Edgar Filing: STMICROELECTRONICS NV

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16 UNDER

THE SECURITIES EXCHANGE ACT OF 1934

Report on Form 6-K dated August 5, 2011

Commission File Number: 1-13546

STMicroelectronics N.V.

(Name of Registrant)

39, Chemin du Champ-des-Filles

1228 Plan-les-Ouates, Geneva, Switzerland

(Address of Principal Executive Offices)

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

Form 20-F Q Form 40-F £

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

Yes £ No Q

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

Yes £ No Q

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

Yes £ No Q

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- __________

Enclosure: STMicroelectronics N.V.’s Second Quarter and First Half 2011:

Operating and Financial Review and Prospects;

Unaudited Interim Consolidated Statements of Income, Balance Sheets, Statements of Cash Flow, and Statements of Changes in Equity and related Notes for the three months and six months ended July 2, 2011; and

Certifications pursuant to Sections 302 (Exhibits 12.1 and 12.2) and 906 (Exhibit 13.1) of the Sarbanes-Oxley Act of 2002, submitted to the Commission on a voluntary basis.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Overview

The following discussion should be read in conjunction with our Unaudited Interim Consolidated Statements of Income, Balance Sheets, Statements of Cash Flow and Statements of Changes in Equity for the three months and six months ended July 2, 2011 and Notes thereto included elsewhere in this Form 6-K, and our annual report on Form 20-F for the year ended December 31, 2010 as filed with the U.S. Securities and Exchange Commission (the “Commission” or the “SEC”) on March 7, 2011 (the “Form 20-F”). The following discussion contains statements of future expectations and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, or Section 21E of the Securities Exchange Act of 1934, each as amended, particularly in the sections “Critical Accounting Policies Using Significant Estimates”, “Business Outlook” and “Liquidity and Capital Resources—Financial Outlook”. Our actual results may differ significantly from those projected in the forward-looking statements. For a discussion of factors that might cause future actual results to differ materially from our recent results or those projected in the forward-looking statements in addition to the factors set forth below, see “Cautionary Note Regarding Forward-Looking Statements” and “Item 3. Key Information—Risk Factors” included in the Form 20-F. We assume no obligation to update the forward-looking statements or such risk factors.

Our Management’s Discussion and Analysis of Financial Position and Results of Operations (“MD&A”) is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition and cash flows. Our MD&A is organized as follows:

Critical Accounting Policies using Significant Estimates, which we believe are most important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.

Business Overview, a discussion of our business and overall analysis of financial and other relevant highlights of the three months and six months ended July 2, 2011 designed to provide context for the other sections of the MD&A.

Business Outlook, our expectations for selected financial items for the next quarter.

Other Developments in 2011.

Results of Operations, containing a sequential and year-over-year analysis of our financial results for the three months and six months ended July 2, 2011 as well as segment information.

Legal Proceedings, describing the status of open legal proceedings.

Related Party Transactions, disclosing transactions with related parties.

Discussion of the impact of changes in exchange rates, interest rates and equity prices on our activity and financial results.

Liquidity and Capital Resources, presenting an analysis of changes in our balance sheets and cash flows, and discussing our financial condition and potential sources of liquidity.

Backlog and Customers, discussing the level of backlog and sales to our key customers.

Disclosure Controls and Procedures.

Cautionary Note Regarding Forward-Looking Statements.

Critical Accounting Policies Using Significant Estimates

The preparation of our Unaudited Consolidated Financial Statements in accordance with U.S. GAAP requires us to make estimates and assumptions. The primary areas that require significant estimates and judgments by us include, but are not limited to:

sales returns and allowances;

determination of the best estimate of selling price for deliverables in multiple element sale arrangements;

inventory reserves and normal manufacturing capacity thresholds to determine costs capitalized in inventory;

provisions for litigation and claims;

valuation at fair value of acquired assets including intangibles, goodwill, investments and tangible assets, and assumed liabilities in a business combination, as well as the impairment of their related carrying values;

assessment, in each reporting period, of events, which could trigger interim impairment testing;

estimated value of the consideration to be received and used as fair value for asset groups classified as assets to be disposed of by sale and the assessment of probability of realizing the sale;

determination of fair value on nonmonetary exchanges of assets;

measurement of the fair value of debt and equity securities, for which no observable market price is obtainable;

assessment of credit losses and other-than-temporary impairment charges on financial assets;

valuation of noncontrolling interest and repurchase of remaining interest on certain investments;

restructuring charges;

assumptions used in calculating pension obligations; and

determination of the amount of taxes estimated for the full year, including deferred income tax assets and valuation allowances, and provisions for uncertain tax positions and claims.

We base the estimates and assumptions on historical experience and on various other factors such as market trends and the latest available business plans that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. While we regularly evaluate our estimates and assumptions, the actual results we experience could differ materially and adversely from our estimates. To the extent there are material differences between our estimates and actual results, future results of operations, cash flows and financial position could be significantly affected. With respect to Wireless, our accounting relies on estimates based on the business plan of ST-Ericsson, as submitted by ST-Ericsson’s CEO to ST-Ericsson’s Board of Directors.

Our Consolidated Financial Statements include the ST-Ericsson joint ventures; in particular, we fully consolidate ST-Ericsson SA and related affiliates (“JVS”), which is owned 50% plus a controlling share by us and is responsible for the full commercial operations of the combined Wireless business, primarily sales and marketing. The other joint venture is focused on fundamental R&D activities. Its parent company is ST-Ericsson AT SA (“JVD”), which is owned 50% plus a controlling share by Ericsson and is therefore accounted for by us under the equity method.

We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our Consolidated Financial Statements:

Revenue recognition. Our policy is to recognize revenues from sales of products to our customers when all of the following conditions have been met: (a) persuasive evidence of an arrangement exists; (b) delivery has occurred; (c) the selling price is fixed or determinable; and (d) collectability is reasonably assured. Our revenue recognition usually occurs at the time of shipment.

Consistent with standard business practice in the semiconductor industry, price protection is granted to distributor customers on their inventory of our products to compensate them for declines in market prices. We accrue a provision for price protection based on a rolling historical price trend computed on a monthly basis as a percentage of gross distributor sales. This historical price trend represents differences in recent months between the invoiced price and the final price to the distributor adjusted, if required, to accommodate for a significant change in the current market price. We record the accrued amounts as a deduction of revenue at the time of the sale. The ultimate decision to authorize a distributor refund remains fully within our control. The short outstanding inventory time period, our ability to foresee changes in standard inventory product pricing (as opposed to pricing for certain customized products) and our lengthy distributor pricing history, have enabled us to reliably estimate price protection provisions at period-end. If market conditions differ from our assumptions, this could have an impact on future periods. In particular, if market conditions were to deteriorate, net revenues could be reduced due to higher product returns and price reductions at the time these adjustments occur, which could severely impact our profitability.

Our customers occasionally return our products for technical reasons. Our standard terms and conditions of sale provide that if we determine that our products are non-conforming, we will repair or replace them, or issue a credit or rebate of the purchase price. In certain cases, when the products we have supplied have been proven to be defective, we have agreed to compensate our customers for claimed damages in order to maintain and enhance our business relationship. Quality returns are not related to any technological obsolescence issues and are identified shortly after sale in customer quality control testing. We provide for such returns when they are considered probable and can be reasonably estimated. We record the accrued amounts as a reduction of revenue.

Our insurance policy relating to product liability only covers physical and other direct damages caused by defective products. We carry limited insurance against immaterial, non-consequential damages in the event of a product recall. We record a provision for warranty costs as a charge against cost of sales based on historical trends of warranty costs incurred as a percentage of sales which we have determined to be a reasonable estimate of the probable losses to be incurred for warranty claims in a period. Any potential warranty claims are subject to our determination that we are at fault and liable for damages, and that such claims usually must be submitted within a short period following the date of sale. This warranty is given in lieu of all other warranties, conditions or terms expressed or implied by statute or common law. Our contractual terms and conditions typically limit our liability to the sales value of the products that gave rise to the claim.

We maintain an allowance for doubtful accounts for estimated potential losses resulting from our customers’ inability to make required payments. We base our estimates on historical collection trends and record a provision accordingly. Furthermore, we are required to evaluate our customers’ financial condition periodically and record a provision for any specific account that we consider doubtful. In the first half of 2011, we did not record any new material specific provision related to bankrupt customers. If we receive information that the financial condition of our customers has deteriorated, resulting in an impairment of their ability to make payments, additional allowances could be required.

While the majority of our sales agreements contain standard terms and conditions, we may, from time to time, enter into agreements that contain multiple elements or non-standard terms and conditions, which require revenue recognition judgments. In such cases, following the guidance related to revenue recognition, we allocate the revenue to different deliverables based on verifiable objective evidence, third party evidence or our best estimates of selling prices of the separable deliverables.

Business combinations and goodwill. The purchase accounting method applied to business combinations requires extensive use of estimates and judgments to allocate the purchase price to the fair value of the identifiable assets acquired. If the assumptions and estimates used to allocate the purchase price are not correct or if business conditions change, purchase price adjustments or future asset impairment charges could be required. At July 2, 2011, the value of goodwill amounted to $1,079 million.

Impairment of goodwill. Goodwill recognized in business combinations is not amortized but is tested for impairment at least annually in the third quarter, or more frequently if a triggering event indicating a possible impairment exists. Goodwill subject to potential impairment is tested at a reporting unit level, which represents a component of an operating segment for which discrete financial information is available. Our reporting unit “Wireless” includes ST-Ericsson JVS, which is consolidated in our accounts. This impairment test determines whether the fair value of each reporting unit for which goodwill is allocated is lower than the total carrying amount of relevant net assets allocated to such reporting unit, including its allocated goodwill. If lower, the implied fair value of the reporting unit goodwill is then compared to the carrying value of the goodwill and an impairment charge is recognized for any excess. In determining the fair value of a reporting unit, we use a market approach with financial metrics of comparable public companies and estimate the expected discounted future cash flows associated with the reporting unit on the basis of the most updated five-year business plan. Significant management judgments and estimates are used in forecasting the future discounted cash flows. Our evaluations are based on financial plans updated with the latest available projections of the semiconductor market, our sales expectations and our costs evaluation, and are consistent with the plans and estimates that we use to manage our business. It is possible, however, that the plans and estimates used may be incorrect, and future adverse changes in market conditions or operating results of acquired businesses that are not in line with our estimates may require impairment of certain goodwill.

We considered the material decline in our Wireless revenues and increased level of losses as a triggering event to perform additional impairment tests during the first and second quarters of 2011. On the basis of the estimates and assumptions set forth in the latest business plan provided by ST-Ericsson, we did not record any goodwill impairment charge in the first half of 2011. However, many of the factors used in the business plan to assess fair values are outside our control as ST-Ericsson is a joint venture between Ericsson and us. The estimates used in such analyses are also subject to change. We will continue to monitor the carrying value of our assets. If market conditions deteriorate or our Wireless business experiences a lack of or delay in results, in particular with respect to design-wins with customers to generate future revenues, this could result in future non-cash impairment charges against earnings, as a result of a requirement to revalue our investment in ST-Ericsson. Further impairment charges could also result from new valuations triggered by changes in our product portfolio or strategic transactions, particularly in the event of a downward shift in future revenues or operating cash flows in relation to our current plans or in case of capital injections by or equity transfers to third parties at a value lower than the one underlying our carrying amount.

The below table presents the results of our most recent impairment tests:

Date of most recent impairment test	Reporting Unit	% estimated fair value exceeds carrying value
Q3 2010	HED	347
Q3 2010	MMS	738
Q2 2011	Wireless	81

Intangible assets subject to amortization. Intangible assets subject to amortization include intangible assets purchased from third parties recorded at cost and intangible assets acquired in business combinations recorded at fair value, comprised of technologies and licenses, trademarks and contractual customer relationships and computer software. Intangible assets with finite useful lives are reflected net of any impairment losses and are amortized over their estimated useful life. We evaluate each period whether there is reason to suspect that intangible assets held for use might not be recoverable. In determining recoverability, we initially assess whether the carrying value exceeds the undiscounted cash flows associated with the intangible assets. If exceeded, we then evaluate whether an impairment charge is required by determining if the asset’s carrying value also exceeds its fair value. An impairment loss is recognized for the excess of the carrying amount over the fair value. We normally estimate the fair value using a market approach with financial metrics of comparable public companies and estimate the expected discounted future cash flows associated with the intangible assets. Significant management judgments and estimates are required to forecast the future operating results used in the discounted cash flow method of valuation.

Our evaluations are based on financial plans, including the plan we receive from ST-Ericsson, updated with the latest available projections of growth in the semiconductor market and our sales expectations. They are consistent with the plans and estimates that we use to manage our business. It is possible, however, that the plans and estimates used may be incorrect and that future adverse changes in market conditions or operating results of businesses acquired may not be in line with our estimates and may therefore require us to recognize impairment charges on certain intangible assets.

We considered the material decline in our Wireless revenues and increased level of losses as a triggering event to perform additional impairment tests during the first and second quarters of 2011. On the basis of the estimates and assumptions set forth in the latest business plan provided by ST-Ericsson, we did not record any intangible assets impairment charge in the first half of 2011. However, many of the factors used in the business plan to assess fair values are outside our control as ST-Ericsson is a joint venture between Ericsson and us. The estimates used in such analyses are also subject to change. We will continue to monitor the carrying value of our assets. If market conditions deteriorate or our Wireless business experiences a lack of or delay in results, in particular with respect to design-wins with customers to generate future revenues, this could result in future non-cash impairment charges against earnings, as a result of a requirement to revalue our investment in ST-Ericsson. Further impairment charges could also result from new valuations triggered by changes in our product portfolio or strategic transactions, particularly in the event of a downward shift in future revenues or operating cash flows in relation to our current plans or in case of capital injections by or equity transfers to third parties at a value lower than the one underlying our carrying amount.

At July 2, 2011, the value of intangible assets subject to amortization amounted to $715 million.

Property, plant and equipment. Our business requires substantial investments in technologically advanced manufacturing facilities, which may become significantly underutilized or obsolete as a result of rapid changes in demand and ongoing technological evolution. We estimate the useful life for the majority of our manufacturing equipment, the largest component of our long-lived assets, to be six years, except for our 300-mm manufacturing equipment whose useful life was estimated to be ten years. This estimate is based on our experience using the equipment over time. Depreciation expense is a major element of our manufacturing cost structure. We begin to depreciate newly acquired equipment when it is placed into service.

We evaluate each period whether there is reason to suspect impairment on tangible assets or groups of assets held for use and we perform an impairment review when there is reason to suspect that the carrying value of these long-lived assets might not be recoverable. In determining the recoverability of assets to be held and used, we initially assess whether the carrying value exceeds the undiscounted cash flows associated with the tangible assets or group of assets. If exceeded, we then evaluate whether an impairment charge is required by determining if the asset’s carrying value also exceeds its fair value. We normally estimate this fair value based on independent market appraisals or the sum of discounted future cash flows, using market assumptions such as the utilization of our fabrication facilities and the ability to upgrade such facilities, change in the selling price and the adoption of new technologies. We also evaluate and adjust, if appropriate, the assets’ useful lives at each balance sheet date or when impairment indicators are identified. Assets classified as held for sale are reported as current assets at the lower of their carrying amount and fair value less costs to sell and are not depreciated. Costs to sell include incremental direct costs to transact the sale that we would not have incurred except for the decision to sell.

Our evaluations are based on financial plans updated with the latest projections of growth in the semiconductor market and our sales expectations, from which we derive the future production needs and loading of our manufacturing facilities, and which are consistent with the plans and estimates that we use to manage our business. These plans are highly variable due to the high volatility of the semiconductor business and therefore are subject to continuous modifications. If future growth differs from the estimates used in our plans, in terms of both market growth and production allocation to our manufacturing plants, this could require a further review of the carrying amount of our tangible assets and result in a potential impairment loss.

Inventory. Inventory is stated at the lower of cost or market value. Cost is based on the weighted average cost by adjusting the standard cost to approximate actual manufacturing costs on a quarterly basis; therefore, the cost is dependent on our manufacturing performance. In the case of underutilization of our manufacturing facilities, we estimate the costs associated with the excess capacity. These costs are not included in the valuation of inventory but are charged directly to cost of sales. Market value is the estimated selling price in the ordinary course of business,

less applicable variable selling expenses and cost of completion. As required, we evaluate inventory acquired in business combinations at fair value, less completion and distribution costs and related margin.

While we perform on a continuous basis inventory write-off of products and semi-finished products, the valuation of inventory requires us to estimate a reserve for obsolete or excess inventory as well as inventory that is not of saleable quality. Provisions for obsolescence are estimated for excess uncommitted inventories based on the previous quarter’s sales, order backlog and production plans. To the extent that future negative market conditions generate order backlog cancellations and declining sales, or if future conditions are less favorable than the projected revenue assumptions, we could be required to record additional inventory provisions, which would have a negative impact on our gross margin.

Restructuring charges. We have undertaken, and we may continue to undertake, significant restructuring initiatives, which have required us, or may require us in the future, to develop formalized plans for exiting any of our existing activities. We recognize the fair value of a liability for costs associated with exiting an activity when we have a present obligation and the amount can be reasonably estimated. Given the significance and timing of the execution of the restructuring activities, the process is complex and involves periodic reviews of estimates made at the time the original decisions were taken. This process can require more than one year due to requisite governmental and customer approvals and our capability to transfer technology and know-how to other locations. As we operate in a highly cyclical industry, we monitor and evaluate business conditions on a regular basis. If broader or newer initiatives, which could include production curtailment or closure of other manufacturing facilities, were to be taken, we may be required to incur additional charges as well as change estimates of the amounts previously recorded. The potential impact of these changes could be material and could have a material adverse effect on our results of operations or financial condition. In the second quarter of 2011, the net amount of restructuring charges and other related closure costs amounted to $31 million before taxes.

Share-based compensation. We measure our share-based compensation expense based on the fair value of the award as at the grant date. This cost is recognized over the period during which an employee is required to provide service in exchange for the award or the requisite service period, usually the vesting period, and is adjusted for actual forfeitures that occur before vesting. Our share-based compensation plans may award shares contingent on the achievement of certain performance conditions based on financial objectives, including our financial results when compared to certain industry performances. In order to determine share-based compensation to be recorded for the period, we use significant estimates on the number of awards expected to vest, including the probability of achieving certain industry performances compared to our financial results, award forfeitures and employees’ service period. As a result, in relation to our nonvested Stock Award Plan, we recorded a total pre-tax expense of $8 million in the second quarter of 2011.

Earnings (loss) on Equity Investments. We are required to record our proportionate share of the results of the entities that we account for under the equity method. This recognition is based on results reported by these entities, relying on their internal reporting systems to measure financial results. In the second quarter of 2011, we recognized a loss of approximately $6 million related to the ST-Ericsson JVD, net of amortization of basis differences, and $3 million loss related to other investments. In case of triggering events, we are required to determine whether our investment is temporarily or other-than-temporarily impaired. If impairment is considered to be other-than-temporary, we need to assess the fair value of our investment and record an impairment charge directly in earnings when fair value is lower than the carrying value of the investment. We make this assessment by evaluating the business on the basis of the most recent plans and projections or to the best of our estimates.

Financial assets. We classify our financial assets in the following categories: held-for-trading and available-for-sale. Such classification depends on the purpose for which the investments are acquired and held. We determine the classification of our financial assets at initial recognition. Unlisted equity securities with no readily determinable fair value are carried at cost. They are neither classified as held-for-trading nor as available-for-sale.

Available-for-sale and held-for-trading financial assets are valued at fair value. The fair value of quoted debt and equity securities is based on current market prices. If the market for a financial asset is not active, if no observable market price is obtainable, or if the security is not quoted, we measure fair value by using assumptions and estimates. For unquoted equity securities, these assumptions and estimates include the use of recent arm’s-length transactions; for debt securities without available observable market price, we establish fair value by reference to publicly available indexes of securities with the same rating and comparable or similar underlying collaterals or industries’ exposure, which we believe approximates the orderly exit value in the current market. In measuring fair value, we make maximum use of market inputs and rely as little as possible on entity-specific inputs.

Income taxes. We are required to make estimates and judgments in determining income tax for the period, comprising current and deferred income tax. We need to assess the income tax expected to be paid or the benefit expected to be received related to the current year income (loss) in each individual tax jurisdiction and recognize deferred income tax for all temporary differences arising between the tax bases of assets and liabilities and their carrying amount in the consolidated financial statements. Furthermore, we are required to assess all material open income tax positions in all tax jurisdictions to determine any uncertain tax positions, and provide for those that could not be sustained upon examination by the taxing authorities.

We are also required to assess the likelihood of recovery of our deferred tax assets and are partially dependent on ST-Ericsson management’s assessment with respect to the deferred tax assets at ST-Ericsson, which were approximately $150 million as of July 2, 2011. This assessment requires the exercise of judgment with respect to, among other things, benefits that could be realized from available tax strategies and future taxable income, as well as other positive and negative factors. The ultimate realization of deferred tax assets is dependent upon, among other things, our ability to generate future taxable income that is sufficient to utilize loss carry-forwards or tax credits before their expiration. If recovery is not likely, we are required to record a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable, which would increase our provision for income taxes. Our deferred tax assets have increased substantially in the period 2007-2009 in light of our net losses, while they decreased in 2010 due to improved performances resulting in net income. As of July 2, 2011, we recorded in our accounts certain valuation allowances based on our current operating assumptions. However, we could be required to record further valuation allowances thereby reducing the amount of total deferred tax assets, resulting in a decrease in our total assets and, consequently, in our shareholders’ equity, if our estimates of projected future taxable income and benefits from available tax strategies are reduced as a result of a change in our assessment or due to other factors, or if changes in current tax regulations are enacted that impose restrictions on the timing or extent of our ability to utilize net operating losses and tax credit carry-forwards in the future. Likewise, a change in the tax rates applicable in the various jurisdictions or unfavorable outcomes of any ongoing tax audits could have a material impact on our future tax provisions in the periods in which these changes could occur. In particular, a significant portion of the increase in the deferred tax assets was recorded in relation to net operating losses incurred in the ST-Ericsson joint-venture. These net operating losses may not be realizable before their expiration in seven years, unless ST-Ericsson is capable of identifying favorable tax strategies. In connection with the continuing losses of ST-Ericsson, in the second quarter of 2011, we performed an assessment of the future recoverability of the deferred tax assets resulting from past net operating losses. On the basis of the most updated ST-Ericsson business plans and its tax planning strategies, no valuation allowance with respect to the ST-Ericsson deferred tax assets was recorded at July 2, 2011. The future recoverability of these net operating losses is partly dependent on the successful market penetration of new product releases and additional tax planning strategies currently under evaluation; however, negative developments in the new product roll-out or in the ongoing evaluation of the tax planning strategies could require adjustments to our evaluation of the deferred tax asset valuation.

Patent and other Intellectual Property (“IP”) litigation or claims. As is the case with many companies in the semiconductor industry, we have from time to time received, and may in the future receive, communications alleging possible infringement of patents and other IP rights of third parties. Furthermore, we may become involved in costly litigation brought against us regarding patents, mask works, copyrights, trademarks or trade secrets. In the event the outcome of a litigation claim is unfavorable to us, we may be required to purchase a license for the underlying IP right on economically unfavorable terms and conditions, possibly pay damages for prior use, and/or face an injunction, all of which singly or in the aggregate could have a material adverse effect on our results of operations and on our ability to compete. See Item 3. “Key Information — Risk Factors — Risks Related to Our Operations — We depend on patents to protect our rights to our technology and may face claims of infringing the IP rights of others” included in our Form 20-F, which may be updated from time to time in our public filings.

We record a provision when we believe that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We regularly evaluate losses and claims with the support of our outside counsel to determine whether they need to be adjusted based on current information available to us. From time to time we face cases where contingent liability cannot readily be reasonably estimated. In the event of litigation that is adversely determined with respect to our interests, or in the event that we need to change our evaluation of a potential third-party

claim based on new evidence or communications, this could have a material adverse effect on our results of operations or financial condition at the time it were to materialize. We are in discussion with several parties with respect to claims against us relating to possible infringement of other parties’ IP rights. We are also involved in several legal proceedings concerning such issues. See “Legal Proceedings”.

As of July 2, 2011, based on our assessment, we did not record any material provisions in our financial statements relating to third-party claims, and in particular third party claims that relate to patent rights, since we had not identified any significant risk of probable loss that is likely to arise out of such asserted claims or ongoing legal proceedings. There can be no assurance, however, that all such claims will be resolved in our favor. If the outcome of any claim or litigation were to be unfavorable to us, we could incur monetary damages, and/or face an injunction, all of which singly or in the aggregate could have an adverse effect on our results of operations and our ability to compete.

Pension and Post-Retirement Benefits. Our results of operations and our consolidated balance sheet include amounts for pension obligations and post-retirement benefits that are measured using actuarial valuations. At July 2, 2011, our pension and long-term benefit obligations net of plan assets amounted to $351 million based on the assumption that our employees will work with us until they reach the age of retirement. These valuations are based on key assumptions, including discount rates, expected long-term rates of return on funds and salary increase rates. These assumptions are updated on an annual basis at the beginning of each fiscal year or more frequently upon the occurrence of significant events. Any changes in the pension schemes or in the above assumptions can have an impact on our valuations. The measurement date we use for the majority of our plans is December 31.

Other claims. We are subject to the possibility of loss contingencies arising in the ordinary course of business. These include, but are not limited to: warranty costs on our products not covered by insurance, breach of contract claims, tax claims and provisions for specifically identified income tax exposures as well as claims for environmental damages. In determining loss contingencies, we consider the likelihood of a loss of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of such loss or liability. An estimated loss is recorded when we believe that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We regularly re-evaluate any losses and claims and determine whether our provisions need to be adjusted based on the current information available to us. In the event we are unable to estimate the amount of such loss in a correct and timely manner, this could have a material adverse effect on our results of operations or financial condition at the time such loss were to materialize. For further details of our legal proceedings refer to “Legal Proceedings” and Note 25 to our Unaudited Interim Consolidated Financial Statements.

Fiscal Year

Under Article 35 of our Articles of Association, our financial year extends from January 1 to December 31, which is the period end of each fiscal year. The first and second quarters of 2011 ended on April 2 and July 2, 2011, respectively. The third quarter of 2011 will end on October 1 and the fourth quarter will end on December 31, 2011. Based on our fiscal calendar, the distribution of our revenues and expenses by quarter may be unbalanced due to a different number of days in the various quarters of the fiscal year and can also differ from equivalent prior years’ periods.

Business Overview

The total available market is defined as the “TAM”, while the serviceable available market, the “SAM”, is defined as the market for products produced by us (which consists of the TAM and excludes PC motherboard major devices such as Microprocessors (“MPUs”), DRAMs, optoelectronics devices and Flash Memory).

The semiconductor industry in the second quarter of 2011 continued to experience a growth on a year-over-year basis, in particular for the SAM.

Based on published industry data by WSTS, semiconductor industry revenues remained basically flat in the second quarter of 2011 on a year-over-year basis for the TAM, while they increased by about 2% for the SAM to reach approximately $74 billion and $43 billion, respectively. Sequentially, in the second quarter of 2011 the TAM and the SAM decreased both by approximately 2%.

Our effective average exchange rate for the first half of 2011 was $1.35 for €1.00 compared to $1.37 for €1.00 for the first half of 2010. Our effective exchange rate for the second quarter of 2011 was $1.37 for €1.00 compared to $1.33 for €1.00 for the first quarter of 2011 and $1.35 for €1.00 in the second quarter of 2010. For a more detailed discussion of our hedging arrangements and the impact of fluctuations in exchange rates, see “Impact of Changes in Exchange Rates” below.

With reference to our revenues performance, we registered a slight increase on both a year-over-year and sequential basis. Our second quarter 2011 revenues amounted to $2,567 million, increasing by 1.4% on a year ago basis and 1.3% sequentially. The sequential performance was substantially at the midpoint of the guidance range released to the market, which indicated a range of a sequential variation between -2% and +5%. The year-over-year revenues increase was driven by a strong performance of our Automotive and Imaging product lines within our ACCI product segment and of our MEMS and Microcontrollers within our AMM product segment, while Wireless revenues declined significantly. Compared to the served market, our performance was above sequentially and below on a year-over-year basis, mainly reflecting the anticipated significant decline in Wireless and largely caused by the weaker demand from ST-Ericsson’s largest customer.

Net revenues were up both sequentially and year-over-year due to solid performance of our wholly owned businesses (including ACCI, AMM, PDP and others, but excluding Wireless, mainly run through ST-Ericsson), which were up 3.2% sequentially and 10.6% on a year-over-year basis, while Wireless was down 9.7% sequentially and 33.9% year-over-year.

Our second quarter 2011 gross margin reached 38.1% of revenues, decreasing by 20 basis points compared to the prior year period, mainly due to the negative price impact, almost entirely balanced by the benefit from improvement in manufacturing performances. On a sequential basis, our gross margin decreased by 100 basis points, in line with our guidance, which indicated a gross margin of 38.7% plus or minus one percentage point.

Our total operating expenses, combining the selling, general and administrative (“SG&A”) and research and development (“R&D”) expenses in the second quarter of 2011, were basically flat compared to the second quarter of 2010.

Our operating results slightly deteriorated on a year-over-year basis, mainly due to a higher level of impairment, restructuring charges and other related closure costs.

In summary, our financial performance during the second quarter of 2011 was characterized by the following:

our consolidated operating income decreased slightly on a year-over-year basis, mainly due to higher charges for restructuring provisions also linked to the new cost saving plan of ST-Ericsson, while manufacturing performances significantly improved, though balanced by negative pricing trend and the weakening U.S. dollar exchange rate; on a sequential basis our operating income deteriorated mainly due to the weakening U.S. dollar exchange rate;

operating income of our wholly owned businesses was up to 14.4% in the second quarter of 2011 from 12.0% in the equivalent year-ago period, while substantially stable on a sequential basis; Wireless operating loss significantly deteriorated to $207 million from $180 million sequentially and $137 million in the year-ago period.

The net income in the second quarter 2011 largely benefited from a cash settlement with Credit Suisse of all outstanding litigation concerning Auction Rate Securities, which resulted in recording a $329 million benefit before taxes, out of which $6 million was a reimbursement of legal fees which was included in the SG&A and $323 million as a gain on financial assets. See “Legal Proceedings”. As a result, the net income in the second quarter of 2011 significantly increased to $420 million, benefiting from a $305 million gain net of taxes on financial assets. Our second quarter net revenues and gross margin results were substantially in line with our business outlook, with sales growth driven by a solid performance from Automotive.

As anticipated, in this quarter we experienced headwinds related to the situation in Japan and currency rates, while continuing to face ST-Ericsson’s ongoing transition. Additionally, in June, we saw weaker demand and a much weaker than planned outlook from a major wireless customer and we saw signs of softening demand in some of our businesses, such as digital consumer products and microcontrollers.

Looking at the 2011 first half, we have made measurable progress in advancing our product portfolio, clearly gaining share as net revenues from our wholly owned businesses increased 17% compared to the year-ago period. Our product portfolio is gaining further traction, with significant design wins in the growth application areas we are targeting: energy management and savings, trust and data security, healthcare and wellness as well as smart consumer devices.

Business Outlook

Entering the third quarter, we have moved quickly to lower production levels at certain fabs primarily due to the significant reduction in the demand outlook from a major customer compared to previous expectations.

Overall, we are anticipating net revenues in the third quarter to evolve sequentially in the range of -5% to +2%. Gross margin in the third quarter, due to the temporary high level of unsaturation at selected facilities, is expected to be about 35.5%, plus or minus one percentage point.

Our net financial position, at approximately $1.1 billion at quarter end, continues to be strong. We expect our capital expenditures in the second half to decline significantly as we have largely completed the selected capacity additions for the year. We continue to strengthen our product portfolio and remain committed to support, as well as diversify, our customer base in order to improve our performance.

This Outlook is based on an assumed effective currency exchange rate of approximately $1.41 = €1.00 for the 2011 third quarter and includes the impact of existing hedging contracts. The third quarter will close on October 1, 2011.

These are forward-looking statements that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially; in particular, refer to those known risks and uncertainties described in “Cautionary Note Regarding Forward-Looking Statements” and Item 3. “Key Information — Risk Factors” in our Form 20-F as may be updated from time to time in our SEC filings.

Other Developments in 2011

On March 15, 2011 we announced new appointments to our executive management team. Fabio Gualandris rejoined us as Corporate Vice President, Director Product Quality Excellence, reporting directly to our Chief Executive Officer Carlo Bozotti. Gualandris took the position previously held by Georges Auguste, who has been appointed Executive Vice President, Packaging & Test Manufacturing (PTM), reporting to Didier Lamouche, our Chief Operating Officer. Claudia Levo joined us to take up the position of Corporate Vice President, Communication, reporting to Carlo Ferro, our Chief Financial Officer. In addition to the new appointments, we also announced a dedicated organization to investigate new areas of potential strategic interest for our Company, including possible investments in start-up companies that develop emerging technologies, products and services related to our business goals. Loic Lietar, Executive Vice President, New Ventures, will manage this new activity. Philippe Lambinet has taken responsibility for the strategic functions formerly managed by Lietar, including Strategic Planning and Corporate Business Development. Lambinet will manage these activities in addition to his current role as Senior Executive Vice President and General Manager Home Entertainment & Displays Group, a position he has held since 2007.

On March 30, 2011 the French Fond Stratégique d’Investissement (FSI) announced that it had completed the acquisition of Areva’s indirect interest in our Company, with an indirect stake of 10.9% in our Company. FSI thus substitutes and succeeds Areva as a party to the shareholders’ agreement relating to ST Holding NV. In addition, FSI and the Italian Ministry of Economy and Finance have agreed in principle to extend the balance period provided for in the shareholders’ agreement, from March 17, 2011 to December 31, 2011.

Our Annual General Meeting of Shareholders was held on May 3, 2011 in Amsterdam and the following decisions were approved by our shareholders:

The reappointment of Mr. Carlo Bozotti as the sole member of the Managing Board and our President and Chief Executive Officer for a three-year term expiring at the 2014 Annual General Meeting;

The reappointment for a three-year term, expiring at the 2014 Annual General Meeting, for the following members of the Supervisory Board: Mr. Didier Lombard, Mr. Bruno Steve and Mr. Tom de Waard;

The appointment of Messrs. Jean d’Arthuys, Jean-Georges Malcor and Alessandro Rivera as new members of the Supervisory Board for a three-year term, expiring at the 2014 Annual General Meeting, in replacement of Messrs. Gerald Arbola and Antonino Turicchi, whose mandates expired at the 2011 Annual General Meeting, and of Mr. Didier Lamouche, who resigned in October 2010;

The approval of our 2010 accounts reported in accordance with International Financial Reporting Standards, as adopted in the European Union (IFRS);

The distribution of a cash dividend of US$0.40 per share, to be paid in four equal quarterly installments in May, August and December 2011 and February 2012 to shareholders of record in the month of each quarterly payment;

The reappointment of PricewaterhouseCoopers Accountants N.V. as our external auditors for a three-year term effective as of our 2011 Annual General Meeting to expire at the end of our 2014 Annual General Meeting.

Following the Annual General Meeting, the Supervisory Board appointed Mr. Didier Lombard as the Chairman of the Supervisory Board and Mr. Bruno Steve as the Vice-chairman, respectively, for a 3-year term ending in 2014.

On May 31, 2011, we announced the publication of our 2010 Sustainability Report. The report provides comprehensive information about our sustainability strategy, policies and performance during 2010 and describes how we incorporate sustainability into our business practices to create value for all of our stakeholders. Key commitments and achievements include a record safety performance that puts us among the worldwide leaders in this field and a commitment to have 100% of our products eco-designed by 2015.

On June 9, 2011, we received a cash payment of $356.8 million from Credit Suisse as the full and final payment for the settlement of all outstanding litigation concerning Auction Rate Securities. This amount fully covers all losses and costs associated with the litigation. We booked a pre-tax gain of approximately $329 million in the second quarter of 2011 as a result of the settlement.

On July 8, 2011, the photovoltaic panels factory run by 3Sun, the equal share joint venture between Enel Green Power, Sharp and us, was inaugurated in Catania, Italy.

Results of Operations

Segment Information

We operate in two business areas: Semiconductors and Subsystems.

In the Semiconductors business area, we design, develop, manufacture and market a broad range of products, including discrete and standard commodity components, application-specific integrated circuits (“ASICs”), full-custom devices and semi-custom devices and application-specific standard products (“ASSPs”) for analog, digital and mixed-signal applications. In addition, we further participate in the manufacturing value chain of Smartcard products, which includes the production and sale of both silicon chips and Smart cards.

As of January 1, 2011 we changed the segment organization structure. The current organization is as follows:

Automotive, Consumer, Computer and Communication Infrastructure (“ACCI”), comprised of:

○

Automotive Products Group (“APG”);

○

Computer and Communication Infrastructure (“CCI”);

○

Home Entertainment & Displays (“HED”); and

○

Imaging (“IMG”).

Analog, MEMS and Microcontrollers (“AMM”), comprised of

○

Analog Products and Micro-Electro-Mechanical Systems (“Analog & MEMS”); and

○

Microcontrollers, non-Flash, non-volatile Memory and Smart Card products (“MMS”).

Power Discrete Products (“PDP”), comprised of:

○

Rectifiers, Thyristors & Triacs, Protection, Integrated Passive Active Devices (IPADs) and Transistors.

Wireless (“Wireless”), comprised of:

○

Entry Solutions and Connectivity (“ESC”) (formerly called “2G, EDGE, TD-SCDMA & Connectivity”);

○

Smartphone and Tablet Solutions (“STS”) (formerly called “3G Multimedia & Platforms”);

○

Modems (“MOD”) (formerly called “LTE & 3G Modem Solutions”);

in which we report the portion of sales and operating results of ST-Ericsson JVS as consolidated in our revenue and operating results; and

○

Other Wireless, in which we report other revenues, gross margin and other items related to our Wireless business outside the ST-Ericsson JVS.

In 2011, we restated our results from prior periods for illustrative comparisons of our performance by product segment due to the former Industrial and Multisegment Sector (“IMS”) now being tracked in two separate segments (“AMM” and “PDP”). The preparation of segment information based on the current segment structure requires us to make significant estimates, assumptions and judgments in determining the operating income of the segments for the prior reporting periods. The tables set forth below also reflect the transfer of the Audio division from ACCI to AMM; accordingly, we have reclassified the prior period’s revenues and operating income results of ACCI and AMM. We believe that the restated 2010 presentation is consistent with that of 2011 and we use these comparatives when managing our company.

Our principal investment and resource allocation decisions in the Semiconductor business area are for expenditures on R&D and capital investments in front-end and back-end manufacturing facilities. These decisions are not made by product segments, but on the basis of the semiconductor business area. All these product segments share common R&D for process technology and manufacturing capacity for most of their products.

In the Subsystems business area, we design, develop, manufacture and market subsystems and modules for the telecommunications, automotive and industrial markets including mobile phone accessories, battery chargers, ISDN power supplies and in-vehicle equipment for electronic toll payment. Based on its immateriality to our business as a whole, the Subsystems business area does not meet the requirements for a reportable segment as defined in the guidance on disclosures about segments of an enterprise and related information.

The following tables present our consolidated net revenues and consolidated operating income by product segment. For the computation of the segments’ internal financial measurements, we use certain internal rules of allocation for the costs not directly chargeable to the segments, including cost of sales, selling, general and administrative expenses and a significant part of research and development expenses. Additionally, in compliance with our internal policies, certain cost items are not charged to the segments, including unused capacity charges, impairment, restructuring charges and other related closure costs, start-up and phase out costs of certain manufacturing facilities, strategic and special R&D programs or other corporate-sponsored initiatives, including certain corporate level operating expenses and certain other miscellaneous charges.

	Three Months Ended (unaudited)				Six Months Ended (unaudited)
	July 2, 2011		June 26, 2010		July 2, 2011		June 26, 2010
	(In millions)

Net revenues by product segment:

Automotive, Consumer, Computer and Communication Infrastructure (“ACCI”)(1)	$	1,118	$	1,022	$	2,170	$	1,915
Analog, MEMS and Microcontrollers (“AMM”)		751		637		1,505		1,183
Power Discrete Products (“PDP”)		337		331		670		612
Wireless		347		525		731		1,112
Others(2)		14		16		25		34
Total consolidated net revenues	$	2,567	$	2,531	$	5,101	$	4,856

____________

(1)	Following the transfer of a small business unit from ACCI to AMM, we have reclassified prior periods’ revenues accordingly.

(2)	In the second quarter of 2011, “Others” includes revenues from the sales of Subsystems ($6 million), sales of materials and other products not allocated to product segments ($7 million) and miscellaneous ($1 million).

	Three Months Ended (unaudited)				Six Months Ended (unaudited)
	July 2, 2011		June 26, 2010		July 2, 2011		June 26, 2010
	(In millions)
Net revenues by product line:

Automotive Products Group (“APG”)	$	458	$	342	$	891	$	651
Computer and Communication Infrastructure (“CCI”)		267		275		534		539
Home Entertainment & Displays (“HED”)		201		245		412		452
Imaging (“IMG”)		182		144		323		250
Others		10		16		10		23
Automotive, Consumer, Computer and Communication Infrastructure (“ACCI”)(1)		1,118		1,022		2,170		1,915
Analog and Micro-Electro-Mechanical Systems (“Analog & MEMS”)		437		350		872		651
Microcontrollers, non-Flash, non-volatile Memory and Smartcard products (“MMS”)		313		286		632		530
Others		1		1		1		2

Analog, MEMS and Microcontrollers (“AMM”)(1)		751		637		1,505		1,183

Power Discrete Products (“PDP”)		337		331		670		612

Entry Solutions and Connectivity (“ESC”)		167		210		357		453
Smartphone and Tablet Solutions (“STS”)		146		306		317		645
Modems (“MOD”)		32		9		55		13
Others		2		-		2		1
Wireless		347		525		731		1,112

Others		14		16		25		34

Total consolidated net revenues	$	2,567	$	2,531	$	5,101	$	4,856

____________

(1) Following the transfer of a small business unit from ACCI to AMM, we have reclassified prior periods’ revenues accordingly.

(1)

	Three Months Ended (unaudited)						Six Months Ended (unaudited)
	July 2, 2011			June 26, 2010			July 2, 2011			June 26, 2010
	(In millions)
Operating income (loss) by product segment:

Automotive, Consumer, Computer and Communication Infrastructure (“ACCI”)	$	122		$	100		$	237		$	149
Analog, MEMS and Microcontrollers (“AMM”)		159			99			325			164
Power Discrete Products (“PDP”)		40			37			90			62
Wireless (1)		(207	)		(137	)		(386	)		(253	)
Others(2)		(31	)		(8	)		(65	)		(51	)
Total consolidated operating income	$	83		$	91		$	201		$	71

____________

(1)

The majority of Wireless’ activities are run through ST-Ericsson JVS. In addition, Wireless includes other items affecting operating results related to the wireless business. The noncontrolling interest of Ericsson in ST-Ericsson JVS’ operating results (which are 100% included in Wireless) is credited on the line “Net loss attributable to noncontrolling interest” of our Consolidated Statements of Income, which represented $109 million for the quarter ended July 2, 2011.

(2)

Operating loss of “Others” includes items such as unused capacity charges, impairment, restructuring charges and other related closure costs, phase-out and start-up costs, and other unallocated expenses such as: strategic or special R&D programs, certain corporate level operating expenses, certain patent claims and litigation, and other costs that are not allocated to the product segments, as well as operating earnings or losses of the Subsystems and Other Products Group.

	Three Months Ended (unaudited)						Six Months Ended (unaudited)
	July 2, 2011			June 26, 2010			July 2, 2011			June 26, 2010
	(As percentage of net revenues)
Operating income (loss) by product segment:

Automotive, Consumer, Computer and Communication Infrastructure (“ACCI”)(1)		10.9	%		9.8	%		10.9	%		7.8	%
Analog, MEMS and Microcontrollers (“AMM”)(1)		21.2			15.6			21.6			13.9
Power Discrete Products (“PDP”)(1)		11.8			11.1			13.4			10.2
Wireless (1)		(59.7	)		(26.1	)		(52.9	)		(22.8	)
Others		-			-			-			-
Total consolidated operating income(2)		3.2	%		3.6	%		3.9	%		1.5	%

____________

(1)	As a percentage of net revenues per product segment.

(2)	As a percentage of total net revenues.

	Three Months Ended (unaudited)						Six Months Ended (unaudited)
	July 2, 2011			June 26, 2010			July 2, 2011			June 26, 2010
	(In millions)
Reconciliation to consolidated operating income:

Total operating income of product segments	$	114		$	99		$	266		$	122
Unused capacity charges		(6	)		-			(8	)		(1	)
Impairment, restructuring charges and other related closure costs		(31	)		(12	)		(55	)		(45	)
Phase-out and start-up costs		(1	)		(3	)		(8	)		(5	)
Strategic and other research and development programs		(2	)		(4	)		(6	)		(7	)
Sales of materials		7			6			13			11
Other non-allocated provisions(1)		2			5			(1	)		(4	)
Total operating loss Others		(31	)		(8	)		(65	)		(51	)

Total consolidated operating income	$	83		$	91		$	201		$	71

____________

(1)	Includes unallocated income and expenses such as certain corporate level operating expenses and other costs/income that are not allocated to the product segments.

Net revenues by location of order shipment and by market segment

The table below sets forth information on our net revenues by location of order shipment:

	Three Months Ended (unaudited)				Six Months Ended (unaudited)
	July 2, 2011		June 26, 2010		July 2, 2011		June 26, 2010
	(In millions)
Net Revenues by Location of Order Shipment:(1)

EMEA(2)	$	639	$	657	$	1,263	$	1,277
Americas		359		339		692		633
Greater China - South Asia		1,157		1,100		2,287		2,061
Japan - Korea		412		435		859		885
Total	$	2,567	$	2,531	$	5,101	$	4,856

____________

(1)

Net revenues by location of order shipment are classified by location of customer invoiced. For example, products ordered by U.S.-based companies to be invoiced to Greater China - South Asia affiliates are classified as Greater China - South Asia revenues. Furthermore, the comparison among the different periods may be affected by shifts in order shipment from one location to another, as requested by our customers.

(2)	EMEA refers to all of Europe, the Middle East and Africa.

The tables below show our net revenues by location of order shipment and market segment application in percentage of net revenues:

	Three Months Ended (unaudited)						Six Months Ended (unaudited)
	July 2, 2011			June 26, 2010			July 2, 2011			June 26, 2010
	(As percentage of net revenues)
Net Revenues by Location of Order Shipment:

EMEA		24.9	%		25.9	%		24.8	%		26.3	%
Americas		14.0			13.4			13.6			13.0
Greater China - South Asia		45.0			43.5			44.8			42.5
Japan - Korea		16.1			17.2			16.8			18.2
Total		100	%		100	%		100	%		100	%

Net Revenues by Market Segment Application(1):

Automotive		17.4	%		13.8	%		17.0	%		13.7	%
Computer		13.6			12.2			13.8			12.3
Consumer		9.6			12.7			10.4			12.4
Telecom		24.9			31.5			25.2			33.0
Industrial and Other		9.7			8.4			9.2			8.4
Distribution		24.8			21.4			24.4			20.2
Total		100	%		100	%		100	%		100	%

____________

(1)

The above table estimates, within a variance of 5% to 10% in the absolute dollar amount, the relative weighting of each of our target segments. Net revenues by market segment application are classified according to the status of the final customer. For example, products ordered by a computer company, even including sales of other applications such as Telecom, are classified as Computer revenues.

The following table sets forth certain financial data from our unaudited Consolidated Statements of Income:

	Three Months Ended (unaudited)						Three Months Ended (unaudited)
	July 2, 2011			July 2, 2011			June 26, 2010			June 26, 2010
	$ million			% of net revenues			$ million			% of net revenues

Net sales	$	2,545			99.1	%	$	2,507			99.0	%
Other revenues		22			0.9			24			1.0
Net revenues		2,567			100			2,531			100.0
Cost of sales		(1,590	)		(61.9	)		(1,563	)		(61.7	)
Gross profit		977			38.1			968			38.3
Selling, general and administrative		(316	)		(12.3	)		(302	)		(12.0	)
Research and development		(579	)		(22.6	)		(593	)		(23.4	)
Other income and expenses, net		32			1.2			30			1.2
Impairment, restructuring charges and other related closure costs		(31	)		(1.2	)		(12	)		(0.5	)
Operating income		83			3.2			91			3.6
Realized gain on financial assets		323			12.6			-			-
Interest income (expense), net		(3	)		(0.1	)		1			0.0
Loss on equity investments and gain on investment divestiture(1)		(9	)		(0.3	)		264			10.4
Loss on financial instruments, net		-			-			(8	)		(0.3	)
Income before income taxes and noncontrolling interest		394			15.4			348			13.7
Income tax expense		(83	)		(3.2	)		(66	)		(2.6	)
Income before noncontrolling interest		311			12.2			282			11.1
Net loss attributable to noncontrolling interest		109			4.2			74			2.9
Net income attributable to parent company	$	420			16.4	%	$	356			14.0	%

____________

(1)	Our equity participation in the ST-Ericsson JVD, which usually results in a loss for us, is not charged to Wireless since this item is included in the Income Statement below the operating result.

Second Quarter of 2011 vs. Second Quarter of 2010 and First Quarter of 2011

Net revenues

	Three Months Ended						% Variation
	July 2, 2011		April 2, 2011		June 26, 2010		Sequential			Year-Over- Year
	(Unaudited, in millions)
Net sales	$	2,545	$	2,523	$	2,507		0.8	%		1.5	%
Other revenues		22		12		24		91.3			(10.2	)
Net revenues	$	2,567	$	2,535	$	2,531		1.3	%		1.4	%

Year-over-year comparison

Our second quarter 2011 net revenues increased in all product segments compared to the year-ago quarter, except in Wireless, mainly reflecting a strong demand for our Automotive, Imaging, MEMS, and Microcontrollers products. Such performance resulted from an approximately 2% increase in volume, while average selling prices slightly declined with approximately 3% negative pricing impact, almost completely offset by a favorable product mix, which benefited from the recognition of sales from certain one-time contracts billed in the second quarter 2011.

ACCI revenues increased by approximately 9%, driven by a significant upside in demand for our APG (34% increase) and IMG (26% increase) products, while CCI’s and HED’s performances were down by approximately 3% and approximately 18%, respectively. AMM’s net revenues were nearly 18% higher, led by MEMS, which more than doubled their revenues, and Microcontrollers. PDP also showed a robust demand, with an approximately 2% increase. Wireless sales registered a decline of approximately 34%, as sales of ST-Ericsson legacy products declined more than anticipated, due to a weaker demand by its major customer.

By market segment, our revenue growth was strong in Automotive, Distribution, Industrial and other and Computer, while Consumer and Telecom revenues were decreasing.

By location of order shipment, the best results were achieved in the Americas and Greater China - South Asia with approximately 6% and 5% revenue growth, respectively; while Japan - Korea and EMEA decreased by approximately 5% and 3%, respectively. In the second quarter 2011, no customer exceeded 10% of our total net revenues, while in the second quarter of 2010 the Nokia group represented about 14% of our net revenues.

Sequential comparison

On a sequential basis our revenues increased by 1.3%, in line with our anticipated guidance of about -2% to +5%. This sequential variation resulted from an approximate 2% increase from average selling prices, due to a more favorable product mix in the second quarter 2011, which benefited from the recognition of sales from certain one-time contracts, offset by an approximate 1% decrease in units sold. Other revenues mainly included $13 million of technology sales and $7 million of materials sales, improving sequentially due to an increase in technology licensing.

ACCI revenues were up by over 6%, mainly due to the good performance of APG and IMG and despite the decline in HED revenues; CCI remained basically flat. AMM variation was basically flat with Analog up by 2%. PDP revenues increased by approximately 1%. Wireless revenues decreased by nearly 10%, primarily due to a reduction in demand from its major customer.

By market segment, Industrial and other, Automotive and Distribution outperformed our results, with approximately 15%, 5% and 4% increase, respectively. All of the other segments’ revenues were down.

Revenues increased in all regions but Japan - Korea, led by the Americas with approximately 8% growth. In the second quarter 2011, no customer exceeded 10% of our total net revenues, while in the first quarter of 2011 the Nokia group represented about 11% of our net revenues.

Gross profit

	Three Months Ended									% Variation
	July 2, 2011			April 2, 2011			June 26, 2010			Sequential			Year-Over- Year
	(Unaudited, in millions)
Cost of sales	$	(1,590	)	$	(1,544	)	$	(1,563	)		(3.0	)%		(1.7	)%
Gross profit		977			991			968			(1.4	)		0.8
Gross margin (as a percentage of net revenues)		38.1	%		39.1	%		38.3	%		-			-

Gross margin was 20 basis points down compared to the year-ago quarter, reaching 38.1%; the main factors contributing to such variation were a negative impact from lower selling prices, product mix and unfavorable currency effects, partially balanced by higher manufacturing efficiencies.

On a sequential basis, gross margin in the second quarter decreased 100 basis points, in spite of a favorable contribution of certain one-time contracts, principally due to unfavorable currency effects, the impact on manufacturing of a change in demand by a major customer and average selling prices, including a less favorable product mix.

Selling, general and administrative expenses

	Three Months Ended									% Variation
	July 2, 2011			April 2, 2011			June 26, 2010			Sequential			Year-Over- Year
	(Unaudited, in millions)
Selling, general and administrative expenses	$	(316	)	$	(312	)	$	(302	)		(1.3	)%		(4.4	)%
As percentage of net revenue		(12.3	)%		(12.3	)%		(12.0	)%		-			-

The amount of our selling, general and administrative expenses did not register a material variation on a sequential basis, while on the year-over-year basis, the increase was due to the negative impact of the U.S. dollar exchange rate. Our share-based compensation charges were $5 million in the second quarter of 2011, basically unchanged compared to the previous periods.

As a percentage of revenues, our selling, general and administrative expenses amounted to 12.3%, slightly increasing in comparison to 12.0% in the prior year period.

Research and development expenses

	Three Months Ended									% Variation
	July 2, 2011			April 2, 2011			June 26, 2010			Sequential			Year-Over- Year
	(Unaudited, in millions)
Research and development expenses	$	(579	)	$	(562	)	$	(593	)		(3.2	)%		2.3	%
As percentage of net revenues		(22.6	)%		(22.1	)%		(23.4	)%		-			-

R&D expenses in the second quarter benefited from the billing of R&D services related to Long-Term Evolution (LTE) development by ST-Ericsson to the Ericsson Group, however at a lower amount than in the prior quarter; though increasing compared to the second quarter of 2010.

The second quarter of 2011 included $2 million of share-based compensation charges, basically flat compared to the first quarter of 2011 and the second quarter of 2010. Total R&D expenses were net of research tax credits, which amounted to $45 million, increasing compared to prior periods due to the qualification for recognition of additional credits for the prior year and for the updated current year forecast.

As a percentage of revenues, second quarter 2011 R&D equaled 22.6%, a decrease of 80 basis points compared to the year-ago period and a slight sequential increase.

Other income and expenses, net

	Three Months Ended
	July 2, 2011			April 2, 2011			June 26, 2010
	(Unaudited, in millions)
Research and development funding	$	29		$	34		$	31
Phase-out and start-up costs		(1	)		(7	)		(3	)
Exchange gain net		3			3			4
Patent costs		(11	)		(4	)		(3	)
Gain on sale of other non-current assets		13			-			2
Other, net		(1	)		(1	)		(1	)
Other income and expenses, net	$	32		$	25		$	30
As a percentage of net revenues		1.2	%		1.0	%		1.2	%

Other income and expenses, net, mainly included, as income, items such as R&D funding, gain on sale of other non-current assets and exchange gain and, as expenses, patent costs and phase-out/ start-up costs. Income from R&D funding was associated with our R&D projects, which, upon project approval, qualifies as funding on the basis of contracts with local government agencies in locations where we pursue our activities. In the second quarter of 2011, the balance of these factors resulted in other income and expenses, net of $32 million, mainly due to the high level of funding for approximately $29 million and the gain on the sale of other non-current assets related to the closing of the sale of our Phoenix facility.

Impairment, restructuring charges and other related closure costs

	Three Months Ended
	July 2, 2011			April 2, 2011			June 26, 2010
	(Unaudited, in millions)
Impairment, restructuring charges and other related closure costs	$	(31	)	$	(24	)	$	(12	)

In the second quarter of 2011, we recorded $31 million of impairment, restructuring charges and other related closure costs, of which:

$16 million was recorded in relation to the manufacturing restructuring plan contemplating the closure of our Carrollton (Texas) and Phoenix (Arizona) sites, and was composed of one-time termination benefits, as well as other related closure charges, mainly associated with the Phoenix fab;

$1 million related to the workforce reduction plans announced in April and December 2009 by ST-Ericsson, pursuant to the closure of certain locations;

$13 million related to the new cost savings plan announced in June 2011 by ST-Ericsson, primarily consisting of the upfront booking of ongoing termination benefits; the total plan charge is expected to be approximately between $70 million and $75 million, which may mainly impact the second half of 2011 and will be finalized in 2012; and

$1 million related to other restructuring initiatives.

In the first quarter of 2011, we recorded $24 million of impairment, restructuring charges and other related closure costs, of which: $19 million was recorded in relation to the manufacturing restructuring plan contemplating the closure of our Carrollton (Texas) and Phoenix (Arizona) sites, and was composed of one-time termination benefits, as well as other related closure charges, mainly associated with Carrollton and Phoenix fabs; at the end of the first quarter, we closed our Phoenix fab, thereby substantially completing the restructuring of our manufacturing operations; $4 million related to the workforce reduction plans announced in April and December 2009 by ST-Ericsson, primarily consisting of lease contract termination costs, pursuant to the closure of certain locations; and $1 million related to other restructuring initiatives.

In the second quarter of 2010, we recorded $12 million of impairment and restructuring charges and other related closure costs, which were basically related to two plans: the manufacturing plan and plans launched in 2009 primarily related to ST-Ericsson. The allocation was as follows: $6 million related to our manufacturing restructuring plan which contemplated the closure of our Ain Sebaa (Morocco), Carrollton (Texas) and Phoenix (Arizona) sites, and was composed of one-time termination benefits, as well as other related charges, mainly related to Carrollton and Phoenix fabs; $6 million related to the plans announced in April and December 2009 by ST-Ericsson, primarily consisting of ongoing termination benefits pursuant to the workforce reduction plan and the closure of certain locations in Europe.

Operating income

	Three Months Ended
	July 2, 2011			April 2, 2011			June 26, 2010
	(Unaudited, in millions)
Operating income	$	83		$	118		$	91
As percentage of net revenues		3.2	%		4.7	%		3.6	%

Our operating results deteriorated compared to both the year-ago period and the prior period, mainly due to a larger operating loss registered in Wireless. The second quarter 2011 registered operating income of $83 million compared to $91 million in the year-ago quarter and operating income of $118 million in the prior quarter.

Our wholly owned businesses (ACCI, AMM and PDP) reported a significant improvement in their profitability levels compared to the year ago period, supported by their higher levels of revenues, while Wireless incurred higher losses due to lower sales. All of our wholly owned businesses reached double digit operating margin. ACCI largely

increased its operating income from $100 million or approximately 10% of the last year second quarter revenues, up to $122 million, or 11% of revenues in the current quarter, with this performance driven mainly by Automotive and Imaging products. AMM significantly improved its profit from $99 million or about 16% of revenues, up to $159 million or 21% of revenues, with all the product lines contributing, and in particular the MEMS products. PDP’s operating income increased from $37 million or about 11% of revenues, up to $40 million, equivalent to about 12% of current quarter revenues. Wireless’ operating loss was higher, moving from $137 million to $207 million, of which the largest part was generated from ST-Ericsson JVS and 50% was attributable to Ericsson as non controlling interest below operating income. The segment “Others” increased its losses to $31 million, from $8 million in the year ago period, mainly due to higher restructuring charges and unused capacity charges.

Other-than-temporary impairment charge and realized gain on financial assets

	Three Months Ended
	July 2, 2011		April 2, 2011			June 26, 2010
	(Unaudited, in millions)
Other-than-temporary impairment charge and realized gain on financial assets	$	323	$	(5	)	$	-

We recorded in the second quarter of 2011 a realized gain on financial assets of $323 million as a result of the cash settlement with Credit Suisse against the transfer of ownership of certain Auction Rate Securities. The other-than-temporary impairment charge (OTTI) of $5 million registered in the previous quarter represented an adjustment of the fair value of certain marketable securities.

Interest income (expense), net

	Three Months Ended
	July 2, 2011			April 2, 2011			June 26, 2010
	(Unaudited, in millions)
Interest income (expense), net	$	(3	)	$	(15	)	$	1

The second quarter of 2011 registered a significant sequential interest expense decrease, mainly due to the one-off sale of certain tax credits of ST-Ericsson in the prior quarter, anticipating their collection by three years.

Loss on equity investments and gain on investment divestiture

	Three Months Ended
	July 2, 2011			April 2, 2011			June 26, 2010
	(Unaudited, in millions)
Loss on equity investments and gain on investment divestiture	$	(9	)	$	(6	)	$	264

In the second quarter of 2011, we recorded a charge of $9 million, out of which $6 million related to our proportionate share in ST-Ericsson JVD’s net results, including amortization of basis difference. The remaining $3 million loss related to other investments. The loss of ST-Ericsson JVD was also the most important loss on equity investments item in the comparable periods. In the year-ago period we recorded income of $264 million, of which (i) $265 million was gain realized on the divestiture of our proportional share in Numonyx (ii) $5 million was income that represented our net proportional share of Numonyx’s first quarter 2010 result and (iii) $7 million was a loss related to our proportionate share in ST-Ericsson JVD.

Gain (loss) on financial instruments, net

	Three Months Ended
	July 2, 2011		April 2, 2011		June 26, 2010
	(Unaudited, in millions)
Gain (loss) on financial instruments, net	$	-	$	22	$	(8	)

No gain or loss on financial instruments was recorded in the second quarter of 2011. The $22 million gain on financial instruments in the first quarter of 2011 was mainly associated with the gain of $20 million related to the sale of the remaining Micron shares and the unwinding of the related hedging of our equity participation in Micron

received upon the Numonyx disposal. In the prior year’s second quarter the $8 million loss was the balance between (i) a loss of $9 million related to the net premia paid on financial contracts designed to hedge part of the disposal of our shares in Numonyx and (ii) a gain of $1 million related to the additional repurchase of a portion of our 2016 Convertible Bonds with an accreted value of $56 million for a cash consideration of $55 million.

Income tax expense

	Three Months Ended
	July 2, 2011			April 2, 2011			June 26, 2010
	(Unaudited, in millions)
Income tax expense	$	(83	)	$	(31	)	$	(66	)

During the second quarter of 2011, we registered an income tax expense of $83 million, reflecting the yearly effective tax rate estimated in each of our jurisdictions and applied to the second quarter consolidated income before taxes. This resulted in an approximately 21% tax rate which is the combination of (i) a favorable tax rate on the $323 million gain on financial assets (ii) income tax expense estimated at about 16% rate on the ST entities income and (iii) an income tax benefit computed with much lower tax rate applicable to the losses on the ST-Ericsson entities.

Our tax rate is variable and depends on changes in the level of operating results within various local jurisdictions and on changes in the applicable taxation rates of these jurisdictions, as well as changes in estimations of our tax provisions. Our income tax amounts and rates depend also on our loss carryforwards and their relevant valuation allowances, which are based on estimated projected plans; in the case of material changes in these plans, the valuation allowances could be adjusted accordingly with an impact on our tax charges. We currently enjoy certain tax benefits in some countries, in particular the second quarter of 2011 benefited from a discrete item such as the $323 million gain on financial assets, which lowered the overall quarterly effective tax rate. Such benefits may not be available in the future due to changes in the local jurisdictions; our effective tax rate could be different in future quarters and may increase in the coming years. In addition, our yearly income tax charges include the estimated impact of provisions related to potential tax positions which have been considered uncertain.

Net loss attributable to noncontrolling interest

	Three Months Ended
	July 2, 2011		April 2, 2011		June 26, 2010
	(Unaudited, in millions)
Net loss attributable to noncontrolling interest	$	109	$	87	$	74

In the second quarter of 2011, we recorded $109 million income, representing the loss attributable to noncontrolling interest, which mainly included the 50% less one share owned by Ericsson in the consolidated ST-Ericsson JVS. In the first quarter of 2011, the corresponding amount was $87 million.

All periods included the recognition of noncontrolling interest related to our joint venture in Shenzhen, China for assembly operating activities and Incard do Brazil for distribution. Those amounts were not material.

Net income attributable to parent company

	Three Months Ended
	July 2, 2011			April 2, 2011			June 26, 2010
	(Unaudited, in millions)
Net income attributable to parent company	$	420		$	170		$	356
As percentage of net revenues		16.4	%		6.7	%		14.0	%

For the second quarter of 2011, we reported a net income of $420 million, a significant improvement compared to the year-ago quarter due to the aforementioned factors.

Diluted earnings per share for the second quarter of 2011 was $0.46 compared to $0.19 per share in the previous quarter and $0.39 in the year-ago quarter.

The quarters under review were impacted by impairment, restructuring charges and other related closure costs, other-than-temporary impairment charges and other one-time items. In addition, the second quarter of 2011 was positively impacted by the ARS settlement and the second quarter of 2010 by the Numonyx investment divestiture. In the second quarter of 2011, the impact after tax of impairment, restructuring charges and other related closure costs, other-than-temporary impairment charge and other one-time items, net of tax, was estimated to be approximately $0.32 per share, while in the first quarter of 2011, it was approximately $(0.01) per share. In the year-ago quarter, the impact of impairment, restructuring charges and other related closure costs as well as other one-time items, net of tax, was estimated to be approximately $0.21 per share.

First Half of 2011 vs. First Half of 2010

The following table sets forth consolidated statements of operations data for the periods indicated:

	Six Months Ended (unaudited)						Six Months Ended (unaudited)
	July 2, 2011			July 2, 2011			June 26, 2010			June 26, 2010
	$ million			% of net revenues			$ million			% of net revenues

Net sales	$	5,068			99.3	%	$	4,818			99.2	%
Other revenues		33			0.7			38			0.8
Net revenues		5,101			100.0			4,856			100.0
Cost of sales		(3,134	)		(61.4	)		(3,011	)		(62.0	)
Gross profit		1,967			38.6			1,845			38.0
Selling, general and administrative		(628	)		(12.3	)		(583	)		(12.0	)
Research and development		(1,141	)		(22.4	)		(1,189	)		(24.5	)
Other income and expenses, net		58			1.1			43			0.9
Impairment, restructuring charges and other related closure costs		(55	)		(1.1	)		(45	)		(0.9	)
Operating income		201			3.9			71			1.5
Other-than-temporary impairment charge and realized gain on financial assets		318			6.2			-			-
Interest income (expense), net		(18	)		(0.3	)		4			0.1
Loss on equity investments and gain on investment divestiture		(15	)		(0.2	)		259			5.2
Gain (loss) on financial instruments, net		22			0.4			(11	)		(0.2	)
Income before income taxes and noncontrolling interest		508			10.0			323			6.6
Income tax expense		(114	)		(2.2	)		(55	)		(1.1	)
Income before noncontrolling interest		394			7.8			268			5.5
Net loss attributable to noncontrolling interest		196			3.8			145			3.0
Net income attributable to parent company	$	590			11.6	%	$	413			8.5	%

Net revenues

	Six Months Ended				% Variation
	July 2, 2011		June 26, 2010
	(Unaudited, in millions)
Net sales	$	5,068	$	4,818		5.2	%
Other revenues		33		38		(12.7	)
Net revenues	$	5,101	$	4,856		5.0	%

Our first half 2011 net revenues increased in all product segments compared to the year-ago period, except in Wireless, mainly reflecting a strong demand in Automotive and Imaging applications and in our MEMS, Microcontrollers and Power Discrete products; taking advantage of a longer first half in 2011 (183 days versus 177 days). Net revenues increased by approximately 5% driven by an increase of approximately 8% in volume offset by a decline in average selling prices by approximately 3%.

ACCI revenues increased by approximately 13%, driven by continued strength in APG (37% increase) and IMG (29% increase) products, while HED decreased by 9% and CCI was basically flat. AMM’s first half net revenues registered over 27% increase, led by MEMS and Microcontrollers. PDP also showed a robust demand, with approximately 9% increase. Wireless sales registered a decline of approximately 34%, as sales of ST-Ericsson legacy products declined more than expected. Excluding Wireless, ST’s net revenues increased approximately 17% for the 2011 first half.

By market segment, our revenue growth was strong in all segments, except Consumer and Telecom, with the best performance in Automotive and Distribution.

By location of order shipment, the best results were achieved in Greater China - South Asia and the Americas with approximately 11% and 9% revenue growth, respectively. EMEA and Japan - Korea decreased by approximately 1% and 3%, respectively. Our largest customer, the Nokia group of companies, accounted for approximately 10% of our first half 2011 net revenues, compared to about 14% in the first half of 2010.

Gross profit

	Six Months Ended						% Variation
	July 2, 2011			June 26, 2010
	(Unaudited, in millions)
Cost of sales	$	(3,134	)	$	(3,011	)		(4.1	)%
Gross profit		1,967			1,845			6.6
Gross margin (as percentage of net revenues)		38.6	%		38.0	%		-

Gross margin improved by 60 basis points compared to the year-ago period, reaching 38.6%, principally reflecting manufacturing efficiencies, which were partially offset by a negative price effect.

Selling, general and administrative expenses

	Six Months Ended						% Variation
	July 2, 2011			June 26, 2010
	(Unaudited, in millions)
Selling, general and administrative expenses	$	(628	)	$	(583	)		(7.6	)%
As percentage of net revenues		(12.3	)%		(12.0	)%		-

The amount of our selling, general and administrative expenses increased, mainly reflecting a longer half and the unfavorable impact of the U.S. dollar exchange rate. Our share-based compensation charges were $9 million in the first half of 2011, remaining at the same level compared to the first half of 2010.

As a percentage of revenues, our selling, general and administrative expenses amounted to 12.3% slightly increasing in comparison to 12.0% in the prior year’s half.

Research and development expenses

	Six Months Ended						% Variation
	July 2, 2011			June 26, 2010
	(Unaudited, in millions)
Research and development expenses	$	(1,141	)	$	(1,189	)		4.0	%
As percentage of net revenues		(22.4	)%		(24.5	)%		-

R&D expenses were down compared to the prior year’s first half, mainly in ST-Ericsson, following their cost savings plans and the benefit of higher billing of R&D services related to Long-Term Evolution (LTE) development by ST-Ericsson to the Ericsson Group in the first half of 2011.

The first half of 2011 included $4 million of share-based compensation charges, compared to $5 million in the first half of 2010. Total R&D expenses were net of research tax credits, which amounted to $82 million, increasing

compared to $72 million in the year-ago period, due to the qualification for recognition of additional credits for the prior year and for the updated current year forecast.

Other income and expenses, net

	Six Months Ended
	July 2, 2011			June 26, 2010
	(Unaudited, in millions)
Research and development funding	$	63		$	49
Phase-out and start-up costs		(8	)		(5	)
Exchange gain net		6			3
Patent costs		(14	)		(4	)
Gain on sale of other non-current assets		14			2
Other, net		(3	)		(2	)
Other income and expenses, net	$	58		$	43
As percentage of net revenues		1.1	%		0.9	%

Other income and expenses, net, mainly included, as income, items such as R&D funding, gain on sale of other non-current assets and exchange gain and, as expenses, patent costs and phase-out/ start-up costs. Income from R&D funding was associated with our R&D projects, which, upon project approval, qualifies as funding on the basis of contracts with local government agencies in locations where we pursue our activities. In the first half of 2011, the balance of these factors resulted in Other income and expenses, net of $58 million, mainly due to the high level of R&D funding of approximately $63 million, which included a catch-up of grants related to certain 2010 activities for which contracts were signed in 2011.

Impairment, restructuring charges and other related closure costs

	Six Months Ended
	July 2, 2011			June 26, 2010
	(Unaudited, in millions)
Impairment, restructuring charges and other related closure costs	$	(55	)	$	(45	)

In the first half of 2011, we recorded $55 million of impairment, restructuring charges and other related closure costs, of which:

$35 million was recorded in relation to the manufacturing restructuring plan contemplating the closure of our Carrollton (Texas) and Phoenix (Arizona) sites, and primarily related to lease contract termination costs recorded at cease-use date and other closure costs and one-time termination benefits to be paid to employees who rendered services until the complete closure of Carrollton and Phoenix fabs, which was substantially finalized;

$6 million related to the workforce reduction plans announced in April and December 2009 by ST-Ericsson, primarily relating to the lease contract termination costs and other closure costs pursuant to the closure of certain locations;

$1 million related to other restructuring initiatives.

In the first half of 2010, we recorded $45 million of impairment and restructuring charges and other related closure costs, which were mainly related to two plans: the manufacturing plan, substantially finalized during the first half of 2011, and plans launched in 2009 that are primarily related to ST-Ericsson: $11 million recorded in relation to our manufacturing restructuring plan which contemplated the closure of our Ain Sebaa (Morocco), Carrollton (Texas) and Phoenix (Arizona) sites, and was composed of one-time termination benefits, as well as other related charges, mainly related to Carrollton and Phoenix fabs; $31 million related to the plans announced in April and December

2009 by ST-Ericsson, primarily consisting of on-going termination benefits pursuant to the workforce reduction plan and the closure of certain locations in Europe; and $3 million related to other restructuring initiatives.

Operating income

	Six Months Ended
	July 2, 2011			June 26, 2010
	(Unaudited, in millions)
Operating income	$	201		$	71
As percentage of net revenues		3.9	%		1.5	%

Our operating results improved compared to the first half of 2010 as a result of a higher level of revenues and cost efficiency initiatives, particularly in manufacturing and R&D. The first half of 2011 registered operating income of $201 million compared to $71 million in the year ago period.

Our wholly owned businesses (ACCI, AMM and PDP) reported a significant improvement in their profitability levels compared to the year-ago period, supported by their higher levels of revenues, with a double digit operating margin, while Wireless incurred higher losses due to the significantly lower level of sales. ACCI largely increased its operating income from $149 million or approximately 8% of the last year’s first half revenues, up to $237 million, or 11% of revenues in the current half, with this performance driven mainly by Automotive and Imaging products. AMM significantly improved its profit from $164 million or 14% of revenues, up to $325 million or about 22% of revenues, with all the product lines contributing to such good performance, and in particular the MEMS products. PDP’s operating income increased from $62 million or about 10% of revenues, up to $90 million, equivalent to about 13% of current first half revenues. Wireless’ operating loss increased from $253 million to $386 million, of which the largest part was generated from ST-Ericsson JVS and 50% was attributable to Ericsson as non controlling interest below operating income; ST-Ericsson JVS is currently in a transition from legacy to new products, while continuing cost saving initiatives. The segment “Others” increased its losses to $65 million, from $51 million in the year-ago period, mainly due to higher amounts of restructuring charges and unused capacity charges.

Other-than-temporary impairment charge and realized gain on financial assets

	Six Months Ended
	July 2, 2011		June 26, 2010
	(Unaudited, in millions)
Other-than-temporary impairment charge and realized gain on financial assets	$	318	$	-

The income of $318 million represents a balance of (i) a realized gain on financial assets of $323 million as a result of the cash settlement from Credit Suisse against the transfer of ownership of certain Auction Rate Securities and (ii) an other-than-temporary impairment charge of $5 million as an adjustment of the fair value of certain marketable securities.

Interest income (expense), net

	Six Months Ended
	July 2, 2011			June 26, 2010
	(Unaudited, in millions)
Interest income (expense), net	$	(18	)	$	4

The first half of 2011 registered a significant expense increase compared with the year-ago period, mainly due to the one-off sale of certain R&D tax credits at ST-Ericsson, anticipating their collection by three years (see “Liquidity and Capital Resources”).

Loss on equity investments and gain on investment divestiture

	Six Months Ended
	July 2, 2011			June 26, 2010
	(Unaudited, in millions)
Loss on equity investments and gain on investment divestiture	$	(15	)	$	259

In the first half of 2011, we recorded a charge of $15 million, out of which $12 million related to our proportionate share in the loss of ST-Ericsson JVD, including amortization of basis difference, while the remaining $3 million loss related to other investments. In the first half of 2010, we recorded income of $259 million, which is comprised of: a $265 million gain realized on the divestiture of our proportionate share in Numonyx; a $7 million income representing our proportional share of Numonyx’s result, recognized on a one-quarter lag; and a $13 million loss related to our proportionate share in the loss of ST-Ericsson JVD.

Gain (loss) on financial instruments, net

	Six Months Ended
	July 2, 2011		June 26, 2010
	(Unaudited, in millions)
Gain (loss) on financial instruments, net	$	22	$	(11	)

The $22 million gain on financial assets in the first half of 2011 was mainly associated with the gain of $20 million related to the sale of the remaining Micron shares and the unwinding of the related hedging of our equity participation in Micron received upon the Numonyx disposal. In the first half of 2010, the $11 million loss on financial instruments was the balance between a loss of $15 million related to the net premia paid on financial contracts designated to hedge part of the disposal of our share in Numonyx and a gain of $4 million related to the repurchase of bonds with an accreted value of $271 million for a cash consideration of $267 million.

Income tax expense

	Six Months Ended
	July 2, 2011			June 26, 2010
	(Unaudited, in millions)
Income tax expense	$	(114	)	$	(55	)

During the first half of 2011, we registered an income tax expense of $114 million, reflecting the yearly effective tax rate estimated in each of our jurisdictions and applied to consolidated income before taxes. This resulted in an approximately 22% tax rate which is the combination of (i) a favorable tax rate on the $323 million gain on financial assets, (ii) income tax expense estimated at about 16% rate on the ST entities income, and (iii) an income tax benefit computed with a much lower tax rate applicable to the losses on the ST-Ericsson entities.

Our tax rate is variable and depends on changes in the level of operating results within various local jurisdictions and on changes in the applicable taxation rates of these jurisdictions, as well as changes in estimations of our tax provisions. Our income tax amounts and rates depend also on our loss carryforwards and their relevant valuation allowances, which are based on estimated projected plans; in the case of material changes in these plans, the valuation allowances could be adjusted accordingly with an impact on our tax charges. We currently enjoy certain tax benefits in some countries, in particular the first half of 2011 benefited from a discrete item such as the $323 million gain on financial assets, which lowered the overall quarterly effective tax rate. Such benefits may not be available in the future due to changes in the local jurisdictions; our effective tax rate could be different in future periods and may increase in the coming years. In addition, our yearly income tax charges include the estimated impact of provisions related to potential tax positions which have been considered uncertain.

Net loss attributable to noncontrolling interest

	Six Months Ended
	July 2, 2011		June 26, 2010
	(Unaudited, in millions)
Net loss attributable to noncontrolling interest	$	196	$	145

In the first half of 2011, we recorded $196 million income representing the loss attributable to noncontrolling interest, which mainly included the 50% less one share owned by Ericsson in the consolidated ST-Ericsson JVS. In the first half of 2011, the corresponding amount was $145 million.

Net income attributable to parent company

	Six Months Ended
	July 2, 2011			June 26, 2010
	(Unaudited, in millions)
Net income attributable to parent company	$	590		$	413
As percentage of net revenues		11.6	%		8.5	%

For the first half of 2011, we reported a net income of $590 million, a significant improvement compared to the year-ago first half due to the aforementioned factors.

Legal Proceedings

As is the case with many companies in the semiconductor industry, we have from time to time received, and may in the future receive, communications from other semiconductor companies or third parties alleging possible infringement of patents. Furthermore, we may become involved in costly litigation brought against us regarding patents, copyrights, trademarks, trade secrets or mask works. In the event that the outcome of such IP litigation would be unfavorable to us, we may be required to take a license for patents or other IP rights upon economically unfavorable terms and conditions, and possibly pay damages for prior use, and/or face an injunction, all of which singly or in the aggregate could have a material adverse effect on our results of operations and ability to compete. See “Item 3. Key Information — Risk Factors — Risks Related to Our Operations — We depend on patents to protect our rights to our technology and may face claims of infringing the IP rights of others” included in our Form 20-F, which may be updated from time to time in our public filings. We are also party to certain disputes which are not related to patents or other IP rights.

We record a provision when, based on our best estimate, we consider it probable that a liability has been incurred and when the amount of the probable loss can be reasonably estimated. We regularly evaluate losses and claims to determine whether they need to be adjusted based on the most current information available to us and using our best judgment. There can be no assurance that our recorded reserves will be sufficient to cover the extent of our potential liabilities. Legal costs associated with claims are expensed as incurred.

We are a party to legal proceedings with Tessera, Inc.

Tessera initiated proceedings in 2006 against us and numerous other semiconductor manufacturers in the U.S. District Court for the Northern District of California. Tessera also filed a complaint in 2007 with the International Trade Commission in Washington, D.C. (“ITC”) against us and numerous other parties. There have been no material developments in the current quarter regarding the Tessera proceedings as described in our Form 20-F. The appeals concerning the unfavorable ITC decision of May 20, 2009, are still pending and the proceedings in the Northern District of California remain stayed. The Tessera patents asserted against us have however all expired.

We are a party to legal proceedings with Rambus Inc.

On December 1, 2010, Rambus Inc. filed a complaint with the ITC against us and numerous other parties, asserting that we engaged in unfair trade practices by importing certain memory controllers and devices using certain accused

interface technologies that allegedly infringe six patents. The complaint seeks an exclusion order to bar importation into the United States of all semiconductor chips that include memory controllers and/or peripheral interfaces that are manufactured, imported, or sold for importation and that infringe any claim of the asserted patents, and all products incorporating the same. The complaint further seeks a cease and desist order directing us and other parties to cease and desist from importing, marketing, advertising, demonstrating, sampling, warehousing inventory for distribution, offering for sale, selling, distributing, licensing, or using any semiconductor chips that include memory controllers and/or peripheral interfaces, and products containing such semiconductor chips, that infringe any claim of the asserted patents. On December 29, 2010, the ITC voted to institute an investigation based on Rambus’ complaint. We filed our response to the complaint on February 1, 2011. The deadline for fact discovery in the case has now passed, and expert discovery is in process. A pre-trial hearing is scheduled before the ITC on October 11, 2011, trial is scheduled to commence on October 12, 2011, and the target date for a Final Determination by the ITC is currently May 4, 2012.

Also on December 1, 2010, Rambus filed a lawsuit against us in the U.S. District Court for the Northern District of California alleging infringement of nineteen Rambus patents. On June 13, 2011, the District Court issued an order granting in part and denying in part defendants’ motion to stay the action concerning Rambus patent infringement claims pending completion of the aforementioned ITC proceedings. The case will be stayed as to nine of the asserted patents, and will move forward as to the remaining patents. No trial date has yet been set. We intend to vigorously defend our position in these matters.

In the second quarter of 2011 we entered into a settlement agreement with Credit Suisse Securities and Credit Suisse Group concerning our ongoing dispute relating to Auction Rate Securities.

Pursuant to the settlement agreement, we received a cash payment on June 9, 2011, of $356.8 million from Credit Suisse as the full and final payment for the settlement of all outstanding litigation concerning auction rate securities. This amount was slightly higher than the full amount initially invested plus lost interest and expenses. We booked a pre-tax profit of approximately $329 million in the income statement of the second quarter of 2011 as a result of the settlement.

We are a party to arbitration proceedings following a complaint filed by NXP Semiconductors.

On December 4, 2009, we received from the International Chamber of Commerce the notification of a request for arbitration filed by NXP Semiconductors Netherlands BV “NXP” against us, claiming compensation for so called underloading costs of approximately $59 million pursuant to a Manufacturing Services Agreement entered into between NXP and ST-NXP Wireless, at the time of the creation of ST-NXP Wireless, our wireless semiconductor products joint venture with NXP. During the second quarter of 2011, an arbitration hearing was held in Paris regarding this claim and we are now awaiting the decision from the arbitral panel. We remain confident in the strength of our legal position regarding this claim.

We and our subsidiaries are also involved in other legal proceedings, claims and litigation arising in the ordinary course of business.

All pending claims and legal proceedings involve complex questions of fact and law and may require the expenditure of significant funds and the diversion of other resources to prosecute and defend. The results of legal proceedings are inherently uncertain, and material adverse outcomes are possible. The resolution of intellectual property litigation may require us to pay damages for past infringement or to obtain a license under the other party’s intellectual property rights that could require one-time license fees or ongoing royalties, which could adversely impact our product gross margins in future periods, or could prevent us from manufacturing or selling some of our products or limit or restrict the type of work that employees involved in such litigation may perform for us. From time to time we may enter into confidential discussions regarding the potential settlement of pending litigation or other proceedings; however, there can be no assurance that any such discussions will occur or will result in a settlement. The settlement of any pending litigation or other proceeding could require us to incur substantial settlement payments and costs. Furthermore, the settlement of any intellectual property proceeding may require us to grant a license to certain of our intellectual property rights to the other party under a cross-license agreement. If any of those events were to occur, our business, financial condition and results of operations could be materially and adversely affected. In addition, from time to time we are approached by holders of intellectual property to engage in discussions about our obtaining licenses to their intellectual property. We will disclose the nature of any such

discussion if we believe that (i) it is probable an intellectual property holder will assert a claim of infringement, (ii) there is a reasonable possibility the outcome (assuming assertion) will be unfavorable, and (iii) the resulting liability would be material to our financial condition. We also constantly review the merits of litigation and claims which we are facing and decide to make an accrual when we are able to reasonably determine that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. To date, we have not determined on such basis that any of the litigation or claims which we are facing gives rise to a material liability, singly or in the aggregate.

Related Party Transactions

During the first quarter of 2011, one of the members of our Supervisory Board was managing director of Areva SA, which is a controlled subsidiary of CEA. One of the members of our Supervisory Board is a member of the Board of Directors of Technicolor (formerly known as Thomson), another is the non-executive Chairman of the Board of Directors of ARM Holdings PLC (“ARM”), one of our Supervisory Board members is a member of the Supervisory Board of Soitec, two of the members of the Supervisory Board are also members of the Supervisory Board of BESI and one of the members of our Supervisory Board is a director of Oracle Corporation (“Oracle”) and Flextronics International. France Telecom and its subsidiaries Equant and Orange, as well as Oracle’s new subsidiary PeopleSoft supply certain services to our Company. One of our executive officers is a member of the Board of Directors of Soitec and Adecco. We have a long-term joint R&D partnership agreement with LETI, a wholly-owned subsidiary of CEA. We have certain licensing agreements with ARM, and have conducted transactions with Soitec, Adecco and BESI as well as with Technicolor and Flextronics. Each of the aforementioned arrangements and transactions are negotiated without the personal involvement of our Supervisory Board members and we believe that they are made on an arm’s-length basis in line with market practices and conditions.

On March 30, 2011, FSI completed the acquisition of Areva’s indirect interest in us. Following this transaction, during the Annual Shareholders’ Meeting held on May 3, 2011, the managing director of Areva, formerly a member of our Supervisory Board, stepped down from this position following the expiry of his mandate.

Impact of Changes in Exchange Rates

Our results of operations and financial condition can be significantly affected by material changes in the exchange rates between the U.S. dollar and other currencies, particularly the Euro.

As a market rule, the reference currency for the semiconductor industry is the U.S. dollar and the market prices of semiconductor products are mainly denominated in U.S. dollars. However, revenues for some of our products (primarily our dedicated products sold in Europe and Japan) are quoted in currencies other than the U.S. dollar and as such are directly affected by fluctuations in the value of the U.S. dollar. As a result of currency variations, the appreciation of the Euro compared to the U.S. dollar could increase, in the short term, our level of revenues when reported in U.S. dollars. Revenues for all other products, which are either quoted in U.S. dollars and billed in U.S. dollars or in local currencies for payment, tend not to be affected significantly by fluctuations in exchange rates, except to the extent that there is a lag between the changes in currency rates and the adjustments in the local currency equivalent of the price paid for such products. Furthermore, certain significant costs incurred by us, such as manufacturing costs, selling, general and administrative expenses, and R&D expenses, are largely incurred in the currency of the jurisdictions in which our operations are located. Given that most of our operations are located in the Euro zone and other non-U.S. dollar currency areas, including Sweden, our costs tend to increase when translated into U.S. dollars when the dollar weakens or to decrease when the U.S. dollar strengthens.

In summary, as our reporting currency is the U.S. dollar, currency exchange rate fluctuations affect our results of operations: in particular, if the U.S. dollar weakens, our results are negatively impacted since we receive a limited part of our revenues, and more importantly, we incur a significant part of our costs, in currencies other than the U.S. dollar. On the other hand, our results are favorably impacted when the dollar strengthens. The impact on our accounts could therefore be material, in the case of a material variation of the U.S. dollar exchange rate.

Our principal strategy to reduce the risks associated with exchange rate fluctuations has been to balance as much as possible the proportion of sales to our customers denominated in U.S. dollars with the amount of materials, purchases and services from our suppliers denominated in U.S. dollars, thereby reducing the potential exchange rate impact of certain variable costs relative to revenues. In addition, since the largest part of our capital expenditures is

denominated in U.S. dollars, we set up a special vehicle during the second quarter, accounting in U.S. dollars, whose objective is to centralize a significant portion of capital expenditures, which are mainly denominated in U.S. dollars. Moreover, in order to further reduce the exposure to U.S. dollar exchange fluctuations, we have hedged certain line items on our consolidated statements of income, in particular with respect to a portion of the costs of goods sold, most of the R&D expenses and certain selling and general and administrative expenses, located in the Euro zone. We use three different types of hedging contracts, consisting of forward contracts, zero cost collars and options.

Our consolidated statements of income for the three months ended July 2, 2011 included income and expense items translated at the average U.S. dollar exchange rate for the period, plus the impact of the hedging contracts expiring during the period. Our effective average exchange rate was $1.35 for €1.00 for the first half of 2011 compared to $1.37 for €1.00 for the first half of 2010. Our effective exchange rate was $1.37 for the second quarter of 2011 and $1.33 for €1.00 for the first quarter of 2011 while it was $1.35 for €1.00 for the second quarter of 2010. These effective exchange rates reflect the actual exchange rates combined with the impact of cash flow hedging contracts that matured in the period.

In 2010 we decided to extend the time horizon of our cash flow hedging contracts for manufacturing costs and operating expenses for up to 24 months, for a limited percentage of our exposure to the Euro and under certain currency market circumstances. As of July 2, 2011, the outstanding hedged amounts were €726 million to cover manufacturing costs and €507 million to cover operating expenses, both at an average exchange rate of about $1.41 to €1.00 (including the premium paid to purchase foreign exchange options), maturing over the period from July 5, 2011 to September 5, 2012. As of July 2, 2011, these outstanding hedging contracts and certain expired contracts covering manufacturing expenses capitalized in inventory represented a deferred gain of approximately $75 million before tax, recorded in “Other comprehensive income” in Net Equity, compared to a deferred gain of approximately $65 million before tax at December 31, 2010 and a deferred gain of approximately $95 million before tax at April 2, 2011.

With respect to the portion of our R&D expenses incurred in ST-Ericsson Sweden, as of July 2, 2011, the outstanding hedged amounts were SEK 766 million at an average exchange rate of about SEK 6.59 to $1.00, maturing over the period from July 7, 2011 to June 7, 2012. As of July 2, 2011, these outstanding hedging contracts represented a deferred gain of approximately $5 million before tax, recorded in “Other comprehensive income” in Net Equity.

Our cash flow hedging policy is not intended to cover our full exposure and is based on hedging a portion of our exposure in the next quarter and a declining percentage of our exposure in each quarter thereafter. In the second quarter of 2011, as a result of EUR USD and USD SEK cash flow hedging, we recorded a net gain of $57 million, consisting of a gain of $22 million to R&D expenses, a gain of $31 million to cost of goods sold and a gain of $4 million to selling, general and administrative expenses, while in the second quarter of 2010, we recorded a net loss of $36 million.

In addition, in order to mitigate potential exchange rate risks on our commercial transactions, we purchase and enter into forward foreign currency exchange contracts and currency options to cover foreign currency exposure in payables or receivables at our affiliates. We may in the future purchase or sell similar types of instruments. See Item 11, “Quantitative and Qualitative Disclosures about Market Risk” in our Form 20-F, which may be updated from time to time in our public filings. Furthermore, we may not predict in a timely fashion the amount of future transactions in the volatile industry environment. No assurance may be given that our hedging activities will sufficiently protect us against declines in the value of the U.S. dollar. Consequently, our results of operations have been and may continue to be impacted by fluctuations in exchange rates. The net effect of the consolidated foreign exchange exposure resulted in a net gain of $3 million recorded in “Other income and expenses, net” in our second quarter of 2011 Statement of Income.

The assets and liabilities of subsidiaries are, for consolidation purposes, translated into U.S. dollars at the period-end exchange rate. Income and expenses, as well as cash flows, are translated at the average exchange rate for the period. The balance sheet impact, as well as the income statement and cash flow impact, of such translations have been, and may be expected to be, significant from period to period since a large part of our assets and liabilities and activities are accounted for in Euros as they are located in jurisdictions where the Euro is the functional currency. Adjustments resulting from the translation are recorded directly in shareholders’ equity, and are shown as

“Accumulated other comprehensive income (loss)” in the consolidated statements of changes in equity. At July 2, 2011, our outstanding indebtedness was denominated mainly in U.S. dollars and in Euros.

For a more detailed discussion, see Item 3, “Key Information — Risk Factors — Risks Related to Our Operations” in our Form 20-F.

Impact of Changes in Interest Rates

Interest rates may fluctuate upon changes in financial market conditions and material changes can affect our results of operations and financial condition, since these changes can impact the total interest income received on our cash and cash equivalents and marketable securities, as well as the total interest expense paid on our financial debt.

Our interest income (expense), net, as reported in our consolidated statements of income, is the balance between interest income received from our cash and cash equivalent and marketable securities investments and interest expense paid on our long-term debt and bank fees (including fees on committed credit lines). Our interest income is dependent upon fluctuations in interest rates, mainly in U.S. dollars and Euros, since we invest primarily on a short-term basis; any increase or decrease in the market interest rates would mean an equivalent increase or decrease in our interest income. Our interest expenses are mainly associated with long and short-term debt, of which only the remaining $492 million of 2016 Convertible Bonds is at a fixed rate of 1.5%, whereas all the remaining debt is at a floating rate (2013 Senior Bonds, which is fixed quarterly at a rate of EURIBOR plus 40bps, and European Investment Bank Floating Rate Loans at LIBOR plus variable spreads).

At July 2, 2011, our total financial resources, including cash, cash equivalents and marketable securities current and non-current, generated an average interest income rate of 0.71%. In the same period, the average interest rate on our outstanding debt was 1.29%.

Impact of Changes in Equity Prices

The impact of changes in equity prices was applicable to us mainly in relation to our participation in Micron, following the Numonyx divestiture. As consideration for the divestiture of our share in Numonyx in May 2010, we received 66.88 million Micron shares and we owed $78 million to one of our partners. In the fourth quarter of 2010 we sold 46.8 million shares at an average price of $8.48 per share, including the unwinding of the applicable hedging contracts. We received proceeds of $319 million (net of the $78 million payment to one of our partners) and realized a $13 million loss in the fourth quarter 2010. The remaining 20.1 million shares were sold in January 2011, together with the unwinding of their hedging contracts, for total proceeds of $195 million, realizing a gain of $20 million, recorded as a gain on financial instruments in the first quarter 2011.

As of July 2, 2011, we did not hold any significant participations, which could be subject to a material impact in changes in equity prices.

Liquidity and Capital Resources

Treasury activities are regulated by our policies, which define procedures, objectives and controls. The policies focus on the management of our financial risk in terms of exposure to currency rates and interest rates. Most treasury activities are centralized, with any local treasury activities subject to oversight from our head treasury office. The majority of our cash and cash equivalents are held in U.S. dollars and Euros and are placed with financial institutions rated “A” or better. Part of our liquidity is also held in Euros to naturally hedge intercompany payables and financial debt in the same currency and is placed with financial institutions rated at least a single A long-term rating, meaning at least A3 from Moody’s Investor Service and A- from Standard & Poor’s or Fitch Ratings. Marginal amounts are held in other currencies. See Item 11, “Quantitative and Qualitative Disclosures About Market Risk” in our Form 20-F.

Cash flow

We maintain a significant cash position and a low debt to equity ratio, which provide us with adequate financial flexibility. As in the past, our cash management policy is to finance our investment needs mainly with net cash generated from operating activities.

During the first half of 2011, the evolution of our cash flow produced a net cash increase of $463 million, generated by net cash from operating activities and the net proceeds from the sale of non current marketable securities, which were partially offset by the increased payments for purchase of tangible assets.

The evolution of our cash flow for the comparable periods is set forth below:

	Six Months Ended
	July 2, 2011			June 26, 2010
	(In millions)
Net cash from operating activities	$	467		$	754
Net cash from (used in) investing activities		83			(545	)
Net cash used in financing activities		(98	)		(431	)
Effect of change in exchange rates		11			(98	)
Net cash increase (decrease)	$	463		$	(320	)

Net cash from operating activities. The net cash from operating activities in the first half of 2011 was $467 million, decreasing compared to the prior year period despite the overall improvement in our financial results (see “Results of Operations” for more information). Net cash from operating activities is the sum of (i) net income (loss) adjusted for non-cash items and (ii) changes in assets and liabilities. The deterioration in net cash from operating activities in the first half of 2011 was mainly due to a change in assets and liabilities which used cash in 2011 while they generated cash in 2010, as follows:

Net income adjusted for non-cash items slightly improved to $595 million of cash generated in the first half of 2011 compared to $574 million in the prior year period.

Changes in assets and liabilities used cash for a total amount of $128 million in the first half 2011, compared to $180 million of cash generated in the prior year period. While the first half of 2011 negative changes were mainly due to the cash used to build inventory in an amount of $199 million, the first half of 2010 main item contributing to the favorable change was trade payables associated with ramp up of our activities. Furthermore the first half of 2011 also included a favorable net cash impact of $80 million, deriving from the sales, with no recourse, of trade and other receivables, mainly done by ST-Ericsson, while the same impact in 2010 was $67 million.

Net cash from (used in) investing activities. Investing activities generated $83 million of cash in the first half of 2011, mainly from proceeds from the sale of current marketable securities, the settlement of non-current marketable securities and proceeds from the sale of stock received on investment divestiture, partially offset by payments for tangible assets, investment in short-term deposits and investment in intangible and financial assets. Payments for purchase of tangible assets totaled $798 million, compared to $313 million registered in the prior year period, as we almost completed the planned upgrading of our production capacity in line with the strong increase in demand for our products. Cash in the first half of 2011 also included net proceeds from non current marketable securities in the amount of $350 million relating to the settlement with Credit Suisse.

Net cash used in financing activities. Net cash used in financing activities was $98 million in the first half of 2011 compared to the $431 million used in the first half of 2010 mainly due to the lower amounts used for the buyback of part of our outstanding bonds. Moreover, the first half 2011 amount included $156 million as proceeds from short-term borrowings and $151 million as dividends paid to shareholders.

Free Cash Flow (non U.S. GAAP measure).

We also present Free Cash Flow, which is a non U.S. GAAP measure, defined as (i) net cash from (used in) operating activities plus (minus) (ii) net cash from (used in) investing activities, excluding payment for purchases (and proceeds from the sale) of marketable securities, short-term deposits and restricted cash, which are considered as temporary financial investments. The result of this definition is ultimately net cash from operating activities plus (minus) payment for purchase of tangible and intangible assets, net proceeds from sales of stock received on investment divestitures, and payment for business acquisitions. We believe Free Cash Flow, a non U.S. GAAP measure, provides useful information for investors and management because it measures our capacity to generate cash from our operating activities to sustain our operating investing activities. Free Cash Flow is not a U.S. GAAP

measure and does not represent total cash flow since it does not include the cash flows generated by or used in financing activities. Free Cash Flow reconciles with the total cash flow and the net cash increase (decrease) by including the payment for purchases (and proceeds from the sale) of marketable securities, short-term deposits and restricted cash, the net cash used in financing activities and the effect of change in exchange rates. In addition, our definition of Free Cash Flow may differ from definitions used by other companies. Free Cash Flow is determined as follows from our Consolidated Statements of Cash Flow:

	Three Months Ended			Six Months Ended
	July 2, 2011			July 2, 2011			June 26, 2010
	(In millions)
Net cash from operating activities	$	117		$	467		$	754
Net cash from (used in) investing activities		289			83			(545	)
Payment for purchase and proceeds from sale of marketable securities, short-term deposits and restricted cash, net(1)		(656	)		(749	)		179
Payment for purchase of tangible and intangible assets, net proceeds from sales of stock received on investment divestitures, and payment for business acquisitions(2)		(367	)		(666	)		(366	)
Free Cash Flow (non U.S. GAAP measure)	$	(250	)	$	(199	)	$	388

____________

(1)

Reflects the total of the following line items reconciled with our Consolidated Statements of Cash Flows relating to temporary financial investments of our liquidity: Payment for purchase of marketable securities, Proceeds from sale of marketable securities, Proceeds from settlement of non-current marketable securities, Investment in short-term deposits, Proceeds from matured short-term deposits, Restricted cash and Release of restricted cash.

(2)

Reflects the total of the following line items reconciled with our Consolidated Statements of Cash Flows relating to the operating investing activities: Payment for purchase of tangible assets, Investment in intangible and financial assets, Net proceeds from sale of stock received on investment divestiture and Payment for business acquisitions, net of cash and cash equivalents acquired.

Free Cash Flow was negative by $199 million in the first half of 2011, as a result of $467 million net cash from operating activities, which was lower than the total amount of $666 million required for the payment for purchase of tangible and intangible assets, net proceeds from sales of stock received on investments divestitures and payment for business acquisitions. The declining net cash generated by operating activities was largely due to the negative financial performances of ST-Ericsson JVS, which is fully consolidated in our Cash Flow Statement, while being funded in 50% by our JV partner. The main components of the $666 million were represented by $798 million of payments for tangible assets, which mainly reflects the capital expenditures realized in the period to support the capacity increases in certain of our fabs and also by $195 million net proceeds from the sale of Micron stock.

The first half of 2010 Free Cash Flow was favorable by $388 million, which included $313 million of payment for purchase of tangible assets.

For details of the year over year variation for net cash from operating activities, see “— Net cash from operating activities” in the above Free Cash Flow description.

Net financial position (non U.S. GAAP measure).

Our net financial position represents the balance between our total financial resources and our total financial debt. Our total financial resources include cash and cash equivalents net of bank overdrafts, current and non-current marketable securities, short-term deposits and restricted cash, and our total financial debt includes short term borrowings and current portion of long-term debt and long-term debt, as represented in our consolidated Balance Sheet. Net financial position is not a U.S. GAAP measure but we believe it provides useful information for investors because it gives evidence of our global position either in terms of net indebtedness or net cash by measuring our capital resources based on cash, cash equivalents and marketable securities and the total level of our financial indebtedness. Our net financial position has been determined as follows from our Consolidated Balance Sheets:

	As at
	July 2, 2011		April 2, 2011		June 26, 2010
	(In millions)
Cash and cash equivalents, net of bank overdrafts	$	2,355	$	1,928	$	1,268
Marketable securities, current		426		719		1,094
Restricted cash		8		92		250
Short-term deposits		151		71