(Mark One)

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

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2008

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ____________ to ____________

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 date of event requiring this shell report

Commission File Number: 001-14974

THOMSON

(Exact name of Registrant as specified in its charter)

46, quai Alphonse Le Gallo
92100 Boulogne-Billancourt - France
(Address of principal executive offices)

Stéphane Rougeot
Chief Financial Officer
Thomson
46, quai Alphonse Le Gallo
92100 Boulogne-Billancourt
France
Tel: +33 1 41 86 50 00
Fax: +33 1 41 86 56 22
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

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

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

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

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock

as of the close of the period covered by the Annual Report:

Common Stock, nominal value €3.75 per share: 269,890,028

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

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

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

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

Large accelerated filer       Accelerated filer       Non-accelerated filer  

Indicate by check mark whether the registrant has submitted electronically and posted on its Corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes        No  

Indicate by check mark which financial statement item the Registrant has elected to follow:  Item 17        Item 18  

If this is an Annual Report, indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes       No  

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

International Financial Reporting Standards as issued by the International Accounting Standards Board    Other  

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow: Item 17       Item 18  

2008 FORM 20-F – THOMSON GROUP

Table of Contents

Page

1

Key Information and Risk Factors

5

1.1    Selected Financial Data

6

1.2    Exchange Rate Information

9

1.3    Risk Factors

10

1.4    Litigation

21

2

Information on the Company

23

2.1    History and Development of the Company

24

2.2    Business Overview

28

2.3    Organizational Structure

42

2.4    Property, Plant and Equipment

42

3

Operating and Financial Review and Prospects

49

3.1    Overview

50

3.2    Key Economic Drivers

51

3.3    Summary of Results

51

3.4    Seasonality

52

3.5    Effect of Exchange Rate Fluctuations

53

3.6    Geographic Breakdown of Net Revenues

54

3.7    Events Subsequent to December 31, 2008

55

3.8    Critical Accounting Policies

56

3.9    Changes in Accounting Principles

59

3.10    Reserved

59

3.11    Changes in Scope of Consolidation in 2008

59

3.12    Notification of Participations Acquired in the Share Capital of French Companies in 2008

60

3.13    Changes in Scope of Consolidation in 2007

60

3.14    Notification of Participations Acquired in the Share Capital of French Companies in 2007

61

3.15    Results of Operations for 2008 and 2007

62

3.16    Results of Operations for 2007 and 2006

68

3.17    Liquidity and Capital Resources

75

3.18    Contractual Obligations and Commercial Commitments including Off-Balance Sheet Arrangements

79

4

Corporate governance and workforce

83

4.1    Directors

84

4.2    Executive Committee

107

4.3    Employees and Workforce

109

5

Shareholders and Listings Information

117

5.1    Major Shareholders

118

5.2    Related Party Transactions

123

5.3    The Offer and Listing

123

6

Additional Information

129

6.1    Share Capital and Voting Rights

130

6.2    Memorandum and Articles of Association

134

6.3    Material Contracts

142

6.4    Exchange Controls and Other Limitations Affecting Security Holders

143

6.5    Taxation

143

6.6    Reserved

149

6.7    Organizational Chart as of December 31, 2008

150

6.8    Information on Minority Interests

153

6.9    Documents on Display

154

6.10    Calendar for the Disclosure of Financial Information

154

7

Quantitative and Qualitative Disclosures about Market Risk

155

7.1    Exchange Rate Fluctuations

157

7.2    Future Cash Flows from Currency Hedging

159

7.3    Interest Rate Fluctuations

160

7.4    Interest Rate Hedging Cash Flows

161

7.5    Liquidity Risk

161

7.6    Fair Value of Financial Instruments

162

7.7    Risk of Share Price Variation

162

8

Internal and External Controls and Procedures

165

8.1    Internal Control Procedures Implemented by the Company

166

8.2    Reserved

171

8.3    Controls and Procedures

171

8.4    Information on Accounting Services

173

8.5    Accountant Fees and Services

174

8.6    Audit Committee Pre-Approval Policies

175

9

Exhibits

177

10

Thomson consolidated financial statements

179

10.1    Reports of Independent Registered Public Accounting Firms

181

10.2    Consolidated Financial Statements

183

10.3    Notes to the Consolidated Financial Statements

188

Cross-Reference to Form 20-F

292

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Please refer to the table on page 292 of this Annual Report that provides cross-references of the information provided in this report as they relate to the requirements of the Form 20-F.

Forward-Looking Statements

In order to utilize the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995, we are providing the following cautionary statement. This Annual Report contains certain forward-looking statements with respect to our financial condition, results of operations and business and certain of our plans and objectives. These statements are based on management’s current expectations and beliefs in light of the information currently available and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. In addition to statements that are forward-looking by reason of context, other forward-looking statements may be identified by use of the terms “may”, “will”, “should”, “expects”, “plans”, “intends”, “anticipates”, “believes”, “estimates”, “projects”, “predicts” and “continue” and similar expressions identify forward-looking statements. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that are anticipated to occur in the future. Such statements are also subject to assumptions concerning, among other things: our anticipated business strategies; our intention to introduce new products and services; anticipated trends in our business; and our ability to continue to control costs and maintain quality. We caution that these statements may, and often do, vary from actual results and the differences between these statements and actual results can be material. Some of the factors that could cause actual results and events to differ materially from those expressed or implied in any forward-looking statements are:

•

our ability to successfully negotiate the restructuring of our financial debt with our creditors and the duration and outcome of this restructuring;

•

financing and refinancing conditions, prevailing interest rates and availability and terms of financing;

•

changes in exchange rates, notably between the euro and the U.S. dollar, Chinese yuan, Canadian dollar, Mexican peso, Polish zloty and British pound;

•

our failure to maintain contractual arrangements with our major customers and/or suppliers and renew existing contractual arrangements with them, or material adverse changes in the financial condition or creditworthiness of our key customers and suppliers over the long term;

•

our ability to design, develop and sell innovative products and services, which are offered in highly competitive markets characterized by rapid technology changes and subjective and changing customer preferences;

•

technological advancements in the Media and Entertainment (M&E) industry;

•

increased competition in video technologies, components, systems and services and finished products and services sold to customers in the M&E industry;

•

economic conditions, including consumer spending, in countries in which our services, systems and equipment are sold or patents licensed, particularly in the United States, Europe and Asia;

•

integration of acquired operations;

•

the success of certain partnerships and joint ventures that we may not control, as well as future business acquisitions, combinations or dispositions;

•

our ability to protect our patents and other intellectual property rights and the outcome of any claims against us for the alleged infringement of third parties’ intellectual property rights;

•

force majeure risks, especially related to our just-in-time inventory, supply and distribution policy;

•

uncertainties and challenges inherent in our business strategy;

•

market risks associated with our minority interests in certain public companies, such as Videocon Industries, following our disengagement from our former Displays and television activities;

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•

general economic trends, changes in raw materials and employee costs and political and social uncertainty in markets where we manufacture goods, purchase components and finished goods and license patents, particularly in Latin America and Asia; and

•

warranty claims, product recalls or litigation that exceed or are not covered by our available insurance coverage.

Furthermore, a review of the reasons why actual results and developments may differ materially from the expectations disclosed or implied within forward-looking statements can be found under Chapter 1: “Key Information and Risk Factors”, section 1.3: “Risk Factors” below. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to publicly update any of them in light of new information or future events. We advise you to consult any documents we may file or furnish with the U.S. Securities and Exchange Commission (“SEC”), as described under Chapter 6: “Additional Information”, section 6.9: “Documents on Display.”

Statements Regarding Competitive Position

This Annual Report contains statements regarding market trends, our market share, market position and products and businesses. Unless otherwise noted herein, market estimates are based on the following outside sources, in some cases in combination with internal estimates:

•

PricewaterhouseCoopers, Futuresource Consulting Ltd., IDATE, Screen Digest and Adams Media Research for overall market trends in the media and entertainment industries;

•

Futuresource Consulting Ltd. for information on DVD replication and distribution services;

•

Screen Digest for information on film, Content Services and post-production services;

•

Frost & Sullivan and Veronis Suhler Stevenson for information on retail Media Networks and out-of-home video advertising networks;

•

Screen Digest and IABM (International Association of Broadcasting Manufacturers) for information on Broadcast & Networks systems and services;

•

Frost & Sullivan, Datamonitor and DIS Consulting Corporation for specific information on broadcast cameras, broadcast video servers, production switchers and routing switchers;

•

MRG (Multimedia Research Group) for information on IPTV network software;

•

IMS Research, In-Stat, MRG and MPA Ltd for information on set-top boxes;

•

Dell’Oro Group and Infonetics Research for information on DSL and cable modems, routers & gateways; and

•

Parks, www.dect.org and CEA (Consumer Electronics Association) for information on telephony markets in the United States and GfK (Gesellschaft für Konsumer Markt- und Absatzforschung) for information on telephony markets in Europe.

Statements contained in this Annual Report that make reference to “value market share” or market share “based on value” mean that the related market estimate is based on sales, and statements referring to “volume market share” or market share “based on volume” mean that the related market estimate is based on the number of units sold.

Market share and market position statements are generally based on sources published mid- to late 2008 or beginning 2009.

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Reporting Currency

Our consolidated financial statements that form part of this Annual Report on Form 20-F are presented in euro.

For your convenience, this Annual Report contains translations of certain euro amounts into U.S. dollars. Unless otherwise indicated, dollar amounts have been translated from euro at the rate of €1.00 = U.S.$1.3260, the noon buying rate in New York City for cable transfers in euro as announced by the Federal Reserve Bank of New York for customs purposes, on March 31, 2009. For additional information see section 1.2: “Exchange Rate Information”.

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1

KEY INFORMATION AND RISK FACTORS

1.1    Selected Financial Data

6

1.2    Exchange Rate Information

9

1.3    Risk Factors

10

1.4    Litigation

21

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1.1    Selected Financial Data

We have derived the following selected consolidated financial data from our consolidated financial statements as of and for each of the years ended December 31, 2008, 2007, 2006, 2005 and 2004. These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as approved by the European Union, and in accordance with IFRS as issued by the International Accounting Standards Board (“IASB”). You should read the following selected consolidated financial data together with Chapter 3: “Operating and Financial Review and Prospects” and our consolidated financial statements. The basis of the preparation of the consolidated financial statements and our significant accounting policies are discussed in Note 2 to our consolidated financial statements.

Effective January 1, 2005, Thomson reorganized the Group’s activities around three principal operating divisions: Services, Systems and Technology, and regrouped our remaining activities in two additional segments: Other (previously Displays & CE Partnerships) and Corporate. This divisional organization remained unchanged in 2006, 2007 and 2008, although the names of some divisions changed in 2008, and our consolidated financial statements as of and for each of the years ended December 31, 2008, 2007, 2006, 2005 and 2004 continue to reflect these segments. From 2009 the Group’s activities are organized around three operating segments – Technicolor (Services until mid-2008), Thomson Connect (Systems until mid-2008 then Thomson Grass Valley until the end of 2008) and Technology. For more information see Chapter 2: “Information on the Company”, section 2.1: “History and Development of the Company”.

The net results of the bulk of our Displays activities, of the Audio-Video and Accessories activities and of the Silicon Solutions business are treated within discontinued operations in the consolidated financial statements as of and for each of the years ended December 31, 2008, 2007, 2006, 2005 and 2004 and are, therefore, not reflected in our reported revenues from continuing operations. The impact of such discontinued activities is detailed in the tables below.

In 2008, Thomson recorded restructuring charges of €204 million related to continuing operations, write-offs of assets of €367 million and Goodwill impairment of €739 million, mainly including:

•

write-offs of intangible assets reached €219 million, mostly related to the alignment of the value of customer relationships in our Technicolor activities with the pressure on volumes and pricing in physical media. Write-offs of tangible assets reached €136 million, mostly related to the anticipated exit from some activities that form part of our Film business and to the impact of capital expenditure requirements on the profitability of our Broadcast Services contracts;

•

impairment of Goodwill was mostly related to our Grass Valley business (€378 million) following the sharp degradation of market conditions and delays in development programs. The Goodwill in the Group’s DVD business was impaired by €139 million to reflect the decrease in volume and price pressure beyond what was estimated previously. The Goodwill in the Group’s Film Services and Content Services businesses was impaired by €143 million to reflect the price erosion in photochemical replication, and to reflect Thomson management’s decision to exit the Digital Cinema business to exhibitors in 2009.

Our television activity was deconsolidated effective August 1, 2004 following the creation of TTE Corporation (“TTE”) in partnership with TCL Multimedia (formerly TCL International) and TCL Corporation (“TCL”), to which this activity was contributed. Our results for 2006 were impacted by the loss arising from the disposal of 10% of the share capital of TCL Multimedia, the write-down of our residual stake in TCL Multimedia to the market price at December 31, 2006 and the costs relating to the amendment of various agreements with TTE and TCL Multimedia. A total of €156 million of costs and charges were recorded in finance costs and share of losses from associates in connection with our interest in TCL Multimedia, including a charge of €70 million, which was accounted for in other financial expenses under finance costs, and a charge of €86 million recorded as a loss from associates. Our operations within the Other segment also reflected a loss of €25 million in respect of the renegotiation of sub-contract manufacturing agreements between Thomson and TTE, bringing Thomson’s aggregate charges related to TCL Multimedia and TTE to €181 million in 2006. There was no material impact from these activities on our results in 2007 and 2008.

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The selected financial data is only a summary and should be read in conjunction with and is qualified by reference to the consolidated financial statements and notes included elsewhere in this document. Information about our significant accounting policies is presented in Note 2 to our consolidated financial statements; information about changes in the scope of consolidation and discontinued operations are presented in Notes 4, 5 and 12 respectively, to our consolidated financial statements. You should also read the following selected consolidated financial data together with Chapter 3: “Operating and Financial Review and Prospects”.

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2008 FORM 20-F – THOMSON GROUP / 8

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RECONCILIATION OF DISCONTINUED OPERATIONS

1.2    Exchange Rate Information

Thomson SA’s shares are denominated in euro. Fluctuations in the exchange rate between the euro and the U.S. dollar will affect the U.S. dollar price of our American Depositary Shares (“ADSs”) on the New York Stock Exchange. Fluctuations in the exchange rate between the euro and the U.S. dollar affect the U.S. dollar equivalent of the price of Thomson SA’s shares on NYSE Euronext Paris.

The following table shows the euro/U.S. dollar exchange rate for the periods presented based on the Federal Reserve Bank of New York Noon Buying Rate until December 31, 2008. Effective January 1, 2009 and following the decision of the New York Fed to discontinue the publication of foreign exchange rates on December 31, 2008, the table will be based on the daily certified exchange rates made available by the Federal Reserve Board. We do not make any representations that the euro could have been converted into dollars at the rates shown or at any other rate.

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The euro/U.S. dollar exchange rate for March 31, 2009 was €1.00 = U.S.$1.3260 based on the Federal Reserve Board certified rate on that date.

1.3    Risk Factors

This section describes some of the risks that could affect our businesses. The factors below should be considered in connection with any forward-looking statements in this document and with the cautionary statements contained in “Forward-Looking Statements” at the beginning of this document.

The risks below are not the only ones that we face. Some risks may not yet be known to us and some that we do not currently believe to be material could later turn out to be material. Any of these risks could materially affect our business, financial condition and results of operations.

You should read this section in conjunction with (i) Chapter 7 “Quantitative and Qualitative Disclosures about Market Risk”, and Notes 24, 25, 26 and 27 to our consolidated financial statements and (ii) section 1.4: “Litigation” and Note 37 to the Group’s consolidated financial statements.

Market risk

Liquidity risk

Risks related to our financial restructuring

The Group’s financial debt situation, announced in the first quarter of 2009, may give cause for concern in the market, among its commercial and financial partners, in particular, clients and suppliers. This concern arises in particular from the uncertainty regarding how long the balance sheet improvement process will continue, whether it will be necessary to initiate a sauvegarde proceeding as part of this process and whether the Company will be able, during this period, to respect its commitments.  For this reason, the risks which the Group would ordinarily be facing (notably, the liquidity risk and the risk of being dependent on suppliers or partners, the interest rate risk, the risk of decline of its stock price, the risk of retention of key personnel of the Group, etc.) are accentuated by the uncertainty surrounding the duration and the outcome of this restructuring, in particular:  

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•

clients and suppliers: certain clients could decide to stop doing business with us, especially with respect to their medium and long-term projects.  Relationships of the Group with its suppliers could worsen, in particular they could demand more restrictive payment terms. The combination of these two trends could have a material adverse effect on the Group’s working capital needs and the results of operations;

•

financing: in the current situation, the Group no longer has access to financing at normal market conditions, and its needs must be entirely met by its own available funds.

These conditions are likely to continue until the end of the ongoing financial restructuring.

The Company’s balance sheet is currently over-leveraged; consolidated net worth became negative as of December 31, 2008 and gross financial debt was very significant, reaching approximately €2.9 billion. The Company is faced with a risk of acceleration of substantially all of its financial debt due to the breach of covenants in its financing agreements for its senior debt. These covenants, as well as other applicable contractual limitations and the consequences of the risk of acceleration, are more fully described in Notes 3.1 and 26.5(g) of the Group’s consolidated financial statements and Chapter 3, section 3.17.2: “Financial Resources” of this Annual Report.  

The Company undertook negotiations with its creditors, representing substantially all of the Group’s senior indebtedness, and amounting to approximately €2.9 billion, regarding the restructuring of such debt and the improvement of its balance sheet.  These discussions are taking place within the framework of a series of waivers, received on April 27, 2009, under the terms of which the creditors have temporarily waived their right to accelerate repayment of such indebtedness as from April 30, 2009 (see Chapter 3, section: 3.17.2 “Financial Resources” for a summary of the waiver provisions) based on the covenant breaches described above.  These waivers are in place until June 16, 2009, subject to compliance with the terms of the waivers.

The uncertainties surrounding the duration and the outcome of the ongoing financial restructuring prevent the Group from obtaining financing at normal market conditions and could have a negative effect on its working capital needs.

The Group can no longer obtain financing at normal market conditions and its needs must be entirely met by its own available funds.

The Group’s estimated cash flow position at the end of first quarter 2009 was €586 million. Upon the closing of accounts for the fiscal year 2008, the Board of Directors carefully assessed the Group’s ability to continue as a going concern for the next twelve months, and the Group’s cash flow projections, which should be sufficient to meet its expected cash requirements until at least December 31, 2009.

The uncertainties created by this situation also have a negative effect on the Group’s working capital needs. The Group’s relationships with its suppliers could worsen; in particular, they could demand more restrictive payment terms.

If the negotiations with its creditors are not successful, the Company could be exposed to legal actions by its creditors or be forced to request the opening of a sauvegarde proceeding.

During the waiver period, certain of the Company’s creditors could take legal action against the Company, the Group or their assets, in France or abroad, claiming a breach of the terms of the waivers (or a breach of the provisions of the financing agreements not covered by the waivers).  In such case, depending on the circumstances, the Company could contest any such action on its merits or request the opening of a collective proceeding (such as, for example, a sauvegarde) in order to benefit from the protection provided by law.

Moreover, if the negotiations entered into are not concluded by June 16, 2009, or if its creditors are not willing to extend the waiver, the creditors of the Company (the private placement noteholders or the syndicated credit facility lenders) could accelerate the debt owed them, based on the covenant breaches described above. The Company would not then be able to repay or refinance its debt in order to respond to such acceleration.

In such case, the Company could, in order to avoid the risk of an acceleration of its debt, request the opening of a sauvegarde proceeding under the provisions of articles L. 620-1 et seq. of the Code de commerce (French Commercial Code). Such proceeding would provide the Company with the protection offered by law (a stay of legal actions against it and a prohibition against paying debts existing as of the date of the opening of the proceeding) and would provide the Company with a stable legal framework to pursue the negotiation of an agreement with its creditors with respect to the restructuring of its debt. If necessary, the Company could take legal action so that the sauvegarde protections provided under French law would be recognized in foreign jurisdictions.

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If the Company does not reach an amicable agreement with its creditors or an agreement with them in the context of a sauvegarde proceeding, the court could possibly, in the context of the sauvegarde proceeding and in the interest of the Company, impose upon the creditors a rescheduling of the debt over a period of ten years.

An agreement with senior creditors and potential investors with respect to a balance sheet improvement plan could result in significant dilution of existing shareholders.

As of the date hereof, the terms of the balance sheet improvement plan of the Company have not been finalized.  Such an agreement, if reached, could notably involve a capital increase now or in the future, which could have the effect of significantly diluting the percentage ownership of the Company’s existing shareholders.

Risk of interest rate fluctuations

Interest rate fluctuations may lead to decreases in our financial results.

Our financial debt is mainly at floating rates (94% of our debt at December 31, 2008 is at floating rates taking into account interest rate hedging). In March 2009 we unwound all of the interest rate swaps which converted our fixed rate debt to floating rate debt. On a pro-forma basis the percentage of our debt at floating rates at December 31, 2008 taking into account these unwindings drops from 94% to 69%. Failure to manage interest rate fluctuations effectively in the future, or increases in interest rates, may have a material adverse impact on our financial charges (see Note 27.2(c) to our consolidated financial statements for a sensitivity analysis of this impact). See also “Risks related to our financial restructuring” above.

Risk of exchange rate fluctuation

Currency exchange rate fluctuations may lead to decreases in our financial results.

To the extent that we incur costs in one currency and make our sales in another, our profit margins may be affected by changes in the exchange rates between the two currencies. Most of our sales are in U.S. dollars and in euros; however, certain expenses are denominated in other currencies such as the Mexican peso and Polish zloty, in particular those of our production facilities in Mexico and Poland. Although our general policy is to hedge against these currency transaction risks on an annual or six month basis, given the volatility of currency exchange rates and the occasional illiquidity in some emerging market currencies together with the potential for changes in exchange control regulations in such emerging markets, we cannot assure that we will be able to manage effectively these risks. Volatility in currency exchange rates may generate losses, which could have a material adverse effect on our financial condition or results of operations. For more detailed information on our hedging policies, refer to Chapter 7: “Quantitative and Qualitative Disclosures about Market Risk.”

Risk of non-favorable evolution of share price

Our share price has been volatile in recent years and is subject to the fluctuations in the equity capital markets.

The stock market in recent years has experienced extreme price and volume fluctuations which have particularly affected the market prices of technology companies. Volatility in our share price has also been significant during this period.

In 2008, our average share price in 2008 was €3.63 (calculation based on the average of monthly closing share prices). It fell by 72% compared to an average share price of €12.95 in 2007. In the first quarter of 2009, the average share price was €0.94.

This volatility can result in losses for investors in a relatively short period of time. See “Risks related to our financial restructuring” above.

In addition, the stock market in general and companies in our sector have experienced share price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of particular companies. Market conditions and industry factors may negatively affect the share price of our common stock, regardless of our actual operating performance. In the past, following a severe drop in the share price of a company’s securities, securities class action litigation has often been instituted against that company. This type of litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, which would harm our business.

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Risks related to our activity

Risks related to commercial activity

Our businesses operate in concentrated markets and depend on a number of major customers and the long-term maintenance of relationships and contractual arrangements with them. Our financial results may suffer if these relationships weaken or terminate, if we are unable to renew these contractual arrangements when they expire or are only able to renew them under significantly less favorable terms, or if certain of our customers face financial difficulties.

Our businesses operate in, and our strategy is to be a preferred partner of, the Media & Entertainment (“M&E”) industry, which is a concentrated market. The Group’s client base is similarly concentrated. In addition to this industry concentration, relationships have historically played an important role in the M&E industry we serve. As a result of the combination of these factors, several of our businesses depend on a number of major customers and our long-term relationships and contractual arrangements with them. For example, our Film Services and DVD Services activities, the largest contributors to the net sales of Technicolor (formerly the Services Division) currently rely on our relationships with a number of major motion picture studios. We generally negotiate exclusive, long-term contracts with these studios. Our top five studio customers accounted for approximately 56% of the revenues of Technicolor and 24% of our 2008 consolidated net revenues. In Thomson Grass Valley (formerly the Systems Division), a large proportion of our revenue is derived from various broadcasters and network operators, including DIRECTV, occasionally under long-term contractual arrangements. Our top five customers in Thomson Grass Valley accounted for approximately 36% of the reported 2008 revenues of the division and 18% of our 2008 consolidated net revenues; for example we have an important long-term contract with DIRECTV which accounted for a significant proportion of these revenues. Our Licensing business is dependent upon our relationships with a relatively limited number of consumer products manufacturers, to whom we license both new and mature technologies. These licensing agreements typically have a duration of five years, and our top ten licensees accounted for approximately 74% of our total Licensing revenues in 2008 (counting the MPEG-LA licensing pool as a single customer, although the pool licenses to a large number of licensees). Overall for the Group, our ten largest customers accounted for 43% of our 2008 consolidated net revenues. If we fail to maintain these relationships, these customers may reduce or cease purchases, which could adversely affect our businesses, results and prospects.

Although most of our major client relationships comprise multiple contractual arrangements of varying terms, in any given year certain contracts come up for renewal across each of our business lines. If we are unable to renew such contracts with similar or more favorable terms, our financial situation may be affected.

From time to time, one or a small number of our customers or licensees may represent a significant percentage of our revenues. A decision by any of our major customers or licensees not to use our products, services or technologies, or their failure or inability to pay amounts owed to us in a timely manner, or at all, whether due to strategic redirections or adverse changes in their businesses or for other reasons, could have a significant effect on our operating results.

We may be unable to fulfill our obligations to clients. Furthermore, our current financial problems could lead to a loss of client confidence, resulting from a fear that we may no longer be able to guarantee services and products. This in turn could lead to clients deciding to no longer purchase from us. We may be forced to offer our clients more attractive financial conditions without any assurance of retaining these clients. See also “Risks related to our financial restructuring” above.

Risks related to our capacity to develop the products and services which answer our customers’ technological choices

The sources and timing of our revenues and our profits depend in large part on our customers’ business plans and investment decisions for certain technologies, products and services, which in turn may depend on the preferences of the public. If our customers do not commit resources to technologies, products and services supplied by us and if the public does not demand our customers’ technologies, products or services, our revenues may fluctuate significantly throughout any given year and our financial results may suffer.

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The sources and timing of our revenues and our profits depend on our customers’ business plans and investment decisions in certain technologies, products and services. For example, in Thomson Grass Valley, the customers of our Access Products activity may determine the rate and timing of service roll-outs and associated products (such as set-top boxes or dual/triple play gateways) differently than we anticipate, while customers of our Broadcast & Networks activities may delay upgrading their systems and equipment and related capital expenditures. In the DVD and Film markets, new formats and major film releases may shift from quarter to quarter affecting the revenue stream and revenue recognition of Technicolor. These types of situations occur primarily because we have no control over our customers’ business plans and investment decisions, which in turn depend largely on the fast changing preferences of the public. The content market is highly competitive and competing technologies and products are often released into the marketplace at the same time. In addition, our businesses and revenues may be affected by shifts in public preferences of the medium over which this content is delivered, if the public does not prefer our customers’ content or their method of content delivery.

If our customers do not commit resources to technologies, products and services supplied by us and if the public does not demand our customers’ technologies, products or services, our revenues may fluctuate significantly throughout any given year and our financial results may suffer.

Risks related to the evolution of market, technologies and consumer demand

The success of our strategy depends in large part on our ability to adapt to new or changing market trends and to develop and deliver on a timely basis innovative technologies, products and services for these industries in general and, in particular, for developing market segments such as electronic content management and distribution and Internet Protocol (IP) devices and solutions. If we fail to do so, our financial results may suffer.

The markets for our products, services and technologies are characterized by rapid change and technological evolution. We will need to expend significant and selective resources on research and development in the future in order to continue to design and deliver innovative products, services and technologies for the M&E industry, including technologies that we may license to manufacturers and other third parties. Despite our efforts, we may not be able to develop and effectively market new products, services and technologies that adequately or competitively address the needs of the changing marketplace. New products, services and technologies can be subject to delays in development and may fail to operate as intended. There may be no or limited market acceptance of new products, services or technologies which we may offer, or significant competitive products, services or technologies may be successfully developed by our competitors.

We may identify economic drivers (see Chapter 3: “Operating and Financial Review and Prospects”, section 3.2: “Key Economic Drivers”) which may not develop or may develop at a slower pace than we expect, for example the roll-out of mobile video and IPTV has to date been slower than we had originally anticipated. Our growth and the success of our strategy depends to a great extent on our ability to develop and deliver innovative products, services and technologies that are widely adopted in response to changes in the M&E industry and that are compatible with the products, services or technologies introduced by other entertainment industry participants. If we fail to correctly and timely anticipate, identify and assess such economic drivers and new or changing market trends or to develop and deliver such products, services and technologies, we may fail to achieve growth and our financial results may suffer.

Risks related to the evolution of the Media & Entertainment industry

The success of our strategy depends in large part on events, conditions and trends in the M&E industry. If this industry fails to grow at the pace we project or is affected by other events, conditions or trends, our growth and business prospects may be limited, and our financial results may suffer.

We have based our strategy on our vision of how the M&E industry is developing and may develop over the next few years. The economic situation has consequences on funding mechanisms for movie making. With reduced upfront funds, studios are likely to be more cautious with investment in film production. A consolidation of players, for example, amongst minor-major studios could take place, resulting in reduction of their overall spending. Despite the huge success of 3D production, the economic downturn is impacting the investment in exhibitors’ 3D deployments. Unless an alternate funding mechanism is adopted, the lack of deployments may hamper 3D productions due to non-optimal return. In addition, the economic situation can also impact our expansion strategy in Western Europe, a market in which we want to leverage Technicolor’s strength and where the top five countries contribute some 20% of global film production investment.

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Digital distribution of premium content to homes is a significant strategic growth area for Thomson over the next five years. This strategy will be affected by many external factors, including the following:

•

firstly, consumer adoption will depend on i) availability of broad and recent content from studios; ii) exceptional viewing experience; iii) simplicity of home device; and iv) attractive pricing models;

•

secondly, in order to satisfy the end users, studios will need to be more aggressive with new release windows, and are likely to create channel conflict with their physical distribution channels;

•

thirdly, one of the key enablers of an exceptional viewing experience is the speed and quality of the broadband connection at home. Although broadband speeds are on the rise, the emergence of over-the-top (OTT) models is impacting Network Service Providers’ (NSPs) appetite to invest. Regulatory frameworks, which differ from country (and often jurisdiction) to country, also play a key role in convincing NSPs to invest;

•

fourthly, to date, the connected home is made of disparate product families from different vendors, each with their own networks and protocols. Connectivity across devices is still immature and in-home integration is complex; and

•

fifthly, especially under the current economic climate, end user pricing is critical. Innovative pricing models are becoming more important, potentially impacting the overall economics of the digital distribution models.

If the M&E industry fails to grow at the pace we project or are affected by other events, conditions or trends (such as or different from those described above), our growth and business prospects may be limited, and our financial results may suffer.

Risks related to technological changes

Technological innovations can make older products and services less competitive and can have an adverse effect on the value of our existing patents and our revenues from licensing programs. Our financial results may suffer, and we could be at a competitive disadvantage in our other businesses if we are unable to develop or have access, either independently or through alliances, to new and widely-used products, services and technologies in advance of our competitors.

The markets in which we operate are undergoing a technological evolution resulting from the increasing use of digital technology and an increasing overlap among video, voice and data services. Technological advances and new product and service introductions may render obsolete or significantly reduce the value of previously existing technologies, services, products and inventories. This could have a material adverse effect on our ability to sell these products and services or to make a profit from these sales. For example, the emergence of digital technology has had this effect on many products or services based on older analog technology. The emergence of new technologies could also have an adverse effect on the value of our existing patents and revenues from licensing programs. Also, within the physical digital formats, a further technological shift could have an adverse effect on our ability to sell such products, like DVD disks and analog film, and to provide services based on digital technologies. For example, in 2008 we witnessed declining DVD shipments and revenues.

Further, advances in technologies for downloading content from the internet such as video-on-demand and similar or other technologies, which Thomson is also active in developing, may significantly reduce the demand for traditional DVD and film products.

We expect that the development of digitalization and the convergence of video, voice and data services will increase the pace and importance of technological advancement in our industry. As a result, we are investing in the development and marketing of new products, services and technologies. These investments might be made in unproven technologies or for products or technologies with no proven markets and may therefore yield limited returns.

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Competition

We face strong competition in many of our businesses, including from groups that are significantly larger than Thomson or from existing customers that may develop in-house capabilities. Competition may push prices to unprofitable levels, which could adversely affect our financial results.

The products and services we supply are subject to intense price competition and, although we have leading positions in many of our market segments, the competing businesses are often part of groups which are significantly larger than Thomson. These groups may include customers who may already have, or may develop, in-house capabilities to supply the products or services which we supply, such as studio customers who have Content Services capabilities in-house or broadcasters who have equipment design and sourcing capabilities in-house. If our competitors or our customers use their size and resources to put additional competitive pressure on Thomson, our operations could be materially and adversely affected.

Furthermore, due to technological innovation and ease of imitation, new products tend to become standardized rapidly, leading to intense competition and price declines. We seek to innovate and to differentiate our products and services in order to minimize the effect of pricing pressures, as well as to design, build and source our products and their components in such a way as to adapt to such deflation. However, price-driven competition may result in reduction of profit margins.

Risks of being dependent on suppliers or partners

We rely on third-party suppliers and partners to manufacture a substantial number of our products or sub-components, develop or co-develop new products or solutions and manage inventory on a just-in-time basis. These practices entail financial risks, risks for suppliers of failing to perform, and reputational and other risks to Thomson.

We procure from third-party suppliers a substantial number of our products or sub-components, particularly for Thomson Grass Valley, and these are usually sourced from a concentrated supplier base. We purchase around 37% of raw materials, components and finished products from our top ten suppliers, and approximately 75% of these purchases are made for Thomson Grass Valley. In addition, we consign to external suppliers extensive operational activities including procurement, manufacturing, logistics and other services. Reliance on outside sources forces us to put in place the necessary measures in order to prevent products from incorporating defective technology or components. We could also be exposed to the effects of production delays or other performance failures of such suppliers. Products with any kind of defects can adversely affect our net sales and reputation. This reliance on external suppliers may also expose Thomson to the effects of suppliers’ insufficient compliance with applicable regulations or third-party intellectual property rights.

In addition, we complement our internal research and development or production activity by entering into co-development agreements and research programs with strategic partners or by subcontracting certain activities, including production to outside providers, particularly for Thomson Grass Valley. These arrangements involve the commitment by each company of various resources, including technology as well as personnel. If these arrangements do not develop as expected, if the products or solutions developed and produced by our partners do not meet the required time and quality standards or experience any performance failures, or if the financial situation of our partners deteriorates, our ability to develop and produce these new products and solutions successfully and on schedule may be hampered.

Moreover, we manage our inventory on a just-in-time basis, which exposes us to performance risks of our suppliers as well as to certain force majeure risks. As a result, in addition to delays or other performance failures of our suppliers, our operations may be disrupted by external factors beyond our control. Depending on the severity and duration of the disruption, our results of operations could be adversely affected.

In 2008, the worldwide economic crisis and its consequences on the industrial sector on one hand, and the announcements we have made since the beginning of the year on the other hand, have brought to light the risks linked to the financial relationship with our suppliers and the working capital management of all parties involved. These financial risks are related primarily to two scenarios: on the one hand, our suppliers might be willing to renegotiate the terms and conditions of their relationship with us in order to protect their own financial interests and limit their exposure to us; on the other hand, we could face a weakening of the suppliers’ financial and cash situation, which could result in a default of supply or in an impossibility for the suppliers to perform the necessary investments to execute their obligations. See “Risks related to our financial restructuring” above.

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Risk related to product defects or product or service quality defects

Product defects or failures to deliver services as contracted could adversely affect our business results and financial condition.

We are sometimes exposed to warranty and product liability claims in cases of product performance issues and claims in cases of service performance issues. There can be no assurance that we will not experience material product or service liability losses arising from such claims or large-scale product recall in the future and that these will not have a negative impact on our reputation and our sales. We generally maintain insurance against many product and service liability risks and record warranty and other provisions in our accounts based on historical or expected defect rates, but there can be no assurance that this coverage and these warranty provisions will be adequate for liabilities ultimately incurred. In addition, there is no assurance that insurance will continue to be available on terms acceptable to us.

Risks related to partnerships, acquisitions or discontinued businesses

We may seek to expand our product and services offering, our technologies portfolio and our geographic coverage, and hence our client base, through acquisitions and partnerships, and have completed a significant number of acquisitions and partnerships over the last several years. We may also decide to stop activities when they become non-strategic. These decisions pose corresponding risks and uncertainties typical of such transactions.

We may seek to develop long-term partnerships and make selective acquisitions, which requires selecting the appropriate opportunities and having access to adequate financing options. See “Risks related to our financial restructuring” above this also depends on our ability to identify appropriate partnerships and joint venture opportunities, appropriate acquisition targets and to obtain the necessary financing to this end, completing agreements in due time, integrating newly acquired entities and obtaining the required authorizations. The process of integrating an acquired company, business or technology may create unforeseen difficulties and expenditures. The areas where we may face risks include: retaining employees from businesses we acquire, cultural challenges associated with integrating employees from acquired businesses into our organization, unanticipated or unknown liabilities relating to acquired businesses, the quality of the assets we sought to acquire and the validity of any acquired patents. In addition, we face other risks normally associated with acquisitions or partnerships or joint ventures, including the integration of numerous entities, organizations, employees and facilities and fortifying new relationships with different customers. We also encounter increasing risks in connection with the protection of our intellectual property rights. Acquisitions, partnerships and joint ventures involve other risks and difficulties, such as delays in implementation, unexpected costs or liabilities, or not realizing operating benefits or synergies from completed transactions. Further, in certain partnerships or joint ventures, important business decisions may be made without our approval, or disagreements, disputes or deadlock may arise among the partners, which may have adverse effects on the related partnership or joint venture, or our interests in connection therewith. Those and other risks or potential difficulties inherent in acquisitions, partnerships and joint ventures may adversely affect our results, financial condition or prospects. If we make significant acquisitions, we may also face an increase in our debt and interest expense.

On the other hand we may decide to stop activities, for example, that become non-strategic, either by selling or closing down the activities concerned. In the case of cessation and closing down of an activity we face risks which include: the disposal of fixed and other assets and the realisation of working capital, the time and cost of the closure especially in relation to employees, clauses in supplier and customer contracts which may lead to penalty claims, and possible decline of operating profit during the closure period. These types of risk are often difficult to predict and their assessment may have a negative impact on the net income of the Group.

In the case of a sale of a business we additionally face risks that the valuations of potential buyers and terms in Sale and Purchase Agreements, which will depend upon their business plans based on their perceived synergies and intentions to develop the business, may lead to losses for the Group on sale of assets.

Risks related to the evolution of the Licensing business

The licensing of patents constitutes a significant source of revenue and profits for us. If sales by our licensees of products incorporating our technologies decline or if we are unable to replace expiring patents with new patents or proprietary technologies, our financial results could suffer.

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We derive significant profit from the licensing of our various technologies to product manufacturers. We have derived a significant portion of our operating income from our technology Licensing business over the last few years. Our top ten licensees account for approximately 74% of our total Licensing revenues in 2008, and our revenues from the MPEG-LA Licensing pool (treated as a single licensee) accounted for approximately 42% of Technology’s revenues in 2008 (2007: 30%). Our Licensing revenue is dependent on sales by our licensees of products that incorporate our technologies. We cannot control these and other manufacturers’ product development or commercialization efforts or predict their success. In addition, our license agreements, which typically require manufacturers and software developers to pay us a specified royalty for every product shipped that incorporates our technologies, do not require these manufacturers to include our technologies in any specific number or percentage of units, and only a few of these agreements guarantee us a minimum aggregate licensing fee. Accordingly, if our licensees sell fewer products incorporating our technologies, or otherwise face significant economic difficulties, our Licensing revenue and profits could decline. Lower sales of products incorporating our technologies could occur for a number of reasons. Changes in consumer tastes or trends, changes in industry standards or potential weaknesses inherent in the technologies we license may affect our Licensing revenue. Demand for new video products incorporating our technologies could also be adversely affected by increasing market saturation, competing products and alternate consumer entertainment options. In addition, our main licensees, for whatever reason, may not choose to or may not be able to incorporate our technologies in the future, which could in turn adversely affect our financial results.

We hold patents covering much of the technology that we license to product manufacturers, and our Licensing revenue is tied in large part to the life of those patents. Our right to receive royalties related to our patents terminates with the expiration of the last patent covering the relevant technologies. However, many of our licensees choose to continue to pay royalties for continued use of our trademarks and know-how even after the licensed patents have expired, although at a reduced royalty rate. Our intellectual property portfolio results from an extensive patenting process that might be challenged by open innovation, strategic alliances, outsourced development and changes in regulations. To the extent that we do not continue to replace Licencing revenue from technologies covered by expiring patents with Licencing revenue based on new patents and proprietary technologies, our Licencing revenue and profits could decline.

In addition, standards-setting bodies may require the use of so-called “open standards,” meaning that the technologies necessary to meet those standards are freely available without the payment of a licensing fee or royalty. The use of open standards may reduce our opportunity to generate revenue, as open standards technologies are based upon non-proprietary technology platforms in which no one company maintains ownership over the dominant technologies.

Risks related to the protection of intellectual property

If we are unable to protect effectively our intellectual property rights in the technologies, brands and know-how we use or license to our customers, our business could be adversely affected. We may have difficulty enforcing our intellectual property rights effectively in many important markets, such as China, including as a result of the limited recognition and enforcement of intellectual property and contractual rights in many jurisdictions outside the European Union and North America.

Our business is dependent upon our patents, trademarks, trade secrets, copyrights and other intellectual property rights. Effective intellectual property rights protection, however, may not be available under the laws of every country in which our products and services and those of our licensees are distributed. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could harm our business or our ability to compete. In addition, protecting our intellectual property rights is costly and time consuming. We have taken steps in the past to enforce our intellectual property rights and expect to continue to do so in the future. However, it may not be practicable, effective or cost-efficient for us to enforce our intellectual property and contractual rights fully, particularly in certain countries outside the European Union and North America or where the initiation of a claim might harm our business relationships. For example, we have experienced, and expect to continue to experience, problems with Asian and other product manufacturers incorporating our technologies into their products without our authorization. If we are unable to successfully identify and stop unauthorized use of our intellectual property, we could experience increased operational and enforcement costs both inside and outside important manufacturing markets, such as China, and suffer substantial loss of Licensing or other revenues and profits, which could adversely affect our financial condition and results of operations.

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We generally seek patent protection for our innovations. It is possible, however, that some of these innovations may not be protectable. In addition, given the costs of obtaining patent protection, we may choose not to protect certain innovations that later turn out to be important. Moreover, we have limited or no patent protection in certain foreign jurisdictions. For example, in China we have only limited patent protection. Furthermore, there is always the possibility, despite our efforts, that the scope of the protection gained will be insufficient or that an issued patent may later be found to be invalid or unenforceable. Moreover, we seek to maintain certain intellectual property as trade secrets. These trade secrets could be compromised by third parties, or intentionally or accidentally by our employees, which would cause us to lose the competitive advantage resulting from them.

Risks related to the access to intellectual property

Our business relies on intellectual property, some of which is owned by third parties. If we cease to have access to any such intellectual property or can only have such access on non favorable terms, our business and financial results could be adversely affected. In addition, we are, and may in the future be, subject to intellectual property rights claims, which are costly to defend, could require us to pay damages and could limit our ability to use certain technologies in the future.

In addition to our proprietary technology, we also rely on certain technology that we license from third parties, particularly in Thomson Grass Valley. We cannot provide any assurance that these third-party licenses will continue to be available to us on commercially reasonable terms or at all. The loss of or inability to maintain any of these technology licenses could adversely affect our business and financial results.

In addition, companies in the technology and M&E industry own large numbers of patents, copyrights and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. We have faced such claims in the past, we currently face such claims and we expect to face similar claims in the future. See Note 37 to our consolidated financial statements for a description of our existing litigation related to intellectual property rights. Any intellectual property claims, with or without merit, could be time consuming, expensive to litigate or settle and could divert management resources and attention. For example, in the past we have settled claims relating to infringement allegations and agreed to make payments in connection with such settlements. An adverse determination could require that we pay damages (including indemnifying our licensees of the related intellectual property) or stop using intellectual property found to be in violation of a third party’s rights and could prevent us from offering our products and services or licensing the intellectual property to others. In order to avoid these restrictions, we may have to seek a license for the intellectual property. This license may not be available on reasonable terms, could require us to pay significant royalties and may significantly increase our operating expenses. The intellectual property may not be available for license to us at all. As a result, we may be required to develop alternative non-infringing intellectual property, which could require significant effort and expense. If we cannot license or develop non-infringing technologies for any infringing aspects of our business, we may be forced to limit our product and service offerings and may be unable to compete effectively. Any of the above circumstances could harm our operating results and our financial condition.

Other risks

Risk related to our minority interest in Videocon

We have completed major transactions in recent years to disengage from our former Displays activities. In connection with these transactions, we now hold a minority interest in a company that we do not control. The value of this interest may fluctuate, including as a result of events we do not control.

In 2005, we disengaged from our Displays activity through a series of sales of our tube manufacturing operations to the Videocon Group. In connection with this disposal, we acquired shares in Videocon Industries, an oil and gas company that is also active in the consumer electronic and consumer electronic components markets, and which is listed on the Luxembourg Stock Exchange. As we are a minority shareholder in Videocon Industries, important business decisions may be made without our approval. In addition, we are exposed to market risk as a result of this investment (for example the decrease of Videocon Industries’ share price in 2008 has resulted in the recording of a €151 million charge for the depreciation of shares) (see Note 17 to our consolidated financial statements for further information). As of December 31, 2008 we held a financial investment valued at €39 million in these shares, which is subject to mark-to-market fluctuations in value which could impact the net income of the Group. For more information on this investment, see Chapter 2: “Information on the Company”, section 2.2.5: “Discontinued Operations”.

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Risks related to economic and social conditions

Economic and geopolitical conditions and potential labor disputes may adversely affect our results and financial condition.

General economic trends in the countries in which our products and services are sold and where we source raw materials and components, primarily in North America, Europe and Asia, can have a significant impact on demand, prices and costs for such products and services. These trends could be accentuated by the of worldwide economic crisis. Pricing pressure and soft demand in the markets in which we sell our products and services or significant increases in the costs of raw materials or components could result in further pressure on our profit margins and our financial results. The activity of Thomson Grass Valley mainly relies on products and equipments which are manufactured primarily in China, Thailand, Eastern Europe and Mexico and could therefore be subject to risks listed above. Furthermore, labor disputes that directly affect our business could adversely affect our ability to deliver goods and services to our customers, and a significant labor dispute in our clients’ industries could also have a material affect on our business. For example, a strike by a major entertainment industry union could reduce the supply of original entertainment content, which could in turn reduce the demand from our customers for our products and services.

In addition, we source a large number of goods from emerging markets and are subject to risks inherent in these markets, including currency fluctuations, political and social uncertainty, exchange controls and expropriation of assets. These risks could disrupt our production in such countries and our ability to produce and procure goods for sale in our principal North American and European markets.

For more detailed discussions on the Group’s activities in its principal markets, see Chapter 2: “Information on the Company”, section 2.2: “Business Overview”, and for further information on our main production sites, refer to section 2.4.1: “Operating Facilities and Locations”.

Risks related to anti-competition procedures

Claims and investigations relating to competition law could materially adversely affect our business, results of operations, financial condition and cash flows.

We are subject to certain claims and investigations relating to alleged anti-competitive conduct by Thomson and certain of its subsidiaries in connection with our former cathode ray tubes (CRT) business. See Note 37 to our consolidated financial statements for more information. It is too early at the present time to assess the extent of any liability that Thomson may incur in connection with such claims and investigations.

Should we or any of our subsidiaries, however, ultimately become subject to fines or penalties in respect of any such alleged conduct, or be held liable therefor towards any third parties, or settle any related claims or proceedings, it is possible that the amounts of any such fines or penalties, liability or settlement could be substantial and could have a material adverse effect on our business, results of operations, financial condition and cash flows.

Risks related to human resources

Our success depends upon retaining key personnel and hiring qualified personnel.

Our success depends to a significant degree upon the contributions of our management team. A limited number of individuals have primary responsibility for managing our business, including our relationships with key customers and licensees. Losing the services of any key member of our team, whether from retirement, competing offers or other causes, could prevent us from executing our business strategy, cause us to lose key customer or licensee relationships, or otherwise adversely affect our operations.

Our performance also depends upon the talents and efforts of highly skilled individuals. Our products, services and technologies are complex, and our future growth and success depend to a significant extent on the skills of capable engineers and other key personnel. Ongoing training of personnel is also necessary to maintain a superior level of innovation and adapt to technological changes. The ability to recruit, retain and develop quality staff is a critical success factor for us and if we are unable to do so effectively, our operating performance could be negatively affected.

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Risks related to the environment

Changes in safety, environmental or health legislation resulting in more burdensome requirements and additional costs could adversely affect our business, results of operations and financial condition.

A certain number of the Group’s manufacturing sites have been used for industrial purposes for many years. Contamination of the soil or the subterranean groundwater, which already occurred on some sites, could occur again or be discovered on other sites in the future. The industrial wastes from any sites that Thomson built or acquired may expose the Group to clean-up or remediation costs. The Group has identified certain sites whose contamination required or will require remedial actions.

The Group estimates that the provisioned amounts and contractual guarantees (contained in the acquisition agreements for certain industrial assets) make it possible to reasonably cover the obligations of safety, health or environment. Potential problems cannot be foreseen with certainty and provisioned amounts may not be adequate in all cases. Moreover, future events, such as changes in government or changes in laws on safety, the environment, or health, or the discovery of new risks, could create additional costs likely to have unfavorable effects on business, results of operations or financial condition.

In addition, some products we sell, or have sold in the past, are subject to electronics recycling legislation in certain jurisdictions or other legislation regulating certain aspects of the materials, manufacturing or design of the product. Many jurisdictions are also considering similar legislation that may impact products we sell or sold and these laws could have a material adverse impact on our financial condition and results of operations. See “Risks related to our financial restructuring” above.

1.4    Litigation

In the normal course of its business activities, the Group is involved in legal proceedings and is subject to tax, customs and administrative audits. The Group sets aside a provision each time that a risk is identified and the cost associated with this risk can be estimated.

The principal legal proceedings and governmental investigations in progress or envisaged, including certain claims and investigations relating to alleged anti-competitive conduct in connection with our former cathode ray tube (CRT) business, are described in Note 37 to the Group’s consolidated financial statements presented below. See also section 1.3: “Risk Factors - Claims and investigations relating to competition law could materially adversely affect our business, results of operations, financial condition and cash flows” for further information.

The Group is not aware of any proceedings envisaged by third parties, other than those referred to in the Group’s consolidated financial statements, likely to have a material adverse effect on the Group’s business activities, financial position, results of operations or solvency. See also “Risks related to our financial restructuring”.

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2

INFORMATION ON THE COMPANY

2.1    History and Development of the Company

24

2.1.1

Company Profile

24

2.1.2

Historical Background

24

2.1.3

Our Organization

25

2.1.4

Strategy and Outlook

26

2.2    Business Overview

28

2.2.1

Technicolor, formerly Services

29

2.2.2

Thomson Grass Valley, formerly Systems

33

2.2.3

Technology

37

2.2.4

Corporate and Other

40

2.2.5

Discontinued Operations

40

2.3    Organizational Structure

42

2.4    Property, Plant and Equipment

42

2.4.1

Operating Facilities and Locations

42

2.4.2

Environmental Matters

44

2.4.3

Insurance

45

2.4.4

Thomson Foundation

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2.1    History and Development of the Company

2.1.1   Company Profile

Legal and commercial name:

THOMSON

Registered office address:

46, quai Alphonse Le Gallo 92100 Boulogne-Billancourt France
Tel.: +33 (0)1 41 86 50 00  Fax: +33 (0)1 41 86 58 59

E-mail: webmaster@thomson.net

Domicile, legal form and applicable legislation: Thomson is a French corporation (société anonyme) with a Board of Directors, governed by Title II of the French Commercial Code pertaining to corporations, by all laws and regulations pertaining to corporations, and its bylaws.

We are registered in the Register of Commerce and Companies (Registre du Commerce et des Sociétés) of Nanterre under No. 333 773 174 and our APE code, which identifies a company’s type of business and activities, is 6420Z, corresponding to the business of corporate administration.

Date of incorporation and length of life of the Company: Thomson was formed on August 24, 1985. It was registered on November 7, 1985 for a term of 99 years, expiring on November 6, 2084.

Fiscal year: January 1 to December 31.

Thomson provides a wide range of video (and enabling) technologies, systems, finished products and services to Media & Entertainment (“M&E”) industry. Until the end of 2008, Thomson’s activities were organized into three operating divisions: Technicolor, Thomson Grass Valley and Technology. Two further activities regroup on the one hand Corporate Functions and on the other hand the residual Other activities. Effective January 1, 2009, a new operational organization has been implemented based upon three operating segments: Technicolor (Services until mid-2008), Thomson Connect (Systems until mid-2008, then Thomson Grass Valley until the end of 2008) and Technology.

In fiscal year 2008, we generated net sales of €4,840 million. At December 31, 2008, the Group had approximately 23,000 employees in more than thirty countries (including those in operations treated as discontinued).

2.1.2   Historical Background

Thomson^® and other major brands in the Group, such as RCA^® and Technicolor^®, have a long history in the development of technologies for the broadcast of radio and television, as well as for the colorization and processing of cinema film content. These technologies remain important for the Group today. Historically, Thomson’s activities and clients had been focused on consumer electronics products and on the manufacturing and assembling of components.

From 2000, the Group started to position itself within the M&E industry to benefit from its technological expertise as these target markets evolved. As part of this transformation strategy, the Group made several acquisitions including Technicolor^®, Philips’ professional broadcast business and Grass Valley^®. In addition, the Group began to dispose of the consumer electronics finished goods and components businesses that generated the bulk of its revenues prior to 2000.

The Group’s former Consumer Products and Components divisions were thus reshaped in 2004 and 2005 (i) with the disposition of substantially all of our television businesses (which were deconsolidated from August 1, 2004) in return for a 33% interest in TTE, which was subsequently converted in August 2005 into a 29% interest in TCL Multimedia, TTE’s parent company, and reduced to 19.3% in 2006, to 2.4% in 2007, and 0.14% in 2008, and (ii) the disposition of the bulk of our displays activity, comprising our television tubes and related components business (referred to herein as the “Displays activity”) by way of two transactions covering the bulk of our tubes and glass operations with members of the Videocon Group of companies (“Videocon”) and the transfer of our Videoglass glass manufacturing operations based at Bagneaux-sur-Loing to the Spanish group, Rioglass.

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This transformation continued over the period from mid-2004 to 2006. In line with these strategic priorities, Thomson invested during this period in key businesses that it had identified as growing, namely Media Networks and Broadcast Services, Content Services, Access Products for telecom operators and Broadcast & Networks businesses (Grass Valley and Software Service Platform).

In addition, in 2007, the Group proceeded with the previously-announced disposal of substantially all of its Audio-Video consumer electronics products and related accessories (together, the “AVA businesses”), which included the sale of its U.S. accessories business and its non-European Audio-Video business to Audiovox Corporation (with the exception of certain assets and liabilities), the disposal of Thomson’s Skymaster activities in Germany to Arques Industries and the closure of Thomson’s remaining European AVA operations. (Please refer to Notes 5 and 12 to our consolidated financial statements for more information, section 2.2.5: “Discontinued Operations” and Chapter 3: “Operating and Financial Review and Prospects”, section 3.15.7: “Profit (Loss) from Discontinued Operations”.)

During 2008, we decided to exit the Silicon Solutions activities which were formerly part of Technology. We also decided in November 2008 to exit the retail telephony activities in North America, which were part of the Access Products activity in Thomson Grass Valley (formerly the Systems Division and as from January 1, 2009, Thomson Connect). The Genlis operation, which assembles decoders for our Thomson Grass Valley activities, was sold on September 30, 2008 to Novatech, a French contract equipment manufacturer. We also announced in September 2008 the sale of our digital film transfer equipment (previously part of Grass Valley) to private investors led by PARTER Capital Group, a German private equity advisory firm.

The transformation of our business has been accompanied by a significant shift in our capital structure. Ten years ago, Thomson (formerly Thomson Multimedia and prior to that, Thomson Consumer Electronics) was indirectly wholly-owned by the French State. Following a series of transactions in our share capital in the period 1998-2003, the French State’s indirect interest in Thomson was reduced and, as of February 28, 2009, amounted to approximately 1.95% of our share capital. In 2004, Silver Lake Partners LLP (“Silver Lake”) invested U.S.$500 million in convertible bonds. In September 2008, Thomson redeemed the U.S.$500 million 3% convertible bonds held by Silver Lake, following exercise of Silver Lake’s put option. At February 28, 2009, the public owned approximately 93.55% of the share capital of Thomson; Thomson held approximately 1.89% of the share capital in the form of treasury shares; and we estimate that our employees and former employees owned approximately 1.98%. For more details on our share capital, please refer to Chapter 5: “Shareholders and Listings Information”, section 5.1: “Major Shareholders”.

2.1.3   Our Organization

As discussed below, the Group was organized around three operating divisions in 2008 – Technicolor (formerly Services), Thomson Grass Valley (formerly Systems and as of January 1, 2009, Thomson Connect) and Technology – and two additional segments: Corporate and Other.

Technicolor, formerly Services (43% of 2008 consolidated net revenues)

During 2008, the division which was formerly known as the Services Division was renamed Technicolor, reflecting the importance and strength of its brand. Technicolor offers end-to-end management of video-related services for our customers in the M&E industry. The division offers services related to the preparation of video content (Content Services) and its distribution, both through physical media (Film Services or DVD Services) and electronic distribution of video and management of video networks (Broadcast Services, Media Networks and Electronic Distribution Services). The film and DVD physical media businesses are mature businesses, while our other Technicolor businesses operate in markets expected to grow over time and represented close to 30% of the division’s revenues in 2008, unchanged with respect to 2007. Technicolor uses the world-leading Technicolor^® trademark across most of its businesses.

We describe the activities in this division in more detail below under the following headings:

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Content Services and Film Services;

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DVD Services and Electronic Distribution Services;

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Broadcast Services and Media Networks.

Since the beginning of 2009, the management of the activities within Technicolor has been reorganized in order to be aligned with our markets and better meet our customers’ requirements. Digital Content Production activities of Animation, Visual Effects and Games have been organized into a separate, focused operational organization. The Content Creative Services activities of Post Production, Digital Color Management, Sound Editorial, etc. will be managed with the Film Services business, providing a full portfolio of services to customers for managing content creation for feature films, television and commercials. The Content Media Management services activities and Electronic Distribution Services are being integrated with the Broadcast Services operations to provide a more complete infrastructure and service set for the delivery of content. The Retail Media Networks and Cinema Advertising activities will form a separate unit and are part of the divestment process announced on January 28, 2009.

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Thomson Grass Valley, formerly Systems (49% of 2008 consolidated net revenues)

This division supplies hardware and software technology for the M&E industry in the areas of production, delivery, management, transmission, and access.

The activities of Thomson Grass Valley are described in more detail below under the headings:

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Access Products – supplying access and home networking products, notably set-top boxes and advanced service gateways, principally to satellite and cable network operators and to telecom operators, as well as selling telephony and related products mostly through retail channels. In November 2008 we decided to exit the retail telephony activities in North America;

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Software Service Platform and Broadcast & Networks – comprising our softswitch and software operations and businesses supplying professional broadcast and network systems and equipment (most notably using the Grass Valley brand).

Following the January 2009 decision to dispose of the Grass Valley activities, the Access Products and home networking activities are regrouped within a new operating segment named Thomson Connect. The Software Service Platform activities from Broadcast & Networks are also incorporated in Thomson Connect.

In 2009, the retail telephony activities, formerly included within Access Products, are included within the “Other” segment.

Technology (8% of 2008 consolidated net revenues)

This division includes the following activities:

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Corporate Research;

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Licensing of patents and trademarks; and

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Software & Technology Solutions.

During 2008 we decided to exit the Silicon Solutions and announced on January 28, 2009 the decision to exit the Software & Technology Solutions activities which were formerly part of the Technology Division. On September 1, 2008, Thomson and NXP combined their respective Tuners business in NuTune, a company jointly owned in which we hold 45%.

Corporate and Other

At the end of 2008, the “Other” segment comprised principally our sub-contract manufacturing operation located in Angers, France and our North American after-sales services operations. In 2009, the retail telephony activities, formerly included within Access Products, are included within the “Other” segment. For more information, please refer to section 2.2.4: “Corporate and Other”.

2.1.4   Strategy and Outlook

With the establishment of its new management, Thomson is undergoing changes to reposition itself for the future. The key foundation for the new strategy of Thomson is to focus on the following items:

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a primary set of customers – content creators and distributors;

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bottom-line and positive cash flow generation; and

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growth from the shift to online entertainment distribution direct to the home.

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Over the 2009-2011 timeframe, Thomson’s business will base its activities around four strategic pillars:

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improve the balance sheet to achieve financial flexibility and sustainability;

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refocus the business portfolio, through a process of exiting businesses that no longer align with our strategic objectives;

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achieve operational effectiveness through a thorough standardisation of processes, systems and tools across the organisation, reaping substantial cost saving benefits; and

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achieve profitable and sustainable growth through a specific set of development initiatives.

For more information regarding our balances sheet situation, see Chapter 1: “Key information and Risk Factors” section 1.3: “Risks related to our financial restructuring”, Note 3.1 to our consolidated financial statements and Chapter 3: “Operating and Financial Review and Prospects”, section 3.17.2: “Financial Resources”.

In refocusing our business towards the investment priorities of content creators, we will leverage both our technological expertise and our positioning with network operators.

Thomson’s new positioning will move it from a conglomerate of contrasting businesses, to a single coherent business, focused on content creators and distributors. In doing so, we will divest out of non-strategic operations. These assets, which include most notably Grass Valley, Premier Retail Network (“PRN”) and cinema advertising, accounted for approximately €1.1 billion of sales in 2008. The divestment plan will provide us with the required focus for management and our resources on activities deemed most valuable by our key customers – the creators and distributors of premium video content. Loss making activities have been reviewed, one of the consequences of which has been the closure of retail telephony in the U.S., which took place in November 2008.

In addition to the benefits reaped from refocusing the business portfolio through the divestment of non-strategic operations, improving the operational effectiveness of the Group is of paramount importance in order to achieve a sustainable operation. 2009 and 2010 will see an increased focus by Thomson on the standardization of offer processes and project management and the standardization of operational and management processes, systems and tools. Increased focus will be directed at the design and development process so as to achieve an optimal cost structure through a culture of “design to cost”. Our objective is that €120 million of annual run-rate savings can be achieved by 2011.

Two key choices have shaped Thomson’s future profitable growth strategy, namely:

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focusing on premium video content creators and distributors, leveraging its position as a world leader in this area, the strength of the Technicolor brand with film and television studios and its technological assets; and

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accompanying this customer base and its priorities in the evolution towards digital technologies and business models across their value chain, in particular leveraging our assets in the shift to on-line distribution of media entertainment services that is taking a hold of the market today.

Thomson’s growth strategy over the next three years is based on four initiatives:

Firstly, we plan to leverage Technicolor’s current position in visual effects and animation to extend our capabilities that enable our customers to create their content and to capture growth in this segment.

Secondly, Thomson will explore geographical expansion (particularly in Western Europe) to extend Technicolor’s capabilities to support customers as they manage their content assets to the growing base of customers outside North America.

Thirdly, Thomson’s strengths in both Technicolor distribution services and Thomson set-top box and gateways will allow it to capture growth in the nascent market of on-line premium video content distribution. The Group’s presence in the set-top box and gateway market represents a significant edge to support film and television studios who aim to develop direct channels for electronic content distribution to the end user. Selective partnerships with third parties in order to deliver quality of experience for the end user on a strong software platform will be established. This will allow Thomson to protect its strongly performing businesses that support the requirements of our customers to deliver their content with the maximum certainty of quality and revenue generation.

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Fourthly, research and development of technologies to support our business remains a priority and investment will be maintained at levels consistent with recent history. However, this investment will be refocused to accommodate our new strategy and the need to utilize partnerships more effectively to achieve our goals. Direct research investment will now be shaped into three major programmes: 3D; home networking; and workflows. In addition, a strategy of selective patent acquisitions will be adopted to maintain our strong intellectual property portfolio.

2.2    Business Overview

The table below sets forth the contribution to our consolidated net revenues for 2008, 2007 and 2006 in accordance with IFRS for each of our divisions (with the exception of discontinued operations).

The net results of our AVA, Silicon Solutions and the bulk of our Displays activities are treated as discontinued operations in the consolidated financial statements as of and for each of the years ended December 31, 2008, 2007 and 2006, and are therefore not reflected in our net revenues. The substantial majority of the net revenues shown in the Corporate and Other line are revenues of our residual Non-Core manufacturing and assembly operations.

See Chapter 3: “Operating and Financial Review and Prospects”, section 3.6: “Geographic Breakdown of Net Revenues” for a breakdown of our revenues by geographic markets.

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2.2.1   Technicolor, formerly Services

Technicolor generated consolidated net revenues of €2,055 million in 2008 (43% of the Group’s reported consolidated net revenues). The division offers end-to-end management of video-related services for the M&E industry. We offer services related to the preparation of video content (Content Services) and distribution of video content, both distribution of video through physical media (Film Services and DVD Services) and electronic distribution of video and management of video networks (Broadcast Services, Media Networks and Electronic Distribution Services). The film and DVD physical media businesses are mature businesses, while our other Technicolor businesses operate in markets expected to grow over time and represented close to 30% of the division’s revenues in 2008, unchanged with respect to 2007. Technicolor uses the leading Technicolor^® trademark across most of its businesses. The Technicolor business is described below under the following headings that correspond broadly to various stages in the preparation and subsequent distribution of video content, whether by content producers, distributors and broadcasters or emerging users of video:

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Content Services and Film Services

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DVD Services and Electronic Distribution Services

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Broadcast Services and Media Networks

Operating principally under the Technicolor^® brand, we are a worldwide leader in the development and printing of film reels, and in DVD Services for content producers/owners (source: Futuresource – DVD Industry Outlook, March 2009), as well as one of the worldwide leaders in both Content Services, including post-production and visual effects, and the activities performed by our Broadcast Services business.

Content Services are provided in the content creation process (pre-production, during production and post-production), such as visual effects (“VFX”), manipulation of digital intermediates (i.e., the digital manipulation of images and the data from which images are generated, including the correction of color, as part of the finishing process for film and TV content), foreign language (e.g. subtitling and dubbing), editing and the creation of final digital and photochemical duplicates for theatrical release, broadcast, packaged media release (e.g. DVD and Blu-ray^™) and for other forms of video distribution (e.g. for digital download services).

Physical media services are provided by Film Services and DVD Services, including content preparation, planning, manufacturing and physical distribution services for video content, for theatrical (cinema) release and for release on DVD and Blu-ray^™. We also provide physical distribution services for theatrical digital releases.

Broadcast Services and Media Networks assemble video programming and/or manage distribution of video content through video networks to broadcasters, retailers, cinema exhibitors and other enterprises that aim to provide audiences/customers with video content. We are also developing our Electronic Distribution Services in order to pursue opportunities that are arising as the electronic distribution of video content to the home becomes more widespread.

Technicolor operates in the worldwide market for the manipulation/distribution of film and video content. The division seeks to extend the range and depth of its product and service offerings, while developing new solutions to support the transition of its customers to digital technology. This strategy builds on the Group’s strong existing position in this business segment, its very close relationships with its M&E clients and its strong capabilities in research and innovation.

Some segments of the M&E industry are concentrated, resulting in a number of key studio clients, geographically based primarily on the West Coast of the United States, accounting for a substantial proportion of the businesses and revenues of Technicolor. However we continue to diversify our offering to serve other groups of customers, such as broadcasters and other users of video content, as the use of video content becomes increasingly pervasive.

Currently, our physical media activities still contribute the majority (a little over 70%) of the division’s revenues, unchanged from the previous year. Although we expect these physical media activities to remain significant contributors to Technicolor for the next few years, we continue to support and guide our customers through an industry-wide transition that is underway to digital formats and services. Based on our current and targeted customer base, we believe this transition offers opportunities, in particular in the areas of the development of high definition optical disc formats (Blu-ray^™), digital cinema, digital post-production, digital media asset management and broadcast play-out services in both our existing markets (principally the United States, Europe and Asia) and in new geographical regions.

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The division has been built around the Technicolor-branded businesses, acquired in March 2001. Our leadership position is based on more than 90 years of motion picture industry leadership, combined with access to the Group’s technology, technical excellence, global reach and scale, an integrated and secure service offering to its customers and an organization-wide focus on quality and customer service.

In many parts of our Technicolor businesses, relationships with most major customers are covered by long-term contracts. In the physical media activities, contracts usually have terms of three to five years and typically provide for volume and time commitments, as well as pricing and geographical territories served. In any given year certain contracts come up for renewal. Major client relationships are typically the result of multiple contractual arrangements for specific types of services, which include a fixed duration and specific terms depending on the particular geographical area. Under the terms of certain of these contracts, we may make advance payments at the commencement of the contractual relationships, which are reimbursed in line with manufactured volume over the duration of the contracts. For more information on these contract advances, see Note 18 to our consolidated financial statements. Our key customers in 2008 in these businesses included major film studios such as The Walt Disney Company, Paramount/Dreamworks, Warner Bros., Universal Studios and, to a lesser extent, software and games publishers such as Microsoft and Electronic Arts. The Content Services activities also deal with many of the same customers, but not under long-term contracts, and with many independent producers and production entities. The Broadcast Services and Media Networks businesses also operate under long-term contracts in respect of some of their revenues, as described below.

In 2008, Technicolor provided services for 15 theatrical features premiering at the Sundance Film Festival, 16 theatrical features premiering at the 61st edition of the Cannes Film Festival and contributed to 20 of the 44 theatrical and documentary features of 2007 nominated for the Oscar^® Academy Awards held in 2008. Technicolor also provided services to all five nominees in the category of Best Motion Picture of the Year and served 100% of the nominated theatrical features in some capacity for theatrical features of 2008 nominated for the Oscar^® Academy Awards held in 2009.

Content Services and Film Services

Content Services

We offer a comprehensive set of content creation, content completion and management services to M&E clients, in the theatrical (cinema), television, commercial/advertising, and interactive gaming segments. The range of services provided includes VFX, animation, Digital Intermediate (“DI”) post production (i.e., the digital manipulation of images and the data from which images are generated, including the correction of color, as part of the finishing process for film and TV content), high definition digital dailies, foreign language versioning (including subtitling and dubbing), video and sound post production for television content, editing and the creation of final masters for theatrical film, broadcast masters, packaged media release (e.g. DVD and Blu-ray^™) and for other forms of video distribution (e.g. for digital download services).

We currently provide services in both analog and digital formats and provide our clients with the ability to move easily between both formats. These services support the content creators’ needs to work in both environments simultaneously. With the transition of the creative process to digital format, the secure management of digital media assets is becoming increasingly important. We have developed digital media asset management solutions allowing the secure storage, management and retrieval of content for easy distribution to multiple distribution channels. The concept of a proprietary global digital network to allow rapid and secure movement of content, particularly during the time-critical production phase, is now being offered to our customers.

In the area of content security, we have developed innovative solutions, which have been adopted by content creators.

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For example, we developed an infrastructure permitting the identification and forensic tracking of pirated content, whether the content is pirated via camcording at a theatre or from advance screening copies for various award nominations. Thomson has also developed hologram and other copy protection supports for Microsoft game content.

In 2007, we expanded our services capabilities with a strategic investment in Paprikaas Animation Studios, a leading animation and game content provider in Bangalore, India. The addition of Paprikaas’ creative, technical and computer animation work gives Thomson added capabilities and resources to capture the growing industry demand for high end 3D digital animation for feature films, television animation, commercial advertising and video games. Further leveraging the investment in India, Thomson also has formed a strategic alliance with DreamWorks Animation SKG, Inc. to develop world-class animation capabilities in India.

In 2008, The Moving Picture Company (“MPC”) launched a new VFX facility in Santa Monica, California (in the greater Los Angeles region). The new facility focuses on the U.S. market for commercial spots and provides a front-end presence to serve MPC’s feature effects business for Hollywood studios.

In 2008, Thomson launched a new DVD compression and authoring (“C&A”) facility in Bangalore, India, to be co-located with Thomson’s Paprikaas Animation and Game Design facility. The new C&A facility opened in May 2008 and is based upon Thomson’s leading research and development efforts for high-definition Blu-ray^™ disc and standard-definition DVDs.

The Content Services market is fragmented with significant elements still being handled internally by some major studios. The market is, however, now beginning to consolidate in some areas with increasing proportions of particular services being outsourced by the studios to multiple suppliers who can meet their technical and service requirements. Thomson believes it has grown its share of the Content Services market and over the last few years has enlarged its global service offerings and expertise with a view to benefiting from the growth of this fragmented market. Our main competitors for Content Services include Ascent Media and Deluxe. In the market for visual effects, Industrial Light & Magic (“ILM”) is a major competitor.

Film Services

After the process of creating and preparing the content is complete, we offer bulk-printing services for the release of a film to cinemas for theatrical release. A major studio worldwide release today can require in excess of 10,000 copies of a film to be printed and delivered to cinemas for simultaneous release. Increasingly, releases are occurring simultaneously worldwide, which requires processing film prints on a large scale and in close coordination with the creative processes to handle multiple language versions in a fast and efficient manner. Through facilities in North America, Europe and Asia, the Group processed close to 4.9 and 3.7 billion feet of film in 2007 and 2008, respectively.

In 2008, we continued to focus our release printing operations on the facilities in Mirabel (Canada) and Rome (Italy). Our Mirabel film processing facility located near Montreal, Canada, handles about 63% of the Group’s North American requirements (compared to 60% in 2007). The largest cost in this business is the cost of purchasing raw film stock, for which Kodak is the major supplier.

We also provide logistical support in North America, delivering prints and studio marketing materials to cinemas. We continue to pursue opportunities to expand these logistical service operations to support the worldwide release of films and to provide real time information to distributors and cinemas regarding the status of film content. Our main competitor in this business is Deluxe.

DVD Services and Electronic Distribution Services

DVD Services

Thomson provides end-to-end packaged media services to content owners, manufacturing and distributing video and game DVDs, Blu-ray^™ discs and CDs. We provide a turnkey integrated solution for video and games content producers that spans mastering, manufacturing, packaging and distribution, including direct-to-retail, direct-to-consumer and returns handling, as well as procurement, information services and retail inventory management systems. With our extensive distribution network we can provide end-to-end supply chain services for our clients, including freight management services.

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In 2008, we replicated approximately 1.4 billion DVDs, compared to approximately 1.5 billion DVDs in 2007. In 2007, as volume growth in the packaged media market began to slow, we completed the consolidation of our DVD manufacturing facilities in Europe and North America from six to two, focusing our replication activities on our facilities in Guadalajara, Mexico and Piaseczno, Poland. Packaging and distribution in the United States is supported by a multi-region/multi-site facility platform with a concentration of such activities based in our Memphis, Tennessee and Livonia, Michigan facilities. During 2008, we continued to implement cost reduction actions, including increased automation and efficiency initiatives.

At December 31, 2008, Thomson had annual capacity to produce 1.9 billion standard definition DVDs supported by approximately 5 million square feet of dedicated distribution space.

DVD Services positioned itself for the retail launches of both HD DVD and Blu-ray^™ in 2006 and 2007, and produced discs for both the U.S. and European markets for the HD DVD, the hybrid dual-layer HD DVD/DVD “combo” and Blu-ray^™ formats. Thomson produced approximately 13 million discs from over 300 titles in 2007 and approximately 30 million discs from over 500 titles in 2008 across the high definition formats. The high definition format uncertainty ended in early 2008, with Blu-ray^™ being the selected format. As a result, Thomson completed a significant Blu-ray^™ capacity expansion in 2008. Thomson now ranks number two in capacity and market share in Blu-ray^™ (source: Futuresource, Blu-ray^™ disc market - February 2009), with annual capacity of about 80 million units at December 31, 2008. The Blu-ray^™ market expanded by approximately 200% from 2007 to 2008, with ongoing growth driven by multiple factors, including HDTV set penetration, falling Blu-ray^™ player prices, and an extensive studio marketing push.

We believe we continue to be the largest independent DVD replicator in the world based on volumes (source: Futuresource, DVD report - March 2009). Our largest competitor is Cinram. Our main customers include The Walt Disney Company, Universal Studios, Paramount/DreamWorks and Microsoft.

Electronic Distribution Services

The scale of our operations in Electronic Distribution Services is currently limited in comparison to our other service businesses. In this developing market, we are developing/launching services such as digital video download support to content owners and retailers, live streaming services, disc initiated services (such as electronic downloading of content from a menu on a DVD), and solutions for the electronic distribution of music, software and games.

Broadcast Services and Media Networks

Broadcast Services

The Broadcast Services activity assembles programming, both pre-recorded and live content, and manages the production, playout, post production and media management of video content for broadcasters through playout facilities in a number of locations worldwide. The demand for Broadcast Services is principally driven by the trend towards outsourcing broadcast playout, news production, and related services.

This business has U.K.-based broadcast facilities, including one of Europe’s leading independent broadcast playout facilities, which handles the playout of Disney’s channels to many of the European and Middle Eastern markets. We also manage the transmission operations of ITV plc (“ITV”), one of the main commercial broadcasters in the United Kingdom, since January 2007. Thomson provides playout services to many French broadcasters and TV channels including Canal Plus Multithématiques, France 24 and TV5 based in customer facilities in Paris. Broadcast Services provides services in The Netherlands through its subsidiary Nederlands Omroepproduktie Bedrijf (“NOB”). During 2007 we launched a new facility in Singapore, the first customer being BBC Worldwide branded channels. We launched several NBC Universal channels from the same Singapore facility in 2008.

From 2009, the media management operations from Content Services and the Electronic Distribution Services business are being combined with the Broadcast Services activities. This re-organization allows the operation to capitalize on similar capabilities for management of digital content workflows as well as customer digital transition requirements as Film Studios and TV Broadcasters transition their business models to a digitally driven content world.

In the fragmented market of outsourced broadcast playout, our main competitors are RedBee Media (owned by MacQuarie) and Ascent Media.

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Media Networks

We provide network services to retailers and cinema exhibitors and other enterprises that provide their customers/audiences with video content. We assemble video programming and/or manage electronic distribution of video content through networks on behalf of our customers. These activities are part of the divestment process announced on January 28, 2009.

Retail Media Networks

Premier Retail Network (“PRN”) is the U.S. leader in the market of out-of-home video advertising networks in retail outlets (source: Media 2008, Global Digital Out of Home Media Forecast - 2008-2012 report). PRN manages in-store video networks in close to 6,400 locations across leading retailers mainly in the United States, most notably WalMart, Costco, Albertsons and Best Buy. PRN offers a comprehensive range of services including installation and management of electronic media infrastructure, conversion and preparation of electronic video content and out-of-home media sales.

PRN also operates an in-store television network in Carrefour hypermarkets in Poland and Brazil and in-store Media Networks for WalMart’s Supercenter format stores in Mexico.

PRN’s main competitors are JC Decaux, Clear Channel Outdoor, Lamar Advertising and CBS Outdoor.

Cinema Advertising (Screenvision)

Screenvision operates screen-advertising activities across the United States and in parts of Continental Europe in two 50:50 joint ventures with ITV. (Screenvision U.S. and Screenvision Europe). In return for granting exclusive rights to our screen-advertising operations through contracts which vary in length from approximately three to five years, the cinema owner or operator receives a share of the revenues from advertisers, and in certain cases may be supported by a minimum revenue guarantee. Our main customers include exhibitors such as National Amusements and Carmike as well as advertising agencies and advertisers.

Competitors include National Cinemedia in the U.S., a company majority-owned by Regal, Cinemark and AMC, three major theatre operators, and Mediavision in Europe.

2.2.2   Thomson Grass Valley, formerly Systems

Thomson Grass Valley generated consolidated net revenues of €2,381 million in 2008 (49% of the Group’s reported consolidated net revenues). This division supplies hardware and software technology for the M&E industry in the areas of production, delivery, management, transmission, and access.

These businesses are described below in more detail under the headings:

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Access Products – (i) supplying access and home networking products, notably set-top boxes and advanced service gateways, primarily to satellite and cable network operators and to telecom operators, and (ii) selling telephony and related products mostly through retail channels. In November 2008, we decided to exit the retail telephony activities in North America; and

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Software Service Platform and Broadcast & Networks – comprising our softswitch and software operations and businesses supplying professional broadcast and network systems and equipment, both hardware and software technology (most notably using the Grass Valley brand).

Access Products

Through our Access Products activities, we develop technologies and products for broadband network operators. Thomson is a global market leader based on volume and value in both the supply of set-top boxes and advanced service gateways, as well as more basic products like DSL and cable modems. The Access Products operations in 2008 served the following customer groupings: products for satellite network operators, products for cable and terrestrial operators, products for telecom operators and telephony products sold through retail or resold by operators. Access Products accounted for approximately 75% of the revenues of Thomson Grass Valley reported for 2008. Thomson shipped 10.5 million satellite set-top boxes in 2008, 5.2 million cable, IP and hybrid set-top boxes, 3.4 million cable modems/eMTAs and 11.1 million Access Products for telecom operators.

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Thomson partners with broadband network operators to enhance the delivery of digital entertainment, data and voice to their end-users. Thomson is one of the leading global broadband solutions providers, offering a full spectrum of customized solutions which integrate hardware, software and services. With an estimated market share above 14% in 2008 in volume (based on latest available forecast sources: IMS-Research - February 2009, Dell’Oro - February 2009), we believe we are also one of the worldwide leaders in all access device categories including IP and satellite premises systems to broadband network operators (these categories include: DSL & Cable Modems, routers and GWs, Satellite STB, IPTV STB, Cable STB, FTTH (Fiber to the Home) Modems & Gateways).

According to Dell’Oro’s “Quarterly Access Reports (4Q08) for DSL and Cable CPe (Cable Customer Premise Equipment)”, Thomson consolidated its worldwide leading market position with 14 million units shipped in 2008, establishing its market volume share at 14.3%.

Operationally, we now outsource the manufacturing of a vast majority of our Access Products to contract manufacturers. We retain some limited manufacturing capabilities in South America and Europe.

Satellite and Cable

We design and sell digital satellite set-top boxes (“STBs”) to satellite operators and are a world leader in digital Pay-TV STBs (source: IMS-Research - February 2009) with 10.5 million units shipped in 2008 (10.1 million units in 2007). Thomson offers a wide range of access platforms in standard definition and high-definition (“HD”), including STBs with hard disk recording capability (“DVRs” - Digital Video Recorders), in addition to standard, more affordable products provided to expand the basic subscriber base. In North America, which represents an estimated 40% of the world market for STBs (source: IMS Research - December 2008), we believe our 2004 agreement for the long-term development and supply of digital satellite STBs with our largest Access Products customer, DIRECTV, continues to help us strengthen our market leadership position based on value. 2008 saw even greater demand for HD and DVR platforms. Furthermore, Thomson also jointly developed with DIRECTV the MFH3^™ (Multi-Family Housing version 3) distribution system designed to solve satellite distribution issues in dense living spaces such as apartment complexes, condominiums and master planned communities. The first such system to use IP technology to deliver satellite television and other services, MFH3^™ was in 2008 recognized as the most significant and innovative technology for the multi-family housing market (Cornerstone Award at the Broadband Properties Summit in June 2008), enabling the delivery of all DIRECTV satellite TV programming and services using existing in-building and distribution wiring. In 2008, MFH3^™ was rolled out with a new software release that doubles the number of DIRECTV receivers using MFH3^™ will support, providing a more cost-effective installation for large properties and enabling injection of local content, such as on-site amenity video feeds into the system.

DIRECTV has been a customer of the Group since 1994 but the level of business associated with DIRECTV grew significantly in 2004. In mid-2004, we announced an agreement with The DIRECTV Group, Inc., which was the parent company of Hughes Network Systems, Inc. (“HNS”), for the development and supply of digital satellite STBs. As part of the transaction, Thomson acquired HNS’ STB manufacturing assets. Under the terms of the supply agreement, Thomson is involved in the technology development of new STB models during the contract period and supplies a full range of receivers including DIRECTV-brand high definition and DVR receivers. Thomson is the lead supplier of DIRECTV System set-top receivers. DIRECTV also received a cash payment of U.S.$250 million from Thomson upon close of the sale of HNS’ STB manufacturing assets, which occurred in June 2004. In July 2008, we amended our agreement with DIRECTV such that the amount of the rebate that DIRECTV can earn from the purchase of STB receivers was reduced to U.S.$42 million and in return DIRECTV is no longer required to purchase a minimum of U.S.$4 billion in STBs over the contract term. DIRECTV continues to be obligated to grant Thomson a significant portion of all STB purchases through the end of the contract period. As part of the amendment, the contract was extended through June 2010.

In Latin America, we have on-going relationships with DIRECTV Panamericana and Sky Mexico and Sky Brazil Latin America. 2008 most notably saw us launch the first HD DVR into DIRECTV Panamericana.

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In Europe, we continued our business with BSkyB, Sogécable, Canal+ and Viasat as satellite and terrestrial Pay-TV operators in Europe continue to introduce more sophisticated services such as HD and PVR (Personal Video Recording).

We are also expanding our customer base in the Asia-Pacific region where we are a major supplier to Malaysia’s leading broadcaster, Astro, India’s TataSky, and Australia’s Austar which operate in markets which continue to experience significant growth in digital TV delivery.

The Group’s main competitors in STBs for the satellite market include Pace, Humax and Samsung.

In terms of our offering for cable operators, we design and sell cable set-top boxes (“CSTB”) and cable modems as well as digital terrestrial STBs to Pay-TV network operators. In addition to CSTBs, our product range includes wireless cable gateways and embedded voice-over-IP (“VoIP”) gateway solutions. Our cable solutions portfolio was further strengthened in 2008 through the launch of our Advanced Cable Gateway, ACG, a sophisticated broadband hub for fully customizable multiple-play services including an expanded set of IP services accessible on the ecosystem of voice and video-connected products in the networked home. Our CSTB offerings have been chosen by many cable network operators in Europe, the Middle East, Latin America and China.

In 2007, we strengthened our position in eMTA dual-play modems (voice and data) in the U.S. and in 2008 entered into a purchase agreement with Comcast, the leading provider of cable, entertainment and communications products and services in the U.S., to be a supplier of digital transport adapters and ACG’s “DTA” (digital to analog). We now have around 50 cable customers including four of the largest operators in the world in numbers of subscribers: Comcast, Time Warner Cable, Liberty Global and Kabel Deutschland GmbH.

In 2008, we provided cable converters (DTAs) for Comcast, for support of the analog switch-off. We also delivered high numbers of SD & HD set top boxes to cable operators (such as Net Brazil, HOT and UPC).

Our main competitors in our various cable markets described above include Motorola, Cisco Scientific-Atlanta, Arris and Pace.

Telecom Operators

Thomson provides telecom operators with a comprehensive range of gateways and modems which enable the delivery of voice, video, data and mobility services to the end users. We have an offering in high end gateways, combining voice, WiFi, services and management of Quality of Service. We have had particular success in the period 2005-2008 in supplying the Livebox^™ to France Telecom in increased volumes, and in 2006-2008 in supplying BT’s Home Hub for its “Total Broadband” service. We are the only company commanding a leading position in broadband gateways. We were also the first provider to introduce a gateway supporting the new, more powerful 802.11n WiFi standard and the first to obtain in 2008 DLNA (Digital Living Network Alliance) certification for a gateway confirming its full interoperability in a home network. These products are increasingly operator-customized and branded by the respective operators. Thomson is currently the leading provider worldwide based on volume and value for these advanced residential gateways (source: Dell’Oro – February 2009).

Key customers include major European telcos like BT, France Telecom, KPN, Telenor, Telefonica, TeliaSonera, Telekom Austria, Tele2 and OTE. Special features (e.g., fixed/mobile convergence, HD sound for VoIP, voice mail and caller ID on TV) support value-added services provided by our telecommunications customers. Our main competitors in telecom products include Sagem, 2Wire, ZTE, Huawei and ZyXEL.

We are currently strengthening our product line-up for ultra broadband, both in VDSL (very high bitrate DSL) and fiber.

Operators are increasingly deploying video entertainment over broadband DSL IP networks. We develop and market IP STBs that allow for such service, for instance with France Telecom and Bouygues. Such an IPTV service is enabled in the consumer’s home in large part by an advanced residential gateway, such as the France Telecom Livebox^™ and BT Home Hub mentioned above.

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Telephony & Home Networking

We have started to develop products that complement our telco and cable gateway sales by developing an ecosystem of home-connected devices to offer to our customers. This expanding ecosystem includes innovations such as the Portable InfoCenter, a wireless multimedia device for the delivery of multiroom IPTV, video on demand and other services, and Symbio, an Internet radio with HD sound and VoIP (Voice-over-IP) DECT phone in one device.

In 2008, Thomson sold residential, small office, and home office communications devices, principally cordless telephony handsets under the GE^™, RCA^™, Alcatel^™ and Thomson^® brand names. In addition to selling to retail outlets, we have established positions with telecommunications providers, with our DECT telephone ranges and voice-over-IP products.

We sell telephones under the Alcatel^™ brand name in France and Spain and the Thomson^® brand name in the rest of Europe. We also sell a large number of telephones through telco operators, branded as BT in the U.K., France Telecom in France, Telmex in Mexico, Telstra in Australia, and Telefonica in Spain. Over half (58%) of the products sold in our main European markets were DECT products.

Our main competitors are Vtech, Uniden, Panasonic, Clarity, Phillips and Emerson in the U.S. and Binatone, Siemens, Deutsche Telecom and Panasonic in Europe.

In November 2008, we decided to exit the retail telephony activities in North America. The Group has also decided to exit these activities in Europe and Asia.

Software Service Platform and Broadcast & Networks

Software Service Platform

Our Software Service Platform activities are based on the combination of the Cirpack softswitch business and SmartVision software operations.

We are one of the European leaders in the supply of softswitches to network operators and Internet Service Providers (“ISPs”). We develop next generation voice switching platforms marketed under the Cirpack brand that allow operators to deliver advanced phone services over legacy and broadband infrastructures and migrate their wireless networks to IMS/TISPAN architectures (IP Multimedia Subsystem/Telecom & Internet Converged Services & Protocols for Advanced Networks). Our end-to-end value proposition includes unified communication, fixed-mobile convergence and advanced business application support for NSP’s like IP-Centrix and migration to IMS with just under 9 million lines deployed. Our platforms are used by over 100 service providers in more than 35 countries, on 3 continents, including several of the largest European VoIP services providers such as Free.fr, SFR, Bouygues, Numericable, T-Online, Telecom Slovenia and Telecom Italia.

The SmartVision service platform supports delivery over managed broadband, hybrid (satellite and terrestrial), cable and mobile networks as well as Internet TV. Our SmartVision video-on-demand (“VoD”) and ad-insertion servers with Sapphire broadcast servers have increased content distribution capability, capacity and scalability. In addition to the hybrid push-and-pull delivery capabilities for hybrid broadcast networks delivered in 2008, Thomson launched new modules to its SmartVision multi-network service platform for delivering VoD over cable architectures. SmartVision also implements a new advanced user interface, integrating advertising and personalization of the user experience maximizing revenue opportunity for the network service operator.

With its Software Service Platform expertise, Thomson can launch a pre-integrated service delivery platform to help telecom service providers introduce sophisticated voice and video features over broadband local loops.

Our Software Service Platform activities are located in Rennes and Boulogne in France with most of the research and development being performed at these locations.

Our main competitors for this activity are Alcatel-Lucent, Cedar Point Communications, Ineo, Microsoft, PCCW, Comverse, Italtel and Nokia Siemens Networks.

Broadcast & Networks (known as Grass Valley)

In January 2009, we announced our decision to exit the Grass Valley business.

The Broadcast & Networks businesses accounted for approximately 25% of the consolidated net revenues of Thomson Grass Valley reported for 2008. These businesses supply content creators, production facilities and distributors with video-focused systems and equipment such as HD digital studio cameras and field camcorders, film imaging and visual processing equipment, broadcast media servers, routing switchers, production switchers/vision mixers, automated production systems, and post production/editing systems – all to support our HD broadcast solutions in news, live and studio production.

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Our customers are demanding the ability to deliver an increased variety of services – video, voice and data – in a seamless fashion to subscribers’ mobile phones, Personal Digital Assistants (“PDAs”) and homes. Key elements are the head-end solution (real-time software platforms, video coding, routing and network processing, and transmission systems). A central element of this head-end solution is our video NetProcessor, which allows (i) delivery of more channels over less bandwidth while maintaining video quality and (ii) facilitates the addition of localized content to make services more competitive and attractive. Our head-end solution also includes our expanded ViBE family of encoders for cost-effective MPEG2 and MPEG4 compression for applications ranging from Mobile TV to 1080i HD.

Primary competitors in the broadcast, media and entertainment market include Avid, Harris, Panasonic and Sony, with multiple niche competitors across individual product lines. Key competitors in the broadband and network operators market include Harmonic, Tandberg (now part of Ericsson), Cisco and Motorola.

The Broadcast & Networks activity has acquired a strong market position in the first wave of the global transition to HD, focused on sports events. Grass Valley has a strong presence with more than 3,700 HD cameras in use throughout the world, as well as 2,500 multi-format and HD production switchers/vision mixers.

Around the world, over-the-air terrestrial radio and television broadcasters are transitioning from analog transmission to digital transmission as countries convert their spectrum to digital. In the United States, broadcasters’ playout facilities and transmission are complete with stations now looking to transition the balance of their product equipment, including news, to HD. As more and more broadcasters move towards HD, other forms of video content on digital cable and satellite networks and packaged Blu-ray^™ HD media are putting increasing pressure on news departments. While competitive pressures are still a factor, the current economic environment has given increased focus on efficiency and cost savings in every area of operations – spending is still expected in areas where short-term cost savings can be realized and those upgrades allow for the transition to HD. In 2008, we saw continued market penetration with the Grass Valley Ignite integrated production platform, which allows high-quality news programming to be produced with just one or two operators, where it is now installed in more than 100 local news operations (primarily in North America).

The goal of broadcasters to create and distribute high quality content in the most efficient manner has created new maintenance, professional services and support opportunities for Grass Valley. Broadcasters have begun purchasing complete systems, rather than just products. Routinely, these systems include service level agreements (“SLAs”). Another area of opportunity for Grass Valley is in facilities management whereby Non-Core operations are handed over to specialist service providers.

Broadcast & Networks operates in more than 20 sites globally and has received over 20 Emmy^® Awards over the past 25 years for its products. Major production sites are based in Nevada City (California), Breda (The Netherlands), Weiterstadt (Germany), Kobe (Japan), Conflans (France) and Rennes (France). Our research and development is mainly performed internally, while large-scale volume production is outsourced to two contract manufacturing partners.

2.2.3   Technology

Technology generated consolidated net revenues of €392 million in 2008 (8% of the Group’s consolidated net revenues). Technology comprises the following activities: Corporate Research, Licensing, and the software business Software & Technology Solutions.

Corporate Research activities are treated as a cost center within the Technology Division. This operation interacts closely with the other divisions but further applied research and product development is undertaken within the relevant division (particularly Thomson Grass Valley, formerly Systems) and the costs accounted for in that division. Total Group research and development expenses are disclosed in Note 8 to our consolidated financial statements. The division monetizes technology principally through licensing Thomson’s intellectual property which represents a significant portion of the division’s consolidated net revenues (€380 million in 2008).

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Corporate Research

The main objective of Corporate Research is to generate innovation to support the services, software and solutions we provide to the M&E industry. A key goal is to create competitive advantage in technology and to develop new market opportunities. It also enhances Thomson leadership in these fields through a proven capacity for invention, manifested in the generation of patents that ensure a continuous flow of Licencing revenues over the next five to fifteen years.

Long-term research is managed centrally through Thomson’s Corporate Research segment, which employed 390 people in six research centers as of December 31, 2008. The largest center, located in Rennes, France, has a permanent staff of 130. The other centers are located in Paris (France), Hanover and Villingen (Germany), Princeton (United States) and Beijing (China).

To develop and respond to customer needs, research focuses on key drivers of the M&E industry. These are addressed in three Strategic Programs: the Enhanced Media Program (3D & Content Coding), the Media Production Program (Workflow & Content Access) and the Media Delivery Program (Home Networking).

The Enhanced Media Program (3D & Content Coding) will deliver compelling new 3D technology and improve audio/video content quality, in order to permit the diffusion of content of the Group’s creative partners to better respond to expectations. Research will include rendering (generating an image from a model, by means of computer programs) and animation and specifically target 3D and compression.

The Media Production Program (Workflow & Content Access) will enable customers to shift to digital production tools by delivering automated semantic metadata generation, annotation & indexing for efficient content preparation, restoration, structuring and repurposing. Research will also create new techniques for content search and access.

The Media Delivery Program (Home Networking) focuses on delivery of content and media services in innovative, reliable, high-performance ways both inside the home, over home network and consumer devices and outside the home via multiple devices. Content and services management and quality-of-experience are two central research topics.

Under the guidance of the Strategic Programs, research will focus the majority of its expertise on a few multi-year strategic projects: Content for 3D, Immersive Experience, Mixed Reality, Content Production Workflow, Media Content Acquisition & Adaptation and Media Consumption & User Experience.

Strategic projects are complemented by dynamic exploratory projects addressing possible scientific disruptions that could provide new opportunities for innovative products.

Licensing

Thomson’s Licensing activities generated consolidated net revenues of €380 million in 2008 (approximately 8% of the Group’s consolidated net revenues). At December 31, 2008, this business employed 220 people based in 13 locations, principally in France, Germany, Switzerland, Japan, South Korea, China, Taiwan and the United States. Our Licensing activities themselves require relatively little infrastructure and have a limited cost base.

We have made it a strategic priority to protect and monetize our intellectual property. Our strong patent portfolio in video technologies, combined with our Licensing expertise, constitute significant competitive advantages. The Licensing activities were brought together in early 1999 with the integration into the Licensing organization already existing within Thomson of the RCA.TL patent and license management business (transferred from General Electric Co. to the Group on January 1, 1999). Since 2005, trademark Licensing activities have also been part of the Licensing business, with several contracts relating to the Thomson and RCA brands.

The Licensing team works closely with Thomson’s research and development centers to identify ideas that may be potential patent candidates, to draft patent applications and to detect uses of our patents by third parties. As of December 31, 2008, we held approximately 50,000 patents and applications worldwide, derived from more than 7,000 inventions. In 2008, we filed 548 priority applications in respect of new inventions that are filed for the first time.

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Thomson finalized its review of the full extent of its patent portfolio in 2008. This initiative allowed the classification of the patents according to their importance, and thereby permitted Thomson to drop a significant number of patents which are not used and had no likelihood of being used in their lifetime. This initiative was part of a quality program launched several years ago, to help Thomson concentrate its filing and maintenance efforts on high quality patents. This will result in a reduction in the patent portfolio maintenance costs over the coming years.

Among the new patented technologies, the Group has significant positions in the areas of digital decoders, HD and digital television sets, optical module patents for DVD and Blu-ray^™ disc players, MPEG video compression, the mp3 audio compression format, interactive TV technologies, storage technologies and new screen technologies such as liquid crystal display (“LCD”) and plasma.

We develop licensing programs rather than “LCD” licensing individual patents. Under our licensing programs, a licensor can obtain a license to use all of our intellectual property as it relates to a particular application (including patents which may be filed subsequent to granting of the license).

We currently have approximately 1,100 licensing agreements across 24 licensing programs relating to a diversified mix of video products and services. We have licensing agreements with a high proportion of consumer electronics companies in the Americas, Europe and Asia. The licensing agreements are typically renewable and have an average duration of five years; royalties are primarily based on sales volumes.

In recent years, we have successfully migrated the majority of Licensing income to digital technology-based programs compared to analog-based programs, as the underlying product markets have evolved.

In 2008, the licensing program generating the most revenue was MPEG2, which is licensed through the MPEG-LA consortium pool in which we participate. This program contributed almost 41% of our Technology revenues in 2008. We expect this program to remain a significant contributor to our Licensing revenues for several years. Licensing agreements with our top ten licensees accounted for 74% of our total Licensing revenues in 2008 (including MPEG-LA as a single licensee, although it represents a large number of underlying licensees). Products using MPEG2 and MPEG4 technology continue to be simultaneously compatible with both standards. There is no risk to MPEG-2 revenue until 2015 or beyond, by way of MPEG2 being replaced by MPEG4.

In 2008, Thomson acquired an important patent portfolio in the LCD technological field from the well known Xerox PARC research center, which it will use to complement its own portfolio in this field.

Finally, we are leveraging our expertise in Licensing through portfolio licensing services to third parties. For information on certain risks to which our Licensing business is subject, please refer to Chapter 1: “Key Information and Risk Factors”, section 1.3: “Risk Factors – Risks related to the evolution of the Licensing business.”

Software & Technology Solutions

In January 2009, we announced our decision to exit this business.

The Software & Technology Solutions activities aim to develop and commercialize technologies, primarily by leveraging Corporate Research innovations, with a specific initial focus on digital watermarking technology for content security and tracking.

Digital watermarking is the technology which embeds invisible and robust pieces of information within a digital content object, whether video, audio or still image. Watermarking enables, for instance, identification of the owner, origin or recipient of a piece of digital content, with market applications in post-production, broadcast distribution or other media and entertainment-related domains. The watermarking technology can be embedded in multiple products, including VoD servers, digital cinema servers, access devices, such as digital TV STBs, and also in professional media asset management systems.

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2.2.4   Corporate and Other

Corporate

Thomson’s Corporate operations comprise the operation and management of the Group’s Head Office, together with various Group functions which are controlled centrally, principally sourcing, Human Resources, operational and financial controlling functions, Corporate legal operations and premises management. The costs of these functions are allocated to the Group’s division where costs can be clearly identified as relating to a particular business within that division. Residual costs are reflected in the results of the segment labelled Corporate in the Group’s segmental reporting.

Other

The principal operations remaining on December 31, 2008 in the Other segment were our residual manufacturing and assembly activities at Angers in France, and our North American after-sales services operations.

The Angers facility produces decoders and printed circuit boards for Thomson Grass Valley. At the end of 2008, the number of employees at the Angers facility was approximately 340.

As part of a contract with TCL our U.S.-based after-sales operations continue to provide services for after-sales for Displays to TTE Inc.

Our European after-sales services operation, which provides spare parts to repair outlets in Europe and to manage repair activities for our audio, video and retail STB customers was sold on April 1, 2008 to Cordon Electronics, a French company specialized on after-sales and repair services for telco and consumer electronics products. As a result of this sale this operation has been classified as a discontinued operation.

The Genlis decoders operation, which assembles decoders for Thomson Grass Valley, was sold on September 30, 2008 to Novatech, a French contract equipment manufacturer.

In 2009, the retail telephony activities are included within the “Other” segment.

2.2.5   Discontinued Operations

Thomson has exited from a number of Non-Core businesses over the last few years, whose results have been reported as discontinued operations under IFRS, principally our Displays, our Audio-Video & Accessories operations and in 2008, our Silicon Solutions business (summarized below). For a description of the financial implications resulting from the exits from these businesses, see Chapter 3: “Operating and Financial Review and Prospects”, section 3.15.7: “Results of Operations for 2008 and 2007 – Profit (Loss) From Discontinued Operations” and section 3.16.7: “Results of Operations for 2007 and 2006 – Profit (Loss) From Discontinued Operations.”

Displays

In 2005, Thomson achieved the key steps in its disengagement from its Displays activity through the disposal of the following tubes manufacturing activities and related glass manufacturing operation. As a result, the assets specified below are treated as discontinued operations in our consolidated financial statements as of and for the years ended December 31, 2008, 2007 and 2006:

•

On February 28, 2005, Thomson completed the transfer of its cathode-ray tube plant at Anagni, Italy to Eagle Corporation, an entity owned by the Videocon Group;

•

On September 30, 2005, Thomson completed the transfer of its tubes assembly assets in Poland, China and Mexico, a research laboratory in Italy and sale, marketing and administrative functions mainly in Boulogne, France to Eagle Corporation, an affiliate of the Videocon Group. Upon completion of the transaction, Thomson received a payment of €240 million in cash from Eagle Corporation for Thomson’s tubes activities and related technologies. Simultaneously, Thomson invested €240 million in Videocon Industries, an oil and gas company that is also active in the consumer electronic and consumer electronic components markets, through the subscription in a private placement of Global Depository Receipts (each representing one underlying share of Videocon Industries) (“GDRs”) listed on the Luxembourg Stock Exchange. Payment was made in full on September 30, 2005, while the GDR allocation was effected in two tranches: 28,650,000 GDRs on September 30, 2005 and 217,200 GDRs on December 21, 2005. All GDRs were purchased at a price of U.S.$10 each. Following this investment, Thomson held approximately 13.1% of the share capital of Videocon Industries. In connection with this investment, Thomson entered into a shareholders’ agreement with Videocon Industries and its shareholders, which restricted Thomson’s ability to transfer its interest in Videocon Industries for a period of three years, subject to certain exceptions. Thomson has subsequently sold some of its shares in Videocon Industries, and, as of December 31, 2008, Thomson held 9.69% of the share capital of Videocon Industries, for €39 million, following the valuation at fair value of the shares held at December 31, 2008. Thomson’s interest in Videocon Industries is accounted for within “Investments and Available-for-sale Financial Assets” in our consolidated balance sheet, see Notes 2 and 17 to our consolidated financial statements.

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Following the agreement with the Videocon Group, over the course of 2007 we ceased production of tube components at the Torreon site (Mexico), and disposed of the Belo Horizonte site (Brazil). The Displays activities at the Genlis site (France) decreased in 2007 and were shut down over the course of the first semester of 2008.

Audio-Video and Accessories

On December 12, 2005, Thomson announced that it had decided to seek partners for its Audio-Video business, its Accessories business and its after-sales businesses for both Europe and the United States within its former business unit, Connectivity. As a result, those activities (together with the “AVA” businesses) are reported as discontinued operations in our consolidated financial statements as of and for each of the years ended December 31, 2008, 2007 and 2006.

The disposal of the North American Accessories business to Audiovox was announced on December 21, 2006 and completed on January 29, 2007.

At the end of December 2007, the Audio-Video business for North America, Latin America and Asia, with the exception of some net assets/liabilities, was purchased by Audiovox, and some staff rehired by Audiovox.

On October 16, 2007, Thomson announced the closing of the Audio Video and Accessories Europe business, except for the Skymaster activities in Germany. For the latter entity, a sale and purchase transaction was signed with Arques Industries, a German company, and completed on December 31, 2007 for the transfer of all the shares in Skymaster to Arques Industries. By the end of the first semester of in 2008 all the European activities had ceased.

Silicon Solutions

Through the Silicon Solutions activities, we designed and developed silicon components for video related applications. Such components are used in DSL modems and gateways, digital set-top boxes (decoders), CD players, professional cameras and encoders. We produced components for our Thomson Grass Valley, and had invested in developing products to increase sales to other manufacturers

Our integrated circuit design team employed around 300 engineers with specialized skills in digital, analog, mixed digital-analog, and radio frequency signal processing. This team operated out of six facilities located in Indianapolis (United States), Rennes (France), Villingen (Germany), Edegem (Belgium), Beijing (China) and Singapore. The production of integrated circuits was achieved through a fabless business model (with production outsourced).

Following the lack of success in generating additional external sales, we announced in the first half of 2008 the shutdown of these loss-making activities and subsequently definitively shut them down.

Silicon Solutions also included our tuners activities. The tuners business was carried out from four main sites: Boulogne (France), Villingen (Germany) and Singapore with manufacturing located at Batam (Indonesia). Our manufacturing site in Batam (which employs close to 1,000 long-term contract workers and over 2,000 short-term contract workers) produced tuners for the internal needs of our decoders and broadcast activities and for external manufacturers. The business was focused on the development of digital tuners for deployment in STBs, television sets and DVD recorders, with a strong growth of digital cable tuners on the Chinese market.

On September 1, 2008 Thomson and NXP combined their respective Tuners business in a common company, NuTune. Thomson mainly contributed to NuTune the fixed assets, inventories and employees of its tuner business. As a result of the transaction, Thomson’s share in the company was 45% as of December 31, 2008. It has been determined that Thomson has neither control nor joint control over NuTune and as a consequence, accounts for its investment in NuTune using the equity method since September 1, 2008.

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Thomson has accounted for the contribution of its Tuner business to NuTune as a disposal and recorded its 45% investment in NuTune as an acquisition. The difference between the fair value and the carrying value of the exchanged assets, less the portion of the gain represented by the economic interest retained by the Group, has been accounted for as a capital loss as of the date of the transaction, which loss is shown in our Consolidated Statements of Operations as a loss from discontinued operations.

2.3    Organizational Structure

Please refer to Chapter 6: “Additional Information”, section 6.7: “Organizational Chart as of December 31, 2008” for an organizational chart and a list of Thomson’s main subsidiaries.

2.4    Property, Plant and Equipment

2.4.1   Operating Facilities and Locations

We have an organization with various manufacturing and distribution operations in order to deliver products and services to our customers. In addition, we rely on outsourcing for manufacturing most of our finished products, particularly in Thomson Grass Valley.

Our objective is to optimize the location and the organization of our operations, to reduce our production costs, minimize our stock levels and our lead-times while minimizing negative impacts that could affect the environment, health and safety. Over the last few years, we have implemented an outsourcing policy for the manufacturing of a significant proportion of standardized products in order to focus our resources on the development of high-end products and services. At the end of 2008, we had facilities involved in the production and distribution of various products, as shown in the table below.

Our principal operating facilities by division at the end of 2008 are described below. We own or lease all of these facilities.

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PRINCIPAL OPERATING FACILITIES

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We also lease R&D or office buildings in several locations the most important by number of employees hosted being Boulogne (France), Rennes (France) Indianapolis (Indiana, USA), Burbank and Glendale (California, USA), Princeton (New Jersey, USA), Beijing (China), Edegem (Belgium). For more information on our leases, see the discussion under Chapter 3: “Operating and Financial Review and Prospects”, section 3.18: “Contractual Obligations and Commercial Commitments including Off Balance Sheet Arrangements”.

We also own the sites of Genlis (France) and Schifflange (Luxemburg), presently without any production or distribution activity.

2.4.2   Environmental Matters

As a global leader in providing a diverse range of video technologies, systems, equipment, and services to consumers and professionals in the M&E industry, Thomson seeks to establish and apply consistent environmental standards in its operations worldwide. Such standards should not only assist each of our locations in meeting all requirements of the country in which it is located, but may also enable each to develop programs that go beyond local regulatory requirements. To support and encourage environmental leadership, Thomson has established a number of programs and initiatives to assist the Group in achieving these standards. These programs are led and implemented by the Group’s Environmental, Health and Safety (EH&S) Organization. The four most significant of these are described below:

•

Corporate EH&S Charter: the EH&S Charter, along with its appropriate supporting policies and guidelines, is the cornerstone of our EH&S program. It defines key management principles designed to protect human health and the environment, to help us meet our legal and corporate responsibilities, and to provide a measure of guidance for each of our locations’ activities and operations. The EH&S Charter has been translated into four languages and is displayed at each industrial site and is available on-line at all locations via an internal EH&S website;

•

EH&S audits: our EH&S audits are a key part of Thomson’s efforts to improve EH&S management and performance, and to prevent accidents from occurring. In addition to the establishment of internal audits within each manufacturing, packaging, and film lab site, a comprehensive Corporate audit program was implemented in 1996. The aim of the audit program is to review our industrial locations’ compliance with Corporate EH&S Policies and Guidelines and specific applicable EH&S laws and regulations. The audit program has also been demonstrated to be a valuable tool for increasing awareness of personnel throughout the organization, identifying “best practices”, communicating successful initiatives among plants, creating opportunities for different approaches to problem solving, and exposing our EH&S personnel to broader aspects of our multi-faceted business. In 2008, nine locations were audited as part of our objective of auditing each industrial location at least every three years;

•

Implementation of an Environmental Management System (EMS): an EMS is a continual cycle of planning, implementing, evaluating and improving practices, processes and procedures to meet environmental obligations and to successfully integrate environmental concerns into normal business practices. ISO 14001 is the most widely accepted international standard for an EMS. To receive certification, organizations are required to develop detailed plans and procedures to identify, evaluate, quantify, prioritize and monitor environmental impacts of its activities. In 2001, Thomson’s Executive Committee identified the facilities that would benefit the most by implementing an EMS and required completion of ISO 14001 certification by December 31, 2004. Currently, 18 locations have completed the ISO 14001 certification process;

•

Annual Performance Measurement Process: a process was implemented in 1997 to allow for the consistent measurement and reporting of key management programs and requirements within each of our industrial locations, and their progress toward environmental, safety and resource conservation improvement goals. This process establishes benchmark criteria, helping us create consistent global focus and action on key programs, requirements and initiatives. Measured criteria include the establishment of internal EH&S audits and inspections, development of emergency preparation and response plans and associated training and drills, development of EH&S Committees, identification and completion of EH&S related employee training, and each location’s progress toward zero work related injuries and lost workdays, reducing environmental impacts to air, water and land, and reducing the consumption of water, energy, or raw materials.

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Furthermore, Thomson’s Corporate EH&S Organization monitors and responds to new governmental law and regulation such as the EU Restriction of Hazardous Substances in Electrical and Electronic Equipment (RoHS) Directive and the EU Waste Electrical and Electronic Equipment (WEEE) Directive. Also, in the Americas, several countries, provinces, and states have introduced legislation concerning restriction of hazardous substances, landfill bans, or end-of-life recycling, and certain laws have been enacted in this area that became effective in 2005, including parts of Mexico, some U.S. states and some Canadian provinces, which the Group believes will not have a material effect on our business or financial position.

A certain number of Thomson’s current and previously owned manufacturing sites have an extended history of industrial use. Soil and groundwater contamination, which occurred at some sites, may occur or be discovered at other sites in the future. Industrial emissions at sites that Thomson has built or acquired expose the Group to remediation costs. The Group has identified certain sites at which chemical contamination has required or will require remedial measures.

Soil and groundwater contamination was detected at a former production facility in Taoyuan, Taiwan acquired in the 1987 transaction with General Electric Company. TCETVT (a subsidiary of Thomson) owned and operated the facility from approximately 1988 to 1992, when it was sold to an outside company. Soil remediation was completed in 1998. In 2002, the Taoyuan Environmental Protection Bureau ordered remediation of the groundwater underneath the former facility. The groundwater remediation process is underway. It is Thomson’s position that General Electric Company has a contractual obligation to indemnify Thomson with respect to certain liabilities resulting from activities that occurred prior to the 1987 agreement with General Electric.

The Group believes that the amounts reserved and the contractual guarantees provided by its contracts for the acquisition of certain production assets will enable it to reasonably cover its safety, health, and environmental obligations. Potential problems cannot be predicted with certainty, however, and it cannot be assumed that these reserve amounts will be adequate. In addition, future developments such as changes in governments or in safety and health laws or the discovery of new risks could result in increased costs and liabilities that could have a material effect on the Group’s financial condition or results of operations. Based on current information and the provisions established for the uncertainties described above, the Group does not believe it is exposed to any material adverse effects on its business, financial condition or result of operations arising from its environmental, health, and safety obligations and related risks.

2.4.3   Insurance

Thomson has a “Corporate Risk & Insurance” department in charge of insurance and associated risk management for the Company.

Through this department, Thomson arranges global insurance programs covering the major risks related to its activities that are underwritten with well-known insurers via a global broker. These programs established on behalf of its subsidiaries worldwide are implemented through a “Master” insurance policy that strengthens the coverage offered by local policies, (and provides “difference in conditions” and “difference in limits” over these policies).

These programs cover risks considered to be major such as general and professional liability, property and business interruption, and some major country-specific risks, such as Employer’s Liability in the U.K. and “Workers’ Compensation” insurance in the U.S.

For risks considered non-strategic, subsidiaries are allowed to take additional insurance policies in their local market.

These insurance programs also cover the risk of damage to goods in transit, where such insurance is required, as well as the environmental damage caused by pollution. In addition, Thomson has insurance for the risks associated with the liability of its Directors and executive officers.

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The Group insurance policies are issued on an “all risks” basis, but with standard market exclusions.

The deductible levels are determined and applied according to the assets and operational risks of the business units.

Insurance policies are purchased whenever required by law or when activities or circumstances render them necessary. Thus, the Group has established insurance covering motor vehicles and the personal liability of employees, in countries where such insurance is required.

In addition, in partnership with its insurers, Thomson has developed a program of prevention and protection of its production sites in order to reduce its exposure to its assets and operating losses that may occur in case such risks should materialize. The Corporate Legal Department has established procedures and rules in order to manage contractual risk. It ensures, in conjunction with the “Corporate Risk & Insurance” team, that these rules are applied throughout the world.

The Group intends to continue its policy of comprehensive coverage for all its exposure to major risks, expand its coverage when necessary and reduce costs through self-insurance when it is deemed appropriate.

The Group does not foresee difficulties in setting up insurance policies in the future.

To date, the Group does not have a captive insurance or reinsurance.

2.4.4   Thomson Foundation

Created in 2006, the Thomson Foundation is a non-profit entity, acting worldwide in the field of preservation and promotion of film and TV heritage, which reflects the history and culture of a country. Working in cooperation with local and international partners, the Thomson Foundation identifies and supports urgent programs for the safeguard of moving images. By identifying the appropriate resources required for each project, the Thomson Foundation helps set up multi-disciplinary teams. They include experts from its founder Thomson and experts from leading film and TV archives, film preservation schools, cinema schools. Transmission and education plays a key role in each program. In all Foundation programs, films and audiovisual materials are preserved in aim to be shared and shown to the largest audience.

The Thomson Foundation operates worldwide and as a priority, in countries where archives are at risk. The three main guidelines of its programs are:

•

to preserve a film heritage as a key part of a country’s cultural memory;

•

to promote and highlight a film heritage so to show it and to share it with any audience; and

•

to train and sensitize everyone who can play a part in the safeguarding of film heritage.

Projects are supported by the Foundation’s Board of Directors. The Board has 11 members, of which 6 are film and TV experts from outside the Group.

The programs of the Thomson Foundation are conducted through Europe, Asia and America, and in particular in India, in Cambodia or in the United States. Other projects are currently under progress in Africa and in the Middle East. Major achievements or programs under progress

One of the Thomson Foundation’s main programs is in Cambodia. The Foundation is contributing to the operations of the Bophana Center, new film and audiovisual center designed by filmmaker Rithy Panh in order to reconstruct the memory of this country.

In India, the Foundation has created an annual film archive educational program within the general curriculum of the national film school of India (FTII): “Film Heritage Educational Program” (premiere in April 2007) with the objective to educate the future generation of filmmakers. This program was conducted again in 2008 and 2009. In parallel, the Foundation has also created a classics section dedicated to film heritage within the largest international film festival of India: “IFFI Goa Film Treasures”. A restoration project of an India film is currently under study.

In the U.S., the Thomson Foundation supports the annual conference of AMIA (Association of Moving Image Archivists) which gathers the worldwide professionals from the film archive field. It also supports the professional training in moving image archiving through its Sid Sollow Scholarship awarded during the AMIA conference of as well as through its Technicolor Fellowship given to an student from George Eastman House.

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In France, the Thomson Foundation actively worked for two years on the restoration of 1955 Max Ophuls’ masterpiece, Lola Montès in order to make the original director’s cut version accessible again. Lola Montès opened the Cannes Classics section on May 2008 and since then, was screened internationally in film festivals (e.g. New York, Bologna and Goa) and then will be shown in schools.

In Thailand with the National Film Archive of Thailand, the Foundation contributed to the restoration of one of the first feature film made in Thailand during the1940s: The King of the White Elephant, with the active contribution from Technicolor Bangkok.

In the Middle East, the Foundation works on a project for a Film and TV Archive in Palestinian Territories and potential programs are under study in Iraq and with UNESCO.

Finally, the Foundation is studying the replication of the Cambodian experience in Burkina Faso and in Mozambique.

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3

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

3.1    Overview

50

3.2    Key Economic Drivers

51

3.3    Summary of Results

51

3.4    Seasonality

52

3.5    Effect of Exchange Rate Fluctuations

53

3.6    Geographic Breakdown of Net Revenues

54

3.7    Events Subsequent to December 31, 2008

55

3.8    Critical Accounting Policies

56

3.8.1

Going concern

56

3.8.2

Tangible and intangible assets with finite useful lives

56

3.8.3

Impairment tests of Goodwill and intangible assets with indefinite useful lives

57

3.8.4

Deferred tax

58

3.8.5

Post employment benefits

58

3.8.6

Provisions and litigations

58

3.8.7

Measurement of the conversion option embedded in certain convertible debt

58

3.8.8

Determination of royalties payable

59

3.9    Changes in Accounting Principles

59

3.10    Reserved

59

3.11    Changes in Scope of Consolidation in 2008

59

(a)

Main Acquisitions

59

(b)

Main disposals

60

(c)

Other operations

60

3.12    Notification of Participations Acquired in the Share Capital of French Companies in 2008

60

3.13    Changes in Scope of Consolidation in 2007

60

(a)

Main Acquisitions

60

(b)

Main Disposals

61

3.14    Notification of Participations Acquired in the Share Capital of French Companies in 2007

61

3.15    Results of Operations for 2008 and 2007

62

3.15.1

Analysis of Net Revenues

62

3.15.2

Profit (Loss) from Continuing Operations before Tax and Net Finance Costs

64

3.15.3

Net Finance Costs

66

3.15.4

Income Tax

66

3.15.5

Share of Profit (Loss) from Associates

66

3.15.6

Profit (Loss) from Continuing Activities

66

3.15.7

Profit (Loss) from Discontinued Operations

66

3.15.8

Net Income (Loss) of the Group

67

3.15.9

Adjusted indicators

67

3.16    Results of Operations for 2007 and 2006

68

3.16.1

Analysis of Net Revenues

69

3.16.2

Profit from Continuing Operations before Tax and Net Finance Costs

71

3.16.3

Net Finance Costs

73

3.16.4

Income Tax

73

3.16.5

Share of Profit (Loss) from Associates

74

3.16.6

Profit from Continuing Activities

74

3.16.7

Profit (Loss) from Discontinued Operations

74

3.16.8

Net Income of the Group

74

3.17    Liquidity and Capital Resources

75

3.17.1

Cash Flows

75

3.17.2

Financial Resources

77

3.18    Contractual Obligations and Commercial Commitments including Off-Balance Sheet Arrangements

79

3.18.1

Unconditional Contractual Obligations and Commercial Commitments

79

3.18.2

Conditional Contractual Obligations and Commercial Commitments

81

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You should read these comments on our operating and financial results in conjunction with our audited consolidated financial statements and the related Notes and other financial information included elsewhere herein. Our audited consolidated financial statements have been prepared in accordance with, International Financial Reporting Standards (“IFRS”) approved by the European Union, and in accordance with IFRS as issued by the IASB. See Note 2 “Summary of significant accounting policies” to our consolidated financial statements for a description of the accounting policies applied this year and last year, and Note 4 “Bridge with financial statements released as of December 31, 2007” to our consolidated financial statements for a description of our application of IFRS 5 to our financial statements for the years 2007 and 2006 which have been restated in order to reflect the effect of the scope of discontinued operations defined as of December 31, 2008.

Certain information discussed below and elsewhere in this Annual Report includes forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements” at the beginning of this Annual Report and Chapter 1: “Key Information and Risk Factors”, section 1.3: “Risk Factors” for a discussion of factors that could cause actual results to differ materially from the results described in or implied by forward looking statements, in this Chapter and throughout this Annual Report.

3.1    Overview

Thomson provides a wide range of video (and enabling) technologies, systems, finished products to the M&E industry. Effective January 1, 2009, our activities have been reorganized into (i) three operating segments: Technicolor (formerly Services), Thomson Connect (formerly Thomson Grass Valley) and Technology; as well as (ii) two further segments Corporate and Other. Until the end of 2008, our activities were organized into (i) three operating divisions: Technicolor (formerly Services), Thomson Grass Valley (formerly Systems), and Technology and (ii) two further segments Corporate and Other. For a description of our strategy, please refer to Chapter 2: “Information on the Company”, section 2.1.4: “Strategy and Outlook.” For a more detailed description of the organization of our businesses, see Chapter 2: “Information on the Company”, section 2.1.3: “Our Organization” and for a description of the products and services provided by each of our divisions, see Chapter 2: “Information on the Company”, section 2.2: “Business Overview,” respectively.

On January 28 and March 9, 2009, we announced that, on April 30, 2009, when our 2008 audited consolidated financial statements were available, we would be in breach of certain covenants contained in financial agreements under which we have borrowed substantially all of our outstanding senior debt (these covenants, as well as other relevant contractual limitations, are more fully described in Note 26.5(g) to our consolidated financial statements).

To prevent the risk of the acceleration of our debt due to the breach of certain covenants, between February and April 2009, we entered into discussions with our principal creditors and potential equity investors to present our strategic framework and to engage in a dialogue regarding our balance sheet structure and our level of indebtedness. In order to be able to meaningfully begin negotiations regarding the restructuring of our indebtedness, we notably negotiated a series of waivers with our creditors, by which such creditors temporarily waived their right to accelerate repayment of such indebtedness as from April 30, 2009.

These discussions were concluded by the signing of a series of waivers with all of the relevant creditors for a period ending on June 16, 2009, which we estimate is appropriate time to conclude our negotiations on the restructuring of our indebtedness and our balance sheet (for further information, please see Notes 3.1 and 26.5(g) to our consolidated financial statements). See also Chapter 1, section 1.3: “Risk Factors – Risks related to our financial restructuring”.

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3.2    Key Economic Drivers

Our strategic priorities described under Chapter 2: “Information on the Company”, section 2.1.4: “Strategy and Outlook” are based on our vision of how the M&E industry may develop over the next few years. We believe the most significant trends include the following:

•

consumer habits are likely to evolve, with rental packaged media gaining against sell-through packaged media;

•

Box Office is likely to show resilience as has been the case during previous economic slowdowns (U.S. Box Office growth shows little correlation with GDP growth – appears to be driven by big hits rather than overall economic growth);

•

the economic crisis is likely to slow down the deployment of digital cinema;

•

the U.S. is likely to remain the dominant source of investment in film production (India and China are dominant in the number of films produced but not in production investment). However, Western Europe is becoming a strong source of investment as the major five countries now make up approximately 20% of worldwide film production investments (source: Screendigest – July 2008);

•

although the M&E industry is witnessing a reduction in the number of movies produced, we believe the investment per movie is on the rise;

•

the major U.S. studios are still the dominant source of investment in film production. However, the industry is witnessing the increasing presence of minor-major and independent studios, which may provide some relief to any reduced demand for production services from the major studios;

•

with the increasing success at the box office of movies with increased animation, visual effects and 3D content, we expect studios to increasingly focus their budgets on these areas and to seek trusted vendors to accompany them;

•

we are witnessing a move by the major studios to develop movies into games and vice versa. Continuing investment in the area of games is thus anticipated over the next few years with two thirds of all-time top 200 films adapted into games;

•

the proliferation of physical and digital formats is driving the studios to increase their focus on exploiting their assets. Therefore, digital archiving and creating the digital studio are seen as medium to long-term areas of focus. In addition, we feel this is likely to force companies to consider the adoption of outsourcing models in this area;

•

we believe that acceleration of the shift to digital distribution will also be a key area of focus for the M&E industry over the next three to five years. We also anticipate that the role of Network Service Providers in facilitating such a transition will increase over the years. This should be facilitated through higher penetration of high-speed Internet as well as a steady increase in the number of connected homes;

•

portability (and mobility) of content should be a key differentiator over the coming three to five years; and

•

we believe that ease of use, user interface, branding and appearance are becoming key device differentiators.

The above indicators have shaped Thomson’s strategic choices and its future growth focus areas. For further information, see Chapter 1: “Key Information and Risk Factors”, section 1.3: “Risk Factors, Risks related to our activity”. For more information on our strategy and outlook, see Chapter 2: “Information on the Company” and section 2.1.4: “Strategy and Outlook”.

3.3    Summary of Results

In 2008, consolidated net revenues from continuing operations amounted to €4,840 million, compared with €5,540 million in 2007, a decrease of €700 million, or 12.6% at current exchange rates (a decrease of 7.7% at constant 2007 exchange rates reflecting a negative currency impact of €273 million). This decrease at current exchange rates resulted from lower revenues in each segment. The revenue decline at Thomson Grass Valley particularly reflected a strong slowdown in the broadcast and network equipment business (Grass Valley) in the second half of 2008 related to the impact of a tougher economic environment on order intake. The Technicolor business suffered from the previously announced loss of a film printing contract for a key customer in North America and from the Writers Guild of America strike at the beginning of 2008 and the anticipation by film studios of a potential Screen Actors Guild strike. The Media Networks business was particularly affected by the impact of the economic environment on advertising budgets. Technology division revenues for 2008 were impacted by a reduced number of new contracts in the fourth quarter that were delayed to 2009. Consolidated net revenues amounted to €5,540 million for 2007 compared to net revenues of €5,691 million for 2006, a decrease of €151 million. These effects are discussed in more detail under sections 3.15.1 and 3.16.1: “Analysis of Net Revenues” below.

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Group loss from continuing operations before tax and net finance costs was €1,303 million in 2008, compared to a profit of €380 million for 2007 and of €552 million for 2006. Group loss from continuing operations before tax and net finance costs in 2008 is mainly attributable to €1,459 million of Goodwill impairments, write-offs and restructuring charges. Excluding these effects, the decline was partly related to the decrease in revenues recorded in 2008, and partly related to delays in adjusting the Group’s cost base to lower activity, particularly in the Film Services and broadcast and network equipment activities. For more information, see section 3.15.2: “Profit (Loss) from Continuing Operations before Tax and Net Finance Costs” and section 3.16.2: “Profit from Continuing Operations before Tax and Net Finance Costs” below.

Net finance costs amounted to €396 million in 2008, compared with €103 million in 2007 and €202 million in 2006. The €293 million increase in net finance costs compared to 2007 mainly resulted from the impact of the impairment of the Group’s financial stake in Videocon. For more information, see sections 3.15.3 and 3.16.3: “Net Finance Costs” below for further details.

The Group current net income tax charge amounted to €40 million in 2008 (2007: €53 million, 2006: €59 million). In addition, a net deferred tax charge of €66 million was recorded in 2008 (2007: €26 million income, 2006: €59 million income), leading to an overall reported net income tax charge of €106 million in 2008 (2007: €27 million, 2006: €0 million). See sections 3.15.4 and 3.16.4: “Income Tax” below for further details.

Following the sell down of the majority of the Group’s stake in TCL Multimedia in 2006 there was no material share of profit/loss from associates in 2008 and 2007 (compared to a loss of €86 million in 2006). See sections: 3.15.5 and 3.16.5: “Share of Profit (Loss) from Associates” below for further details.

The Group loss from continuing activities in 2008 was therefore €1,809 million (2007: profit of €251 million, 2006: profit of €264 million). See sections 3.15.6 and 3.16.6: “Profit from Continuing Activities” below for further details.

Certain activities were treated as discontinued operations in accordance with IFRS 5 in the 2008 results and in the 2007 and 2006 comparative figures. The loss from discontinued activities recorded for 2008 was €124 million (2007: €274 million, 2006: €209 million), and was principally related to the Silicon Solutions business and the AVA businesses. See sections 3.15.7 and 3.16.7: “Profit (Loss) from Discontinued Operations” below for further details.

As a result, the Group recorded a net loss of €1,930 million, compared to a net loss of €23 million in 2007 and net income of €55 million in 2006. See sections 3.15.8 and 3.16.8: “Net Income (Loss) of the Group” below for further details.

Thomson’s net loss per share on a non-diluted basis was €7.41 in 2008, compared to a net loss per share of €0.16 in 2007 and a net earnings per share of €0.14 in 2006.

3.4    Seasonality

Our net revenues have historically tended to be higher in the second half of the year than in the first half, reflecting the business activity of our end customers, notably in Technicolor and Thomson Grass Valley. The net revenues of the continuing operations in the second half of 2008 totaled €2,638 million, representing 55% of the annual net revenues of the Group, compared to €2,951 million in the second half of 2007, representing 53% (2006: €3,140 million, representing 55%).

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The net revenues of our Technicolor businesses in the second half of 2008 totaled approximately €1.15 billion, representing 56% of the division’s 2008 net revenues, compared to approximately 55% in 2007 and in 2006. The net revenues of our Thomson Grass Valley businesses in the second half of 2008 totaled approximately €1.3 billion, representing 53% of the division’s 2008 net revenues, compared to 53% in 2007, and 56% in 2006. The net revenues of our Technology businesses in the second half of 2008 totaled €211 million, representing 54% of the division’s 2008 net revenues, compared to 50% in 2007 and 52% in 2006. See sections 3.15.1 and 3.16.1: “Analysis of Net Revenues” below for further information.

Profit from continuing operations was impacted by revenue seasonality (i) because fixed costs are recovered more efficiently in the second half due to higher volumes and (ii) by one-off impacts which in 2008 were unusually high in the second half due to the impairment charges.

3.5    Effect of Exchange Rate Fluctuations

We estimate that the impact of translating into euro the revenues of operating entities that are denominated in currencies other than euro had a negative impact of €273 million on our net revenues as expressed in euro in 2008. We estimate that the positive impact in 2008 of translating into euro the loss from continuing operations before tax and net finance costs of operating entities that are denominated in currencies other than euro was €80 million as expressed in euro in 2008.

In sections 3.15: “Results of Operations for 2008 and 2007” and 3.16: “Results of Operations for 2007 and 2006”, certain net revenue figures at the Group and segment levels are presented where indicated on a comparable basis at constant exchange rates. To this end, the actual financial year figures are adjusted by applying the average exchange rate used for the statement of operations for the earlier financial year to eliminate exchange rate effects. We believe this presentation of changes in net revenues, adjusted to reflect exchange rate fluctuations, for this year-on-year comparison is helpful for analyzing the performance of the Group. The table below sets forth the exchange rate effect on our net revenues from continuing operations in 2008, compared with the 2007 net revenues and exchange rates, on a consolidated and segment-by-segment basis.

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The table below sets forth the exchange rate effect on our net revenues from continuing operations in 2007, compared with the 2006 results and exchange rates, on a consolidated and segment-by-segment basis.

With regard to our 2007 results, the impact of translating revenues of operating entities that were denominated in currencies other than euro into euro had a negative impact of €245 million on our net revenues as expressed in euro in 2007 compared to 2006. We estimate that the negative impact of translating the operating results of operating entities that were denominated in currencies other than euro into euro was €2.6 million in 2007 on our profit from continuing operations before taxes and net finance costs as expressed in euro in 2007.

3.6    Geographic Breakdown of Net Revenues

The table below sets forth our 2008, 2007 and 2006 net revenues from continuing operations broken down by destination and classified by the location where the customer is invoiced. As illustrated below, our most important markets are the United States and Europe, accounting for 47.3% and 34.8% of our 2008 net revenues, respectively.

The table below sets forth our 2008, 2007 and 2006 net revenues from continuing operations broken down by origin and classified by the location of the entity that invoices the customer. As illustrated below, our most important markets are the United States and Europe, accounting respectively for 41.8% and 44% of our 2008 net revenues.

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3.7    Events Subsequent to December 31, 2008

Please see Note 39 to our consolidated financial statements for information on events subsequent to December 31, 2008. With the exception of the information featured in Note 39 to our consolidated financial statements, no significant change in the Group’s financial or business situation occurred subsequent to December 31, 2008.

On January 28 and March 9, 2009, we announced that, on April 30, 2009, when our 2008 audited consolidated financial statements were available, we would be in breach of certain covenants contained in financial agreements under which we have borrowed substantially all of our outstanding senior debt (these covenants, as well as other relevant contractual limitations, are more fully described in Note 26.5(g) to our consolidated financial statements).

To prevent the risk of the acceleration payment of our debt due to the breach of certain covenants, between February and April 2009, we entered into discussions with our principal creditors and potential equity investors to present our strategic framework and to engage in a dialogue regarding our balance sheet structure and our level of indebtedness. In order to be able to meaningfully begin negotiations regarding the restructuring of our indebtedness, we notably negotiated a series of waivers with our creditors, by which such creditors temporarily waived their right to accelerate repayment of such indebtedness as from April 30, 2009.

These discussions were concluded by the signing of a series of waivers with all of the relevant creditors for a period ending on June 16, 2009, which we estimate is appropriate time to conclude our negotiations on the restructuring of our indebtedness and our balance sheet (for further information, please see Notes 3.1 and 26.5(g) to our consolidated financial statements). See also Chapter 1: “Key Information and Risk Factors”, section 1.3: “Risk Factors – Risks related to our financial restructuring”.

Debt rating downgrades

In January 2009 Moody’s lowered our corporate rating to Caa3 and the rating on our deeply subordinated bonds to C. The outlook was maintained as negative.

In January 2009 S&P lowered our long-term rating to CC, the rating on our deeply subordinated bonds to C and our short-term ratings to C. The ratings were removed from credit watch and the outlook was negative.

Strategic framework and action plan

For a discussion of our new strategic plan, see Chapter 2, section 2.1.4: “Strategy and Outlook”.

Key commercial contracts

Thomson announced on March 10, 2009 that it has extended its existing multi-territory DVD replication and distribution agreements with Walt Disney Studios Home Entertainment. Over the term of the multi-year agreement, Thomson will, in addition to existing services, provide freight management services to Walt Disney Studios Home Entertainment in North America.

Paramount Pictures and Thomson announced on March 10, 2009 plans to create a state-of-the-art post production sound facility on the Paramount Hollywood lot. The new sound facility will become the centerpiece of Paramount’s Post Production Village, providing a wide range of post-production services for filmed entertainment, television productions and commercial producers.

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3.8    Critical Accounting Policies

Thomson’s principal accounting policies are described in Note 2 to our consolidated financial statements. Certain of Thomson’s accounting policies require the application of judgment by management in selecting appropriate assumptions for calculating financial estimates which inherently contain some degree of uncertainty. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the reported carrying values of assets and liabilities and the reported amounts of revenues and expenses. Actual results may differ from these estimates, while different assumptions or conditions may yield different results. Management believes the following to be the critical accounting policies and related judgments and estimates used in the preparation of its consolidated financial statements under IFRS.

3.8.1   Going concern

Thomson provides a wide range of video (and enabling) technologies, systems and finished products to the M&E industry. Effective January 1, 2009, our activities have been reorganized into (i) three operating segments: Technicolor (formerly Services), Thomson Connect (formerly Thomson Grass Valley) and Technology; as well as (ii) two activities Corporate and Other. Until the end of 2008, our activities were organized into (i) three principal Divisions: Technicolor (formerly Services), Thomson Grass Valley (formerly Systems), and Technology and (ii) two further segments Corporate and Other. For a description of our strategy, please refer to Chapter 2: “Information on the Company”, section 2.1.4: “Strategy and Outlook.” For a more detailed description of the organization of our businesses, see Chapter 2: “Information on the Company”, section 2.1.3: “Our Organization” and for a description of the products and services provided by each of our divisions, see Chapter 2: “Information on the Company”, section 2.2: “Business Overview,” respectively.

On January 28 and March 9, 2009, we announced that, on April 30, 2009, when our 2008 audited consolidated financial statements were available, we would be in breach of certain covenants contained in financial agreements under which we have borrowed substantially all of our outstanding senior debt (these covenants, as well as other relevant contractual limitations, are more fully described in Note 26.5(g) to our consolidated financial statements).

To prevent the risk of the acceleration of our debt due to such breach, between February and April 2009, we entered into discussions with our principal creditors and potential equity investors to present our strategic framework and to engage in a dialogue regarding our balance sheet structure and our level of indebtedness. In order to be able to meaningfully begin negotiations regarding the restructuring of our indebtedness, we notably negotiated a series of waivers with our creditors, by which such creditors temporarily waived their right to accelerate repayment of such indebtedness as from April 30, 2009.

These discussions were concluded by the signing of a series of waivers with all of the relevant creditors for a period ending on June 16, 2009, which we estimate is appropriate time to conclude our negotiations on the restructuring of our indebtedness and our balance sheet (for further information, please see Notes 3.1 and 26.5(g) to our consolidated financial statements).

3.8.2   Tangible and intangible assets with finite useful lives

The Group records intangible assets with finite useful lives (mainly customer relationships, software, development projects and certain rights on intellectual property acquired) under “Other intangible assets” and tangible assets under “Property, plant and equipment” (“PPE”). Significant estimates and assumptions are required to determine (i) the expected useful lives of these assets for purposes of their depreciation and (ii) whether there is an impairment of their value requiring a write-down of their carrying amount. Estimates that are used to determine the expected useful lives of PPE and intangible assets are defined in the Group’s accounting policies manual and are consistently applied throughout the Group.

For the year ended December 31, 2008, the Group recognized depreciation expense amounting to €173 million related to PPE and amortization expense of €155 million for intangible assets with finite useful lives (these figures include depreciation expense booked in the loss from discontinued operations). As of December 31, 2008, the net carrying amount of PPE and intangible assets with finite useful lives amounted to €541 million and €436 million, respectively.

In order to ensure that its assets are carried at no more than their recoverable amount, Thomson evaluates at each reporting date certain indicators that would result, if applicable, in the calculation of an impairment test in accordance with the accounting policy stated in Note 2 to our consolidated financial statements. The recoverable amount of an asset or group of assets may require the Group to use estimates, in particular, to assess the future cash flows expected to arise from the asset or group of assets and a suitable discount rate in order to calculate present value. Any negative change in relation to the operating performance or the expected future cash flow of individual assets or group of assets will change the expected recoverable amount of these assets or groups of assets and therefore may require a write-down of their carrying amount.

As of December 31, 2008, the Group reviewed its triggering indicators and determined that some amortizable assets and cash generating units may have lost value. Consequently, it performed impairment tests for these assets or group of assets (see Notes 13 and 14 to our consolidated financial statements). The impairment booked on amortizable assets in 2008 amounts to €343 million, split between PPE (€136 million), patents, R&D and other intangible assets (€55 million) and customer relationships (€152 million). These amounts exclude impairment loss of assets in the frame of a restructuring plan that amount to €39 million in 2008.

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3.8.3   Impairment tests of Goodwill and intangible assets with indefinite useful lives

We review annually Goodwill and other indefinite-lived intangible assets for impairment in accordance with the accounting policy stated in Note 2 to our consolidated financial statements. Such review requires management to make material judgments and estimates when performing impairment tests.

Thomson’s management believes its policies relating to such impairment testing are critical accounting policies involving critical accounting estimates because determining the recoverable amount of cash-generating units requires (1) determining the appropriate discount rate to be used to discount future expected cash flow of the cash-generating unit and (2) estimating the value of the operating cash flows including their terminal value, the growth rate of the revenues generated by the assets tested for impairment, the operating margin rates of underlying assets for related future periods and the royalty rates for the trademarks. These assumptions used by the Group for the determination of the recoverable amount are described in Note 14 to our consolidated financial statements.

In addition to the annual review for impairment, Thomson evaluates at each reporting date certain indicators that would result, if applicable, in the calculation of an additional impairment test in accordance with the accounting policy stated in Note 2 to our consolidated financial statements.

As of December 31, 2008, the net book value of Goodwill and trademarks amounted to €926 million and €237 million, respectively after depreciation and impairment.

Thomson performed an annual impairment test in 2008 based on the organization effective in 2008 which resulted in:

•

a total impairment of Goodwill of €739 million to €349 million related to Technicolor, €378 million to Thomson Grass Valley and €12 million to Technology; and,

•

impairment of the Technicolor trademark for €6 million and of the RCA trademark for €6 million.

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Management believes the updated assumptions used concerning sales growth, terminal values and royalty rates are reasonable and in line with updated market data available for each GRU (group of reporting units).

3.8.4   Deferred tax

Management judgment is required to determine the Group’s deferred tax assets and liabilities and the extent to which deferred tax assets can be recognized in accordance with the accounting policy stated in Note 2 to our consolidated financial statements. When a specific subsidiary has a history of recent losses, future positive taxable income is assumed improbable, unless the asset recognition can be supported for reasons such as (1) the losses having resulted from exceptional circumstances which are not expected to re-occur in the near future, (2) the expectation of exceptional gains and/or (3) future income to be derived from long-term contracts. We have considered tax-planning in assessing whether deferred tax assets should be recognized.

As of December 31, 2008, the Group had recorded deferred tax liabilities of €284 million and €515 million of deferred tax assets reflecting management’s estimates.

3.8.5   Post employment benefits

The Group’s determination of its pension and post-retirement benefits obligations and expense for defined benefit plans is dependent on the use of certain assumptions used by actuaries in calculating such amounts. These assumptions are described in Note 28 to our consolidated financial statements and include, among others, the discount rate, expected long-term rate of return on plan assets and annual rate of increase in future compensation levels. Our assumptions regarding pension and post-retirement benefits obligations are based on actual historical experience and external data.

The assumptions regarding the expected long-term rate of return on plan assets are determined by taking into account, for each country where the Group has a plan, the distribution of investments and the long-term rate of return expected for each of its components. The capital markets experience fluctuations that cause downward/upward pressure on assets value and higher volatility. As a result, short-term valuation of related plan assets is decreasing/increasing, causing a corresponding increase/decrease of the provision for pension and post-retirement obligation. While management believes that the assumptions used are appropriate, significant differences in actual experiences or significant changes in the assumptions may materially affect our pension and post-retirement benefits net obligations under such plans and related future expense.

As of December 31, 2008, the post-employment benefits provision amounted to €403 million. The present value of the obligation amounted to €551 million, the fair value of plan assets amounted to €148 million and unrecognized prior service cost was zero. For the year ended December 31, 2008, net pension costs amounted to a loss of €37 million.

3.8.6   Provisions and litigations

Thomson’s management is required to make judgments about provisions and contingencies, including the probability of pending and potential future litigation outcomes that, by their nature, are dependent on future events that are inherently uncertain. In making its determinations of likely outcomes of litigation and tax matters etc., management considers the evaluation of outside counsel knowledgeable about each matter, as well as known outcomes in case law. See Note 37 to our consolidated financial statements for a description of the significant legal proceedings and contingencies.

3.8.7   Measurement of the conversion option embedded in certain convertible debt

On September 16, 2004, Thomson issued subordinated bonds that are (1) redeemable in U.S. dollars or (2) convertible into newly issued ordinary shares or existing ordinary shares (or a combination of both), which, at the option of the bondholders, could be delivered in the form of American Depositary Shares evidencing such ordinary shares. As required by IAS 32 and 39, the embedded conversion option has been bifurcated and accounted for separately within non-current liabilities.

The conversion option and the debt component are recognized at fair value at inception. Subsequent changes in the fair value of the embedded derivative have been charged to the statement of operations. As such Thomson’s management is required to make significant estimates in order to measure the fair value of the conversion option that has been bifurcated from the bonds. The measurement process uses an option instrument measurement model adapted from the binomial tree model.

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Main inputs relate to the discounted volatility of Thomson shares on the stock exchange, Thomson shares closing prices and the exchange rate as of the measurement date.

The fair value of the embedded conversion option bifurcated from the debt component of the convertible debt instrument amounted to €45 million at inception. In 2007, the change in fair value required Thomson to recognize a net non cash financial gain amounting to €37 million (comprising a gain of €34 million and a foreign exchange gain of €3 million). In 2006, the change in fair value had required Thomson to recognize a net non-cash financial gain amounting to €6 million (comprising a gain of €4 million and a foreign exchange gain of €2 million).

The bonds had an investor call option from September 16, 2008 which was exercised, and the bonds were reimbursed in their entirety on September 22, 2008.

3.8.8   Determination of royalties payable

In the normal course of its business, the Group may use certain technology protected by patents owned by third parties. In the majority of cases, the amount of royalties payable to these third parties for the use of this technology will be defined in a formal licensing contract. In some cases, and particularly in the early years of an emerging technology when the ownership of intellectual property rights may not yet be ascertained, management judgment is required to determine the probability of a third party asserting its rights and the likely cost of using the technology when such assertion is probable. In making its evaluation, management considers past experience with comparable technology and / or with the particular technology owner. The royalties payable are presented within the captions “Other current liabilities” and “Other non-current liabilities” in our balance sheet and detailed in Note 31 to our consolidated financial statements.

3.9    Changes in Accounting Principles

The accounting policies applied by the Group in 2008 are consistent with those followed in the preparation of the Group’s annual financial statements for the year ended December 31, 2007. The new amendments and interpretations effective in 2008 and disclosed in Note 2.2 to our consolidated financial statements had no impact on the Group’s consolidated financial statements.

For a description of the accounting principles applied by the Group, see Note 2 to our consolidated financial statements.

3.10    Reserved

3.11    Changes in Scope of Consolidation in 2008

(a)   Main Acquisitions

On July 1, 2008, Thomson signed a long-term contract with NBC Universal, a major commercial broadcaster in the U.S., to transmit the broadcast distribution service of its 31 existing channels in America, in Europe and in Asia. The operations were transferred with effect from July 1, 2008 with the assets, employees and corresponding risks and rewards being assumed by Thomson from that date for a price of US$1.0 million (equivalent to €0.7 million at the date of the transaction). The NBC Universal operations have been consolidated from the acquisition date and are included in Technicolor.

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On July 31, 2008, Thomson acquired from Televisa its Out Of Home (“OOH”) business, which includes the TV network installed in Wal Mart stores in Mexico and a long-term contract with Wal Mart. The acquisition price amounts to US$8 million (equivalent to €6 million at the date of transaction) to be paid over the term of the contract with Wal Mart. The Televisa OOH business has been consolidated from the acquisition date and is included in Technicolor.

(b)   Main disposals

On September 30, 2008, Thomson sold its Genlis Decoder plant in Burgundy (France) to Novatech Industries. As part of the agreement, Thomson is committed to fund this entity up to a maximum of €15 million if certain conditions are met (i.e. if a specified level of employment is maintained). This obligation has been recorded in Thomson’s 2008 consolidated financial statements.

On November 28, 2008, Thomson sold its digital film equipment product line, formerly part of its Grass Valley Business division, to private investors led by PARTER Capital Group. The total loss related to this disposal amounts to €23 million.

(c)   Other operations

On September 1, 2008, Thomson and NXP combined their respective Tuners activities in a new company, NuTune, of which Thomson holds 45% and NXP holds 55%. The Tuner activity of Thomson was previously reported within Technology. Thomson has neither control nor joint control of NuTune and consolidate NuTune under the equity method from September 1, 2008. The Tuners activity before September 1, 2008 is presented under the full consolidation method. Thomson accounted for the contribution of its Tuner business as a disposal and booked the 45% interest in NuTune as an acquisition.

3.12    Notification of Participations Acquired in the Share Capital of French Companies in 2008

The Group did not acquire any stake in a  French company in 2008.

3.13    Changes in Scope of Consolidation in 2007

(a)   Main Acquisitions

Thomson signed a long-term contract with ITV, the leading commercial broadcaster in the U.K., to transmit its six existing channels, including ITV1. The operations were transferred with effect from January 2, 2007 with the assets, employees and corresponding risks and rewards being assumed by Thomson from that date for a price of £4 million (equivalent to €7 million at the date of transaction). The ITV operations have been consolidated from January 2, 2007 and are included in Technicolor.

On January 11, 2007, Thomson exercised its option to acquire the remaining 25% minority interest in Technicolor Universal Media Services LLC of America for US$16 million (equivalent to €12 million at the date of transaction). This acquisition followed an initial acquisition of 60% of the capital in June 2002 (as part of the overall acquisition of the Panasonic Disc Services business), completed by subsequent acquisitions representing a further 15% of the capital. The company is fully consolidated since June 25, 2002 and the option to acquire the minority interests was recorded as a financial liability at an estimated amount of approximately €12 million as of December 31, 2006.

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On January 16, 2007, Thomson exercised its option to acquire the remaining 22% minority interests in Technicolor Network Services UK Limited (formerly Corinthian Television Facilities Ltd.) for a price of €3 million. This acquisition followed an initial transaction made in October 2004 by Thomson with the acquisition of 78% of the capital. Thomson has been fully consolidated since October 27, 2004 and the option to acquire the minority interests was recorded as a financial liability at an estimated amount of approximately €3 million as of December 31, 2006.

On February 13, 2007, Thomson acquired a 51% interest subsequently increased to 63%, in Paprikaas Interactive Services Pty Limited (Paprikaas), a leading Indian animation and gaming cinematics firm, for US$5 million paid in cash (equivalent to €4 million at the date of transaction). Since then the company has been consolidated and included in Technicolor.

On July 30, 2007 Thomson acquired SyncCast, a leading outsourced digital media services provider mainly over IP networks, for a consideration of US$13 million (equivalent to €10 million at the date of transaction). The price could reach US$20 million depending on specified earn-out conditions to occur from 2008 to 2010. The company has been consolidated from July 30, 2007 and is included in the Technicolor.

(b)   Main Disposals

On December 21, 2006, Thomson signed an agreement for the disposal of its accessories business in the U.S. with Audiovox Corporation. The closing of the transaction was finalized on January 29, 2007 for a price of US$59 million paid in cash (equivalent to €42 million at average exchange rate over the period and €44 million at the date of transaction), based on the level of working capital at that date.

On October 16, 2007, Thomson signed an agreement for the disposal of its audio-video business in the U.S. and in the rest of the world (excluding Europe) with Audiovox Corporation. The closing of the transaction was finalized on December 31, 2007 for a price of U.S.$19 million paid in cash (equivalent to €13 million at the date of transaction), based on the level of the net assets at that date.

On December 21, 2007, Thomson sold all the assets of Gyration Inc. to Movea SA, a company specialized in motion sensing technologies. As part of the transaction Thomson acquired a minority stake of 10.5% in Movea.

On December 31, 2007, Thomson sold the Audio-Video and Accessories Skymaster activities in Germany to Arques Industries for €1. As part of the agreement, Thomson waived a debt towards the sold entity for €33 million and recapitalized this entity with €11 million in 2008. This obligation was recorded in Thomson’s 2007 consolidated financial statements.

3.14    Notification of Participations Acquired in the Share Capital of French Companies in 2007

Under Article L. 233-6 of the French Commercial Code, we disclosed that:

•

on December 11, 2007, the Group, via its subsidiary Thomson Telecom SAS, formed a joint venture with France Telecom (60%) and Sagem (20%). Thomson Telecom, thus holds 20% of HNSA SA, which provides solutions in the field of telecommunications, information technology, telematics and communication, with the objective to provide software solutions enabling communications of home networking multimedia equipment;

•

on December 21, 2007, Thomson sold all the assets of Gyration Inc. to Movea SA. As part of the transaction, the Group acquired, via its subsidiary Thomson Multimedia Sales International SAS, a minority interest of 10.5% in Movea SA; Movea has developed a motion capture solution (containing hardware and software products) dedicated to B2C products (multimedia pilot, user interface, games, etc.), as well as to certain B2B applications, especially for the medical field (e.g. Physical therapy).

Neither of these participations were material to the Group at December 31, 2007.

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3.15    Results of Operations for 2008 and 2007

The Group’s revenues and profit (loss) from continuing operations before tax and net finance costs for the years 2008 and 2007 are presented below for each of the operating divisions – Technicolor, Thomson Grass Valley and Technology – and for the Corporate and Other segments. The results of discontinued operations are presented separately under section 3.15.7: “Profit (Loss) from Discontinued Operations”.

Our results are presented in accordance with IFRS 5 and therefore exclude activities now treated as discontinued from the results for continuing operations. Prior period results are adjusted to take into account the current perimeter of discontinued operations.

3.15.1   Analysis of Net Revenues

Net revenues for 2008 amounted to €4,840 million, down 12.6% at current currency compared to 2007, and down 7.7% at constant currency. During the year, the Group suffered from several adverse events, including the strike of the Writers Guild of America, some contract renewals and planned renegotiations in Film and DVD Services which led to increased price declines, and a weak activity in some other business areas, particularly in the advertising and broadcast and network equipment businesses. The decision taken by the Group in November 2008 to exit from its retail Telephony activities in North America also weighed on revenues. These negative effects were partially compensated by the recorded growth in some other activities, notably high-definition discs (Blu-ray™), with a strong increase in volumes in the second half of 2008, and Access Products for cable operators, following the contract signed with Comcast for the delivery of digital-to-analog adapters, marking the Group’s first step in the U.S. cable video market. Both 2008 and 2007 acquisitions had an immaterial effect on 2008 revenues.

Technicolor

Revenues of Technicolor totaled €2,055 million in 2008 compared with €2,400 million in 2007, representing a decline of 7.7% at constant currency. This evolution reflected a strong revenues decline in Film Services and Media Networks, and a slight decline in revenues in DVD Services and Content Services, which were only partially offset by revenues growth in Broadcast Services.

Content Services activities (visual effects, animation and digital postproduction) revenues decreased by approximately 4% at constant rates in 2008. The Writers Guild of America strike at the beginning of the year and the anticipation by film studios of a potential Screen Actors Guild strike also impacted Content Services.

The contribution to sales of physical media (DVD Services and Film Services) was stable compared to last year, representing a little over 70% of total sales in Technicolor.

Film Services processed 3.7 billion feet in 2008 which compares with 4.9 billion feet processed in 2007. Film Services suffered from the Writers Guild of America strike at the beginning of 2008 and the anticipation by film studios of a potential Screen Actors Guild strike. Film Services also suffered as expected from the previously announced loss of a film printing contract for a key customer in North America and weaker release slate from key customers.

The number of DVDs replicated in 2008 amounted to 1.39 billion, a decrease of 5.4% from 2007, mainly resulting from lower SD-DVD volumes worldwide, partially offset by a strong volumes growth in HD discs (Blu-ray^TM). The growth of Electronic Distribution Services revenues did not compensate for the negative impact of the decline in DVD volumes and the price reductions related to contract renewals and/or planned contract price reviews in DVD Services.

Media Networks (advertising services to retailers and cinema theatres) revenues decreased by approximately 11% at constant rates in 2008. In the second half of 2008, revenues from the Media Networks activity suffered from the strong impact of the weak economic environment on the advertising market.

Broadcast Services (services to TV broadcasters) represented an increased share of Technicolor revenues in 2008 compared with 2007. The revenue growth from this activity reflected the strong momentum recorded by the Group in the Netherlands (“NOB-CMF”) and the positive impact of a contract gain in France.

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Thomson Grass Valley

Net revenues of Thomson Grass Valley totaled €2,381 million in 2008 compared with €2,679 million in 2007 representing a decline of 7.5% at constant currency. This evolution reflected a strong slowdown in the Broadcast & Networks business (Grass Valley) in the second half of 2008, with a deeper impact in the fourth quarter due to the negative impact of a weak demand and a tougher economic environment impacting order intake.

In its Access Products business, the Group recorded strong growth in shipments in 2008, driven by market share gains and improved product mix, especially with key Satellite and Cable customers in the United States. Revenues for Access Products declined in 2008 due to currency fluctuations and to price declines not fully compensated for by higher volumes and improved mix. Cable Access Products registered a strong growth in volumes with 7.5 million CSTBs and modems/eMTAs shipped in 2008 (2007: 5.2 million), driven by the contract signed with Comcast in July 2008 for the delivery of digital-to-analog adapters. The positive impact of the volumes increase in satellite STBs to 10.5 million in 2008 (2007: 10.1 million) was reinforced by an improvement in mix with an increased proportion of high-definition boxes, especially with a key customer in the U.S. These positive effects were offset by ongoing price declines. We sold 11.1 million access products for telecom operators (2007: 11.1 million), with stable volumes but further price declines. Overall, a total of 29.1 million set-top boxes, DSL/cable modems and gateways were sold in 2008, a strong increase on the 2007 total of 26.4 million units. The difference between the 2007 total of 26.4 million units and the total of 23.4 million units for 2007 previously released is explained by the fact that we now include cable modem/eMTA shipments.

In addition, the decision taken by the Group to exit from retail Telephony in North America led to a strong revenue decline in this activity, particularly in the second half of 2008.

Revenues from the Software Service Platform activity, principally Cirpack softswitches and the SmartVision IPTV/Mobile TV system, were stable compared with 2007.

Revenues of the Broadcast & Networks business were down substantially in 2008 compared to 2007. During the second half of 2008, the Broadcast & Networks business performed poorly, reflecting: (i) the global economic situation leading to a decline in capital expenditure spending from major customers and projects postponed; (ii) further impact of the delay of the Mustang head-end products; (iii) the end of product cycles for key routers and switchers equipment; and (iv) the decline in the Post-Production Solutions business which was sold in November 2008.

Technology

Net revenues of Technology totaled €392 million in 2008 compared with €445 million in 2007. Currency effects decreased consolidated net revenues of the division by €15 million in 2008, principally affecting the Licensing activity which has a significant proportion of revenues invoiced in U.S. dollars.

Revenues for the Licensing activity amounted to €380 million in 2008, a reduction of €53 million compared with €433 million in 2007. Currency effects decreased Licensing revenues by €14 million. 2008 revenues of the Licensing activities declined by 9% at constant currency. In 2008, Licensing revenues benefited from a stable revenue stream from the MPEG2 program (administrated through the MPEG-LA pool), which remains the most significant contributor to our Licensing revenues (approximately 40% of Technology’s revenues in 2008 compared with 30% in 2007). Other newer programs such as Digital TV contributed strongly. However, in the fourth quarter of 2008, Licensing revenues did not benefit from the same level of new contracts as in the same period in 2007 due to our decision to delay the signature of some new Digital TV contracts to extract better value from related patents. At the end of 2008, the Group had over 1,097 licensing contracts in place compared to 990 at the end of 2007 and 959 at the end of 2006.

Licensing revenues are based on estimates founded on license agreements. The difference between estimated and actual revenue figures derived from cash collection for the years ended December 31, 2008 and 2007, measured as a percentage of the total Licensing revenues, amounted to an excess of actual over estimated revenue of 1.6% and 1.8%, respectively.

During the first half of 2008, the Group decided to exit from its loss-making Silicon Solutions activities.

The contribution of the Software & Technology Solutions activity remained limited in 2008.

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Corporate and Other

Corporate revenues (2008: €4 million and 2007: €6 million) mainly relate to services recharged to third parties and are not material to the Group revenues.

Revenues from Other continuing operations were €8 million in 2008 (2007: €10 million), reflecting mainly reduced external revenues from activities in our After-Sales business.

3.15.2   Profit (Loss) from Continuing Operations before Tax and Net Finance Costs

Profit (loss) from continuing operations before tax and net finance costs declined by €1,683 million to a loss of €(1,303) million in 2008. The loss from continuing operations is mainly attributable to €1,459 million of Goodwill impairments, write-offs and restructuring charges.

Given the significant impact of the assets impaired on the Company’s 2008 results, Thomson is presenting, with the aim to provide a more comparable view of the evolution of its operating performance, a set of adjusted indicators which exclude the non-cash impacts of this asset review, restructuring charges and non-cash financial charges. These adjustments, a summary of which is presented along with a description of the limitations of these indicators in section 3.15.9: “Adjusted Indicators”, amount to a negative impact on the Group’s profit from continuing operations before tax and net finance costs of €1,459 million for 2008, compared to a positive impact of €20 million for 2007.

Impairment Losses on Non-Current Operating Assets

In 2008, Thomson recorded impairment losses on non-current operating assets of €1,106 million, compared with €6 million in 2007:

•

impairment losses on Goodwill reached €739 million, and were mostly related to our Grass Valley business (€378 million) following the sharp degradation of market conditions and delays in development programs. The Goodwill in the Group’s DVD business was impaired by €139 million to reflect the decrease in volume and price pressure beyond what was estimated previously. The Goodwill in the Group’s Film Services and Content Services businesses was impaired by €143 million to reflect the price erosion in photochemical replication, and to integrate Thomson management’s decision to exit the Digital Cinema business to exhibitors in 2009. For further information, please see Note 9 to our consolidated financial statements;

•

write-offs of intangible assets reached €219 million, mostly related to the alignment of the value of customer relationships in our Technicolor activities with the pressure on volumes and pricing in physical media. Write-offs of tangible assets reached €136 million, mostly related to the anticipated exit from some activities that form part of our Film Services business activities and to the impact of capital expenditure requirements on the profitability of our Broadcast Services contracts. For further information, see Note 9 to our consolidated financial statements.

Other Income (Expense)

Other income (expense) amounted to an expense of €1,135 million in 2008 which included Goodwill and customer relationship impairment of €1,106 million, compared with income of €111 million in 2007 which included gains on the disposal of land and buildings amounting to €47 million relating to Technicolor and a gain of €63 million relating to U.S. medical benefit curtailment.

Cost of Sales

Cost of sales amounted to €3,904 million in 2008, a decrease of €347 million compared with a cost of sales of €4,251 million in 2007 mainly explained by lower sales. The reduction of material costs as a percentage of revenues was partially offset by slightly higher labor costs and other cost of goods sold, resulting in a gross margin of €936 million in 2008, or 19.3% of net revenues, compared with €1,289 million in 2007, or 23.3% of net revenues.

Restructuring Costs

Restructuring costs amounted to €204 million in 2008, compared with €82 million in 2007. In 2008, we launched an important restructuring plan in order to significantly reduce our cost base, mostly targeted at the Thomson Grass Valley activities (for example, the exit from retail Telephony in North America, the sale of the Digital Film Transfer equipment activity, the sale of the Genlis-based production facility) and cost reduction in Technicolor activities.

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Selling and Administrative Expenses

Selling and marketing expenses amounted to €306 million, or 6.3% of net revenues in 2008, an increase of €14 million compared with expenses of €292 million or 5.3% of net revenues in 2007.

Administrative expenses amounted to €359 million or 7.4% of net revenues in 2008, a decrease of €34 million compared with expenses of €393 million or 7.1% of net revenues in 2007. This decrease is due in part to the cost cutting efforts in the Thomson Grass Valley activities as well as in Technicolor.

Research and Development Expenses

Research and development expenses, which are net of external funding, amounted to €235 million or 4.9% of net revenues in 2008, a decrease of €18 million compared with expenses of €253 million or 4.6% of net revenues in 2007. Out of the total spending on research and development in 2008, €45 million was within Technology, which includes our Corporate Research operations.

Technicolor

Profit (loss) from continuing operations before tax and net finance costs for Technicolor amounted to a loss of €731 million in 2008, a decrease of €846 million compared with profit from continuing operations before tax and net finance costs of €115 million in 2007. This was largely attributable to increased impairment losses on non-current operating assets for Technicolor, amounting to €645 million in 2008, compared with a gain of €43 million in 2007.

Content Services and Film Services profitability suffered from the adverse effect of the Writers Guild of America strike at the beginning of 2008 and the anticipation by film studios of a potential Screen Actors Guild strike. Film Services also suffered from a delay in adapting the cost structure to lower volumes related to the previously announced loss of a film printing contract for a key customer in North America.

In DVD Services, ongoing cost reductions have almost fully offset the adverse impact of price and volume reductions and of the increase in raw material costs related to oil prices increases in 2008. DVD Services also benefited from growth in the Distribution activity, as well as growth in Blu-ray™ replication volume.

Broadcast Services (services to TV broadcasters) profitability was slightly down, mostly due to increased operational and depreciation charges on build-outs for the ITV contract in the U.K. location.

Media Networks (advertising services to retailers and cinema theatres) profitability was affected by the strong decrease in revenues resulting from the impact of the weak economic environment on the advertising market.

Restructuring costs amounted to €42 million in 2008 compared with charges of €71 million in 2007.

Thomson Grass Valley

Profit (loss) from continuing operations before tax and net finance costs for Thomson Grass Valley amounted to a loss of €617 million in 2008 compared with a profit of €28 million in 2007. This was mainly attributable to increased impairment losses on non-current operating assets for Thomson Grass Valley, amounting to €449 million in 2008, compared with a gain of €4 million in 2007.

In Access Products, the impact of price pressure was partially offset by significant cost improvements from new products introduction and savings in sourcing and by an improved product mix.

The Broadcast & Networks activities reflected weak market conditions, particularly in the second half of 2008 as the shortfall in revenues over the period had a significant negative effect on operating profitability.

Restructuring charges amounted to €112 million in 2008 compared with €11 million in 2007. The increase in restructuring charges in 2008 was due to the decision to exit the Group’s retail Telephony activities in North America and Grass Valley’s Digital Film Equipment product line.

Technology

Profit (loss) from continuing operations before tax and net finance costs for Technology amounted to €245 million in 2008, compared to €316 million in 2007, representing a profit margin of 62.5% in 2008 compared with 71.0% in 2007. The decrease in profitability was partly due to impairment losses on non-current operating assets and other non-current items for Technology which amounted to a loss of €22 million in 2008, compared with a gain of €7 million in 2007.

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Despite lower Licensing revenues, the continuing optimization of the cost base led to stability in the profit margin from continuing operations before tax, net finance costs, write-offs and impairments compared with 2007.

Restructuring charges amounted to €3 million in 2008 and were immaterial in 2007.

Corporate and Other

Profit (loss) before tax and net finance costs of the Group’s unallocated Corporate functions was a loss of €102 million in 2008 (2007: loss of €74 million). Restructuring costs amounted to €13 million in 2008 (2007: €2.2 million) and other non-current items amounted to a cost of €2 million in 2008 (2007: income of €9 million).

Profit (loss) before tax and net finance costs for our Other functions was a loss of €98 million in 2008 (2007: loss of €6 million including a one-time gain of €50 million from changes to healthcare plans). The Displays, Angers operations, Genlis decoders manufacturing (prior to their disposal) and After-Sales activities in the U.S. together contributed €59 million of this loss.

3.15.3   Net Finance Costs

Net finance costs comprising the total of net interest expenses and other financial expenses amounted to €396 million in 2008 (2007: €103 million)

Other Financial Income (Expense)

Other financial expenses for continuing operations totaled €306 million in 2008 (2007: €2 million including a €34 million (non-cash) gain on the mark-to-market revaluation of the call option embedded in the Silver Lake convertible bond). This total includes a non-cash charge related to the impairment of our financial stake in Videocon of €151 million and €36 million of re-valuation of U.S. dollar hedge borrowings. See Note 10 “Net Finance costs” to our consolidated financial statements for further information.

Net Interest Expense

Net interest expense for continuing operations decreased to €90 million in 2008 (€101 million in 2007), mainly due to lower interest rates in 2008 offset by a higher average debt level in 2008 compared to 2007.

3.15.4   Income Tax

In 2008, the Group total income tax expense on continuing operations, including both current and deferred taxes, amounted to €106 million compared to €27 million in 2007.

The current tax charge in 2008 is notably the result of current taxes due in Australia, Mexico, the U.S. and Italy as well as withholding taxes on income earned by our Licensing activities, which were only partially credited against taxes payables in France. The implementation of the new tax treaty between France and Japan, led to a decrease in the withholding tax charge compared to 2007. The current income tax charge amounted to €16 million in France (reflecting mainly withholding taxes) and €24 million outside France.

In 2008, Thomson recorded a net deferred tax expense of €66 million due mainly to additional valuation allowance on deferred tax assets in some countries as a consequence of updated forecasts.

3.15.5   Share of Profit (Loss) from Associates

The Group recorded a €4 million share of loss from associates in 2008, compared to a profit of €1 million in 2007, related principally to NuTune, a joint venture between Thomson and NXP Semiconductors combining their respective tuner businesses.

3.15.6   Profit (Loss) from Continuing Activities

As a result of the factors discussed above, the Group’s recorded loss from continuing operations was €1,809 million in 2008, compared to a profit of €251 million in 2007.

3.15.7   Profit (Loss) from Discontinued Operations

The loss from discontinued activities recorded for 2008 was €124 million (2007: loss of €274 million), of which €79 million (2007: loss of €33 million) was related to the Silicon Solutions business; and €29 million, (2007: loss of €227 million) respectively was related to the AVA businesses.

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For further information, please see Note 12 to our consolidated financial statements.

3.15.8   Net Income (Loss) of the Group

As a result of the factors discussed above, consolidated net loss reached €1,933 million in 2008 (2007: €23 million). Loss due to minority interests was €3 million in 2008 (2007: €0 million). Group share of net loss was therefore €1,930 million (2007: €23 million). Total net loss per share, on a non-diluted basis, was €7.41 in 2008, compared to a total net loss per share of €0.16 in 2007.

3.15.9   Adjusted indicators

As announced on January 28, 2009, the Group has appointed PriceWaterhouseCoopers as independent appraiser to review its Goodwill and other types of assets, taking into account the changed market conditions in which the Group operates and the evolution of its strategic framework. Given the significant impact of the assets impaired on the Company’s 2008 results, Thomson is presenting, in addition to published results and with the aim of providing for 2008 a more comparable view of the evolution of its operating performance, a set of adjusted indicators which exclude the non-cash impacts of this asset review, restructuring charges and non-cash financial charges.

Adjusted profit (loss) from continuing operations before tax and net finance costs, “Adjusted profit (loss) from continuing operations before tax and net finance costs + Depreciation and Amortization” and “Adjusted net loss” are non-IFRS financial measures. Management used such adjusted indicators with the aim to reflect our operating performance on a basis which would be more comparable to the 2007 results than the actual 2008 results. Management used these adjusted indicators to compare the performance of our business year-on-year.

We are aware of these limitations in the use of the adjusted indicators and have used them to evaluate our business performance only in conjunction with actual results. You should not place undue reliance on those non-IFRS financial measures or regard them as a substitute for the nearest IFRS mesures. In addition, the adjusted indicators presented in this Annual Report may not be comparable to similarly titled measures reported by other companies due to differences in the way that these measures are calculated. Further, these non-IFRS financial measures are not meant to be predictive of future results, cash flows or financial position.

Total P&L adjustments, a summary of which is presented in the following table, amount to a positive impact of €1,646 million for 2008 and a negative impact of €54 million for 2007.

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RECONCILIATION OF ADJUSTED INDICATORS

Adjusted profit from continuing operations before tax and net finance costs + Depreciation and Amortization declined from €736 million in 2007 to €526 million in 2008. This decline was partly related to the decrease in revenues recorded in 2008, and partly related to delays in adjusting the Group’s cost base to lower activity, particularly in the Film Services and broadcast and network equipment activities.

Adjusted net loss (Group share) was €284 million in 2008 compared with adjusted net loss of €77 million in 2007, a decline of €207 million.

3.16    Results of Operations for 2007 and 2006

The Group’s revenues and profit from continuing operations before tax and net finance costs for the years 2007 and 2006 are presented below for each of the divisions – Technicolor, Thomson Grass Valley and Technology – and for Corporate and the non-core Other segment. The results of discontinued operations are presented separately under section 3.16.7: “Profit (Loss) from Discontinued Operations”.

Our results are presented in accordance with IFRS 5 and therefore exclude activities now treated as discontinued from the results for continuing operations. Prior period results are adjusted to take into account the current perimeter of discontinued operations. The originally reported revenues and profit from continuing operations before tax and net finance costs for Thomson for 2006 were €5,854 million and €479 million respectively, of which €163 million of revenue and a loss of €73 million, respectively, were from activities since treated as discontinued in 2008 (principally our residual displays components activity at Genlis, European after-sales activities and the Silicon Solutions business) – see Note 4 to our consolidated financial statements for further details. The analysis below uses these restated figures.

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3.16.1   Analysis of Net Revenues

Thomson’s net revenues for the Group for 2007 were €5,540 million, a decrease year-on-year of €151 million or 2.7% (2006: €5,691 million). Currency movements, principally the weaker U.S. dollar, decreased revenues for the year by €245 million. Group revenues for the year excluding currency movements therefore increased 1.7% year-on-year.

The decrease at actual exchange rates resulted from slightly lower revenues in each segment. Within Thomson Grass Valley revenue growth in the Access Products activities was more than offset by a fall in revenues from the Broadcast & Networks activities, while in Technicolor lower revenues from the physical media activities (Film Services and DVD Services) were partially offset by higher revenues in the electronic businesses in the division (Content Services, Broadcast Services, Media Networks and Electronic Distribution Services).

2007 acquisitions had an immaterial effect on 2007 revenues. Our acquisition of NOB-CMF in the fourth quarter 2006 in Broadcast Services contributed €53 million to Technicolor revenues in 2007, compared to €14 million in 2006.

Technicolor

Consolidated net revenues for Technicolor totaled €2,400 million in 2007 compared with €2,489 million in 2006, including a significant adverse impact of exchange rate variations of €123 million. Consolidated net revenues of Technicolor at constant 2006 exchange rates grew by 1.3%. This growth reflected strong growth in Broadcast Services and Media Networks and more modest growth in Film Services & Content Services, while the rise in DVD volumes and higher revenues in the DVD distribution activity were outweighed as expected by the negative impact of price reductions related to contract renewals in DVD Services, which tend to be greater in the first year of such renewed contracts.

The Content Services activities experienced organic revenue growth in visual effects (VFX) and in higher-end services such as digital intermediates (“DI”) while maintaining focus on integrating its various units into a more efficient organization. In 2007 this activity started to address the Indian and Chinese markets, including the investment in Paprikaas and the related strategic alliance with DreamWorks Animation to develop animation capabilities in India. Content Services experienced some minor revenue losses in the latter months of 2007 as a result of the recent strike by members of the Writers’ Guild of America. The Electronic Distribution Services operation was strengthened during second half 2007 with the acquisition of SyncCast, a provider of end-to-end solutions for the online distribution of digital content over IP networks, but revenues are not yet material.

Our physical media sales (DVD Services and Film Services) accounted for approximately 72% of total sales in Technicolor in 2007, compared to approximately 75% in 2006.

Film Services processed 4.9 billion feet in 2007 which compares with 5.0 billion feet processed in 2006. Film Services benefited from a stronger film slate in first half 2007 compared to the first half of 2006, with notable titles including Pirates of the Caribbean: At World’s End, Shrek the Third, and Harry Potter and the Order of the Phoenix.

In our DVD Services business the number of DVDs replicated in 2007 amounted to 1.47 billion, an increase of 1.6% from 2006, mainly resulting from higher volumes in North America and Australia. The growth in distribution activity and higher replication volumes did not fully offset the impact of price reductions related to contract renewals early in the year. The major “blockbuster” releases on DVD were as usual concentrated in the latter part of the year, particularly the fourth quarter of 2007. Key titles included Pirates of the Caribbean: At World’s End, Transformers, Shrek the Third and The Bourne Ultimatum.

Broadcast Services revenues in 2007 grew significantly, principally with the expansion of our activities in Broadcast Services in Europe. The biggest contributors to this growth were a full year of operation of the playout facility in The Netherlands acquired in fourth quarter 2006 and the contract with ITV awarded at the start of 2007. Within Media Networks, our retail media networks revenues were at the same level as last year in North America while several initiatives were taken to expand our activities in Brazil and in Europe, notably in Poland.

Revenues from electronic media services (Content Services, Broadcast Services, Media Networks and Electronic Distribution Services) represented approximately 28% of total sales of Technicolor in 2007 (continuing the trend from 25% in 2006) reflecting the higher relative contribution from the growing electronic media services activities.

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Thomson Grass Valley

Consolidated net revenues for Thomson Grass Valley were broadly flat year-on-year at €2,679 million for 2007, compared to €2,684 million for 2006. This result includes a negative impact of exchange rate variations of €90 million. Consolidated net revenues of Thomson Grass Valley increased by 3.2% in 2007 at constant 2006 exchange rates.

This overall performance reflected growth in the Access Products activities and a drop in revenues from the Broadcast & Networks activities. Access Products, accounting for around 76% of the division’s revenues, increased sales with cable and telecom customers, but fourth quarter 2007 saw a decline in revenues compared to the same period in 2006. Broadcast & Networks faced weaker market conditions early in the first half of 2007, compounded by late new product introductions. Despite an improvement in the third quarter of 2007, activity was again weak in the fourth quarter of 2007. Overall, therefore, revenues from the Broadcast & Networks activities declined year-on-year.

Revenues in Access Products grew in 2007 with cable, satellite and telecom customers, partially offset by some decline in revenues from telephony & home networking. Cable set-top boxes registered volume growth with 2.3 million cable set-top boxes (2006: 2.0 million) and an improvement in product mix, from sales of products with a higher ASP (average selling price). The volume decrease in satellite set-top boxes to 10.1 million in 2007 from 11.1 million in 2006 was more than outweighed by the improved mix with an increased proportion of high definition (HD) boxes. We sold 11.1 million access products for telecom operators (2006: 10.0 million), with the volume increase being offset to some extent by price declines. Overall, a total of 26.4 million set-top boxes, DSL modems and gateways were sold in 2007, an increase on the 2006 total of 23.2 million units, and with an improved mix overall. In addition the Group began delivering eMTAs in the U.S. (dual play modems for cable customers). The difference between the 2007 total of 26.4 million units and the number of 23.4 million units for 2007 previously released is explained by the fact that we now include cable modem/eMTA shipments.

In satellite, volumes sold in the U.S. slightly decreased year on year but the proportion of HD devices grew. The growing transition to HD products (including HD PVRs), which generally command a higher ASP than non HD products, offset unfavourable volume effects and ongoing price declines. DIRECTV remained the largest customer of the division. The business continued to expand in other markets in 2007, especially in Latin America, and also pursued its development with Asian satellite broadcasters, notably India’s TataSky and Malaysia’s Astro.

Sales of cable access products grew significantly year-on-year. Our successes in 2007 included the delivery of integrated triple play boxes to Portugal’s TV Cabo and initial shipments of eMTAs (dual-play modems) to Comcast in the United States. Overall, the Group consolidated its leadership in EMEA and Latin America based on volume and value.

Thomson’s business with telecom customers continued to grow during 2007. The roll-out of the France Telecom Livebox™ continued successfully in 2007 with introduction of a more sophisticated device. Overall, improved volumes continued to offset continuing price erosion. Our telephony & home networking business increased volumes in DECT (Digital Enhanced Cordless Telecommunications) partially offsetting price erosion.

Revenues from Software Service Platform, principally Cirpack softswitches and the SmartVision IPTV/Mobile TV system, decreased in 2007 compared to 2006 due primarily to the slow rollout of IPTV and Mobile TV services.

Revenues of the Broadcast & Networks activities were down significantly in 2007 compared to 2006. During first half 2007, the Broadcast & Networks activities performed poorly with weak markets and some delays in new product introductions, most notably the LDK 8000 HD broadcast camera. The activities returned to growth in third quarter 2007 with improving sales of, for example, the LDK 8000 HD broadcast camera, but fourth quarter 2007 was again weak and revenues declined year-on-year. Expectations for both product and, notably, system contracts were not met as customers again postponed capital expenditure decisions. Orders for other product categories, such as telecine equipment for post-production and for older models, declined year-on-year. Initial deliveries of new products, such as the NetProcessor, the ViBE MPEG4 encoder range based on the Mustang chip solution, and the Infinity professional camcorders were made, but with minimal revenues in 2007 for these products.

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Technology

Consolidated net revenues for Technology amounted to €445 million in 2007, a decline of €11 million compared with €456 million in 2006. Currency effects decreased consolidated net revenues of the division by €31 million in 2007, principally affecting the Licensing activity which has a significant proportion of revenues invoiced in U.S. dollars.

Consolidated net revenues for the Licensing activity amounted to €433 million in 2007, a reduction of €12 million compared with €445 million in 2006. Currency effects decreased Licensing revenues by €31 million. Underlying this performance were strong performances in the newer Licensing programs, offsetting decreases in older programs such as analog TV. The most significant contributor to our Licensing revenues in 2007 was again the MPEG2 program (administrated through the MPEG-LA pool), which increased to account for approximately 30% of Technology’s revenues in 2007 (2006: 24%). Other newer programs contributed strongly, in particular Digital TV in North America, which increased significantly in 2007 compared to 2006. Trademark revenues also increased from a small base. At the end of 2007, the Group had over 990 licensing contracts in place compared to 959 at the end of 2006.

Licensing revenues are based on estimates based on License agreements. The difference between estimated and actual revenue figures derived from cash collection for the years ended December 31,2007 and 2006, measured as a percentage of the total Licensing revenues, amounted to an excess of actual over estimated revenue of 1.8% and 1.8%, respectively.

The contribution of our Software & Technology Solutions activity remained limited.

Corporate and Other

Consolidated net revenues in 2007 from Corporate and Other totaled €16 million, down €45 million compared with €61 million in 2006. Of the 2007 total, €6 million was recorded in Corporate (2006: €27 million). Revenues from our Other continuing operations fell to €10 million for 2007 (2006: €34 million), largely as a result of reduced external revenues from activities at the Angers facility.

3.16.2   Profit from Continuing Operations before Tax and Net Finance Costs

Cost of net revenues amounted to €4,251 million in 2007, a decrease of 2.1% compared with cost of net revenues of €4,342 million in 2006. This reduction was less than the decrease in revenues of 2.6%, resulting in a gross margin of €1,289 million in 2007, or 23.3% of net revenues, compared with €1,349 million in 2006, or 23.7% of net revenues. This reduction in gross margin, most notably reflected lower gross margin in the Broadcast & Networks activities in Thomson Grass Valley.

Selling and marketing expenses amounted to €292 million, or 5.3% of net revenues in 2007, an increase of 7% compared with €273 million or 4.8% of net revenues in 2006 due largely to increased selling and marketing efforts that have not yet resulted in corresponding increases in revenues.

Administrative expenses amounted to €393 million or 7.1% of net revenues in 2007, an increase of 3.4% compared with €380 million or 6.7% of net revenues in 2006. This increase is due in part to increased levels of expenses in the Group’s early stage businesses such as the Broadcast Services activities in Technicolor.

Other expenses and income, excluding selling and marketing and general and administrative expenses, amounted to income of €29 million in 2007, compared with income of €100 million in 2006. This is due to the lower impact of post-retirement benefit obligations, while higher restructuring was largely offset by higher gains on the disposal of land and buildings, as described below. Restructuring charges in continuing operations amounted to €82 million in 2007, compared with €65 million in 2006. In 2007, Thomson completed an important restructuring plan within its DVD Services activities in order to significantly reduce manufacturing cost base in the United States and Europe. As a result, restructuring charges in Technicolor amounted to €71 million in 2007 (compared to €30 million in 2006). In 2007 we recorded gains on the disposal of land and buildings amounting to €47 million (2006: €23 million) relating to Technicolor.

During 2007 the Group continued to implement the realignment of medical and healthcare plans begun in 2006. The actuarial liability for post-retirement obligations on the Group’s balance sheet reduced by €169 million to €403 million, and a gain of €63 million was credited to profit from continuing operations before tax and financial result (2006: €167 million), of which €50 million was recorded in the Other segment with the balance mainly in Thomson Grass Valley.

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Research and development (R&D) expenses for continuing operations (net of external funding) amounted to €253 million in 2007, or 4.6% of net revenues in 2007, compared with €243 million or 4.3% in 2006. Out of the total spending on research and development in 2007, €47 million was within Technology, which includes the Group’s Corporate Research operations.

Depreciation and amortization related to continuing activities (including amortization of contract advances and customer relationships) of €376 million in 2007 (compared with €447 million in 2006).

As a result of the evolution of these expenses combined with a decrease of 2.6% in revenues (including the negative effect of exchange rate fluctuations), the Group’s consolidated profit from continuing operations before tax and net finance costs reached €380 million in 2007 (2006: €552 million). This decrease reflected notably the higher level of restructuring costs in Technicolor and sharply lower profitability in Thomson Grass Valley, in particular the Broadcast & Networks activities which were loss-making in 2007.

Technicolor

Profit from continuing operations before tax and net finance costs for Technicolor amounted to €115 million in 2007 compared with €160 million in 2006. The division’s 2007 profit margin was 4.8% compared with a 2006 profit margin of 6.4%. Savings from restructuring and cost-control actions, as well as process transformation initiatives in DVD Services, Film Services and Content Services, did not fully offset restructuring charges of €71 million (2006: €30 million), the impact of lower pricing in the DVD business following recent contract renewals, and spending on the newer electronic media activities. The €57 million gross cash costs of the restructuring actions in 2007 were covered by the proceeds received through related real estate sales, notably the Camarillo site in California.

In Content Services and Film Services, the positive effects of process and efficiency improvements, and the continuation of film volume shifts to lower cost facilities were outweighed by the impact of restructuring charges and other costs related to sites optimization and consolidation programs. The 2007 results reflect start-up costs in India and China in Content Services activities, as well as the continuation of investment in digital cinema beta-tests deployed for various clients.

In DVD Services, the significant reduction of the manufacturing cost base has partially offset the adverse impact of prices reductions in 2007. DVD Services bore the bulk of the division’s restructuring charge in 2007. DVD Services benefited from a number of one-time items, most notably a large proportion of the €47 million profit on real estate sales in 2007 and €14 million relating to the recovery of certain expenses concerning past services.

Electronic Distribution Services is still in a loss-making start-up phase, reflecting the start-up costs for on-line video distribution services, including in the SyncCast operation (acquired in the second half of 2007).

In Broadcast Services and Media Networks, revenue growth has generated additional profit compared with last year and has helped finance the retail media networks start-ups in Brazil and in Europe.

Overall we estimate that one-time items have reduced the profitability of Technicolor by a net amount of €10 million in 2007, including most notably restructuring costs of €71 million, the profit on the Camarillo disposal of €36 million and the credit in DVD Services referred to above in the amount of €14 million.

Thomson Grass Valley

Profit from continuing operations before tax and net finance costs for Thomson Grass Valley amounted to €28 million in 2007 compared with €132 million in 2006. The division’s 2007 profit margin was 1.1% compared with a 2006 profit margin of 4.9%.

In Access Products, underlying profitability improved in 2007. The transition to high definition products in 2007 improved product mix and helped offset price erosion on like-for-like products. Profitability was held back by the weaker activity in fourth quarter 2007, compared to the corresponding period in 2006, as customers began to reduce inventory levels.

The Broadcast & Networks activities were loss-making for the year, after recording a profit in 2006. This reflects an operating loss and includes one-time costs taken in both first half 2007 and in second half 2007. The performance for the year reflected weaker than expected market conditions and problems with new product introductions, particularly in the first half. The losses for second half 2007 were lower than in first half 2007 but the shortfall in revenues in fourth quarter 2007 versus expectations (and compared to the corresponding period in 2006) had a significant negative effect on operating profitability and outweighed the initial effects of cost reduction programs initiated after the first half loss. The one-time items included non-cash inventory write-downs.

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Technology

Profit from continuing operations before tax and net finance costs for Technology amounted to €316 million in 2007, compared to €322 million in 2006, representing a profit margin of 71.1% in 2007 compared with 70.6% in 2006.

In 2007, the profit before tax and finance costs of our Licensing activity was €363 million compared to €368 million in 2006, a decrease of €5 million. The profit margin for Licensing was 83.8% in 2007 compared with a margin of 82.7% in 2006. During the year, the Licensing activity increased its focus on optimizing the cost-efficiency of its patent application and maintenance operations.

The total research costs accounted for within Technology amounted to €47 million in 2007, a slight decrease from €50 million in 2006.

Corporate and Other

The charge before interest and finance costs of the Group’s unallocated Corporate functions was €74 million in 2007 (2006: €77 million).

Other continuing operations reported a loss of €6 million in 2007 (2006: profit of €15 million). One-time gains of €50 million from changes to healthcare plans more than offset the continuing losses in Other continuing operations. Various other one-time items affecting the profit from Other continuing operations are estimated to total an aggregate charge of €16 million.

3.16.3   Net Finance Costs

Net finance costs comprising the total of net interest expense and other financial expenses amounted to €103 million in 2007 (2006: €202 million)

Net Interest Expense

Net interest expense for continuing operations reached €101 million in 2007 (2006: €90 million), principally reflecting higher euro interest rates in 2007 despite a slightly lower level of average debt in 2007 compared to 2006.

Other Financial Expenses

Other financial expenses for continuing operations totaled €2 million in 2007 (2006: €112 million, including a charge of €70 million relating to our holding in TCL Multimedia). This total includes a €34 million (non-cash) gain on the mark-to-market revaluation of the call option embedded in the Silver Lake convertible bond (2006: gain of €4 million).

3.16.4   Income Tax

In 2007, the Group’s total income tax expense on continuing operations, including both current and deferred taxes, amounted to €27 million compared to zero in 2006.

The current income tax charge of €53 million in 2007 (2006: €59 million) is notably the result of current taxes due in Australia, Canada and the U.K., as well as withholding taxes on income earned by our Licensing activity, which were only partially credited against taxes payable in France, and therefore were mainly booked as an income tax charge. The current income tax charge amounted to €26 million in France (reflecting mainly withholding taxes) and €27 million abroad.

In 2007, Thomson recorded a net deferred tax income of €26 million (2006: €59 million) primarily due to (1) the recognition of previously unrecognized deferred tax assets amounting to €139 million and corresponding to the tax losses in France, as a result of improved visibility over future Licensing income stream in France, once the loss-making activities had been disposed of or shut down and (2) an impairment charge of €100 million resulting from the downward revision in our estimates of the taxable income expected in the short-term in the U.S.

The current income tax charge in 2006 was notably the result of current taxes due in The Netherlands, the United States, Australia, Mexico and Canada, as well as withholding taxes on income earned by our Licensing activity, which were only partially credited against taxes payable in France, and therefore were mainly booked as an income tax charge.

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In 2006, Thomson recorded a net deferred tax income of €59 million primarily due to recognition of additional tax assets in France notably because of the end of the Japanese withholding tax on patents income in future years.

3.16.5   Share of Profit (Loss) from Associates

Following the sell down of the majority of the Group’s stake in TCL Multimedia in 2006 there was no material share of profit or loss from associates in 2007, compared to a loss of €86 million in 2006 related principally to the Group’s then holding in TCL Multimedia at that time.

3.16.6   Profit from Continuing Activities

As a result of the factors discussed above, the Group recorded a profit from continuing operations of €251 million for 2007 compared to €264 million in 2006.

3.16.7   Profit (Loss) from Discontinued Operations

The results for 2007 and 2006 include activities treated as discontinued operations under IFRS 5, principally the Silicon Solutions business (which was reclassified as discontinued activities during 2008), Audio-Video (AV) and Accessories businesses (together AVA) and the Group’s residual displays components activity based at Genlis and European after-sales activities (which were reclassified as discontinued activities during 2007). The comparative figures for 2006 have been adjusted accordingly to reflect this change of perimeter in accordance with IFRS.

The total loss attributable to discontinued operations for 2007 was €274 million, of which €33 million related to the operations reclassified as discontinued during 2008 (2006: loss €209 million, of which €25 million was attributable to the operations reclassified during 2008). The bulk of the 2007 charge related to the operating losses and write-downs on the disposal/exit from the AVA businesses recorded during 2007, in particular the losses relating to the exit from the European AVA operations.

The disposal of the North American Accessories business to Audiovox was completed on January 29, 2007. At the end of December 2007, the Audio-Video (AV) activities outside Europe were also purchased by Audiovox. On October 16, 2007, Thomson announced it would progress with closing the AVA Europe business, except for the Skymaster activities in Germany. On December 31, 2007 Skymaster was sold to Arques Industries, a German company.

The 2007 loss from discontinued activities of €274 million led to a net cash outflow in 2007 of €180 million in respect of discontinued activities. For further information, see Note 12 “Discontinued Operations” to our consolidated financial statements.

3.16.8   Net Income of the Group

After taking account of the negative impact of the loss from discontinued operations of €274 million (2006: loss of €209 million), the Group consolidated net loss was €23 million for 2007 (2006: profit of €55 million). Net loss per share, on a non-diluted basis, was €0.16 in 2007, compared to a net earnings per share of €0.14 in 2006.

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3.17    Liquidity and Capital Resources

3.17.1   Cash Flows

Net Cash generated from / (used in) Operating Activities

Net cash used in operating activities was €318 million in 2008, compared to €281 million generated from operating activities in 2007 (€415 million generated from operating activities in 2006), mainly attributable to a significant decline with respect to our continuing operations.

Continuing Operations

Net operating cash used in continuing operations amounted to €156 million in 2008, compared to €483 million generated from continuing operations in 2007 (€548 million generated from continuing operations in 2006). This decline reflects:

•

a reduced use of factoring €(250) million for Thomson Group compared to 2007 and client advances as well as the gradual alignment of the supplier payment cycle with contractual terms, all made necessary in the context of a more difficult trading environment and a more restrictive credit market;

•

working capital and other assets and liabilities (including contract advances) had a negative impact of €327 million in 2008 compared to a positive impact of €55 million in 2007 (a negative impact of €8 million in 2006);

•

cash used in restructuring of continuing operations was €58 million in 2008, compared with €87 million in 2007 (€52 million in 2006);

•

net interest (corresponding to net interest paid and received) amounted to €83 million paid in 2008, compared to €84 million in 2007 (€78 million in 2006; an additional €59 million was paid in 2006 in respect of accrued interest on convertible bonds issued in October 2000); and

•

cash taxes paid amounted to €37 million in 2008, compared with €69 million in 2007 (€42 million in 2006).

Loss from continuing operations in 2008 was €1,809 million, compared to a profit of €251 million in 2007 (€264 million in 2006). Non-cash elements included are mainly impairment of assets amounted to €1,155 million in 2008 compared to €22 million in 2007 (€3 million in 2006), depreciation and amortization of €537 million in 2008, compared to €375 million in 2007 (€447 million in 2006) and an increase in provisions of €129 million, compared to a reduction of €130 million in 2007 (€155 million in 2006).

Discontinued Operations

Net operating cash used in discontinued operations was €162 million in 2008, compared to €202 million in 2007 (€133 million in 2006).

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Net Cash generated from/(used in) Investing Activities

Net cash used in investing activities was €351 million in 2008, compared to €139 million in 2007 (€466 million in 2006).

Continuing Operations

The increase in net investing cash used in continuing activities to €330 million in 2008 from €162 million in 2007 (€303 million in 2006) was driven primarily by a lower cash inflow from proceeds from sale of assets of €6 million in 2008 compared to €111 million in 2007 and also from cash collateral granted to third parties (€35 million in 2008 compared to 0 in 2007 and 2006). Other factors included:

•

gross tangible and intangible capital expenditures amounting to €280 million in 2008 compared to €264 million in 2007 (€268 million in 2006). Net capital expenditures amounted to €274 million in 2008, compared with €153 million in 2007 (€198 million in 2006) due to cash received from tangible and intangible asset disposals which was only €6 million in 2008, compared to €111 million in 2007 (€70 million in 2006). The largest of these disposals in 2007 was of the Camarillo site in California, USA;

•

cash outflow for the acquisition of subsidiaries (net of cash acquired) was €16 million. See Note 35 to our consolidated financial statements for more information regarding the cash impact of these acquisitions; and

•

lower proceeds earned from sale of investments and marketable securities of €(2) million in 2008, compared to €42 million in 2007 (€133 million in 2006).

Discontinued Operations

Net investing cash outflows in discontinued operations were €21 million in 2008, compared to €23 million of cash generated in 2007 (€163 million of cash used in 2006).

Net Cash generated from/(used in) Financing Activities

Net cash generated from financing activities amounted to €870 million in 2008 compared to €861 million used in 2007 (€373 million generated in 2006). All of the net cash generated was related to our continuing operations.

Continuing Operations

Net financing cash generated from continuing operations was €870 million in 2008, compared with €860 million of net financing cash used in 2007 (€383 million generated in 2006). The cash generated in 2008 was principally due to the proceeds from borrowings, primarily drawings on our syndicated credit facility, for an amount of €1,610 million offset by the repayment of convertible bonds for an amount of €367 million, the repayment of other debt for an amount of €345 million and the payment of €29 million in dividends and distributions to holders of deeply subordinated bonds.

The cash used in 2007 was principally due to the repayment of short-term borrowings for an amount of €898 million, the proceeds from new debt, primarily from a private placement made in 2007 for an amount of €150 million, and the payment of €117 million in dividends and distributions (including €29 million paid to holders of deeply subordinated bonds).

The cash generated in 2006 was principally due to the €594 million in new debt raised via private placements as well as the €400 million in short-term drawings on our syndicated credit facility, partially offset by repayment at maturity of convertible bonds in 2006 for a total principal amount of €611 million plus the payment of €107 million in dividends and distributions (including €29 million paid to holders of deeply subordinated bonds).

Discontinued Operations

There was no net financing cash used by discontinued operations in 2008 compared to €1 million used in 2007 (€10 million used in 2006).

Cash and Cash Equivalents

As a result of the factors discussed above, we experienced a net increase of cash and cash equivalents of €201 million in 2008 compared to a decrease of €719 million in 2007 (increase of €322 million in 2006) before the effect of exchange rate differences. Cash and cash equivalents amounted to €769 million at the end of 2008 compared to €572 million at the end of 2007 (€1,311 million at the end of 2006).

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3.17.2   Financial Resources

Please see Note 26 to our consolidated financial statements.

The table below summarizes Thomson’s liquidity situation at December 31, 2008. In the table below the private placements, the interest rate swaps and the amounts drawn from the syndicated credit facility are shown at their original maturities even though they are considered as current due to the breach of the financial covenants, as described in more detail in Notes 24, 26.5(a) and 26.5(g) to our consolidated financial statements.

Gross financial debt totaled €2,884 million at the end of 2008 compared with €1,823 million at the end of 2007. At December 31, 2008, financial debt comprised primarily notes placed privately with institutional investors for the equivalent of €1,036 million (€1,014 million at December 31, 2007) and the €1.733 billion drawn under the €1.75 billion syndicated credit facility, compared to €100 million at December 31, 2007. Financial debt due within one year amounted to €2,862 million at the end of 2008, compared with €745 million at the end of 2007.

Covenant Breach

The private placement notes issued by us to institutional investors in a total amount of €1,036 million have two financial covenants: (i) the maximum ratio of net debt to net worth must not exceed 1 and (ii) the ratio of profit from continuing operations before tax, finance and restructuring costs to adjusted net interest expense must be at least 3.

According to the Group’s audited 2008 consolidated financial statements, available on April 30, 2009, the Group is in breach of these convenants. The Group is also in breach, at such date, of certain limitations with respect to the negative pledge and the limit on subsidiary indebtedness, which are contained in its syndicated credit facility of €1.75 billion (of which €1.733 billion was drawn on December 31, 2008) and the private placement notes. Finally, the syndicated credit facility contains a cross acceleration clause pursuant to which the lenders under the syndicated credit facility may accelerate repayment of their debt in the case of a default (other than a payment default, for example a breach of covenant) with respect to indebtedness of the Group in an amount greater than €25 million, if the holders of such debt also cause the accelerated payment of their debt.

Having anticipated the breach of the covenants mentioned above, Thomson notably negotiated a series of waivers with its creditors, by which such creditors temporarily waived their right to accelerate repayment of such indebtedness as from April 30, 2009. For more information on the breach of the covenants, see Note 3.1 to our consolidated financial statements, and Chapter 1: “Key Information and Risk Factors”, section 1.3: “Risk Factors - Risks related to our financial restructuring”.

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Principal Terms of the Waivers

The Group has obtained a series of waivers a series of covenant breaches under its private placement notes and syndicated credit facility, including covenants requiring the net debt to net worth ratio as at December 31, 2008 not to exceed 1:1, until 16 June 2009, the date at which the Group will hold its Annual General Meeting.  By obtaining these waivers, the Group has avoided potential acceleration of substantially all of its senior debt during the waiver period.  In addition, until the end of the waiver period we have obtained from the relevant creditors a deferral of the obligation to repay $92,500,000 principal amount under certain of our private placement notes that was otherwise due to be repaid on May 17, 2009.

The waivers may terminate earlier than June 16, 2009 upon the occurrence of certain events, including if we discharge any indebtedness (subject to certain exceptions), secure any currently unsecured Group indebtedness or commence or are subject to any court insolvency proceeding.  In connection with the granting of the waivers, the Group will pay additional interest and fees and will also make certain interest payments earlier than scheduled.

The waivers constitute an important step which maintains a stable framework for the Group to continue discussions on the restructuring of its balance sheet, which started in February 2009.  If these negotiations are not successful during the waiver period or if the Group’s creditors are not willing to extend the waivers, the Board of Directors may, in order to avoid the risk of an accelerated repayment of its financial debt, request the opening of a sauvegarde proceeding under the provisions of articles L. 620-1 et seq. of the Code de commerce (French Commercial Code). Such proceeding will have the effect of providing the Company with the protections offered by law (suspension of legal actions against the Company and a prohibition against paying debts existing as of the date of the opening of the proceeding) and with a stable legal framework for the Company to pursue the negotiations with respect to the restructuring of its debt.

Deeply Subordinated Bonds

Our financial debt of €2,884 million excludes our 5.75% (5.85% yield to first call date) €500 million deeply subordinated bonds issued in September 2005. Because of their perpetual and subordinated nature, these bonds are recorded under IFRS in shareholders’ equity for the net value received of €492 million (representing the issue price minus the offering discount and fees). On any interest payment date, payment of interest is optional only if we do not declare and pay a dividend at the most recent Shareholders’ Meeting and we have not repurchased our shares in the preceding six months. The bonds are perpetual and have no stated maturity date; they may, however, be redeemed at the issuer’s option in certain conditions, in particular (i) on or after September 25, 2015, (ii) at any time in the event of a change of control of Thomson or (iii) as a result of certain tax reasons. These bonds provide that if there is a change of control and the rating for our senior unsecured obligations is downgraded by one full notch by either Moody’s or S&P such that the reduction results in a rating below Baa3 by Moody’s or BBB- by S&P, then we may redeem the bond at no penalty. However, should we decide not to redeem, the coupon rate increases by 5 percentage points. Even though our senior credit rating (S&P: CC and Moody’s: Caa3) is currently below investment grade (S&P: BBB- and Moody’s: Baa3), this provision does not apply because no change of control has occurred. For more information on these bonds, see Note 23.4 to our consolidated financial statements.

Ratings

We use the services of rating agencies to help investors to evaluate our credit quality and rate our debt.

The rating agency Standard & Poors (S&P) issues to us: (1) a general corporate credit rating which covers our long-term senior unsecured debt and credit lines as well as our convertible notes issued in 2000 and 2002 (long-term rating), (2) a short-term credit rating (short-term rating) and (3) a specific rating covering our deeply subordinated bonds issued in September 2005 (rating on our deeply subordinated bonds).

In March 2008, after having put our rating on credit watch following the announcement of our 2007 results, S&P reduced our long-term rating from BBB- to BB, our short-term rating from A-3 to B and the rating on our deeply subordinated bonds from BB to B. S&P maintained the negative outlook on our rating. In May 2008, S&P lowered our long-term rating to BB- and the rating on our deeply subordinated bonds to B-; our short-term rating was maintained at B and the outlook was maintained as negative.  

In August 2008, S&P reduced our long-term rating to B+ and the rating on our deeply subordinated bonds to CCC; our short-term rating was maintained at B and the outlook as negative. In December 2008, S&P lowered our long-term rating to B and the rating on our deeply subordinated bonds to CCC- and the ratings were placed on credit watch with negative implications; our short-term rating was affirmed at B. In January 2009, S&P lowered our long-term rating to CC, the rating on our deeply subordinated bonds to C and our short-term ratings to C; the ratings were removed from credit watch and the outlook was negative.

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The rating agency Moody’s issues to us (1) a general issuer rating covering the long term debt issued by us (issuer rating) which was replaced in March 2008 by a Corporate Family Rating (corporate rating) and (2) a specific rating covering our deeply subordinated bonds issued in September 2005 (rating on our deeply subordinated bonds).  

In March 2008, after having put our rating on review following the announcement of our 2007 results, Moody’s reduced our issuer rating from Baa3 (outlook negative) to Ba1 (outlook stable) and announced that this rating – in accordance with Moody’s methodology for non investment grade ratings – would become a corporate rating (Corporate Family Rating). Moody’s also reduced the rating on our deeply subordinated bonds from Ba2 to Ba3.

Subsequently, on April 1, 2008, Moody’s changed the outlook on Thomson from stable to negative, and on April 18, 2008 downgraded our corporate rating to Ba2 and downgraded the rating on our deeply subordinated bonds to B2; the negative outlook was maintained.  In July 2008, Moody’s put our ratings on review for possible downgrade and in August 2008, Moody’s downgraded our corporate rating to B1 and the rating on our deeply subordinated bonds to Caa1 with a stable outlook.  In October 2008, Moody’s changed the outlook to negative.  In January 2009, Moody’s lowered our corporate rating to Caa3 and the rating on our deeply subordinated bonds to C. The outlook was maintained as negative.

Our syndicated credit facility has a ratings grid whereby the margin changes as the S&P rating varies between A and BBB-; for ratings above A or below BBB-, the margin corresponding respectively to an A rating and BBB- applies.

In addition to the debt position as described above, we also have reserves for post-employment benefits that we  provide to our employees, which amounted to €403 million at December 31, 2008 compared to the same amount of €403 million at December 31, 2007. For more information on our reserves for post-employment benefits, see Note 27 to our consolidated financial statements.