NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Currency--Thousands of U.S. dollars)

1. The Company

SGS-THOMSON Microelectronics N.V. (the "Company") was formed in 1987 by the combination of the semiconductor business of SGS Microelettronica (then owned by Società Finanziara Telefonica (S.T.E.T.), an Italian corporation) and the non-military business of Thomson Semiconducteurs (then owned by Thomson-CSF, a French corporation) whereby each company contributed their respective semiconductor businesses in exchange for a 50% interest in the Company.

The Company is registered in The Netherlands with its statutory domicile in Amsterdam.

As of December 31, 1997, the Company was 68.90% (December 31, 1996: 68.97%) owned by SGS-THOMSON Microelectronics II B.V., and 31.10% by the public (December 31, 1996: 31.03%)

At December 31, 1997, SGS-THOMSON Microelectronics II B.V. was 100% owned by SGS-THOMSON Microelectronics Holding N.V. At December 31, 1997, SGS-THOMSON Microelectronics Holding N.V. was owned as follows:

50% by FT1CI, a French holding company, whose shareholders are CEA-Industrie (51%) and France Telecom (49%).

50% by M.E.I.--Microelettronica Italiana s.r.l. ("M.E.I."), an Italian holding company, whose Shareholders are Comitato per l'intervento nella SIR ed in settori ad alta tecnologia ("Comitato SIR") (49.9%) and Istituto per la Ricostruzione Industriale S.p.a. (I.R.I.) (50.1%).

At December 31, 1996, SGS-THOMSON Microelectronics Holding N.V. was owned as follows:

50% by FT2CI, a French holding company, whose shareholders in turn were FT1CI (50.1%) and Thomson-CSF (49.9%).

50%, (48.14% in 1995) by M.E.I.--Microelettronica Italiana s.r.l. ("M.E.I."), an Italian holding company.

During 1997, Thomson CSF sold its entire minority interest in FT2CI (49.9%) to FT1CI. The Company has been informed by CEA Industrie and France Telecom that FT1CI and FT2CI have been merged at the end of 1997, with FT1CI the surviving company in the merger. This transaction does not modify the equality in ownership interest between the French Shareholders and the Italian Shareholders.

2. Summary of accounting policies

2.1) Principles of consolidation

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (US GAAP). The Company's consolidated financial statements include the assets, liabilities and results of operations of its majority-owned subsidiaries. The ownership of the other interest holders is reflected as minority interests. All significant intercompany accounts and transactions have been eliminated in consolidation.

The initial combination of the SGS Microelettronica and Thomson Semiconducteurs civilian semiconductor businesses was accounted for as the creation of a joint venture. Accordingly, the assets and liabilities of the combined entities were recorded in the books of the joint venture at their carrying amounts at the date of combination.

2.2) Use of estimates

The preparation of the Company's financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes to the financial statements. Actual results could differ from those estimates and may affect amounts reported in future periods. Management believes that the estimates are reasonable.

2.3) Income recognition

Sales Revenues on sales of semiconductor products are recognized upon shipment of the products. A portion of the Company's sales are made to distributors who participate in certain programs common to the semiconductor industry whereby the distributors are allowed to return merchandise under certain circumstances and may receive future price reductions. Provision is made at the time of sale for estimated product returns and price protection which may occur under programs the Company has with these customers.

Subsidies Government subsidies are recognized as the related costs are incurred, commencing when the subsidies' contract is signed with the relevant government department or agency. Government subsidies for research and development are included in "other income and expenses". Government subsidies for industrialization costs (certain costs incurred to bring prototype products to the production stage) are offset against related expenses in "cost of sales". Government subsidies for capital expenditures are deducted from the cost of the related fixed assets.

2.4) Foreign currency

The United States dollar is the reporting currency for the Company because the dollar is the currency of reference in terms of market pricing in the world-wide semiconductor industry. Furthermore, there is no currency in which the majority of transactions are denominated, and revenues from external sales in US dollars exceed revenues in any other currency.

The functional currency used by each significant subsidiary throughout the group is generally the local currency. For consolidation purposes, assets and liabilities of these subsidiaries are translated at current rates of exchange at the balance sheet date. Income and expense items are translated at the average exchange rate for the period. The effects of translating the financial position and results of operations of local functional currency are included in shareholders' equity.