				IFO				sales				IFO1)				sales
Healthcare			7,839				591				7.5				848				10.8
Consumer Lifestyle			8,467				321				3.8				339				4.0
Lighting			6,546				(16	)			(0.2	)			145				2.2
Group Management & Services			337				(282	)			—				(282	)			—
Philips Group			23,189				614				2.6				1,050				4.5

In 2010, IFO increased by EUR 1,451 million compared to 2009, to EUR 2,065 million, or 8.1% of sales. 2010 included EUR 233 million of restructuring and acquisition-related charges, compared to EUR 551 million in 2009. In addition to lower restructuring and acquisition-related charges, the year-on-year improvement was mainly driven by higher sales and a higher gross margin percentage in each of the operating sectors, and lower costs in Group Management & Services.

Amortization of intangibles, excluding software and capitalized product development, amounted to EUR 487 million in 2010, compared to EUR 436 million in 2009. Amortization charges were higher than in 2009 due to acquisitions.

Adjusted IFO increased from EUR 1,050 million, or 4.5% of sales, in 2009 to EUR 2,552 million, or 10.0% of sales, in 2010. Higher adjusted IFO was visible in all sectors, notably Lighting.

Healthcare

Adjusted IFO increased from EUR 848 million, or 10.8% of sales, in 2009 to EUR 1,186 million, or 13.8% of sales, in 2010. Adjusted IFO improvements were realized across all businesses, largely as a result of higher sales, favorable currency impact and cost-saving programs. Restructuring and acquisition-related charges totaled EUR 77 million, compared to EUR 106 million in 2009.

Consumer Lifestyle

Adjusted IFOA improved from EUR 339 million, or 4.0% of sales, in 2009 to EUR 639 million, or 7.2% of sales, in 2010. Restructuring and acquisition-related charges amounted to EUR 61 million in 2010, compared to EUR 136 million in 2009. The year-on-year adjusted IFO improvement was largely driven by higher sales, fixed cost savings, EUR 48 million product recall related charges in 2009, and lower restructuring charges. Adjusted IFO was higher than in 2009 in all businesses. Notable improvements were achieved in Domestic Appliances, Television, and Licenses.

Lighting

Adjusted IFO amounted to EUR 869 million, or 11.5% of sales, which included EUR 96 million of restructuring and acquisition-related charges. EUR 247 million of restructuring and acquisition-related charges were included in 2009. The adjusted IFO improvement was also driven by higher sales, improved gross margin and fixed cost savings from restructuring programs.

Group Management & Services

Adjusted IFO improved from a loss of EUR 282 million in 2009 to a loss of EUR 142 million in 2010. Adjusted IFO in 2009 included a EUR 134 million gain related to curtailment for retiree medical benefit plans, EUR 57 million of net asbestos-related recoveries, and EUR 46 million of asset write-offs. 2009 also included EUR 63 million restructuring charges. 2010 results included a EUR 119 million gain from a change in a pension plan. The year-on-year adjusted IFO improvement was largely attributable to higher license revenue, discontinuation of Molecular Healthcare, and lower costs in the global service units.

Pensions

The net periodic pension costs of defined-benefit pension plans amounted to a credit of EUR 103 million in 2010, compared to a cost of EUR 3 million in 2009. The defined-contribution pension cost amounted to EUR 118 million, EUR 11 million higher than in 2009, mainly due to a gradual shift from defined-benefit to defined-contribution pension plans.

The 2010 costs were impacted by the recognition of EUR 119 million of negative prior-service costs. These resulted from a reduction of pension benefits expected to be paid in the future, in part due to a change in indexation. In 2010, a curtailment gain of EUR 9 million on one of our retiree medical plans was recognized due to the partial closure of a US site.

In 2009, curtailment gains totaling EUR 134 million, relating to changes in retiree medical plans, positively impacted the result. These curtailment gains are the result of changes in the benefit level and the scope of eligible participants of a retiree medical plan, which became effective and irreversible in 2009.

For further information, reference is made to note 28 “Pensions and other postretirement benefits” to the Group financial statements on pages 182 through 187 of the 2010 Annual Report incorporated herein by reference.

Restructuring and impairment charges

In 2010, IFO included net charges totaling EUR 162 million for restructuring and related asset impairments. 2009 included EUR 450 million of restructuring and related asset impairment charges. In addition to the annual goodwill impairment tests for Philips, trigger-based impairment tests were performed during the year, resulting in no goodwill impairments.

For further information on sensitivity analysis, please refer to note 8 “Goodwill” to the Group financial statements on pages 172 and 173 of the 2010 Annual Report incorporated herein by reference.

Restructuring and related charges
in millions of euros		2009				2010
Restructuring charges per sector:
Healthcare			42				48
Consumer Lifestyle			120				42
Lighting			225				74
GM&S			63				(2	)
			450				162
Cost breakdown of restructuring charges:
Personnel lay-off costs			399				155
Release of provision			(81	)			(77	)
Restructuring-related asset impairment			84				19
Other restructuring-related costs			48	1)			65
			450				162

The restructuring charges in 2010 were mainly attributable to the operating sectors. Within Healthcare, the largest projects related to the reorganization of the commercial organization in Imaging Systems (Germany, Netherlands, and the US). Consumer Lifestyle restructuring charges were mainly in Television, particularly in China due to the brand licensing agreement with TPV. Restructuring projects in Lighting were focused on reduction of production capacity in traditional lighting technologies, such as incandescent. The largest projects were initiated in Brazil, France, and the US.

In 2009, the most significant restructuring projects related to Lighting and Consumer Lifestyle. Restructuring projects at Lighting centered on Lamps. The largest restructuring projects were in the Netherlands, Belgium, Poland and various locations in the US. Consumer Lifestyle restructuring projects focused on Television (primarily Belgium and France), Accessories (mainly Technology & Development in the Netherlands) and Domestic Appliances (mainly Singapore and China). Healthcare initiated various restructuring projects aimed at reduction of the fixed cost structure, mainly impacting Imaging Systems (Netherlands), Home Healthcare Solutions and Patient Care & Clinical Informatics (various locations in the US).

Other restructuring projects focused on reducing the fixed cost structure of Corporate Technologies, Philips Information Technology, Philips Design, and Corporate Overheads within Group Management & Services.

Reference is made to note 19 “Provisions”, under the heading “Restructuring-related provisions” to the Group financial statements on pages 178 and 179 of the 2010 Annual Report incorporated herein by reference. For further information on impairment please refer to the information under the heading “Impairment of non-financial assets” in section “Critical accounting policies” on pages 67 through 69.

Financial income and expenses

A breakdown of Financial income and expenses is presented in the table below.

Financial income and expenses
in millions of euros		2009				2010
Interest expense (net)			(252	)			(225	)
Sale of securities			126				162
Value adjustments on securities			(58	)			(2	)
Other			18				(57	)
			(166	)			(122	)

The net interest expense in 2010 was EUR 27 million lower than in 2009, mainly as a result of lower interest expense.

Income from the sale of securities consists of:

Sale of securities
in millions of euros		2009				2010
Income from the sale of securities:
Gain on sale of NXP shares			—				154
Gain on sale of LG Display shares			69				—
Gain on sale of Pace shares			48				—
Others			9				8
			126				162

In 2010, income from the sale of securities of EUR 162 million was mainly attributable to the sale of NXP shares. In 2009, income from the sale of securities totaled EUR 126 million. This included a EUR 69 million gain from the sale of the remaining shares in LG Display, and a EUR 48 million gain from the sale of the remaining shares in Pace Micro Technology.

Value adjustments on securities
in millions of euros		2009				2010
NXP			(48	)			—
Prime Technology			(6	)			(2	)
Other			(4	)			—
			(58	)			(2	)

2009 was impacted by impairment charges amounting to EUR 58 million, mainly from shareholdings in NXP.

Other financial expenses amounted to a EUR 57 million expense in 2010, compared to EUR 18 million income in 2009. 2010 primarily consisted of a EUR 21 million loss related to the revaluation of the convertible bonds received from TPV Technology and CBaySystems Holdings (CBAY), and a EUR 20 million accretion expense mainly associated with discounted provisions.

Other financial expenses in 2009 primarily consisted of a EUR 19 million gain related to the revaluation of the convertible bonds received from TPV Technology and CBAY,and dividend income totaling EUR 16 million, EUR 12 million of which related to holdings in LG Display. Other financial expenses included EUR 15 million accretion expenses, mainly associated with discounted asbestos provisions.

For further information, refer to note 2 “Financial income and expenses” to the Group financial statements on page 162 of the 2010 Annual Report, which is incorporated herein by reference.

Income taxes

Income taxes amounted to EUR 509 million, compared to EUR 100 million in 2009. The year-on-year increase was largely attributable to higher taxable earnings.

The tax burden in 2010 corresponded to an effective tax rate of 26.2%, compared to 22.3% in 2009. The increase in the effective tax rate was attributable to a change in the country mix of income tax rates and a change in the mix of profits and losses in the various countries, as well as 2009’s recognition of a deferred tax asset for Lumileds previously not recognized. This was partly offset by a number of tax settlements.

For 2011, the effective tax rate excluding incidental non-taxable items is expected to be between 30% and 32%.

Reference is made to note 3 “Income taxes” to the Group financial statements on pages 162 through 166 of the 2010 Annual Report, which is incorporated herein by reference.

Results of investments in associates

The results related to investments in associates declined from EUR 76 million in 2009 to EUR 18 million in 2010.

Results of investments in associates
in millions of euros		2009				2010
Company’s participation in income (loss)			23				14
Results on sale of shares			—				5
Gains arising from dilution effects			—				—
(Reversal of) investment impairment and guarantee charges			53				(1	)
			76				18

The company’s participation in income declined from EUR 23 million in 2009 to EUR 14 million in 2010, mainly due to the sale of our remaining stake in TPV Technology.

In 2009, following recovery of the TPV share price, the accumulated value adjustment of the shareholding in TPV recognized in 2008 was reversed by EUR 55 million. The company’s participation in income of EUR 23 million in 2009 was mainly attributable to results on Intertrust.

For further information, refer to note 4 “Investments in associates” to the Group financial statements on pages 166 through 167 of the 2010 Annual Report, which is incorporated herein by reference.

Non-controlling interests

Net income attributable to non-controlling interests amounted to EUR 6 million in 2010, compared to EUR 14 million in 2009.

Net income

Net income increased from EUR 424 million in 2009 to EUR 1,452 million. The improvement was driven by EUR 1,451 million higher IFO and EUR 44 million lower costs in Financial income and expenses, partly offset by EUR 409 million higher income tax charges and EUR 58 million lower income from our investments in associates.

Net income attributable to shareholders per common share increased from EUR 0.44 per common share in 2009 to EUR 1.54 per common share in 2010.

For a description of the impact of inflation and information regarding any governmental economic, fiscal, monetary or political policies that could materially affect, directly or indirectly, the Company’s operations reference is made to the information under the heading “Strategic risks” in Item 3 “Key information” on pages 10 through 11.

For information regarding the impact of foreign currency fluctuations on the Company reference is made to the information under the heading “Financial risks” in Item 3 “Key information” on pages 14 through 15.

Performance by sector
Healthcare

Key data
in millions of euros unless otherwise stated		2009				2010
Sales			7,839				8,601
Sales growth
% increase, nominal			2				10
% increase, comparable1)			(3	)			4
Adjusted IFO1)			848				1,186
as a % of sales			10.8				13.8
IFO			591				922
as a % of sales			7.5				10.7
Net operating capital (NOC)1)			8,434				8,908
Cash flows before financing activities1,2)			889				1,139
Employees (FTEs)			34,296				35,479

Sales per market cluster
in millions of euros		2009				2010
Western Europe			1,941				2,042
North America			3,685				3,901
Other mature markets			763				968
Total mature markets			6,389				6,911
Emerging markets			1,450				1,690
			7,839				8,601

In 2010, sales amounted to EUR 8,601 million, 10% higher than in 2009 on a nominal basis, driven by higher sales in all businesses. Excluding a 6% favorable impact of currency effects, comparable sales were 4% higher. Mid-single-digit comparable sales growth was achieved by Patient Care & Clinical Informatics, Home Healthcare Solutions and Customer Services. Imaging Systems comparable sales were in line with 2009. Green Product sales amounted to EUR 2,136 million, a 19% year-on-year increase.

Geographically, comparable sales in mature markets were higher than in 2009 in all businesses except Imaging Systems. The year-on-year sales increase was largely attributable to Western Europe. Comparable sales in North America were broadly in line with 2009. In emerging markets we achieved 7% growth, largely driven by strong, double-digit growth in China and India.

Adjusted IFO increased from EUR 848 million, or 10.8% of sales, in 2009 to EUR 1,186 million, or 13.8% of sales, in 2010. Adjusted IFO improvements were realized across all businesses in Healthcare, largely as a result of higher sales, favorable currency impact and cost-saving programs. Restructuring and acquisition-related charges were EUR 77 million, compared with EUR 106 million in 2009.

IFO amounted to EUR 922 million, or 10.7% of sales, and included EUR 263 million of charges related to amortization of intangible fixed assets.

Net operating capital in 2010 increased by EUR 474 million to EUR 8.9 billion. Excluding a EUR 713 million currency impact, net operating capital decreased by EUR 239 million.

Cash flows before financing activities increased from an inflow of EUR 889 million in 2009 to an inflow of EUR 1,139 million in 2010, mainly attributable to higher earnings.

Consumer Lifestyle

Key data
in millions of euros unless otherwise stated		2009				2010
Sales			8,467				8,906
of which Television			3,122				3,155
Sales growth
% increase (decrease), nominal			(22	)			5
% increase (decrease), comparable1)			(17	)			1
Sales growth excl. Television
% increase (decrease), nominal			(13	)			8
% increase (decrease), comparable1)			(12	)			1
Adjusted IFO1)			339				639
of which Television			(179	)			(125	)
as a % of sales			4.0				7.2
IFO			321				595
of which Television			(179	)			(130	)
as a % of sales			3.8				6.7
Net operating capital (NOC)1)			625				911
of which Television			(386	)			(299	)
Cash flows before financing activities1,2)			598				404
of which Television			(16	)			(117	)
Employees (FTEs)			18,389				17,706
of which Television			4,766				3,613

Sales per market cluster
in millions of euros		2009				2010
Western Europe			3,987				3,874
North America			1,084				1,156
Other mature markets			216				268
Total mature markets			5,287				5,298
Emerging markets			3,180				3,608
			8,467				8,906

2010 proved to be a challenging year for driving sales growth in Consumer Lifestyle. We began the year with strong comparable sales growth in the first two quarters, though we experienced sales declines in the last two quarters, with high stock levels in retail and, consequently, strong price erosion, particularly in Television. For the year, our sales increased by EUR 439 million, or 5% nominal growth. However, adjusted for favorable currency and unfavorable portfolio changes, comparable sales growth was limited to 1%.

We achieved double-digit growth at Health & Wellness and high single-digit growth at Personal Care, driven by our increased investment in advertising and promotion. Sales at Domestic Appliances showed low single-digit growth, as strong growth in emerging markets, notably China, was partly offset by lower sales in mature markets. Comparable sales growth at Television was limited to 1%, while sales declined at Audio & Video Multimedia and Accessories.

From a geographical perspective, we recorded 6% comparable sales growth in emerging markets, which was partly offset by a 2% decline in mature markets, mainly in Western Europe. Sales growth in emerging markets was driven by solid growth in Latin America and Russia, though this was tempered by a sales decline in China. The decline in China was substantially due to a delay in the implementation of the brand licensing agreement for Television with TPV. Emerging markets’ share of sector sales increased from 37% in 2009 to 41% in 2010. Green Product sales amounted to over EUR 3 billion and increased from 23% of total sales in 2009 to 34% in 2010.

Adjusted IFO significantly improved from EUR 339 million, or 4.0% of sales, in 2009 to EUR 639 million, or 7.2% of sales, in 2010. Restructuring and acquisition-related charges amounted to EUR 61 million in 2010, compared to EUR 136 million in 2009. The year-on-year Adjusted IFO improvement was largely driven by improved gross margin, fixed cost savings, the previous year’s EUR 48 million product recall-related charges, and lower restructuring charges. Adjusted IFO was higher than in 2009 in all businesses, notably Domestic Appliances and Television.

IFO amounted to EUR 595 million, or 6.7% of sales, which included EUR 44 million of amortization charges, mainly related to amortization of intangible fixed assets at Health & Wellness and Domestic Appliances.

Net operating capital increased from EUR 625 million in 2009 to EUR 911 million in 2010, primarily due to higher inventories at Television and an increase in assets following the acquisition of Discus Holdings.

Cash flows before financing activities declined from an inflow of EUR 598 million in 2009 to an inflow of EUR 404 million. The decline was mainly attributable to lower cash inflow from changes in working capital, partly offset by higher earnings.

Lighting

Key data
in millions of euros unless otherwise stated		2009				2010
Sales			6,546				7,552
Sales growth
% increase, nominal			(11	)			15
% increase, comparable1)			(13	)			9
Adjusted IFO1)			145				869
as a % of sales			2.2				11.5
IFO			(16	)			695
as a % of sales			(0.2	)			9.2
Net operating capital (NOC)1)			5,104				5,561
Cash flows before financing activities1,2)			624				590
Employees (FTEs)			51,653				53,888

Sales per market cluster
in millions of euros		2009				2010
Western Europe			2,271				2,297
North America			1,811				1,989
Other mature markets			253				367
Total mature markets			4,335				4,653
Emerging markets			2,211				2,899
			6,546				7,552

Sales amounted to EUR 7,552 million, a nominal increase of 15% compared to 2009, driven by a rebound in sales of general and automotive lamps as well as ongoing growth of our Lumileds LED business. Excluding a 6% favorable currency impact and a 1% contribution from acquisitions, comparable sales increased by 9%.

The year-on-year sales increase was substantially driven by growth in emerging markets, which grew over 20% on a comparable basis. Emerging market sales grew to over 38% of total Lighting sales, driven by China, India and Brazil, compared to 34% in 2009. In mature markets, sales growth was limited to low single-digits due to lower demand in North America and Western Europe, particularly for Professional and Consumer Luminaires.

A rebound in the global automotive market supported solid, double-digit sales growth in this business. Our general Lamps business also grew strongly compared to 2009, buoyed by demand for high-end lamps in retail and emerging geographies. Ongoing softness in both the residential and commercial construction markets — particularly in mature geographies — meant that sales in our Luminaires businesses remained broadly in line with 2009. Sales of LED-based products grew to over 13% of total sales, up from 8% in 2009, driven by Lumileds, Lamps and Professional Luminaires. Sales of energy-efficient Green Products exceeded EUR 4 billion, or 58% of sector sales.

Adjusted IFO amounted to EUR 869 million, or 11.5% of sales, which included EUR 96 million of restructuring and acquisition-related charges. This compared to EUR 247 million of restructuring and acquisition-related charges in 2009. The adjusted IFO improvement was driven by higher sales, improved gross margin and fixed cost savings from restructuring programs.

IFO amounted to EUR 695 million, or 9.2% of sales, which included EUR 174 million of amortization of intangible fixed assets, mainly from Lumileds and Genlyte.

Net operating capital increased by EUR 457 million to EUR 5.6 billion, due to unfavorable currency translation, higher activity levels and additional LED-related capital expenditures.

Cash flows before financing activities declined from EUR 624 million in 2009 to EUR 590 million, reflecting higher cash earnings which were more than offset by higher working capital requirements and additional growth-focused investments in capital expenditures.

Group Management & Services

Key data
in millions of euros unless otherwise stated		2009				2010
Sales			337				360
Sales growth
% increase (decrease), nominal			(31	)			7
% increase (decrease), comparable1)			(30	)			6
Adjusted IFO Corporate Technologies1)			(162	)			(63	)
Adjusted IFO Corporate & regional costs1)			(174	)			(142	)
Adjusted IFO Pensions1)			142				100
Adjusted IFO Services Units and other1)			(88	)			(37	)
Adjusted IFO1)			(282	)			(142	)
IFO			(282	)			(147	)
Net operating capital (NOC)1)			(1,514	)			(3,309	)
Cash flows before financing activities1,2)			(785	)			(679	)
Employees (FTEs)			11,586				11,928