© Copyright 2008 ABB. All rights reserved. Concept and design by Interbrand Zintzmeyer & Lux. Energy efficiency for a connected world Energy efficiency for a connected world ABB and energy efficiency The ABB Group Annual Report 2007 Did you know that as much as 80 percent of available energy is Operational and financial review lost in the process of making and distributing electricity, and in its inefficient consumption? That means just one-fifth of the energy we have becomes the power we need.

| As the global leader in power transmission and distribution tech- The ABB Group Annual Report 2007 nology and one of the world’s leading automation companies, ABB has found ways to optimize energy use at every step.

From harvesting primary energy resources to transporting, ­distributing and using electrical power, proven ABB technologies

| reduce waste by 20 to 30 percent. Operational and financial review

ABB technology can reduce losses along the energy value chain

Process Transport Plant Grid Process Motors and Building automation systems automation ­operation automation drives installations

Total potential energy

Primary Transport Conversion Line losses Production Motor inefficiency energy (e.g. pipelines, inefficiency processes Losses in building systems production marine transport) (e.g. power plants)

Energy provision Energy consumption

Reduced energy losses with ABB products Energy losses without ABB products ABB Ltd ABB Ltd Corporate Communications Investor Relations P.O. Box 8131 P.O. Box 8131 ABB’s power and automation technologies can help save energy by reducing power consumption CH-8050 Zurich CH-8050 Zurich and losses, improving productivity and managing equipment.

Switzerland Switzerland GF-CC 08-4 Tel: +41 (0)43 317 7111 Tel: +41 (0)43 317 7111 Fax: +41 (0)43 317 7958 Fax: +41 (0)44 311 9817 www.abb.com © Copyright 2008 ABB. All rights reserved. Concept and design by Interbrand Zintzmeyer & Lux. Energy efficiency for a connected world Energy efficiency for a connected world ABB and energy efficiency The ABB Group Annual Report 2007 Did you know that as much as 80 percent of available energy is Operational and financial review lost in the process of making and distributing electricity, and in its inefficient consumption? That means just one-fifth of the energy we have becomes the power we need.

| As the global leader in power transmission and distribution tech- The ABB Group Annual Report 2007 nology and one of the world’s leading automation companies, ABB has found ways to optimize energy use at every step.

From harvesting primary energy resources to transporting, ­distributing and using electrical power, proven ABB technologies

| reduce waste by 20 to 30 percent. Operational and financial review

ABB technology can reduce losses along the energy value chain

Process Transport Plant Grid Process Motors and Building automation systems automation ­operation automation drives installations

Total potential energy

Primary Transport Conversion Line losses Production Motor inefficiency energy (e.g. pipelines, inefficiency processes Losses in building systems production marine transport) (e.g. power plants)

Energy provision Energy consumption

Reduced energy losses with ABB products Energy losses without ABB products ABB Ltd ABB Ltd Corporate Communications Investor Relations P.O. Box 8131 P.O. Box 8131 ABB’s power and automation technologies can help save energy by reducing power consumption CH-8050 Zurich CH-8050 Zurich and losses, improving productivity and managing equipment.

Switzerland Switzerland GF-CC 08-4 Tel: +41 (0)43 317 7111 Tel: +41 (0)43 317 7111 Fax: +41 (0)43 317 7958 Fax: +41 (0)44 311 9817 www.abb.com This is ABB ABB is one of the world’s leading power and automation ­engineering companies. We provide solutions for secure, ­energy-efficient transmission and distribution of electricity, and for increasing productivity in industrial, commercial and utility operations.

Our portfolio ranges from light switches to robots for painting cars or packing food, and from huge ­electrical transformers to control systems that manage entire power networks and factories.

We help our customers meet their challenges with minimum environmental impact. That’s why ABB means “Power and ­productivity for a better world.”

Highlights Earnings before interest and taxes (EBIT) increase by 57 percent to record $4 billion EBIT margin – or EBIT as a percentage of revenues – rises to 13.8 percent from 11 percent Orders rise by 27 percent in 2007 to $34.3 billion as demand grows in every region and division ABB Board proposes doubling dividend to 0.48 Swiss francs per share and proposes buying back shares up to maximum value of 2.2 billion francs Comprehensive strategy review sets new targets for period to 2011, confirms focus on power and automation Focus on core technologies is completed with sale of ABB Lummus Global business The ABB Annual Report 2007 consists of two ABB wins orders to supply key components for world’s longest power link in China, using new volumes, a combined Operational and Financial low-loss technology review, and a Sustainability review.

For an additional copy of either volume, please use the contact information on the back of this document or download copies from www.abb.com.

Parts of the ABB Annual Report 2007 have been translated into German and/or Swedish. For all Total ABB Group Revenues per division Revenues by region documents in the annual report series, the ($ millions unless otherwise indicated) Power Products 30% Europe 46% English-language version is the binding version. 2007 2006 Power Systems 18% Asia 25% Orders 34,348 27,048 Automation Products 27% The Americas 18% Caution concerning forward-looking statements The ABB Annual Report 2007 includes “forward-looking statements” technological change and evolving industry standards in the markets Revenues 29,183 23,281 Process Automation 20% Middle East and Africa 11% within the meaning of Section 27A of the Securities Act of 1933 and in which we operate; (vii) the timely development of new products, Earnings before interest and taxes (EBIT) 4,023 2,557 Section 21E of the Securities Exchange Act of 1934. We have based these technologies, and services that are useful for our customers; (viii) unan- Robotics 4% forward-looking statements largely on current expectations, estimates ticipated cyclical downturns in the industries that we serve; (ix) the risks as % of revenues 13.8% 11.0% Non-core activities 1% and projections about the factors that may affect our future performance, inherent in large, long-term projects served by parts of our business; including global economic conditions as well as the economic condi- (x) the difficulties encountered in operating in emerging markets; (xi) the Net income 3,757 1,390 tions of the regions and the industries that are major markets for ABB. amount of revenues we are able to generate from backlog and orders Basic earnings per share ($) 1.66 0.65 EBIT per division The words “believe,” “may,” “will,” “estimate,” “continue,” “target,” received; (xii) changes in interest rates and fluctuations in currency “anticipate,” “intend,” “expect” and similar words and the express or exchange rates and (xiii) other factors described in documents that we Dividend per share in CHF (proposed) 0.48 0.24 Power Products 37% implied discussion of strategy, plans or intentions are intended to identify may furnish from time to time with the U.S. Securities and Exchange forward-looking statements. These forward-looking statements are Commission, including our Annual Reports on Form 20-F. Although we Cash flow from operations 3,054 1,939 Power Systems 11% subject to risks, uncertainties and assumptions, including among other believe that the expectations reflected in any such forward-looking Free cash flow 2,429 1,598 things, the following: (i) costs associated with compliance activities; statements are based on reasonable assumptions, we can give no assur- Automation Products 34% (ii) the difficulty of forecasting future market and economic conditions; ance that they will be achieved. We undertake no obligation to update as % of net income 65% 115% Process Automation 16% (iii) the effects of, and changes in, laws, regulations, governmental publicly or revise any forward-looking statements because of new infor- policies, taxation, or accounting standards and practices; (iv) changes mation, future events or otherwise. In light of these risks and uncertainties, Return on capital employed 35% 21% Robotics 2% in raw materials prices; (v) the effects of competition and changes in the forward-looking information, events and circumstances might not Number of employees 112,000 108,000 economic and market conditions in the product markets and geographic occur. Our actual results and performance could differ substantially from (excludes non-core and corporate) areas in which we operate; (vi) our ability to anticipate and react to those anticipated in our forward-looking statements. This is ABB ABB is one of the world’s leading power and automation ­engineering companies. We provide solutions for secure, ­energy-efficient transmission and distribution of electricity, and for increasing productivity in industrial, commercial and utility operations.

Our portfolio ranges from light switches to robots for painting cars or packing food, and from huge ­electrical transformers to control systems that manage entire power networks and factories.

We help our customers meet their challenges with minimum environmental impact. That’s why ABB means “Power and ­productivity for a better world.”

Highlights Earnings before interest and taxes (EBIT) increase by 57 percent to record $4 billion EBIT margin – or EBIT as a percentage of revenues – rises to 13.8 percent from 11 percent Orders rise by 27 percent in 2007 to $34.3 billion as demand grows in every region and division ABB Board proposes doubling dividend to 0.48 Swiss francs per share and proposes buying back shares up to maximum value of 2.2 billion francs Comprehensive strategy review sets new targets for period to 2011, confirms focus on power and automation Focus on core technologies is completed with sale of ABB Lummus Global business The ABB Annual Report 2007 consists of two ABB wins orders to supply key components for world’s longest power link in China, using new volumes, a combined Operational and Financial low-loss technology review, and a Sustainability review.

For an additional copy of either volume, please use the contact information on the back of this document or download copies from www.abb.com.

Parts of the ABB Annual Report 2007 have been translated into German and/or Swedish. For all Total ABB Group Revenues per division Revenues by region documents in the annual report series, the ($ millions unless otherwise indicated) Power Products 30% Europe 46% English-language version is the binding version. 2007 2006 Power Systems 18% Asia 25% Orders 34,348 27,048 Automation Products 27% The Americas 18% Caution concerning forward-looking statements The ABB Annual Report 2007 includes “forward-looking statements” technological change and evolving industry standards in the markets Revenues 29,183 23,281 Process Automation 20% Middle East and Africa 11% within the meaning of Section 27A of the Securities Act of 1933 and in which we operate; (vii) the timely development of new products, Earnings before interest and taxes (EBIT) 4,023 2,557 Section 21E of the Securities Exchange Act of 1934. We have based these technologies, and services that are useful for our customers; (viii) unan- Robotics 4% forward-looking statements largely on current expectations, estimates ticipated cyclical downturns in the industries that we serve; (ix) the risks as % of revenues 13.8% 11.0% Non-core activities 1% and projections about the factors that may affect our future performance, inherent in large, long-term projects served by parts of our business; including global economic conditions as well as the economic condi- (x) the difficulties encountered in operating in emerging markets; (xi) the Net income 3,757 1,390 tions of the regions and the industries that are major markets for ABB. amount of revenues we are able to generate from backlog and orders Basic earnings per share ($) 1.66 0.65 EBIT per division The words “believe,” “may,” “will,” “estimate,” “continue,” “target,” received; (xii) changes in interest rates and fluctuations in currency “anticipate,” “intend,” “expect” and similar words and the express or exchange rates and (xiii) other factors described in documents that we Dividend per share in CHF (proposed) 0.48 0.24 Power Products 37% implied discussion of strategy, plans or intentions are intended to identify may furnish from time to time with the U.S. Securities and Exchange forward-looking statements. These forward-looking statements are Commission, including our Annual Reports on Form 20-F. Although we Cash flow from operations 3,054 1,939 Power Systems 11% subject to risks, uncertainties and assumptions, including among other believe that the expectations reflected in any such forward-looking Free cash flow 2,429 1,598 things, the following: (i) costs associated with compliance activities; statements are based on reasonable assumptions, we can give no assur- Automation Products 34% (ii) the difficulty of forecasting future market and economic conditions; ance that they will be achieved. We undertake no obligation to update as % of net income 65% 115% Process Automation 16% (iii) the effects of, and changes in, laws, regulations, governmental publicly or revise any forward-looking statements because of new infor- policies, taxation, or accounting standards and practices; (iv) changes mation, future events or otherwise. In light of these risks and uncertainties, Return on capital employed 35% 21% Robotics 2% in raw materials prices; (v) the effects of competition and changes in the forward-looking information, events and circumstances might not Number of employees 112,000 108,000 economic and market conditions in the product markets and geographic occur. Our actual results and performance could differ substantially from (excludes non-core and corporate) areas in which we operate; (vi) our ability to anticipate and react to those anticipated in our forward-looking statements. Contents

Chairman and CEO letter 02 Introduction 06 ABB people at work A better way to build solar cells 16 Making the most of factory assets 18 Fit to compete on the global market 20 Turning prairie wind into clean power 22 Heat and clean air for China’s Ice City 24 Strategy drivers 26 The energy challenge 28 The infrastructure boom 30 Globalization 32 People, culture and values 34 Technology 36 ABB Group Executive Committee 38 Corporate governance 39 Financial review 57 02 Dear shareholders, Chairman andCEOletter nesses intheirquest forhigherproductivity. and toincrease energyefficiency. Loweringenergycosts isnowpartofthestrategy ofmanybusi- In allregions, industriesare investinginequipmenttoautomateproduction, tomeetstrong demand, renewable energysources. Europein western andNorthAmerica. Equipmentmustbereplaced andupgradedtoincorporate Power utilitiesare expandingtheirnetworksinAsiaandthe MiddleEastandthegridsare aging lowering theenvironmental impactofindustrialoperations. energy-efficient transmissionanddistributionofelectricity, andwehelpincrease productivity while This challengeisanopportunityforABB.We provide sustainablesolutionsforthesecure and emerging economies,whiletakingimmediatestepstoreduce environmental pollution. The globalchallengeistherefore tosupportcontinuinggrowth inlivingstandards, particularlyin main causeofourworld’s changingclimate. unchanged. Atthesametime,increasing evidencepointstotheconsumptionoffossilfuelsas Demand forenergyisforecast toincrease bymore than50percent by2030ifpoliciesremain the agendainsomanypartsofworldandindustries. The strength ofourmarkets istrulyexceptional.Rarely haveenergy-related issues beensohighon is really payingoff. in powerandautomationoncore valuessuchasinnovation,qualityandcustomerrelationships we havebeenimplementingtoimprove ouroperations.Thestrategyoffocusingoncore strengths ABB hadarecord yearin2007,reflecting thestrength ofourmarketsandthesuccessmeasures CEO andCFO,right Michel Demaré, Chairman, left Hubertus vonGrünberg, These long-term factors were identified in ABB’s comprehensive strategy review last year as pillars of our growth until at least 2011, but they have in fact been elements of our success in recent years, including 2007.

Just as important as the strong market environment, our determined focus on improving internal processes and the management of supplies and working capital has seen ABB make a truly remark- able recovery from the crisis of a few years ago. Rigorous attention to project selection and execu- tion, general and steady productivity improvements, and the removal of bottlenecks in production are among measures that have had a major impact on our results and will continue to benefit the com- pany over the coming years.

We are equally determined to maintain the technology leadership that has played such an important role in building ABB’s strength in power and automation. We increased spending on research and development (including order-related) by almost 9 percent in 2007, and expect our activities in this area to make a significant contribution to our goals for the coming years.

Orders rose 27 percent and revenues by 25 percent last year, 27% with growth in every region and division

2007 produced not only record results but balanced and broadly based growth, in every region of the world and every ABB division.

Asia had another very strong performance, helped by the rapid development of China and India, and the Middle East and Africa region continues to thrive as oil revenue is reinvested in new industries and power networks. Growth was also very satisfactory in Europe and the Americas, where industries are investing in productivity gains and where energy networks are being refurbished and adapted to | ABB Annual Report 2007 Chairman and CEO letter

enhance reliability. 03

The Power Products division achieved significant growth at all levels and in all regions, driven by higher demand for power infrastructure to meet grid expansion and load growth, replace aging infrastructure and integrate renewable power sources. Power Systems won several major orders in 2007, including one from China for key components of a 2,000-kilometer power transmission link – the world’s longest – using our efficient, ultrahigh-voltage transmission technology, and a landmark order from E.ON to connect the world’s largest offshore wind park to the German power grid.

The Automation Products division experienced continued strong growth, as customers invested in equipment to reduce energy costs and cut carbon emissions. Demand for Process Automation sys- tems and products remained strong due to customer requirements for increased productivity and energy efficiency, with a particularly robust growth in orders in the minerals, metals and marine sectors.

The turnaround in Robotics is well under way and is expected to be completed in 2008.The order growth reflects customer requirements for improved process quality and productivity improvement, as well as strong demand from Asia. The division successfully expanded into industries outside the automotive sector, and the EBIT margin has rebounded following cost-cutting measures, production expansion in low-cost countries and a focus on execution.

The impact of these strong performances on the ABB Group has been record EBIT, another leap in net income and further strengthening of our financial position. Our solid financial and market position is reflected in the further increase in our investment-grade credit rating, and the Board’s confidence in the sustainability of ABB’s profitable growth is behind its proposal to double the dividend payment and to return funds to shareholders through a share buyback.

We completed the planned concentration on our true strengths in power and automation with the sale of the ABB Lummus Global business, and this tightened focus has allowed us to concentrate on the efficiency of our operations. By strengthening the framework that allows us to deliver on our 04 labor capacity, andfrom energynationalismtofurtherstrong advancesinrawmaterialprices. risks thatmightemergeordevelop. Theserangefrom a slowdown inU.S.growth to ashortagein Such geographicdiversification willalsohelptomakethebusinessmore resilient to avarietyof Mexico are amongthecountriesthatwillbefocusof investments incomingyears. We aimtooptimizequality, riskanddeliverytimesbybalancingourglobalpresence. India,Chinaand lowering ourmanufacturing,engineeringandsupplycosts. mies provide auniqueopportunitytoaccessnewmarketsandsuppliers,maximizinggrowth while We are expandingourglobalfootprintbyinvesting,particularlyinemergingmarkets.Theseecono- Global footprint energy efficiencyforourcustomers. changing markets.More than50percent ofourR&Dprojects are currently focusedonincreasing technologies, aswelldevelopingtomorrow’s “blockbuster”technologiestoaddress theneedsof We are pursuingabalancedR&Dstrategycoveringbothincremental improvements toexisting made inresearch anddevelopment,evenduringthecrisisyears. Our leadingmarketpositionsare largelytheresult ofthesustainedeffort andinvestment wehave Technology particular industry segments, such as wind, rail and water, to better serve theneeds of ourcustomers. This includes strengthening our presence in regions with growth potential and bundling our expertise in offering andexploitthesynergies ofaninterwovenportfolio. and automationcore, yetexpand withintheseareas toprovide customerswith thefullestpossible Our businessesare among thetopthree suppliersinmostmarkets.We willremain truetoourpower Portfolio Our strategyforoutpacingthemarketovercomingyearsisbasedonanumberofpillars. most visiblefactorbehindoursuccess,yetweexpecttogrow almosttwiceasfastthemarket. Demand forenergyefficiency, grid reliability andindustrialproductivity willcontinuetobethe 15–20% just tosupportourorganicgrowth strategy. are suchthatweplantohire anadditional20,000people, mainlyengineers,overthenextfiveyears We are undernopressure tomakeacquisitionsastheopportunitiesforABB’s existingbusiness where opportunitiesarisetocloseagapinourtechnologyportfolioorgeographicreach. organic growth fortheprofitable expansionofourexisting businesses,andmakenewacquisitions Our goalistocreate valueforshareholders through entrepreneurial activities,sowewillinvestin One ofthemostfrequently askedquestionsregarding ourstrategyhasbeenaboutnewacquisitions. increase ataCAGRof15to20percent. of 8to11percent, andanEBITmarginofupto16percent.pershare Earnings are expectedto targets for2011publishedlastSeptember:compoundannualgrowth rate(CAGR)inrevenues full advantageofverystrong globalmarkets.Ourambitiongoesfurther, andisreflected inthenew ABB’s results inrecent yearsshowhowsuccessfulthisstrategyhasbeen,enablingustotake growth muchfasterthanexpected. promises, tocustomersaswellshareholders, we reached our2005–2009targetsforprofitable growth rateof15to20percent intheperiodto2011 pershareEarnings are expectedtoincrease ata compound annual labor capacity, andfrom energynationalismtofurtherstrong advancesinrawmaterialprices. risks thatmightemergeordevelop. Theserangefrom a slowdown inU.S.growth to ashortagein Such geographicdiversification willalsohelptomakethebusinessmore resilient to avarietyof Mexico are amongthecountriesthatwillbefocusof investments incomingyears. We aimtooptimizequality, riskanddeliverytimesbybalancingourglobalpresence. India,Chinaand lowering ourmanufacturing,engineeringandsupplycosts. mies provide auniqueopportunitytoaccessnewmarketsandsuppliers,maximizinggrowth while We are expandingourglobalfootprintbyinvesting,particularlyinemergingmarkets.Theseecono- Global footprint energy efficiencyforourcustomers. changing markets.More than50percent ofourR&Dprojects are currently focusedonincreasing technologies, aswelldevelopingtomorrow’s “blockbuster”technologiestoaddress theneedsof We are pursuingabalancedR&Dstrategycoveringbothincremental improvements toexisting made inresearch anddevelopment,evenduringthecrisisyears. Our leadingmarketpositionsare largelytheresult ofthesustainedeffort andinvestment wehave Technology particular industry segments, such as wind, rail and water, to better serve theneeds of ourcustomers. This includes strengthening our presence in regions with growth potential and bundling our expertise in offering andexploitthesynergies ofaninterwovenportfolio. and automationcore, yetexpand withintheseareas toprovide customerswith thefullestpossible Our businessesare among thetopthree suppliersinmostmarkets.We willremain truetoourpower Portfolio Our strategyforoutpacingthemarketovercomingyearsisbasedonanumberofpillars. most visiblefactorbehindoursuccess,yetweexpecttogrow almosttwiceasfastthemarket. Demand forenergyefficiency, grid reliability andindustrialproductivity willcontinuetobethe 15–20% just tosupportourorganicgrowth strategy. are suchthatweplantohire anadditional20,000people, mainlyengineers,overthenextfiveyears We are undernopressure tomakeacquisitionsastheopportunitiesforABB’s existingbusiness where opportunitiesarisetocloseagapinourtechnologyportfolioorgeographicreach. organic growth fortheprofitable expansionofourexisting businesses,andmakenewacquisitions Our goalistocreate valueforshareholders through entrepreneurial activities,sowewillinvestin One ofthemostfrequently askedquestionsregarding ourstrategyhasbeenaboutnewacquisitions. increase ataCAGRof15to20percent. of 8to11percent, andanEBITmarginofupto16percent.pershare Earnings are expectedto targets for2011publishedlastSeptember:compoundannualgrowth rate(CAGR)inrevenues full advantageofverystrong globalmarkets.Ourambitiongoesfurther, andisreflected inthenew ABB’s results inrecent yearsshowhowsuccessfulthisstrategyhasbeen,enablingustotake growth muchfasterthanexpected. promises, tocustomersaswellshareholders, we reached our2005–2009targetsforprofitable growth rateof15to20percent intheperiodto2011 pershareEarnings are expectedtoincrease ata compound annual top priorities. corporate citizenthrough our environmental, socialandhumanrightspolicieswilltherefore remain value inotherrespects as well. Businessethics,healthandsafety, staff trainingandbeingagood Financial results are onemeasure ofsuccess,butsustainableprogress requires abusinesstocreate of zero tolerance. the contractsofemployeeswhohaveviolateditsterms,inaccordance withourwell-knownpolicy suspect activityandabouttheconsequencesofnoncompliance.Andwedonothesitatetoterminate We wanttomakesure thatnoemployeecanclaimignoranceabouttherules,howtoreport top managersare nowrequired toreconfirm theircommitmenttotheCodeofConducteveryyear. stepped up,allnewemployeesare givenathorough briefingonourexpectations,andthecompany’s and investigatepotentialbreaches ofourCodeConduct.Onlineandface-to-facetraininghasbeen In 2007,wecontinuedtoreinforce thestructures wehaveinplacetotrainemployees andtodiscover happens. Acting responsibly istheonlywaytoachievethis,andwehaveprograms inplacetoensure this To supportanddevelopthisbusinessmodel,ABBmustbeagoodcorporatecitizeninlocalmarkets. Business ethicsandcompliance over thecomingyears. talent, notnationality, iswhatABBlookingfor. We willinvestconsiderableresources inthiseffort will dependonourabilitytoattractandretain thesepeople,wherever theymightbe,andengineering our ambitionsisachallenge,andwewanttoemploythebestpeopleinindustry. Future success In aglobalmarket,thismultinationaloutlookisanasset.Findingtalentedengineerstohelpusfulfill eight amongthe10-memberExecutiveCommittee,andsixmembersofBoard. There are 60different nationalitiesrepresented amongthe300employeesatourheadofficeinZurich, helped ABBbecomeoneoftheworld’s mostglobalcompanies. mergers 20yearsago,andthespiritofopennessthatresulted from thiscombinationhasalso emerging markets,includingChinaandIndia.ABBwasformedinoneofthefirstbigcross-border choice intraditionalmarketsEurope, butthebrandisalsowellknownandrespected inkey We havedevelopedaverystrong localpresence inmostpartsoftheworld.ABBisemployer People Chairman, ABB Ltd Hubertus von Grünberg 20,000 for abetterworld.” Our current andfuture successrests onourlong-termcommitmenttoprovide “Powerandproductivity homes. the world,generatingortransmittingelectricity, orusingittoruntheirfactories, offices,shopsor tricity valuechain,whethertheyare extractingprimaryenergyresources, transportingthemaround We havetheknow-howtohelpourcustomersreduce theirconsumptionateverystageoftheelec- and affordability ofsupplieswilldominatepublicdebateandsupportourbusinessforyearstocome. Efforts tocombatclimatechange,theworld’s energyrequirements, aboutaccess andconcerns over fiveyearstosupportorganicgrowth ABB expectstohire anadditional 20,000people CEO andCFO, ABBLtd Michel Demaré

05 | ABB Annual Report 2007 Chairman and CEO letter 06 quality, raisingefficiencyandcuttingwaste. performance of complex operations for energy efficiency and product tions gatherandinterpret plant-widedatainreal time, optimizing Productivity isaboutusingresources wisely. ABBautomation solu-

connecting challenges. From runningafactorytocaringfortheworld:

07 | ABB Annual Report 2007 Introduction 08 energy consumptionandensure acomfortableenvironment. systems control heating,lightingandventilationtoreduce equipment forpower, dayandnight.Ourintelligent building Hotels, offices,apartmentsandshops rely onABBdistribution connecting needs. From busybuildingstosoundsleep:

09 | ABB Annual Report 2007 Introduction 10 impurities. treatment plantsandourinstrumentshelptodetectleaks growth. Ourmotorsanddrivesreduce energyconsumption in Demand forwaterisrisingatthree timestherateofpopulation connecting solutions. From dynamicdrivestodrinkingpleasure:

11 | ABB Annual Report 2007 Introduction 12 the grid,convertingpowerofnature intocleanelectricity. to windturbinemanufacturers andconnectswindparksto the world’s largestsupplierofelectricalproducts andservices Renewable energyiskeytotacklingclimatechange.ABB connecting technologies. From seabreeze tocitylights:

13 | ABB Annual Report 2007 Introduction 14 start andhelpincrease theuseofexistingcapacity. ABB solutionsidentifyproblems inpowernetworksbefore they dependable transport,communicationandotherservices. economy,Reliable poweristhelifebloodofamodern ensuring connecting systems. From powergridstorailwaynetworks:

15 | ABB Annual Report 2007 Introduction TitelABB people at work EinleitungstextA better way to build solar cells 16

As told by Katrin Winterhalter, marketing and controlled process of making thin-film silicon solar communication manager for the photovoltaics modules. In addition to handling thin-film substrates segment of ABB Robotics, Germany in the clean room, ABB robots also perform heavy- duty tasks like feeding silicon ingots into sawing and Customer need grinding machines, and the delicate job of sorting “The solar photovoltaic industry is growing globally by silicon wafers.” 30 to 40 percent per year, as demand for clean electricity from renewable sources soars. Five years The benefits ago, Oerlikon Solar began developing turnkey pro- “When production started in July 2007, Oerlikon duction solutions for thin-film silicon solar modules. Solar became the only company with a proven, fully This early start and its micromorph tandem tech­ automated, high-volume manufacturing solution nology have made it a solar market leader. In 2006, for solar modules. ABB’s range of robots perform the company received an order to supply the first many demanding tasks in the factory, with mini- indus­trial-scale automated 40-MWp (megawatts mum maintenance and maximum availability. Their peak) production facility to ersol Thin Film GmbH in unique motion control optimizes robot efficiency with Germany, creating a flexible, cost-effective mass precision movement, high speed, short cycle time, production system for solar modules.” easy programmability and synchronization with external tools. ABB robots can help reduce manu­ ABB’s solution facturing costs, increase production and broaden “ABB industrial robots perform repetitive operations access to this clean source of electricity. And if needs with extreme accuracy. They can be adapted for change, ABB robots can be reprogrammed with use in specialized clean room environments, which is minimum disruption.” ideal for a factory manufacturing solar modules. In cooperation with Oerlikon Solar’s system integrator for automated manufacturing, Sieghard Schiller GmbH & Co. KG, ABB adapted a robot for use in the stringently 17 | ABB Annual Report 2007 ABB people at work 18 mation know-howandAlunorte’s operational tech needed aperfectsolution,combiningABB’sauto lines and increase output by 75 percent, the company When Alunortedecidedtoinstalltwonewproduction in 1995andsubsequentexpansionsofthisrefinery. cessfully suppliedautomationsystemsforthestart-up primary componentofrefined aluminum.ABBsuc- and anannualyieldof4.4milliontonsalumina,the Vale. It’s ahugecomplexwithfiveproduction lines (Alunorte), asubsidiaryoftheBrazilianmininggiant, in theworldisoperatedbyAluminadoNorteBrasil “The mosttechnologicallyadvancedaluminarefinery Customer need the Alunortealuminarefinery project, Brazil As toldbyLuizSimões,leadproject engineerfor Making themostoffactoryassets ABB peopleatwork Alunorte staff canmonitorandadjustthe performance 15 different manufacturers. Atthe clickofamouse, instruments measuringpressure andflowsetc.)from relays, frequency converters, process analyzers, more than3,000devicesofvarioustypes(protection Extended Automation System 800xA, which integrates “The newproduction linesare controlled byABB’s ABB’s solution nology.” ­ ­-

being added.” so successfulthattwomore production linesare now to fullproduction. TheABB-Alunortecollaborationis 12 20 weeksand,thankstoSystem800xA,tookjust productivity. Thelastexpansionwascommissionedin eight hours),Alunortehasanenviablerecord of only oneshutdownin12years(plannedandforjust and optimizedbyABBautomationsystems.With “The entire Alunorterefinery iscontrolled, monitored The benefits Vale plants,andevenothercompanies.” and itisfrequently visitedby technicalstaff from other plant forthistypeofindustrialcomputernetwork, the manufacturer. ThishasmadeAlunorteareference of equipmentanywhere in the complex,regardless of

days ratherthantheusualtwomonthstorampup

19 | ABB Annual Report 2007 ABB people at work TitelABB people at work EinleitungstextFit to compete on the global market 20

As told by Juergen Link, site manager, ABB environment. In addition, about 160 energy-saving Maintenance Services, CHH Kinleith Pulp and projects were identified by establishing an energy Paper Mill, New Zealand council, eliminating belt drives, installing energy- ­efficient motors, and equipping fans and vacuum Customer need pumps with variable-speed drives.” “In 2002, the future of Kinleith Mill was uncertain. Although it was the largest operating unit of Carter The benefits Holt Harvey, Australasia’s leading forest products com- “ABB has implemented international best practice pany, low pulp prices, increased competition, rising business processes at the Kinleith mill, both technically operational, energy and maintenance costs, and and organizationally, contributing to a decrease in difficult labor relations made business increasingly maintenance, stores and operating costs, as well as hard. To compete effectively in global markets, achieving efficiency improvements. The mill has it needed considerable efficiency improvements.” achieved record performance levels, with a substan- tial increase in output and decrease in total energy ABB’s solution usage per ton of dried product over the first four years “ABB took over the complete maintenance organi­ of the contract. ABB has achieved an injury-free site, zation of the mill in 2003 under a five-year Full Service and ABB’s work with the mill on energy and other maintenance performance management contract, improvements has resulted in the Kinleith mill winning allowing CHH to focus on operational excellence at awards from the customer as well as two New Zealand Kinleith. The new service organization immediately national awards for energy-efficiency improvements.” began to implement world-class processes and pro- cedures, which ABB had developed in its other 150 Full Service contracts around the world. A com- prehensive culture development plan was designed and implemented over three years, which helped shift the culture to a more team-building, constructive 21 | ABB Annual Report 2007 ABB people at work 22 ABB’s Jefferson City transformer factoryinMissouri per monthand quickly buildingthefirstprototype. production commitmenttoaspecificnumberofunits This presented challenges,includinggettingafactory turbine-generated energyinto usable electricpower. pad-mounted transformers,which are neededtoturn “The utilityaskedABBtofast-track anorder for ABB’s solution park’s generatingcapacityby233megawatts (MW).” decided toinstall155newturbinesandincrease the consumer demandfornon-pollutingpower, AES park nearAbilene,Texas, in2006.To meetsoaring electricity from 67turbinesattheBuffalo Gapwind utilities, AES,begangeneratingemissions-free developing windprojects. Oneoftheworld’s biggest trans plenty ofopenspace,constantbreezes andagood States, United the in interest huge generating power are “Renewable, emissions-free energysources likewind Customer need Distribution Transformers, U.S. and PamRost,regional sales manager, ABB As toldbyTimBryant,ABBaccountmanager, Turning prairiewindintocleanpower ABB peopleatwork mission network – perfect conditions for for conditions perfect – network ­mission particularly Texas, ­particularly whichisblessedwith ­ position asoneofthelargestinUnitedStates.” generating capacityto524MW, consolidatingits finished bymid-2008willincrease thewindpark’s 100,000 Texan homes.Afurtherexpansion tobe of emissions-free electricity, enoughforabout largest windproject intheU.S.,producing 354MW expansion inAugust2007.Itisnowthesecond “AES completedthesecondphaseofBuffalo Gap’s The benefits proven performancerecord spanning20years.” ideal forwind-generatedpowerapplications,witha quality. ABB transformers are robust, efficientand track record foron-timedelivery, product reliability and transformers sincethe1980s,andhasanunrivalled has suppliedtheU.S.windpowerindustrywith

23 | ABB Annual Report 2007 ABB people at work TitelABB people at work EinleitungstextHeat and clean air for China’s Ice City 24

As told by Yanbing Zhang, manager responsible For example, drives controlling the pump motors for the district heating business at ABB in China reduce electricity consumption by 50 percent. The main control system, a Supervisory Control and Customer need Data Acquisition (SCADA) system, monitors pres- “Harbin lies 1,000 kilometers north of Beijing, and with sure differential in the network and adjusts the flow nearly 10 million people is China’s 10th-largest city. to the 156 heat-exchanger substations, so no more Winter temperatures here dip as low as –40˚C, and energy is distributed than is actually needed. Water the freeze can last for up to six months. Harbin citizens temperature and flow are controlled automatically, mostly stay warm by burning coal in boilers, which based on actual heat consumption and outside ­ is not only inefficient, but creates a great deal of pollu- temperature.” tion. City officials wanted a solution for the district of Daoli that could improve and optimize heating for The benefits about one million people and also reduce emissions.” “Harbin city officials say that when all households are hooked up to this state-of-the-art district-heating ABB’s solution network, it will save 300,000 tons of standard coal

“ABB’s solution replaced more than 500 small, annually, reduce CO2 emissions by 500,000 tons and

inefficient coal-fired boilers with a new central com- SO2 emissions by 2,200 tons annually, and remove bined heat and power plant. A new district-heating 11,000 tons of dust from the air. In addition, stokers network of nearly 100 kilometers of pre-insulated and engineers have been thoroughly trained to underground pipes connect the plant to 156 heat- operate and maintain all systems.” exchanger substations, which pump hot water into household radiators. The network delivers heat using pumps, variable-speed drives, heat exchangers, thousands of instruments and a main control sys- tem. New technologies cut energy losses consider- ably, reducing coal consumption and emissions. 25 | ABB Annual Report 2007 ABB people at work 26 excellence willsupportABB’s growth inthecomingyears to increase productivity andenergyefficiency, plusafocuson Ever-increasing demandforreliable energy, mountingefforts Strategy drivers better-than-average results forourindustry. health andsafety, willcontinuetohelpABB achieve to staff training,businessethics,andoccupational we do,from R&D,project selectionandexecution, Internally, arigorous focusonexcellenceineverything change andenergyefficiency. aboutclimate globalization oftrade;andconcern EuropeAmerica andeastern includingRussia; of newmarketsinAsia,theMiddleEast,Latin and automationmarketsincludetheemergence factorssupportingpower section). External factors(outlinedinthis andinternal of external targets thatare settobe drivenbyacombination ABB hasgoodprospects andambitiousgrowth 100 Forecast growth ofABB’s marketsby2011 (in $billions) 20 40 60 80 0

Americas +25% MEA +40% Eur ope +24% Asia +52% 2006 201 1 capital employed. on return and taxes, and interest before earnings measures ofprofitability, pershare, includingearnings growth. Ambitiousgoalshavealsobeensetforkey in ourmarketsandthree timestherateofglobalGDP to 2011periodatabouttwicethepaceofgrowth pected tohelpABBincrease revenue duringthe2007 Together, forces and internal are theseexternal ex- nological leadership. innovation tohelpussustainandenhanceourtech- We are alsocountingonourtraditionalstrength in global presence. new customers, lower costs and achieve a balanced tions infast-growing emerging marketstobetterserve world. Inparticular, wewanttoincrease ouropera- of demandandsupplyopportunitiesanywhere inthe will expandourglobalfootprinttotakeadvantage We supplies. our buy we how including operations, our streamline to continue will we grows, ABB As

27 | ABB Annual Report 2007 Strategy drivers 28 the securityofsupplies,fuelcostsandclimatechange isgrowingAs energyconsumptionsoars,concern about The energychallenge dependence on fossilfuels. fortheenvironmentconcern andourcontinuing The energychallengeisalsomarked bywidespread affordable andavailableondemand. are underpressure tomakesure suppliesremain dence onahandfulofcountries.Governments competition forresources isincreasing ourdepen- Strong demandispushing upfuelprices,andthe EnergyAgency.ing totheInternational to risebyasmuch55percent by2030,accord- energy consumptionisalsosoaringandprojected standards, particularlyin emergingmarkets,but Rapid growth of the world economy is raising living ation are implemented(bottomline).Figures rebased to100. continue unchanged(topline)and38percent ifallpoliciesunderconsider policies energy present if 2030 by percent 55 rise will demand energy Primary 100 120 140 160 World primaryenergydemand % 2005 2015 Source: EnergyAgency International 2030 - ABB isuptothe challenge. have access,all withoutdamagingtheenvironment. the 1.6billionpeoplearound theworldwhodon’t rising livingstandards andmakeelectricityavailableto The energychallengeofthe21st centuryis tosupport lowering environmental impact. and costs reducing percent, 50 as much as by cases, ABBtechnologiescanraiseenergyefficiency consumption inthehome,officeorfactory. Insome mine, dametc.)through powergenerationto coal field, (oil resources primary harvesting from use: use ofenergyateachstagecreation and ABB products andsystemsalsoadvancetheefficient to connectwindfarmspowergrids. turers, and a leading supplier of products and systems trical products andservices towindturbinemanufac- distribution equipment,thebiggestsupplierofelec- the world’s biggestmakerofpowertransmissionand These developmentsplaytoABB’s strengths. ABBis an intensefocusonenergyefficiency. the developmentofrenewable energysources and developments: theexpansionofelectricitynetworks, All ofthesefactorsare feeding three verystrong 29 | ABB Annual Report 2007 Strategy drivers 30 for electricityisexpectedtototalmore than$11trillionby2030 Spending ontheinstallationsneededtomeetglobaldemand The infrastructure boom forming international energymarkets. forming international Asia, where thesheersizeofenergyneedsistrans- nomic growth inChina,Indiaandotherpartsof The sharpriseindemandismostlytiedtorapideco- last 50yearsofthe20thcentury. total amountspentonelectricalinfrastructure inthe $11 trillionby2030.Thisismore thanfourtimesthe spending onpowerinfrastructure willtotalabout According EnergyAgency, totheInternational global and incorporaterenewable energysources. networks toimprove efficiency, enhancecapacity lenges inproviding new and upgradedpower Utilities around theworld facesignificantchal- Latin America Middle East/Africa India China Europe North America forecast fortheyears2006–2030(in$billions) Cumulative investmentinpowersupplyinfrastructure Source: Energy Agency International

2,764 1,728 2,246 762 890 956 energy efficiency apartoftheequation. bringing renewables intotheenergymixand making challenges –expandingandupgrading gridcapacity, sustainable solutionsforeach of theseenergy ABB offers products and systemsthatcanprovide impact, two factors that are high on the global agenda. in terms of cost efficiency and reduced environmental existing andrenewable resources offers huge rewards Building theinfrastructure toallowbetteruseof sources are often located far from centers of demand. renewable best the as requiresmore investment, even But incorporatingrenewable energyonalargescale as hydroelectric, windandsolarenergy. modate more powerfrom renewable sources such grids are beingdesignedand adaptedtoaccom To reduce dependence on carbon-based fuel sources, North AmericanElectricReliabilityCorp. the to according added, being are supplies electricity In theU.S.,demandisgrowing twiceasfastnew demand. meet to expanded capacity and replaced or Europe, agingpowerequipment mustbeupgraded Meanwhile, inmature markets likeNorthAmericaand ­ 31 | ABB Annual Report 2007 Strategy drivers 32 ­opportunities forABBtoexpanditsownglobalfootprint for solutionstoincrease industrialproductivity andcreating A surgeintradeandglobalcompetitionisfuelingdemand Globalization new sources ofskillandknowledge. ways tolowercosts,increase productivity, andtap companies everywhere havebeensearching forbetter are continuallylured intothemarketplace.To survive, manufacturers indevelopingcountries,asnewplayers Rapid economicgrowth isaffecting evenlow-cost products, andalsowhowill makethem. their make will they how and where plan carefully tensified. Today, tostaycompetitive,companiesmust As marketsbecomemore open, competitionhasin- duction sotheycanparticipateinglobalmarkets. regions, whichare pro- expandingandmodernizing triggered rapideconomic growth indeveloping The loweringoftradebarriersinrecent yearshas % ofworldGDP Trade exposure isincreasing globally 10 15 20 25 30 1 970 1 975 Imports ofgoodsandservices 1 980 Source: World Bank,World DevelopmentIndicators database; 1 985 1 990 OECD StructuralAnalysisdatabase 1 995 2000 2005

markets. traditional important our in assets the upgrade ally This willhelpustoreduce risks,whilewecontinu- costs andachieveamore balancedglobalpresence. economies worldwidetotapnew markets,lowerour footprint bydevelopingouroperations inemerging ABB’s own operations.We are expandingourglobal Globalization alsooffers opportunitiesforstreamlining the efficiencyoftheirinstalledassets. Performance-based serviceshelpcustomersimprove devices. smaller, automation as well smarter as ment, wireless communicationsandremote assetmanage- maintenance, predictive scheduling, real-time control, Our productivity portfoliofeatures advancedprocess as profound know well as programs, asset-management and data time an innovative mix of reliable, efficient equipment, real- ity. But manufacturers need new ideas, and ABB offers chain are themostobvious waystoincrease productiv mating simpleoperationsandimproving thesupply instruments andotherautomationtechnologies.Auto- such asrobots, control systems,motors,drives, industries, whichisfuelingdemandforABBsolutions Automation iscreating productivity gainsinmany ­ledge ofmanufacturingprocesses. ­ 33 | ABB Annual Report 2007 Strategy drivers 34 of openness,transparency andinclusiveness significantly addingtoitsgreatest assets–people,andaculture ABB expectstohire 20,000more peopleinthenext fiveyears, People, culture andvalues 21,000 employees in41countries. organization has nowbeenattendedbymore than to bringaculture ofleadershiptoeverylevelthe first-class environment. Our staff development program ethics becausethebestpeople wanttoworkina operational execution,healthand safety, and business We striveforexcellenceinpersonaldevelopment, crease productivity andefforts tofightclimatechange. such asrisingelectricityconsumption,pressure toin- years tomeetdemandresulting from long-termtrends plans tocreate about20,000 newjobsinthenextfive This broad outlookisatremendous asset,asABB attract topperformersfrom allovertheworld. transparency andinclusiveness thathelpsto of itsstaff. Thishasbred aculture ofopenness, in boththereach ofitsbusiness andthediversity ABB isoneoftheworld’s mostglobalcompanies, ABB employeesbyregion 2007 Middle EastandAfrica7% The Americas17% Asia 23% Europe 53% reputation. endangers their careers, aswellthecompany’s knows unethicalbehaviorisunfair, unacceptable and employee every that is Conduct of Code our of The goalofourzero-tolerance approach tobreaches to educate staff and eliminate inappropriate activities. ethics, where wecontinuetostrengthen mechanisms ABB’s pursuitofexcellencealsoextends tobusiness performance inthiscriticalarea. we are taking a range of measures toimprove our tably, the number of incidents increased in2007,and to taketheutmostcare ofhealthandsafety. Regret employees are hurt or killed, as part of our commitment We aimtoeliminatework-related incidentsinwhich drive theanticipatedgrowth ofprofit margins. profitability in recent years,andwilllikelycontinueto has contributedsignificantlytotheincrease inABB’s The focus on improving project planning and execution implement bestpracticesacross thecompany. nologies andbyadedicatedprogram toshare and global responsibility forparticular products ortech- is achievedbygivingABBfacilitiesaround theworld Excellence inmanufacturing,engineeringandservice

- 35 | ABB Annual Report 2007 Strategy drivers 36 technologies helpsusandourcustomersbecomemore Strengthening ourleadershiprole inpowerandautomation Technology at improving energyefficiency. 2007, andmore thanhalfofourefforts were aimed research anddevelopment (includingorder-related) in ers more competitive.We spent$1.2billionon and improve technologiesthatwillmakeourcustom- 70 universitycollaborations–all workingtodevelop ABB haseightresearch centers,6,000scientistsand that willmeetbothexistingandfuture challenges. institutions around theworld todeveloptechno with ourcustomers,suppliersandleadingacademic productivity andenergyefficiency. We workclosely aims ofenhancingelectricalpowerreliability, industrial Our approach totechnology isbasedonourkey successful innovationinourR&Dactivities. quality, commitment tocustomersand,aboveall, as such strengths of fruit the is technology ABB’s leadingpositioninpowerandautomation 2007 2006 2005 including order-related (in$millions) ABB spendingonresearch and ­development, 1,173 1,079 973

­l ­ogies ­ future needs forpowerandautomationsystems. to come,whiledevelopingnew technologiestomeet years for reliability their ensure to technologies ing capital investments.We willcontinuetoinvestinexist- energy more effectively andmaximizereturnson efficiency, developingproducts andservicesthatuse energy on focus to is future the for strategy Our HVDC system. conventional a of those than lower even be will control systems.Thenewlink’s transmissionlosses development ofoutdoorinsulatorsandadvanced in basicresearch inanumberoffields,includingthe in 20yearsandwasmadepossiblebyadvances the biggestleapintransmissionefficiencyandcapacity pioneered by ABB more than 50 years ago. It marks UHVDC technology is a further development of HVDC, the highlyindustrializedcoastalarea intheeast. the XiangjiabahydropowerChinato plantinwestern power at800kilovoltsover2,000kilometers,from link. Thehigh-efficiencylinkwilldeliver renewable of anultrahigh-voltagedirect current (UHVDC)power the contractwonin2007todeliverkeycomponents One exampleofthesuccessourR&Dprograms is

­competitive

37 | ABB Annual Report 2007 Strategy drivers 38 ABB Group ExecutiveCommittee Bernhard Jucker and CFO; and Compliance; Gary Steel Tom Sjökvist From lefttoright Ravi Uppal , HeadofHumanResources; , HeadofAutomationProducts division; Veli-Matti Reinikkala , HeadofPowerProducts division; , Head of Global Markets; , HeadofProcess Automation division; DianedeSaintVictor Ulrich Spiesshofer PeterLeupp AndersJonsson , GeneralCounsel,HeadofLegal , HeadofPowerSystemsdivision. , Head of Corporate Development; , HeadofRoboticsdivision; MichelDemaré , CEO

56 56 55 55 55 53 52 48 47 44 44 43 41 40 Table ofcontents Corporate governance

Further informationoncorporategovernance Information policy Auditors Change ofcontrol provisions Duty tomakeapublictenderoffer and theGroup ExecutiveCommittee ABB shareholdings ofmembers oftheBoard Employee participationprograms Compensation Group ExecutiveCommittee Board ofDirectors Shareholders’ participation Capital structure Group structure andshareholders Principles

39 | ABB Annual Report 2007 Corporate governance Titel1. Principles that is not explicitly excluded by the business purpose of the Einleitungstext1.1 General Principles corporation. In so doing, however, the directors and officers ABB is committed to the highest international standards of must still pursue the duty of due care and the duty of loyalty corporate governance, and supports the general principles as described above and must extend equal treatment to the cor- set forth in the Swiss Code of Best Practice for Corporate poration’s shareholders in like circumstances. ABB’s Articles of Governance, as well as those of the capital markets where its Incorporation do not contain provisions concerning a director’s shares are listed and traded. power, in the absence of an independent quorum, to vote on the compensation to themselves or any members of their body. In addition to the provisions of the Swiss Code of Obligations, ABB’s key principles and rules on corporate governance are Conflicts of interest laid down in ABB’s Articles of Incorporation, the ABB Ltd Board Swiss law does not have a general provision on conflicts of Regulations, the regulations of ABB’s board committees, and interest and our Articles of Incorporation do not limit our the ABB Code of Conduct. It is the duty of ABB’s Board of directors’ power to vote on a proposal, arrangement or con- Directors (the Board) to review and amend or propose amend- tract in which the director or officer is materially interested. ments to those documents from time to time to reflect the most However, the Swiss Code of Obligations requires directors and recent developments and practices, as well as to ensure officers to safeguard the interests of the corporation and, in compliance with applicable laws and regulations. this connection, imposes a duty of care and loyalty on directors and officers. This rule is generally understood and so recom- This section of the Annual Report is based on the Directive on mended by the Swiss Code of Best Practice for Corporate Information Relating to Corporate Governance published by Governance as disqualifying directors and officers from the SWX Swiss Exchange. Where an item listed in the directive participating in decisions, other than in the shareholders’ is not addressed in this report, it is either inapplicable to, or meeting, that directly affect them. immaterial for, ABB. Confidentiality In accordance with the requirements of the New York Stock Confidential information obtained by directors and officers of Exchange (NYSE), a comparison of how the corporate gover- a Swiss corporation acting in such capacity must be kept con-

40 nance practices followed by ABB differ from those required fidential during and after their term of office. under the NYSE listing standards can be found in the corporate governance section at: www.abb.com/investorrelations Sanctions If directors and officers transact business on behalf of the 1.2 Duties of directors and officers corporation with bona fide third parties in violation of their The directors and officers of a Swiss corporation are bound, statutory duties, the transaction is nevertheless valid as long as as specified in the Swiss Code of Obligations, to perform their it is not explicitly excluded by the corporation’s business duties with all due care, to safeguard the interests of the purpose as set forth in its articles of incorporation. Directors cor­­poration in good faith and to extend equal treatment to and officers acting in violation of their statutory duties – whether shareholders in like circumstances. transacting business with bona fide third parties or performing any other acts on behalf of the company – may, however, The Swiss Code of Obligations does not specify what standard become liable to the corporation, its shareholders and its of due care is required of the directors of a corporate board. creditors for damages. The liability is joint and several, but the However, it is generally held by Swiss legal scholars and juris­- courts may apportion the liability among the directors and prudence that the directors must have the requisite capability officers in accordance with their degree of culpability. and skill to fulfill their function, and must devote the necessary time to the discharge of their duties. Moreover, the directors In addition, Swiss law contains a provision under which must exercise all due care that a prudent and diligent director payments made to a shareholder or a director or any person(s) would have taken in like circumstances. Finally, the directors are associated therewith other than at arm’s length must be repaid required to take actions in the best interests of the corporation to the company if the shareholder or director or any person and may not take any actions that may be harmful to the associated therewith was acting in bad faith. corporation. If the board of directors has lawfully delegated the power to Exercise of powers carry out day-to-day management to a different corporate Directors, as well as other persons authorized to act on behalf body, e.g., the executive committee, it is not liable for the acts of a Swiss corporation, may perform all legal acts on behalf of of the members of that different corporate body. Instead, the the corporation which the business purpose, as set forth in the directors can only be held liable for their failure to properly articles of incorporation of the corporation, may entail. Pursuant select, instruct and supervise the members of that different to court practice, such directors and officers can take any action corporate body. of ABBLtd,Switzerland,anditssignificantsubsidiaries: The followingtablesetsforth,asofDecember31,2007,thename,countryincorporation,ownershipinterest andshare capital All dataasofDecember31,2007. of CHF75.5billion. On December31,2007,ABBLtdhadamarketcapitalization (ADS) –eachADSrepresenting oneregistered ABBshare). shares are tradedintheformofAmericandepositary shares OMX Nordic ExchangeStockholmandtheNYSE(where its are listedontheSWXSwissExchange(tradedvirt-x), operating andholdingsubsidiariesworldwide.ABBLtd’s shares ABB Group, whichprincipallycomprises323consolidated ABB Ltd,Switzerland,istheultimateparent companyofthe 2.1 Group structure 2. Group structure andshareholders National StockExchangeofIndia Bombay StockExchange New York StockExchange OMX Nordic ExchangeStockholm SWX SwissExchange(virt-x) Stock exchange Stock exchangelistings Company name/location ABB Ltdandsignificantsubsidiaries ABB S.A.,BuenosAires ABB AustraliaPtyLimited,Sydney ABB AG,Vienna ABB Ltda.,Osasco ABB BulgariaEOOD,Sofia ABB Inc.,St.Laurent, Quebec ABB (China)Ltd.,Beijing Asea Brown BoveriLtda.,Bogotá ABB Ltd.,Zagreb ABB s.r.o., Prague ABB A/S,Skovlunde ABB EquadorS.A.,Quito Asea Brown BoveriS.A.E.,Cairo ABB AS,Tallinn ABB Oy, Helsinki ABB S.A.,Rueil-Malmaison ABB AG,Mannheim ABB AutomationGmbH,Mannheim ABB AutomationProducts GmbH,Ladenburg ABB Beteiligungs-undVerwaltungsges. mbH,Mannheim Asea Brown BoveriS.A.,MetamorphossisAttica ABB (HongKong)Ltd.,HongKong ABB EngineeringTrading andServiceLtd.,Budapest ABB Limited,Bangalore ABB Ltd,Dublin ABB Limited,Bangalore, share ABB Limited,Bangalore, share ABB Ltd,Zurich,ADS ABB Ltd,Zurich,share ABB Ltd,Zurich,share Security CZECH REPUBLIC a marketcapitalizationofINR320.5billion. cent ofABBLimited,Bangalore, India,whichatthattimehad ABB Ltd,Switzerland,directly orindirectly owned52.11 per- from theKolkataStockExchange.OnDecember31,2007, of India.During2007,ABBLimited,Bangalore, India,delisted Bombay StockExchangeandtheNational shares isABBLimited,Bangalore, India,whichislisted onthe The onlyconsolidatedsubsidiaryintheABBGroup withlisted HONG KONG ARGENTINA AUSTRALIA COLOMBIA BULGARIA GERMANY GERMANY GERMANY GERMANY DENMARK HUNGARY ECUADOR CROATIA ESTONIA AUSTRIA IRELAND FINLAND CANADA GREECE FRANCE Country BRAZIL EGYPT CHINA INDIA ABB ABB ABB ABB ABBN symbol Ticker interest % 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 99.99 96.87 52.11 ABB

– 500002 000375204 – 1222171 number Security Share capitalin 1,000number 122,436 301,957 120,000 485,477 400,000 100,000 167,500 120,000 444,090 423,817 10,510 15,000 94,396 82,490 25,985 10,003 38,921 15,000 20,750 20,000 3,010 2,730 1,182 315 635 INE117A01022 INE117A01022 US0003752047 CH0012221716 CH0012221716 ISIN code Currency BGN DEM DEM COP HKD CAD HRK AUD USD USD DKK EGP EUR EUR EUR EUR EUR ARS EUR EUR CZK HUF BRL EEK INR

41 | ABB Annual Report 2007 Corporate governance TitelABB Ltd and significant subsidiaries (continued) ABB Share capital in EinleitungstextCompany name/location Country interest % 1,000 number Currency ABB Technologies Ltd., Tirat Carmel ISRAEL 99.99 420 ILS ABB S.p.A., Milan ITALY 100.00 107,000 EUR ABB SACE S.p.A., Sesto S. Giovanni (MI) ITALY 100.00 60,000 EUR ABB Trasmissione & Distribuzione S.p.A. in liquidazione, Milan ITALY 100.00 3,300 EUR ABB Technology SA, Abidjan IVORY COAST 99.00 178,540 XOF ABB K.K., Tokyo JAPAN 100.00 1,000,000 JPY ABB Ltd., Seoul KOREA, REPUBLIC OF 100.00 18,670,000 KRW ABB Holdings Sdn. Bhd., Subang Jaya MALAYSIA 100.00 4,490 MYR Asea Brown Boveri S.A. de C.V., Tlalnepantla MEXICO 100.00 419,096 MXN ABB BV, Rotterdam NETHERLANDS 100.00 9,076 EUR ABB Holdings BV, Amsterdam NETHERLANDS 100.00 119 EUR ABB Limited, Auckland NEW ZEALAND 100.00 34,000 NZD ABB Holding AS, Billingstad NORWAY 100.00 800,000 NOK ABB S.A., Lima PERU 76.34 27,915 PEN Asea Brown Boveri Inc., Paranaque, Metro Manila PHILIPPINES 100.00 123,180 PHP ABB Sp. z o.o., Warsaw POLAND 99.83 260,643 PLN ABB (Asea Brown Boveri), S.A., Paco de Arcos PORTUGAL 100.00 4,117 EUR Asea Brown Boveri Ltd., Moscow RUSSIA 100.00 332 USD ABB Contracting Company Ltd., Riyadh SAUDI ARABIA 65.00 10,000 SAR ABB Holdings Pte. Ltd., Singapore SINGAPORE 100.00 25,597 SGD ABB Holdings (Pty) Ltd., Sunninghill SOUTH AFRICA 80.00 4,050 ZAR Asea Brown Boveri S.A., Madrid SPAIN 100.00 33,318 EUR ABB AB, Västerås SWEDEN 100.00 400,000 SEK ABB Norden Holding AB, Stockholm SWEDEN 100.00 459,000 SEK 42 ABB Asea Brown Boveri Ltd, Zurich SWITZERLAND 100.00 2,768,000 CHF ABB Ltd, Zurich SWITZERLAND Parent 5,790,038 CHF ABB Schweiz AG, Baden SWITZERLAND 100.00 55,000 CHF ABB LIMITED, Bangkok THAILAND 100.00 1,034,000 THB ABB Holding A.S., Istanbul TURKEY 99.95 12,844 USD ABB Ltd., Kiev UKRAINE 100.00 5,860 USD ABB Industries (L.L.C), Dubai UNITED ARAB EMIRATES 49.00 5,000 AED ABB Holdings Ltd., Warrington UNITED KINGDOM 100.00 203,014 GBP ABB Ltd., Warrington UNITED KINGDOM 100.00 219,000 GBP ABB Holdings Inc., Norwalk, CT UNITED STATES 100.00 2 USD ABB Inc., Norwalk, CT UNITED STATES 100.00 1 USD Asea Brown Boveri S.A., Caracas VENEZUELA 100.00 4,899,373 VEB ABB (Private) Ltd., Harare ZIMBABWE 100.00 1,000 ZWD

ABB’s operational group structure is described in the FMR LLC (FMR), U.S., held 127,059,033 ABB shares as of “Financial review” part of this Annual Report. December 31, 2007, representing approximately 5.8 percent of ABB’s total share capital and voting rights as registered in 2.2 Significant shareholders the Commercial Register on that date. Investor AB, Sweden, held 166,330,142 ABB shares as of December 31, 2007, representing approximately 7.6 percent To the best of ABB’s knowledge, no other shareholder held of ABB’s total share capital and voting rights as registered 5 percent or more of ABB’s total share capital and voting rights in the Commercial Register on that date. The number of shares as registered in the Commercial Register on December 31, 2007. held by Investor AB does not include shares held by Mr. Jacob Wallenberg, the chairman of Investor AB, in his individual In January 2008, FMR notified us that it held 104,896,048 ABB capacity. shares as of January 11, 2008, representing approximately 4.8 percent of ABB’s total share capital and voting rights as registered in the Commercial Register on that date. share capital ofCHF5,192,353,742.50divided into contingent capital inconnectionwiththeESAP. Theresulting In November2005,ABBissued 6,626,550shares outof its 2006. reflected inABB’s ArticlesofIncorporation datedasofJune26, 5,455,024,257.50 dividedinto 2,182,009,703shares was convertible bonds.Theresulting share capitalofCHF contingent capitaltoholdersofitsthenoutstandingU.S.-dollar In 2006,ABBalsoissued105,068,206shares outofits December 15,2006. was reflected inABB’s ArticlesofIncorporationdatedas of CHF5,469,390,792.50dividedinto2,187,756,317shares capital inconnectionwiththeESAP. Theresulting share capital In 2006,ABBissued5,746,614shares outofitscontingent ration datedasofJanuary10,2008. registered shares wasreflected inABB’s ArticlesofIncorpo of CHF5,790,037,755dividedinto2,316,015,102fullypaid Swiss-franc convertiblebonds.Theresulting share capital out ofitscontingentcapitaltoholdersthenoutstanding 8.2 and8.3.In2007,ABBalsoissued104,931,602shares For furtherdetailsabouttheESAPandMIPseesections Plan (ESAP)andABB’s ManagementIncentivePlan(MIP). capital inconnectionwithABB’s EmployeeShare Acquisition In 2007,ABBissued23,327,183shares outofitscontingent 3.2 Changestotheshare capital registered shares. CHF 5,469,390,792.50dividedinto2,187,756,317fullypaid share capitalasregistered withtheCommercial Registerwas of CHF2.50pershare. As ofthatdate,ABB’s ordinary into 2,316,015,102fullypaidregistered shares withaparvalue treasury shares) amountedtoCHF5,790,037,755divided On December31,2007,ABB’s ordinary share capital(including 3.1 Ordinary share capital 3. Capitalstructure company. the share capitalorthevotingrightsbetweenABBandanother There are nocross-shareholdings inexcessof5percent of 2.3 Cross-shareholdings person. controlled orbyanyothercorporation byanygovernment To ourknowledge,weare notdirectly orindirectly ownedor different votingrights. represents onevote.Significantshareholders donothave Under ABB’s ArticlesofIncorporation,eachregistered share registered intheCommercial Register. 3 In February2008,FMRnotifiedusthatitheldlessthan

percent ofABB’s totalshare capitalandvotingrightsas ­ par valueofCHF2.50pershare through theexercise ofwar issuance ofupto10,000,000fullypaidregistered shares witha by anamountnottoexceedCHF25,000,000through the As atJanuary10,2008,ABB’s share capitalmaybeincreased 3.3 Contingentshare capital to ABB’s share capitalduring2007,2006and2005. Except asdescribedinthissection3.2,there were no changes Incorporation datedasofDecember6,2005. 2,076,941,497 shares wasreflected inABB’s Articlesof purposes inthe interest ofthecompany. Furthermore, the not exercised atmarketconditionsoruse themforother shares astowhichpre-emptive rightshavebeengrantedbut shareholders toexpire oritmayplacetheserightsand/or may permitpre-emptive rightsthathavenotbeenexercised by capital availabletoABBonDecember 31,2007.TheBoard dividend entitlement. This represented the total authorized share the exercise ofpre-emptive rightsandthebeginningdatefor shares, theissueprice,typeofpayment,conditionsfor Board isauthorizedtodeterminethedateofissuenew value ofCHF2.50each,whichisvaliduntilMay3,2009.The of upto200,000,000fullypaidregistered shares withapar the amountofuptoCHF500,000,000through theissuance holders approved thecreation ofanauthorizedshare capitalin At ABB’s annualgeneralmeetinginMay 2007,ABB’s 3.4 Authorizedshare capital restrictions ofABB’s ArticlesofIncorporation(seesection4.2). each subsequenttransferoftheshares willbesubjecttothe shares withinthecontextof employeeshare ownershipand lower thanthatquotedonastockexchange.Theacquisitionof issue shares orsubscription rightstoemployeesataprice tions, levelofresponsibility andprofitability criteria.ABBmay issued bytheBoard, taking intoaccountperformance,func- issued toemployeespursuantoneormore regulations tobe excluded. Theshares orrights tosubscribeforshares willbe tive andadvancesubscriptionrightsofABB’s shareholders are a parvalueofCHF2.50pershare toemployees.Thepre-emp- through theissuanceofup to44,299,653fullypaidshares with be increased byanamount nottoexceedCHF110,749,132.50 In additionasatJanuary10,2008,ABB’s share capitalmay restrictions ofABB’s ArticlesofIncorporation(seesection4.2). each subsequenttransferoftheshares willbesubjecttothe The acquisitionofshares through theexercise ofwarrantsand The conditionsofthewarrantswillbedeterminedbyBoard. owners ofwarrantswillbeentitledtosubscribefornewshares. connection with the issuance of warrant rights. The then current The pre-emptive rightsoftheshareholders are excludedin in theinterest ofABB. warrant rightsnottakenupbyshareholders forotherpurposes rant rightsgrantedtoitsshareholders. TheBoard may grant ­share- ­-

43 | ABB Annual Report 2007 Corporate governance TitelBoard is authorized to restrict or deny the pre-emptive rights of In special cases the Board may grant exemptions. There were Einleitungstextshareholders and allocate such rights to third parties if the no exemptions granted in 2007. shares are used (1) for the acquisition of an enterprise, parts of an enterprise, or participations, or for new investments, or in 4.3 Shareholders’ dividend rights case of a share placement, for the financing or refinancing of ABB Ltd may only pay out a dividend if it has been proposed such transactions; or (2) for the pur­­pose of broadening the by a shareholder or the Board and approved at a general shareholder constituency in con­nection with a listing of shares meeting of shareholders, and the statutory auditors confirm that on domestic or foreign stock exchanges. the dividend conforms to statutory law and ABB’s Articles of Incorporation. Dividends are usually due and payable in Swiss The subscription and acquisition of the new shares, as well as francs no earlier than three trading days after the approving each subsequent transfer of the shares, will be subject to the shareholders’ resolution. restrictions of ABB’s Articles of Incorporation (see section 4.2). ABB has established a dividend access facility for its share­ 3.5 Convertible bonds and warrants holders who are residents of Sweden for tax purposes. If such For information about convertible bonds and warrants on shareholders have registered their shares with VPC AB in shares issued by ABB, please refer to notes 13 and 20 to Sweden, then they may elect to receive the dividend in Swedish ABB’s consolidated financial statements contained in the kronor from ABB Norden Holding AB without deduction of “Financial review” part of this Annual Report. Swiss withholding tax. For further information on the dividend access facility please refer to ABB’s Articles of Incorporation, 4. Shareholders’ participation a copy of which can be found in the corporate governance 4.1 Shareholders’ voting rights section at: www.abb.com/investorrelations ABB has one class of shares and each registered share carries one vote at the general meeting. Voting rights may be exer- 4.4 General meeting cised only after a shareholder has been registered in the share Shareholders’ resolutions at general meetings are approved register of ABB as a shareholder with the right to vote, or with with an absolute majority of the votes represented at the VPC AB in Sweden, which maintains a subregister of the share meeting, except for those matters described in article 704 of

44 register of ABB. the Swiss Code of Obligations and for resolutions with respect to restrictions on the exercise of the right to vote and the A shareholder may be represented at the annual general removal of such restrictions, which all require the approval of meeting by another shareholder with the right to vote, its legal two-thirds of the votes represented at the meeting. representative, a corporate body (Organvertreter), an indepen- dent proxy (unabhängiger Stimmrechtsvertreter) or a depositary Shareholders representing shares of a par value of at least (Depotvertreter). All shares held by one shareholder may be CHF 1,000,000 may request items to be included in the agenda represented by one representative only. of a general meeting. Any such request must be made in writing at least 40 days prior to the date of the general meeting For practical reasons shareholders must be registered in the and specify the items and the motions of such shareholder(s). share register no later than 10 days before the general meeting ABB’s Articles of Incorporation do not contain provisions on the in order to be entitled to vote. Except for the cases described convocation of the general meeting of shareholders that differ under section 4.2, there are no voting rights restrictions limiting from the applicable legal provisions. ABB’s shareholders’ rights. 5. Board of Directors 4.2 Limitations on transferability of shares and nominee 5.1 Responsibilities and organization registration The Board defines the ultimate direction of the business of ABB may decline a registration with voting rights if a share- ABB and issues the necessary instructions. It determines the holder does not declare that it has acquired the shares in its organization of the ABB Group and appoints, removes and own name and for its own account. If the shareholder refuses supervises the persons entrusted with the management and to make such declaration, it will be registered as a shareholder representation of ABB. without voting rights. The internal organizational structure and the definition of the A person failing to expressly declare in its registration applica- areas of responsibility of the Board, as well as the information tion that it holds the shares for its own account (a nominee), will and control instruments vis-à-vis the Group Executive Com­ be entered in the share register with voting rights, provided that mittee, are set forth in the ABB Ltd Board Regulations, a copy such nominee has entered into an agreement with the Board of which can be found in the corporate governance section at: concerning its status, and further provided that the nominee is www.abb.com/investorrelations subject to recognized bank or financial market supervision. and isanAmerican citizen. Telecom U.S.advisoryboard. Mr. in1949 Hughes wasborn (U.S.)andamemberoftheBritish advisor toWindpoint Sulzer (Switzerland)andElectrolux (Sweden).Heisanexecutive directors ofAkzoNobel(TheNetherlands),MTU(Germany), Laboratories (bothU.S.).Heis alsoamemberoftheboards of of theboard ofdirectors andchiefexecutiveofficerofGBS the board ofdirectors ofMaxagerTechnology andthechairman Directors sinceMay16,2003.Mr. Hughesisthechairmanof Louis R.Hughes Mr. a memberoftheboard ofdirectors ofSpectraEnergy(U.S.). officer ofCompanhia Vale doRioDoce(Brazil).Heisalso since March 12,2002.Heisthepresident andchiefexecutive Roger Agnelli Mr. of theboard ofdirectors ofSchindlerHolding(Switzerland). and DeutscheTelekom AG(bothGermany).Heisamember member ofthesupervisoryboards ofAllianzVersicherungs AG of thesupervisoryboard of ContinentalAG(Germany).Heisa ABB’s Board of Directors since May 3, 2007. He is the chairman Hubertus vonGrünberg Members oftheBoard (Board termMay2007to2008): executive andindependentdirectors (seealsosection5.3). As atDecember31,2007,allBoard memberswere non- sectionat: porate governance Board Regulations,acopy ofwhichcanbefoundinthecor- age limitformembersoftheBoard issetforthintheABBLtd the retirement ofdirectors basedontheirage.However, an section at a copyofwhichcanbefoundinthecorporategovernance one year;re-election ispossible.OurArticlesofIncorporation, ordinary generalmeetingoftheshareholders foraterm of The membersoftheBoard are electedindividuallyat the 5.2 Term andmembers section at: a copy of which can be found in the corporate governance are set forth in section 6 of the ABB Ltd Board Regulations, mation concerning ABB’s business and affairs. Additional details ness andaffairs. Further, Board membersare entitledtoinfor- stances so require, report to the Board about ABB’s overall busi- The CEOshallregularly, andwheneverextraordinary circum- are recorded in written minutes of the meetings. prior to the meetings. Decisions made at the Board meetings order to allow each member time to study the covered matters Board meeting is sent out in advance to each Board member in mentation covering the various items of the agenda for each by adirector orthechiefexecutiveofficer(CEO). Written docu Board meetings are convened by the chairman or upon request

Agnelli was born in1959andisaBrazilian citizen. Agnelli wasborn in1942andisaGermancitizen. von Grünbergwasborn www.abb.com/investorrelations www.abb.com/investorrelations hasbeenamemberofABB’s Board ofDirectors hasbeenamemberofABB’s Board of hasbeenamemberandchairmanof www.abb.com/investorrelations , donotprovide for

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of theboard oftrusteestheHermitageMuseum,St. foundation board ofSchulthessKlinik,Zurich,Switzerland,and Festival GstaadAG(allSwitzerland).Heisalsoamemberofthe directors ofMettler-Toledo SwissReandMenuhin International, Middle EastandAfrica(France),amemberoftheboard of Directors sinceMarch 12,2002.HeischairmanofIBM Europe, 1939 andisaGermancitizen. Osram andWacker Chemie(allGermany).Mr. Voss in wasborn boards ofdirectors ofAllianzLeben,Continental,Hapag-Lloyd, board ofDresdner Bank(Germany).Heisalsoamemberofthe since March 12,2002.He is amemberofthesupervisory W.Bernd Voss Mr. (Sweden). Foundation Wallenberg Alice and Knut the of tors Unilever PLC(U.K.).Heisalsoamemberoftheboard ofdirec- of directors ofEricsson(Sweden), UnileverNV(Holland),and ­Directors sinceMay16,2003. Heisthechairmanofboards Michael Treschow and isaFrench citizen. Partners RoyaltyFund(U.S.).Mr. in1951 deRosenwasborn He isalsoamemberoftheadvisoryboard ofPaulCapital vania BiotechandEndoPharmaceuticalHoldingsInc.(allU.S.). member oftheboards ofdirectors ofUrsinusCollege, Pennsyl- ViroPharmaand chiefexecutiveofficerof (U.S.).Heisa Directors sinceMarch 12,2002.Heisthechairman, president Michel deRosen Mr. in1946andisaSwisscitizen. Märkiwasborn sity of Navarra) Barcelona, Spain; and Bocconi SDA, Milan, Italy. of HEC(HauteEcoleCommercial) Paris,France;IESE(Univer advisoryboardsof IMDLausanne,Switzerland;theinternational burg, Russia.Heservesasamemberoftheboard oftrustees Hans UlrichMärki Jacob Wallenberg governance sectionat: governance tion onABB’s Board memberscanbe foundinthecorporate holds anyofficialfunctionsor political posts.Furtherinforma- As ofDecember31,2007,none ofABB’s Board members in1956andisaSwedishcitizen. born Corporation (U.S.,from January2008).Mr. Wallenberg was Sweden) andCoca-Cola (all Economics of School Stockholm the and Alice Wallenberg Foundation,theNobelFoundation He isalsoamemberoftheboards ofdirectors oftheKnutand Enskilda Banken,AtlasCopcoABandSAS(allSweden). AB (Sweden).HeisvicechairmanofSEBSkandinaviska Group. Heisthechairmanofboard ofdirectors ofInvestor Asea Brown BoveriLtd,theformerparent companyoftheABB 1999, heservedasamemberoftheboard ofdirectors ofABB Directors sinceJune28,1999. From March 1999toJune

Treschow in1943andisaSwedishcitizen. wasborn hasbeenamemberofABB’s Board ofDirectors hasbeenamemberofABB’s Board of hasbeenamemberofABB’s Board of hasbeenamemberofABB’s Board of hasbeenamemberofABB’s Board of www.abb.com/investorrelations

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45 | ABB Annual Report 2007 Corporate governance Titel5.3 Business relationships Governance and the independence criteria set forth in the EinleitungstextThis section describes important business relationships between corporate governance rules of the New York Stock Exchange. ABB and its Board members, or companies and organizations represented by them. The Board has determined that business ABB obtains a portion of its insurance coverage from Zurich relationships with ABB customers which do not result in annual Financial Services. Fred Kindle, the CEO of ABB during 2007, revenues for ABB in excess of $10 million are not important was also a director of Zurich Financial Services during 2007. business relationships per se for the purposes of this section 5.3. The Board has determined that ABB’s business with Zurich Financial Services is not material. During 2007, Companhia Vale do Rio Doce and its subsidiaries (Vale) and ABB entered into a framework agreement to establish 5.4 Board committees general terms and conditions for the supply of products, From among its members, the Board has appointed two Board systems and services among their respective group subsidiaries. committees: the Governance, Nomination and Compensation ABB supplies Vale primarily with process auto­mation products Committee (GNCC) and the Finance, Audit and Compliance for mineral systems. The total revenues received by ABB Committee (FACC). The duties and objectives of the Board in 2007 relating to its contracts with Vale were approximately committees are set forth in regulations issued or approved by $100 million. Roger Agnelli is president and CEO of Vale. the Board, copies of which can be found in the corporate governance section at www.abb.com/investorrelations. These In 2007, ABB earned revenues of approximately $40 million committees assist the Board in its tasks and report regularly from Atlas Copco AB and its subsidiaries (Atlas Copco) to the Board. The members of the Board committees are primarily for automation products such as motors and drives. required to be independent. Jacob Wallenberg is the vice chairman of Atlas Copco. 5.4.1 Governance, Nomination and Compensation Committee During 2007, ABB received approximately $44 million of The Governance, Nomination and Compensation Committee revenues from Sulzer AG (Sulzer) primarily for various automa- is responsible for (1) overseeing corporate governance practices tion products. Louis R. Hughes is a member of Sulzer’s board within ABB, (2) selecting candidates for the Board, its commit- of directors. tees, the CEO and the members of the Group Executive Com-

46 mittee, and (3) succession planning and employment as well On July 4, 2005, ABB entered into an unsecured syndicated as compensation matters relating to the Board and the Group $2-billion, five-year revolving credit facility, which became Executive Committee. The Governance, Nomination and available in July 2005 and which was amended and restated on Compensation Committee is also responsible for maintaining June 27, 2007. As of December 31, 2007, SEB Skandinaviska an orientation program for new Board members and an ongoing Enskilda Banken AB (publ) (SEB) has committed to $120 million education program for existing Board members. out of the $2-billion total and Dresdner Bank AG (Dresdner) has committed to $105 million out of the $2-billion total. Jacob The Governance, Nomination and Compensation Committee Wallenberg is the vice chairman of SEB and Bernd W. Voss must comprise three or more independent directors. Upon is a member of Dresdner’s supervisory board. invitation by the committee’s chairman, the CEO or other members of the Group Executive Committee may participate In 2003, ABB entered into a 10-year agreement with IBM in the committee meetings, provided that any potential conflict pursuant to which IBM took over the operation and support of of interest is avoided and confidentiality of the discussions is ABB’s information systems infrastructure. The total value of the maintained. infrastructure and related operational services to be provided under this agreement is expected to approach $1.7 billion. As at December 31, 2007, the members and secretary of the Hans Ulrich Märki is chairman of IBM Europe, Middle East and Governance, Nomination and Compensation Committee were: Africa. Members: Hans Ulrich Märki (chairman) Michel de Rosen After comparing the revenues generated from ABB’s business Roger Agnelli with Vale, Atlas Copco, Sulzer, SEB, and Dresdner to the total Secretary: Gary Steel annual revenues of ABB and of those companies, and after re- viewing the infrastructure and operational services arrangement 5.4.2 Finance, Audit and Compliance Committee with IBM and the banking commitments of SEB and Dresd­ner, The Finance, Audit and Compliance Committee is responsible the Board has determined that ABB’s business relationships for overseeing (1) the integrity of ABB’s financial statements, with those companies do not constitute material business (2) ABB’s compliance with legal and regulatory requirements, ­relationships and that all members of the Board are considered (3) the independent auditors’ qualifications and independence, to be independent directors. This determination was made in and (4) the performance of ABB’s internal audit function and accordance with the Swiss Code of Best Practice for Corporate independent auditors. ABB’s overall business and affairs and day-to-day management. bers of the Group Executive Committee are responsible for Committee. TheCEOandunderhisdirection theothermem- to theCEOandothermembersofGroup Executive The Board hasdelegatedthe executivemanagementofABB 6.1 Responsibilitiesandorganization 6. Group ExecutiveCommittee isthesecretaryDiane deSaintVictor totheBoard. 5.6 Secretary totheBoard as welltheattendanceofindividualBoard members. 2007 bytheBoard andits committees,theiraverageduration, The tablebelowshowsthenumberofmeetingsheldduring 5.5 Meetingsandattendance Secretary: Members: Finance, AuditandComplianceCommitteewere: As atDecember31,2007,themembersandsecretary ofthe expert. W.determined thatBernd Voss isanauditcommitteefinancial Securities andExchangeCommission(SEC),theBoard has ity ofthediscussionsismaintained.Asrequired bythe U.S. that anypotentialconflictofinterest isavoidedandconfidential- Committee may participate in the committee meetings, provided chairman, theCEOorothermembersofGroup Executive Committee meetings.Uponinvitationbythecommittee’s auditors, mayparticipateintheFinance,AuditandCompliance audit,aswelltheexternal functions, theheadofinternal committee’s chairmanformattersrelated totheirrespective understanding offinanceandaccounting.Asdeterminedbythe three ormore independentdirectors whohaveathorough The Finance,AuditandComplianceCommitteemustcomprise Jacob Wallenberg W.Bernd Voss Michael Treschow Michel deRosen Hans UlrichMärki Louis R.Hughes Roger Agnelli Hubertus vonGrünberg(from May2007) Jürgen Dormann(untilMay2007) Meetings attended: Number ofmeetings Average duration(hours) Meetings andattendance

Michel Demaré Louis R.Hughes Jacob Wallenberg W.Bernd Voss (chairman) 5 4 5 5 5 5 4 3 2 5 7 Board ofDirectors

is aBelgiancitizen. within DowChemical(U.S.).Mr. in1956and Demaréwasborn Baxter Europe. From 1984until2002,heheldvariouspositions Mr. Demaréwas vicepresident andchieffinancialofficerof his dutiesasCFOinFebruary2008.From 2002until2004 ary 1,2005,andwasappointedinterimCEOinadditionto tive Committeewere: As atDecember31,2007,themembersofGroup Execu- 6.2 MembersoftheGroup ExecutiveCommittee and dischargedbytheBoard. Each memberoftheGroup ExecutiveCommitteeisappointed nel matters,transactionsandotherissuesrelevant totheGroup. and financialperformanceonallorganizationalperson- nary circumstances so require, on the course of ABB’s business The CEOreports totheBoard regularly, andwheneverextraordi- was born in1964andisaGermancitizen. was born with A.T. Pty. Kearney Ltd.anditsaffiliates.Mr. Spiesshofer Roland BergerAG.Priorto2002,heheldvariouspositions at practice operations of partner, head senior global he was opment inNovember2005.From 2002untilhejoinedABB, Ulrich Spiesshofer Michel Demaré 1959 andhasdualLiechtensteinSwisscitizenship. Sulzer’s of member a board ofdirectors. Mr. in Kindlewasborn also was he 2004, to 2003 from executive and officerofSulzer Sulzer (Switzerland) since 1992. In 2001, he became chief Switzerland). Before joiningABB,Mr. Kindlehadbeenwith of VZHoldingLtd.andZurichFinancialServices(both February 2008,Mr. Kindleisamemberoftheboard ofdirectors Executive Officerfrom January2005untilFebruary2008.Asof Fred Kindle – – – 6 7 – 5 – – 7 2 Compensation Committee Nominationand Governance, joinedABBinSeptember2004andwastheChief joinedABBasChiefFinancialOfficeronJanu- joinedABBasheadofCorporateDevel 7 7 – – – 6 – – – 7 3 Compliance Committee Finance, Auditand ­

47 | ABB Annual Report 2007 Corporate governance TitelGary Steel joined ABB as head of Human Resources in January sion in China. From 1976 to 2004, he held various positions with Einleitungstext2003. Mr. Steel is a member of the board of directors of ABB. Mr. Jonsson was born in 1950 and is a Swedish citizen. Harman International Industries Inc. (U.S.). In 2002, he was the human resources director, group finance at Royal Dutch Shell On February 13, 2008, ABB announced that Fred Kindle was (Netherlands). Between 1976 and 2002, he held several human leaving ABB due to irreconcilable differences about how to resources and employee relations positions at Royal Dutch lead the company. Michel Demaré was appointed interim CEO Shell. Mr. Steel was born in 1952 and is a British citizen. in addition to his role as Chief Financial Officer.

Diane de Saint Victor joined ABB as General Counsel in January Further information about the members of the Group Executive 2007. From 2004 to 2006, she was general counsel of Euro- Committee can be found in the corporate governance section pean Aeronautic Defence and Space, EADS (France/Germany). at: www.abb.com/investorrelations From 2003 to 2004, she was general counsel of SCA Hygiene Products (Germany). From 1993 to 2003, she held various 6.3 Management contracts positions with Honeywell International (France/Belgium). There are no management contracts between ABB and Ms. de Saint Victor was born in 1955 and is a French citizen. companies or natural persons not belonging to the ABB Group.

Ravi Uppal was appointed President, Global Markets, in July 7. Compensation 2007. From 2006 until his appointment to the executive commit- 7.1 Principles of Board compensation tee in 2007 he was ABB’s regional manager of Southeast Asia. The compensation levels of members of the Board for their From 2001 to 2007 he was ABB’s country manager for India. term from May 2007 to May 2008 are as follows: Prior to 2001 he held various positions with several different Chairman: CHF 1,200,000 companies including approximately 15 years with ABB. Member of the Board Mr. Uppal was born in 1952 and is an Indian citizen. and Committee chairman: CHF 400,000 Member of the Board: CHF 300,000 Bernhard Jucker was appointed Executive Committee member responsible for the Power Products division in January 2006. As of May 2007, Board compensation is payable in semi-annual

48 From 2003 to 2005, he was ABB’s country manager for installments in arrear. The first payment is made in November, Germany. From 1980 to 2003 he held various positions in ABB. for the period of Board membership from election at the annual Mr. Jucker was born in 1954 and is a Swiss citizen. general meeting in May until October of that year. The second payment is made in May of the following year for the period of Peter Leupp was appointed Executive Committee member Board membership from November to May. responsible for the Power Systems division in January 2007. From 2005 to 2006, he was ABB’s regional manager for North Also as of 2007, Board members elect to receive either 50 per- Asia and from 2001 to 2006 he was ABB’s country manager for cent or 100 percent of their compensation in ABB shares. China. From 1989 to 2001, he held various positions in ABB. The reference price for the shares to be delivered (and hence Mr. Leupp was born in 1951 and is a Swiss citizen. the calculation of the number of shares to be delivered) is the average closing price of the ABB share during a defined 30-day Tom Sjökvist was appointed Executive Committee member period which is different for each installment. The ABB shares responsible for the Automation Products division in January are kept in a blocked account for three years after the date 2006. From 2003 to 2005, he was the head of the Automation of original delivery and may only be disposed of earlier if the Products business area. From 1972 to 2003, he held several respective person shall have left the Board and shall not have positions with ABB. Mr. Sjökvist was born in 1947 and is a agreed to the shares remaining blocked for the original three- Swedish citizen. year period. In addition, all shares that were in the blocked account at the beginning of May 2007 are blocked until May Veli-Matti Reinikkala was appointed Executive Committee 2010 and may only be disposed of earlier if the respective member responsible for the Process Automation division in Board member shall have left the Board before 2010 and shall January 2006. He is a member of the board of directors not have agreed to the shares remaining blocked until 2010. of UPM-Kymmene (Finland). In 2005, he was the head of the Process Automation business area. From 1993 to 7.2 Details of Board compensation 2005, he held several positions with ABB. Mr. Reinikkala The compensation to which Board members are entitled for was born in 1957 and is a Finnish citizen. the period from May 2007 to May 2008 amounts to CHF 3,500,000. Of this amount, CHF 1,750,000 was settled in cash Anders Jonsson was appointed Executive Committee member and/or shares in November 2007. The remainder will be settled responsible for the Robotics division in January 2006. In 2005, in May 2008 in cash and/or shares, according to the elections he was the head of the former Automation Technologies divi- made by the Board members. The amounts per individual Incentive Plan(LTIP). Forfurther detailsabouttheLTIP see by offering them theopportunitytoparticipate intheLong-term Executive Committeewiththat ofABBonalonger-term basis ABB alignstheperformanceof themembersofGroup of 100percent oftheirbasesalary. tive Committeemembershave amaximumbonusopportunity 150 percent ofhisbasesalary. Allothercurrent Group Execu- announced. TheCEOhasamaximumbonusopportunityof bonuses are paidinMarch eachyearafterfull-yearresults are performance duringthepreceding financialyear. Resulting these bonusesdependatleast50percent onABB’s business expectations ofthesememberswiththedevelopmentABB, Committee are theirannualbonuses.To aligntheperformance Short-term incentivesformembersoftheGroup Executive U.S. topexecutivebenchmarksprovided bytheHayGroup. benchmarks, andinthecaseofVeli-Matti Reinikkala,against the GNCCreviews thecomponents againstpan-European ponents foreachoftheGroup ExecutiveCommitteemembers, and (3)along-termincentive.Indecidingthelevelofthesecom- ponents (1)anannualbasesalary, (2)ashort-termincentive of theGroup ExecutiveCommittee intothree principalcom The GNCChasstructured thecompensationformembers 7.3 PrinciplesofGroup Executive Committeecompen eligible to participate in any of our employee incentive programs. Board membersdonotreceive pensionbenefitsandare not May 2006to2007. paid in2007respect of the Board termfortheperiodfrom Board memberare listedinthetableabove.Noamountswere Total Jacob Wallenberg W.Bernd Voss Michael Treschow Michel deRosen Hans UlrichMärki Louis R.Hughes (3) (2) (1) Roger Agnelli Hubertus vonGrünberg Name Board compensation (5) (4)

Member oftheFinance,AuditandComplianceCommittee NominationandCompensationCommittee Member oftheGovernance, Number ofshares perBoard memberiscalculatedbasedonnetamountdueafterdeductionsforsocialsecurity, withholdingtaxetc. Represents gross amountspaidin2007,priortodeductionsforsocialsecurity, withholdingtaxetc. Jürgen DormannservedasChairmanoftheBoard untiltheannualgeneralmeetinginMay2007.AllcompensationconnectionwithhislasttermasChairmanwaspaidandrecorded in2006. Compensation fortheperiodofBoard membershipfrom May2007to2008.Expenserecognized inthecompany’s IncomeStatementfor2007amountedtoCHF2,449,000.

(4)

(5) (4)

(5) Member oftheBoard and ComplianceCommittee of theFinance,Audit Member oftheBoard andchairman Member oftheBoard Member oftheBoard and CompensationCommittee Nomination of theGovernance, Member oftheBoard andchairman Member oftheBoard Member oftheBoard Chairman oftheBoard Function

­sation ­

3,500,000 1,200,000 ­compen-

300,000 400,000 300,000 300,000 400,000 300,000 300,000 sation share at the time of grant and for the LTIP grants assumes The valuation is based on the market price of the ABB Ltd compensation includes all share-related grants to individuals. compensation tablelaterinthis section.Thetotalshare-based other itemsasdescribedmore fullyinthesalaryandnon share- includes base salary, bonuses, pension contributions and certain sation. The total salary and non share-based compensation share-based com Committee is displayed in two parts: (1) total salary and non The total compensation of each member of the Group Executive 7.4 DetailsofGroup ExecutiveCommitteecompensation education. Membersare alsoeligibletoparticipateinESAP. In somecases,membersreceive contributionstochildren’s unemployment, socialandhealthinsurancecompensation. additional benefitssuchasacompanycar, andaccident,life, Group ExecutiveCommittee membersreceive customary accordance withtheterms oftheirpensionplans. The membersreceive pension contributionsfrom ABBin the pension plan in Finland and the 401(k) plan in the U.S. under insured is who Veli-MattiReinikkala, of exception the regulations are availableunderwww.abbvorsorge.ch), with –TEDCPlan(the Plan, theTödiPlanandFoundation the ABBPensionFund,SupplementaryInsurance in Switzerland in insured are members All benefits. pension Members oftheGroup Executive Committeealsoreceive for thesameperiod. they doso,are noteligible toparticipateinanLTIP launch have participatedintheearlierlaunchesofMIPandwhen section 8.4.SomemembersoftheGroup ExecutiveCommittee Total (CHF)

(1)

compensation tobe settled inshares Percentage of

­pensation and(2)totalshare-based compen- 100% 100% 50% 50% 50% 50% 50% 50%

in cash 700,000 100,000 300,000 Settled 75,000 75,000 75,000 75,000 (CHF)

2007 installment (2) 0 0

Settled inshares – shares received number of

25,263 3,354 6,149 1,677 1,677 1,677 1,677 2,273 6,779

(3)

49 | ABB Annual Report 2007 Corporate governance Titel100 percent vesting, although less than 100 percent may rized in the first table. The second table shows the gross Einleitungstextactually vest. Share-based compensation is described more payments (i.e. compensation before deduction of employee fully in the share-based compensation table later in this section. social insurance and pension contributions) that were made The total compensation only includes compensation received to, or on behalf of, the members of the Group Executive by an individual in connection with his or her role as a member Committee in 2007 but excludes share-based compensation, of the Group Executive Committee. The total compensation of which is shown in a separate table below. members of the Group Executive Committee in 2007 is summa-

Group Executive Committee total compensation Total salary and other non Total share-based share-based Total Name Function compensation compensation compensation

(CHF) (CHF) (CHF) Fred Kindle President and Chief Executive Officer 3,926,255 5,545,689 9,471,944 Michel Demaré Chief Financial Officer 1,980,964 3,289,469 5,270,433 Gary Steel Head of Human Resources 1,784,766 2,472,964 4,257,730 Ulrich Spiesshofer Head of Corporate Development 1,568,506 1,038,384 2,606,890 Diane de Saint Victor General Counsel 1,371,821 3,053,627 4,425,448 Ravi Uppal President Global Markets since July 1, 2007 507,109 – 507,109 Bernhard Jucker Head of Power Products division 2,049,338 1,241,391 3,290,729 Peter Leupp Head of Power Systems division 1,383,040 1,855,839 3,238,879 Tom Sjökvist Head of Automation Products division 2,465,439 1,101,153 3,566,592 Veli-Matti Reinikkala Head of Process Automation division 1,523,328 1,039,682 2,563,010 Anders Jonsson Head of Robotics division 1,367,618 761,926 2,129,544 Dinesh Paliwal President Global Markets and Technology until June 30, 2007 2,974,974 1,498,518 4,473,492

50 Total 22,903,158 22,898,642 45,801,800

Group Executive Committee salary and other non share-based compensation Employers’ Employer Additional pension Costs of Costs of Costs of social Base compen­ contribu- company health children’s security Name salary Bonus sation tions car insurance education payments Total (1)

(CHF) (CHF) (CHF) (CHF) (CHF) (CHF) (CHF) (CHF) (CHF) Fred Kindle 1,487,507 1,977,615 207,845 35,000 8,296 209,992 3,926,255 Michel Demaré 866,677 756,480 210,585 29,000 8,478 26,600 83,144 1,980,964 Gary Steel 736,668 654,264 224,356 27,000 8,970 62,000 71,508 1,784,766 Ulrich Spiesshofer 683,338 616,395 165,217 29,000 7,780 66,776 1,568,506 Diane de Saint Victor (2) 700,012 403,000 203,664 8,947 56,198 1,371,821 Ravi Uppal (3) 350,000 125,335 4,776 26,998 507,109 Bernhard Jucker 816,669 721,500 220,181 30,000 8,187 252,801 2,049,338 Peter Leupp 700,000 303,286 227,854 25,000 9,486 117,414 1,383,040 Tom Sjökvist (4) 716,674 689,150 474,830 244,279 30,000 8,354 302,152 2,465,439 Veli-Matti Reinikkala (5) 629,832 553,808 58,975 214,787 41,839 4,517 19,570 1,523,328 Anders Jonsson 545,007 319,800 215,003 27,000 9,091 251,717 1,367,618 Dinesh Paliwal (6) 427,386 1,454,086 165,630 743,916 13,496 17,823 73,317 79,320 2,974,974 Total 8,659,770 8,046,384 1,102,435 3,003,022 287,335 104,705 161,917 1,537,590 22,903,158

(1) The table above provides compensation amounts with respect to 2007 on a cash basis. Consequently, the table shows bonuses relating to 2006, paid in 2007, except for Dinesh Paliwal, whose bonus includes a pro rata share for 2007 (see note 6 below). The CEO has a maximum bonus opportunity of 150 percent of his base salary. All other Executive Committee members have a maximum bonus opportunity of 100 percent of their base salary. Accrued bonus at December 31, 2007, amounted to CHF 8,060,008. Bonus payments will be made in March 2008, after the 2007 financial results are published. (2) Diane de Saint Victor received 250,000 euros as a sign-on bonus upon joining the company. This amount has been translated into Swiss francs using a rate of 1.612. (3) Ravi Uppal was appointed to the Executive Committee effective July 1, 2007. Therefore the table shows his compensation from that date and excludes compensation he received during 2007 in respect of his previous role within ABB. (4) Tom Sjökvist received additional compensation of CHF 474,830 upon reaching the age of 60, under an agreement entered prior to his becoming an Executive Committee member. (5) Veli-Matti Reinikkala received his compensation and car benefits in U.S. dollars, which have been converted into Swiss francs using a rate of 1.1247 per U.S. dollar. He received his employer’s pension contributions and health insurance benefits in euros, which have been converted into Swiss francs using a rate of 1.65528 per euro. His additional compensation was for relocation expenses, financial counseling and term life insurance premiums. (6) Dinesh Paliwal left the company as of the end of June, 2007 and therefore received a pro rata share of his compensation for 2007, including an amount of CHF 480,121 in respect of his bonus 2007. He received his compensation in U.S. dollars, which has been converted into Swiss francs using a rate of 1.1247 per U.S. dollar. His additional compensation was for cost-of-living adjustments, financial counseling and term life insurance premiums. prior totheend ofFebruary2009,thenthecompany will employment of February2009. Ifhedoesnotfindalternative tions andthepayoutofunused vacationdays)uptotheend salary, bonusandotherbenefits(including pension contribu- company. the to Mr. leaving entitled is is Kindle, Kindle Fred In February2008,thecompany announcedthatitsCEO, CHF 34.98. (depending onthesavingscurrency) atanexercise priceof acquire uptoamaximumnumberof280or290shares 12-month periodand,inNovember2008,usetheirsavingsto fourth launchofESAP, whichallowsthemtosaveovera Executive CommitteeexceptforRaviUppalparticipatedinthe In additiontotheaboveawards, allmembersoftheGroup below. Thevestingdatesoftherespective awards are listedinthefootnotestotable. Share-based compensationgrantedtomembersoftheGroup ExecutiveCommitteeduring2007issummarizedinthetable Spiesshofer Ulrich Gary Steel Michel Demaré Fred Kindle Group ExecutiveCommitteeshare-based compensation (8) (7) (6) (5) (4) (3) (2) (1) de SaintVictor Diane Paliwal Dinesh Jonsson Anders Reinikkala Veli-Matti Tom Sjökvist Peter Leupp Jucker Bernhard Total Ravi Uppal

Upon leavingthecompany, DineshPaliwal forfeitedallunvestedshare-based awards. The tableexcludesshare-based compensationreceived byRaviUppalinconnectionwithhisprevious role withinABB,priortohisbecomingamemberoftheExecutiveCommittee. In 2007,atotalof199,685shares, vestingonMarch 1,2010,were awarded totheseindividualscompensateforachangeinpensionarrangements. 31,983 shares willvestandbedelivered inMarch 2008. remaining the and 2007 March in delivered were shares 31,983 shares. 63,966 of form the in paid be to million 1.5 CHF of 2006 for bonus additional an allocated was Kindle Fred 2007, In Vesting dateMarch 15,2010. Vesting dateMarch 15,2009.Includesatotalof16,478shares deliverableundertheco-investmentcomponentof2006launch ofLTIP. Fair valuerepresents marketvalueoftheshares aspergrantdateoftherespective award. Vesting dateMarch 15,2008. Name

(8)

(7) 59,150 59,150

Number of conditionally granted shares under the 2005 launch of LTIP (1) 1,197,788 1,197,788 (CHF)

Fair value LTIP 2005 (2) 41,526 41,526 83,052

Number of con­ditionally granted shares under the 2006 launch of LTIP (3) 1,681,804 840,902 840,902 (CHF)

Fair value LTIP 2006 (2) 424,408 32,733 35,105 41,746 71,158 26,092 33,022 34,156 33,207 39,374 44,608 33,207 Number of con­ditionally granted shares

respective awards. wise havereceived attheendofvestingperiods cation (through February 28, 2009) of the shares he would other- in March 2008,242,598shares, representing apro rataallo- Mr. respect toothershare-based awards previously grantedto With 2008. March in vesting scheduled their with accordance 304,711 shares thatwere previously grantedbutunvestedin the 12 any, if during employment, other from compensation and his 70 between difference the to equal amount an pay continue to under the performance component of

(4)

percent of his annual compensation(base salaryandbonus) his of percent the 2007 launch of LTIP Kindle andvestingin2009 2010,Mr. Kindle willreceive,

months endinginFebruary2010.Mr. Kindlewillreceive 132,194 10,243 11,843 30,959 10,789 11,295 16,556 9,650 5,007 9,414 8,219 8,219 Number of con­ditionally granted shares under the co-investment component of the 2007 launch of LTIP (4) 13,636,752 1,038,384 1,111,026 1,312,931 2,501,867 1,039,682 1,101,153 1,014,937 1,241,391 1,498,518 1,014,937 761,926 (CHF)

Total fair value LTIP 2007 (2) 1,500,000 1,500,000 (CHF) Fair value of shares in respect of bonus (2)(5) 1,361,938 1,976,538 1,543,822 4,882,298 (CHF) Fair value of share-based award in lieu of certain pension arrangements (2)(6) 22,898,642 2,472,964 3,289,469 5,545,689 1,038,384 1,039,682 1,101,153 1,855,839 1,241,391 1,498,518 3,053,627 761,926 (CHF) Total fair value of share-based awards 0 granted in 2007

51 | ABB Annual Report 2007 Corporate governance Titel7.5 Additional fees and remuneration amount is the lower of 10 percent of gross monthly salary or EinleitungstextOther than as disclosed herein, in 2007, ABB did not pay any the local currency equivalent of CHF 750. At the end of the additional fees or remuneration to the members of the Board savings period, employees choose whether to exercise their or the Group Executive Committee for services rendered to stock options to buy ABB shares (ADS in the case of employ- ABB. Also, in 2007 ABB did not pay any additional fees or ees in the U.S.) at the exercise price set at the grant date, remuneration, other than on market terms, to persons closely or have their savings returned with interest. The savings are linked to a member of the Board or the Group Executive accumulated in a bank account held by a third-party trustee on Committee for services rendered to ABB. “Persons closely behalf of the participants and earn interest. linked” is understood to mean: (1) an individual’s spouse, (2) an individual’s children below the age of 18, (3) any persons living The maximum number of shares that each employee can in the same household as an individual for at least 12 months, purchase has been determined based on the exercise price and (4) any legal entities that are under the control of an individual or the aggregate savings for the 12-month period, increased by any of the persons mentioned under (1) to (3) above, and (5) 10 percent to allow for currency fluctuations. If, at the exercise any legal or natural person acting as an individual’s fiduciary or date, the balance of savings plus interest exceeds the maxi- the fiduciary of any of the persons mentioned under (1) to (4) mum amount of cash the employee must pay to fully exercise above. their stock options, the excess funds will be returned to the employee. If the balance of savings and interest is insufficient 7.6 Loans and guarantees granted to members of the to permit the employee to fully exercise their stock options, the Board or Group Executive Committee employee has the choice, but not the obligation, to make an In 2007, ABB did not grant any loans or guarantees to its Board additional payment so that they may fully exercise their stock members or members of the Group Executive Committee or to options. persons closely linked to any of those members. If an employee ceases to be employed by ABB, the accumu- 7.7 Severance provisions lated savings as of the date of cessation of employment will be Employment contracts for Group Executive Committee mem- returned to the employee and the employee’s right to exercise bers contain notice periods of 12 months or less, during which their stock options will be forfeited. Employees can withdraw

52 they are entitled to running salaries and bonuses. In addition, from the ESAP at any time during the savings period and will be if the company terminates the employment of a member of the entitled to a refund of their accumulated savings. Group Executive Committee and that member does not find alternative employment within their notice period that pays at The exercise price per share and ADS of CHF 34.98 and $29.78, least 70 percent of such member’s annual compensation, respectively, for the 2007 grant, was determined using the clo­- then the Company will continue to pay compensation to that sing price of the ABB share on the SWX Swiss Exchange (virt-x) member for up to 12 additional months. and ADS on the New York Stock Exchange on the grant date.

7.8 Compensation to former members of the Board 8.3 MIP and the Group Executive Committee ABB maintains an MIP under which it offers stock warrants, In 2007, ABB did not make any payments to a former member options and warrant appreciation rights (WARs) to key employ- of the Board or the Group Executive Commtitee in connec- ees for no consideration. tion with such member’s role, or departure from the role, as a member of the Board or the Group Exeuctive Committee. The warrants and options granted under the MIP allow partici- pants to purchase shares of ABB at predetermined prices. 8. Employee participation programs Participants may sell the warrants and options rather than 8.1 Incentive plans linked to ABB shares exercise the right to purchase shares. Equivalent warrants are In order to align its employees’ interests with the business listed by a third-party bank on the SWX Swiss Exchange, which goals and financial results of the company, ABB operates a facilitates pricing and transferability of warrants granted under number of incentive plans, linked to ABB’s shares, which are the MIP. The options entitle the holder to request that a summarized below (for a more detailed description of each third-party bank purchase such options at the market price of incentive plan, please refer to note 20 to ABB’s consolidated equivalent warrants listed by the third-party bank in connection financial statements contained in the “Financial review” part with that MIP launch. If the participant elects to sell the warrants of this Annual Report). or options, the instruments will then be held by a third party and, consequently, ABB’s obligation to deliver shares will be to 8.2 ESAP this third party. Each WAR gives the participant the right to The ESAP is an employee stock-option plan with a savings receive, in cash, the market price of the equivalent listed warrant feature. Employees save over a 12-month period, by way of on the date of exercise of the WAR. The WARs are non trans­- monthly salary deductions. The maximum monthly savings ferable. with thedefinedpeers.Thefull amountoftheconditionalgrant delivered willbedependentonABB’s rankingincomparison half ofthedefinedpeers.The actual numberofshares to be evaluation periodmustbepositive andequaltoorbetterthan In order forshares tovest, ABB’s performanceoverthe annual dividendyieldpercentage (ABB’s performance). ABB share priceovertheevaluationperiodandanaverage terms, oftheaveragepercentage pricedevelopmentofthe evaluation periodwillbemeasured asthesum,inpercentage The performanceofABBcompared toitspeersoverthe exceed 100percent oftheconditionalgrant. number ofshares received aftertheevaluationperiodcannot pants inthatcapacityduringtheevaluationperiod.Theactual and (2)thetermofservicerespective eligiblepartici- selected peergroup ofpublicly listedmultinationalcompanies defined period(evaluationperiod)compared tothoseofa dependent on(1)theperformanceofABBshares duringa eligible participantwillreceive free ofchargeatafuture dateis the initialgrantdate.Theactualnumberofshares thateach downward forindividualswho becomeeligibleparticipantsafter 2006. Thenumberofshares grantedusuallyisadjusted of theco-investmentcomponent)and100percent asfrom percentages were 150percent in2005(priortotheintroduction grant. FormembersoftheGroup ExecutiveCommittee,these percentage oftheeligibleparticipant’s basesalaryatthedateof the numberofshares conditionally grantedequalsacertain Under theshare-price performance component,thevalueof in theprevious launches. in additiontotheshare-price performancecomponentexisting as ofthe2006launch,containsaco-investmentcomponent, The LTIP involvesannualconditionalgrantsofABB’s stockand, tee andcertainotherexecutives(eachaneligibleparticipant). ABB hasanLTIP formembersofitsGroup ExecutiveCommit- 8.4 LTIP 2007, are asfollows: The detailsofthevariousunexpired grantsasatDecember31, options andWARs expire sixyearsfrom thedateofgrant. certain circumstances, suchasdeathordisability. Allwarrants, from thedateofgrant.Vesting restrictions canbewaivedin exercise WARs afterthevestingperiod,whichisthree years Participants mayexercise orsellwarrantsandoptions Grant December 2003 December 2004 February 2006 May 2007 price inCHF Warrant exercise 7.00 7.50 15.30 26.00 ratio Subscription 5:1 5:1 5:1 5:1 31, 2007,are asfollows: The detailsofthevariousunexpired launchesasatDecember of shares. free ofchargetotheeligibleparticipantamatchingnumber participant andtheownerofsuchshares, thenABBwilldeliver end oftheevaluationperiodindividualremains aneligible to anindividuallydefinedmaximumnumberofshares. Ifatthe participant isinvitedtodepositanumberofABBshares, up Under theco-investmentcomponentofLTIP, eacheligible the definedpeers’. will vestifABB’s performanceisbetterthanthree-quarters of Board memberasofDecember 31,2007: The tablebelowshowsthenumberofABBshares heldbyeach 9.1 Board ownershipofABB shares andoptions Group ExecutiveCommittee 9. ABBshareholdings of members oftheBoard andthe 2009 and2010,respectively. 2006 andthe2007launcheswillbeknownonlyinMarch 2008, The exactnumberofshares tobereceived forthe2005, ABB shares. a memberoftheBoard heldanyshares ofABBoroptionsin 2007, nomemberoftheBoard andnopersoncloselylinked to Except asdescribedinthissection 9.1,asofDecember31, Total 2007 2006 2005 Launch year Jacob Wallenberg W.Bernd Voss Michael Treschow Michel deRosen Hans UlrichMärki Louis R.Hughes Roger Agnelli Hubertus vonGrünberg Board shareholdings (2) (1)

Investor AB,ofwhichMr. Wallenberg ischairman. by owned beneficially shares the include not do table this in provided amounts Share compensation. Board the of terms the with accordance in blocked currently and years prior and current in members Board to compensation as paid shares 814,657 of total a Includes

(2) to March 15,2010 March 15,2007, to March 15,2009 March 15,2006, to March 15,2008 March 15,2005, Evaluation period Total numberofshares held at December31,2007 21.08 15.48 7.15 (in CHF) Reference price 146,724 950,716 137,807 304,051 134,482 71,007 90,115 59,751 6,779

(1)

53 | ABB Annual Report 2007 Corporate governance Titel9.2 Group Executive Committee ownership of ABB shares and options EinleitungstextAs of December 31, 2007, the members of the Group Executive Committee held the following numbers of shares (or ADSs representing such shares), the conditional rights to receive ABB shares under the LTIP, warrants or options (either vested or unvested as indicated) under the MIP and unvested shares in respect of bonus and/or pension arrangements:

Group Executive Committee shareholdings, warrant holdings and option holdings

Unvested at December 31, 2007 (1) (2)

(3) (3)

Name held number of shares Total Number of conditionally under the granted shares 2005 launch of the LTIP Number of conditionally under the granted shares 2006 launch of the LTIP Number of matching shares deliverable under the 2006 co-investment portion of LTIP Number of conditionally under the granted shares 2007 launch of the LTIP Number of matching shares deliverable under the 2007 co-investment portion of LTIP Number of warrants/options held under the MIP Number of warrants/options held under the MIP of bonus in respect Shares 2006 in lieu of pension Shares arrangements

2006 grant 2007 grant (vesting (vesting (vesting (vesting (vesting (vesting (vesting (vesting (vesting 2008) 2009) 2009) 2010) 2010) 2009) 2010) 2008) 2010) Fred Kindle 165,453 272,728 92,055 40,115 71,158 30,959 31,983 63,142 Michel Demaré (4) 62,961 157,343 51,680 15,014 41,746 11,843 80,840 Gary Steel 51,120 146,854 46,512 13,416 35,105 10,243 55,703 Ulrich Spiesshofer 25,330 107,955 41,990 13,372 32,733 9,650 Diane de Saint Victor 20,000 59,150 33,287 8,239 33,207 8,219

54 Ravi Uppal 30,717 237,220 Bernhard Jucker 31,375 48,450 8,595 39,374 11,295 Peter Leupp 32,988 33,287 8,239 33,207 8,219 Tom Sjökvist (5) 40,011 45,220 12,451 34,156 10,789 Veli-Matti Reinikkala 22,538 43,001 5,680 33,022 9,414 Anders Jonsson (6) 67,291 33,592 3,603 26,092 5,007 100,000 96,300 Total 549,784 744,030 469,074 128,724 379,800 115,638 100,000 333,520 31,983 199,685

(1) Excluded on the grounds of immateriality are unvested shares in respect of the fourth launch of ESAP. For details, see note 20 to ABB’s consolidated financial statements contained in the “Financial review” part of this Annual Report. (2) Includes shares deposited as match for the co-investment portion of the LTIP. These shares may be sold/transferred but then the corresponding number of co-investment shares would be forfeited. (3) Warrants/options may be sold or exercised/converted into shares at the ratio of 5 warrants/options for 1 share. (4) Total number of shares held includes 500 shares held jointly with spouse. (5) Total number of shares held includes 7,560 shares held by spouse or child. (6) Total number of shares held includes 55,529 shares held by or jointly with spouse. The warrants vesting in 2009 and 2010 were received by Anders Jonsson’s spouse in connection with her role as an ABB employee. ­exercised entitletheholdertoreceive incashthemarket valueoftheequivalentlistedwarrantattimeexercise. Furthermore, asofDecember31,2007,thefollowingmembersGroup ExecutiveCommitteeheldWARs thatwhen function inMay2003. sible forthemandate,Charles Barone, beganservingin this auditor oftheABBGroup in1994.Theheadauditorrespon- &YoungErnst assumedtheexistingauditingmandate as of theGroup auditor 12.2 Durationofthemandateandtermoffice capital. reports required in connectionwithchangesinABB’s share OBT hasbeenelectedasspecialauditortoissuereview &YoungErnst istheGroup andstatutoryauditorofABB. 12.1 Group auditorsandspecial 12. Auditors of control. parachutes” orotherspecialbenefitsintheeventofachange members orofseniormanagementreceive “golden None ofABB’s Board members,Group ExecutiveCommittee 11. Changeofcontrol provisions Stock ExchangeandSecuritiesTrading Act. to makeapublictenderoffer pursuanttoarticle32oftheSwiss raising thethreshold (opting-up) orwaivingtheduty(opting-out) ABB’s ArticlesofIncorporationdonotcontainanyprovisions 10. Dutytomakeapublictenderoffer company’s totalshares outstanding. Group ExecutiveCommittee ownedlessthan1percent ofthe As ofDecember31,2007,themembersourBoard and 9.3 Total shareholdings ofABBshares andoptions Committee heldanyshares ofABBoroptionsinshares. person closelylinkedtoamemberoftheGroup Executive 2007, nomemberoftheGroup ExecutiveCommitteeandno Except asdescribedinthissection9.2,ofDecember31, Total Anders Jonsson Veli-Matti Reinikkala Tom Sjökvist Peter Leupp Bernhard Jucker Ravi Uppal Group ExecutiveCommitteewarrantappreciation rightsholdings 2003 grant 137,500 Number offullyvestedWARs 75,000 62,500 the Board. auditorsto material elementsofitssupervision oftheexternal the results oftheirauditprocedures. TheFACC reports the regularly auditors toobtainreports withtheexternal about their qualifications,independenceandperformance.Itmeets responsible auditorstoensure forsupervisingtheexternal ment andremovalauditors.TheFACC oftheexternal isalso The FACC prepares proposals forthe Board fortheappoint- the Group auditors 12.4 Supervisoryandcontrol instrumentsvis-à-vis &Young.by Ernst pre-approval ofauditandnon-auditservicestobeperformed ABB has,onaglobalbasis,process forthereview and Sarbanes-Oxley Actof2002andrulesissuedbytheSEC, tax services.Inaccordance withtherequirements oftheU.S. plans, accountingadvisoryservices,taxcomplianceandother in connectionwithdivestments,auditsofpensionandbenefit services includeprimarilyaccountingconsultationsandaudits for non-auditservicesperformedduring2007.Non-audit &YoungIn addition,Ernst chargedapproximately $10.2million to underwritersinconnectionwithdebtandequityofferings. delivered letters comfort and results financial quarterly of reviews pre-issuance policies, accounting new of application vided only by the Group auditor, such as assistance with the This classificationmayalsoincludeservicesthatcanbepro- statements. of ABBandtoissueanopiniononthelocalstatutoryfinancial to issueanopinionontheconsolidatedfinancialstatements performed eachfiscalyearnecessarytoallowtheauditor 2007. Auditservicesare definedasthestandard audit work prescribed auditamountedtoapproximately $25.8million in &YoungThe auditfeeschargedbyErnst forthelegally 12.3 AuditingandadditionalfeespaidtoGroup auditor

held undertheMIP 2004 grant 812,500 312,500 225,000 275,000

Number ofunvestedWARs 2006 grant(vesting2009) held undertheMIP 2,250,000 375,000 375,000 375,000 375,000 375,000 375,000

55 | ABB Annual Report 2007 Corporate governance Titel13. Information policy 14. Further information on corporate governance EinleitungstextABB, as a publicly traded company, is committed to communi- The list below contains references to additional information cating in a timely and consistent way to shareholders, potential concerning the corporate governance of ABB, which investors, financial analysts, customers, suppliers, the media can be accessed in the corporate governance section at: and other interested parties. ABB is required to disseminate www.abb.com/investorrelations material information pertaining to its businesses in a manner that complies with its obligations under the rules of the stock n Articles of Incorporation exchanges where its shares are listed and traded. n Regulations of the Board n CVs of the Board members ABB publishes an Annual Report consisting of two volumes, n CVs of the Group Executive Committee members (1) an “Operational and financial review” and (2) a “Sustainability n Regulations of the Governance, Nomination and review.” The “Operational and financial review” provides infor- ­Compensation Committee mation on human resources, technology, audited financial n Regulations of the Finance, Audit and Compliance ­ statements, business results and corporate governance. The Committee “Sustainability review” provides information on the company’s n ABB Code of Conduct performance in environmental management, social responsi­ n Comparison of ABB’s corporate governance practices bility and employee health and safety. with the New York Stock Exchange rules

Apart from this Annual Report, ABB also submits an annual report on Form 20-F to the SEC. In addition, ABB publishes its results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of the stock exchanges on which its shares are listed and traded. Press releases relating to financial results and material events are also filed with the SEC on Form 6-K. An archive containing Annual Reports, Form 20-F reports, quarterly results releases and related presentations

56 can be found on the ABB Web site at www.abb.com/investor- relations. The quarterly results press releases contain unaudited financial statements prepared in accordance with U.S. GAAP.

ABB’s official means of communication is the Swiss Official Gazette of Commerce (www.shab.ch). The invitation to the company’s annual general meeting is sent to registered shareholders by mail.

Inquiries may also be made to ABB Investor Relations: Telephone: +41 (0)43 317 7111 Fax: +41 (0)44 311 9817

ABB’s Web site is: www.abb.com 108 108 107 107 107 106 105 105 102 Table ofcontents Financial review 98 98 98 93 91 91 88 88 86 84 82 81 81 81 80 79 77 76 75 74 67 65 64 60 58 58 58 58 58

Note 11Goodwill andotherintangibleassets Note 10Property, plant andequipment,net Note Note Note Note Note Note Note Note Note ­Statements Notes totheConsolidatedFinancial Consolidated FinancialStatements Contingencies andretained liabilities Related andcertainotherparties Off-balance sheetarrangements and commitments Disclosures aboutcontractual obligations Cash flows Financial position Liquidity andcapitalresources Capital expenditures Discontinued operations Corporate Non-core andOtheractivities Robotics Process Automation Automation Products Power Systems Power Products Consolidated results ofoperations Exchange rates Acquisitions, investmentsanddivestitures Application ofcriticalaccountingpolicies Our businessdivisions Organizational structure History oftheABBGroup About ABB and prospects Operating andfinancial review

9 Financingreceivables, net 8 Inventories,net 7 6 Receivables,net 5 Financialinstruments 4 3 2 Significantaccountingpolicies 1 TheCompany Securitization investments Marketable securitiesandshort-term ­discontinued operations Acquisitions, divestmentsand 145 144 142 140 139 138 138 136 133 128 128 127 123 119 119 116 112 112 112 109 138 137 137 137 136 136 136 136 136 132 129 109 146 143 136 135

Investor information Report oftheStatutoryAuditors Proposed appropriation ofavailableearnings Note 16Otherinformation Note 15 Note 14Executivecommitteecompensation Note 13Board ofdirectors compensation Note 12Significantshareholders Note 11Credit facilityagreement Note 10Contingentliabilities Note Note Note Note Note Note Note Note Note Notes totheFinancial Financial StatementsofABBLtd,Zurich ABB LtdGroup Auditors’Reports over financial reporting controlReport ofmanagementoninternal Note 24 Note 23 pershareNote 22Earnings Note 21Stockholders’equity Note 20Share-based paymentarrangements Note 19Employeebenefits Note 18Otherliabilities Note 17Taxes Note 16Commitmentsandcontingencies Note 15Leases Note 14Provisions andother Note 13Debt Note 12

9 Stockholders’equity 8 Bonds 7 Provisions 6 Current liabilities 5 Participation 4 Long-termloans–group 3 Receivables 2 Cashandequivalents 1 General data Operating segmentandgeographic ­restructuring charges Transformer business andother ­accounted companies Investments inequitymethod committee members and members of the executive Share OwnershipofABBbyBoard ­Statements

57 | ABB Annual Report 2007 Financial review TitelOperating and financial review and prospects Einleitungstext

About ABB Organizational structure ABB is a global leader in power and automation technologies Our business is international in scope and we generate that improve performance and lower environmental impact for revenues in numerous currencies. We operate in approximately our utility and industrial customers. We provide a broad range 100 countries, and have structured our global organization into of products, systems, solutions and services that improve four regions: Europe; the Americas; Asia and the Middle East power grid reliability, increase industrial productivity and enhance and Africa (MEA). We are headquartered in Zurich, Switzerland. energy efficiency. Our focus on power transmission, distribution and power-plant automation serves electric, gas and water We manage our business based on a divisional structure. Our utilities, as well as industrial and commercial customers. We core business comprises five divisions: Power Products; Power also deliver automation systems that measure, control, protect Systems; Automation Products; Process Automation and and optimize plant applications across a full range of industries. Robotics. As of December 31, 2007, we employed approximately 112,000 people. In addition, certain of our operations that are not integral to our focus on power and automation technologies and that we History of the ABB Group are considering for sale, winding down or otherwise exiting The ABB Group was formed in 1988 through a merger between are classified as Non-core and Other, as are our corporate real Asea AB and BBC Brown Boveri AG. Initially founded in 1883, estate activities. Corporate comprises headquarters and Asea AB was a major participant in the introduction of electricity stewardship, corporate research and development (R&D) and into Swedish homes and businesses and in the development of other activities. Sweden’s railway network. In the 1940s and 1950s, Asea AB expanded into the power, mining and steel industries. Brown Our business divisions Boveri and Cie. (later renamed BBC Brown Boveri AG) was Power Products formed in Switzerland in 1891 and initially specialized in power Our Power Products division is a leading supplier of transmis-

58 generation and turbines. In the early to mid 1900s, it expanded sion and distribution products and services, serving electric, its operations throughout Europe and broadened its business gas and water utilities, as well as industrial and commercial operations to include a wide range of electrical engineering customers, with a broad range of products and services for activities. power transmission and distribution. It had approximately 32,000 employees as of December 31, 2007 and generated In January 1988, Asea AB and BBC Brown Boveri AG each $9.8 billion in revenues in 2007. contributed almost all of their businesses to the newly formed ABB Asea Brown Boveri Ltd, of which they each owned The division manufactures and sells a broad range of power 50 percent. In 1996, Asea AB was renamed ABB AB and BBC products, such as high- and medium-voltage switchgear and Brown Boveri AG was renamed ABB AG. In February 1999, apparatus, circuit breakers for various current and voltage the ABB Group announced a group reconfiguration designed to levels and power and distribution transformers. The division’s establish a single parent holding company and a single class primary customers are utilities, distributors, wholesalers, of shares. ABB Ltd was incorporated on March 5, 1999, under installers and original equipment manufacturers (OEMs) in the the laws of Switzerland. In June 1999, ABB Ltd became the utilities, transportation and power-generation industries. holding company for the entire ABB Group. This was accom- plished by having ABB Ltd issue shares to the shareholders of Power Systems ABB AG and ABB AB, the two publicly traded companies that Our Power Systems division is a market leader in the engineer- formerly owned the ABB Group. The ABB Ltd shares were ing of grid systems, power generation systems, network exchanged for the shares of those two companies, which, as a management solutions and substations. The division generated result of the share exchange and certain related transactions, revenues of $5.8 billion in 2007 and had approximately became wholly owned subsidiaries of ABB Ltd and are no 14,200 employees as of December 31, 2007. Power Systems longer publicly traded. ABB Ltd shares are currently listed on deliverables include network management, utility communi­ the SWX Swiss Exchange (traded on virt-x), the Stockholm cation, transmission and distribution substations, flexible alter- Stock Exchange and the New York Stock Exchange (in the form nating current transmission systems (FACTS), high-voltage of American Depositary Shares). direct current (HVDC) systems and automation and electrical solutions for power plants. This division also offers automation, control and protection systems and related services for power transmission and distribution networks, power plants and water pumping stations. Our FACTS and HVDC businesses offer maintenance programs tous. provide customers anopportunitytooutsource theirplant plant-wide, performance-based maintenancecontracts,which reliability analysis.Usingourfullserviceprogram wealsooffer improvement, safetyandhazardous operationanalysisand compliance, validation,benchmarking, plantperformance mization weoffer servicesforengineering,design,consulting, $6.4 as ofDecember31,2007andgeneratedrevenues of knowledge. Thedivisionhadapproximately 26,100employees zation solutionsandfeature industry-specificapplication services giveourcustomerscontrol-system andplant-optimi Our Process Automationdivision’s products, systemsand Process Automation integrators andelectricalpanelbuilders. distributors, wholesalers,machinebuilders,OEMs,system revenues comefrom salesthrough channelpartnerssuchas partners andend-usercustomers.Thelargemajorityof More thanonemillionproducts are shippeddailytochannel such asutilitiesandrailtransportation. for industrialapplications,butalsoinbuildingsandmarkets cessing andactuation.Themajorityoftheseproducts isused and control, energyconversion, dataacquisitionandpro- safety. Keyapplications includepowerdistribution,protection customers toimprove productivity, saveenergyandincrease and powerelectronics systems.Alltheseproducts help wiring accessories,instrumentation,drives,motors,generators switches, control products, DIN-railcomponents,enclosures, ucts andservicesincludinglow-voltageswitchgear, breakers, The AutomationProducts divisionoffers awiderange ofprod- in more than100countries. generated $8.6billioninrevenues in2007,withsalesactivities mately 33,000peopleworldwideasofDecember31,2007and and buildingperformance.Thisbusinessemployedapproxi- turing sitesin50countriescreating products thatimprove plant 170,000 different products andhasmore than100manufac- Our AutomationProducts divisionmanufactures approximately Automation Products industries. This divisionsellsprimarilytoutilitiesandpowergeneration supported byourpowersemiconductorandcablefactories. transmission capacityandstabilityinpowernetworksare technologically advancedsolutionsdesignedtoincrease remote monitoring,trainingandupgrades.Forassetopti product lifecyclesupport,weoffer fieldservices,spare parts, minerals, pulpandpaper, chemicalsandpharmaceuticals.For munication. Marketsservedincludeoilandgas,metals and assetoptimization,analyticalmeasurement andtelecom- automation andelectrification,energymanagement,process The divisiondeliversindustry-specificsolutionsforplant

billion in2007. ­ ­ material handling.Thedivisiondevelopsstandardized manu industries, inadditiontoapplicationsfoundry, packagingand tending. Key markets include the automotive and manufacturing facturing solutionsforuseinassembly, finishingandmachine Our Roboticsdivisionoffers robots, servicesandmodular manu- Robotics distributors, systemintegratorsandOEMs. delivers stand-alonecontrol systemproducts soldthrough cation systemsforthemarineindustry. Inaddition,thedivision solutions forturbocharging,aswellpropulsion andelectrifi- The Process Automationdivisionalsodeliversspecialized We haveresearch operationsineight countries:theUnited nologies and in developing cross-divisional technology platforms. partners tosupportourdivisions inadvancingrelevant tech- ogies andcollaborateswithuniversities andotherexternal divisions. Eachlaboratoryworks onnewandemergingtechnol- work ontechnologiesrelevant tothefuture ofourfivecore and theotherfocusedonautomation technologies,whichboth research laboratories,onefocusedonpowertechnologies Our R&Dactivitiesprimarilyincludetheoperationoftwoglobal relations andhumanresources. corporate communications,informationsystems,investor legal affairs andcompliance,riskmanagementinsurance, finance andtaxes,planningcontrolling,audit, internal bilities, suchasaccountingandfinancial reporting, corporate These activitiescoverstaff functionswithgroup-wide responsi- as corresponding subsidiary operationsinvariouscountries. of ourcorporateheadquartersinZurich,Switzerland,aswell Headquarters andstewardship activitiesincludetheoperations 1,360 employeesasofDecember31,2007. R&D activitiesandotheractivities.Corporatehadapproximately Corporate comprisesheadquartersandstewardship activities, Corporate 2007. had approximately 330employeesasofDecember31, and billion $0.4 approximately of 2007 in revenues Other generated South Africathatare being considered forsale.Non-core and and three equityinvestments inColombia,IvoryCoastand and Other mainly consisted of real estate management activities in Morocco andIndia.Asof December31,2007,Non-core with thedivestmentofourequityinvestmentsinpowerplants In 2007,wecontinuedtowinddownourNon-core portfolio Non-core andOther 31, 2007andgenerated$1.4billionofrevenues in2007. division hadapproximately 4,900employeesasofDecember ponents toautomobilebodies)andpowertrainassembly. The body-in-white systems(automationforaddingcom- manufacturers forpress automation,paintprocess automation, and finishingprovides packagedsystemstoautomobile facturing cellsformachinetending,welding,cutting,painting ­

59 | ABB Annual Report 2007 Financial review TitelStates of America (United States); Sweden; Switzerland; method should no evidence for the fair value of the delivered EinleitungstextPoland; China; Germany; Norway and India. item be available, provided that such element meets the criteria for treatment as a separate unit of accounting. The allocation Application of critical accounting policies of the sales price between delivered elements and undelivered General elements might affect the amount of revenue recorded in We prepare our Consolidated Financial Statements in accor- certain periods, but would not change the total revenue recog- dance with United States Generally Accepted Accounting nized on the contract. Principles (U.S. GAAP). Revenues from contracts that contain customer acceptance The preparation of our financial statements requires us to provisions are deferred, in whole or in part, until customer make estimates and judgments that affect the reported acceptance occurs, or we have demonstrated the customer- amounts of assets, liabilities, revenues and expenses and the specified objective criteria are satisfied or the contractual related disclosure of contingent assets and liabilities. We acceptance period has lapsed. evaluate our estimates on an ongoing basis, including, but not limited to, those related to: costs expected to be incurred to These revenue recognition methods require the collectibility complete projects; costs of product guarantees and warran- of the revenues recognized to be reasonably assured. When ties; provisions for bad debts; recoverability of inventories, recording the respective accounts receivable, allowances investments, fixed assets, goodwill and other intangible assets; are calculated to estimate those receivables that will not be income tax related expenses and accruals; provisions for collected. These reserves assume a level of default based restructuring; gross profit margins on long-term construction- on historical information, as well as knowledge about specific type contracts; pensions and other postretirement benefit invoices and customers. The risk remains that a different assumptions and contingencies and litigation. We base our number of defaults will occur than originally estimated. As estimates on historical experience and on various other such, the amount of revenues recognized might exceed assumptions that we believe to be reasonable under the or fall below that which will be collected, resulting in a change circumstances, the results of which form the basis for making in earnings in the future. The risk of deterioration is likely judgments about the carrying values of assets and liabilities to increase during periods of significant negative industry or

60 that are not readily apparent from other sources. Actual results economic trends. may differ from these estimates under different assumptions or conditions. Revenues under long-term contracts are recognized using the percentage-of-completion method of accounting pursuant We deem an accounting policy to be critical if it requires an to Statement of Position 81-1, Accounting for Performance accounting estimate to be made based on assumptions about of Construction-Type and Certain Production-Type Contracts matters that are highly uncertain at the time the estimate is (SOP 81-1). We principally use the cost-to-cost or delivery made and if different estimates that reasonably could have events method to measure progress towards completion on been used, or if changes in the accounting estimates that are contracts. Management determines the method used by type reasonably likely to occur periodically, could materially impact of contract based on its judgment as to which method best our Consolidated Financial Statements. We also deem an measures progress towards completion on contracts. accounting policy to be critical when the application of such policy is essential to our ongoing operations. We believe the The percentage-of-completion method of accounting involves following critical accounting policies reflect significant estimates the use of assumptions and projections, principally relating to and assumptions that we use in preparing our Consolidated future material, labor and overhead costs. As a consequence, Financial Statements. These policies should be considered there is a risk that total contract costs will exceed those we when reading our Consolidated Financial Statements. originally estimated and the margin will decrease. This risk increases if the duration of a contract increases or if the project Revenues and cost of sales recognition is a fixed-price turnkey project, because there is a higher We generally recognize revenues when persuasive evidence probability that the circumstances upon which we originally of an arrangement exists to sell products and/or services, developed estimates will change, resulting in increased costs the price is fixed or determinable, collectibility is reasonably that we may not recover. Factors that could cause costs to assured and upon transfer of title, including the risks and increase include: rewards of ownership, or upon the rendering of services. n unanticipated technical problems with equipment supplied When multiple elements, such as products and services, are or developed by us which may require that we incur addi- contained in a single arrangement or in related arrangements tional costs for us to remedy; with the same customer, we allocate revenue to each element n changes in the cost of components, materials or labor; based on its relative fair value or according to the residual n n n n n Consolidated BalanceSheets. liabilities heldforsaleandindiscontinued operationsinour the related assetsandliabilitiestobeclassifiedas or tions inourConsolidatedIncome Statementsandrequires discontinued operationsbelowincomefrom continuingopera- of certaindivestmentsandabandonments,tobeclassified as SFAS 144requires therevenues and results, netoftaxes, thereby improving thepredictive valueoffinancialstatements. by divestmentsortheclosure orabandonmentofbusinesses, data tobeavailableinvestorswithoutthedistortionscreated The purposeofSFAS 144istoallowhistoricallycomparable than anentire reporting segment,whencertaincriteriaare met. operations toincludedisposaltransactionsinvolvingless Assets (SFAS 144),broadened thepresentation ofdiscontinued Accounting fortheImpairmentorDisposalofLong-Lived Statement ofFinancialAccountingStandards (SFAS) No. certain businessesthatare notpartofourcore business. In accordance withourstrategy, wehavesoldandplantosell Accounting fordiscontinuedoperations application ofrevenue recognition methodsmustbemade. As aresult oftheabovepolicies, judgmentintheselectionand test orsimilarevent. mance specificationsdemonstratedinafactoryacceptance that isacceptancebythecustomer, compliancewithperfor contract methodare recognized uponsubstantialcompletion as required bySOP81-1.Revenuesunderthecompleted- ful are accountedforunder thecompleted-contractmethod made orforwhichinherent hazards makeestimatesdoubt- tracts forwhichreasonably dependableestimatescannotbe Short-term construction-typecontractsorlong-termcon- related contractrevenues. based upontheanticipatedexcessofcontractcostsover are recognized intheperiodwhentheyare identifiedandare of eachproject. Additionally, lossesonlong-termcontracts to datereflect thecurrent estimatesofthestage completion changes inestimatescumulatively, recorded revenue andcosts the changesinestimatesare determined.Byrecognizing Weearnings. recognize thesechangesintheperiodwhich revisions toestimatedcosts,currentandanticipated earnings a regular basisbetweenbalancesheetdates,mayresult in Changes inourinitialassumptions,whichwereview on

suppliers’ orsubcontractors’failure toperform; project modificationscreating unanticipatedcosts; approvals; difficulties inobtaining required permitsor governmental delays causedbyunexpectedconditionsorevents. the project inaccordance withagreed upontimelimitsand penalties incurred asaresult ofnotcompletingportions of

144, - projected lossesofanentity. triggering events,suchasadecision todivestabusinessor accordingly testforimpairmentupontheoccurrence ofcertain We review intangibleassets inaccordance withSFAS 144and loss equaltothedifference. exceeds itsimpliedfairvalue,thenwerecord animpairment goodwill. Ifthecarryingvalueofareporting unit’s goodwill will andcompare ittothecarryingvalueofreporting unit’s to determinetheimpliedfairvalueofreporting unit’s good- of thereporting unit,thenwemustperformthesecondstep assets assignedtothereporting unitexceedsthefairvalue no furthertestingisperformed.Ifthecarryingvalueofnet and impaired not is goodwill unit, that to assigned assets value ofthereporting unit exceeds thecarryingvalueofnet fair the If value. market fair determinable readily a is there flow modeltodeterminethefairvalueof reporting units,unless below thesereportable segments. We useadiscountedcash divisions where ourreporting unitsare represented bythelevel except inourPowerProducts andProcess Automation geographic data”toourConsolidatedFinancialStatements, segments identifiedin“Note24Operatingsegmentand its carryingvalue.Ourreporting unitsrepresent thereportable first step,wecompare the fairvalueofeach reporting unitto two-step impairmenttestbeperformedongoodwill.Inthe Other IntangibleAssets(SFAS 142).SFAS 142requires thata recoverable inaccordance withSFAS No. indicate thecarryingvalueofanintangibleassetmaynotbe and additionallywhenevereventsorchangesincircumstances We review goodwillforimpairmentannuallyasofOctober Goodwill andotherintangibleassets Financial Statements. divestments anddiscontinuedoperations”toourConsolidated see “Discontinuedoperations”and“Note3Acquisitions, For amore detaileddescriptionofourdiscontinuedoperations, permitted byU.S.GAAP. within cashfrom operating,investingandfinancingactivities,as together withcontinuingoperationsintheindividuallineitems included thebusinessesclassifiedasdiscontinuedoperations In theConsolidatedStatementsofCashFlows,wehave components thereof. on ourincomefrom continuingoperationsandtheindividual from discontinuedoperationsmayhaveamaterialimpact be classifiedasadiscontinuedoperation.Reclassificationtoor may affect ourinterpretation astowhetherabusiness should classification. Changesinplans regarding thesaleof abusiness significant interpretation is required to determine the appropriate SFAS 144requires certaincriteriabemet.Incases, operation, discontinued a as business a classify to order In

142, Goodwilland

1

61 | ABB Annual Report 2007 Financial review TitelCash flow models used in evaluating impairments are dependent The amount of pension and other postretirement plan liabilities Einleitungstexton a number of factors including estimates of future cash at December 31, 2007 and 2006, recognized in accumulated flows and other variables and require that we make significant other comprehensive loss, net of tax, was $486 million and estimates and judgments, involving variables such as sales $629 million, respectively. volumes, sales prices, sales growth, production and operating costs, capital expenditures, market conditions and other We made non-cash contributions of $49 million and $449 million economic factors. Further, discount rates used in the dis- of available-for-sale debt securities to certain of our pension counted cash flow model to calculate the fair value require the plans in Germany in 2007 and 2006, respectively. We also determination of variables such as the risk free rate and the made cash contributions of $248 million and $199 million to equity market risk premium. We base our fair value estimates other pension plans and $12 million and $18 million to other on assumptions we believe to be reasonable, but which are benefit plans during 2007 and 2006, respectively. We anticipate unpredictable and inherently uncertain. Actual future results contributing a total of approximately $200 million to our pension may differ from those estimates. Additionally, we consider our plans and $18 million to our postretirement benefit plans, market capitalization on the date we perform the analysis. respectively, in 2008, to meet minimum statutory requirements. We may make additional discretionary pension contributions We record any related impairment charge in other income during 2008. (expense), net, in our Consolidated Income Statement, unless it is related to a discontinued operation, in which case the charge At December 31, 2007 and 2006, in accordance with SFAS is recorded in income (loss) from discontinued operations, net No. 158, Employers’ Accounting for Defined Benefit Pension of tax. and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 123(R) (SFAS 158), we Pension and postretirement benefits recorded in our Consolidated Balance Sheets a prepaid asset As more fully described in “Note 19 Employee benefits” to of $380 million and $373 million, respectively and a non-current our Consolidated Financial Statements, we operate pension liability of $631 million and $809 million, respectively. At Decem- plans that cover a large percentage of our employees. We ber 31, 2007 and 2006, we recorded in our Consolidated use actuarial valuations to determine our pension and post­ Balance Sheets current accrued pension costs of $22 million

62 retirement benefit costs and credits. The amounts calculated and $13 million, respectively, in relation to pension benefits depend on a variety of key assumptions, including discount and $18 million and $18 million, respectively, in relation to other rates and expected return on plan assets. Under U.S. GAAP benefits. Additionally, at December 31, 2007 and 2006, we we are required to consider current market conditions in recorded in our Consolidated Balance Sheets non-current selecting these assumptions. In particular the discount rates accrued pension costs of $335 million and $473 million, respec- are reviewed annually based on changes in long-term, highly tively, in relation to pension benefits and $197 million and rated corporate bond yields. Decreases in the discount $204 million, respectively, in relation to other benefits. rates result in an increase in the projected benefit obligation and in pension costs. The expected return on plan assets is reviewed regularly and considered for adjustment annually based on current and Under U.S. GAAP, we accumulate and amortize over future expected asset allocations and represents the long-term return periods actual results that differ from the assumptions used. expected to be achieved. Decreases in the expected return on Therefore, actual results generally affect our recognized plan assets result in an increase to pension costs. An increase expense for pension and other postretirement benefit obliga- or decrease of 0.5 percent in the expected long-term rate of tions in future periods. asset return would have decreased or increased, respectively, the net periodic benefit cost in 2007 by approximately The funded status, which can increase or decrease based on $45 million. the performance of the financial markets or changes in our assumptions regarding rates, does not represent a mandatory Holding all other assumptions constant, a 0.25 percentage short-term cash obligation. Instead, the funded status of a point decrease in the discount rate would have increased the pension plan is the difference between the projected benefit PBO related to our pension plans by approximately $260 obligation to employees (PBO) and the fair value of the plan million, while a 0.25 percentage point increase in the discount assets. The funded status of our pension plans as of Decem- rate would have decreased the PBO related to our pension ber 31, 2007, was $22 million overfunded compared to an plans by approximately $252 million. underfunding as of December 31, 2006, of $115 million. Our other postretirement plans were underfunded by $215 million The determination of pension expense and pension funding is and $222 million as of December 31, 2007 and 2006, based on a variety of rules and regulations. Changes in these ­respectively. rules and regulations could impact the calculation of pension plan liabilities and the valuation of pension plan assets. They provisions andaccruals. could bedifferent than thatwhichisreflected in our incometax the finaldeterminationoftax audits andany related litigation reasonable andthatappropriate taxreserves have beenmade, circumstances. Althoughwebelievethatourtaxestimatesare (OECD) guidelinesandourbestknowledgeofthefacts law, OrganisationforEconomicCo-operationandDevelopment technical meritsofthecontingency, includingapplicabletax contingencies, includingpotentialtaxaudits,onthebasisof the regularly subjecttoauditbytaxauthorities.We provide fortax We operateinnumerous taxjurisdictionsand,asaresult, are estimates. as compared totheactual taxableincome,mayaffect these tax laws,aswelldifferences intheprojected taxableincome operations, netoftax.Unforeseen changesintaxratesand case thechangeisrecorded inincome(loss)from discontinued unless thechangerelates to discontinuedoperations,inwhich provision fortaxesintheConsolidated IncomeStatements a period,werecognize the changeintheallowancewithin ences. To theextentweincrease ordecrease thisallowancein expected timingofthereversals ofexistingtemporarydiffer historical losses,projected future taxableincomeandthe recoverability and establishavaluationallowancebasedupon will berealized. We regularly review our deferred tax assets for deferred taxassetwhenit is more likelythannotthattheasset when thedifferences are expectedtoreverse. We recognize a enacted taxratesandlawsthatare expectedtobeineffect assets andliabilities.Deferred taxesare measured usingthe differences betweenthefinancial reporting andthetaxbasesof mine deferred taxassetsand liabilitiesbasedontemporary the assetandliabilitymethod.Underthismethod,wedeter- in whichweoperate.We accountfordeferred taxes by using required toestimateincometaxesineachofthejurisdictions In preparing ourConsolidatedFinancialStatements,weare Taxes thereafter. to 4.96percent perannumby2017andtoremain at thatlevel to be10.72percent perannumfor2008,graduallydeclining health care costs,wehaveassumedhealthcare cost increases contributions adjustedannually. Forpurposesofestimatingour health care plansare generallycontributorywithparticipants’ We havemultiplenon-pensionpostretirement benefitplans.Our under existingrules. accelerate thepensionfundingascompared tothefunding change thecurrent rules.Mostoftheseproposals would legislative proposals beingconsidered that,ifenacted, would fund ourpensionplans.There are currently anumberof statement disclosure andaccelerateincrease the needto may alsoresult inhigherpensioncosts,additionalfinancial - result intheidentificationofanotherentityasprimary residual returnsmaterially different from thoseprojected could the probability ofcashflows. Expectedlossesandexpected us touseassumptions,includingassumptionsregarding returns tobegeneratedbythatVIE.Theseprojections require to makeprojections ofexpected lossesandexpectedresidual In determiningtheprimarybeneficiaryofaVIE,weare required consolidation policiesinaccordance withU.S.GAAP. where weare nottheprimarybeneficiary, weapplyourexisting we are considered theprimarybeneficiary. ForthoseVIEs we consolidateourinterest invariableinterest entities(VIEs)if No. solidation ofVariable InterestEntities–aninterpretationofARB Additionally, pursuant toFASB Interpretation No. Financial Statements. which couldhaveamaterialimpactonourConsolidated method betweenconsolidationorthecostequitymethods, significant influenceoveranentitycouldchangetheaccounting Material changesinourabilitytoretain control andexercise as wellourownershipinterests intheentity. and ourabilitytoexercise significantinfluenceovertheentity, retain andexercise control through ourdecision-makingpowers appropriate. Thisdeterminationisbaseduponourabilityto consolidation orthecostequitymethodofaccountingis ventures andothertypesofinvestmentstodeterminewhether We evaluateourinvestmentsinoperatingcompanies,joint Consolidation of anytypemaychangeinthefuture duetonewdevelopments. estimated. Therequired amountofprovisions forcon been incurred andtheamountoflosscanbereasonably likely thannotthatanassethasbeenimpaired oraliabilityhas contingency beaccruedasachargetoincomeifitismore tax contingenciesrequires thatanestimatedlossfrom a Income Taxes (FIN48)asofJanuary1,2007,accountingfor (FASB) Interpretation No. theintroduction ofFinancialAccountingStandardsWith Board ranges ofprobable losses.Adetermination oftheprovision judgments oroutcomes tothesematters,as well aspotential matters. We are required to assess the likelihood of any adverse inquiries, environmental, labor, product, regulatory andother we are subjecttoproceedings, lawsuitsandotherclaims and contingencies”toourConsolidated FinancialStatements, gencies andretained liabilities”andin“Note16Commitments As more fullydescribedintheSectionbelowentitled“Contin- Contingencies Financial Statements. couldhaveamaterial impactonourConsolidated which inturn an impactonourdeterminationoftheprimarybeneficiary, ownership betweenthepartiesinvolvedinVIEcouldhave ­beneficiary. Achangeinthecontractualarrangementsor

51 (FIN46)andrevised Interpretation No.

48, AccountingforUncertaintyin

46 (FIN46(R)),

46, Con ­tingencies ­

63 | ABB Annual Report 2007 Financial review Titelrequired, if any, for these contingencies is made after analysis of related assets and liabilities differently without having to apply Einleitungstexteach individual issue, often with assistance from both internal complex hedge accounting provisions. SFAS 159 is expected and external legal counsel and technical experts. The required to expand the use of fair value measurement. SFAS 159 is amount of a provision for a contingency of any type may effective for us as of the beginning of the first quarter of 2009. change in the future due to new developments in the particular We will consider the adoption of SFAS 159 for new financial matter, including changes in the approach to its resolution. transactions entered into after December 31, 2007.

We provide for anticipated costs for warranties when we rec- In December 2007, the Financial Accounting Standards Board ognize revenues on the related products or contracts. Warranty issued Statement of Financial Accounting Standards No. 160, costs include calculated costs arising from imperfections in Noncontrolling Interests in Consolidated Financial Statements – design, material and workmanship in our products. Although an amendment of ARB No. 51 (SFAS 160) and revised State- we generally make assessments on an overall, statistical basis, ment of Financial Accounting Standards No. 141, Business we make individual assessments on contracts with risks Combinations (SFAS 141(R)). The statements require most resulting from order-specific conditions or guarantees. There is assets, liabilities, noncontrolling interests and goodwill acquired a risk that actual warranty costs may exceed the amounts in a business combination to be recorded at full fair value provided for, which would result in a deterioration of earnings in and require noncontrolling interests (previously referred to as the future when these actual costs are determined. minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncon­ New accounting pronouncements trolling interest holders. Both statements are effective for us in In September 2006, the Financial Accounting Standards Board 2009 and earlier adoption is prohibited. We will apply SFAS issued SFAS No. 157, Fair Value Measurements (SFAS 157). 141(R) to business combinations occurring after the effective SFAS 157 defines fair value, establishes a framework for date. SFAS 160 will be applied prospectively, with the exception measuring fair value and enhances fair value measurement of the presentation and disclosure requirements which will be disclosure. SFAS 157 does not require any new fair value made on a retrospective basis, to all noncontrolling interests, measurements and eliminates inconsistencies in guidance including any that arose before the effective date. After adop- found in various prior accounting pronouncements. SFAS 157 tion, noncontrolling interests of $592 million and $451 million

64 provides a single definition for fair value that is to be applied in 2007 and 2006, respectively, will be classified as a part consistently for all accounting applications (excluding require- of stockholders’ equity. Income attributable to minority interest ments of other standards) and also generally describes and of $244 million and $179 million in 2007 and 2006, respec- prioritizes according to reliability the methods and inputs used tively, will be excluded from net income, although such income in valuations. In February 2008, the FASB issued Staff Position will continue to be deducted to calculate earnings per share. FSP No. 157-b, the Effective Date of FASB Statement No. 157 Purchases and sales of minority interest will be reported in (FSP 157-b). FSP 157-b delays the effective date of SFAS 157 equity. for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the Acquisitions, investments and divestitures financial statements on a recurring basis (at least annually), until Acquisitions and investments the beginning of the first quarter of 2009. We are currently During 2007, 2006 and 2005, we invested $54 million, evaluating the impact of adopting SFAS 157 on our fair value $3 million and $27 million, respecitvely, in 14, 11 and 22 new measurements with respect to those nonfinancial assets and businesses, joint ventures or affiliated companies, respectively. nonfinancial liabilities that are subject to delayed application under FSP 157-b. With respect to fair value measurement of Divestitures of businesses, joint ventures and affiliated financial instruments, the adoption of SFAS 157 is not expected companies to have a significant impact on our Consolidated Financial In 2007, 2006 and 2005, we received (paid) cash, net of cash Statements. However, the resulting fair values calculated under disposed, from sales of businesses, joint ventures and affiliated SFAS 157 after adoption may be different than the fair values companies of $1,142 million, $27 million and ($97) million, that would have been calculated under previous guidance. respectively. In relation to these transactions, we recognized gains in 2007, 2006 and 2005, within other income (expense), In February 2007, the Financial Accounting Standards Board net, of $11 million, $3 million and $20 million, respectively. issued SFAS No. 159, The Fair Value Option for Financial We also recognized gains and losses related to the sale of Assets and Financial Liabilities – Including an amendment of operations in 2007, 2006 and 2005, within income (loss) from FASB Statement No. 115 (SFAS 159). SFAS 159 permits discontinued operations, net of tax, of $530 million, ($83) million entities to choose to measure many financial instruments and and ($16) million, respectively. certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring These businesseshadrevenues of$80 Mexico forasalespriceof$20millionandgain$0million. In 2007,wesoldourPowerLinesbusinessesinBraziland included incontinuingoperations. tion resulted inagainofapproximately $38millionwhichis $4 million,$9millionand$23respectively. Thetransac- for theyearsendedDecember31,2007,2006and2005,was 2005, respectively. Ourshare ofthepre-taxNeyveli earnings $62 pre-tax ofJorfLasfarwas$21million,$67millionand earnings Limited (Neyveli),apowerplantinIndia.Ourshare ofthe Morocco andourstakein S.T.CMS ElectricCompanyPrivate Energy CompanyS.C.A.(JorfLasfar),apowerplantbasedin In May2007,wecompletedthesaleofourstakeinJorfLasfar (loss) from discontinuedoperations, netoftax. of $47millionandaloss$2million,recorded inincome Up tothedivestmentdatein2007,businesshadrevenues proceeds whichwere expectedfrom thesaleofbusiness. 2006, $67millionwasanimpairmentchargebaseduponthe discontinued operations,netoftax.Ofthelossreported for and $20million,respectively, recorded inincome(loss)from 2005, respectively. Lossesfor2006and2005were $65million $354 million for the years ended December operations. Thebusinesshadrevenues of$286 million and business inGermany, whichwasreported indiscontinued In April2007,wecompletedthesaleofourBuildingSystems net oftax. lion, recorded inincome(loss)from discontinuedoperations, net oftax.We hadagainonthesaleofLummus$530mil- lion, recorded inincome(loss)from discontinuedoperations, Lummus hadrevenues of$870millionandincome$9mil- operations, netoftax.Uptothedivestmentdatein2007, respectively, recorded inincome(loss)from discontinued Income for2006and2005was$9million$36 the yearsendedDecember31,2006and2005,respectively. Lummus hadrevenues of$985millionand$929for received netcashproceeds ofapproximately $810million. (Lummus) toChicagoBridge&Iron Company(CB&I).ABB In November2007,wecompletedthesaleofLummusGlobal Divestitures in2007 the yearsended December31,2006and2005, respectively. The businesshad revenues of$95million and$76 In December2006,wesoldour CablebusinessinIreland. Divestitures in2006 discontinued operations,netof tax. reported alossof$3millionrecorded inincome (loss) from in 2007,thesebusinesseshadrevenues of$39 discontinued operations,netoftax.Uptothedivestmentdate (loss) in2006and2005wasrecorded inincome(loss)from ended December31,2006and2005,respectively. Income and income(loss)of($4)million$3fortheyears

million fortheyearsendedDecember31,2007,2006and

million and$84

31, 2006and

million and

million for million, of $1 The businesshadrevenues of$41millionin2005andaloss In 2005,wecompletedthesaleofourFoundrybusiness. of tax. recorded inincome(loss)from discontinuedoperations,net $14 millionrelated tothegain onthesaleofbusiness, operations, netoftax,in2005.Theincome2005includes of $15 This businesshadrevenues of$26millionaswellincome In 2005,wesoldourControl Valves business inJapan. principally related tothelossonsaleofbusiness. million inincome(loss)from discontinuedoperations,netoftax, our Structured Financebusiness.We recorded alossof$28 mately $300millionandwasthelastremaining majorentityof business heldleaseandloanfinancial receivables ofapproxi- business inFinland.Atthetimeofsale,LeasePortfolio Structured FinancebusinessbydivestingourLeasePortfolio In November2005,wecompletedthesaleofourremaining Divestitures in2005 income (loss)from discontinuedoperations,netoftax. ended December31,2006and,2005,respectively, recorded in $18 millionandalossof($1)$0fortheyears South Africa.Thesebusinesseshadrevenues of$8millionand In 2006,wesoldourPowerLinesbusinessesinVenezuela and loss reported in2006related tothesaleofbusiness. tinued operations,netoftax.Themajoritythe$48million respectively andwere recorded inincome(loss)from discon- Losses for2006and2005were $48 n n n between currencies mayaffect: operations. Asaconsequence, movementsinexchangerates liabilities are denominatedinothercurrencies duetoourglobal A significantamountofour revenues, expenses,assetsand We report ourfinancial results inU.S.dollars(USDor$). Exchange rates investment. other income(expense),net,of$4millionrelated tothis power project inBrazilfor$46millionandrecorded alossin In 2005,wealsosoldourequityinterest intheTermobahia income (loss)from discontinued operations,netoftax. of $27millionandaloss$12in2005,recorded in in Nigeria,ItalyandGermany. Thesebusinesseshadrevenues In 2005,wecompletedthesaleofourPowerLinesbusinesses operations, netoftax.

the carryingvalue ofourassetsandliabilities. the comparabilityofourresults betweenperiodsand our profitability;

million recorded inincome(loss)from discontinued

million recorded inincome(loss)from discontinued

million and$15million,

65 | ABB Annual Report 2007 Financial review TitelWe translate non-USD denominated results of operations, In 2007, approximately 88 percent of our consolidated Einleitungstextassets and liabilities to USD in our Consolidated Financial revenues were reported in currencies other than USD. Of that Statements. Balance sheet items are translated to USD using amount, the following percentages were reported in the year-end currency exchange rates. Income statement and cash following currencies: flow items are translated to USD using the average currency exchange rate over the relevant period. n Euro, approximately 29 percent; n Chinese renminbi, approximately 9 percent; Increases and decreases in the value of the USD against other n Swedish krona, approximately 5 percent; currencies will affect the reported results of operations in n Swiss franc, approximately 5 percent and our Consolidated Income Statements and the value of certain n Indian rupee, approximately 5 percent. of our assets and liabilities in our Consolidated Balance Sheets, even if our results of operations or the value of those assets In 2007, approximately 90 percent of our cost of sales and and liabilities have not changed in their original currency. selling, general and administrative expenses were reported Because of the impact foreign exchange rates have on our in currencies other than USD. Of that amount, the following reported results of operations and the reported value of our percentages were reported in the following currencies: assets and liabilities, changes in foreign exchange rates could significantly affect the comparability of our reported results n Euro, approximately 34 percent; of operations between periods and result in significant changes n Chinese renminbi, approximately 7 percent; to the reported value of our assets, liabilities and shareholders’ n Swedish krona, approximately 9 percent; equity, as has been the case during the period from 2005 n Swiss franc, approximately 9 percent and through 2007. n Indian rupee, approximately 3 percent.

While we operate globally and report our financial results in We also incur expenses other than cost of sales and selling, USD, because of the location of our significant operations and general and administrative expenses in various currencies. because our headquarters are in Switzerland, exchange rate movements between the USD and both the euro (EUR) and the The results of operations and financial position of many of our

66 Swiss franc (CHF) are of particular importance to us. subsidiaries outside of the United States are reported in the currencies of the countries in which those subsidiaries reside. The exchange rates between the USD and the EUR and the We refer to these currencies as “local currencies.” Local USD and the CHF as of December 31, 2007, 2006 and 2005, currency financial information is then translated into USD at were as follows: applicable exchange rates for inclusion in our Consolidated Financial Statements. Exchange rates into $ 2007 2006 2005 EUR 1.00 1.47 1.32 1.18 The discussion of our results of operations below provides CHF 1.00 0.89 0.82 0.76 certain information with respect to orders, revenues, earnings before interest and taxes and other measures as reported in The average exchange rates between the USD and the EUR USD (as well as in local currencies). We measure period-to- and the USD and the CHF for the years ended December 31, period variations in local currency results by using a constant 2007, 2006 and 2005, were as follows: foreign exchange rate for all periods under comparison. Differences in our results of operations in local currencies as Exchange rates into $ 2007 2006 2005 compared to our results of operations in USD are caused EUR 1.00 1.37 1.25 1.25 exclusively by changes in currency exchange rates. CHF 1.00 0.84 0.80 0.81 While we consider our results of operations as measured in When we incur expenses that are not denominated in the local currencies to be a significant indicator of business same currency as the related revenues, foreign exchange rate performance, local currency information should not be relied fluctuations could adversely affect our profitability. To mitigate upon to the exclusion of U.S. GAAP financial measures. the impact of exchange rate movements on our profitability, it is Instead, local currencies reflect an additional measure of our policy to enter into forward foreign exchange contracts to comparability and provide a means of viewing aspects of our manage the foreign exchange risk of our operations. operations that, when viewed together with the U.S. GAAP results and our reconciliations, provide a more complete understanding of factors and trends affecting the business. Because local currency information is not standardized, it may not be possible to compare our local currency information to other companies’ financial measures that have the same or a 2007 were recorded byourPowerSystemsdivisionand31 or services.Approximately 55percent ofthelargeorders in orders from third parties involving at least $15 million of products we recorded in2007were “largeorders,” whichwedefineas backlog. Approximately 17 percent ofthevaluetotalorders from ourorders atanypointintimeisrepresented byourorder The undiscountedvalueofrevenues weexpecttogenerate and returnsofdelivered goods. scope ofproducts orservices ordered, cancellationsoforders up tothedateofcontractualperformance,changesin the period,mayincludechangesinestimatedorder price the aggregate increase ordecrease theorders reported during the beginningofperiod.Theseadjustments,whichmayin value oforders received duringtheperiodandorders existingat adjusted toreflect theaggregate valueofanychanges tothe the sumofvalueallorders received duringthe period, value of orders received during a given period of time represents discounts andexcludinganyvalueaddedorsalestax.The of thegoodsorservicessubjecttoorder, lessanytrade value ofrevenues thatweexpecttorecognize following delivery reported valueofanorder corresponds totheundiscounted be supplied,thedeliveryscheduleandpaymentterms.The a minimum,thepriceandscopeofproducts orservicesto agreement hasbeenconcludedwiththecustomercovering,at We bookandreport anorder whenabindingcontractual Orders rely onanysinglefinancialmeasure. statements andpubliclyfiled reports intheirentirety andnotto similar title.We encourageinvestorstoreview ourfinancial result intheeliminationoforder. can reduce ordelayanyfuture revenues from theorder, ormay cancelled, delayedormodifiedbythecustomer. Theseactions ating performance.Orders thathavebeenplacedcanbe cannot beusedtoaccuratelypredict future revenues oroper- booked. However, theleveloflargeorders andorders generally, large orders result inrevenues inperiodsaftertheorder is projects thatcantakemonthsoryearstocompleteandmany that order. Portionsofourbusinessinvolveorders forlong-term included inanyparticularorder canbecomplexanduniqueto The leveloforders fluctuates from yeartoyear. Arrangements than $15millionofproducts orservices. less for parties third from orders as define we which orders,” remaining portionoftotalorders recorded in2007was“base The 2007. during recorded orders large total the of remainder Automation Products and Robotics divisionsaccountforthe cent inourProcess Automation division.ThePowerProducts,

per-

Consolidated results ofoperations and otherincome(expense),net,from ourrevenues. our costofsales,selling,generalandadministrativeexpenses margin). EBITistheamountresulting from thesubtraction of taxes (EBIT)andEBITasapercentage ofrevenues (EBIT on orders received, revenues,before earnings interest and We evaluatetheperformanceofourdivisionsprimarilybased Performance measures Basic earnings (loss)pershare:Basic earnings Net income(loss) change, netoftax Cumulative effect ofaccounting operations, netoftax Income (loss)from discontinued accounting change before cumulativeeffect of Income from continuingoperations Minority interest Provision fortaxes expenses Net interest andotherfinance beforeEarnings interest andtaxes Other income(expense),net expenses Selling, generalandadministrative Gross profit Cost ofsales Revenues Net income change, netoftax Cumulative effect ofaccounting operations, netoftax Income (loss)from discontinued accounting change before cumulativeeffect of Income from continuingoperations (loss)pershare:Diluted earnings Net income change, netoftax Cumulative effect ofaccounting operations, netoftax Income (loss)from discontinued accounting change before cumulativeeffect of Income from continuingoperations Order backlog Orders ($ millions,exceptpershare data) 31, YearDecember ended (1) asofDecember31

(1) (20,215) 29,183 22,715 34,348 (4,975) 3,757 3,171 4,023 8,968 2007 1.63 0.25 1.38 1.66 0.26 1.40 (244) (595) 586 (13) 30 – – – (16,537) 23,281 15,829 27,048 (4,326) 1,390 1,532 2,557 6,744 2006 (0.06) (0.07) 0.63 0.69 0.65 0.72 (142) (179) (686) (160) 139 – – – (15,510) 20,964 11,096 22,364 (3,780) 1,711 5,454 2005 (0.06) (0.07) 0.00 0.00 0.36 0.42 0.36 0.43 (127) (126) (464) (254) 735 867 37 (5)

67 | ABB Annual Report 2007 Financial review TitelA more detailed discussion of the orders, revenues and EBIT In 2006, orders received increased by 21 percent (20 percent Einleitungstextfor our individual divisions and other businesses follows in the in local currencies). All divisions, except Robotics, reported sections below entitled “Power Products,” “Power Systems,” growth in the range of 21 percent to 28 percent in both USD “Automation Products,” “Process Automation,” “Robotics,” and in local currencies. Continuing the trend from 2005, both “Non-core and Other,” “Corporate” and “Discontinued opera- our Power Systems and Power Products divisions benefited tions.” Orders and revenues of our core divisions include from increasing customer investments in new power infrastruc- inter-divisional transactions which are eliminated in the Cor- ture, grid expansion and refurbishment projects. Order growth porate and inter-division eliminations line. in our Process Automation division was achieved across the board in the Oil and Gas, Marine, Minerals, Pulp and Paper and Orders Turbochargers businesses. In our Automation Products divi- Orders received sion, the growth was primarily driven by strong demand from Year ended December 31, 2007 2006 2005 the industrial sector to cope with economic growth in many ($ in millions) industrial and market areas. Orders in our Robotics division Power Products 11,320 8,572 6,742 were weak due to a slowdown in the automotive market. Power Systems 7,744 5,733 4,468 Automation Products 9,314 7,706 6,210 Large orders in 2007 increased by 57 percent (47 percent in Process Automation 7,935 6,550 5,400 local currencies) to $5,702 million, compared to the 66 percent Robotics 1,488 1,240 1,496 increase, in both USD and local currencies, reported in 2006. Core divisions 37,801 29,801 24,316 The relative share of large orders compared to the total orders Non-core and Other 390 366 376 increased from 13 percent in 2006 to 17 percent in 2007. Corporate and inter-division eliminations (3,843) (3,119) (2,328) We determine the geographic distribution of our orders based Total 34,348 27,048 22,364 on the location of the customer, which may be different from the ultimate destination of the products’ end use. The geographic Total orders in 2007 increased by 27 percent (19 percent in distribution of our consolidated orders in 2007, 2006 and 2005 local currencies). This strong growth continued to be driven by was approximately as follows:

68 high demand for power products and systems required to install new power infrastructure to expand or refurbish existing Year ended December 31, 2007 2006 2005 facilities in order to improve energy efficiency. Demand for ($ in millions) more energy-efficient technologies and the need for capacity Europe 15,655 12,124 10,314 expansions to improve productivity also continued to grow The Americas 6,013 5,064 4,296 in most industrial sectors. All divisions benefited from favorable Asia 9,186 6,504 5,622 market conditions in 2007, resulting in the increase of both Middle East and Africa 3,494 3,356 2,132 base and large orders. Total 34,348 27,048 22,364

Orders in the Power Products division grew by 32 percent In 2007, orders from Europe increased by 29 percent (19 per- (25 percent in local currencies), supported by strong demand cent in local currencies), boosted by continued investments in for Transformers and High Voltage Products and to a lesser power grid upgrades, interconnection projects and equipment extent Medium Voltage Products. Orders in the Power Systems replacement. In particular, we experienced significant increases division increased by 35 percent (26 percent in local curren- in Germany, the United Kingdom, Russia and Norway. Orders cies), as it obtained a few very large grid system and substation from the Americas increased by 19 percent (15 percent in local projects during 2007. Orders in the Automation Products currencies), as demand for refurbishing aging equipment and division rose by 21 percent (13 percent in local currencies), upgrades in the industrial sector to improve energy efficiency benefiting from continued investments by industrial customers continued, particularly in the United States, Brazil and to a in efficiency improvements due to higher raw material and lesser extent, in Chile. Orders from Asia increased by 41 percent energy costs. The Process Automation division recorded a (31 percent in local currencies), following higher demand in the 21 percent increase (13 percent in local currencies) in orders, utilities and industrial sectors to support rapid economic backed by strong demand in the metals, minerals and marine growth, particularly in China and India. Compared to the very sectors. Orders in the Robotics division grew by 20 percent high level of orders received in 2006, orders from MEA in- (13 percent in local currencies), reflecting the positive trend in creased by 4 percent and were almost flat in local currencies. general industry, particularly in the consumer electronic, food processing and packaging sectors, amid continued weak demand in the automotive industry. In our Power Products and Automation Products divisions, order growth was also driven by sale price increases to offset higher raw material costs. Revenues received compared torevenues generated. which decreased primarily due toalowervolumeoforders reported asignificantincrease intheirbacklogexceptRobotics, 43 In 2006,theorder backlog increased by$4,733million,or divisions. particularly inourPowerSystemsandProcess Automation by ahighervolumeoflargeorders withlongdeliveryschedules, of revenues. Growth intheorder backlogwasfurtherincreased in absoluteterms,was18percent higherthantheamount currencies), astheamount oforders received duringtheyear, strong revenue growth of25percent (18percent inlocal Order backlogcontinuedto grow atahighratein2007despite 2006 duetostrong order growth inalldivisions. or 44percent (32percent inlocalcurrencies), from theendof Order backlogattheendof 2007increased by$6,886million, Order backlog respectively. by 2percentage pointsin2007to17percent and10 percent, the share of orders from the Americas and MEA decreased to 27percent duringthesameperiod.Ascompared to 2006, of orders from theAsianmarketincreased from 24 to 46percent in2007from 45percent in2006,whiletheshare Europe accountedforthelargestshare oforders andincreased Total eliminations Corporate andinter-division Non-core andOther Core divisions Robotics Process Automation Automation Products Power Systems Power Products ($ inmillions) 31, December at Total eliminations Corporate andinter-division Non-core andOther Core divisions Robotics Process Automation Automation Products Power Systems Power Products ($ inmillions) 31, YearDecember ended

percent (33percent inlocalcurrencies). Alldivisionsin2006 22,715 25,111 29,183 32,080 (2,397) (3,321) 5,951 3,490 8,209 6,932 1,407 6,420 8,644 5,832 9,777 2007 2007 529 424 1 15,829 17,343 23,281 25,392 (1,537) (2,493) 3,991 2,439 5,627 4,845 1,288 5,448 6,837 4,544 7,275 2006 2006 441 382 23

percent 11,096 12,068 20,964 22,862 (1,000) (2,313) 2,647 1,417 4,085 3,413 1,699 4,996 5,897 4,085 6,185 2005 2005 506 415

28 (24 Robotics divisionrevenues, whichdeclinedby24percent the automotivemarketduring2006wasreflected inour (8 11 and Process Automation divisions, which recorded growth of 2006, contributedtorevenue growth inthePowerSystems beginning oftheyearandthosereceived inthefirsthalfof orders, particularlylargeorders from theorder backlogatthe for thehighercostofrawmaterials.Theexecutionsystem volume oforders received andpriceincreases tocompensate intake, highercapacityutilizationtoexecutetheincreasing in localcurrencies), respectively, asaresult ofincreased order cent (12percent inlocalcurrencies) and16percent (15 ucts andAutomationProducts divisionsincreased by18 (10 percent inlocalcurrencies). RevenuesinourPowerProd- In 2006,revenues increased by$2,317million,or11 percent backlog atthebeginningofyear. the growth reported byotherdivisions,duetoarelatively small (18 34 percent (27 and AutomationProducts divisionsrecorded revenue growth of high utilizationofproduction capacity. ThePowerProducts of theyear, anincreasing volumeofbookandbillorders and was primarilydrivenbyahighorder backlogatthebeginning (18 percent inlocalcurrencies). Growth inrevenues in2007 Revenues in2007increased by$5,902million,or25percent approximately asfollows: geographic distributionofourconsolidatedrevenues was from theultimatedestinationofproducts’ enduse.The based onthelocationofcustomer, whichmaybedifferent We determinethegeographic distributionofourrevenues of 9 the firsthalfof2007.Revenuegrowth intheRoboticsdivision the executionoflargeorders received during2006 andin Automation division,reflecting furtherprogress achievedin and 18percent (10percent inlocalcurrencies) inourProcess (20 materials. Revenuegrowth wasreported at28percent price increases tocompensateforthehighercostsofraw divisions benefited from favorablemarketconditionsandsales

Total Middle EastandAfrica Asia The Americas Europe ($ inmillions) 31, YearDecember ended percent inlocalcurrencies), respectively. Theslowdownin

percent (10percent inlocalcurrencies) and 9 percent inlocalcurrencies), in2006. percent inlocalcurrencies) inourPowerSystemsdivision percent inlocal currencies), respectively, as these product

percent (3percent inlocalcurrencies), waslowerthan

percent inlocalcurrencies) and26percent 29,183 13,322 3,134 7,480 5,247 2007 23,281 10,969 2,055 5,863 4,394 2006

percent

20,964 10,154 percent

1,696 5,000 4,114 per- 2005

69 | ABB Annual Report 2007 Financial review TitelIn 2007, revenues in Europe increased by 21 percent (12 per- Selling, general and administrative expenses Einleitungstextcent in local currencies). In particular, we experienced significant The components of selling, general and administrative revenue increases in Russia, Germany, Italy and Spain. How- expenses were as follows: ever, as a result of rapid revenue growth in other regions, the relative share of revenues from the European market decreased Year ended December 31, 2007 2006 2005 to 46 percent of our total revenues in 2007, compared to ($ in millions) 47 percent in 2006. The revenues from Asia, which increased Selling expenses (2,531) (2,202) (2,039) by 28 percent (20 percent in local currencies), were driven Selling expenses as a percentage mainly by the increases in China and India and accounted for of orders received 7.4% 8.1% 9.1% 25 percent of total revenues, compared to 25 percent in 2006. General and administrative expenses (2,444) (2,124) (1,741) Revenues from the Americas increased by 19 percent (16 per- General and administrative cent in local currencies), mainly contributed by the United expenses as a percentage of States and at December 31, 2007, represented 18 percent of revenues 8.4% 9.1% 8.3% the total revenues, compared to 19 percent in the previous Total selling, general and year. Revenues from MEA accounted for 11 percent of total administrative expenses (4,975) (4,326) (3,780) revenues, compared to 9 percent in 2006, which represented Total selling, general and adminis- an increase of 53 percent (47 percent in local currencies), trative expenses as a percentage of revenues 17.0% 18.6% 18.0% compared to 2006. Revenue growth in this region was particu- Total selling, general and adminis- larly strong in Saudi Arabia and Qatar. trative expenses as a percentage of the average of orders received Cost of sales and revenues 15.7% 17.2% 17.4% Cost of sales increased by $3,678 million, or 22 percent (15 per- cent in local currencies), in 2007, after an increase of $1,027 Selling, general and administrative expenses increased million, or 7 percent (6 percent in local currencies), in 2006. The by $649 million, or 15 percent (8 percent in local currencies), increase in cost of sales in 2007 is attributable to the growth in 2007. In 2006, selling, general and administrative expenses in sales volumes, which for the same year reached 25 percent increased by $546 million, or 14 percent (14 percent in local

70 (18 percent in local currencies). A higher cost of sales in 2007 currencies). was also due to increases in some raw material costs, particu- larly in the product divisions. Selling expenses in 2007 increased by $329 million, or 15 per- cent (7 percent in local currencies), from 2006. In 2006, selling Cost of sales consists primarily of labor, raw materials and expenses increased by $163 million, or 8 percent (7 percent ­components. Cost of sales also includes expenses for warranty, in local currencies). These increases were primarily due to contract losses and project penalties, as well as order-related volume-related expenses such as sales commissions, hiring of development expenses incurred in connection with projects for additional resources employed in the developing markets and which corresponding revenues were recognized. more intensified sales programs to expand market shares and enter into new markets. Expressed as a percentage of orders As a percentage of revenues, cost of sales decreased, as received, selling expenses decreased by 0.7 percentage points reflected in the increase in gross profit margin to 30.7 percent in in 2007, continuing the trend from 2006 which showed a 2007 from 29.0 percent in 2006 and 26.0 percent in 2005. The decrease of 1.0 percentage point from 2005. higher gross margin in 2007 reflected a continuing trend from 2006, as the operations benefited from increased business General and administrative expenses increased by $320 million, volume, higher capacity utilization, better project execution and or 15 percent (8 percent in local currencies), in 2007, which process improvement programs in the areas of risk manage- were primarily, driven by increased revenues and high capacity ment and project cost control. Furthermore, the progress made utilization. In 2006, general and administrative expenses in the implementation of our cost migration strategy has started increased by $383 million, or 22 percent (21 percent in local to deliver financial benefits through cost savings in 2007. currencies). General and administrative expenses include non-order related R&D which increased by 15 percent (7 per- cent in local currencies) to $871 million in 2007, relative to 2006, after increasing 14 percent (13 percent in local curren- cies), in 2006 compared to 2005, reflecting the continued spending on product development activities, particularly in the Power Products and Automation Products divisions. The total general and administrative expenses, as a percentage of revenues, decreased by 1.6 percentage points in 2007, as compared to an increase of 0.6 percentage points in 2006. mately $65million and$45million,respectively, ofgains from ment. In2006and 2005,capitalgains,net,included approxi- and a$5milliongainonsaleof variousmachineryandequip- land, Italyandtoalesserextent inBrazil,NorwayandFrance gain from thesaleofreal estateproperties mainly inSwitzer our equityinvestmentsinJorfLasfar andNeyveli,a$41million ments, includinga$38million gain from thedivestmentof consisted of$49millioningainsfrom thesaleofequityinvest- Capital gains,net,during2007amountedto$95millionwhich turing costsresulted inanincomeof$3million. due toachangeintherestructuring liabilityestimate,restruc- $1 $2 costs forcapacityexpansioninthePowerSystemdivision, tions inthePowerProducts division,$2millionrestructuring consisted of$3millioncostsincurred tostreamline theopera- other income(expense)amountedto$8millionthatprimarily the charges.In2007,restructuring costsreported under Consolidated IncomeStatementsdependingonthenature of Restructuring costsare recorded invariouslineswithinthe Ventures businessandlicenseincome. from equityaccountedcompanies, principallyfrom ourEquity equipment, assetwrite-downs,ourshare ofincomeorloss gains orlossesfrom thesale ordisposalofproperty, plantand expenses, gainsorlossesfrom thesaleofbusinesses, Other income(expense),net,typicallyconsistsofrestructuring Other income(expense),net cost management. cent recorded in2005,reflecting continuingimprovements in from 17.2percent in2006,whichwaslowerthanthe 17.4per- decreased in2007by1.5percentage pointsto15.7 percent percentage oftheaverageorders received andrevenues, related tobothorders received andrevenues, expressed asa Total selling,generalandadministrativeexpenses,whichare at thecorporateandoperatingunitlevels. increased focusonthemonitoringandcontrolling of costsboth from thegroup-wide process optimizationprograms and the provisions of the Sarbanes Oxley Act of 2002, higher savings controlassociated withtheinternal measures tocomplywith for growing businessvolumes,were partlyduetolowercosts penses in2007, despite increasing administrative requirements Lower incremental expensesingeneralandadministrationex- ($ inmillions) 31, YearDecember ended Total accounted companiesandother Income from licenses,equity Asset write-downs Capital gains,net Restructuring expenses

million ofcostsintheAutomationProducts division.In2006, million restructuring costsinRealEstateoperationsand 2007 (66) 30 95 (8) 9 2006 139 (12) 75 73 3 2005 (58) (51) - 37 62 84

Our EBIToverthethree year periodwasasfollows: beforeEarnings interest and taxes the liquidcrystaldisplaytechnology. due totheexpirationofcertainlicenseagreements related to Asia. Theleveloflicenseincomedecreased compared to2005 mostly resulted from Turbocharger licensingtothird partiesin $23 millionfrom Neyveli.License incomein2007and2006, included incomeof$62millionfrom JorfLasfarandincomeof equity accountedcompaniesin2005was$109million,which companies inIndiaandtheUnitedStates.Incomefrom income were derivedfrom variousotherequityaccounted derived from JorfLasfarandrelatively smalleramounts of were soldorclosedinearlieryears.Income2006wasmainly was alsooffset bychargestowards severalbusinesses that sale inthesecondquarterof2007.During2007,thisincome $36 million,whichwasprimarilyrelated toJorfLasfarpriorits Income from equityaccountedcompaniesin2007included and investments,primarilyinourEquityVentures business. long-lived assets,mainlyinEurope and$22milliononloans ments. In2005,assetwrite-downsamountedto$36millionon Europe andseveralminorwrite-downsonloansinvest- the impairmentoflong-livedassets$8million,primarilyin less thanourbookvalue.Assetwrite-downsin2006included which weintendtodivest,astheanticipatedmarketvalueis of $42millioninrespect ofoneourequityinvestments, Asset write-downsduring2007includedanimpairmentcharge minor transactions. and participationsinourEquityVentures businessandother in 2005alsoincluded$18milliongainsonthesaleofshares the saleoflandandbuildingsinEurope. Capitalgains,net, (48 in localcurrencies), in2007andby$846million,or49percent EBIT increased by$1,466million,or57percent (47percent Total eliminations Corporate andinter-division Non-core andOther Core divisions Robotics Process Automation Automation Products Power Systems Power Products ($ inmillions) 31, YearDecember ended

percent inlocalcurrencies), in2006. 4,023 4,324 1,477 1,596 2007 (310) 683 489 79 9 2,557 2,813 1,053 2006 (321) 541 279 939 65 1 1,711 2,098 2005 (401) 398 822 187 600 91 14

71 | ABB Annual Report 2007 Financial review TitelThe EBIT margins for our core divisions and on a consolidated increase in interest income in 2007 of $78 million, compared Einleitungstextbasis for the years ended December 31, 2007, 2006 and 2005, to 2006. were as follows: Both interest and dividend income and interest and other Year ended December 31, 2007 2006 2005 finance expense include a gross-up in the amount of $44 mil- Power Products 16.3% 12.9% 9.7% lion, related to interest income and expense on certain balance Power Systems 8.4% 6.1% 4.6% sheet items that were economically related but did not meet Automation Products 17.1% 15.4% 13.9% the criteria for presentation on a net basis. Process Automation 10.6% 9.9% 8.0% Robotics 5.6% 0.1% 5.4% Interest and other finance expense was lower in 2007 than in Core divisions 13.5% 11.1% 9.2% 2006. The reduction was the result of several factors. Firstly, Consolidated 13.8% 11.0% 8.2% interest and other finance expense in 2006 included $55 million in expenses related to the induced conversion of our The higher group EBIT and EBIT margin were achieved through $968 million convertible bonds during the second quarter of higher contribution from increased revenues and higher capacity 2006. Secondly, as a result of the improvement in our liquidity utilization, better execution of large projects and increased position, described above, we generated approximately sourcing of production capacity, components and materials $18 million additional net gains on marketable securities in from emerging markets. 2007, compared to 2006. While the induced conversion of our $968 million convertible bonds during 2006 and the conver- Net interest and other finance expense sion by bondholders during 2007 of our 1 billion Swiss francs Net interest and other finance expense consists of interest and convertible bonds resulted in a significantly lower average debt dividend income offset by interest and other finance expense. level during 2007, compared to 2006, the savings in interest expense were partially offset by increases in interest rates Interest and other finance expense includes interest expense (particularly in euros) as all of our currently outstanding bonds on our debt, securitization costs, the amortization of upfront are swapped using interest rate swaps into floating rate costs associated with our credit facility and our debt securities, obligations.

72 commitment fees on our bank facility, the accretion to par of our $968 million convertible bonds up until their conversion Interest and dividend income decreased slightly in 2006 in 2006, offset by gains on marketable securities. compared to 2005 despite an increase in interest rates and an overall increase in the aggregate balance of cash and equiva- Year ended December 31, 2007 2006 2005 lents and marketable securities and short-term investments. ($ in millions) The principal reason was that a higher proportion of the cash Interest and dividend income 273 147 153 and equivalents, marketable securities and short-term invest- Interest and other finance expense (286) (307) (407) ments balances during 2006 were invested in accumulating net Net interest and other finance asset value money-market funds where the income is not expense (13) (160) (254) distributed but is reflected by an increase in value of the funds’ shares and is realized upon the sale of such investments. Gains Interest and dividend income increased in 2007 compared to on the sale of such securities are recorded in interest and other 2006, reflecting the improvement in our liquidity during the year, finance expense in the table above. with the aggregate of the cash and equivalents and marketable securities and short-term investments balances increasing Interest and other finance expense improved in 2006 to to $8,110 million at December 31, 2007, from $4,726 million $307 million from $407 million in 2005. Although the induced at December 31, 2006. conversion of our $968 million convertible bonds during the second quarter of 2006 resulted in savings in interest expense Up to August 2007, we invested a significant amount of our in 2006, these savings were substantially offset by the costs of excess liquidity in accumulating net asset value money-market the conversion and the accelerated amortization of deferred funds, where the income is not distributed but is reflected issuance costs on these bonds. Our average debt level in 2006 by an increase in value of the funds’ shares and is realized upon was lower than in 2005 but this benefit in terms of interest the sale of such investments. However, due to the turbulence expense was offset by the continuing upward trend in interest in the financial markets, we decided to realize our gains on rates and a charge of $19 million in 2006 relating to the such securities and invest the cash in term deposits with banks. accretion to par of our discounted asbestos obligations. The As gains on sales of securities are recorded in interest and higher income generated from money market funds in 2006 other finance expense, while interest on deposits is recorded compared to 2005, contributed to lower interest and finance in interest and dividend income, this change in investment expense in 2006 compared to 2005, as did the reduction in strategy, combined with our improved liquidity resulted in an securitization expense associated with lower levels of securiti- on productive activitiesandothernon-deductibleexpenses. taxable income,suchasinterest expense,stateandlocal taxes accounting purposesbutnotfor thepurposeofcomputing $60 for taxesin2005includedanexpenseofapproximately an effective taxratefortheyearof31.8percent. Theprovision The provision fortaxesin2005was$464million,representing lower taxjurisdictions. opment in2006from 2005,wastheincreasedfrom earnings in taxaccruals.Themaindriverofthepositiveratedevel expense ofapproximately $70millionrelating toanetincrease Furthermore, theprovision fortaxesin2006alsoincludedan on productive activitiesand othernon-deductibleexpenses. taxable income,suchasinterest expense,stateandlocaltaxes accounting purposesbutnotforthepurposeofcomputing $35 for taxesin2006includesanexpenseofapproximately an effective taxrateforthe yearof28.6percent. Theprovision The provision fortaxesin2006 was$686million,representing increase intaxaccruals. an expenseofapproximately $45millionrelating toanet agreements Africaand bycompetent taxauthoritiesinnorthern relating totheinterpretation oftaxlawanddoubletreaty taxes in2007includedanexpenseofapproximately $35million Canada andtheUnitedKingdom.Inaddition,provision for approximately $490million, butalsoincludingcountriessuchas operations incertaincountriessuchastheUnitedStateswith change invaluationallowancewaspredominantly related toour than notthatsuchdeferred taxassetswouldberealized. The approximately $698millionaswedetermineditwasmore likely for taxesin2007includesthechangevaluationallowanceof an effective taxratefortheyearof14.8percent. The provision The provision fortaxesin2007was$595million,representing Provision fortaxes to expiry. of unamortizedcostsona$1billioncredit facilityreplaced prior loss onrepurchase ofbondsandthewrite-off of$12million 2006 ofcertainitemsoccurringin2005,suchasthe$19million zation in2006compared to2005andthenon-recurrence in Effective taxratefortheyear Provision fortaxes effect ofaccountingchange minority interest andcumulative ­operations, before taxesand Income from continuing ($ inmillions) 31, YearDecember ended

million relating toitemsthatwere deductedforfinancial million relating toitemsthat were deductedforfinancial 14.8% 4,010 2007 (595) 28.6% 2,397 2006 (686) 31.8% 1,457 2005 (464) ­ Earnings (loss)pershareEarnings $735 millionin2005. improved by$655millionto anetincomeof$1,390millionfrom by $2,367millionto$3,757in2007.In2006,netincome As a result of the factors discussed above, net income improved Net income operations” toourConsolidatedFinancialStatements. tions,” and“Note3Acquisitions,divestmentsdiscontinued results ofourdiscontinuedoperations,see“Discontinuedopera- operations, netoftax,aswelladetaileddiscussionthe For adetaileddiscussionoftheincome(loss)from discontinued Income (loss)from discontinuedoperations,netoftax interest andprovision fortaxes. and otherfinanceexpense,partlyoffset byhigherminority mainly reflected improved EBITandanimproved netinterest in 2006ascompared to$867millionin2005.Theincrease accounting changeincreased by$665millionto$1,532 Income from continuingoperationsbefore cumulative effect of United States,CanadaandGermany. primarily drivenbytherecognition ofdeferred taxassets inthe and otherfinanceexpensesalowereffective taxrate reflecting increased EBIT, significant reductioninnetinterest million in2007ascompared to$1,532millionin2006,primarily accounting changeincreased by$1,639millionto$3,171 Income from continuingoperationsbefore cumulative effect of effect ofaccountingchange Income from continuingoperationsbefore cumulative securities were exercised, ifdilutive.Potentially dilutivesecuri- outstanding during theyear, assumingthatallpotentiallydilutive dividing incomebytheweighted-average numberofshares the year. (loss)pershare Dilutedearnings is calculatedby by theweighted-averagenumber ofshares outstanding during (loss)pershareBasic earnings iscalculatedbydividingincome operations, netoftax: Income (loss)from discontinued Net income: change, netoftax Cumulative effect ofaccounting effect ofaccountingchange: operations before cumulative Income from continuing Year ended December 31, 31, YearDecember ended Basic Diluted Basic Diluted Basic Diluted Basic Diluted $ $ $ $

2007 0.26 1.40 1.63 1.66 1.38 0.25 – – $ $ $ $

2006 (0.07) (0.06) 0.63 0.65 0.69 0.72 – – $ $ $ $

2005 (0.07) (0.06) 0.42 0.43 0.36 0.36 0.00 0.00

73 | ABB Annual Report 2007 Financial review Titelties comprise: outstanding written call options; outstanding accounting for a slightly lower share of the total orders relative Einleitungstextoptions and shares conditionally granted under our employee to 2006, continued to grow strongly as demand increased in incentive plans and prior to September 2007, shares issuable many countries, particularly in China and India due to increased upon conversion of our outstanding convertible bonds. (See investment in grid infrastructure. The share of orders from “Note 22 Earnings per share” to our Consolidated Financial MEA remained stable in 2007, reflecting increased investment Statements). in infrastructure in the region, supported by high oil prices.

Power Products Order backlog The financial results of our Power Products division were as Order backlog in 2007 increased by $2,087 million, or 43 per- follows: cent (32 percent in local currencies), due to increased order intake in all businesses, led by Transformers which typically Year ended December 31, 2007 2006 2005 have longer delivery schedules. ($ in millions) Orders 11,320 8,572 6,742 Order backlog in 2006 increased by $1,432 million, or 42 per- Order backlog 6,932 4,845 3,413 cent (33 percent in local currencies), as a result of increased Revenues 9,777 7,275 6,185 order intake, particularly due to an increase in orders with EBIT 1,596 939 600 longer delivery schedules.

Orders Revenues Orders increased by $2,748 million, or 32 percent (25 percent Revenues increased by $2,502 million, or 34 percent (27 per- in local currencies), in 2007, after increasing $1,830 million, cent in local currencies), in 2007 after increasing $1,090 million, or 27 percent (21 percent in local currencies), in 2006. These or 18 percent (12 percent in local currencies), in 2006, as a movements in all years were primarily due to higher demand result of order growth experienced in many market segments, for power infrastructure expansion and improvements in most particularly in transformers, and sales price increases to cover markets. The increase in orders reflected growth in all busi- increased raw material costs. nesses, led by Transformers. Base orders, which grew by

74 30 percent and 27 percent (22 percent and 21 percent in local The geographic distribution of revenues in 2007, 2006 and currencies), made up the vast majority of orders in 2007 2005, for our Power Products division was approximately as and 2006, respectively. Price increases to cover the increase follows: in the cost of raw materials also contributed to the order increase in 2007 and in 2006. Year ended December 31, 2007 2006 2005 Europe 39% 37% 36% The geographic distribution of orders as a percentage of total The Americas 24% 25% 26% orders over the three year period for our Power Products Asia 30% 31% 31% division was approximately as follows: Middle East and Africa 7% 7% 7% Total 100% 100% 100% Year ended December 31, 2007 2006 2005 Europe 39% 36% 36% The relative share of revenues among geographic regions in The Americas 24% 25% 26% 2007 remained similar to the distribution of orders, while all Asia 30% 31% 32% regions recorded growth in revenues as compared to 2006. In Middle East and Africa 7% 8% 6% Europe the growth in revenues was led by Russia and Germany. Total 100% 100% 100% Revenue growth in Asia in 2007 was led by China and India, while revenue growth in the Americas was particularly strong in The share of orders from Europe, which continued to be the the United States. In MEA, the share of revenues remained largest regional source of orders, increased as a result of the similar compared to 2006 with the increase in revenues driven growth in the absolute value of orders in 2007, which was by Saudi Arabia. driven by the replacement of aging infrastructure and demand for new interconnections and renewables in the region. The Earnings before interest and taxes large increase in orders from Europe resulted in a slight reduc- EBIT grew by $657 million, or 70 percent (60 percent in local tion in the share of orders from the Americas and Asia, though currencies), in 2007, after increasing $339 million, or 57 percent the absolute value of orders grew in both of these regions. (55 percent in local currencies), in 2006. The EBIT margin for Order growth in the Americas was mainly due to increased the division was 16.3 percent in 2007, as compared to 12.9 per- orders from the United States, which were driven by the need cent in 2006 and 9.7 percent in 2005. EBIT and EBIT margin to replace aging infrastructure and to meet existing mandated benefited from higher contribution from increased revenues, reliability standards and load growth. Orders in Asia, although improved capacity utilization across all businesses, operational for ourPowerSystemsdivisionwasapproximately asfollows: The geographicdistributionoforders in2007,2006and2005 tions totheGulfGridproject. Orders in2005includeda $220 millionorder todeliversubsta- to The largestproject secured in2006wasa$450millionorder as thegeneraldemandforpowersystemsincreased globally. 11 percent (10 percent local currencies), increase in base orders and localcurrencies, inthe leveloflargeprojects andalsoan was mainlydrivenbya79percent increase, inbothU.S. in localcurrencies), in2006. Theorder increase versus2005 Orders increased by$1,265million,or28percent (28percent of approximately $270million. link inChinawithanorder value forthePowerSystem’s division Kingdom withtheNetherlandsandanultrahigh-voltagepower $400 million,a$350millioncableorder toconnecttheUnited wind farmorder inGermany withanorder valueofmore than markets. Thelargestprojects secured in2007were anoffshore transmission anddistributionsystemsremained strong inmost of largeandbaseorders, respectively, asdemandforpower local currencies) and26percent (18percent inlocalcurrencies), to 2006reflected significant growth of52percent (41percent in in localcurrencies), in2007.Theincrease inorders compared Orders increased by$2,011million,or35percent (26percent Orders follows: The financial results ofourPowerSystemsdivisionwere as Power Systems dation program. mainly in2006,lowercostsrelated tothetransformerconsoli- and productivity improvements, supplychainsavings and,

Total Middle EastandAfrica Asia The Americas Europe EBIT Revenues Order backlog Orders ($ inmillions) 31, YearDecember ended Year ended December 31, 31, YearDecember ended deliver substationstoagridexpansionproject inQatar. 100% 5,832 8,209 7,744 2007 2007 22% 21% 11% 46% 489 100% 4,544 5,627 5,733 2006 2006 28% 16% 17% 39% 279 100%

4,085 4,085 4,468 dollars 2005 2005 28% 15% 16% 41% 187 follows: 2005 forourPowerSystemsdivisionwasapproximately as The geographicdistributionofrevenues in2007,2006and backlog. currencies), in2006onproject executionfrom theorder increased by$459million,or11percent (10 increased project executionfrom theorder backlog. Revenues cent inlocalcurrencies), in 2007.Revenuesgrew asaresult of Revenues increased by$1,288 million,or28percent (20per- Revenues increase inlargerorders during2006. 2006, from December31, 2005,particularlyreflecting an 38 percent (28percent inlocalcurrencies), asofDecember31, and baseorders. Order backlogincreased by$1,542million,or December 31,2006,reflecting thecontinuedgrowth inlarge (34 percent inlocalcurrencies), asofDecember31,2007,from The order backlogincreased by$2,582million,or46percent Order backlog system projects intheregion continued. 2006 remained strong inMEA,asthehighdemandforlarge project inCanada.Indialed theorder increase inAsia.Orders in in northAmericawasmainlyduetothe$180millionHVDC higher proportional increases inallotherregions. Order growth percentage ofthedivision’s orders decreased in2006,dueto to bethelargestregional source oforders. However, Europe’s for interconnections andgridupgrades.Europe continued The order growth inEurope in2006wasdrivenbytheneed 2006 didnotrecur in2007. in MEAwere howeverflatasthehighleveloflargeprojects in trigger investmentsinlargeinfrastructure projects. 2007 orders growth forthePowerSystemsdivision,ashighfuelprices pared to2006.MEAcontinuesshowthelargestmarket orders, resulting inoveralllowerorder volumesin2007com- the Americaswasmore thanoffset byalowerlevelof large gained highershares compared to2006.Baseorder growth in significant increases intheir respective order volumesand the Americas and MEA decreased as Europe and Asia recorded strong baseorder growth ledbyIndia.Theshare oforders from 2007 wasduetoalargeultrahigh-voltageproject inChinaand percentage share in2007.Very strong order growth inAsia remained thelargestregional source oforders andincreased its but alsoreflected double-digitgrowth inbaseorders. Europe The order growth in Europe in 2007 was fueled by large projects Total Middle EastandAfrica Asia The Americas Europe Year ended December 31, 31, YearDecember ended 100% 2007 25% 20% 15% 40%

percent inlocal 100% 2006 20% 20% 16% 44% 100% 2005 19% 22% 16% 43%

75 | ABB Annual Report 2007 Financial review TitelAll regions recorded growth in revenues over the previous drives which received a $110 million order for an advanced Einleitungstextyear in 2007 and in 2006. Europe and the Americas recorded a railway power converter system in Germany. Also, standard reduction in their respective shares of total revenues as MEA products such as low-voltage (LV) drives, breakers and gained a higher share of the revenues of many large projects in switches, LV motors, control products, instrumentation, the Middle East. Growth in Europe was led by central and enclosures and DIN-rail components reached double-digit eastern Europe, with a significant increase in Russia. The higher growth in local currencies. revenues from the Americas reflected strong revenue growth, particularly from Canada on the execution of the HVDC project Orders in 2006 grew by $1,496 million, or 24 percent (23 per- booked in 2006 and also resulted from increases in the United cent in local currencies). The increase in orders reflected States and Brazil. The revenue increase in Asia related primarily favorable market conditions, which drove demand for our to strong growth in India. products and systems from end-customers, as well as OEMs and system integrators who also serve our industrial markets. The revenue increase in Europe in 2006 was led by central and The division experienced increased orders for its standard eastern Europe, with strong growth in Russia. Higher revenues products, led by LV drives, breakers and switches and LV in south America more than compensated for a small decrease motors. High growth rates were achieved in systems and in north America. The revenue increase in Asia was largely engineered products such as power electronic systems, MV attributable to India. The largest revenue growth in 2006 was drives, machines and LV systems. Growth was further sup- recorded by MEA and mainly related to project execution in the ported by some large orders received in 2006, compared to Middle East. 2005.

Earnings before interest and taxes The geographic distribution of orders in 2007, 2006 and 2005 EBIT for our Power Systems division grew by $210 million, for our Automation Products division was approximately as or 75 percent (63 percent in local currencies). The EBIT margin follows: for the division was 8.4 percent in 2007, compared to 6.1 per- cent in 2006. EBIT and EBIT margin increased due to higher Year ended December 31, 2007 2006 2005 revenues and capacity utilization, continued focus on project Europe 63% 63% 65%

76 selection and execution and the cost benefit from expanding The Americas 11% 12% 12% engineering resources in emerging markets. Asia 21% 20% 19% Middle East and Africa 5% 5% 4% EBIT for our Power Systems division grew by $92 million, or Total 100% 100% 100% 49 percent (48 percent in local currencies). The EBIT margin for the division was 6.1 percent in 2006, as compared to The share of orders from Europe and MEA remained at the 4.6 percent in 2005. EBIT and EBIT margin increased due to same level compared to 2006, while the share of orders from higher revenues, increased capacity utilization, particularly in the Americas slightly decreased due to the increase in the our HVDC/FACTS and Power Cable businesses and continued share of orders from Asia, as a result of fast growing markets in focus on project selection and execution. that region, especially in China and India. Orders in Europe increased, supported by the growth in eastern Europe. Orders Automation Products in the Americas increased, although north America grew at a The financial results of our Automation Products division were lower pace than in 2006 due to slowdown in the United States as follows: market, which was more than offset by growth in south America, particularly, Brazil. The increase in MEA is mainly a Year ended December 31, 2007 2006 2005 result of continued high investments in the oil and gas sector. ($ in millions) Orders 9,314 7,706 6,210 The share of orders from Europe decreased in 2006 compared Order backlog 3,490 2,439 1,417 to 2005 although total orders increased in Europe driven by Revenues 8,644 6,837 5,897 solid growth in the oil and gas, marine, metals and transporta- EBIT 1,477 1,053 822 tion sectors. Orders in the Americas also grew in 2006, reflecting a favorable market, especially in the United States. Orders The share of orders in Asia increased in 2006, reflecting high Orders increased by $1,608 million, or 21 percent (13 percent demand for automation and energy efficiency in that region, in local currencies), in 2007. Overall demand continued to grow particularly in China and India. The MEA region also increased as many industrial customers increased their investments in its share of orders due to high growth in 2006, as a result of efficiency improvements due to higher raw material and energy investments in the oil and gas sector. costs. Orders received increased for all business units with the highest growth in power electronics and medium-voltage (MV) South Africa. and Egypt Dubai, in strongest grew region MEA revenues. in Asiaandcontributedtoanincrease intheshare oftotal duction resources inChinaandIndia,resulted inahighgrowth strong growth inorders andtheexpansionofmore localpro- to addsalesandmarketingresources inthisregion. Continued America grew significantlyfollowingseveralcompanyinitiatives contributed tothegrowth over2006.Revenuesinsouth neered products andsystemsstandard products, which north Americabenefitedfrom ahighorder backlogofengi- The share ofEuropean orders decreased, although Europe and Revenues in2007showeddouble-digitgrowth inallregions. as follows: 2005 forourAutomationProducts divisionwasapproximately The geographicdistributionofrevenues in2007,2006and such ascopperandsteel. were initiatedbecauseofhigher costsin2006forrawmaterials, a combinationofhighervolumesandpriceincreases. Thelatter in localcurrencies), in2006. Thegrowth wasachievedthrough Revenues increased by$940 million,or16percent (15percent compensate forincreased rawmaterialcosts. achieved byincreased volumesbutalsobyhigherpricesto mainly was growth The systems. and products engineered in MV drives, due to the high order backlog, with strong growth business units,suchasMachinesandPowerElectronics and cent inlocalcurrencies), in2007.Revenuesincreased inall Revenues increased by$1,807million,or26percent (18per- Revenues which havelongerdeliveryschedules. to increased volumeoforders forlargemotorsandgenerators or 72percent (60percent inlocalcurrencies), primarilydue Order backlogattheendof2006increased by$1,022 million, longer deliverytimescompared tostandard products. orders related tosystemsandengineered products, whichhave December 31,2006.Theincrease related mainlytogrowth in (31 Order backlogincreased by$1,051million,or43percent Order backlog Total Middle EastandAfrica Asia The Americas Europe Year ended December 31, 31, YearDecember ended

percent inlocalcurrencies), asofDecember31,2007, from 100% 2007 22% 12% 61% 5% 100% 2006 20% 12% 63% 5% 100% 2005 18% 12% 66% 4%

$231 In 2006,EBITfortheAutomationProducts divisiongrew by from already highlevels. LV motorsand enclosures andDIN-railcomponentsincreased standard products suchasLV drives,breakers andswitches, machines andLV systems.Inaddition,EBITmarginson largest improvements made inpowerelectronics, MVdrives, emerging markets.Allbusinessunitsincreased EBITwiththe continued highcapacityutilizationandfurthermigrationto The EBITincrease in2007 wasdrivenbytherevenue growth, compared to15.4percent in2006. The EBITmarginforthedivisionwas17.1percent in2007, by $424 In 2007,EBITfortheAutomationProducts divisiongrew beforeEarnings interest andtaxes compared to2005. resulted inanincrease intheregion’s totalshare ofrevenues especially intheGulfregion from theoilandgassector, which strong revenue growth. Revenueswere alsohigherinMEA, those markets.MostothermarketsinAsiaalsoexperienced where additionalproduction facilitieswere establishedtoserve revenue growth, reflecting higher revenues inChinaandIndia in Asiaincreased astheregion experienceddouble-digit its share ofthegrowing totalrevenues. Theshare ofrevenues result offavorablemarketconditions,astheregion maintained particularly intheUnitedStates,CanadaandArgentinaasa Denmark andNorway. Revenuesincreased intheAmericas, absolute termsintheregion, primarilyinItaly, theUK,Spain, compared tootherregions. Revenueshowever, increased in which resulted intheshare ofrevenues inEurope decreasing In 2006,weexperiencedrapidgrowth inallotherregions, follows: The financial results ofourProcess Automationdivisionwere as Process Automation Europewestern andotheroperationalmeasures. was more thanoffset bychargesfordownsizingoperationsin EBIT includeda$34milliongainonthesaleofreal estatewhich drives, breakers andswitches,LV motorsandcontrol products. improvements were madeinstandard products suchasLV and engineeringfacilitiesaround theworld.Thelargest benefited from improved capacityutilizationintheproduction compared to13.9percent in2005.EBITandmargins The EBITmarginforthedivisionwas15.4percent in2006as EBIT Revenues Order backlog Orders ($ inmillions) 31, YearDecember ended

million, or28percent (27percent inlocalcurrencies).

million, or40percent (30percent inlocalcurrencies). 6,420 5,951 7,935 2007 683 5,448 3,991 6,550 2006 541 4,996 2,647 5,400 2005 398

77 | ABB Annual Report 2007 Financial review TitelOrders European orders represented a share of 46 percent of the total EinleitungstextOrders increased by $1,385 million, or 21 percent (13 percent divisional orders in both 2006 and 2005. Europe was able in local currencies), with substantial growth in large orders of to maintain its share of total divisional orders from year-to-year 45 percent (35 percent in local currencies) and an increase in despite increases in other regions due primarily to higher base orders of 16 percent (8 percent in local currencies), in demand in the marine and the oil and gas sectors. Orders in 2007, compared to 2006. The market was driven by high fuel the Americas increased due to stronger demand in the United and commodity prices, leading to expansion investments States, growth in the services and pulp and paper sectors especially in Asia and MEA regions. This expansion contributed in south America and strong growth in the oil and gas sector to the strong growth in metals, minerals, marine and turbo- in Canada. Orders in 2006 increased in all regions except Asia, charging sectors. Pulp and paper orders were lower, mainly where higher base orders were offset by lower large orders due to extraordinary high investments in Asia in 2006. resulting in flat development and a lower share of total orders relative to 2005. Orders in MEA increased significantly with high Orders in 2006 increased by $1,150 million, or 21 percent demand in the oil and gas, minerals, metals and pulp and paper (20 percent in local currencies), compared to 2005. Large sectors, more than doubling its share of total orders. orders increased by 45 percent (43 percent in local currencies) and base orders increased by 17 percent (16 percent in local Order backlog currencies), in 2006, compared to 2005, driven mainly by higher The order backlog rose substantially by $1,960 million, or by demand in the marine and minerals sectors, continued invest- 49 percent (36 percent in local currencies), as of December 31, ments in the oil and gas sector and greenfield projects in the 2007, from December 31, 2006. The growth in the order pulp and paper industry. backlog was driven by the large system orders received in the metals, minerals and marine sectors with delivery schedules The geographic distribution of orders in 2007, 2006 and 2005 extending into 2009 and beyond. for our Process Automation division was approximately as follows: Order backlog as of December 31, 2006, increased by $1,344 million, or 51 percent (40 percent in local currencies), Year ended December 31, 2007 2006 2005 compared to December 31, 2005. This increase was primarily

78 Europe 42% 46% 46% due to several large system orders received in the marine, The Americas 19% 16% 18% minerals and oil and gas sectors, which were scheduled for Asia 30% 25% 30% delivery in 2007 and 2008. Middle East and Africa 9% 13% 6% Total 100% 100% 100% Revenues Revenues increased by $972 million, or 18 percent (10 percent European orders showed a slight increase in absolute terms in local currencies), in 2007. Revenues increased in all sectors in 2007 but the region’s share of the total orders decreased with significant growth reported in our Minerals, Metals, Marine due to higher proportional increases in the Americas and Asia. and Turbocharging businesses. The revenue growth was mainly Europe continued to account for the largest share of orders, a result of the large order backlog and growth in the Turbo- mainly driven by the Service business and the demand from the charging product sales. shipbuilding, metals and minerals sectors. The Americas also experienced significant growth driven by the Minerals business During 2006, revenues increased by $452 million, or 9 percent in Canada and Brazil, the Oil and Gas business in Chile and (8 percent in local currencies). Revenues increased particularly the Service business in the United States resulting in an in- in the Systems business and notably in the Minerals and Marine crease in the region’s share of total orders. Asia’s proportional businesses, which had particularly high order backlogs. Higher share of the total orders also increased with strong growth revenues were also reported in the Products business. mainly coming from the infrastructure related Metals and Minerals businesses as well as the Marine business. MEA The geographic distribution of revenues in 2007, 2006 and experienced growth in the Minerals business, but recorded 2005 for our Process Automation division was approximately as a decrease in total orders due to two extraordinary large follows: orders from the oil and gas sector from Algeria in 2006, which were not replaced by similarly sized orders in 2007, leading Year ended December 31, 2007 2006 2005 to a decrease in their share. Europe 46% 46% 53% The Americas 17% 19% 17% Asia 26% 26% 22% Middle East and Africa 11% 9% 8% Total 100% 100% 100% ness andPaint Systems businessintheautomotive sector. processing continued.Demandincreased intheServicebusi- industry, suchaspackaging,consumerelectronics andfood in localcurrencies), in2007.Increases inorders in general Orders increased by$248 million,or20percent (13 percent Orders The financial results ofourRoboticsdivisionwere asfollows: Robotics migration projects allcontributed toimproved margins. projects, improved capacityutilizationandongoingcost revenues inallbusinesses, improved executionoflarge from 8.0percent in2005.Increased contributionfrom higher to 10.6percent from 9.9percent in2006afterimproving increased by$143million in 2006.TheEBITmarginincreased or 26percent (18percent inlocalcurrencies), in2007.EBIT EBIT forourProcess Automation divisiongrew by$142million, beforeEarnings interest and taxes MEA region remained stableyearoveryear. oil andgassectorinAlgeria.Revenuesothercountriesthe South Korea. Revenuesin MEAincreased, mainlyfrom the as aresult oflargemarine and oilgasprojects inIndiaand revenues intheAmericas. Revenues inAsiaincreased mainly order backlogatthebeginning of2006,helpedgeneratehigher the UnitedStatesandsouthAmerica,supportedbyahigher in 2005ofalargeproject inPoland.Increasing demand in Europeeastern were lower, mainlyreflecting the revenue impact Europe were flatyearoverwhile revenues incentraland increased inallregions exceptEurope. Revenuesinwestern increased inallotherregions compared to2005,asrevenues The share oftotalrevenues in2006decreased inEurope and booming Mineralsbusiness. from thelargeoilandgasprojects inAlgeriaaswell the did in2006.TheMEAshare oftotalrevenues increased mainly the share oftotalrevenues remained atthesamelevelasit especially withintheMarineandMetalsbusinesses,however, driven bythestrong order backlogfrom previous periods share ofthetotalrevenues declined.RevenuesinAsia were business, butastheotherregions grew faster, theAmericas’ Revenues intheAmericaswere mainlydrivenbytheService revenues, withashare oftotalrevenues similartothatin2006. which allowedtheregion tomaintainthelargestshare oftotal revenues, drivenprimarilybytheOEMandServicebusiness, showing strong growth. Europe experiencedanincrease in Revenues increased inallregions withAsia,Europe andMEA EBIT Revenues Order backlog Orders ($ inmillions) 31, YearDecember ended 1,407 1,488 2007 529 79 1,288 1,240 2006 441 1 1,699 1,496 2005 506 91

from the automotive sector during 2006. 2006. during sector automotive the from December 31, 2005, as a result of decreasedprimarily orders (18 percent in local currencies), as of December 31, 2006, from Order backlogdecreased by$65million,or13percent from generalindustry. December 31, 2006, reflecting primarily the increased orders cent inlocalcurrencies), asofDecember31,2007,from Order backlogincreased by$88million,or20percent (12per- Order backlog even thoughdecisionsonsomelargeprojects were delayed. in Japan.Anincrease indemandwasexperiencedChina decrease inactualvalueoforders, primarilyduetoadecrease division orders remained stablealthoughweexperienceda in adeclinetheregion’s share of orders. Asia’s share oftotal intheautomotiveindustry,mainly bythedownturn resulting Europe.eastern Orders in the Americasdecreased, driven Europe, whichmore thanoffset animprovement indemand region decreased slightlyduetolowerorders inwestern division orders althoughthe absolutevalueoforders from the In 2006,European orders increased asapercentage oftotal division orders, alsoincreased in2007. Total orders inMEA,whichare not significanttothetotal automotive industrycontributedtothegrowth inAsia2007. and Chinaduetohigherdemandingeneralindustry ­motive industrycompared to2006.Increased orders inJapan in 2007increased, asaresult ofregaining ashare oftheauto- Europe.Systems businessinwestern Orders intheAmericas consumer electronics and food processing and, in particular, the from the demand growth in general industry, such as packaging, 2006. European orders increased inabsoluteterms,benefiting resulting from significantgrowth inthat region compared to due toanincrease intheshare oforders derivedfrom Asia sion orders derivedfrom Europe andtheAmericasdecreased In 2007,orders grew inallregions, whiletheshare oftotaldivi- for ourRoboticsdivisionwasapproximately asfollows: The geographicdistributionoforders in2007,2006and2005 except service,whichremained stable. resulted inadecrease inorders inallpartsofthebusiness the automotivemarketandgreater selectivityinproject orders (17 In 2006,orders decreased by$256million,or17percent Total Middle EastandAfrica Asia The Americas Europe Year ended December 31, 31, YearDecember ended

percent inlocalcurrencies), from 2005.Lowerdemandin 100% 2007 20% 24% 56% 0% 100% 2006 17% 25% 58% 0% 100%

2005 17% 31% 52% 0%

79 | ABB Annual Report 2007 Financial review TitelRevenues In 2006, EBIT for our Robotics division decreased to $1 mil- EinleitungstextRevenues increased by $119 million, or 9 percent (3 percent lion from $91 million in 2005. The EBIT margin for the division in local currencies), in 2007. The increase in revenues followed also decreased to 0.1 percent in 2006 from 5.4 percent in the trend in orders led by the Systems business. 2005. Both decreases reflected not only lower revenues but also costs associated with the optimization of manufacturing Revenues decreased by $411 million, or 24 percent (24 percent locations and costs related to improving the division’s opera- in local currencies), in 2006. This decrease was due both to tional performance, such as R&D expenses for new product the weak automotive sector as well as greater project selectivity, development and cost migration efforts, as well as charges with a focus on improved profitability. associated with a large project.

The geographic distribution of revenues in 2007, 2006 and Non-core and Other 2005 for our Robotics division was approximately as follows: As of December 31, 2007, Non-core and Other constituted corporate real estate activities, a few minor equity investments Year ended December 31, 2007 2006 2005 and other minor businesses which are in the divestment Europe 58% 57% 47% process. The Americas 23% 25% 37% Asia 18% 18% 16% Orders and revenues Middle East and Africa 1% 0% 0% Orders and revenues from Non-core and Other comprised Total 100% 100% 100% primarily the rental income from internal real estate agreements, which are eliminated in the calculation of our total consolidated In 2007, revenues increased in all regions reflecting the upward orders and revenues, as well as revenues from the remaining trend in orders. Revenues in Europe increased due to continued Distributed Energy business in the United Kingdom, Germany improvement in general industry which also resulted in a slight and Italy, and other businesses that are ceasing operations. increase in the region’s share of total revenues compared to 2006. America’s share of total revenues decreased as the total EBIT revenues from this region remained stable as a result of the EBIT in Non-core and Other in 2007 of $9 million included

80 increased sales in general industry offset by the slower develop- $43 million from our real estate operations, mainly from the ment in the automotive sector. Revenues from Asia grew, led gains on the sale of real estate properties in Switzerland, by growth in China which allowed Asia to maintain its share of Norway, Brazil and Australia and $38 million net gain on the total revenues compared to 2006. sale of equity investments in Jorf Lasfar and Neyveli. The EBIT in Non-core and Other was largely offset by a $42 million In 2006, revenues declined in all regions reflecting primarily a impairment charge in respect of one of our equity investments, lower level of orders received. Revenues in central and eastern which we intend to divest, as the anticipated market value is Europe remained stable at low levels, while western Europe less than our book value, as well as other charges related to recorded slightly lower revenues as a result of a slow-down in businesses that were sold. the automotive sector partially offset by improvements in general industry. The downturn in the north American automo- In 2006, EBIT in Non-core and Other included $34 million from tive industry was reflected in the reduced share of revenues real estate activities, mainly gains from the sale of real estate from the Americas. The share of revenues in Asia continued to in Europe and $61 million from Equity Ventures, representing grow, increasing in importance for the division. primarily income from equity investments in Jorf Lasfar and Neyveli. Non-core and Other EBIT also included losses, mainly Earnings before interest and taxes from old projects in the remaining Building Systems and other EBIT for our Robotics division increased by $78 million. The businesses. In 2005, EBIT in Non-core and Other was repre- EBIT margin for the division increased to 5.6 percent in 2007 sented by $69 million from Equity Ventures and $10 million from from 0.1 percent in 2006. real estate operations. These earnings were partly offset by costs associated with the closure of other business activities. Higher revenues, especially increased sales in general industry, margin improvements in the Systems business and increased sourcing of materials in emerging markets contributed to the EBIT improvement. In addition, 2006 included charges booked in association with a large project. 2007, 2006and2005,respectively. an expense(benefit)of$36million, ($7)millionand$9in Tax expense, net,indiscontinuedoperationsrepresented set forthbelow: The income(loss)from discontinued operations,netoftaxisas Discontinued operations in ourGroup Treasury Operations. in Otherprimarilyrepresent thegeneraladministrativeexpenses appreciation ofthelocalcurrencies relative totheUSD.Costs Corporate R&Dincreased slightly in2007, primarilyduetothe businesses soldduringtheperiod. Jürgen DormannFoundationandsomeminorgainsfrom in 2007alsoincludeda$17millioncontributionmadetothe Oxley Actof2002.Headquartersandstewardship results control measures to comply with the provisions of the Sarbanes 2006 were partly due to lower costs associated with the internal headquarters andstewardship results in2007ascompared to out theworldandinheadquartersZurich.Improved reducing corporatecostsintheCompany’s operationsthrough- both 2007and2006asaresult ofthecontinuedfocuson Headquarters andstewardship operatingresults decreased in division wasasfollows: research anddevelopmentother. EBITforourcorporate Corporate comprisesheadquartersandstewardship, corporate Corporate Total Corporate Other ­development Corporate research and Headquarters andstewardship ($ inmillions) 31, YearDecember ended Total Others Asbestos chemicals Upstream Oil,GasandPetro- Cable businessIreland Transformer business SouthAfrica Power Lines Germany Building Systemsbusiness Downstream OilandGasbusiness ($ inmillions) 31, YearDecember ended 2007 2007 (310) (202) 586 539 (10) (98) 17 21 15 (1) (3) (2) – 2006 2006 (321) (142) (224) (89) (70) (48) (65) 15 16 (8) (5) 6 9 2005 2005 (401) (127) (303) (133) (90) (15) (20) 36 (8) (1) (9) 9 6 capital spendinginEurope. investments in the emerging markets of Asia and relatively lower depreciation andamortizationcharge.We anticipatehigher tures toanamountwhichishigherthanourexpectedannual In 2008,weplantocontinueincreasing ourcapitalexpendi- and Switzerland. was $173 of December31,2006,theamountconstructioninprogress the UnitedStates,China,India,SwitzerlandandGermany. As as ofDecember31,2007was$285million,mainlyinSweden, Construction inprogress forproperty, plantandequipment to real estateproperties, primarilyinSwitzerlandandGermany. the saleofproperty, plantandequipmentwasrelated mostly to real estateproperties inNorway, SwedenandItaly. In2006, plant andequipmentin2007,asignificantportionwas related 2006 and2005,respectively. Ofthetotalsalesofproperty, amounted to$30million,$54millionand$81in2007, The carryingvalueofproperty, plantandequipmentsold due torapidgrowth inthese geographicalmarkets. or buildnewfacilitiestoincrease production capacityneeded expenditures inemergingmarkets were mostlymadetoexpand a significantincrease reported in2007.Investmentsforcapital expenditures inChina2007 were atsimilarlevelas2006after in India,Brazil,Mexico,CzechRepublicandPoland.Capital and continuedtogrow fasterascompared to2006especially tures inemergingmarketsincreased significantlyin 2007 production facilitiestoimprove productivity. Capitalexpendi- in thisregion were primarilydrivenbyupgradesofexisting Europe.level inwestern Investmentsforcapitalexpenditures facilities, capitalexpenditures in2007remained atsignificant Due tothecurrent geographicdistributionofourproduction lower in2006and2005,respectively. were 27percent higherin2007and3percent and29percent Compared tothedepreciation expenses,capitalexpenditures lion and$423millionin2007,20062005,respectively. including intangibleassetsamountedto$765million,$556mil- Total capitalexpenditures forproperty, plantand equipment Capital expenditures to ourConsolidatedFinancialStatements. “Note 3Acquisitions,divestmentsanddiscontinuedoperations” “Acquisitions, divestmentsanddiscontinuedoperations” For furtherdiscussiononthediscontinuedoperations,see

million, mainlyinGermany, Finland,China,Sweden

81 | ABB Annual Report 2007 Financial review TitelLiquidity and capital resources Debt and interest rates EinleitungstextPrincipal sources of funding At December 31, 2007 and 2006, total outstanding debt In 2007, 2006 and 2005, we met our liquidity needs principally amounted to $2,674 million and $3,282 million, respectively, as using cash from operations, bank borrowings and to a shown in the table below. decreasing extent, the sale of receivables under our securitiza- tion programs. at December 31, 2007 2006 ($ in millions) During 2007, 2006 and 2005, our financial position was Short-term term debt including current strengthened by the positive cash flow from operating activities maturities of long-term debt (including bonds) 536 122 of $3,054 million, $1,939 million and $1,012 million, respec- Long-term debt tively. The cash generated in 2007, 2006 and 2005 enabled us – bonds 1,983 2,884 to reduce the level of our securitization programs (see “Securiti- – other long-term debt 155 276 zation programs”), to restructure or repurchase debt (see Total debt 2,674 3,282 “Note 13 Debt” to our Consolidated Financial Statements) and to make discretionary pension contributions (see “Note 19 The decrease in debt in 2007 was primarily the result of the Employee benefits” to our Consolidated Financial Statements). holders of our 3.5% CHF Convertible Bonds, due 2010, con- The debt reductions combined with net income of $3,757 mil- verting the total aggregate principal of 1 billion Swiss francs of lion, $1,390 million and $735 million in 2007, 2006 and 2005, our 3.5% CHF Convertible Bonds, due 2010, into shares. No respectively, have been the main drivers in the reduction in new bonds were issued during 2007. In 2006, we restructured our gearing from 52 percent at December 31, 2005, to 19 per- our debt through the induced conversion of our 4.625% USD cent at December 31, 2007. (See “Financial position”). The Convertible Bonds, due 2007 and an exchange offer for our improvement in our financial position during 2007 is demon- 9.5% EUR Instruments, due 2008 and our 10% GBP Instru- strated in the table below: ments, due 2009. For the cash flow and financial impact of these transactions, see “Cash flows used in financing activities” at December 31, 2007 2006 and “Note 13 Debt” to our Consolidated Financial Statements. ($ in millions)

82 Cash and equivalents 4,650 4,198 Our debt has been obtained in a range of currencies and Marketable securities and short-term maturities and on various interest rate terms. We use derivatives investments 3,460 528 to reduce the interest rate and/or foreign currency exposures Short-term debt and current maturities arising on our debt. For example, we use interest rate swaps to of long-term debt (536) (122) effectively convert fixed rate debt into floating rate liabilities and Long-term debt (2,138) (3,160) we use cross currency swaps to effectively convert certain Net cash (defined as the sum of the foreign currency denominated bonds into U.S. dollar liabilities. above lines) 5,436 1,444

After considering the effects of interest rate swaps, the effective We believe that the cash flows generated from our business are average interest rate on our floating rate long-term debt sufficient to support business operations, capital expenditures, (including current maturities) of $2,398 million and our fixed rate the payment of dividends to shareholders and contributions long-term debt (including current maturities) of $147 million was to pension plans. Due to the nature of our operations, our cash 6.8 percent and 6.4 percent, respectively. This compares with flow from operations generally tends to be weaker in the first an effective rate of 5.8 percent for floating rate long-term debt half of the year than in the second half of the year. We have the of $2,188 million and 6.0 percent for fixed-rate long-term debt ability to supplement this near-term liquidity, if necessary, of $199 million as of December 31, 2006. The figures for fixed through access to the capital markets (including short-term rate debt at December 31, 2006, exclude our convertible commercial paper) and credit facilities. Consequently, we believe bonds of $820 million which bore interest at an effective rate of that our ability to obtain funding from these sources will con- 3.5 percent until converted during 2007. tinue to provide the cash flows necessary to satisfy our working capital and capital expenditure requirements, as well as meet our debt repayments and other financial commitments for the next 12 months. (See “Contractual obligations”). the remaining program. receivables soldintosuchprograms and, in2007,terminated for suchfinancingdeclined,we have reduced thevolume of and 2007,asourliquiditysituation improved andtheneed ables in revolving-period securitization programs. Between 2005 and capitalresources, wealsohavesoldcertaintradereceiv- In additiontotheaforementioned primarysources ofliquidity Securitization programs date ofissuanceof,eachdebtinstrument. MTN Program are determinedwithrespect toandasofthe to usandthetermsavailabilityoffinancingsunder MTN Program donotobligateanythird partytoextendcredit debt issuancesundertheMTNProgram. Thetermsofthe $1,898 million,respectively, ofourtotaldebtoutstanding,were As ofDecember31,2007and2006,$2,094million to theequivalentof$5,250millionincertaindebtinstruments. We haveinplaceaMTNProgram thatallowsustoissueup Medium Term NoteProgram (MTN) programs. issued orwere outstanding underthesecommercial paper As ofDecember31,2007and2006,noamountshadbeen short-term commercial paper ineitherSwedishkrona oreuro. December 31,2007exchangerates),allowingustoissue krona program (equivalenttoapproximately $781million,using new programs are inadditiontotheexisting5billionSwedish issuance ofcommercial paper inavarietyofcurrencies. These established a$1billionEuro-commercial paperprogram forthe commercial paperintheUnited States.InDecember2007,we program fortheprivateplacement ofUSD-denominated In October2007,weestablisheda$1billioncommercial paper Commercial paper a specifiedthreshold. to defaultonindebtedness,asdefinedinthefacility, atorabove clauses whereby aneventofdefaultwouldoccurifwewere programs describedbelow. Thefacilitycontainscross-default in theeventthatweissuecommercial paperunderthe serve asback-stopfacilitytoourcommercial paperprograms and 2006.Thefacilityisforgeneralcorporatepurposeswill No amountwasdrawnunderthefacilityatDecember31,2007 see “Note13Debt”toourConsolidatedFinancialStatements. maximum netleverage.Forfurtherdetailsofthiscredit facility, the soleremaining financialcovenantwhichwas related to the facilitytoreduce thecostsassociatedwithitandtoremove currency revolving credit facility. During2007,weamended Since July2005,wehaveinplaceafive-year, $2billionmulti- Credit facilities Debt” toourConsolidatedFinancialStatements. characteristics ofourindividualbondissuances,see“Note13 For adiscussionofourusederivativestomodifythe $1,332 millionand$1,195million, respectively. investments undersuchlimitationstotaledapproximately equivalents andmarketablesecuritiesothershort-term of December31,2007and2006,thebalancecash the cashissituated,includingthosedescribedabove.As the repayment ofdebtoutsidetherespective countrieswhere but wedonotconsiderthesefundsimmediatelyavailablefor reported ascashonourConsolidatedBalanceSheets, cash obligationsoutsidetherelevant country. Thesefundsare within ourGroup Treasury Operationstomeetshort-term needs locally. Asaconsequence,thesefundsare notavailable and are therefore depositedandusedforworkingcapital repayments, cannot be transferred offshore from these countries Venezuela. Funds,otherthanregular dividends, feesorloan Saudi Arabia,SouthAfrica,Taiwan, Thailand,Turkey and including: Brazil,China,Egypt,India,Korea, Malaysia,Russia, the transfer of funds in a number of countries where we operate, Currency andotherlocalregulatory limitationsexistrelated to Limitations ontransfersoffunds long-term ratingsfrom Baa1 toA3. On January21,2008,Moody’s announcedanupgradeinour December 31,2006. at debt unsecured long-term our for BBB and Baa1 and ratings company respectively,long-term our BBB+, for and Moody’s Poor’sto & pares Baa1 of Standard and ratings respectively, aswasourlong-termunsecured debt.Thiscom- were Baa1andA-,from Moody’s andStandard &Poor’s, 2007. AtDecember31,2007,ourlong-termcompanyratings to A-.Theratingsfrom Moody’s remained unchangedduring from BBB+toA-andourlong-termunsecured debt from BBB In April2007,Standard &Poor’s increased ourcorporaterating and BBB-(orabove)from Standard &Poor’s. that wouldberepresented byBaa3(orabove)from Moody’s Since April2006,ourratingsare againof“investmentgrade” lower borrowing costsandincreased accesstocapital markets. agencies considerreliable. Higherratingsgenerallyresult in ­information provided byusorothersources thatthe rating the credit riskassociatedwithourcompanyandare based on Credit ratingsare assessmentsbytheratingagencies of Credit ratings our ConsolidatedFinancialStatements. Significant accountingpolicies”and“Note7Securitization”to and 2005,see“Off-balance sheetarrangements”and“Note cash flows related to securitization programs during 2007, 2006 For furtherdiscussionofoursecuritizationprograms, including

2

83 | ABB Annual Report 2007 Financial review TitelFinancial position in “Net interest and other finance expense” from August 2007, EinleitungstextBalance sheet we invested our excess liquidity in time deposits rather than During 2007 and 2006, divestments and the discontinuation of marketable securities due to the market turbulence. certain businesses were recorded as discontinued operations. Accordingly, the balance sheet data for all periods presented Receivables, net, as at the end of 2007, increased from have been restated to present the financial position and results the end of 2006 by approximately 31 percent. Approximately of operations of the businesses meeting the criteria of SFAS 35 percent of this increase was related to the appreciation of 144 as assets and liabilities held for sale and in discontinued local currencies relative to the USD. In addition, the increase in operations. revenues during the year from all of the core divisions also contributed to the increase in the receivables, net. Current assets As of December 31, 2007 2006 Inventories, net, also increased primarily reflecting the increase ($ in millions) in our order backlog as at the end of 2006. Approximately Cash and equivalents 4,650 4,198 47 percent of this increase was related to the appreciation of Marketable securities and short-term local currencies relative to the USD. The increase in inventories investments 3,460 528 was particularly high in our Power Products and Automation Receivables, net 8,582 6,566 Products divisions to execute the increased order backlog. Inventories, net 4,863 3,807 Prepaid expenses 307 247 The reduction in assets held for sale and in discontinued Deferred taxes 783 572 operations mainly reflects the sale of Lummus in 2007. Other current assets 368 240

Assets held for sale and in discontinued Current liabilities operations 132 1,397 As of December 31, 2007 2006 Total current assets 23,145 17,555 ($ in millions) Accounts payable, trade 4,167 3,279 Our total current assets as of December 31, 2007, increased Billings in excess of sales 829 394 Accounts payable, other 1,289 1,172 84 by 32 percent, as compared to total current assets as of December 31, 2006. (See “Cash flows”). Short-term debt and current maturities of long-term debt 536 122 Advances from customers 2,045 1,490 As of December 31, 2007 and 2006, we had cash and Deferred taxes 371 226 equivalents and marketable securities and short-term invest- Provisions and other 3,342 2,864 ments totaling $8,110 million and $4,726 million, respectively. Accrued expenses 1,737 1,513 Approximately $5,757 million and $2,661 million as of Asbestos obligations 101 150 December 31, 2007 and 2006, respectively, was invested in Liabilities held for sale and in discontinued time deposits by our Group Treasury Operations and was operations 62 1,275 denominated primarily in USD and EUR. Further amounts, Total current liabilities 14,479 12,485 totaling approximately $1,332 million and $1,195 million, as of December 31, 2007 and 2006, respectively, were deposited locally in countries where currency or other local regulatory Total current liabilities as of December 31, 2007, increased by limitations exist, as described above under “Liquidity and capital 16 percent compared to December 31, 2006. More than resources – Limitations on transfers of funds.” Balances not 50 percent of this increase was due to the appreciation of the remitted to Group Treasury Operations are primarily denomi- local currencies relative to the USD. Excluding the currency nated in the currency of the respective country holding the impact, the increase in business volume was the main factor balance. contributing to the increase in current liabilities.

We invest surplus cash available in time deposits and market- Total accounts payable and billings in excess of sales as of able securities with varied maturities based on defined invest- December 31, 2007, increased compared to December 31, ment guidelines and the liquidity requirements of the business. 2006, due primarily to an increase in business volume in all of Investments which have maturities of three months or less at the core divisions. Short-term debt and current maturities the time of acquisition are classified as part of cash and of long-term debt were higher than 2006, as more long-term equivalents and those that have maturities of more than three debt became due within one year. Advances from customers months at the time of acquisition are classified as part of also increased reflecting the increased volume of orders marketable securities and short-term investments. The balance received during 2007, particularly in our Power Products and of marketable securities and short-term investments fluctuate Power Systems divisions. The increase in provisions for depending on the timing of these investments. As described warranties and contract penalties as a result of increased busi- did notmeetthemore likelythannotstandard ofbeingrealized. ating lossescarriedforward andotheritems,whichpreviously taxes mainlyreflects the recognition oftaxassetsonnetoper- mainly reflecting thesaleofJorfLasfar. Theincrease indeferred equity methodcompaniesare lowerthantheprevious year in thevalueofUSDagainstlocalcurrencies. Investmentsin During 2007,goodwillincreased principallyduetothechange Finland andSwitzerland. machinery andequipmentinChina,Germany, Sweden, major capitalexpenditures during2007were investmentsin Robotics remained atthesame levelastheprioryear. The further improve production capacities.Capitalexpenditure in divisions exceptRoboticsraisedtheirinvestmentlevelsto the valueofUSDagainstlocalcurrencies. Allofourcore 2006, approximately 63percent wasrelated tothechangein ment, net,betweenDecember31,2007and Of thetotalincrease inthe valueofproperty, plantandequip- term notereceivable ahead ofscheduledmaturity. December 31,2006,mainlyduetothesettlementofalong- includes leaseandloanreceivables, decreased compared to Financing receivables, net, asofDecember31,2007,which by 4percent compared toDecember31,2006. Total non-current assetsasofDecember31,2007,increased tions decreased followingthesaleofLummus. liabilities”). Liabilitiesheldforsaleandindiscontinuedopera- asbestos obligations.(See“Contingenciesandretained sions and other. These increases were offset by a decrease in ness volumeisamajordriverbehindtheincrease inprovi- Total non-current assets Other non-current assets Deferred taxes Investments inequitymethodcompanies Prepaid pensionandotheremployeebenefits Other intangibleassets,net Goodwill Property, plantandequipment,net Financing receivables, net ($ inmillions) 31, December of As Non-current assets 7,856 2,421 3,246 2007 127 862 380 270 487 63 7,587 2,369 2,793 2006 175 507 545 373 286 539 $340 a reclassification asofJanuary 1,2007,ofapproximately The balanceofdeferred taxes decreased mainlydueto accounting policies”). tionary pensioncontributions.(See“Applicationofcritical actuarial assumptionsduring2007,aswellminordiscre- discount rates,changesinmortalitytablesand benefits during2007wasthenet result ofincreases inthe The reduction inthebalance ofpensionandotheremployee convertible bonds. due tothegrowth innetincomeandtheconversionofour and theincrease instockholders’equityduring2007,primarily December 31,2006,reflecting the reduction ofour total debt of December31,2007,ascompared to34percent as of ing borrowings indiscontinuedoperations,was19percent as resources –Debtandinterest rates”).Ourgearingratio,exclud- current maturitiesoflong-termdebt.(See“Liquidityandcapital of aportionourlong-termdebttoshort-termand francs convertiblebondsintoequityandthereclassification through theconversionbybondholdersofour1billionSwiss During 2007,ourlong-termdebtwassignificantly reduced remediation costsrelated toourformer NuclearTechnology ties alsoincludes provisions fortheestimated environmental as ofDecember31,2007and 2006,respectively. Otherliabili- and othernon-current liabilitiesof$352millionand$312 million ment incentiveplanprovisions of$71millionand$58 derivative liabilitiesof$162million and$113million,manage- deferred incomeof$113millionand$118million,non-current non-current depositliabilitiesof$298millionand$302million, (See “Note17Incometaxes”).Otherliabilitiesfurtherinclude 48. FIN of adoption the of result a as 2007, 1, January of sification ofapproximately $340millionfrom deferred taxesas tax related liabilitiesof$556millionwhichincludesthereclas- The increase inotherliabilitiesispredominantly duetoincome liabilities. accrued isduein2008andhasbeenclassifiedcurrent were paidduring2007.The remaining asbestosobligation including apaymentof$204millionuponthesaleLummus to $0millionin2007, giventhatpaymentsof$304million, 2006 in million $282 from decreased obligations Asbestos adoption ofFIN48. Total non-current liabilities Other liabilities Asbestos obligations Deferred taxes Pension andotheremployeebenefits Long-term debt ($ inmillions) 31, December of As Non-current liabilities

million tootherliabilitiesasaconsequenceofthe 4,973 1,797 2,138 2007 407 631 – 6,168 1,154 3,160 2006

282 763 809

85 | ABB Annual Report 2007 Financial review Titelbusiness of $245 million and $251 million as of December 31, Cash flows provided by operating activities in 2007 included Einleitungstext2007 and 2006, respectively. (See “Environmental liabilities” $382 million asbestos payments, of which $204 million was and “Note 16 Commitments and contingencies” and “Note 18 paid upon the sale of Lummus. In addition, the taxes paid Other liabilities” to our Consolidated Financial Statements). during 2007 were more than 30 percent higher compared to 2006. Cash flows In the Consolidated Statements of Cash Flows, the effects Due to the improved liquidity situation of the group we termi- of discontinued operations are not segregated, as permitted nated the securitization activities in the United States during the by SFAS No. 95, Statement of Cash Flows (SFAS 95). third quarter of 2007. This termination had an impact on the full year cash flows from operations of $178 million. Approximately The Consolidated Statements of Cash Flows can be summa- 50 percent of this impact was in our Power Products division. rized as follows: Cash flows provided by operating activities increased by Year ended December 31, 2007 2006 2005 $927 million in 2006, as compared to 2005. Approximately ($ in millions) 50 percent of this increase was attributable to the significant Cash flows provided by reduction in the amount of receivables securitized in 2005 operating activities 3,054 1,939 1,012 (see “Off-balance sheet arrangements”), which resulted in a Cash flows used in investing reduction of our cash flow in our core divisions and Corporate activities (2,291) (694) (316) during 2005. In addition, the increased revenues and the high Cash flows used in financing capacity utilization, mainly in our Power Products and Auto­ activities (625) (392) (896) mation Products divisions, resulted in higher cash outflows Effects of exchange rate changes on cash and equivalents 275 184 (259) towards increased working capital levels in 2006. These Adjustment for the net change in increases were more than offset by the advances received cash and equivalents in assets from our customers, particularly in our Process Automation held for sale and in discontinued division and an increase in the cash effective earnings of operations 39 25 37 most of our core divisions. Cash flows provided by operating Net change in cash and

86 activities increased in all our core divisions relative to 2005. equivalents – continuing operations 452 1,062 (422) Cash flows used in investing activities

Year ended December 31, 2007 2006 2005 Cash flows provided by operating activities ($ in millions) Operating activities provided net cash of $3,054 million in 2007, Proceeds from sale of businesses, substantially up by $1,115 million from the prior year. This in- net of acquisitions 1,088 24 (124) crease was driven primarily by significantly higher cash effective Purchases of property, plant earnings (net income after adjusting back non-cash and non- and equipment and intangibles, net of disposals (681) (408) (339) operating expenses) year over year as well as by comparatively Purchases of marketable securities lower cash outflows towards operating assets and liabilities. (other than trading) and short-term Cash outflows arising from the changes in operating assets and investments, net of sales (2,754) (377) (82) liabilities were $267 million during 2007, compared to $571 Other investing activities, net 56 67 229 million in 2006. This improvement was a result of an improved Cash flows used in investing focus on working capital management, particularly with respect activities (2,291) (694) (316) to inventories and trade payables. Investing activities include: accounts receivable from leases Cash flows provided by operating activities increased in all of and third party loans (financing receivables); net investments in our core divisions where higher cash outflow requirements for marketable securities that are not held for trading purposes; working capital, as a result of the significant increase in the asset purchases, net of disposals and acquisitions of, invest- volume of operations, were more than offset by the significant ments in and divestitures of businesses. increase in cash effective earnings. The Power Systems division contributed to cash flows provided by operating activities in Cash flows used in investing activities during 2007 were 2007, the majority of which was as a result of high advances $2,291 million. Net cash inflows from the sale of businesses from customers on major projects and resulting from the closer and equity accounted companies amounted to $1,142 million in management of trade payables. In the Power Products division, 2007. This net inflow included approximately $810 million working capital improvements were driven by improved net proceeds from the sale of Lummus, as well as $483 million inventory management. net proceeds from the sale of our interests in Jorf Lasfar and Neyveli. These inflows were offset by a cash outflow of $173 mil- and buildings,$84 the purchase of machinery and equipment, $128millionforland amounted to $756 million, which included $457 million towards requirements. Capitalexpenditure payments during the year penditures due to new growth projects andincreasing capacity by approximately $270million,reflecting highercapital ex- equipment andintangibles,netofdisposals,in2007increased Total cashdisbursementforthepurchase ofproperty, plantand Ltd inIndia. 2007, including$26millionfortheacquisitionofRamanBoards cash outflowsforacquisitionsamountedto$54millionin lion related tothesaleofBuildingSystemsinGermany. Net in Europe andAsia. in machineryandequipmentduring 2005occurred primarily and equipment.Majorcapitalexpenditures oninvestment primarily inEurope and$20millionfrom thesaleofmachinery was $108millioninproceeds onthesaleoflandandbuildings, relates tomachineryandequipment.Inthesameyear, there on projects whichare underconstruction,themajorityofwhich $45 milliononintangibles,mainlysoftware and$72million machinery andequipment,$111milliononlandbuildings, $536 Total cashdisbursedforcapitalexpenditures during2006was the purchase ofproperty, plantandequipmentincreased. orders andcontinuedhighcapacityutilization,cashoutflowsfor In 2006,asaconsequenceoftheincrease inthevolumeof with settlementsrelated to ourUpstream OilandGasbusiness. Portfolio businessinFinlandandcashpaymentsconnection ments, net,primarilyduetothecashsoldwithourLease In 2005,wehadacashoutflowfrom acquisitionsanddivest- Africa aswellthesaleofourCablebusinessinIreland. sale ofourPowerLinesbusinessesinVenezuela andSouth ber 31,2006,mainlyincludedtheproceeds received from the Acquisitions anddivestments,net,fortheyearendedDecem- net cashinvestedbyourcaptiveinsurancecompany. the pensionfundsinGermanyand$30millionadditional lion inpurchases ofmarketable securitiestocontribute securities andshort-terminvestmentsin2007include$49mil- liquidity generatedbythegroup. Otheroutflowsofmarketable $2,754 million in 2007, reflects the investment of the increased ties andshort-terminvestmentsfrom $377millionin2006,to The substantialincrease innetpurchases ofmarketable securi- locations. $16 millionfrom thesaleofmachineryandequipmentinvarious sale ofreal estateproperties, mainlyinItalyandFrance, and equipment during2007included$58millionproceeds from the construction. Cashreceived from thesaleofproperty, plantand mainly software and$87millionforprojects whichare under

million. Ofthisamount$308millionwasspenton

million forthepurchase ofintangibleassets,

Cash flowsusedinfinancingactivities Germany. $262 millionwhichwere contributedtoourpensionfundsin which were offset bythepurchase ofmarketablesecurities the saleofourleaseportfolioandrelease ofrestricted cash all otherinvestingactivitieswas$147million,whichincluded other marketablesecurities.During2005,netcashprovided by were partiallyoffset bythecashinflowsandoutflows relatedto funds inGermany. Thesepurchases ofmarketablesecurities securities of$449millionwhichwere contributedtothepension were $310million,includingthepurchase ofmarketable Cash outflowsfrom allotherinvestingactivities,net,in2006, amounted to$117millionin2007. of CHF0.24pershare. Dividendspaidtominorityshareholders Dividends paidin2007of$449 million,represented adividend shares andnetproceeds of$60million. held undertheESAPresulted intheissuanceof3.7million of $181million.Theexercise byemployeesoftheoptionsthey issuance ofapproximately 19.6millionshares andnetproceeds 7.00 toCHF13.49.Theexercise bythebankresulted inthe issued byusatfairvaluewithstrikepricesrangingfrom CHF incentive planlaunchesin2001,2003and2004)hadbeen call optionsheldbythebank(andrelated toourmanagement tion withourEmployeeShare AcquisitionPlan(ESAP).The by abankandtheissuanceofshares toemployeesinconnec- The issuanceofshares represents theexercise ofcalloptions the corresponding increase intreasury stock. incentive plans,resulting in acashoutflowof$199millionand our ownshares foruseinconnection withouremployee During 2007,wepurchased, ontheopenmarket,10millionof capital andtreasury stock transactions anddividendspaid. issuance ofdebtsecuritiesandborrowings directly from banks, Our financingactivitiesprimarilyincludedebt,bothfrom the activities Cash flowsusedinfinancing Other financingactivities holders Dividend paidtominorityshare- Dividends paid Purchases ofshares Issuance ofshares exchange bond conversionand Payments madeuponinduced Change indebt,netofrepayments ($ inmillions) 31, YearDecember ended 2007 (625) (117) (449) (199) 241 (45) (56) – 2006 (392) (183) (203) 105 (94) (64) 47 – 2005 (896) (832) (74) (25) 35 – – –

87 | ABB Annual Report 2007 Financial review TitelAs there were no bond maturities or significant repurchases We have determined our long-term debt obligations and Einleitungstextof bonds in 2006, repayments of debt were significantly interest payments related to long-term debt obligations by reduced compared to 2005. During 2006, the capital increase reference to the payments due under the terms of our debt resulting from the issuance of shares under our employee share obligations at the time such obligations were incurred. However, acquisition plan led to a net cash inflow of $47 million. During we use interest rate swaps to modify the characteristics of 2006, we paid a dividend of CHF 0.12 per share which resulted certain of our debt obligations. The net effect of these swaps in an outflow of $203 million. Dividends paid to minority share- may be to increase or decrease the actual amount of our cash holders increased by $20 million to $94 million compared to the interest payment obligations, which may differ from those $74 million paid in 2005. Other financing activities in 2006 stated in the above table. For further details on our debt included $72 million payments made in relation to the induced obligations and the related hedges, see “Note 13 Debt” to our conversion of our 4.625% USD Convertible Bonds, due 2007, Consolidated Financial Statements. Of the total of $647 million $111 million payments in connection with the exchange of our unrecognized tax benefits for 2007 it is expected that $68 10% GBP Instruments, due 2009 and the 9.5% EUR Instru- million will be paid within less than a year, however, we cannot ments, due 2009, which were partly offset by cash inflows from make a reasonably reliable estimate as to the related future certain financial derivative transactions. payments for the remaining amount of $579 million. (See “Note 17 Taxes”). Significant cash outflows from financing activities during 2005 included the repayment of maturing bonds and the repurchase Off-balance sheet arrangements of bonds. The cash inflow for the capital and treasury stock Commercial commitments transactions primarily represented the capital increase resulting Certain guarantees issued or modified after December 31, from our ESAP. 2002 are accounted for in accordance with FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements Disclosures about contractual obligations for Guarantees, Including Indirect Guarantees of Indebtedness and commitments of Others (FIN 45). Upon issuance of certain guarantees, a The contractual obligations presented in the table below repre- liability, equal to the fair value of the guarantee, is recorded. sent our estimates of future payments under fixed contractual

88 obligations and commitments. The amounts in the table may FIN 45 requires that we disclose the “maximum potential differ from those reported on our Consolidated Balance Sheets exposure” of certain guarantees, as well as possible recourse as of December 31, 2007. Changes in our business needs, provisions that may allow us to recover from third parties cancellation provisions and changes in interest rates, as well as amounts paid out under such guarantees. The “maximum actions by third parties and other factors, may cause these potential exposure” as defined by FIN 45 does not allow any estimates to change. Therefore, our actual payments in future discounting of our assessment of actual exposure under the periods may vary from those presented in the table. The guarantees. The information below reflects our maximum following table summarizes certain of our contractual obliga- potential exposure under the guarantees, which is higher than tions and principal and interest payments under our debt our assessment of the expected exposure. instruments, leases and purchase obligations as of Decem- ber 31, 2007: Guarantees The following table provides quantitative data regarding Less More our third-party guarantees. The maximum potential payments Payments due than 1–3 3–5 than represent a “worst-case scenario,” and do not reflect our by period Total 1 year years years 5 years expected results. ($ in millions) Long-term debt The carrying amount of liabilities recorded in the Consolidated obligations 2,545 407 180 934 1,024 Balance Sheets reflects our best estimate of future payments, Interest payments related to long-term which we may incur as part of fulfilling our guarantee obliga- debt obligations 838 206 254 184 194 tions. Operating lease obligations 1,863 354 543 407 559 Purchase obligations 4,701 3,804 716 134 47 Total 9,947 4,771 1,693 1,659 1,824

on behalfoftheformerPowerGenerationbusiness. have notexperiencedanylossesrelated toguaranteesissued $717 millionatDecember31,2007and2006,respectively. We Power Generationbusinessisapproximately $171millionand quantifiable guaranteesissuedbyusonbehalfofourformer Our bestestimateofthetotalmaximumpotentialexposure of harmless againstanyclaimsarisingundersuchguarantees. undertaken jointlyandseverallytofullyindemnifyholdus Alstom, theparent company andAlstomPowerNV, have obligations thatare thesubject oftheguarantees.Further, its subsidiarieshaveprimaryresponsibility forperformingthe Power NVtoAlstomSA(Alstom).Asaresult, Alstomand expiration date.InMay2000,wesoldourinterest intheAlstom be completedby2015butinsomecaseshavenodefinite The guaranteesare related toprojects whichare expectedto pliance withlaborlaws,environmental lawsandpatents. for personalinjuriesandproperty damages,taxesandcom- guarantees undercertaincontractssuchasindemnification advance paymentguaranteesandothermiscellaneous The guaranteesprimarilyconsistofperformanceguarantees, ABB AlstomPowerNVjointventure (AlstomPowerNV). Generation businesscontributedinmid-1999totheformer We retained obligationsforguaranteesrelated tothePower ment guaranteesandperformancestandbylettersofcredit. Performance guaranteesincludesurety bonds,advancepay- we willcompensatetheguaranteedpartyincashorkind. a specifiedtime.Ifthethird partydoesnotfulfilltheobligation, include guaranteesthataproject willbecompletedwithin according tothetermsofacontract.Suchguaranteesmay guarantee theperformanceofathird party’s product orservice Performance guaranteesrepresent obligationswhere we Guarantees related tothird partyperformance Performance guarantees ($ inmillions) December 31, Financial guarantees Indemnification guarantees Total

Guarantees related tofinancialobligations ber 31,2007. the guaranteeswasapproximately $92millionatDecem- one tothirteenyears.Themaximumamountpayableunder The guaranteeshaveoriginalmaturitydatesrangingfrom The guaranteesprimarilyconsistofperformanceguarantees. the BuildingSystemsbusinessinGermanysold2007. The Companyretained obligations forguaranteesrelated to ber 31,2007. backstop guaranteesisapproximately $30millionatDecem- guarantees. Themaximumpotentialrecovery underthese payments undertheseguaranteesthrough certainbackstop December 31,2007.We have theabilitytorecover potential payable undertheguaranteesisapproximately $301millionat dates rangingfrom oneto five years.Themaximumamount performance guarantees.Theguaranteeshaveoriginalmaturity business soldin2007.Theguaranteesprimarilyconsistof We retained obligationsforguaranteesrelated totheLummus $21 millionatDecember31,2007and2006,respectively. these backstopguaranteesisapproximately $13millionand backstop guarantees.Themaximumpotentialrecovery under potential paymentsundertheseguaranteesthrough certain 2007 and2006,respectively. We havetheabilitytorecover approximately $393millionand$375atDecember31, years. Themaximumamountpayableundertheguaranteesis tees haveoriginalmaturitydatesrangingfrom onetoseven guarantees andothermiscellaneousguarantees.Theguaran- primarily consistofperformanceguarantees,advancepayment Upstream OilandGasbusinesssoldin2004.Theguarantees We haveretained obligationsforguaranteesrelated tothe the guaranteeincursalossduetothatfailure. fails tofulfillitsfinancialobligationsandthebeneficiaryunder will makepaymenttoabeneficiaryintheeventthatthird party Financial guaranteesrepresent irrevocable assurancesthatwe payments Maximum potential 1,416 957 131 328 2007 amount of liabilities Carrying 10 9 1 – payments Maximum potential 1,092 1,338 166 80 2006 amount of liabilities Carrying 1 1 – –

89 | ABB Annual Report 2007 Financial review TitelAt December 31, 2007 and 2006, we had $131 million and During 2007, 2006 and 2005, respectively, we received and Einleitungstext$166 million, respectively, of financial guarantees outstanding. paid, in respect of securitization programs, the following Of those amounts, $56 million and $80 million, respectively, amounts: were issued on behalf of companies in which we currently have or formerly had an equity interest. The guarantees have various Year ended December 31, 2007 2006 2005 maturity dates. The majority of the durations run to 2010 with ($ in millions) the longest expiring in 2021. Gross trade receivables sold 1,265 2,001 4,925 Collections made on behalf of Guarantees related to indemnification purchaser (1,513) (2,091) (5,489) We have indemnified certain purchasers of divested businesses Discount, liquidity and program fees (8) (8) (18) for potential claims arising from the operations of the divested Decrease in retained interests 65 80 178 businesses. To the extent the maximum loss related to such Net cash paid during the year 191 31 404 indemnifications could not be calculated, no amounts have Receivable as of December 31 – 13 – been included under maximum potential payments in the table above. Indemnifications for which maximum losses could not be calculated include indemnifications for legal claims. We paid discount and program fees on our securitization programs. Discounts were based on the amount of funding that We delivered to the purchasers of the Lummus business and we received, while program fees were based on the programs’ our interest in Jorf Lasfar, guarantees related to assets and size. These costs, of $8 million, $8 million and $18 million in liabilities divested in 2007. The maximum liability at December 2007, 2006 and 2005, respectively, are included in interest and 31, 2007 of $50 million and $189 million, respectively, relating other finance expense. to these businesses will reduce over time, pursuant to the sales agreements. In addition, we transfer receivables outside of the above described securitization programs. These transfers were sales, We delivered to the purchaser of the Upstream Oil, Gas and made without recourse, directly to banks and/or sales pursuant Petrochemicals business guarantees related to assets and to factoring or similar type arrangements. Total sold receivables

90 liabilities divested in 2004. The maximum liability at December included in these transactions during 2007 and 2006 were 31, 2007 and 2006, of approximately $89 million and $80 mil- approximately $378 million and $538 million, respectively, of lion, respectively, relating to this business will reduce over time, which, sales of $5 million in 2006 only, related to assets held pursuant to the sales agreement, subject to foreign exchange for sale and in discontinued operations. During each of 2007 fluctuations. and 2006, the related costs, including the associated gains and losses, were $5 million, respectively. (See “Note 2 Significant With respect to the sale of Lummus, we retained certain accounting policies” and “Note 7 Securitization” to our Consoli- liabilities, including potential fines and penalties connected with dated Financial Statements). suspect payments made prior to completion of the sale. We have disclosed these suspect payments to the United States Variable interests Securities and Exchange Commission and the United States We are a party to certain off-balance sheet arrangements Department of Justice. We cannot estimate the likelihood including variable interests in unconsolidated entities. (See of an unfavorable outcome or the amount of any potential loss. “Note 12 Investments in equity method accounted companies” Therefore, we have not recorded any provisions for any poten- to our Consolidated Financial Statements). tial fines or penalties relating to these suspect payments.

Securitization programs In addition to the primary sources of liquidity and capital resources described in the section entitled “Liquidity and capital resources,” we have sold certain trade receivables in revolving- period securitization programs. Between 2005 and 2007, as our liquidity improved and the need for such financing declined, the volume of trade receivables sold into such programs correspondingly declined. During 2007, we terminated the remaining revolving-period securitization program and, as of December 31, 2007, no amounts were outstanding. and contingencies”toourConsolidatedFinancialStatements). with theenduserofoutput.(See“Note16Commitments product. Therevenue usuallyisdefinedbyalong-termcontract final product orfrom sellingtheoutputgeneratedby entities generallyreceive revenues eitherfrom thesaleof These jointventures, affiliated companiesorproject-specific the sectionentitled“Off-balance sheetarrangements”above. projects andguaranteetheir obligations,asdiscussedunder credit tothesejointventures oraffiliatedcompaniesforspecific may operatethefinishedproducts. We mayalsograntlinesof specific projects, mayact asthecontractorofsuchprojects or In additiontoourinvestments,wemayprovide products to such asconstructing,operatingandmaintainingapowerplant. entities havebeenestablishedtoperformspecificfunctions, which are accounted for using the equity method. Many of these We have participations in joint ventures and affiliated companies, Consolidated FinancialStatements). basis. (See“Note16Commitmentsandcontingencies”toour on termsthatwebelieveare negotiatedonanarm’s length engage intransactionswithbusinessesthatwehavedivested companies. Also,inthenormalcourseofouractivities,we knowledge, thesetransactionsare notmaterialtothose involved inthesetransactionsare notmaterialtousand,our companies inwhichweholdanequityinterest. Theamounts the normalcourseofouractivities,wepurchase products from transactions are notmaterialtothosecompanies.Inaddition,in tions are notmaterialtousand,ourknowledge,these an equityinterest. Therevenues derivedfrom thesetransac- derive certainotherrevenues from companiesinwhich wehold In thenormalcourseofouractivities,wesellproducts and Related andcertainotherparties effect onourConsolidatedFinancialStatements. resolution of any such liability would not have a material adverse presently advisers,thatthe availableandonadviceofexternal collected. We are oftheopinion,baseduponinformation record suchamountsonlywhenitisprobable thattheywillbe matters from insurers orotherthird parties;however, we may beabletorecover aportionofthecostsrelating tothese timing ofpaymentscannotbereasonably estimated.We obligations are notdiscountedtotheirpresent valuebecause estimated. Estimatedlossesforenvironmental remediation these actionsandtheamountsoflossescanbereasonably are recorded when itisprobable thatlosses willresult from laws and under certain agreements with third parties. Provisions various UnitedStates(U.S.)andotherenvironmental protection sites principallyintheUnitedStatesofAmerica,arisingunder We are engagedinenvironmental clean-upactivitiesatcertain Environmental liabilities Contingencies andretained liabilities plan fortheHematitesite. and obtainingregulatory approval ofitsdraftdecommissioning Westinghouse’s efforts were focusedonmodifying,finalizing share oftheHematitesiteremediation cost.During2007, Thus, in2006,wemadenoadjustmenttothereserve forour tion waslargelyoffset byalowersiteremediation costestimate. for theHematitesite.Theunfavorableoutcomeofarbitra- re-estimate ourshare oftheexpectedtotalremediation costs Westinghouse andothersiterelated data,wewere ableto Investigation ReportandDecommissioningPlanprepared by Separately, basedonthepubliclyavailabledraftRemedial the Westinghouse costssubjecttothecostsharingagreement. was unfavorable to Westinghouse’s claims, potentially increasing in theCombustionEngineeringpurchase agreement forthesite related toindemnification of formerowner/operatorscontained Westinghouse’s claims.During2006,anarbitrationruling past andfuture remediation costs.Thedefendantscontested Response CompensationandLiabilityAct(CERCLA)torecover undertheComprehensiveU.S. Government Environmental against formerowner/operatorsoftheHematitesiteand Toshiba Corporation,Japan.Westinghouse brought legalaction house wasacquired during 2006byaconsortiumled oversees remediation activities attheHematitesite.Westing- Company LLC(Westinghouse), BNFL’s formersubsidiary, now cost sharingcontributionsfrom us.Westinghouse Electric other potentiallyresponsible partiesasconditionsforobtaining efficient mannerandpursue recovery of remediation costsfrom have theremediation ofthe Hematitesiteperformedinacost Under thetermsofsaleagreement, BNFLisresponsible to may takeuntil2011. site,webelievetheremediation respect totheWindsor With that itmaytakeuntil2013toremediate theHematitesite. based oninformationthatBNFLhasmadeavailable,webelieve radiological andchemicalcontaminationattheHematitesite, with accuracytheamountoftimeitmaytaketoremediate incurred over a number of years. Although it is difficult to predict incurred untilafacilityistakenoutofuseandgenerallyare radiological andchemicalcontamination.Suchcostsare not associated withthesesitesrelate tothecostsofremediating Hematite, Missouri,facility. Theprimaryenvironmental liabilities BNFL incursforenvironmental liabilitiesassociatedwiththe and agreed toreimburse BNFLforashare ofthecoststhat bustion Engineeringsubsidiary’s Windsor, Connecticut,facility the environmental liabilitiesassociatedwithourformerCom- Pursuant tothesaleagreement withBNFL,wehaveretained which wesoldtoBritishNuclearFuelsPLC(BNFL)in2000. by ourformersubsidiary, ABBCE-NuclearPowerInc., tion costsattwositesintheUnitedStatesthatwere operated We retain liabilitiesforcertainspecificenvironmental remedia- business Contingencies related toformerNuclearTechnology

91 | ABB Annual Report 2007 Financial review TitelDuring 2007, we reached agreement with U.S. government Einleitungstextagencies to transfer oversight of the remediation of the portion of the Windsor site under the U.S. government formerly Utilized Sites Remedial Action Program from the U.S. Army Corps of Engineers to the Nuclear Regulatory Commission which has oversight responsibility for the remaining radiological areas of that site and our radiological license for the site. Manage- ment believes this could result in cost efficiencies as well as expedited completion of the remediation activities at the site.

We established a provision of $300 million in income (loss) from discontinued operations in 2000 for our estimated share of the remediation costs for these sites. As of December 31, 2007 and 2006, we have recorded in current and non-current other liabilities reserves of $245 million and $251 million, respectively, net of payments from inception of $50 million and $47 million, respectively and reversal of $3 million in 2007 and $2 million in 2005 to income (loss) from discontinued operations reflecting realized cost savings. The balance of the provision at Decem- ber 31, 2007 represents our best estimate of our remaining remediation costs for these facilities. Expenditures charged to the provision were $3 million, $4 million and $9 million during 2007, 2006 and 2005, respectively. We have estimated that during 2008 we will charge expenditures of approximately $26 million to the provision. 92 Consolidated IncomeStatements Consolidated FinancialStatements

(loss)pershareDiluted earnings

(loss)pershareBasic earnings Net income Cumulative effect ofaccountingchange,nettax Income before cumulativeeffect ofaccountingchange Income (loss)from discontinuedoperations,netoftax Income from continuingoperationsbefore cumulativeeffect ofaccountingchange Minority interest Provision fortaxes effect ofaccountingchange Income from continuingoperationsbefore taxes,minorityinterest andcumulative Interest andotherfinanceexpense Interest anddividendincome Earnings beforeEarnings interest andtaxes Other income(expense),net Selling, generalandadministrativeexpenses Gross profit Total costofsales Cost ofservices Cost ofproducts Total revenues Sales ofservices Sales ofproducts Year endedDecember31(inmillions,exceptpershare data) See accompanyingNotestotheConsolidatedFinancialStatements. Net income Cumulative effect ofaccountingchange,nettax Income (loss)from discontinuedoperations,netoftax Income from continuingoperationsbefore cumulativeeffect ofaccountingchange Net income Cumulative effect ofaccountingchange,nettax Income (loss)from discontinuedoperations,netoftax Income from continuingoperationsbefore cumulativeeffect ofaccountingchange $ $ $ $ $ $ (20,215) (17,292) 29,183 24,816 (4,975) (2,923) 3,757 3,171 4,010 4,023 8,968 4,367 3,757 0.25 0.26 2007 (244) (595) (286) 1.63 1.38 1.66 1.40 586 273 30 – – – $ $ $ $ $ $ (16,537) (13,967) 23,281 19,503 (4,326) (2,570) 1,390 1,532 2,397 2,557 6,744 3,778 1,390 (0.06) (0.07) 2006 (142) (179) (686) (307) 0.63 0.69 0.65 0.72 147 139 – – – $ $ $ $ $ $ (15,510) (13,205) 20,964 17,622 (3,780) (2,305) 1,457 1,711 5,454 3,342 (0.06) (0.07) 2005 (127) (126) (464) (407) 0.36 0.00 0.42 0.36 0.00 0.43 740 867 153 735 37 (5)

93 | ABB Annual Report 2007 Financial review TitelConsolidated Balance Sheets Einleitungstext at December 31 (in millions, except share data) 2007 2006 Cash and equivalents $ 4,650 $ 4,198 Marketable securities and short-term investments 3,460 528 Receivables, net 8,582 6,566 Inventories, net 4,863 3,807 Prepaid expenses 307 247 Deferred taxes 783 572 Other current assets 368 240 Assets held for sale and in discontinued operations 132 1,397 Total current assets 23,145 17,555

Financing receivables, net 487 539 Property, plant and equipment, net 3,246 2,793 Goodwill 2,421 2,369 Other intangible assets, net 270 286 Prepaid pension and other employee benefits 380 373 Investments in equity method companies 63 545 Deferred taxes 862 507 Other non-current assets 127 175 Total assets $ 31,001 $ 25,142

Accounts payable, trade $ 4,167 $ 3,279 Billings in excess of sales 829 394

94 Accounts payable, other 1,289 1,172 Short-term debt and current maturities of long-term debt 536 122 Advances from customers 2,045 1,490 Deferred taxes 371 226 Provisions and other 3,342 2,864 Accrued expenses 1,737 1,513 Asbestos obligations 101 150 Liabilities held for sale and in discontinued operations 62 1,275 Total current liabilities 14,479 12,485

Long-term debt 2,138 3,160 Pension and other employee benefits 631 809 Deferred taxes 407 763 Asbestos obligations – 282 Other liabilities 1,797 1,154 Total liabilities 19,452 18,653

Minority interest 592 451 Stockholders’ equity: Capital stock and additional paid-in capital (2,570,314,947 and 2,370,314,947 authorized shares at December 31, 2007 and 2006, respectively) 5,634 4,514 Retained earnings 6,955 3,647 Accumulated other comprehensive loss (1,330) (2,019) Less: Treasury stock, at cost (18,725,475 and 8,782,721 shares at December 31, 2007 and 2006, r­espectively) (302) (104) Total stockholders’ equity 10,957 6,038 Total liabilities and stockholders’ equity $ 31,001 $ 25,142

See accompanying Notes to the Consolidated Financial Statements. Consolidated StatementsofCashFlows Carrying valueof debt andaccruedinterest convertedintocapitalstock Taxes paid Interest paid Supplementary disclosure ofcashflowinformation Cash andequivalentsendofperiod Cash andequivalentsbeginningofperiod Net changeincashandequivalents–continuingoperations and indiscontinuedoperations Adjustment forthenetchangeincashandequivalentsassetsheld forsale Effects ofexchangeratechangesoncashandequivalents Net cashusedinfinancingactivities Other Payments madeuponbondexchange Payments madeuponinducedbondconversion Dividends paidtominorityshareholders Dividends paid Purchase oftreasury shares Issuance ofshares Repayment ofdebt Increases indebt Net changesindebtwithmaturitiesof90daysorless Financing activities: Net cashusedininvestingactivities Proceeds from salesofbusinessesandequityaccountedcompanies(netcashdisposed) Proceeds from salesofproperty, plantandequipment Proceeds from salesofmarketablesecurities(otherthantrading)andshort-terminvestments Acquisitions ofbusinesses(netcashacquired) Purchases ofproperty, plantandequipmentintangibleassets Purchases ofmarketablesecurities(otherthantrading)andshort-terminvestments Changes infinancing receivables Investing activities: Net cashprovided byoperatingactivities

Adjustments toreconcilenetincomecashprovidedbyoperatingactivities: Net income Operating activities: Year endedDecember31(inmillions) See accompanyingNotes totheConsolidatedFinancialStatements. Changes inoperatingassetsandliabilities: Other Loss (gain)onsaleofdiscontinuedoperations Minority interest Income from equityaccountedcompanies Net gainfrom saleofproperty, plantandequipment Deferred taxes Pension andpostretirement benefits Provisions, net Depreciation andamortization Other assetsandliabilities,net Advances from customers Billings inexcessofsales Trade payables Inventories Trade receivables

$ $ $ $ $ (10,115) (2,291) (1,112) 4,198 1,142 7,361 3,054 4,650 3,757 (625) 2007 (117) (449) (199) (247) (756) (551) (541) (351) (362) 843 780 246 452 275 241 210 411 374 530 132 246 602 (45) (19) (54) (55) (46) (61) 39 75 56 81 – – $ $ $ $ $ (4,743) 3,136 1,062 4,366 1,939 4,198 1,390 (392) (694) 2006 (111) (203) (189) (536) (314) (512) (594) 953 594 274 184 105 151 128 461 132 256 190 179 113 243 570 (72) (94) (26) (95) (76) 25 47 27 67 (3) (4) – – $ $ $ $ $ (1,915) 1,833 1,012 3,136 3,558 (422) (896) (316) (259) 2005 (978) (456) (328) (892) (109) 325 332 155 117 229 118 161 159 131 466 597 735 (25) (74) (97) (27) (42) (44) (62) 37 35 68 16 38 (9) – – – – –

95 | ABB Annual Report 2007 Financial review TitelConsolidated Statements of Changes in Stockholders’ Equity Einleitungstext

Accumulated other comprehensive loss

Foreign Unrealized gain Pension and Unrealized gain Total accumu- Capital stock currency (loss) on other post- on cash flow lated other Total and additional Retained translation available-for-sale retirement plan hedge compre­hensive ­stockholders’ For the years ended December 31, 2007, 2006 and 2005 (in millions) paid-in capital earnings adjustment securities adjustments derivatives loss Treasury stock equity Balance at January 1, 2005 $ 3,083 $ 1,725 $ (1,708) $ 12 $ (206) $ 56 $ (1,846) $ (138) $ 2,824 Comprehensive income: Net income 735 735 Foreign currency translation adjustments (52) (52) (52) Accumulated foreign currency translation adjustments allocated to divestments of businesses 4 4 4 Effect of change in fair value of available-for-sale securities (net of tax of $2) (11) (11) (11) Minimum pension liability adjustments (net of tax of ($18)) (8) (8) (8) Change in derivatives qualifying as cash flow hedges (net of tax of $24) (49) (49) (49) Total comprehensive income 619 Issuance of shares 35 35 Share-based payment arrangements 4 4 Treasury share transactions (1) 2 1 Balance at December 31, 2005 $ 3,121 $ 2,460 $ (1,756) $ 1 $ (214) $ 7 $ (1,962) $ (136) $ 3,483 Comprehensive income: Net income 1,390 1,390 Foreign currency translation adjustments 294 294 294 Effect of change in fair value of available-for-sale securities (net of tax of ($1)) (3) (3) (3) Minimum pension liability adjustments (net of tax of ($15)) 11 11 11

96 Change in derivatives qualifying as cash flow hedges (net of tax of ($21)) 67 67 67 Total comprehensive income 1,759 Adjustment upon adoption of SFAS 158 (net of tax of $6) (426) (426) (426) Treasury share transactions (1) 1 – Shares issued to Asbestos PI Trust (CE Settlement Shares) 407 407 Dividends paid (203) (203) Conversion of convertible bonds 903 25 928 Issuance of shares 47 47 Share-based payment arrangements 21 6 27 Call options 16 16 Balance at December 31, 2006 $ 4,514 $ 3,647 $ (1,462) $ (2) $ (629) $ 74 $ (2,019) $ (104) $ 6,038 Comprehensive income: Net income 3,757 3,757 Foreign currency translation adjustments 505 505 505 Accumulated foreign currency translation adjustments allocated to divestments of businesses 51 51 51 Effect of change in fair value of available-for-sale securities (net of tax of $0) 9 9 9 Unrecognized income related to pensions and other postretirement plans (net of tax of ($5)) 59 59 59 Adjustments related to pensions and other postretirement plans allocated to divestments of businesses (net of tax of $0) 84 84 84 Change in derivatives qualifying as cash flow hedges (net of tax of $4) (19) (19) (19) Total comprehensive income 4,446 Treasury share transactions (1) (198) (199) Dividends paid (449) (449) Conversion of convertible bonds 830 830 Issuance of shares 241 241 Share-based payment arrangements 45 45 Call options 5 5 Balance at December 31, 2007 $ 5,634 $ 6,955 $ (906) $ 7 $ (486) $ 55 $ (1,330) $ (302) $ 10,957

See accompanying Notes to the Consolidated Financial Statements. Dividends paid Treasury share transactions

Comprehensive income: Balance atDecember31,2006 Call options Share-based paymentarrangements Issuance ofshares Conversion ofconvertiblebonds Dividends paid Shares issuedtoAsbestosPITrust (CESettlementShares) Treasury share transactions Adjustment uponadoptionofSFAS 158(netoftax$6)

Comprehensive income: Balance atDecember31,2005 Treasury share transactions Share-based paymentarrangements Issuance ofshares

Balance atDecember 31,2007

Call options

Share-based paymentarrangements

Issuance ofshares Comprehensive income: Conversion ofconvertiblebonds Balance atJanuary1,2005 See accompanyingNotes totheConsolidatedFinancialStatements. For theyearsendedDecember31,2007,2006and2005(inmillions) Total comprehensive income Change inderivativesqualifyingascashflowhedges(netoftax$4) of businesses(nettax$0) Adjustments related topensionsandotherpostretirement plansallocatedtodivestments Unrecognized incomerelated topensionsandotherpostretirement plans(netoftax($5)) Effect ofchangeinfairvalueavailable-for-sale securities(netoftax$0) Accumulated foreign currency translationadjustmentsallocatedtodivestmentsofbusinesses Foreign currency translationadjustments Net income Total comprehensive income Change inderivativesqualifyingascashflowhedges(netoftax($21)) Minimum pensionliabilityadjustments(netoftax($15)) Effect ofchangeinfairvalueavailable-for-sale securities(netoftax($1)) Foreign currency translationadjustments Net income Total comprehensive income Change inderivativesqualifyingascashflowhedges(netoftax$24) Minimum pensionliabilityadjustments(netoftax($18)) Effect ofchangeinfairvalueavailable-for-sale securities(netoftax$2) Accumulated foreign currency translationadjustmentsallocatedtodivestmentsofbusinesses Foreign currency translationadjustments Net income paid-in capital and additional Capital stock $ $ $ $ 4,514 3,121 5,634 3,083 903 407 241 830 16 21 47 35 45 (1) (1) (1)

4

5

$ $ $ $ Retained earnings 3,647 2,460 6,955 1,725 3,757 1,390 (449) (203) 735

adjustment translation $ $ $ $ currency Foreign (1,462) (1,756) (1,708) (906) 505 294 (52) 51

4

available-for-sale Unrealized gain $ $ $ $ Accumulated othercomprehensive loss securities (loss) on 12 (11) (2) 1 7 (3)

9

retirement plan Pension and adjustments other post- $ $ $ $ (629) (214) (486) (206) (426) 84 59 11 (8)

Unrealized gain on cashflow derivatives $ $ $ $ hedge 74 (19) 55 56 (49) 67 7

compre­ Total accumu- lated other $ $ $ $ hensive (2,019) (1,962) (1,330) (1,846) (426) loss 505 294 (19) (49) (11) (52) 84 59 51 67 11 (3) (8)

9

4

Treasury stock $ $ $ $ (104) (136) (302) (138) (198) 25

6

1

2

­stockholders’ $ $ $ $ 10,957 6,038 equity 3,483 2,824 4,446 3,757 1,759 1,390 Total (199) (203) (426) (449) 505 928 407 294 619 241 735 830 (19) (49) (11) (52) 84 59 51 16 27 47 67 11 35 45 (3) (8) 9 1 4 5 4 –

97 | ABB Annual Report 2007 Financial review Notes to the Consolidated Financial Statements Titel(U.S. dollar amounts in millions, except per share amounts) Einleitungstext Note 1 The company ABB Ltd and its subsidiaries (collectively, the Company) together form a leading global company specializing in power and automation tech­ nologies that improve the performance of utility and industry customers, while lowering environmental impact. The Company works with customers to engineer and install networks, facilities and plants with particular emphasis on enhancing efficiency, reliability and productivity for customers who generate, convert, transmit, distribute and consume energy.

Note 2 Significant accounting policies The following is a summary of significant accounting policies followed in the preparation of these Consolidated Financial Statements.

Basis of presentation The Consolidated Financial Statements are prepared in accordance with United States of America (United States or U.S.) generally accepted accounting principles (U.S. GAAP) and are presented in United States dollars ($ or USD) unless otherwise stated. Par value of capital stock is denominated in Swiss francs.

Scope of consolidation The Consolidated Financial Statements include the accounts of ABB Ltd and companies which are directly or indirectly controlled. Additionally, the Company consolidates variable interest entities (VIEs) for which it is deemed to be the primary beneficiary. Intercompany accounts and transactions have been eliminated. Investments in joint ventures and affiliated companies in which the Company has the ability to exercise significant influence over operating and financial policies (generally through direct or indirect ownership of 20 percent to 50 percent of the voting rights), are recorded in the Consolidated Financial Statements using the equity method of accounting.

Reclassifications Amounts reported for prior years in the Consolidated Financial Statements and Notes have been reclassified to conform to the current year’s presentation, primarily related to the application of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), in reflecting assets and liabilities held for sale and in discontinued operations.

Operating cycle A portion of the Company’s operating cycle, including long-term construction activities, exceeds one year. For classification of current assets and liabilities related to these types of construction activities, the Company elected to use the duration of the contracts as its operating cycle.

Use of estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make assumptions and estimates that directly 98 affect the amounts reported in the Consolidated Financial Statements. Significant estimates for which changes in the near term are considered reasonably possible and that may have a material impact on the financial statements are addressed in the Notes to these Consolidated Financial Statements.

Cash and equivalents Cash and equivalents include highly liquid investments with maturities of three months or less at the date of acquisition.

Marketable securities and short-term investments All current debt and equity securities are classified as “available-for-sale” at the time of purchase and are reported at fair value. Unrealized gains and losses on available-for-sale securities are excluded from the determination of earnings and are instead recognized in the accumulated other comprehensive loss component of stockholders’ equity, net of tax (accumulated other comprehensive income) until realized. Realized gains and losses on available-for-sale securities are computed based upon the historical cost of these securities using the specific identification method.

The Company analyzes its available-for-sale securities for impairment during each reporting period to evaluate whether an event or change in circumstances has occurred in that period that may have a significant adverse effect on the fair value of the investment. The Company records an impairment charge through current period earnings and adjusts the cost basis for such other-than-temporary declines in fair value when the fair value is not anticipated to recover above cost within a three-month period after the measurement date, unless there are mitigating factors that indicate an impairment charge through earnings may not be required. If an impairment charge is recorded, subsequent recoveries in fair value are not reflected in earnings until sale of the security.

Accounts receivable and allowance for doubtful accounts Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in existing accounts receivable. The Company determines the allowance based on historical write-off experience and customer economic data. The Company reviews the allowance for doubtful accounts regularly and past due balances are reviewed for collectibility. Account balances are charged off against the allowance when the Company believes that the amount will not be recovered.

Concentrations of credit risk The Company sells a broad range of products, systems and services to a wide range of industrial, commercial and utility customers as well as various government agencies throughout the world. Concentrations of credit risk with respect to trade receivables are limited, as the Company’s customer base is comprised of a large number of individual customers. Ongoing credit evaluations of customers’ financial positions are performed and generally, no collateral is required. The Company maintains reserves for potential credit losses. Such losses, in the aggregate, are in line with the Company’s expectations.

It is the Company’s policy to invest cash in deposits with banks throughout the world with certain minimum credit ratings and in high quality, low ­risk, liquid investments. The Company actively manages its credit risk by routinely reviewing the creditworthiness of the banks and the investments held, as well as maintaining such investments in time deposits or other liquid investments. The Company has not incurred significant credit losses related to such investments. U.S. dollar amounts in millions, except per share amounts share per except millions, in amounts dollar U.S. Flows. Cash of Statement 95, No. Standards Accounting Financial of by Statement permitted as segregated, not are operations discontinued in and sale for held liabilities and assets with to businesses related amounts the Flows, Cash of Statements Consolidated the In Statements. Income Consolidated the in operations discontinued from (loss) income through recorded are balances such of adjustments future liabilities; and assets continuing in recorded are retained are that operations to sold related liabilities and Assets sell. to cost less value fair or amount carrying of lower the at measured are sale for held as classified liabilities and occur. Assets they which in period the in recognized are operations discontinued from Results sale. for held as classified to be criteria the meet assets the when cease amortization and Depreciation abandonment. or sale their for plans Company’s to the respect with criteria certain meet that liabilities and assets the operations discontinued in and sale for held liabilities and assets in includes SFAS 144, with Company the accordance In assets. the of nature the on depending values appraised or flows cash discounted on based determined is value SFAS of fair 144. Estimated criteria measurement to the pursuant value, fair estimated its to reduced is asset the of amount any, if carrying the asset, the of disposition from expected proceeds net including life useful remaining its over generated be to expected flows cash undiscounted net assets the exceeds value carrying net assets the If recoverable. be not may asset the of amount carrying the that indicate circumstances or events when impairment for assessed are used” and “held are that assets Long-lived operations discontinued for accounting and assets long-lived of Impairment year. one within realized to be expected not is which of aportion cycles, production long with contracts to relating amounts include costs inventoried contracts, to long-term relating inventory For sales. of cost in recognized by amounts reduced overheads, manufacturing applicable and labor and material direct including cost, production actual or cost acquisition at stated are costs ried Invento- market. or method) cost weighted-average the or first-out first-in, the either using (determined cost of lower the at stated are Inventories Inventories borrowings. secured as for SFAS of 140 accounted are requirements the meet not do that SFAStransfers in or 140. Sales provided criteria the with accordance in evaluated as surrendered, been has control when assets financial to derecognize entity an SFAS 140 requires (SFAS 140). Liabilities of Extinguishments and Assets Financial of Servicing and Transfers for 140, No. Accounting Standards Accounting of Financial Statement with accordance in receivables trade of sales/transfers such for accounts Company The arrangements. type similar or to factoring ­ and/or to banks directly 7) Note (see recourse without receivables trade sells/transfers business, of course normal its in Company, The receivables of transfers or Sales sales. of cost of acomponent as recorded are costs handling and Shipping revenues. contract related the over costs contract of excess anticipated the upon based are and identified are they when period the in recognized are contracts maintenance-type and product on Losses contracts. or products related the on revenues recognizes it when warranties for costs anticipated for provides Company The provisions loss contract and expenses Product-related revenues). from (excluded basis a net on presented are taxes excise some and value-added use, sales, as such acustomer, and aseller between transactions revenue-producing on imposed directly are that authority by agovernmental assessed taxes 06-3), (EITF Presentation) Net Versus Gross is, (that Statement Income the in Presented be Should Authorities to Governmental Remitted and Customers from Taxes Collected How 06-3, No. EITF with accordance In lapsed. has period acceptance contractual the or criteria, objective customer-specified the demonstrated has Company the or occurs, acceptance customer until deferred are provisions acceptance customer contain that contracts from Revenues accounting. of unit aseparate as treatment for criteria the meets element such Significant accounting policies, continued policies, accounting Significant pursuant pursuant -

99 | ABB Annual Report 2007 Financial review Note 2 Significant accounting policies, continued TitelGoodwill and other intangible assets In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), goodwill is tested for Einleitungstextimpairment annually or more frequently if impairment indicators arise. The Company performs its annual impairment assessment on October 1. A fair value approach is used to identify potential goodwill impairment and, when necessary, measure the amount of impairment. The Company uses a discounted cash flow model to determine the fair value of reporting units, unless there is a readily determinable fair market value.

The cost of acquired intangible assets is amortized on a straight-line basis over their estimated useful lives, typically ranging from 3 to 10 years. Intangible assets are tested for impairment in accordance with SFAS 144, upon the occurrence of certain triggering events.

Capitalized software costs Capitalized costs of software for internal use are accounted for in accordance with Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, and are amortized on a straight-line basis over the estimated useful life of the software, typically ranging from 3 to 5 years. Capitalized costs of a software product to be sold are accounted for in accordance with Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, and are amortized on a straight-line basis over the estimated life of the product. The Company periodically performs an evaluation to determine that the unamortized cost of software to be sold does not exceed the net realizable value. The Company expenses costs incurred prior to technological feasibility, and thereafter capitalizes costs incurred in developing or obtaining software for internal use and for software products to be sold.

Property, plant and equipment Property, plant and equipment is stated at cost, less accumulated depreciation, and is depreciated using the straight-line method. The estimated useful lives of the assets are generally as follows:

Factories and office buildings: 30 to 40 years Other facilities: 15 years Machinery and equipment: 3 to 15 years Furniture and office equipment: 3 to 8 years

Derivative financial instruments and hedging activities The Company uses derivative financial instruments to manage interest rate, currency and commodity risk exposures, arising from its global operating, financing and investing activities.

Due to the global nature of its operations, the Company is exposed to foreign currency exchange risks in the ordinary course of business. The Company’s policies require that its industrial entities economically hedge their foreign currency risk exposures from binding contracts ­denominated in foreign currencies, as well as at least fifty percent of the anticipated foreign currency denominated sales volume of standard products and related foreign currency purchases over the next twelve months. 100

The Company accounts for its derivative financial instruments in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted (SFAS 133). SFAS 133 requires the Company to recognize all derivatives, other than certain derivatives indexed to the Company’s own stock, on the Consolidated Balance Sheets at fair value. Derivatives that are not designated as hedging instruments are reported at fair value through earnings. If the derivatives are designated as a hedge, depending on the nature of the hedge, changes in the fair value of the derivatives will either be offset against the change in fair value of the hedged item through earnings or recognized in accumulated other comprehensive loss until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings consistent with the classification of the hedged item.

Forward foreign exchange contracts are the primary instrument used to manage foreign exchange risks. Where forward foreign exchange contracts are designated as cash flow hedges under SFAS 133, changes in their fair value are recorded in accumulated other comprehensive loss until the hedged item is recognized in earnings. The Company also enters into forward foreign exchange contracts that serve as economic hedges of existing assets and liabilities. These do not qualify for hedge accounting under SFAS 133 and, consequently, changes in their fair value are reported in earnings.

If an underlying hedged transaction is terminated early, the hedging derivative instrument is treated as if terminated simultaneously, with any gain or loss on termination of the derivative immediately recognized in earnings. Where derivative financial instruments have been designated as hedges of forecasted transactions, and such forecasted transactions become probable of not occurring, hedge accounting is discontinued. Any derivative gain or loss previously included in accumulated other comprehensive loss is reclassified into earnings.

To reduce its interest rate and currency exposure arising from its borrowing activities, the Company uses interest rate and currency swaps. Where interest rate swaps are designated as fair value hedges, changes in the fair value of the swaps are recognized in earnings, as are the changes in the fair value of the underlying debt, attributable to the risks being hedged. Where such interest rate swaps do not qualify for the short cut method as defined under SFAS 133, any ineffectiveness is included in earnings.

Certain commercial contracts may grant rights to the Company or the counterparties, or contain other provisions that are considered to be derivatives under SFAS 133. Such embedded derivatives are assessed at inception of the contract, and depending on their characteristics, accounted for as separate derivative instruments pursuant to SFAS 133.

Sale-leasebacks The Company occasionally enters into transactions accounted for as sale-leasebacks, in which fixed assets, generally real estate and/or equipment, are sold to a third party and then leased for use by the Company. Under certain circumstances, the necessary criteria to recognize a sale of the assets may not occur, and the transaction is reflected as a financing transaction, with the proceeds received from the transaction reflected as a borrowing or deposit liability. When the necessary criteria have been met to recognize a sale, gains or losses on the sale of the assets are generally deferred and amortized over the term of the transaction, except in certain limited instances when a portion of the gain or loss may be recognized. The lease of the assets is accounted for as either an operating lease or a capital lease, depending upon its specific terms, as required by Statement of Financial Accounting Standards No. 13, Accounting for Leases.

U.S. dollar amounts in millions, except per share amounts U.S. dollar amounts in millions, except per share amounts share per except millions, in amounts dollar U.S. grant. of date the on shares underlying the of value market the than, to, greater or equal prices exercise had plans these under granted options or warrants all as (ESAP), plan acquisition share employee the under Company by the granted options stock the and MIP the under issued warrants the for 1, 2006, to January prior recognized was compensation 25. stock-based APB No with accordance in 2005 in Statement Income Consolidated the in recognized was cost (LTIP), plan compensation incentive long-term the under awarded shares granted conditionally the and (MIP) plan incentive management the under granted rights appreciation warrant cash-settled with (SFAS 123). connection In Compensation Stock-Based for 123, No. Accounting Standards Accounting Financial of by Statement permitted as Interpretations, 25), related (APB and to Employees Issued Stock for 25, No. Accounting Opinion Board Principles Accounting with accordance in plans these for accounted Company the 1, 2006, to January Prior award. the of value fair the on based date, grant the at measured is compensation share-based Accordingly, method. value fair the under for accounted be to awards equity employee SFAS method. requires 123R transition modified-prospective the using (SFAS 123R), Payment 1232004), No. Share-Based (revised Standards Accounting Financial of Statement of provisions the adopted Company 1, the 2006, January 20. Note Effective in fully more described are which arrangements, payment share-based various has Company The arrangements payment Share-based 13 20. Notes in and securities dilutive potentially the of discussion further and 22 Note in share per to earnings related discussion further See bonds. convertible to outstanding relation in 2007, issuable to September shares prior and, arrangements payment share-based Company’s the under conditions vesting and/or to market subject granted shares and options outstanding options, call written outstanding comprise: securities dilutive Potentially dilutive. if exercised, were securities dilutive potentially all that assuming year, the during outstanding shares of number weighted-average by the (loss) income by dividing calculated is share per (loss) earnings Diluted year. the during outstanding shares of number weighted-average by the (loss) income by dividing calculated is share per (loss) earnings Basic share per Earnings respectively. 2007, 2005, and 2006 in million $668 and $758 $871 million was million, expenses administrative and general selling, in included expense development and Research development and Research expense. finance other and interest as Statements Financial dated Consoli the in classified is Interest tax. for provision as Statements Financial Consolidated the in classified is penalties to tax related Expense restated. been not have periods prior 48, by FIN required As immaterial. was earnings retained to opening adjustment The liabilities. –non-current liabilities other of balance opening the in $470 million approximately of increase an and liabilities –current expenses accrued of balance opening the in million $30 approximately of adecrease liabilities, –current other and provisions of balance opening the in $100 million approximately of adecrease liabilities, –non-current taxes deferred of balance opening the in million $340 approximately of adecrease Sheet, Balance Consolidated the in liabilities tax-related income certain of 1, 2007, January of reclassification as to 48 the FIN of led adoption The 1, 2007. January effective 48 FIN adopted Company The settlement. ultimate upon realized being of likely percent 50 than more is which amount largest the as benefit tax the to measure is step second any. if The processes, litigation or appeals related of resolution including audit, on sustained be will position the that not than likely more is it that indicates evidence available of weight the if by determining recognition for position tax the is evaluate to step first The Taxes. Income for 109, No. Accounting Standards Accounting Financial of Statement with accordance in for accounted positions tax uncertain measuring and to recognizing approach atwo-step applying requires 48). 48 FIN (FIN Taxes Income in Uncertainty for Accounting 48, No. Interpretation (FASB) issued Board Standards Accounting F Significant accounting policies, continued policies, accounting Significant -

101 | ABB Annual Report 2007 Financial review Note 2 Significant accounting policies, continued TitelAsset retirement obligations The Company may have a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are condi- Einleitungstexttional on a future event that may or may not be within the control of the Company. In 2005, the Company recognized the cumulative effect of an accounting change of $5 million, net of tax, in the Consolidated Income Statements as a result of the adoption of the Financial Accounting Standards Board Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143 (FIN 47). In accordance with FIN 47, the Company recognizes a liability for the fair value of a conditional asset retirement obligation when the fair value of the liability can be reasonably estimated.

Pensions and other postretirement benefits The Company recognizes an asset for a plan’s overfunded status or a liability for a plan’s underfunded status in its Consolidated Balance Sheets in accordance with Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS 158). Additionally, the Company measures a plan’s assets and obligations that determine its funded status as of the end of the year, and recognizes the changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes are reported in accumulated other comprehensive loss and as a separate component of stockholders’ equity. The Company adopted SFAS 158 in 2006. See Note 19 for further discussion of SFAS 158 and the Company’s employee benefit plans.

New accounting pronouncements In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value and enhances fair value measurement disclosure. SFAS 157 does not require any new fair value measurements and eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 provides a single definition for fair value that is to be applied consistently for all accounting applications (excluding requirements of other standards), and also generally describes and prioritizes according to reliability the methods and inputs used in valuations. In February 2008, the Financial Accounting Standards Board issued Staff Position (FSP) No. 157-b, Effective Date of FASB Statement No. 157 (FSP 157-b). FSP 157-b delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the Consolidated Financial Statements on a recurring basis (at least annually) until the beginning of the first quarter of 2009. The Company is currently evaluating the impact of adopting SFAS 157 on its fair value measurements with respect to those nonfinancial assets and nonfinancial liabilities that are subject to delayed application under FSP 157-b. With respect to fair value measurement of financial instruments, the adoption of SFAS 157 is not expected to have a significant impact on the Company’s Consolidated Financial Statements. However, the resulting fair values calculated under SFAS 157 after adoption may be different than the fair values that would have been calculated under previous guidance.

In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing 102 entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is expected to expand the use of fair value measurement. SFAS 159 is effective for the Company as of the beginning of the first quarter of 2008. The Company will consider the adoption of SFAS 159 for new financial transactions entered into after December 31, 2007.

In December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51 (SFAS 160), and revised Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS 141R). The statements require most assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at full fair value and require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. Both statements are effective for the Company in 2009, and earlier adoption is prohibited. The Company will apply SFAS 141R to business combina- tions occurring after the effective date. SFAS 160 will be applied prospectively, with the exception of the presentation and disclosure require- ments which will be made on a retrospective basis, to all noncontrolling interests. After adoption, noncontrolling interests of $592 million and $451 million in 2007 and 2006, respectively, will be classified as a part of stockholders’ equity. Income attributable to noncontrolling interests of $244 million and $179 million in 2007 and 2006, respectively, will be excluded from net income, although such income will continue to be deducted to calculate earnings per share. Purchases and sales of noncontrolling interests will be reported in equity.

Note 3 Acquisitions, divestments and discontinued operations Acquisitions During 2007, 2006 and 2005, the Company invested $54 million, $3 million and $27 million, in 14, 11, and 22, new businesses, joint ventures or affiliated companies, respectively. Acquisitions have been accounted for under the purchase method and have been included in the Company’s Consolidated Financial Statements since the date of acquisition. The aggregate excess of the purchase price over the fair value of net assets acquired totaled $23 million, $2 million and $6 million in 2007, 2006 and 2005, respectively, and was recorded as goodwill. The Company has not presented the pro forma results of operations of the acquired businesses as the results are not material to the Consolidated Financial Statements.

Divestments In addition to the sold businesses described under discontinued operations below, the Company has divested businesses and investments not considered by management to be aligned with its focus on power and automation technologies as described in Note 1. Since these divestments did not meet the requirements of SFAS 144, the results of operations of these divested businesses are included in the Company’s Consolidated Income Statements in the respective line items of income from continuing operations, through the date of divestment.

In May 2007, the Company completed the sale of its 50 percent stake in Jorf Lasfar Energy Company S.C.A. (Jorf Lasfar), a power plant based in Morocco, and its 50 percent stake in S.T.CMS Electric Company Private Limited (Neyveli), a power plant in India, to Taqa, the Abu Dhabi National Energy Company. The Company’s share of the pre-tax earnings of Jorf Lasfar was $21 million, $67 million and $62 million for the years ended December 31, 2007, 2006 and 2005, respectively. The Company’s share of the pre-tax earnings of Neyveli for the years ended Decem- ber 31, 2007, 2006 and 2005 was $4 million, $9 million and $23 million, respectively. The transaction resulted in a gain of approximately $38 mil- lion, which is included in continuing operations.

U.S. dollar amounts in millions, except per share amounts U.S. dollar amounts in millions, except per share amounts share per except millions, in amounts dollar U.S. tax. of net operations, discontinued from (loss) income in recorded in 2005, of million $1 loss a and $41of million revenues had business Foundry The operations. discontinued to reclassified to being prior division Automation Process Company’s the of part was business This business. Foundry its of sale the completed Company the 2005, In business Foundry business. the of sale to the related 2006 in recorded loss the of majority The tax. of net operations, discontinued from (loss) income in million $48 of aloss and million $95 of revenues recorded business the 2006, in date 31, divestment to the Up 2005. December ended year the for tax, of net operations, discontinued from (loss) income in $15recorded of million, aloss and of $76 million revenues had business The operations. discontinued to reclassified to being prior division Products Power Company’s the of part was business This Kingdom. United the in Ltd, based Cable to Longford Ireland in business cable its sold Company the 2006, In business Cable operations. discontinued to reclassified to being prior division Systems Power Company’s the of part were businesses Lines Power All tax. of net operations, discontinued from (loss) income $12 of in aloss and million $27 of million revenues recorded businesses these 2005, in date divestment to the Up Nigeria. and Italy Germany, in businesses Lines Power its of sale the completed Company the 2005, In tax. of net operations, discontinued from (loss) income in recorded respectively, 31, 2005, and 2006 December ended years the for million $0 and ($1) of (loss) million income and $18 million and million $8 of revenues had businesses These Africa. South and Venezuela in businesses Lines Power its of disposed Company the 2006, In tax. of net operations, discontinued from (loss) income in recorded million, $3 of aloss and million $39 of revenues had businesses these 2007, in date divestment to the Up tax. of net operations, discontinued from (loss) income in recorded was which respectively, 2005, and 2006 31, December ended years the for million $3 and million ($4) of (loss) income and million $84 and million $80 of revenues had businesses These loss. or gain no and million $20 of price asales for Mexico and Brazil in businesses Lines Power its 2007, sold Company the February In business Lines Power tax. of net operations, discontinued from (loss) income in recorded million, $2 of aloss and $47 of million revenues had 2007,in business the date divestment to the Up business. the of sale the from expected were which proceeds the upon based charge impairment an was million $67 2006, for reported loss the Of tax. of net operations, discontinued from (loss) income in recorded respectively, million, $20 and million $65 were 2005 and 2006 for Losses respectively. 31, 2005, and 2006 December ended years the for million $354 and million $286 of revenues had business The Germany. in located Group, WISAG the was business this of purchaser The operations. discontinued to reclassified to being prior Other and Non-core of part was business This Germany. in business Systems Building its of sale the 2007, completed April In Company the Germany in business Systems Building tax. of net operations, discontinued from (loss) income in recorded million, $530 of Lummus of sale the on again had Company the addition, In tax. of net operations, discontinued from (loss) income in recorded million, $9 of income and $870 of million revenues had 2007, in business date Lummus the divestment to the Up tax. of net operations, discontinued from (loss) income in recorded respectively, million, $36 and million $9 was 2005 and 2006 for recorded Income respectively. 31, 2005, and 2006 December ended years the for million $929 and million $985 of revenues had business Lummus The 16). Note (see of sale the completion to prior made payments suspect with connected penalties and fines potential for including liabilities certain retains Company The 14, 2007. November on executed was trust to the payment The Engineering. Combustion of liabilities asbestos to cover up set Trust, atrust PI Asbestos CE to the Company by the million $204 of payment accelerated an triggered sale The $810 million. approximately of proce Acquisitions, divestments and discontinued operations, continued continued operations, discontinued and divestments Acquisitions,

103 | ABB Annual Report 2007 Financial review Note 3 Acquisitions, divestments and discontinued operations, continued TitelControl Valves business In 2005, the Company sold its Control Valves business in Japan. This business was part of the Company’s Power Products division prior Einleitungstextto being reclassified to discontinued operations. The Control Valves business had revenues of $26 million and income of $15 million in 2005. The income recorded in 2005 includes $14 million related to the gain on sale of the Control Valves business, recorded in income (loss) from discontinued operations, net of tax.

Upstream oil and gas business In 2006, the Company and the buyer of the upstream oil and gas business entered into an agreement to settle certain items which were disputed by the buyer after the closing of the transaction in 2004. In 2007 and 2006, the Company recorded income in connection with the release of certain provisions, amounting to approximately $21 million and $15 million in income (loss) from discontinued operations, net of tax, related to the divestment.

Structured Finance business In November 2005, the Company completed the sale of its remaining Structured Finance business and divested the Lease Portfolio business in Finland. This business was part of Non-core and Other prior to being reclassified to discontinued operations. With lease and loan financial receivables of approximately $300 million, the Lease Portfolio business was the last remaining major entity of the Structured Finance business. In 2005, the Company recorded a loss of approximately $28 million in income (loss) from discontinued operations, net of tax, principally related to the loss on sale of the business.

Other In addition, the Company has also reflected certain other operations as held for sale and in discontinued operations, as appropriate.

Income (loss) from discontinued operations, net of tax, also includes costs related to the Company’s asbestos obligations of approximately $0 million, $70 million and $133 million in 2007, 2006 and 2005, respectively (see Note 16).

Operating results of the held for sale and discontinued operations are summarized as follows:

Year ended December 31, 2007 2006 2005 Revenues $ 1,123 $ 1,602 $ 1,677 Costs and expenses, finance loss (1,047) (1,668) (1,775) Operating income (loss) before taxes 76 (66) (98) Tax (expense) benefit (20) 7 (13) Operating income (loss) from discontinued operations 56 (59) (111) 104 Gain (loss) from dispositions, net of tax 530 (83) (16) Income (loss) from discontinued operations, net of tax $ 586 $ (142) $ (127)

The major components of assets and liabilities held for sale and in discontinued operations in the Company’s Consolidated Balance Sheets are summarized as follows:

December 31, 2007 2006 Cash and equivalents, Marketable securities and short-term investments $ 26 $ 65 Receivables, net 37 820 Inventories, net 56 115 Prepaid expenses and Other assets 2 43 Property, plant and equipment 11 25 Goodwill and Other intangible assets, net – 236 Prepaid pension and other employee benefits – 2 Investments in equity method companies – 91 Assets held for sale and in discontinued operations $ 132 $ 1,397

Accounts payable $ 18 $ 368 Short-term debt and current maturities of long-term debt – 5 Advances from customers 25 53 Provisions and other 14 157 Accrued expenses 4 457 Pensions and other employee benefits – 195 Other liabilities, non-current 1 40 Liabilities held for sale and in discontinued operations $ 62 $ 1,275

As of December 31, 2006, assets and liabilities held for sale and in discontinued operations includes assets and liabilities of the Lummus business. The sale of Lummus was completed in November 2007.

U.S. dollar amounts in millions, except per share amounts contractual maturities of the above available-for-sale debt securities consisted of the following: the of consisted securities debt available-for-sale above the of maturities contractual 31, 2007,December At significant. not were securities available-for-sale on losses and gains 31, unrealized 2006, and 2007 At December Available-for-sale securities, classified as marketable securities, consisted of the following: the of consisted securities, marketable as classified securities, Available-for-sale 31, respectively. 2006, and 2007 December at million $38 and million $36 were loss comprehensive other accumulated in included options call cash-settled the of value fair the in Changes WARs. the for liability the of value fair in change the offset they that extent to the to earnings released and loss comprehensive other accumulated in recorded value fair in changes subsequent with value fair at measured assets as recorded been have options call 00-19), (EITF Stock cash-settled the Own aCompany’s in, Settled Potentially to, and Indexed Instruments Financial Derivative for 00-19, No. EITF with Accounting accordance In WARs. outstanding the under obligations to its equivalent amounts to receive Company the entitle which options, call cash-settled purchases Company MIP, Company’s the the under issued (WARs) rights appreciation warrant Company’s the of value fair in to fluctuations exposure To its hedge U.S. dollar amounts in millions, except per share amounts share per except millions, in amounts dollar U.S. following: the of consisted investments short-term and securities Marketable 4 Note cross-currency swaps. Where such instruments are designated as fair value hedges, the changes in fair value of these instruments, as well as as well as instruments, these of value fair in changes the hedges, value fair as designated are instruments such Where swaps. cross-currency and rate interest uses Company the activities, borrowing its from primarily arising exposures currency foreign and rate interest its To reduce hedges value Fair 2011. through 2009 in to earnings reclassified be to is expected million $5 and in 2008 earnings to 31, reclassified to be 2007, expected is December at loss million $50 hensive compre other accumulated in included million $55 the Of respectively. 2007, in 2005, and $27 million and 2006 million $95 $79 of million, gain net was a earnings to loss comprehensive other accumulated from reclassified losses or gains instrument financial derivative of amount The hedged. being transaction underlying the of impact earnings the of classification the with consistent sales of cost or revenues either in shown is and to earnings released is loss earnings. in comprehensive other recognized is accumulated in item amount hedged the respective the time, until At such loss, comprehensive other accumulated in recorded is value fair their in changes the of portion effective the hedges, flow cash as qualify and designated are instruments such Where risks. uses also commodity its toCompany manage The contracts commodity operations. its of risk exchange foreign the manage to contracts exchange foreign forward into enters Company The hedges flow Cash 5 Note arrangements. security other and credit of letters issued for collateral as securities marketable of respectively, million, $58 and million $65 pledged Company 31, the 2006, and 2007 At December 31, 2007,December 2005. and 2006 at significant not were position loss unrealized acontinuous in been have that securities available-for-sale those of losses unrealized Gross expense. finance other and interest in included are losses and gains Such respectively. 2007, in 2005, and million 2006 $34 and million $3 $1 million, were securities available-for-sale on losses realized Gross respectively. 2007, in $18 2005, and and million 2006 million $96 $130 were million, securities available-for-sale on gains realized Gross Total Total debtsecurities

Total

Cash-settled calloptionsservingashedgesoftheCompany’s MIP(seeNote20)

Time deposits Time Debt securities: Available-for-sale securities Equity securities December 31, December 31, Total Due aftertenyears Six totenyears One tofiveyears Less thanoneyear Other Corporate European obligations government U.S. government obligations U.S. government Marketable securities and short-term investments investments short-term and securities Marketable Financial instruments instruments Financial $ $ Cost 344 286 132 48 20 86 58 2007 Fair value $ $ 351 286 132 47 19 88 65 $ $ $ $ $ $ 3,460 2,889 2007 Cost Cost 220 351 316 269 120 142 286 45 26 78 47 38 84 22 2006 Fair value Fair value $ $ $ $ $ $ 2006 314 264 528 118 176 314 142 286 44 25 38 77 50 38 85 21 -

105 | ABB Annual Report 2007 Financial review Note 5 Financial instruments, continued Titelthe changes in fair value of the underlying liabilities attributable to the risks being hedged, are recorded as offsetting gains and losses in the determination of earnings. The hedge ineffectiveness in 2007, 2006 and 2005, resulted in a gain (loss) of $0 million, $3 million and ($16) million, Einleitungstextrespectively.

Disclosure about fair values of financial instruments The Company uses the following methods and assumptions in estimating fair values for financial instruments:

Cash and equivalents, receivables, accounts payable, short-term debt and current maturities of long-term debt: The carrying amounts approximate the fair values as the items are short-term in nature.

Marketable securities and short-term investments: Fair values of marketable securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying amounts of short-term investments approximate the fair values.

Financing receivables and loans (non-current portion): Fair values are determined using a discounted cash flow methodology based upon loan rates of similar instruments. The carrying values and estimated fair values of long-term loans granted at December 31, 2007, were $104 million and $102 million, respectively, and at December 31, 2006, were $154 million and $154 million, respectively.

Long-term debt (non-current portion): Fair values of public bond issues are based on quoted market prices. The fair values of other debt are based on the present value of future cash flows discounted at estimated borrowing rates for similar debt instruments, or in the case of private placement bond or note issuances, using the relevant borrowing rates derived from interest rate swap curves. The carrying values and estimated fair values of long-term debt at December 31, 2007, were $2,138 million and $2,300 million, respectively, and at December 31, 2006, were $3,160 million and $4,448 million, respectively.

Derivative financial instruments: Fair values are the amounts by which the contracts could be settled. These fair values were estimated by using a discounted cash flow methodology based on available market data, option pricing models or by obtaining quotes from brokers. At December 31, 2007 and 2006, the carrying values equal fair values. Current derivative assets are recorded in other current assets, and non-current derivative assets are recorded in other non-current assets. Current derivative liabilities are recorded in provisions and other and non-current derivative liabilities are recorded in other liabilities. The fair values were:

December 31, 2007 2006 Derivative assets, current $ 295 $ 187 Derivative assets, non-current 83 121 106 Total $ 378 $ 308

Derivative liabilities, current (see Note 14) $ 243 $ 146 Derivative liabilities, non-current (see Note 18) 162 113 Total $ 405 $ 259

Note 6 Receivables, net Receivables, net consisted of the following:

December 31, 2007 2006 Trade receivables $ 6,734 $ 5,069 Other receivables 602 641 Allowance (224) (174) 7,112 5,536 Unbilled receivables, net: Costs and estimated profits in excess of billings 3,370 2,025 Advance payments received (1,900) (995) 1,470 1,030 Total $ 8,582 $ 6,566

Trade receivables include contractual retention amounts billed to customers of $250 million and $158 million at December 31, 2007 and 2006, respectively. Management expects that the majority of related contracts will be completed and substantially all of the billed amounts retained by the customer will be collected within one year of the respective balance sheet date. Other receivables consisted of value added tax, claims, employee and customer-related advances and other non-trade receivables. The 2006 amount of other receivables also includes the retained interests on sold receivables under the Company’s securitization program. In 2007, the Company terminated its remaining revolving-period securitization program (see Note 7).

Costs and estimated profits in excess of billings represent sales earned and recognized under the percentage-of-completion method. Amounts are expected to be collected within one year of the respective balance sheet date.

U.S. dollar amounts in millions, except per share amounts Inventories, net, consisted of the following: the of consisted net, Inventories, 8 Note expense. finance other and interest in included is which million, $5 were losses, and gains associated the including costs, related the 2007, of 2005, each and 2006 During operations. discontinued in and sale for held to assets only, related 2006 in million $5 of sales which of respectively, million, $530 and million $538 $378 million, approximately were 2007, 2005, and during 2006 transactions these in included receivables Total sold arrangements. type similar or to factoring pursuant sales and/or to banks directly recourse, without made sales, were transfers These program. securitization described above of the outside receivables transfers Company the addition, In expense. finance other and interest in included is respectively, 2007, in $18 2005, and and million 2006 million $8 million, $8 of programs securitization revolving-period under receivables trade of securitization to the related fees) program and liquidity discount, (representing expense total The Financing receivables consisted of the following: the of consisted receivables Financing 9 Note 2006. in million $395 and 2007 in million $356 of contracts to long-term relating costs inventoried contains process in Work Net gains on these transactions are being recognized over the lease terms, which expire by 2021. expire which terms, lease the over recognized being are transactions these on gains Note Net (see 18). liabilities other in included is which liability, deposit non-current offsetting an with assets, financial pledged as reflected are tions transac to these relating rents to prepaid 1999. The prior U.S. investors with transactions leasing tax-advantaged into entered Company The Company. the by manufactured products to related customers to provided arrangements financing represent primarily receivable Loans U.S. dollar amounts in millions, except per share amounts share per except millions, in amounts dollar U.S. Company: to the unrelated to aVIE, or entity purpose special aqualifying either to programs, securitization its of respect in Company, the by paid and received were flows cash following the 2007, 2005, and During 2006 SFAS 140. with accordance in receivables trade of securitization the for accounted 2, Company Note in the disclosed As outstanding. 31, 2007, were December of as and amounts no program securitization revolving-period remaining its 2007, terminated During Company the 7 Note Receivable asofDecember31 Total Net cashpaidduringtheyear Advance paymentsreceived Decrease inretained interests Advances tosuppliers Total Discount, liquidityandprogram fees Finished goods Other Collections madeonbehalfofpurchaser Work inprocess Pledged financialassets Gross tradereceivables sold Loans receivable Raw materials December 31, December 31, December 31, Inventories, net net Inventories, Financing receivables, net net receivables, Financing Securitization $ $ (1,513) 1,265 2007 191 65 (8) – $ $ $ $ $ $ (2,091) 4,863 5,340 2,240 2,001 1,879 2006 2007 2007 (477) 240 487 981 298 104 13 31 80 85 (8) $ $ $ $ $ $ (5,489) 3,807 4,167 1,770 4,925 1,469 2005 2006 2006 (360) 404 178 208 539 720 302 154 (18) 83 - –

107 | ABB Annual Report 2007 Financial review Note 10 Property, plant and equipment, net TitelProperty, plant and equipment, net, consisted of the following:

EinleitungstextDecember 31, 2007 2006 Land and buildings $ 2,789 $ 2,468 Machinery and equipment 5,500 4,908 Construction in progress 285 173 8,574 7,549 Accumulated depreciation (5,328) (4,756) Total $ 3,246 $ 2,793

In 2007, 2006 and 2005, depreciation expense was $437 million, $399 million and $401 million, respectively.

Note 11 Goodwill and other intangible assets The changes in the carrying amount of goodwill for the year ended December 31, 2007 and 2006 are as follows:

Power Power Automation Process Non-core Corporate/ Products Systems Products Automation Robotics activities Other Total Balance at January 1, 2006 $ 122 $ 425 $ 674 $ 933 $ 101 $ 8 $ 20 $ 2,283 Other 5 (3) 2 Foreign currency translation 7 4 52 14 7 84 Balance at December 31, 2006 $ 129 $ 434 $ 723 $ 947 $ 108 $ 8 $ 20 $ 2,369 Goodwill acquired during the year 21 2 23 Impairment losses (7) (7) Other (11) (9) (52) (72) Foreign currency translation 8 5 56 25 10 2 2 108 Balance at December 31, 2007 $ 158 $ 428 $ 772 $ 920 $ 118 $ 3 $ 22 $ 2,421

Amounts in the line item other principally relate to goodwill adjustments in connection with the release of valuation allowances related to 108 deferred tax assets of acquired entities. These valuation allowances were initially recorded when the businesses were acquired.

Other intangible assets consisted of the following:

December 31, 2007 2006

Gross Net Gross Net carrying Accumulated carrying carrying Accumulated carrying amount amortization amount amount amortization amount Capitalized software for internal use $ 557 $ (438) $ 119 $ 441 $ (370) $ 71 Capitalized software for sale 402 (311) 91 372 (253) 119 Other intangible assets 495 (435) 60 496 (400) 96 Total $ 1,454 $ (1,184) $ 270 $ 1,309 $ (1,023) $ 286

For the years ended December 31, 2007 and 2006, the Company capitalized intangible assets of $89 million ($80 million, $5 million and $4 million of software for internal use, software for sale and other intangible assets, respectively) and $77 million ($42 million, $30 million and $5 million of software for internal use, software for sale and other intangible assets, respectively), respectively.

Amortization expense of capitalized software for internal use for 2007 and 2006, recorded in selling, general and administrative expenses, amounted to $40 million and $39 million, respectively. Amortization expense of capitalized software for sale for 2007 and 2006, recorded in cost of sales, amounted to $40 million and $51 million, respectively. Amortization expense of other intangible assets for 2007 and 2006, recorded in other income (expense), net, amounted to $45 million and $44 million, respectively.

The Company recorded insignificant impairment charges to intangible assets in 2007, 2006 and 2005. These charges are included in other income (expense), net, in the Consolidated Income Statements.

Other intangible assets primarily include intangibles created through acquisitions, such as trademarks and patents.

U.S. dollar amounts in millions, except per share amounts financial covenant in respect of maximum net leverage. net maximum of respect in covenant financial remaining sole the of removal the iv) and facility), the of half than greater drawings on payable are fees (utilization payable are fees such before made be can that drawings of amount the in increase an and to 0.05percent fees utilization of level the in reduction the iii) to 0.0525 percent, fees commitment in 0.175 of amargin reduction plus the ii) drawings) the of percent, currency the on (depending EURIBOR or STIBOR LIBOR, to the facility under on drawings costs in interest i) the reduction were 2010. changes maturing facility, credit principal The revolving multicurrency billion $2 its of terms certain to amend banks its with Agreement Restatement and Amendment an into 2007, entered June In Company the 31, 2006. and 2007 December at programs these of any under outstanding were amounts No 2005. in established program paper commercial krona Swedish 5billion existing to the addition in are programs paper commercial new These currencies. of avariety in paper commercial of issuance the for program paper Euro-commercial a$1 billion 2007, established Company the December In States. United the in paper mercial com- U.S. of dollar-denominated placement private the for program paper commercial a$1 billion 2007, established October In Company the banks. various from loans short-term represents primarily debt Short-term The Company’s short-term debt and current maturities of long-term debt consisted of the following: the of consisted debt long-term of maturities current and debt short-term Company’s The debt long-term of maturities current and debt Short-term respectively. to $2,674 million, $3,282 31, and amounted 2006, million and 2007 December at debt total Company’s The 13Note interests. financing and equity combined Company’s to the limited is VIEs the with involvement of aresult as to loss exposure The respectively. $31 million, and million $32 of taxes and interest before earnings and respectively, $132 and $133 of million, million revenues total combined reported and $719 and respectively, million, million $695 approximately of assets total combined have VIEs these 2006, and 31, 2007 December ended years the for and of As plants. power the of financing and commissioning procurement, engineering, the contract to is VIEs the of purpose The VIEs. the of inception of dates the at 2000 1995 and between began VIEs these with involvement Company’s The consolidated. not are they therefore and 46R FIN by VIE’sdefined as these of beneficiary primary the not is Company The plants. power to develop consortia as established were and accounting, of method equity the using for accounted are that VIEs two in respectively, million, and $124 million $82 approximately of interest financing and equity acombined maintained Company 31, the 2006, and 2007 At December entities interest Variable as the anticipated market value was less than its book value. value. book its than less was value market anticipated the as to divest, intends it which investments, equity its of one of respect in million $42 of charge impairment an 2007, recorded During Company the India. in plant a power Neyveli, in stake percent 50 its as well as Lasfar, Jorf in stake percent 50 its 2007, May sold In Company percent. 50 the owned Company the which of Morocco, in based plant apower Lasfar, Jorf was accounting of method equity the using for accounted company principal The accounting. of method equity the under for accounted investees of earnings pre-tax the of share Company’s the representing net, (expense), income other in respectively, 2007, in 2005, and $97 million 2006 and million $83 million, $36 of earnings pre-tax recorded Company The 12Note U.S. dollar amounts in millions, except per share amounts share per except millions, in amounts dollar U.S. follows: as to be estimated is assets intangible other of expense Amortization 11Note The Company’s shareofequityaccountedinvestees ofearnings Less: Current incometaxexpense Total Total Current maturitiesoflong-termdebt(weighted-averageinterest rateof4.4%and4.5%) Other Total Thereafter 2012 2011 2010 2009 Short-term debt(weighted-averageinterest rateof8.6%and5.7%) Jorf Lasfar 2008 December 31, Goodwill and other intangible assets, continued assets, intangible other and Goodwill Investments in equity method accounted companies accounted method equity in Investments Debt Debt $ $ Investment balance 2007 63 63 – $ $ 2006 545 163 382 $ $ of thepre-taxequity earnings 2007 (11) 25 36 15 21 The Company’s share accounted investees $ $ $ $ 2007 2006 536 407 129 (22) 61 83 16 67 $ $ $ $ $ $ 2006 2005 122 270 138 (16) 81 97 47 35 75 62 20 36 62 6 8

109 | ABB Annual Report 2007 Financial review Note 13 Debt, continued NoTitel amount was drawn under the facility at December 31, 2007 and 2006. The facility contains cross-default clauses whereby an event of defaultEinleitungstext would occur if the Company were to default on indebtedness as defined in the facility, at or above a specified threshold. Long-term debt The Company utilizes a variety of derivative instruments to modify the characteristics of its long-term debt. The Company uses interest rate swaps to effectively convert certain fixed-rate long-term debt into floating rate obligations. For certain non-U.S. dollar denominated debt, the Company utilizes cross-currency swaps to effectively convert the debt into a U.S. dollar obligation. As required by SFAS 133, the carrying value of debt, designated as being hedged by fair value hedges, is adjusted for changes in the fair value of the debt attributable to the risks being hedged.

The following table summarizes the Company’s long-term debt considering the effect of interest rate and currency swaps. Consequently, a fixed-rate debt subject to a fixed-to-floating interest rate swap is included as a floating rate debt in the table below:

December 31, 2007 2006

Nominal Effective Nominal Effective Balance rate rate Balance rate rate Floating rate $ 2,398 5.8% 6.8% $ 2,188 5.8% 5.8% Fixed rate 147 2.4% 6.4% 199 2.5% 6.0% Convertible bonds – – – 820 3.5% 3.5% 2,545 3,207 Current portion of long-term debt (407) 4.4% 6.1% (47) 4.5% 4.5% Total $ 2,138 $ 3,160

At December 31, 2007, maturities of long-term debt were as follows:

Due in 2008 $ 407 Due in 2009 174 Due in 2010 6 Due in 2011 925 Due in 2012 9

110 Thereafter 1,024 Total $ 2,545

Bond conversions During 2007, holders of the total aggregate principle amount of 1 billion Swiss francs of the Company’s 3.5% CHF Convertible Bonds, due 2010, converted their bonds into shares. The conversions resulted in the issuance of approximately 105 million shares out of contingent capital. Total debt decreased by approximately $825 million as a result of the conversion of the bonds, while capital stock and additional paid-in capital increased by approximately $830 million, representing the carrying value of debt and accrued interest converted into shares, net of certain charges in connection with the share issuance.

During 2006, the Company announced an offer to holders of its outstanding 4.625% USD Convertible Bonds, due 2007, that contained certain incentives to induce the bondholders to convert their bonds into the Company’s American Depositary Shares (ADSs). Approximately 98 percent of the holders accepted the conversion offer which resulted in the issuance of approximately 105 million shares of the Company out of con- tingent capital and the delivery of ADSs to the bondholders. The Company exercised its right under the terms of the bonds to call the remaining outstanding 4.625% USD Convertible Bonds, due 2007, resulting in the remaining bonds being converted into approximately 2 million ADSs. This obligation was met by using treasury shares. As a result of the induced conversion and the Company’s subsequent call, a total of approxi- mately 107 million ADSs were issued to bondholders.

In connection with the conversion offer in 2006, the Company incurred expenses related to the write-off of unamortized debt issuance costs, inducement payments to bondholders and transaction costs, totaling approximately $55 million, which are included in interest and other finance expense in accordance with Statement of Financial Accounting Standards No. 84, Induced Conversions of Convertible Debt. Total debt decreased by approximately $932 million as a result of the conversion of the bonds, while the impact on equity (capital stock and additional paid-in capital and treasury stock) was an increase of approximately $928 million, after consideration of certain net charges in connection with the share issuance. Cash payments upon conversion of the bonds amounted to $72 million, including inducement payments to bondholders and transaction costs which are included in the $55 million recorded in interest and other finance expense, as well as other conversion-related payments.

Bond exchange During 2006, the Company completed an exchange offering related to the 9.5% EUR Instruments, due 2008, and 10% GBP Instruments, due 2009, into 4.625% EUR Instruments, due 2013. Bonds with a total face value of approximately 423 million euro, out of the total 500 million euro outstanding, and 180 million pounds sterling, out of the 200 million pounds sterling outstanding, were exchanged into 4.625% EUR Instruments, due 2013, with an aggregate face value of approximately 685 million euro. This exchange offering was accounted for in accordance with EITF No. 96-19, Debtor’s Accounting for a Modification or Exchange of Debt Instruments. Consequently, the carrying value of the bonds exchanged formed the basis for the carrying value of the new bonds, considering the terms of the exchange offering, which included upfront cash payments to bondholders. The adjusted carrying value is being accreted to par over the period to maturity. Insignificant transaction costs, paid to third parties, were expensed as incurred.

U.S. dollar amounts in millions, except per share amounts U.S. dollar amounts in millions, except per share amounts share per except millions, in amounts dollar U.S. significant. individually is which of none debt, long-term other and subsidiaries, of borrowings bank obligations, lease 31, are 2006, and 2007 December at debt long-term in included above, described bonds to the addition In obligations. debt other with passu pari rank and Company the of obligations unsecured constitute bonds such all Furthermore, threshold. aspecified above or at borrowing any on to default were Company the if ment repay- to demand bondholders the allow would which clauses cross-default contain bonds traded publicly Company’s the of all Substantially obligation. euro rate afloating became 2013, due effectively 4.625%the Instruments, EUR swaps, these of 2013. due aresult As 4.625% the on Instruments, EUR obligations interest its to hedge swaps rate interest into entered has Company The bonds. the of terms the with accordance in bonds, the redeem or to repurchase Company the require can a bondholder control, of achange of event the In bonds. the of terms the with 6, 2010, June accordance from in time any at early bonds the to redeem option the has Company The rateof 4.625percent. annual afixed at arrears in annually 2013, due interest pay 4.625%The Instruments, EUR obligation. euro rate afloating 2011, due became 6.5% Instruments, the EUR effectively while obligation, franc Swiss rate afloating became effectively 2009, 3.75% the due swaps, rate Bonds, CHF interest these of impact the 2011. due considering Instruments, After 6.5% the EUR and 2009, 3.75% the due on Bonds, CHF obligations interest its to hedge swaps rate interest into entered has Company The interest. accrued any plus thereof, amount principal the of 101 at bonds percent the to repurchase to offer Company the require bonds these of terms the Company, the of control of change of a event the In percent. rate6.5 of annual afixed at arrears in 2011, due semi-annually 6.5% Instruments, EUR interest The pay rateof 3.75 percent. annual afixed at annually interest pay 2009, 3.75% due The Bonds, CHF obligation. dollar rate U.S. floating a became effectively 2009, due Instruments, the GBP 10% while obligation, euro rate afloating became 2008, due 9.5% the Instruments, EUR swaps, cross-currency and rate interest the of impact the considering After 2009. due Instruments, GBP 10% the of characteristics the to modify used been has swap across-currency and 2008, due 9.5% the Instruments, EUR to modify used been has swap rate interest an exposure, currency and interest its reducing of policy Company’s the with line In respectively. bonds, sterling and euro the for 10 and percent 9.5 is percent that issuance, at level the at remains bonds the on rate interest the then respectively, BBB-, and Baa3 above or at &Poor’s remains Standard and Moody’s by both bonds to these assigned rating the If bonds. to the assigned rating credit to the bonds the on paid interest the linking clauses certain contain 2009, due 10% Instruments, the GBP and 2008, due 9.5% Instruments, The EUR above. debt long-term of table the in debt rate floating as shown are consequently and swaps cross-currency or rate interest of use the through obligations rate floating into swapped been have 2010) due Bonds, 3.5% Convertible the CHF (except above table the 31, in 2006, and 2007 December at outstanding bonds public the of All follows: as are bonds outstanding Company’s the of Details issuance. of time the at million $20 2013, due approximately or 4.625% the of Instruments, euro EUR 15mately million approxi of value aface with bonds issued Company the above, described 2006 in offering exchange the of independently but Concurrently 2007. during bonds any issue not did Company The issuance Bond repurchases. the on $19 of debt of million guishment extin on aloss recognized and 2009, due bonds, franc Swiss 3.75% Company’s the of million 500 aportion primarily million, $307 of value face a total with securities debt repurchased Company the 2005, During 2006. and 2007 during repurchases bond significant no were There repurchase Bond 31, 2006. and 2007 December at outstanding remain and offering exchange the of part as by bondholders tendered not were 2009, due 10% Instruments, GBP original the of sterling pounds 20 million approximately and 2008, due 9.5% Instrume Total outstandingbonds Private placements 4.625% EURInstruments,due2013 6.5% EURInstruments,due2011 3.5% CHFConvertibleBonds,due2010 3.75% CHFBonds,due2009 10% GBPInstruments,due2009 9.5% EURInstruments,due2008 Public bonds: December 31, (1)

USD carryingvalueisnetofbonddiscountsandincludesadjustmentsforfairhedgeaccounting,where appropriate. Debt, continued Debt, GBP outstanding EUR EUR CHF EUR Nominal 700 650 108 20 77 2007 – $ $ Carrying value 2,276 207 912 910 113 40 94 (1) – GBP EUR EUR CHF CHF EUR outstanding Nominal 1,000 700 650 108 20 77 2006 $ $ Carrying value 2,884 191 103 824 821 820 - - 39 86 (1)

111 | ABB Annual Report 2007 Financial review Note 14 Provisions and other TitelProvisions and other consisted of the following:

EinleitungstextDecember 31, 2007 2006 Contract related provisions $ 594 $ 604 Provisions for warranties and contract penalties (see Note 16) 1,279 1,037 Derivatives (see Note 5) 243 146 Pension and other employee benefits (see Note 19) 73 71 Taxes payable 451 372 Income tax related liabilities 68 – Other 634 634 Total $ 3,342 $ 2,864

Note 15 Leases Lease obligations The Company’s lease obligations primarily relate to real estate and office equipment. In the normal course of business, management expects most leases to be renewed or replaced by other leases. Rent expense was $387 million, $365 million and $337 million in 2007, 2006 and 2005, respectively. Sublease income received on leased assets by the Company was $44 million, $40 million and $36 million in 2007, 2006 and 2005, respectively.

At December 31, 2007, future net minimum lease payments for operating leases, having initial or remaining non-cancelable lease terms in excess of one year, consisted of the following:

2008 $ 354 2009 290 2010 253 2011 212 2012 195 Thereafter 559 1,863 112 Sublease income (136) Total $ 1,727

Note 16 Commitments and contingencies Contingencies – Environmental The Company is engaged in environmental clean-up activities at certain sites principally in the United States, arising under various United States and other environmental protection laws and under certain agreements with third parties. Provisions are recorded when it is probable that losses will result from these actions and the amounts of losses can be reasonably estimated. Estimated losses for environmental ­remediation obligations are not discounted to their present value because timing of payments cannot be reasonably estimated. The Company may be able to recover a portion of the costs relating to these matters from insurers or other third parties; however, the Company records such amounts only when it is probable that they will be collected. Management is of the opinion, based upon information presently available, that the resolution of any such liability would not have a material adverse effect on the Company’s Consolidated Financial Statements.

Contingencies related to former Nuclear Technology business The Company retains liabilities for certain specific environmental remediation costs at two sites in the United States that were operated by its former subsidiary, ABB CE-Nuclear Power Inc., which the Company sold to British Nuclear Fuels PLC (BNFL) in 2000. Pursuant to the sale agreement with BNFL, the Company has retained the environmental liabilities associated with its Combustion Engineering subsidiary’s Windsor, Connecticut, facility and agreed to reimburse BNFL for a share of the costs that BNFL incurs for environmental liabilities associated with its former Hematite, Missouri, facility. The primary environmental liabilities associated with these sites relate to the costs of remediating radiological and chemical contamination. Such costs are not incurred until a facility is taken out of use and generally are incurred over a number of years. Although it is difficult to predict with accuracy the amount of time it may take to remediate radiological and chemical contamination at the Hematite site, based on information that BNFL has made available, the Company believes that it may take until 2013. With respect to the Windsor site, the Company believes the remediation may take until 2011.

Under the terms of the sale agreement, BNFL is responsible to have the remediation of the Hematite site performed in a cost efficient manner and pursue recovery of remediation costs from other potentially responsible parties as conditions for obtaining cost sharing contributions from the Company. Westinghouse Electric Company LLC (Westinghouse), BNFL’s former subsidiary, now oversees remediation activities at the Hematite site. Westinghouse was acquired during 2006 by a consortium led by Toshiba Corporation, Japan. Westinghouse brought legal action against former owner/operators of the Hematite site and the U.S. Government under the Comprehensive Environmental Response Compensa- tion and Liability Act (CERCLA) to recover past and future remediation costs. The defendants contested Westinghouse’s claims. During 2006, an arbitration ruling, related to indemnification of former owner/operators contained in the Combustion Engineering purchase agreement for the site, was unfavorable to Westinghouse’s claims, potentially increasing the Westinghouse costs subject to the cost sharing agreement. Sepa- rately, based on the publicly available draft Remedial Investigation Report and Decommissioning Plan prepared by Westinghouse and other site related data, the Company was able to re-estimate its share of the expected total remediation costs for the Hematite site. The unfavorable outcome of the arbitration was largely offset by a lower site remediation cost estimate. Thus, in 2006, the Company made no adjustment to the

U.S. dollar amounts in millions, except per share amounts

The effect on the Company’s Consolidated Income Statements is set forth below: forth set is Statements Income Consolidated Company’s the on effect The flows. cash or operations of results position, financial consolidated Company’s the on impact amaterial had not has Lummus and CE than other entities Company’s the against claims asbestos-related resolving To Company. the of date, aproduct and exposure claimed plaintiff’s the between linkage apparent no is there where claims from missals dis- seeks generally Company The otherwise. or system, tort the in them to resolve continue will claims to such subject are that entities ABB Lummus. and CE than other entities ABB against outstanding claims 12,100, and 9,500 asbestos-related approximately were respectively, there 31, 2006, and 2007 At December claims. asbestos-related in defendants as named been have Company the of entities other to time, time From Trust 2, to $28 of that million. May 2007, on payment the PI Trust completed upon was Asbestos 16, 2007. Lummus November the of on Funding occurred which Lummus of sale the with 14, conjunction 2007,November in required as Trust to on this paid was million $204 addition, In dates. payment scheduled certain on made been PI Trust has Asbestos CE the of Funding PI Trust, respectively. Asbestos Lummus PI Trust the or Asbestos CE to the channeled are Lummus and CE of operations to the entities relate that other certain and affiliates its and Company the against filed claims injury personal related asbestos future and present all which under Code 524(g) U.S. Bankruptcy the of to Section pursuant issued were injunctions channeling dates, effective Plan respective the on and Lummus and CE against claims related asbestos future to settle funded being are and created were trusts injury personal separate Plans, the Under 31, respectively. 21, August and 2006, April on 2006 effective became Plans) the (collectively, reorganization of plan Lummus the and reorganization of plan CE The Code. Chapter Bankruptcy the of U.S. 11 under filed were amended, as Lummus, and CE for reorganization of plans Separate claims. those of payment partial 14, to provide and 2002 November before claims their lodged had who claimants settling certain of claims injury personal related asbestos Trust to resolve Settlement CE the of establishment the involved that into entered was Agreement Settlement AMaster Company. the of entities other against as well as subsidiary Lummus former Company’s the against brought been also had claims of number Asmaller to asbestos. exposure from resulting injury personal for damage claiming lawsuits of number alarge in aco-defendant been had (CE) subsidiary Inc. Engineering, Combustion Company’s The obligations Asbestos $10mately million. approxi be will projects these on expenditures 2008 during that estimated has Company The respectively. million, $2 and million $4 million, $4 31, were 2007, December 2005 and ended 2006 years the for Expenditures 31, respectively. 2007, December 2005, and ended 2006 years U.S. dollar amounts in millions, except per share amounts share per except millions, in amounts dollar U.S. $7 including to earnings, Charges respectively. million, $22 and million $32 totaling reserves liabilities other non-current and liabilities current in recorded has Company 31, the 2006, and 2007 December of As contamination. groundwater and soil primarily involves sites these of up clean The States. United the in primarily facilities, former or present at contamination environmental of remediation the in involved is Company The U.S. the in primarily facilities former and present other to related Contingencies provision. to the $26 million approximately of expenditures charge will it 2008 during that estimated has Company The respectively. 2007, 2005, and during 2006 million $9 and million $4 million, $3 were provision to the charged Expenditures facilities. these for costs remediation remaining its of estimate 31, best Company’s 2007, the represents December at balance provision The respectively. $47 million, and million $50 of inception from payments of $251net and million, $245 million of provisions liabilities other non-current in recorded has Company 31, the 2006, and 2007 December of As sites. these for costs remediation the of share estimated its for 2000 in operations discontinued from (loss) income in million $300 of aprovision established Company The site. the at activities remediation the of completion as expedited well as efficiencies cost in result could this believes Management site. the for license logical radio Company’s the and site that of areas radiological remaining the for responsibility oversight has which Commission Regulatory Nuclear to the Engineers of Corps U.S. Army the from Program Action Remedial Sites Utilized Formerly U.S. Government’s the under site Windsor the of portion the of remediation the of oversight to transfer agencies U.S. government with agreement an 2007, reached During Company the site. Hematite the for plan decommissioning draft its of approval regulatory obtaining and finalizing modifying, on focused were 2007, efforts During cost. Westinghouse’s remediation site Hematite the of share its for reserve 16Note Fees andothercosts Lummus AsbestosPITrust CE AsbestosPITrust CE SettlementTrust Cash paymentsto: Income (loss)from discontinuedoperations,netoftax(seeNote3) Year endedDecember31, Year endedDecember31,

million and $6 million in income (loss) from discontinued operations in 2007 and 2006, were $14 million, $9 million and $4 million for the the for million $4 and million $9 $14 were million, 2006, and 2007 in operations discontinued from (loss) income in million $6 and million Commitments and contingencies, continued continued contingencies, and Commitments $ $ $ 2007 2007 382 354 28 – – – $ $ $ 2006 2006 99 20 70 70 9 – $ $ $ 2005 2005 133 28 25 -

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113 | ABB Annual Report 2007 Financial review Note 16 Commitments and contingencies, continued TitelThe effect on the Company’s Consolidated Balance Sheets is set forth below:

EinleitungstextYear ended December 31, 2007 2006 2005 Asbestos obligations: $ $ $ Current – CE Plan (Face Value $100 million at December 31, 2007) 97 146 1,080 Other 4 4 5 $ 101 $ 150 $ 1,085

Asbestos liabilities included in liabilities held for sale and in discontinued operations $ – $ 29 $ 43

Non current – CE Plan $ – $ 282 $ –

The asbestos obligations relating to the CE Plan as reflected in the Company’s Consolidated Financial Statements are payable pursuant to a non-interest bearing promissory note (the ABB Promissory Note). The Company is also liable on a contingent basis under the Promissory Note for two additional payments of $25 million each. One additional payment of $25 million is payable in 2010 or 2011 if the Company attains an earnings before interest and taxes (EBIT) margin of 9% for 2009 or 14% in 2010. The other additional payment of $25 million is payable in 2011 if the Company attains an EBIT margin of 9.5% in 2010. These two $25 million contingent payments are not included in the provisions for asbestos obligations. If the Company is found by the U.S. Bankruptcy Court (the Bankruptcy Court) to have defaulted on its payment obligations under the ABB Promissory Note, the CE Asbestos PI Trust may petition the Bankruptcy Court to terminate the CE channeling injunction and the protections afforded by that injunction to the Company and other ABB entities as well as certain other entities, including Alstom SA (Alstom).

Contingencies – Regulatory and Compliance Gas Insulated Switchgear business In May 2004, the Company announced that it had undertaken an internal investigation which uncovered that certain of its employees together with employees of other companies active in the gas insulated switchgear business were involved in anti-competitive practices. The Company has reported such practices upon identification to the appropriate authorities, including the European Commission. The European Commission announced its decision on January 24, 2007, and granted ABB full immunity from fines assessed to the Company of 215 million euro under the European Commission’s leniency program. The Company continues to cooperate with other anti-competition authorities in several locations globally which are investigating anti-competitive practices related to gas insulated switchgear. 114

Power Transformers investigation in Germany In February 2007, the European Commission conducted dawn raids at the premises of an ABB unit in Bad Honnef, Germany, as part of its investigation into alleged anti-competitive practices of certain manufacturers of power transformers. The German Anti-trust Authority (Bundeskartellamt) and other anti-trust authorities are also reviewing those alleged practices which relate to the German market and other markets. Management is cooperating fully with the authorities in their investigations. Depending on the outcome of the investigations, the Company would likely face fines and penalties. The Company has not recorded any provisions for any potential fines, penalties or costs since management does not have enough information to reliably estimate such amounts.

Disclosures to the United States Securities and Exchange Commission (SEC) and the United States Department of Justice (DoJ) of suspect payments In April 2005, the Company voluntarily disclosed to the DoJ and the SEC certain suspect payments in its network management unit in the United States. Subsequently, including during 2007, the Company made additional voluntary disclosures to the DoJ and the SEC regarding suspect payments made by other Company subsidiaries, including Lummus, in a number of countries in the Middle East, Asia, South America and Europe. These payments were discovered by the Company as a result of the Company’s internal audit program and compliance reviews. The payments may be in violation of the Foreign Corrupt Practices Act (FCPA) or other applicable laws. The Company anticipates an unfavorable outcome with respect to the investigation of these suspect payments and expects that fines will be imposed. These payments and any related fines or penalties could have other consequences for the Company, including other costs or other effects on its business. The Company is cooperating with the relevant authorities regarding these issues, and is continuing its internal investigations and compliance reviews. The Company has not recorded any significant provisions for any such fines, penalties or other costs since management does not have enough information to reliably estimate such amounts.

The outcome of the matters described above in the Power Transformers investigation in Germany and the Disclosures to the SEC & DOJ of suspect payments sections could have a material impact on the Company’s consolidated operating results, cash flows and financial position. While it is not possible based on information currently available to management to estimate the outcome of these matters, the Company does not expect any potential fines, penalties or costs to negatively impact its ability to conduct business.

Earnings overstatement in an Italian subsidiary In September 2004, the Company restated its Consolidated Financial Statements for all prior periods as a result of earnings overstatements by a business unit of the Company’s Power Products division (part of the former Power Technologies division) in Italy. The restatement followed an internal investigation by the Company which revealed that the business unit had overstated earnings before interest and taxes and net income, as well as that certain employees had participated in arranging improper payments to an employee of an Italian power generation company in order to obtain a contract. The Company has reported this matter to the Italian authorities, who have initiated formal criminal proceedings, as well as to the SEC. The Company cannot reasonably predict the outcome of the criminal proceedings or what action, if any, the SEC may take.

U.S. dollar amounts in millions, except per share amounts equity interest. The guarantees have various maturity dates. The majority of the durations runs to 2010 with the longest expiring in 2021. in expiring to 2010 longest the runs with durations the of majority The dates. maturity various have guarantees The interest. equity an had formerly or has currently Company the which in companies of behalf on issued were respectively, million, $80 and million $56 amounts, those Of outstanding. guarantees financial of respectively, $166 $131 had and million, Company million 31, the 2006, and 2007 At December failure. that due to loss a incurs guarantee the under beneficiary the and obligations financial its to fulfill fails party third a that event the in to abeneficiary payment make will Company the that assurances irrevocable represent guarantees Financial –financial Guarantees 31, 2007. December at million $92 approximately was guarantees the under payable amount maximum The years. to thirteen one from ranging dates maturity original have guarantees The guarantees. performance of consist primarily 2007. in sold guarantees The Germany in business Systems Building to the related guarantees for obligations retained Company The 31, 2007. December at million $30 approximately was guarantees backstop these under recovery potential maximum The guarantees. backstop certain through guarantees these under payments potential to recover 31, ability the has 2007. December at Company The million $301 approximately was guarantees the under payable amount maximum The years. to five one from ranging dates maturity original have guarantees The guarantees. mance perfor of consist primarily 2007. in sold guarantees The business Lummus to the related guarantees for obligations retained Company The respectively. 2006, and 2007 31, December at $21 million and $13 million approximately was guarantees backstop these under recovery potential maximum The guarantees. backstop certain through guarantees these under payments potential to recover ability the has Company The respectively. 2006, and 2007 31, December at $375 and million million $393 approximately was guarantees the under payable amount maximum The years. to seven one from ranging dates maturity have original guarantees The guarantees. miscellaneous other and guarantees payment advance guarantees, mance perfor of consist primarily guarantees The 2004. in sold business Upstream to the related guarantees for obligations retained Company The business. Generation Power former the of behalf on issued to guarantees related losses any experienced not has Company The respectively. 2006, and 31, $171 $717 2007 and December at approximately was million million business Generation Power former its of behalf on Company by the issued guarantees quantifiable of exposure potential maximum total the of estimate best Management’s guarantees. such under arising claims any against Company the harmless hold and indemnify to fully severally and jointly NV, Power undertaken have Alstom and company, parent the Alstom, Further, guarantees. the of subject the are that obligations the performing for responsibility primary have subsidiaries its and Alstom result, As a Alstom. NV to Power Alstom in interest its sold Company the May 2000, In expiration. definite no have cases by 2015 some in but completed to be expected are which to projects related are guarantees The patents. and laws environmental laws, labor and with taxes, compliance damages, property and injuries personal for indemnification as such contracts certain under guarantees guarantees payment advance miscellaneous other and guarantees, performance of consist primarily guarantees The NV). Power (Alstom venture joint NV Power Alstom ABB mid-1999 in former to the contributed business Generation Power to the related guarantees for obligations retained Company The credit. of letters standby performance and guarantees, payment advance bonds, surety include guarantees Performance kind. in or cash in party guaranteed the compensate will Company the obligation, the fulfill not does party third the If time. aspecified within completed be will aproject that guarantees include may guarantees Such acontract. of terms to according the service or product party’s athird of performance the guarantees Company the where obligations represent guarantees Performance –performance Guarantees U.S. dollar amounts in millions, except per share amounts share per except millions, in amounts dollar U.S. obligations. guarantee its fulfilling of part as incur may it payments future of estimate best management’s reflect Sheets Balance Consolidated the in recorded liabilities of amounts carrying The results. expected management’s reflect not do and scenario” “worst-case a represent payments potential maximum The guarantees. third-party Company’s the regarding data quantitative provides table following The –general Guarantees claims. and investigations, proceedings, other such of outcome the certainty any with to predict Company the for time this at possible not is It resolved. been yet not have that business of course ordinary the in arisen have that matters environmental including claims, and investigations, proceedings, legal various to other subject is Company the addition, In proceedings. legal related any and investigations continuing the of costs the bear will Company the contingencies, foregoing to the respect With –general Contingencies 16Note Total Indemnification guarantees Financial guarantees Performance guarantees December 31, Commitments and contingencies, continued contingencies, and Commitments Maximum potential payments $ $ 1,416 328 131 957 2007 Carrying amount of liabilities $ $ 10 1 9 –

Maximum potential payments $ $ 1,338 1,092 166 80 2006 Carrying amount of liabilities $ $

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115 | ABB Annual Report 2007 Financial review Note 16 Commitments and contingencies, continued TitelGuarantees – indemnification The Company has indemnified certain purchasers of divested businesses for potential claims arising from the operations of the divested Einleitungstextbusinesses. To the extent the maximum loss related to such indemnifications could not be calculated, no amounts have been included under maximum potential payments in the table above. Indemnifications for which maximum losses could not be calculated include indemnifications for legal claims.

The Company delivered to the purchasers of Lummus and the Company’s interest in Jorf Lasfar guarantees related to assets and liabilities divested in 2007. The maximum liability at December 31, 2007, of $50 million and $189 million, respectively, relating to these businesses will reduce over time, pursuant to the sales agreements.

The Company delivered to the purchaser of the Reinsurance business guarantees related to assets and liabilities divested in 2004. The maximum liability at December 31, 2007 and 2006, of approximately $89 million and $80 million, respectively, relating to this business will reduce over time, pursuant to the sales agreement, subject to foreign exchange fluctuations.

With respect to the sale of Lummus, the Company retained certain liabilities, including for potential fines and penalties connected with suspect payments made prior to completion of the sale. The Company has disclosed these suspect payments to the SEC and DoJ. The Company cannot estimate the likelihood of an unfavorable outcome or the amount of any potential loss. Therefore, the Company has not recorded any provisions for any potential fines or penalties relating to these suspect payments.

Product and order related contingencies The Company calculates its provision for product warranties based on historical claims experience and specific review of certain contracts.

Reconciliation of the provision for warranties, including guarantees of product performance is as follows:

December 31, 2007 2006 Balance at the beginning of year $ 998 $ 715 Claims paid in cash or in kind (243) (164) Net increase to provision for changes in estimates, warranties issued and warranties expired 267 379 Exchange rate differences 99 68 Balance at the end of year $ 1,121 $ 998

IBM Outsourcing Agreement In 2003, the Company entered into a 10-year global framework agreement with International Business Machines Corporation (IBM) to outsource 116 the Company’s information systems infrastructure services to IBM. The global framework agreement includes an obligation for IBM to lease new personal computers and other IT equipment to the Company as older equipment is retired. The Company accounts for these items as capital leases or operating leases based on the terms of the leases.

Further, pursuant to the global framework agreement, IBM will receive monthly payments from the Company’s subsidiaries in the respective countries related to information systems infrastructure services. Annual costs during 2007, 2006 and 2005 were $251 million, $236 million and $228 million, respectively, reflecting the current level of usage of the services.

Related party transactions The Company also conducts business with other companies where members of the Company’s Board of Directors act as directors or board members. This business includes the IBM global frame agreement, the Company’s banking relationships with Skandinaviska Enskilda Banken AB (Publ) and Dresdner Bank AG and various sales of products and services. The Company’s Board of Directors has determined that the Company’s business relationships with those companies do not constitute material business relationships. This determination was made in accordance with the Swiss Code of Best Practice and the independence criteria set forth in the corporate governance rules of the New York Stock Exchange.

Note 17 Taxes Provision for taxes consisted of the following:

December 31, 2007 2006 2005 Current taxes on income $ 939 $ 564 $ 425 Deferred taxes (344) 122 39 Tax expense from continuing operations 595 686 464 Tax expense (benefit) from discontinued operations 36 (7) 9

The weighted average tax rate is the tax rate that results from applying each subsidiary’s statutory income tax rate to the income from con- tinuing operations before taxes and minority interest. The Company operates in countries that have differing tax laws and rates. Consequently, the consolidated weighted average effective rate will vary from year to year according to the source of earnings or losses by country and the change in applicable tax rates.

U.S. dollar amounts in millions, except per share amounts of deferred taxes under APB 23 predominantly related to tax law changes in North Asia. North in changes law to tax related 23 predominantly APB under taxes deferred of recognition to the related million $85 approximately of amount an included liability tax 31, deferred total in 2007,At other December item line the Deferred income tax assets and liabilities consisted of the following: the of consisted liabilities and assets tax income Deferred items. similar other and expenses entertainment and meals disallowed activities, productive on taxes local and state expense, interest as such income taxable of computation the in included not were but purposes, accounting financial for deducted were that to items relating million $60 approximately of expense an other, included item net reconciling the 2005, In items. similar other and expenses entertainment and meals disallowed activities, productive on taxes local and state expense, interest as such income taxable of computation the in included not were but purposes, accounting financial for deducted were that to items relating million $35 approximately of expense an included net other, Further, accruals. tax in increase to anet relating $70 million approximately of expense an other, included item net reconciling the 2006, In items. similar other and expenses entertainment and meals disallowed activities, productive on taxes local and state expense, interest as such income taxable of computation the in included not were but purposes, accounting financial for deducted were that to items relating million $35 approximately of expense an $45 approximately of expense additional an other, included Further, net Africa. Northern in authorities tax by competent double agreements and law treaty tax tax of interpretation the to related million $35 approximately of expense an included net other, item 2007, In reconciling the Kingdom. United the and Canada as such countries including also but million, $490 approximately with States United the as such countries certain in operations Company’s to the related predominantly was allowance valuation in change the 2007, In realized. be would assets tax deferred such that not than likely more was it that determined Company the as required was allowance valuation in change The jurisdictions. those in incurred differences timing and losses operating net for recognized were that assets tax deferred of respect in jurisdictions certain in recorded allowance valuation the in changes included 2007, for 2005 and taxes of 2006 reconciliation The U.S. dollar amounts in millions, except per share amounts share per except millions, in amounts dollar U.S. 17Note Net deferred taxasset Deferred taxasset,netofvaluationallowance Valuation allowance Total deferred taxasset Other Inventories Effective taxratefortheyear Unused taxlossesandcredits Tax expensefrom continuingoperations Pension andotheraccruedliabilities Other, net Property, plantandequipment Changes intaxlawsandenactedrates Investments andother Deferred taxassets: Changes invaluationallowance Total deferred taxliability Items taxedatratesotherthantheweightedaveragetaxrate Other Taxes atweightedaveragetaxrate Inventories Weighted averagetaxrate Pension andotheraccruedliabilities of accountingchange Income from continuingoperationsbefore taxes,minorityinterest andcumulativeeffect Reconciliation oftaxes: Property, plantandequipment Deferred taxliabilities: December 31, December 31,

million relating to a net increase in tax accruals. The Company’s policy for such accruals is outlined in Note 2. other, is outlined In addition, included net accruals for such Company’s policy The accruals. in tax to a relating increase net million Taxes, continued Taxes, $ $ 14.8% 29.7% 1,189 4,010 2007 (698) 595 115 (15) 4 $ $ $ $ 28.6% 29.7% 1,645 2,605 1,443 2,397 2006 2007 (778) (960) (197) (140) (221) (220) 867 123 180 686 770 712 (60) (55) 92 88 (3) 1 $ $ $ $ 31.8% 34.2% (1,872) 1,079 2,951 1,595 1,457 2005 2006 (989) (592) (217) 151 124 464 992 499 (21) (27) (39) (93) (87) 90 52 79 10

117 | ABB Annual Report 2007 Financial review Note 17 Taxes, continued TitelCertain entities have deferred tax assets related to net operating loss carry-forwards and other items. Because recognition of these assets does not meet the more likely than not standard, valuation allowances of $960 and $1,872 million have been established at December 31, 2007 Einleitungstextand 2006, respectively.

At December 31, 2007, net operating loss carry-forwards of $3,827 million and tax credits of $109 million are available to reduce future taxes of certain subsidiaries, of which $2,477 million loss carry-forward and $106 million tax credits which will expire in varying amounts through 2027. These carry-forwards are predominantly related to the Company’s U.S. operations.

At December 31, 2007, the line item unused tax losses and credits included the increase of approximately $140 million due to losses of a predivestment reorganization. However, the Company determined it was more likely than not that such deferred tax assets would not be realized. The Company has therefore established a full valuation allowance for this matter.

At December 31, 2007, the line item valuation allowance included the reversal of a valuation allowance of approximately $200 million. The offsetting credit was recognized as a reduction of taxes in discontinued operations, predominantly related to the Company’s divestment of Lummus. Furthermore, the line item valuation allowance also included the reversal of a valuation allowance of approximately $60 million. The offsetting credit was recognized as a reduction of goodwill predominantly related to the Company’s operation in countries including Germany and the United States.

At December 31, 2006, the line item pension and other accrued liabilities included approximately $340 million that were reclassified to other current and non-current liabilities in the 2007 opening Consolidated Balance Sheet upon adoption of FIN 48.

Unrecognized tax benefits consisted of the following:

Unrecognized Penalties and interest related to Total tax benefits unrecognized tax benefits 2007 Classification as unrecognized tax items on January 1, $ 524 $ 107 $ 631 Increase relating to prior year tax positions 101 48 149 Decrease relating to prior year tax positions (128) (7) (135) Increase relating to current year tax positions 76 2 78 Decrease related to current year tax positions (4) – (4) Decrease due to settlements with taxing authorities (30) (16) (46) Decrease as a result of the applicable statute of limitations (37) (10) (47) 118 Exchange difference average 16 5 21 Balance at December 31, which would, if recognized, affect the effective tax rate $ 518 $ 129 $ 647

The reconciling item decrease relating to prior year positions includes approximately $100 million related to the outcome of a court decision in Northern Europe where the Company has claimed in its tax return a divestment loss that did not meet the technical merits for recognition under FIN 48 accounting principles. No penalty and interest were due as a result of this court decision.

The reconciling item increase relating to current year tax positions is predominantly related to our interpretation of tax law and OECD guidelines.

In February 2008, pending court cases in Northern Europe relating to certain sale and leaseback transactions were ruled in favor of the Company. Accordingly, the Company will release in 2008 provisions of approximately $40 million in taxes and approximately $25 million in penalties and interest. Otherwise, the Company has not identified any significant changes which it would expect are reasonably possible to occur within the next twelve months.

As of December 31, 2007, the earliest open tax years that remain subject to examination are the following:

Region Year Central Europe 2002 Mediterranean 2003 Middle East & Africa 2005 North America 2004 North Asia 2001 Northern Europe 2002 South America 2003 South Asia 2000

U.S. dollar amounts in millions, except per share amounts Balance Sheets at December 31, 2007 and 2006, for the Company’s benefit plans: benefit Company’s the 31, for 2006, and 2007 December at Sheets Balance Consolidated the in recognized status funded the and assets plan in change the obligations, benefit in change the forth set tables following The status funded and Obligations tax. of net $42631,million, of 2006, December at loss comprehensive other accumulated ending to charge in a resulted This obligation. benefit the and assets plan the of value fair the between difference the as measured plans, postretirement and pension benefit defined its of status funded the Sheets Balance Consolidated its in to recognize Company the SFAS requires 158, adopted which 31, Company the 2006, December On plans. its for date 31 measurement aDecember uses Company The requirements. tax and government to local pursuant funded to be required not are that plans pension several has Company The requirements. tax and government local the with consistent are plans Company’s the of policies funding The the Company. from contributions or other matching to earn employees enable and to contributions make employees require plans of these Some countries. certain in plans benefit postretirement other operates also Company The plans. multi-employer are plans these of Certain employment. of termination or retirement, disability, death, of event the in employees to benefits provide and employees Company’s the of portion alarge cover plans These practices. and local with regulations accordance in plans indemnity termination and contribution defined benefit, defined including plans, pension operates Company The 19Note U.S. dollar amounts in millions, except per share amounts share per except millions, in amounts dollar U.S. following: the of consisted liabilities Other 18Note Funded status Fair valueofplanassetsattheendyear Exchange ratedifferences Plan amendmentsandother Plan assetsofbusinessesdisposed Benefit payments Contributions from planparticipants Contributions from employer Actual returnonplanassets Fair valueofplanassetsatthebeginningyear Benefit obligationattheendofyear Exchange ratedifferences Plan amendmentsandother Total Actuarial (gain)loss Other liabilitiesnon-current Benefit obligationsofbusinessesdisposed Income taxrelated liabilities(Note17) Benefit payments Management incentiveplanprovisions Contributions from planparticipants Non-current derivativeliabilities(seeNote5) Interest cost Deferred income Service cost Non-current depositliabilities(seeNote9) Nuclear technologyenvironmental provisions (seeNote16) December 31, Benefit obligationatthebeginningofyear Employee benefits benefits Employee Other liabilities Other $ $ 8,906 8,163 8,884 Pension benefits 8,278 2007 (538) (538) 592 297 370 616 361 189 (22) (16) (78) 38 23 38 (5) – $ $ 8,163 6,895 8,278 7,557 2006 (464) (464) 115 626 648 479 676 329 180 (52) (36) (50) 36 50 36 (5) $ $ $ $ 1,797 2007 2007 Other benefits 215 215 352 556 162 113 298 222 245 (12) (11) (12) 12 71 12 3 1 – – – – – – – – - - $ $ $ $ 1,154 2006 2006 222 222 312 113 118 302 246 251 (18) (20) (18) 18 58 12 2 – – – – – – – – – – – -

119 | ABB Annual Report 2007 Financial review Note 19 Employee benefits, continued TitelThe pre-tax amounts recognized in accumulated other comprehensive loss related to continuing operations in 2007 and 2006 consisted of:

Einleitungstext Pension benefits Other benefits

December 31, 2007 2006 2007 2006 Transition liability $ – $ – $ (4) $ (4) Net actuarial loss (530) (585) (86) (104) Prior service cost (47) (42) 90 100 Total amounts recognized in accumulated other comprehensive loss $ (577) $ (627) $ – $ (8)

The amount of pension liability at December 31, 2007 and 2006, recognized in accumulated other comprehensive loss, was $577 million and $627 million, respectively, of which $0 million and $84 million, respectively, related to discontinued operations. The amount of pension liability at December 31, 2007 and 2006, recognized in accumulated other comprehensive loss, net of tax, was $486 million and $629 million, respectively.

The following amounts related to continuing operations have been recognized in the Company’s Consolidated Balance Sheets at December 31, 2007 and 2006:

Pension benefits Other benefits

December 31, 2007 2006 2007 2006 Overfunded plans $ (379) $ (371) $ – $ – Accrued pension cost current 22 13 18 18 Accrued pension cost non-current 335 473 197 204 Funded status $ (22) $ 115 $ 215 $ 222

December 31, 2007 2006 Overfunded plans $ (379) $ (371) Other employee related benefits that do not meet the criteria of SFAS 87 (1) (2)

120 Prepaid pension and other employee benefits $ (380) $ (373)

December 31, 2007 2006 Employee related benefit costs attributable to pension plans $ 40 $ 31 Employee related benefit costs that do not meet the criteria of SFAS 87 33 40 Total other current pension and other employee benefit liability $ 73 $ 71

December 31, 2007 2006 Underfunded pension plans non-current $ 335 $ 473 Underfunded other benefit plans non-current 197 204 Other employee related benefits that do not meet the criteria of SFAS 87 99 132 Total other non-current pension and other employee benefit liability $ 631 $ 809

The funded status, calculated by the projected benefit obligation (PBO) and fair value of plan assets, for pension plans with a PBO in excess of fair value of plan assets or fair value of plan assets in excess of PBO, respectively, was:

December 31, 2007 2006 PBO Assets Difference PBO Assets Difference Underfunded plans $ 2,383 $ 2,026 $ 357 $ 4,010 $ 3,524 $ 486 Overfunded plans 6,501 6,880 (379) 4,268 4,639 (371) Total $ 8,884 $ 8,906 $ (22) $ 8,278 $ 8,163 $ 115

U.S. dollar amounts in millions, except per share amounts The following weighted-average assumptions were used to determine benefit obligations at December 31, 2006: and 2007 December at obligations benefit to determine used were assumptions weighted-average following The Assumptions ($11) respectively. million, and million $1 million, $6 are year next the over cost benefit periodic net into loss comprehensive other accumulated from be amortized will that plans postretirement non-pension benefit defined the for cost service prior and cost transition loss, actuarial net estimated The respectively. and $14 are $12 million, year million next the over cost benefit periodic net into loss comprehensive other accumulated from amortized be to estimated is that plans pension benefit defined the for cost service prior and loss actuarial net The projected types of investments in each asset category and the long-term historical returns for each investment type. investment each for returns historical long-term the and category asset each in investments of types projected and current the allocation, asset projected and current the from derived is assumption assets plan on return of rate long-term expected The and 2005: and 31, 2007,December ended 2006 years the for cost benefit periodic net to determine used were assumptions weighted-average following The plans. respective the for durations appropriate of investments income fixed quality high of rates from derived is assumption rate discount The For the years ended December 31, 2007, 2006 and 2005, net periodic benefit cost consisted of the following: the of consisted cost benefit 31, periodic net 2007, December 2005, and ended 2006 years the For loss comprehensive other accumulated in recognized amounts other and cost benefit periodic net of Components unfunded. are plans benefit postretirement other Company’s the of All U.S. dollar amounts in millions, except per share amounts share per except millions, in amounts dollar U.S. was: respectively ABO, of excess in assets plan of value fair or assets plan of value fair of excess in ABO with plans pension for assets plan of value fair and ABO by the calculated status, funded The respectively. 2006, and and December 2007 31, million $8,573 was at plans $7,976 million pension benefit defined all for (ABO) obligation benefit accumulated The 19Note Net periodicbenefitcost Other benefits Curtailments, settlementsandspecialtermination Amortization ofnetactuarialloss Amortization priorservicecost Amortization transitionliability Rate ofcompensationincrease Expected returnonplanassets Expected long-termreturnonplanassets Interest cost Pension increase assumption Total Rate ofcompensationincrease Discount rate Service cost Assets exceedABO Discount rate December 31, December 31, December 31, December 31, ABO exceedsassets Employee benefits, continued benefits, Employee $ $ $ $ 8,573 8,226 ABO 347 2.32% 5.00% 4.39% 2007 2007 (400) 209 361 189 21 31 3 4 - Pension benefits Pension benefits Assets 2007 $ $ 8,906 8,850 2.35% 4.92% 4.29% 56 2006 2006 (353) 207 329 180 39 1 7 4 – Difference $ $ 1.49% 2.35% 5.16% Pension benefits 2007 2.16% 5.47% 4.58% (333) (624) 291 2005 2005 (342) 227 342 179 44 4 – – - $ $ $ $ 0.98% 2.32% 4.39% 7,976 6,150 1,826 2006 5.70% ABO 2007 2007 (11) 11 12 1 7 1 1 – – – – Other benefits Other benefits $ $ 6.17% 2006 $ $ Assets 2007 8,163 6,725 1,438 Other benefits 5.50% 2006 2006 – – (11) 13 12 1 8 1 2 – – – – Difference $ $ $ $ 5.75% 5.70% 2005 2005 2006 (187) (575) 388 22 17 (6) 1 7 3 – – – – – – –

121 | ABB Annual Report 2007 Financial review Note 19 Employee benefits, continued TitelThe Company maintains non-pension postretirement benefit plans, which are generally contributory with participants’ contributions adjusted Einleitungstextannually. December 31, 2007 2006 Health care cost trend rate assumed for next year 10.72% 11.74% Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) 4.96% 4.97% Year that the rate reaches the ultimate trend rate 2017 2014

A one-percentage-point change in assumed health care cost trend rates would have the following effects at December 31, 2007:

1-percentage-point increase 1-percentage-point decrease Effect on total of service and interest cost $ 1 $ (1) Effect on postretirement benefit obligation $ 15 $ (13)

Plan assets Long-term allocation

December 31, 2007 2006 Asset category: Equity securities 32% 33% 20% –40% Debt securities 55% 55% 50% –70% Real estate 7% 7% 0% –15% Other 6% 5% 0% –15% Total 100% 100%

The pension plan assets for each individual plan are invested in accordance with statutory regulations, pension plan rules and decisions of the pension fund trustees. The investment allocation strategy is expected to remain consistent with historical averages.

The Company periodically reviews the asset allocation in light of the duration of its pension liabilities and analysis trends and events that may affect assets values in order to initiate appropriate measures at an early stage. 122

The Company does not expect any plan assets to be returned to the employer during the 12-month period ending December 31, 2008.

At December 31, 2007 and 2006, the plan assets included approximately 623,000 shares and 630,000 shares of the Company’s capital stock with a total value of $18 million and $11 million, respectively.

Contributions The Company made non-cash contributions of $49 million and $449 million of available-for-sale debt securities to certain of the Company’s pension plans in Germany in 2007 and 2006, respectively. The Company also made cash contributions of $248 million and $199 million to other pension plans and $12 million and $18 million to other benefit plans during 2007 and 2006, respectively.

The Company expects to contribute approximately $200 million to its pension plans and $18 million to its other postretirement benefit plans in 2008.

The Company also maintains several defined contribution plans. The expense for these plans was $68 million, $55 million and $52 million in 2007, 2006 and 2005, respectively. The Company also contributed $20 million, $19 million and $61 million to multi-employer plans in 2007, 2006 and 2005, respectively.

Estimated future benefit payments The expected future cash flows to be paid by the Company in respect of pension and other postretirement benefit plans at December 31, 2007 are as follows:

Pension benefits Other postretirement benefits Benefit payments Medicare subsidies 2008 $ 543 $ 19 $ (1) 2009 563 20 (1) 2010 556 20 (1) 2011 566 20 (1) 2012 577 20 (1) Years 2013–2017 $ 2,986 $ 99 $ (7)

Additionally, the Medicare subsidies column represents payments estimated to be received from the United States government as part of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The United States government began making the subsidy payments for employers in 2006.

U.S. dollar amounts in millions, except per share amounts launches. MIP comparable previous from data the used has Company the forfeitures, estimating In options. and warrants the of life contractual six-year the reflecting rate, interest franc Swiss asix-year on based is rate risk-free The options. and warrants the of value time the realizing thereby shares, purchase to right the exercise than rather option or warrant the to sell elect can aparticipant period, vesting the after that fact the on based option, and warrant each of life six-year contractual the to be assumed been has granted options and warrants the of term expected The Ltd shares. ABB on warrants listed equivalent from volatilities implied on based are volatilities Expected 2005. in MIP the under grants no were There below. table the in noted assumptions the uses that model alattice using grant of date the on estimated is option and warrant each of value fair The options and Warrants grant. of date the from years six expire WARs and options warrants, All disability. or death as such circumstances certain in waived be can restrictions Vesting grant. of date the from years three is which period, vesting the after WARs exercise and options and warrants sell or exercise may Participants non-transferable. are WARs The WAR. the of exercise of date market the on the warrant cash, listed in receive, equivalent to an of price right the participant the gives WAR Each party. third this toward be will shares deliver to obligation Company’s the consequently, and, party, by athird held be thereafter will instruments the options, or warrants the to sell elects participant the If launch. MIP that with connection in bank third-party by the listed warrants equivalent of price market the at options such purchase bank a third-party that to request holder the entitle options The plan. this under granted warrants of transferability and pricing facilitates which Exchange, Swiss SWX the on bank by athird-party listed are warrants Equivalent shares. to purchase right the exercise than rather options and warrants the sell may Participants prices. Ltd predetermined at ABB of shares to purchase participants allow MIP the under granted options and warrants The consideration. no for to key employees options, launch, 2007 May the of as and, (WARs) rights appreciations warrant cash-settled warrants, physically-settled offers MIP, the Company Under the MIP U.S. dollar amounts in millions, except per share amounts share per except millions, in amounts dollar U.S. model. alattice using grant of date the on determined was to employees offered securities the of value SFAS of 123R. fair The adoption to the prior presented periods all in compensation SFASof 123 employee to stock-based provisions recognition value fair the applied had Company the if share per income on and income net on effect the illustrates table following The francs. Swiss in presented are arrangements payment share-based under granted instruments to the related below tables the in data certain francs, Swiss in traded are shares the which (virt-x), on Exchange Swiss SWX the Ltd is ABB of shares the for market trading primary the As arrangements. payment share-based with connection in capital contingent of out shares new million 44 to approximately up to issue 31, ability the 2007, had At December Company the arrangements. payment share-based with connection in use for shares its of 10 of atotal million transactions, two in 2007, May repurchased, In Company the note. this of WAR section the in disclosed are liabilities share-based of respect in recorded Charges insignificant. were years both in benefits tax The awards. equity of respect in $18 of charge million a total recorded Company SFAS 123R, the adopting of aresult as 2006, In awards. equity of respect in million $32 of charge atotal 2007,In recorded Company the restated. been not have periods prior for SFAS of 123R. Results provisions the with accordance in estimated value fair grant-date the on based 1, 2006, to January subsequent granted arrangements payment share-based all for cost SFAS of 123, compensation ii) and provisions original the with accordance in estimated value fair grant-date the on 1, based 2006, of, as January vested yet not to, but prior granted arrangements payment share-based all for cost compensation i) includes 2006 in recognized cost compensation method, transition that Under method. transition modified-prospective SFAS of the 123R, using provisions recognition value fair the adopted Company 1, the 2006, January Effective grant. of date the on shares underlying the of value market the than, to, greater or equal prices exercise had plans these under granted options stock and warrants all ESAP, the under as Company by the granted options stock the and MIP the under issued warrants the 1, for 2006, to January prior recognized was compensation 25. stock-based APB No with accordance in 2005 in Statements Income Consolidated the in recognized was cost tion LTIP, the under awarded compensa shares granted conditionally the and MIP the under granted rights appreciation warrant cash-settled with by SFAS 123. connection In permitted as FASB Interpretations, related 25, APB and with accordance in plans these for accounted Company 1, the 2006, to January Prior below. sections respective the in described fully more as plans, payment share-based three has Company The 20 Note Diluted –pro forma Diluted –asreported Basic –pro forma Basic –asreported Income pershare: Pro formanetincome net ofrelated taxeffects Deduct: Total stock-based employeecompensationexpensedeterminedunderfairvaluebasedmethodforallawards, Add: Stock-basedemployeecompensationexpenseincludedinreported netincome,ofrelated taxeffects Net income,asreported

Share-based payment arrangements payment Share-based $ $ $ $ $ $ 2005 0.35 0.36 0.36 0.36 727 735 (39) 31 -

123 | ABB Annual Report 2007 Financial review Note 20 Share-based payment arrangements, continued Titel 2007 grant 2006 grant EinleitungstextExpected volatility 27% 28% Dividend yield 1.14% 1.06% Expected term 6 years 6 years Risk-free interest rate 3.00% 2.30%

Presented below is a summary of the activity related to warrants and options for the year ended December 31, 2007:

Weighted-average Weighted-average remaining Aggregate intrinsic Number of Number of exercise price ­contractual term value (in millions of instruments shares (1) (in Swiss francs) (2)(3) (in years) (3) Swiss francs) (4) Outstanding at January 1, 2007 66,334,250 14,120,576 10.42 Granted 28,475,520 5,695,104 26.00 Exercised (5) (35,433,500) (7,937,168) 10.38 Forfeited (1,638,495) (327,699) 16.35 Expired (62,500) (15,758) 13.49 Outstanding at December 31, 2007 57,675,275 11,535,055 17.97 4.3 169

Vested and expected to vest at December 31, 2007 54,640,796 10,928,159 17.64 4.2 164 Exercisable at December 31, 2007 19,819,975 3,963,995 8.22 2.8 97

(1) The information in the table above aggregates warrants with different conversion ratios. Warrants granted in 2001 require the exercise of 100 warrants for 25.21 shares of ABB Ltd. Warrants granted in 2003, 2004, 2006 and 2007 require the exercise of five warrants for one share of ABB Ltd. The options granted in 2007 require the exercise of five options for one share of ABB Ltd. No warrants were granted in 2002 and 2005. Information presented reflects the number of shares of ABB Ltd that can be received upon exercise. (2) Information presented reflects the exercise price per share of ABB Ltd. (3) Information presented is weighted on the number of shares. (4) Computed using the closing price, in Swiss francs, of ABB Ltd shares on the SWX Swiss Exchange (virt-x) and the exercise price per share of ABB Ltd. (5) The cash received upon exercise amounted to $68 million. The shares were issued out of contingent capital. 124

Of the outstanding instruments at December 31, 2007, 2006 and 2005, 9.5 million, 14.4 million and 9.9 million, respectively, have been sold to a third-party by participants, representing 1.9 million, 3.5 million and 2.5 million shares, respectively.

At December 31, 2007, there was $26 million of total unrecognized compensation cost related to non-vested warrants and options granted under the MIP. That cost is expected to be recognized over a weighted-average period of 2.3 years. The weighted-average grant-date fair value of warrants and options granted during 2007 and 2006 was 1.35 Swiss francs and 0.73 Swiss francs, respectively. The aggregate intrinsic value (on the days of exercise) was 117 million Swiss francs. There were no exercises of these instruments in 2006 and 2005.

Presented below is a summary, by launch, related to instruments outstanding at December 31, 2007:

Weighted-average remaining Number of Number of ­contractual term Exercise price (in Swiss francs) (1) instruments shares (2) (in years) (3) 7.00 5,545,750 1,109,150 1.9 7.50 12,712,500 2,542,500 2.9 15.30 11,430,000 2,286,000 4.1 26.00 27,987,025 5,597,405 5.4 Total number of instruments and shares 57,675,275 11,535,055 4.3

(1) Information presented reflects the exercise price per share of ABB Ltd. (2) Information presented reflects the number of shares of ABB Ltd that can be received upon exercise. (3) Information presented is weighted on the number of shares.

WARs As each WAR gives the holder the right to receive cash equal to the market price of an equivalent listed warrant on date of exercise, the Company records a liability based upon the fair value of outstanding WARs at each period end, accreted on a straight-line basis over the three-year vesting period. In selling, general and administrative expenses, the Company recorded expense of $142 million, $106 million and $31 million for 2007, 2006 and 2005, respectively, as a result of changes in both the fair value and vested portion of the outstanding WARs. To hedge its exposure to fluctuations in the fair value of outstanding WARs, the Company purchased cash-settled call options, which entitle the Company to receive amounts equivalent to its obligations under the outstanding WARs. In accordance with EITF 00-19, the cash-settled call options have been recorded as assets measured at fair value (see Note 4), with subsequent changes in fair value recorded through earnings to the extent that they offset the change in fair value of the liability for the WARs. In 2007, 2006 and 2005, the Company recognized income of $132 million, $97 million and $26 million, respectively, in selling, general and administrative expenses related to the cash-settled call options.

U.S. dollar amounts in millions, except per share amounts U.S. dollar amounts in millions, except per share amounts share per except millions, in amounts dollar U.S. 31, 2007: December ended year the for to participants granted WARs of activity of asummary is below Presented Exchange. Swiss SWX the on listed warrants equivalent of price trading the upon based determined was WARs of value fair The 31, respectively. 2006, $176 and 2007 and December at million $220 million was WARs outstanding of value fair aggregate The 20 Note launches. ESAP previous from data the options. used the has of life Company the contractual forfeitures, year one estimating In the reflecting rates, interest franc Swiss one-year on based is rate risk-free The interest. with returned savings their have or options their to exercise whether to decide required are participants the and vest options the which of end the at option, each of life one-year contractual the to be determined been has granted option the of term expected The below. table the in noted assumptions MIP, the the under using described as model valuation option same the using grant of date the on estimated is option each of value fair The savings. accumulated their of to arefund entitled be will and period savings the during time any at ESAP the from withdraw can Employees interest. earn and participants the of behalf on trustee by athird-party held account bank a in accumulated are savings The interest. with returned savings their have or date, grant the at set price exercise the at Company) the of share registered one representing ADS –each States United the in employees of case the in (ADS) Shares Depositary (American Ltd shares ABB to buy interest plus savings their using options stock their to exercise whether choose employees period, savings the of end At the deductions. salary monthly of by way period atwelve-month over save Employees feature. asavings with plan stock-option employee an is ESAP The ESAP by participants. WARs of exercise upon paid were respectively, $1 million, and $18 $106 of million million, liabilities share-based 2007, In 2005, 2005. in and 2006 granted were WARs No respectively. $19 and million, $7 million was 2006 and 2007 in granted WARs of grant of date at value fair aggregate The Presented below is a summary of activity under the ESAP during the year ended December 31, 2007: December ended year the during ESAP the under activity of asummary is below Presented Outstanding atDecember31,2007 Not exercised (savingsreturnedplusinterest) (4) (3) (2) (1) Exercised Forfeited Granted Outstanding atJanuary1,2007 Exercisable atDecember31,2007 Outstanding atDecember31,2007 Expired Forfeited Exercised Granted Outstanding atJanuary1,2007 Risk-free interest rate Expected term Dividend yield Expected volatility Vested andexpectedtovestatDecember31,2007 Exercisable atDecember31,2007

The cashreceived uponexercise amountedto$61millionandthecorresponding taxbenefitwas$13million.Theshares were issuedoutofcontingentcapital. Computed usingtheclosingprice,inSwissfrancs, ofABBLtdshares on theSWXSwissExchange(virt-x)andexercise priceofeachoptioninSwissfrancs. Information presented forADSisbasedonequivalentSwissfrancdenominated awards. Includes shares represented byADS. Share-based payment arrangements, continued arrangements, payment Share-based (4) Number of (3,730,651) 2,772,670 2,772,670 4,022,310 2,658,991 (127,729) (163,930) shares (1) – Weighted-average (in Swissfrancs) exercise price 18.55 34.98 18.55 34.98 18.55 18.55 34.98 (2) –

2007 grant Weighted-average ­contractual term 2.82% 0.89% 1 year 34% remaining (in years) 0.8 0.8 2006 grant –

2.13% 0.81% 1 year 30% value (inmillionsof Aggregate intrinsic Number ofWARs Swiss francs) (34,460,575) 21,966,000 58,879,135 89,567,000 2005 grant (1,625,000) 6,163,935 (766,225) 1.40% 0.97% 1 year 27% (2)(3) – – –

125 | ABB Annual Report 2007 Financial review Note 20 Share-based payment arrangements, continued TitelThe exercise prices per ABB Ltd share and per ADS of 34.98 Swiss francs and $29.78, respectively, for the 2007 grant, 18.55 Swiss francs and $14.75, respectively, for the 2006 grant, and 10.30 Swiss francs and $7.88, respectively, for the 2005 grant were determined using the closing Einleitungstextprice of the ABB Ltd share on SWX Swiss Exchange (virt-x) and ADS on the New York Stock Exchange on the respective grant dates.

At December 31, 2007, there was $10 million of total unrecognized compensation cost related to non-vested options granted under the ESAP. That cost will be recognized over the first 10 months of 2008. The weighted-average grant-date fair value of options granted during 2007, 2006 and 2005, was 4.93 Swiss francs, 2.32 Swiss francs, and 1.12 Swiss francs, respectively. The total intrinsic value (on the day of exercise) of options exercised in 2007, 2006 and 2005 was 61 million Swiss francs, 50 million Swiss francs, and 22 million Swiss francs, respectively.

LTIP The Company has an LTIP for members of its Executive Committee and other executives (Eligible Participants), as defined in the terms of the LTIP and determined by the Company’s Governance, Nomination and Compensation Committee. The LTIP involves annual grants (subject to market and vesting conditions) of the Company’s stock and, as of the 2006 launch, contains a co-investment component, in addition to the share-price performance component existing in the previous launches.

Under the share-price performance component, the number of shares conditionally granted is dependent upon the base salary of the Eligible Participant. The actual number of shares that each Eligible Participant will receive free-of-charge at a future date is dependent on i) the performance of ABB Ltd shares during a defined period (Evaluation Period) compared to those of a selected peer group of publicly-listed multinational companies and ii) the term of service of the respective Eligible Participant in their capacity as an Eligible Participant during the Evaluation Period. The actual number of shares received after the Evaluation Period cannot exceed 100 percent of the conditional grant.

The performance of the Company compared to its peers over the Evaluation Period will be measured as the sum, in percentage terms, of the average percentage price development of the ABB Ltd share price over the Evaluation Period and an average annual dividend yield percentage (the Company’s Performance).

In order for shares to vest, the Company’s Performance over the Evaluation Period must be positive and equal to or better than half of the defined peers. The actual number of shares to be delivered by the Company, after the end of the Evaluation Period, will be dependent on the Company’s ranking in comparison with the defined peers. The full amount of the conditional grant will vest if the Company’s Performance is better than three-quarters of the defined peers.

Under the co-investment component of the LTIP, each Eligible Participant is invited to invest in the Company’s shares, up to an individually defined maximum number of shares. If the Eligible Participant remains the owner of such shares until the end of the Evaluation Period, the Company will deliver free-of-charge to the Eligible Participant a matching number of shares.

In May 2007, 666,951 shares were conditionally granted to Eligible Participants under the 2007 launch of the LTIP, representing the total of the 126 share price performance and co-investment components.

In September 2006, 733,173 shares were conditionally granted to Eligible Participants under the 2006 launch of the LTIP, representing the total of the share price performance and co-investment components. In March 2007, a further 83,052 shares were conditionally granted under the 2006 launch to new Eligible Participants.

In December 2005, 1,044,456 shares were conditionally granted to Eligible Participants under the 2005 launch of the LTIP. In March 2007, a further 59,150 shares were conditionally granted under the 2005 launch to a new Eligible Participant.

Presented below is a summary of launches of the LTIP:

Conditionally granted shares outstanding Reference price Launch year Evaluation Period at December 31, 2007 (Swiss francs) (1) 2005 March 15, 2005, to March 15, 2008 928,646 7.15 2006 March 15, 2006, to March 15, 2009 730,994 15.48 2007 March 15, 2007, to March 15, 2010 605,776 21.08

(1) For the purpose of comparison with the peers, the reference price is calculated as the average of the closing prices of the ABB Ltd share on SWX Swiss Exchange (virt-x) over the 20 trading days preceding March 15 of the respective launch year.

Presented below is a summary of activity under the LTIP for the year ended December 31, 2007:

Weighted-average grant-date fair Number of shares value per share (Swiss francs) Nonvested at January 1, 2007 1,773,632 13.84 Granted 809,153 23.75 Forfeited (317,369) 15.52 Nonvested at December 31, 2007 2,265,416 17.14

Effective January 1, 2006, the Company accounts for the LTIP in accordance with SFAS 123R. The charge is based on the market price of the ABB Ltd share on grant date and is recorded in selling, general and administrative expenses over the vesting period, which is from grant date to the end of the Evaluation Period. Prior to January 1, 2006, the Company accounted for awards under the LTIP using the intrinsic value method of APB 25. The LTIP was deemed to be a variable plan in accordance with APB 25. Accordingly, changes in the fair value of the Company’s stock and number of shares anticipated to vest resulted in a change in the intrinsic value and amount of the awards, with a corresponding change to compensation expense over the vesting period.

U.S. dollar amounts in millions, except per share amounts U.S. dollar amounts in millions, except per share amounts share per except millions, in amounts dollar U.S. n n n n to deliver: obligations outstanding 31, further 2007, had December at above, to the Company the addition In bank. the with agreement the of terms the under exercised be could 7.00 francs, from Swiss to 26.00 ranging prices strike 31, with 2007,December instruments, 4.1 these of only million 2013. to May 2009 However, at December from ranging periods in expire options call These bank. by the held were francs Swiss 26.00 7.00 from to ranging prices strike with and shares of number same the 31, representing options, 2007, call At December 23 of million atotal $181 of capital million. paid-in additional and stock capital in increase anet was there and Company by the issued were shares 19.6 million approximately aresult, As held. options call the of aportion 7.00 exercised from to 13.49francs, ranging Swiss prices strike with and value fair at Company by the issued 2004), been had and 2001, which 2003, during launches MIP to (related options call holding 2007, bank the During WARs. their exercised or warrants their exercised or sold either have participants MIP that extent to the bank by the exercised be only can options call the bank, the with agreement the of terms the Under to participants. WAR awards and warrant MIP by the represented shares of number to the equivalent shares to acquire right the bank the giving value, fair at to abank options call sold MIP, Company’s the of Company the launch each with connection in and Upon million. $60 of capital paid-in additional and stock capital in increase an in resulted issuance ESAP. the share under This obligations Company’s the fulfilling of purposes the for stock capital contingent from shares 3.7 million 2007, issued November Company In the $199 of stock million. treasury in increase an in resulted transactions These arrangements. payment share-based with connection in use for shares own its of 10 million market open the on 2007, purchased During Company the million. $830 of capital paid-in additional and stock capital in increase an and shares 105 of million issuance the in resulting bonds, their converted bonds convertible franc Swiss 1billion Company’s the of 2007, 13, Note in during bondholders the described As Sheets. Balance Consolidated the in capital paid-in additional and stock capital in increase by acorresponding offset was amount This contribution. of date the on shares the of value fair the million, by $407 obligations asbestos in areduction in 21, resulted and PI Trust April on 2006, Asbestos CE to the contributed were shares These liabilities. asbestos Company’s the of part to cover reserved were 30,298,913 Ltd shares 2005, In ABB 2,187,756,317 2,370,314,947 had which of 31, Company shares, the 2006, authorized issued. and registered were shares 31, 2,316,015,102 2,570,314,947 2007, had At December which of At December Company shares, the issued. and authorized registered were 21 Note insignificant. were amounts 2005 and 2006 The million. $3 totaled arrangements such for expenses administrative and general selling, in recorded expense the and shares amillion half than less of grant aggregate an represented In 2007, arrangements such arrangements. payment share-based insignificant other has Company The payments share-based Other respectively. francs, 11.53 and 16.75 francs, 23.75 francs, was 2007, Swiss Swiss 2005, Swiss and during 2006 granted conditionally shares of value fair grant-date in 2007. vested under weighted-average LTIP The grants no and in 2006 first vested LTIP The francs. Swiss 3million was 2006 during vested that shares of value fair grant-date 1.7 of total The period years. aweighted-average over recognized to be LTIP.the expected is cost Such under granted conditionally shares to non-vested related cost 31, compensation 2007,At December unrecognized $17 total of was there million respectively. million, $9 and $10 $16 million, approximately was 2007, in 2005 and granted 2006 conditionally of shares of grant, dates the at value, fair aggregate The 20 Note buyback program up to a maximum value of 2.2 billion Swiss francs (equivalent to approximately $2 billion at the then valid exchange rates). exchange valid then the at billion $2 to approximately (equivalent francs Swiss 2.2 of billion value to amaximum up program buyback ashare to launch decision its announced Company the addition, In share. 0.48 per CHF 2.50 distribute 2.02 to CHF CHF and from shares the of value nominal the to reduce Meeting General Annual to the put be will aproposal that announced Directors of Board the 2008, February In distribution. for available is francs 748 Swiss and million is restricted, francs 1,512 isunrestricted Swiss francs million capital, 2,902 Swiss share is million francs Swiss 5,469million statements, financial unconsolidated such in reflected equity stockholders’ francs 31, 10,631 Swiss the of 2006, million At December distribution. for available is francs 1,772 and Swiss 1,175 million unrestricted is restricted, is francs Swiss francs Swiss million million 4,096 capital, share is francs Swiss million 5,790 statements, financial unconsolidated such in reflected equity 31, stockholders’ 2007, francs December Swiss 12,833 the of million law. At Swiss with compliance in prepared Zurich, ABB Ltd, of statements financial unconsolidated the in reflected as equity stockholders’ and Incorporation of Ltd’s law, ABB Articles Swiss of requirements the on based stockholders Company’s to the payable are Dividends arrangements. payment share-based above the of adescription 20 for Note See

employees. with arrangements payment share-based other certain with connection in shares amillion half than less respectively; 2010, 2008, and March 2009 in LTIP, the of expiring and launches 2007, the vesting 2005 and under 2006 Participants to Eligible free-of-charge shares to 2.3up million 2008; November in ESAP,expiring the and under vesting to employees francs, Swiss 34.98 of price astrike at shares, to 2.8up million 2013; May in 2010May expiring and MIP, the of in launch vesting 2007 the under granted options to the relating francs, Swiss 26.00 of price astrike at shares, to 3.0up million Stockholders’ equity equity Stockholders’ Share-based payment arrangements, continued arrangements, payment Share-based million million

127 | ABB Annual Report 2007 Financial review Note 22 Earnings per share TitelBasic earnings (loss) per share is calculated by dividing income (loss) by the weighted-average number of shares outstanding during the year. Diluted earnings (loss) per share is calculated by dividing income (loss) by the weighted-average number of shares outstanding during the year, Einleitungstextassuming that all potentially dilutive securities were exercised, if dilutive. Potentially dilutive securities comprise: outstanding written call options; outstanding options and shares granted subject to market and/or vesting conditions under the Company’s share-based payment arrangements; and, prior to September 2007, shares issuable in relation to outstanding convertible bonds. In 2007, 2006 and 2005, outstanding securities representing a maximum of 3 million, 4 million and 133 million shares, respectively, were excluded from the calculation of diluted earnings (loss) per share as their inclusion would have been anti-dilutive.

Year ended December 31, 2007 2006 2005 Income from continuing operations before cumulative effect of accounting change $ 3,171 $ 1,532 $ 867 Income (loss) from discontinued operations, net of tax 586 (142) (127) Cumulative effect of accounting change, net of tax – – (5) Net income $ 3,757 $ 1,390 $ 735

Weighted-average number of shares outstanding (in millions) 2,258 2,128 2,029

Basic earnings (loss) per share: Income from continuing operations before cumulative effect of accounting change $ 1.40 $ 0.72 $ 0.43 Income (loss) from discontinued operations, net of tax 0.26 (0.07) (0.07) Cumulative effect of accounting change, net of tax – – 0.00 Net income $ 1.66 $ 0.65 $ 0.36

Year ended December 31, 2007 2006 2005 Income from continuing operations before cumulative effect of accounting change $ 3,171 $ 1,532 $ 867 Effect of dilution: Interest on convertible bonds, net of tax 9 29 26 Income from continuing operations before cumulative effect of accounting change, adjusted 3,180 1,561 893 128 Income (loss) from discontinued operations, net of tax 586 (142) (127) Cumulative effect of accounting change, net of tax – – (5) Net income, adjusted $ 3,766 $ 1,419 $ 761

Weighted-average number of shares outstanding (in millions) 2,258 2,128 2,029 Effect of dilutive securities: Call options and shares 18 15 4 Convertible bonds 32 105 105 Dilutive weighted-average number of shares outstanding (in millions) 2,308 2,248 2,138

Diluted earnings (loss) per share: Income from continuing operations before cumulative effect of accounting change $ 1.38 $ 0.69 $ 0.42 Income (loss) from discontinued operations, net of tax 0.25 (0.06) (0.06) Cumulative effect of accounting change, net of tax – – 0.00 Net income, adjusted $ 1.63 $ 0.63 $ 0.36

Note 23 Transformer business and other restructuring charges In 2005, the Company announced its decision to consolidate its global transformer business in the Power Products division, including closing certain plants and employment reductions, as a result of overcapacity, increasing raw material costs and a regional shift in demand experienced by the transformer business. This consolidation program is expected to be completed by the end of 2008 and will result in approximately $240 million of total charges.

During 2007, the Company recorded an expense of $34 million; $23 million was recorded in cost of sales, $2 million in selling, general and administrative expenses, and $9 million in other income (expense) net. This expense consisted of $15 million charges related to employee severance costs, $9 million of estimated contract settlement and loss order costs and $10 million related to inventory and long-lived asset impairments.

During 2006, the Company recorded an expense of $38 million; $26 million was recorded in cost of sales, $9 million in selling, general and administrative expenses and $3 million in other income (expense) net. This expense consisted of $47 million of estimated contract settlement and loss order costs, $3 million charges related to employee severance costs, and $1 million related to inventory and long-lived asset impair- ments and costs. These expenses were offset by a change in estimate of $13 million related to employee severance costs.

U.S. dollar amounts in millions, except per share amounts Automation Products, Process Automation, and Robotics. The remaining operations of the Company are included in Non-core and Other. and Non-core in included are Company the of operations remaining The Robotics. and Automation, Process Products, Automation Systems, Power Products, Power included segments, operating Company’s 1, the 2006, January Effective below. outlined information the using segment operating each of performance the assesses to and resources allocates CODM The Committee. 131,SFAS by Executive Company’s the defined is as (CODM), Maker Decision Operating Chief The segments. operating about information reporting for standards establishes (SFAS 131), Information Related and Enterprise an of Segments 131, No. about Standards Disclosures Accounting Financial of Statement 24 Note made. are payments shortfall lease as years five approximately over paid be will costs exit other and termination lease These costs. exit other and termination lease for $17 respectively, and million, million $8 and reductions workforce for $17 respectively, $14 of and million, million consisted programs other these to related liabilities 31, 2006, and 2007 December At operations. streamlining and headcount reducing by efficiency to increase factories and facilities individual to restructure continues Company the above, described consolidation business transformer to the addition In estimate. original Company’s the with line in be will program consolidation business transformer the of duration the throughout incurred costs total that expects however, Company the accruable; yet not are costs future These program. consolidation business transformer to the relation in incur might it costs and losses potential other to assess continue will Company The U.S. dollar amounts in millions, except per share amounts share per except millions, in amounts dollar U.S. n n n n n n n following: the of consisted and 2008 of end by the primarily settled to be expected are expenses these with associated Liabilities 23 Note to third parties, at current market prices. market current at parties, to third were transfers and sales the if as transfers and sales inter-division for accounts Company The expenditures. capital and assets operating net taxes, and interest before earnings amortization, and depreciation revenues, division SFAS 131, with presents Company accordance the In tax. of net operations, discontinued from (loss) income and interest, minority taxes, for provision expense, finance other and interest income, dividend and interest excludes which taxes, and interest before earnings on based segments its of performance evaluates Company The

Liability atDecember31,2007 Change inestimates Exchange ratedifferences Cash payments Expenses Liability atDecember31,2006 Changes inestimates Exchange ratedifferences Cash payments Expenses Liability atDecember31,2005 Operations. Treasury Group and Development and Research Central Headquarters, includes Corporate/Other – – – following: the includes Other and Non-core industries. manufacturing other and automotive the for service and systems products, robot offers Robotics industries. turbocharging and marine automation, utility gas, and oil pharmaceuticals, and chemicals minerals, and paper, metals and pulp the for services and knowledge application specific industry solutions, and products automation optimization, plant control, sells and develops Automation Process safety. increase and energy, save productivity, increase to customers help that products to these related services and systems, electronics power generators, motors, drives, instrumentation, sories, acces wiring enclosures, components, DIN-rail products, control switches, breakers, switchgear, low-voltage produces Products Automation parties. by third and Company the by both manufactured components incorporating solutions, electrification and automation plant power and systems distribution and transmission upgrades and installs Systems Power customers. commercial and industrial for utilities water and gas electric, for sensors and transformers, distribution and power levels, voltage and current all for breakers circuit apparatus, and switchgear medium-voltage and high- sells and manufactures Products Power businesses. minor other some and business Energy Distributed remaining the 12); Note (see and business Ventures Equity remaining the 1, 2006; January effective Other and Non-core to Corporate from reclassified was which facilities and assets estate real its of majority the of use the manage principally which activities Estate Real Company’s the Operating segment and geographic data data geographic and segment Operating Transformer business and other restructuring charges, continued charges, restructuring other and business Transformer severance costs Employee $ $ $ (10) (13) (19) 33 17 26 51 (2) 2 4 3 ­ settlement/(loss) Contractual order costs $ $ $ (31) (44) 18 15 37 47 31 (6) 3 3 - $ $ $ Total (41) (13) (63) 51 32 63 50 82 (8) 5 7 -

129 | ABB Annual Report 2007 Financial review Note 24 Operating segment and geographic data, continued TitelThe following tables summarize information for each segment:

Einleitungstext Depreciation and Earnings before Capital 2007 Revenues amortization interest and taxes Total assets ­expenditures (1) Power Products $ 9,777 $ 131 $ 1,596 $ 5,770 $ 209 Power Systems 5,832 57 489 4,167 50 Automation Products 8,644 150 1,477 5,371 193 Process Automation 6,420 109 683 4,111 91 Robotics 1,407 21 79 821 14 Non-core and Other 424 84 9 1,904 110 Corporate 1,140 45 (310) 8,726 82 Inter-division elimination (4,461) – – – – Consolidated $ 29,183 $ 597 $ 4,023 $ 30,869 $ 749

Depreciation and Earnings before Capital 2006 Revenues amortization interest and taxes Total assets ­expenditures (1) Power Products $ 7,275 $ 119 $ 939 $ 4,322 $ 145 Power Systems 4,544 59 279 3,345 26 Automation Products 6,837 138 1,053 4,554 148 Process Automation 5,448 114 541 3,644 70 Robotics 1,288 23 1 750 14 Non-core and Other 382 71 65 2,264 71 Corporate 925 31 (321) 4,866 46 Inter-division elimination (3,418) – – – – Consolidated $ 23,281 $ 555 $ 2,557 $ 23,745 $ 520 130 Depreciation and Earnings before Capital 2005 Revenues amortization interest and taxes Total assets ­expenditures (1) Power Products $ 6,185 $ 133 $ 600 $ 3,377 $ 131 Power Systems 4,085 57 187 2,787 26 Automation Products 5,897 151 822 3,782 158 Process Automation 4,996 117 398 3,214 37 Robotics 1,699 28 91 933 16 Non-core and Other 415 69 14 2,294 70 Corporate 436 16 (401) 4,373 13 Inter-division elimination (2,749) Consolidated $ 20,964 $ 571 $ 1,711 $ 20,760 $ 451

(1) Capital expenditures reflect cash outflow towards purchases of tangible and intangible fixed assets.

Geographic information

Revenues Long-lived assets Year ended December 31, at December 31, 2007 2006 2005 2007 2006 Europe $ 13,322 $ 10,969 $ 10,154 $ 2,358 $ 2,082 The Americas 5,247 4,394 4,114 258 213 Asia 7,480 5,863 5,000 522 405 Middle East and Africa 3,134 2,055 1,696 108 93 $ 29,183 $ 23,281 $ 20,964 $ 3,246 $ 2,793

U.S. dollar amounts in millions, except per share amounts U.S. dollar amounts in millions, except per share amounts share per except millions, in amounts dollar U.S. business. of course normal the in basis aregular on renegotiated are and requirements regulatory to various subject are agreements These countries. various in agreements bargaining to collective subject are employees Company’s the of 57 percent Approximately type. service and by product customers external from revenues to present Company the for practicable not is it Accordingly, services. and products of group or type each for customers external with transactions from derived revenues segregate not does Company The 31, 2006. December at 15 and percent 20 percent 31, approximately and 2007 December at assets long-lived Company’s the of respectively, 15 and percent, 19 percent approximately represented Germany and Switzerland assets. the of by location shown are and net, equipment, and plant property, represent assets Long-lived 2007, in 2005. and 2006 Switzerland outside generated were revenues total Company’s the of percent 95 than More respectively. 2007, in 2005, and revenues total 2006 Company’s the of 9percent and 8 percent cent, 8per- approximately generated Germany respectively. 2007, in 2005, and revenues total 2006 Company’s the of 1211 and percent percent 11 percent, approximately generated States United The respectively. 2007, in 2005, and revenues total 2006 Company’s the of 10and percent percent, percent, 12 11 approximately generated China customer. the of location the on based regions the in reflected been have Revenues 24 Note Operating segment and geographic data, continued data, geographic and segment Operating

131 | ABB Annual Report 2007 Financial review TitelReport of management on internal control over financial reporting Einleitungstext The Board of Directors and management of the Group are responsible for establishing and maintaining adequate internal controls over financial reporting. The Group’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of the published consolidated financial statements in accordance with accounting principles generally accepted in the United States of America.

Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

Management conducted an assessment of the effectiveness of internal controls over financial reporting based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organization of the Treadway Commission (COSO). Based on this assessment, management has concluded that internal control over financial reporting was effective as of December 31, 2007.

Ernst & Young AG, an independent registered public accounting firm, has issued an opinion on the effectiveness of the Group’s internal control over financial reporting as of December 31, 2007 which is included on page 134 of the annual report.

Michel Demaré CEO and CFO

Zurich, March 7, 2008 132 March 7,March 2008 Switzerland Zurich, charge in Auditor Barone C. &Young AG Ernst thereon. opinion unqualified an 7, March expressed dated 2008 report our and Treadway Commission the of Organizations Sponsoring of Committee the by issued Framework Integrated – Control Internal in established 31, 2007,December criteria of as on based reporting financial over control Ltd’s ABB States), internal (United Board Oversight Accounting Company Public the of standards the with accordance in audited, have We also 132(R).”106, and No. 87,Statements ofFASB 88, amendment – an Plans Benefit Postretirement Other and Pension Benefit Defined for Accounting “Employers’ No. Standards Accounting Financial of Statement adopted 31, company the 2006, December effective and Payment”, “Share-Based No. Standards Accounting Financial of Statement adopted Company the 1, 2006, January effective in 2006 statements, financial dated No. FASB of Statement interpretation Taxes an Income in Uncertainty for “Accounting 48, No. Interpretation 1, 2007,FASB adopted January in 2007, Company the statements effective financial consolidated 2to Note the in discussed As approved. be to you submitted statements financial consolidated the that We recommend law. Swiss with comply and principles accounting accepted 31, U.S. generally with 2007, December ended conformity in period the in years three the of each for flows cash its and operations its of results consolidated the 31, and 2006, and 2007 Ltd December at ABB of position financial consolidated the respects, material all in fairly, present above to referred statements financial the audits, our on based opinion, our In opinion. our for basis reasonable a provide audits our that believe We presentation. statement financial overall the evaluating as well as by management, estimates made significant and used principles accounting the assessing includes also the audit An statements. supporting financial the in evidence basis, disclosures and test a on amounts examining, includes audit An misstatement. material of free are statements financial the whether about assurance reasonable to obtain audit the perform and plan we that require standards Those in Standards. and States) Auditing Swiss (United with Board accordance Oversight Accounting Company Public the of standards the with accordance in audits our conducted We independence. and qualification professional concerning requirements legal the meet we that confirm We audits. our on based statements financial these on opinion an to express is responsibility Our management. and Directors of Board Company’s the of responsibility the are 31,statements 2007. December financial ended These period the in years three the of each for equity stockholders’ in changes of statements and flows, cash of statements statements, income consolidated related the 31, and 2006, and 2007 December of Ltd as ABB of sheets balance consolidated accompanying the audited have we auditors, Group As Ltd: ABB of Stockholders The ABB LtdGroup Auditors’Reports Sills M. 109”. As also discussed in Note 2 to the consoli 2to Note the in 109”. discussed also As 158, 123(R),

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133 | ABB Annual Report 2007 Financial review Titel Einleitungstext The Stockholders of ABB Ltd:

We have audited ABB Ltd’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). ABB Ltd’s Board of Directors and management are responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of management on internal control over financial reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assur- ance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, ABB Ltd maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2007 134 consolidated financial statements of ABB Ltd and our report dated March 7, 2008, expressed an unqualified opinion thereon.

Ernst & Young AG

C. Barone M. Sills Auditor in charge

Zurich, Switzerland March 7, 2008 Sheet Balance Statement Income Financial StatementsofABBLtd,Zurich Net income Income taxes Net incomebefore taxes Revaluation gainonownshares Net gainfrom saleofownshares Other expenses Personnel expenses Finance expense Other income Finance income Dividend income (CHF inthousands) Year endedDecember31, Total liabilitiesandstockholders’equity Total stockholders’equity Net income Retained earnings Other reserves Reserve fortreasury shares Legal reserve Share capital Total liabilities Bonds Provisions Long-term loans–group Short-term loan–group Current liabilities Total assets Total non-current assets Own shares Participation Long-term loans–group Total current assets Short-term loan–group Receivables Cash andequivalents (CHF inthousands) December 31, 13,471,774 12,832,517 13,471,774 12,771,368 1,174,539 1,190,039 1,135,000 1,174,539 1,174,844 3,686,683 5,790,038 8,996,335 3,366,345 161,593 597,725 408,688 639,257 208,300 278,045 408,688 700,406 595,910 (15,500) (31,341) (46,020) (47,382) 18,189 90,726 62,186 89,976 14,520 2007 2007 – – – 11,601,391 10,630,563 11,601,391 10,930,920 1,511,250 2,734,907 5,469,391 5,226,834 5,537,505 580,758 112,858 583,058 500,000 167,676 166,581 970,828 208,300 424,205 166,581 670,471 558,217 580,758 205,701 (30,785) (44,151) (37,389) 54,601 12,003 15,921 97,600 35,022 97,600 14,654 (2,300) 2006 2006

135 | ABB Annual Report 2007 Financial review Notes to Financial Statements Titel Einleitungstext Note 1 General ABB Ltd, Zurich (the Company) is the parent company of the ABB Group whose Consolidated Financial Statements include 100 percent of the assets, liabilities, revenues, expenses, income and cash flows of ABB Ltd and group companies in which the Company has a controlling interest, as if the Company and its group companies were a single company. The Consolidated Financial Statements are of overriding impor- tance for the purpose of the economic and financial assessment of the Company. The Unconsolidated Financial Statements of the Company are prepared in accordance with Swiss law and serve as complementary information to the Consolidated Financial Statements.

Certain prior year amounts have been reclassified to conform to the current year’s presentation.

Note 2 Cash and equivalents

2007 2006 (CHF in thousands) Cash in bank 643 701 Cash deposit with ABB Group Treasury Operations 595,267 557,516 Total 595,910 558,217

ABB Group maintains an internal treasury function, Group Treasury Operations, comprising certain indirect subsidiaries of the Company, to provide group companies with deposit and borrowing facilities.

Note 3 Receivables

2007 2006 (CHF in thousands) Non-trade receivables 292 81 Non-trade receivables – group 4,309 4,987 Accrued income – group 9,919 9,586 Total 14,520 14,654 136

Note 4 Long-term loans – group

2007 2006 (CHF in thousands) Long-term loans – group 3,366,345 5,537,505

The Company maintains interest bearing credit agreements with ABB Asea Brown Boveri Ltd, Zurich, Switzerland, and ABB Inc, Norwalk, United States. These loans are stated at the lower of cost or fair value.

Note 5 Participation

Ownership interest Company name Purpose Domicile Share capital 2007 2006 ABB Asea Brown Boveri Ltd Holding CH-Zurich CHF 2,768,000,000 100% 100%

During 2007, the Company made contributions of CHF 3,826,405 thousand to indirectly held subsidiaries.

The participation is valued at the lower of cost or fair value, using valuation models accepted under Swiss law.

Note 6 Current liabilities

2007 2006 (CHF in thousands) Non-trade payables 16,446 8,420 Non-trade payables – group 1,873 1,983 Accrued expenses 40,965 23,691 Accrued expenses – group 2,902 928 Total 62,186 35,022 into American depositary shares), thereby increasing the Company’s share capital and legal reserve by CHF 9,338 thousand and 114,903 and thousand 9,338 by CHF reserve legal and capital share Company’s the increasing thereby shares), depositary American into converted to be issued 33.61, to shares CHF those for 29.94, equivalent (USD 33.60 CHF at 3,735,058 company, shares group to the capital, contingent of out 2007, issued, November Company in the Consequently Company. the from value market then their at shares of number required the to acquire Company the with agreement an into entered company group the options, stock their exercised have who employees to shares to deliver ESAP the facilitates that company group the To (ESAP). plan enable acquisition share employee an has Group ABB The 10, 2008. January of as cancelled were bond, convertible the of respect in issuance for specifically capital, contingent the of 192 shares remaining 7). Note The (see reserves to other released were provisions of 205,701 CHF thousand respectively. 725,713 CHF and 262,329 by CHF thousand thousand, reserve legal and capital share Company’s the increased issuance share This capital. 104,931,602 contingent of out issued shares Company the company, group by the issued bond convertible 1billion CHF the of to holders pany Com- the of shares to deliver 2007, obligations to September to meet March during company by agroup exercised options with connection In 3, 2009. May than later by not 2.50 each, CHF of value apar with shares to 200,000,000 up of issuance the through thousand 500,000 CHF to exceed not amount an in capital share authorized to create tion, Incorpora of Articles Company’s to the amendment an approved 3, 2007, May on shareholders meeting the general annual Company’s At the 9 Note obligations. franc Swiss rate floating into bonds these convert to effectively banks with transactions swap rate interest into entered has Operations, Treasury Group through Company, The value. nominal their at stated are bonds The 8 Note provisions. of 205,701 CHF the thousand reserves to other released Company the 9). Note Consequently, (see shares contingent of out issued being shares corresponding the with exercised, was option the and full in bonds their converted 2007, During company. bondholders by agroup issued bonds convertible 1billion CHF the with connection in Company, to 104,931,794 up to deliver the of option to an shares related 205,701 CHF of thousand provisions had 31, Company the 2006, At December 7 Note Closing balanceasofDecember31 Net incomefortheyear Decrease ofotherreserves Contingent shares Issued shares Share capitalasofDecember31,2006 Authorized shares Contingent shares Issued shares Share capitalasofDecember31,2007 (CHF inthousands) Total Bond 1999–20093.75%coupon Note 2001–20083.75%coupon (CHF inthousands) Use ofshare premium Employee planissuance Management planissuance CHF 1,000convertibleissuances Dividend paid Release ofotherreserves Allocation toretained earnings Opening balanceasofJanuary1 Stockholders’ equity Stockholders’ Bonds Provisions 5,790,038 5,469,391 262,329 capital 48,980 Share 9,338 3,686,683 2,734,907 114,903 168,064 725,713 reserve (56,904) Legal for treasury Reserve 408,688 242,107 166,581 shares

registered shares registered shares 1,174,844 1,511,250 reserves (242,107) (300,000) 2,187,756,317 2,316,015,102 205,701 182,558,630 200,000,000 Other 54,299,845 Number of Number of Retained earnings (450,709) 597,725 300,000 580,758 167,676 Par value Par value CHF 2.50 CHF 2.50 CHF 2.50 CHF 2.50 CHF 2.50 1,174,539 1,174,539 208,300 108,300 100,000 (580,758) 580,758 income 2007 (CHF inthousands) (CHF inthousands) Net 12,832,517 10,630,563 1,174,539 5,469,391 5,790,038 1,193,743 (450,709) 456,397 500,000 135,750 124,241 217,044 208,300 108,300 100,000 (56,904) 2006 2007 Total Total Total – – – -

137 | ABB Annual Report 2007 Financial review Note 9 Stockholders’ equity, continued Titelthousand, respectively. The Company used CHF 56,904 thousand of the share premium recognized on issuance to reduce the carrying value Einleitungstextof its participation in the subsidiary. During 2007, a bank holding call options related to ABB Group’s management incentive plan (MIP) exercised a portion of its holding. These options had been issued by the group company that facilitates the MIP (related to MIP launches during 2001, 2003 and 2004) at fair value and with strike prices ranging from CHF 7.00 to CHF 13.49. At issuance, the group company had entered into intercompany options on the same terms to enable it to meet its future obligations. As a result of the exercise by the bank, the Company issued 12,609,225 shares at CHF 13.49, 6,410,400 shares at CHF 7.00 and 572,500 shares at CHF 7.50 out of contingent capital, thereby increasing the Company’s share capital and legal reserve by CHF 48,980 thousand and 168,064 thousand, respectively. A further 4,407 shares at CHF 13.49 were delivered out of own shares.

Number of shares Number of shares Own shares 2007 2006 Opening balance as of January 1 8,782,721 11,531,106 Purchases 10,004,407 – Subtotal 18,787,128 11,531,106 Transfers (61,653) (2,748,385) Closing balance as of December 31 18,725,475 8,782,721

In May 2007, the Company purchased 10,000,000 own shares on the open market at an average price of CHF 24.33 for use in connection with share-based programs. In December 2007, the Company purchased 4,407 own shares from another group company at the then market price of CHF 32.08 per share. In 2007 and 2006, the Company transferred out own shares of 61,653 and 2,748,385 at an average price per share of CHF 19.75 and CHF 12.10, respectively. The average acquisition price of the own shares as of December 31, 2007 and 2006, was CHF 21.83 and CHF 18.97, respectively.

The own shares are stated at the lower of cost or fair value. As a consequence of increases in the fair value, the own shares were revalued to CHF 18.97 per share at December 31, 2006, resulting in a gain of CHF 54,601 thousand in 2006.

Note 10 Contingent liabilities As of December 31, 2007, the Company had issued a support letter to a surety institution in the amount of CHF 337,522 thousand. This facility is used for the issuance of surety bonds on behalf of group companies. 138 Furthermore, the Company has Keep-well agreements with certain group companies. A Keep-well agreement is a shareholder agreement between the Company and a group company. These agreements provide for maintenance of a minimum net worth in the group company and the maintenance of 100 percent direct or indirect ownership by the Company.

For those group companies acting on the capital markets, the Keep-well agreements additionally provide that if at any time the group company has insufficient liquid assets to meet any payment obligation on its debt (as defined in the agreements) and has insufficient unused commit- ments under its credit facilities with its lenders, the Company will make available to the group company sufficient funds to enable it to fulfill such payment obligation as it falls due. A Keep-well agreement is not a guarantee by the Company for payment of the indebtedness, or any other obligation, of a group company. No party external to the ABB Group is a party to any of these Keep-well agreements.

Combustion Engineering Inc (CE), an indirect wholly owned subsidiary of the Company, had been a defendant in numerous asbestos-related claims in the United States. On April 21, 2006, a channeling injunction was issued and became effective pursuant to Section 524(g) of the U.S. Bankruptcy Code under which all present and future asbestos-related personal injury claims filed against the Company and its affiliates and certain other entities that relate to the operations of CE are channeled to the CE Asbestos PI Trust. Potential commitments and current provisions of the Company and its direct and indirect subsidiaries in respect of this matter are further described in Note 16 of the Consolidated Financial Statements of ABB Ltd. The Company’s financial guarantee to the CE Asbestos PI Trust is CHF 168’705 thousand as of December 31, 20 07.

As a result of its ongoing internal investigations, in 2007 and previously, the Company disclosed to the U.S. Department of Justice and the U.S. Securities and Exchange Commission various suspect payments that occurred in various Group companies across several years. In addition, the Company is cooperating with various anti-trust authorities, including the European Commission, regarding certain alleged anti-competitive practices. The outcome of these matters could have a material impact on the Company’s consolidated operating results, cash flows and financial position.

The Company is part of a value added tax group and therefore is jointly liable to the Swiss Federal Tax Department for the value added tax liabilities of the other members.

Note 11 Credit facility agreement The Company and certain of its group companies are parties to a $2 billion multicurrency revolving credit facility, maturing 2010. No amounts were drawn under this facility at December 31, 2007 and 2006.

Note 12 Significant shareholders FMR LLC, U.S., held 127,059,033 ABB Ltd shares as of December 31, 2007 which is more than 5 percent of total capital and voting rights. Subsequently, in February 2008, FMR LLC announced that, as of February 18, 2008, together with its direct and indirect subsidiaries, it holds for its funds and clients a total of registered shares of ABB Ltd, Zurich, which is less than 3 percent of total capital and voting rights.

As of December 31, 2007, Investor AB, Sweden, held 166,330,142 ABB Ltd shares. below. No amounts were paid in 2007 in respect of 2006. of respect in 2007 in paid were amounts No below. table the in listed are member Board individual per amounts The members. Board by the made election to the according shares, and/or cash in 1,050,000 CHF and in May 2008 2007. in cash of in the form 25,263in settled be November will 700,000 was settled CHF shares remainder The amount, this Of 3,500,000. to CHF amounts 2008 to 2007 May May period the for entitled are members Board to which compensation The 2010. until blocked remaining shares to the agreed have not 2010 shall before and Board the left have shall member Board respective the if earlier of disposed be 2010 May only may until and blocked are 2007 May of beginning the at account blocked the in were that shares all addition, In period. three-year original the for blocked remaining shares to the agreed not has and directors of Board the left has person respective the if earlier of disposed be only may and delivery original of date the after years three for account blocked in a are kept shares ABB The installment. each for different is which period 30-day adefined during share ABB the of price closing average the is delivered) to be shares of number the of calculation the hence (and delivered to be shares the for price reference The shares. ABB in compensation their of 100 or percent percent 50 either to receive elect 2007, of as members Board effective Also to May. November from membership Board of period the for year following the of May in made is payment second year. that of The October until May in meeting general annual the at election from membership Board of period the for November, in made is payment first The arrear. in installments semi-annual in payable is 2007, of as compensation Board Effective and legal entities controlled by a member of the Board. the of by amember controlled entities legal and afiduciary as acting persons natural or legal eighteen, of age the below children aspouse, includes party Arelated to ABB. rendered services for remunerations and fees additional any received them of to any related parties or Board, the of members no herein, disclosed as than Other 2007. in members Board to former made 2007. in were payments No members to Board granted were guarantees or loans No programs. incentive ABB’semployee of any in participate to eligible not are and benefits pension receive not do members Board n n n follows: as were May 2008 May 2007 to from office of term their for directors of Board the of members of levels compensation The 13Note

Total Jacob Wallenberg W.Bernd Voss Michael Treschow Michel deRosen Hans UlrichMärki Louis R.Hughes (5) (4) (3) (2) (1) Roger Agnelli Hubertus vonGrünberg Board: the of Member chairman: Committee and Board the of Member Board: the of Chairman Name

Member oftheFinance,AuditandComplianceCommittee NominationandCompensationCommittee Member oftheGovernance, Number ofshares perBoard memberiscalculatedbasedonnetamountdueafterdeductionsforsocialsecurity, withholdingtaxetc. Represents gross amountspaidin2007,priortodeductionsforsocialsecurity, withholdingtaxetc. Jürgen DormannservedasChairmanoftheBoard untiltheannualgeneralmeetinginMay2007.Allcompensationconnectionwithhisrole asChairmanwaspaidandrecorded in2006. Compensation fortheperiodofBoard membershipfrom May2007to2008.Expenserecognized intheCompany’s IncomeStatementfor2007amountedtoCHF2,449,000. Board of directors compensation directors of Board (4) (5) (4) (5) Member oftheBoard and ComplianceCommittee of theFinance,Audit Member oftheBoard andChairman Member oftheBoard Member oftheBoard and CompensationCommittee Nomination of theGovernance, Member oftheBoard andChairman Member oftheBoard Member oftheBoard Chairman oftheBoard Function CHF CHF CHF 1,200,000 300,000 400,000 3,500,000 1,200,000 ­compen-

300,000 400,000 300,000 300,000 400,000 300,000 300,000 sation Total (CHF) (1)

compensation tobe settled inshares Percentage of

100% 100% 50% 50% 50% 50% 50% 50%

in cash 700,000 100,000 300,000 Settled 75,000 75,000 75,000 75,000 (CHF) 2007 installment (2) – –

Settled inshares – shares received number of

25,263 3,354 6,149 1,677 1,677 1,677 1,677 2,273 6,779 (3)

139 | ABB Annual Report 2007 Financial review Note 14 Executive committee compensation TitelThe total compensation of members of the executive committee in 2007 is summarized in the table below: Einleitungstext Total salary and other Total non-share-based share-based Total Name Function compensation compensation compensation

(CHF) (CHF) (CHF) Fred Kindle President & Chief Executive Officer 3,926,255 5,545,689 9,471,944 Michel Demaré Chief Financial Officer 1,980,964 3,289,469 5,270,433 Gary Steel Human Resources responsible 1,784,766 2,472,964 4,257,730 Ulrich Spiesshofer Corporate Development responsible 1,568,506 1,038,384 2,606,890 Diane de Saint Victor General Counsel 1,371,821 3,053,627 4,425,448 Ravi Uppal President Global Markets since July 1, 2007 507,109 – 507,109 Bernhard Jucker Power Products Division responsible 2,049,338 1,241,391 3,290,729 Peter Leupp Power Systems Division responsible 1,383,040 1,855,839 3,238,879 Tom Sjökvist Automation Products Division responsible 2,465,439 1,101,153 3,566,592 Veli-Matti Reinikkala Process Automation Division responsible­ 1,523,328 1,039,682 2,563,010 Anders Jonsson Robotics Division responsible 1,367,618 761,926 2,129,544 Dinesh Paliwal President Global Markets and Technology until June 30, 2007 2,974,974 1,498,518 4,473,492 Total 22,903,158 22,898,642 45,801,800

The table below shows the gross payments (i.e. compensation before deduction of employee social insurance and pension contributions) that were made to or on behalf of the members of the executive committee in 2007 but excluding share-based compensation which is shown in a separate table below.

Employers’ Employer Additional pension Costs of Costs of Costs of social Base compen­ contribu- company health children’s security (1) 140 Name salary Bonus sation tions car insurance education payments Total

(CHF) (CHF) (CHF) (CHF) (CHF) (CHF) (CHF) (CHF) (CHF) Fred Kindle 1,487,507 1,977,615 207,845 35,000 8,296 209,992 3,926,255 Michel Demaré 866,677 756,480 210,585 29,000 8,478 26,600 83,144 1,980,964 Gary Steel 736,668 654,264 224,356 27,000 8,970 62,000 71,508 1,784,766 Ulrich Spiesshofer 683,338 616,395 165,217 29,000 7,780 66,776 1,568,506 Diane de Saint Victor (2) 700,012 403,000 203,664 8,947 56,198 1,371,821 Ravi Uppal (3) 350,000 125,335 4,776 26,998 507,109 Bernhard Jucker 816,669 721,500 220,181 30,000 8,187 252,801 2,049,338 Peter Leupp 700,000 303,286 227,854 25,000 9,486 117,414 1,383,040 Tom Sjökvist (4) 716,674 689,150 474,830 244,279 30,000 8,354 302,152 2,465,439 Veli-Matti Reinikkala (5) 629,832 553,808 58,975 214,787 41,839 4,517 19,570 1,523,328 Anders Jonsson 545,007 319,800 215,003 27,000 9,091 251,717 1,367,618 Dinesh Paliwal (6) 427,386 1,454,086 165,630 743,916 13,496 17,823 73,317 79,320 2,974,974 Total 8,659,770 8,046,384 1,102,435 3,003,022 287,335 104,705 161,917 1,537,590 22,903,158

(1) The table above provides compensation amounts with respect to 2007 on a cash basis. Consequently, the table shows bonuses relating to 2006, paid in 2007, except for Dinesh Paliwal, whose bonus includes a pro rata share for 2007 (see note 6 below). The CEO has a maximum bonus opportunity of 150 percent of his base salary. All other Executive Committee members have a maximum bonus opportunity of 100 percent of their base salary. Accrued bonus at December 31, 2007, amounted to CHF 8,060,008. Bonus payments will be made in March 2008, after the 2007 financial results are published. (2) Diane de Saint Victor received 250,000 euros as a sign-on bonus upon joining the Company. This amount has been translated into Swiss francs using a rate of 1.612. (3) Ravi Uppal was appointed to the executive committee effective July 1, 2007. Therefore the table shows his compensation from that date and excludes compensation he received during 2007 in respect of his previous role within ABB. (4) Tom Sjökvist received additional compensation of CHF 474,830 upon reaching the age of 60, under an agreement entered prior to his becoming an executive committee member. (5) Veli-Matti Reinikkala received his compensation and car benefits in U.S. dollars which have been converted into Swiss francs using a rate of 1.1247 per U.S. dollar. He received his employer’s pension contributions and health insurance benefits in euro which have been converted into Swiss francs using a rate of 1.65528 per euro. His additional compensation was for relocation expenses, financial counseling, and term life insurance premiums. (6) Dinesh Paliwal left the Company as of the end of June, 2007, and therefore received a pro rata share of his compensation for 2007, including an amount of CHF 480,121 in respect of his bonus 2007. He received his compensation in U.S. dollars which has been converted into Swiss francs using a rate of 1.1247 per U.S. dollar. His additional compensation was for cost of living adjustments, financial counseling, and term life insurance premiums.

Share-based compensation granted to members of the executive committee during 2007 is summarized in the table below. The vesting dates of the respective awards, principally granted under the long-term incentive plan (LTIP), are listed in the footnotes to the table. The numbers of shares awarded under LTIP and their valuation assume 100% vesting, although less than 100% may actually vest. have received at the end of the vesting periods of the respective awards. respective the of periods vesting the of end the at received have otherwise would he shares the of 28, 2009) February (through allocation rata apro representing 242,598 2008, shares, March in receive, will 2010, and 2009 Mr. in Kindle vesting and to Mr. granted Kindle previously awards share-based to other respect With 2008. March in vesting scheduled their with accordance in unvested but granted 304,711 previously were 2010. receive that will Mr. shares Kindle February in ending months twelve the any, if during employment, other from compensation his and bonus) and salary (base compensation 70% annual his of between difference to the equal amount an to pay continue will Company the then 2009, February of end to the prior employment alternative find not does he If 2009. February of end up the to days) vacation unused of payout the and contributions pension (including benefits other and bonus to salary, entitled is Mr. Company. the Kindle leaving is Kindle, CEO, Fred its that announced Company the 2008, February In 2007. in committee executive the of to members granted were guarantees or loans No committee. executive the of by amember controlled entities legal and afiduciary as acting persons natural or legal eighteen, of age the below children aspouse, includes party Arelated basis. arm’san length on than other to ABB, rendered services for remunerations or fees any received committee executive the of member to any related parties No committee. executive the of members to former made 2007,In were payments no share. per 34.98 CHF of price exercise an at currency) savings’ their on (depending shares 290 or 280 of to amaximum up to acquire savings their use 2008, November in and, period atwelve-month over to save them allow will which ESAP of launch fourth the in participated Uppal, Ravi for except committee, executive the of members all awards, above to the addition In 14Note Spiesshofer Ulrich Gary Steel Michel Demaré Fred Kindle (8) (7) (6) (5) (4) (3) (2) (1) de SaintVictor Diane Paliwal Dinesh Jonsson Anders Reinikkala Veli-Matti Tom Sjökvist Peter Leupp Jucker Bernhard Total Ravi Uppal

Upon leavingtheCompany, DineshPaliwalforfeitedallunvestedshare-based awards. The tableexcludesshare-based compensationreceived byRaviUppalinconnectionwithhisprevious role withinABB,priortohisbecomingamemberoftheexecutivecommittee. In 2007,atotalof199,685shares, vestingonMarch 1,2010,were awarded totheseindividualscompensateforachangeinpensionarrangements. 31,983 shares willvestandbedelivered inMarch 2008. In 2007,Fred Kindlewasallocatedanadditionalbonusfor2006ofCHF1.5milliontobepaidintheform63,966shares. 31,983shares were delivered inMarch 2007andtheremaining Vesting dateMarch 15,2010. Vesting dateMarch 15,2009.Includesatotalof16,478shares deliverableundertheco-investmentcomponentof2006launch of LTIP. Fair valuerepresents marketvalueoftheshares aspergrantdateoftherespective award. Vesting dateMarch 15,2008. Name (8) Executive committee compensation, continued compensation, committee Executive (7) 59,150 59,150

Number of conditionally granted shares under the 2005 launch of LTIP (1) 1,197,788 1,197,788 (CHF)

Fair value LTIP 2005 (2) 41,526 41,526 83,052

Number of con­ditionally granted shares under the 2006 launch of LTIP (3) 1,681,804 840,902 840,902 (CHF)

Fair value LTIP 2006 (2) 424,408 32,733 35,105 41,746 71,158 26,092 33,022 34,156 33,207 39,374 44,608 33,207 Number of con­ditionally granted shares under the performance component of the 2007 launch of LTIP (4) 132,194 10,243 11,843 30,959 10,789 11,295 16,556 9,650 5,007 9,414 8,219 8,219 Number of con­ditionally granted shares under the co-investment component of the 2007 launch of LTIP (4) 13,636,752 1,038,384 1,111,026 1,312,931 2,501,867 1,039,682 1,101,153 1,014,937 1,241,391 1,498,518 1,014,937 761,926 (CHF)

Total fair value LTIP 2007 (2) 1,500,000 1,500,000 (CHF) Fair value of shares in respect of bonus (2)(5) 1,361,938 1,976,538 1,543,822 4,882,298 (CHF) Fair value of share-based award in lieu of certain pension arrangements (2)(6) 22,898,642 2,472,964 3,289,469 5,545,689 1,038,384 1,039,682 1,101,153 1,855,839 1,241,391 1,498,518 3,053,627 761,926 (CHF) Total fair value of share-based awards 0 granted in 2007

141 | ABB Annual Report 2007 Financial review Note 15 Share Ownership of ABB by Board members and members of the executive committee TitelAs of December 31, 2007, the members of the Board of directors as of that date, held the following numbers of shares (or ADSs representing Einleitungstextsuch shares): Total number of shares held at December 31, 2007 (1) Hubertus von Grünberg 6,779 Roger Agnelli 134,482 Louis R. Hughes 59,751 Hans Ulrich Märki 304,051 Michel de Rosen 90,115 Michael Treschow 71,007 Bernd W. Voss 137,807 Jacob Wallenberg (2) 146,724 Total 950,716

(1) Includes a total of 814,657 shares paid as compensation to Board members in current and prior years and currently blocked in accordance with the terms of the Board compensation. (2) Share amounts provided in this table do not include the shares beneficially owned by Investor AB, of which Mr. Wallenberg is chairman.

As of December 31, 2007, the members of the executive committee as of that date, held the following numbers of shares (or ADSs representing such shares), the conditional rights to receive ABB shares under the LTIP, warrants or options (either vested or unvested as indicated) under the MIP and unvested shares in respect of bonus and/or pension arrangements:

Unvested at December 31, 2007 (1) (2) (3) (3) 142 Name held number of shares Total Number of conditionally under the granted shares 2005 launch of the LTIP Number of conditionally under the granted shares 2006 launch of the LTIP Number of matching shares deliverable under the 2006 co-investment portion of LTIP Number of conditionally under the granted shares 2007 launch of the LTIP Number of matching shares deliverable under the 2007 co-investment portion of LTIP Number of warrants/options held under the MIP Number of warrants/options held under the MIP of bonus in respect Shares 2006 in lieu of pension Shares arrangements

2006 grant 2007 grant (vesting (vesting (vesting (vesting (vesting (vesting (vesting (vesting (vesting 2008) 2009) 2009) 2010) 2010) 2009) 2010) 2008) 2010) Fred Kindle 165,453 272,728 92,055 40,115 71,158 30,959 31,983 63,142 Michel Demaré (4) 62,961 157,343 51,680 15,014 41,746 11,843 80,840 Gary Steel 51,120 146,854 46,512 13,416 35,105 10,243 55,703 Ulrich ­Spiesshofer 25,330 107,955 41,990 13,372 32,733 9,650 Diane de Saint Victor 20,000 59,150 33,287 8,239 33,207 8,219 Ravi Uppal 30,717 237,220 Bernhard Jucker 31,375 48,450 8,595 39,374 11,295 Peter Leupp 32,988 33,287 8,239 33,207 8,219 Tom Sjökvist (5) 40,011 45,220 12,451 34,156 10,789 Veli-Matti Reinikkala 22,538 43,001 5,680 33,022 9,414 Anders Jonsson (6) 67,291 33,592 3,603 26,092 5,007 100,000 96,300 Total 549,784 744,030 469,074 128,724 379,800 115,638 100,000 333,520 31,983 199,685

(1) Excluded on the grounds of immateriality are unvested shares in respect of the fourth launch of ESAP. For details see Note 20 to ABB’s Consolidated Financial Statements contained in the “financial review” part of this annual report. (2) Includes shares deposited as match for the co-investment portion of the LTIP. These shares may be sold/transferred but then the corresponding number co-investment shares would be forfeited. (3) Warrants/options may be sold or exercised/converted into shares at the ratio of 5 warrants/options for 1 share. (4) Total number of shares held includes 500 shares held jointly with spouse. (5) Total number of shares held includes 7,560 shares held by spouse or child. (6) Total number of shares held includes 55,529 shares held by or jointly with spouse. The warrants vesting in 2009 and 2010 were received by Anders Jonsson’s spouse in connection with her role as an ABB employee. the holder to exercise such WARs and receive in cash the market value of the equivalent listed warrant at the time of exercise. of time the at warrant listed equivalent the of value market the cash in receive and WARs such to exercise holder the entitle that (WARs) rights appreciation warrant held committee executive the of 31, 2007, members December of as following the Furthermore, 15Note latest at that meeting. meeting. that at latest shares the of cancellation the 2010 in to propose and shareholders of meeting general annual to the prior program such to complete intends Company The 2.2 billion. CHF of value to amaximum up program buyback ashare to launch decision its announced Company the addition, In share. 0.48 per CHF 2.50 distribute 2.02 to CHF CHF and from shares the of value nominal the to reduce meeting general annual to the put be will aproposal that announced directors of Board 13, the 2008 February On 16Note shares. ABB in options or ABB of shares any holds committee executive or directors of Board the of 31, member to any related 2007, December of as party no disclosed, as than Other 31, 2007. December of as outstanding shares total Company’s the of 31, 1percent 2007, than December of as less owned committee executive and directors of Board our of members The Total Anders Jonsson Veli-Matti Reinikkala Tom Sjökvist Peter Leupp Bernhard Jucker Ravi Uppal Share Ownership of ABB by Board members and members of the executive committee, continued committee, executive the of members and members Board by ABB of Ownership Share Other information Other 2003 grant 137,500 Number offullyvestedWARs 75,000 62,500

held undertheMIP 2004 grant 812,500 312,500 225,000 275,000

Number ofunvestedWARs 2006 grant(vesting2009) held undertheMIP 2,250,000 375,000 375,000 375,000 375,000 375,000 375,000

143 | ABB Annual Report 2007 Financial review TitelProposed appropriation of available earnings Einleitungstext 2007 2006 (CHF in thousands) Net income for the year 1,174,539 580,758 Carried forward from previous year 597,725 167,676 Release of other reserves – 300,000 Earnings available to the annual general meeting 1,772,264 1,048,434

Number of shares 2006 (CHF in thousands – except for share and per share amounts) Dividend according to annual general meeting of May 3, 2007 (CHF 0.24 per share) 2,287,711,198 (549,051) Dividend paid on dividend access facility 401,005,549 96,241 No dividend paid on own shares 8,750,738 2,101 Dividend paid (450,709) Balance to be carried forward 597,725

The Board of directors proposes to release CHF 2,086,683 thousand of the legal reserves and allocate those released reserves to other reserves and to carry forward the available earnings in the amount of CHF 1,772,264 thousand. 144 Zurich, March 7, March 2008 Zurich, charge in Auditor Accountant) Public (Certified Barone C. &Young AG Ernst approved. be to you submitted statements financial the that We recommend incorporation. of articles company’s the and law Swiss with comply earnings of available appropriation proposed the and statements financial and records accounting the opinion, our In opinion. our for basis reasonable a provides audit our that believe We presentation. statement financial overall the and made estimates significant used, principles accounting the assessed Wehave also statements. in the financial disclosures and the amounts supporting evidence basis, on a test examined, have We misstatement. material from free are statements financial the whether about assurance reasonable to obtain performed and planned be audit an that require which Standards, Auditing Swiss with accordance in conducted was audit Our independence. and qualification professional concerning requirements legal the meet we that We confirm audit. our on based ments state- financial these on opinion an is to express responsibility Our Directors. of Board the of responsibility the are statements financial These 31, 2007. December ended year 135 the for to 143)pages Ltd, Zurich, ABB of notes; and statement income sheet, (balance statements financial the and records accounting the audited have we auditors, statutory As Report oftheStatutoryAuditors Accountant) (Certified Y. Vontobel

145 | ABB Annual Report 2007 Financial review TitelInvestor information Einleitungstext ABB Ltd share price trend during 2007 During 2007, the price of ABB Ltd shares listed on the SWX Swiss Exchange (traded on virt-x) increased 49 percent, while the Swiss Performance Index was unchanged. The price of ABB Ltd shares on Stockholmsbörsen increased 49 percent, compared to the OMX Stockholm Index, which decreased by 9 percent. The price of ABB Ltd American Depositary Shares traded on the New York Stock Exchange increased 60 per- cent compared to the Dow Jones Industrial Index, which increased by 7 percent.

Source: Bloomberg, SWX Swiss Exchange (virt-x), Stockholmsbörsen, New York Stock Exchange

Share price (data based on closing prices)

New York SWX Swiss Exchange Stockholmsbörsen Stock Exchange (virt-x/CHF) (SEK) (US$) High 36.52 202 31.81 Low 19.65 113.75 15.96 Year-end 32.62 185 28.80 Average daily traded number of shares 18,050,000 4,600,000 3,400,000

Market capitalization On December 31, 2007, ABB Ltd’s market capitalization based on outstanding shares (total number of outstanding shares: 2,297,289,627) was approximately $66.1 billion (CHF 74.9 billion, SEK 426.6 billion).

Shareholder structure As of December 31, 2007, the total number of shareholders directly registered with ABB Ltd was approximately 148,000. In addition, another 322,000 shareholders hold shares indirectly through nominees. In total, ABB has approximately 470,000 shareholders.

Major shareholders As of December 31, 2007, Investor AB, Stockholm, Sweden, owned 166,330,142 shares of ABB Ltd, corresponding to 7.2 percent of total capital and votes. 146 FMR LLC, Boston, U.S., announced that as of February 14, 2007, it held for its funds and clients 109,485,941 shares of ABB Ltd, corresponding to 5.0 percent of total capital and votes. Thereafter FMR LLC disclosed that as per January 11, 2008 their holdings fell below the 5 percent threshold and that as per February 18, 2008 their holdings fell below the 3 percent threshold.

To the best of ABB’s knowledge, no other shareholder holds 5 percent or more of the total voting rights.

Dividend proposal ABB’s Board of directors has proposed a dividend for 2007 of CHF 0.48 per share in the form of a nominal value reduction. Translated into U.S. dollars using year-end 2007 exchange rates, the dividend corresponds to approximately 26 percent of ABB’s 2007 net income. The proposal is subject to approval by shareholders at ABB’s annual general meeting, scheduled for May 8, 2008, in Zurich, Switzerland. Should the proposal be approved, the ex-dividend date would be July 28, 2008.

Key data

2007 2006 Dividend per share (CHF) 0.48 (1) 0.24 Par value per share (CHF) 2.50 (1) 2.50 Votes per share 1 1 Earnings per share (USD) (2) 1.63 0.63 Stockholders’ equity per share (USD) (3) 4.77 2.77 Cash flow from operations per share (USD) (2) 1.35 0.86 Dividend pay-out-ratio (%) 26% 31% Weighted average number of shares outstanding (in millions) 2,258 2,128 Dilutive weighted average number of shares outstanding (in millions) 2,308 2,248

(1) Proposed by the Board of directors and subject to approval by shareholders at the Annual General Meeting on May 8, 2008, in Zurich, Switzerland. (2) Calculation based on dilutive weighted average number of shares outstanding (3) Calculation based on the number of shares outstanding as of December 31 Outstanding public bonds as of February 29, 2008. February of as bonds public Outstanding information Bondholder time. any at to revision subject are ratings credit These Stable Outlook: rating: debt Short-term rating: unsecured senior Long-term Moody’s Stable Outlook: rating: credit corporate Short-term debt: unsecured senior Long-term rating: credit corporate Long-term &Poor’s Standard 2008 29, February of as Ltd ABB for rating Credit (NYSE) Exchange YorkNew Stock Stockholmsbörsen (virt-x) Exchange Swiss SWX Reuters at Ltd ABB for symbols Ticker (NYSE) Exchange YorkNew Stock Stockholmsbörsen (virt-x) Exchange Swiss SWX Bloomberg at Ltd ABB for symbols Ticker (NYSE) Exchange YorkNew Stock Stockholmsbörsen (virt-x) Exchange Swiss SWX Ltd ABB for symbols Ticker 171 222 6. 001 CH is: share ABB the for code ISIN global The Exchange. York New Stock the and virt-x), Stockholmsbörsen on (traded Exchange Swiss SWX the on listed Ltd is ABB listings Exchange Stock ABB shareholders’ calendar 2008 calendar shareholders’ ABB 10:00 at a.m. 9, 2008 May on Sweden, Västerås, in held be will Meeting Information an Sweden in shareholders For 15, 2008. April of Handelsamtsblatt Schweizerisches the in published be will Obligations of Code Swiss the of 700 Article with accordance in invitation the of text full The consideration. into taken be longer no can date that after arriving notifications reasons, technical For May 2, 2008. than later not company the reach must notification acorresponding or form reply The invitation. the with enclosed form reply the using request on cards admission their receive Ltd will ABB of shares registered of Holders cards Admission Meeting. General Annual the in to participate entitled are 28, 2008, to vote, by April right the with register, share the in entered Shareholders French. and English into translated simultaneously be will and German in principally held be will Meeting General Annual The Switzerland. Zurich-Oerlikon, in hall Zurich Messe the at 2008 8, May 10:00 at Thursday, on a.m. held be Ltd will ABB of Meeting General Annual 2008 The meeting general annual Ltd ABB Nine-month results 2008 Six-month results 2008 ABB LtdInformationMeeting,Västerås ABB LtdAnnualGeneralMeeting,Zurich Three-month results 2008 (2) (1) ABB International FinanceLtd ABB International ABB Ltd ABB International FinanceLtd ABB International ABB International FinanceLtd ABB International

Outstanding amount=CHF108million Outstanding amount=GBP20million

Prime-2 A3 A2 A- A- ABB.N ABB.ST ABBN.VX US ABB SS ABB VX ABBN ABB ABB ABBN principal amount GBP 200million Original issued EUR 650million CHF 500million EUR 700million

Coupon 4.625% 3.75% 6.5% 10% (2) (1) 2009 2009 2011 2013 Due ABB 4.62506/06/13 ABB 3.7509/30/09 Bloomberg ticker ABB 6.511/30/11 ABB 1005/29/09 CH014855661= CH018119617= CH025291581= Reuters ticker CH896367=S October 23 April 24 July 24 May 9 May 8

147 | ABB Annual Report 2007 Financial review TitelPrice trend for ABB Ltd shares EinleitungstextCHF 38 Price trend for ABB Ltd shares, Zurich 38 36 Swiss Performance Index rebased, Zurich 36 34 34 32 32 30 30 28 28 26 26 24 24 22 22 20 20 18 1/07 2/07 3/07 4/07 5/07 6/07 7/07 8/07 9/07 10 /07 11 /07 12/07 18

SEK CHF Pantone 301 100% 210 SPI PantonePrice 301 trend 50 for% ABB Ltd shares, Stockholm 210 200 OMX Index rebased, Stockholm 200 190 190 180 180 170 170 160 160 150 150 140 140 148 130 130 120 120 110 1/07 2/07 3/07 4/07 5/07 6/07 7/07 8/07 9/07 10 /07 11 /07 12/07 110

USD CHF Pantone 301 100% 34 SPI PantonePrice 301 trend 50 for% ABB Ltd shares, New York 34 32 Dow Jones Index rebased, New York 32 30 30 28 28 26 26 24 24 22 22 20 20 18 18 16 16 14 1/07 2/07 3/07 4/07 5/07 6/07 7/07 8/07 9/07 10 /07 11 /07 12/07 14

Source: Bloomberg

CHF Pantone 301 100% SPI Pantone 301 50% This is ABB ABB is one of the world’s leading power and automation ­engineering companies. We provide solutions for secure, ­energy-efficient transmission and distribution of electricity, and for increasing productivity in industrial, commercial and utility operations.

Our portfolio ranges from light switches to robots for painting cars or packing food, and from huge ­electrical transformers to control systems that manage entire power networks and factories.

We help our customers meet their challenges with minimum environmental impact. That’s why ABB means “Power and ­productivity for a better world.”

Highlights Earnings before interest and taxes (EBIT) increase by 57 percent to record $4 billion EBIT margin – or EBIT as a percentage of revenues – rises to 13.8 percent from 11 percent Orders rise by 27 percent in 2007 to $34.3 billion as demand grows in every region and division ABB Board proposes doubling dividend to 0.48 Swiss francs per share and proposes buying back shares up to maximum value of 2.2 billion francs Comprehensive strategy review sets new targets for period to 2011, confirms focus on power and automation Focus on core technologies is completed with sale of ABB Lummus Global business The ABB Annual Report 2007 consists of two ABB wins orders to supply key components for world’s longest power link in China, using new volumes, a combined Operational and Financial low-loss technology review, and a Sustainability review.

For an additional copy of either volume, please use the contact information on the back of this document or download copies from www.abb.com.

Parts of the ABB Annual Report 2007 have been translated into German and/or Swedish. For all Total ABB Group Revenues per division Revenues by region documents in the annual report series, the ($ millions unless otherwise indicated) Power Products 30% Europe 46% English-language version is the binding version. 2007 2006 Power Systems 18% Asia 25% Orders 34,348 27,048 Automation Products 27% The Americas 18% Caution concerning forward-looking statements The ABB Annual Report 2007 includes “forward-looking statements” technological change and evolving industry standards in the markets Revenues 29,183 23,281 Process Automation 20% Middle East and Africa 11% within the meaning of Section 27A of the Securities Act of 1933 and in which we operate; (vii) the timely development of new products, Earnings before interest and taxes (EBIT) 4,023 2,557 Section 21E of the Securities Exchange Act of 1934. We have based these technologies, and services that are useful for our customers; (viii) unan- Robotics 4% forward-looking statements largely on current expectations, estimates ticipated cyclical downturns in the industries that we serve; (ix) the risks as % of revenues 13.8% 11.0% Non-core activities 1% and projections about the factors that may affect our future performance, inherent in large, long-term projects served by parts of our business; including global economic conditions as well as the economic condi- (x) the difficulties encountered in operating in emerging markets; (xi) the Net income 3,757 1,390 tions of the regions and the industries that are major markets for ABB. amount of revenues we are able to generate from backlog and orders Basic earnings per share ($) 1.66 0.65 EBIT per division The words “believe,” “may,” “will,” “estimate,” “continue,” “target,” received; (xii) changes in interest rates and fluctuations in currency “anticipate,” “intend,” “expect” and similar words and the express or exchange rates and (xiii) other factors described in documents that we Dividend per share in CHF (proposed) 0.48 0.24 Power Products 37% implied discussion of strategy, plans or intentions are intended to identify may furnish from time to time with the U.S. Securities and Exchange forward-looking statements. These forward-looking statements are Commission, including our Annual Reports on Form 20-F. Although we Cash flow from operations 3,054 1,939 Power Systems 11% subject to risks, uncertainties and assumptions, including among other believe that the expectations reflected in any such forward-looking Free cash flow 2,429 1,598 things, the following: (i) costs associated with compliance activities; statements are based on reasonable assumptions, we can give no assur- Automation Products 34% (ii) the difficulty of forecasting future market and economic conditions; ance that they will be achieved. We undertake no obligation to update as % of net income 65% 115% Process Automation 16% (iii) the effects of, and changes in, laws, regulations, governmental publicly or revise any forward-looking statements because of new infor- policies, taxation, or accounting standards and practices; (iv) changes mation, future events or otherwise. In light of these risks and uncertainties, Return on capital employed 35% 21% Robotics 2% in raw materials prices; (v) the effects of competition and changes in the forward-looking information, events and circumstances might not Number of employees 112,000 108,000 economic and market conditions in the product markets and geographic occur. Our actual results and performance could differ substantially from (excludes non-core and corporate) areas in which we operate; (vi) our ability to anticipate and react to those anticipated in our forward-looking statements. © Copyright 2008 ABB. All rights reserved. Concept and design by Interbrand Zintzmeyer & Lux. Energy efficiency for a connected world Energy efficiency for a connected world ABB and energy efficiency The ABB Group Annual Report 2007 Did you know that as much as 80 percent of available energy is Operational and financial review lost in the process of making and distributing electricity, and in its inefficient consumption? That means just one-fifth of the energy we have becomes the power we need.

| As the global leader in power transmission and distribution tech- The ABB Group Annual Report 2007 nology and one of the world’s leading automation companies, ABB has found ways to optimize energy use at every step.

From harvesting primary energy resources to transporting, ­distributing and using electrical power, proven ABB technologies

| reduce waste by 20 to 30 percent. Operational and financial review

ABB technology can reduce losses along the energy value chain

Process Transport Plant Grid Process Motors and Building automation systems automation ­operation automation drives installations

Total potential energy

Primary Transport Conversion Line losses Production Motor inefficiency energy (e.g. pipelines, inefficiency processes Losses in building systems production marine transport) (e.g. power plants)

Energy provision Energy consumption

Reduced energy losses with ABB products Energy losses without ABB products ABB Ltd ABB Ltd Corporate Communications Investor Relations P.O. Box 8131 P.O. Box 8131 ABB’s power and automation technologies can help save energy by reducing power consumption CH-8050 Zurich CH-8050 Zurich and losses, improving productivity and managing equipment.

Switzerland Switzerland GF-CC 08-4 Tel: +41 (0)43 317 7111 Tel: +41 (0)43 317 7111 Fax: +41 (0)43 317 7958 Fax: +41 (0)44 311 9817 www.abb.com