FORM F-1

F-1 1 y01243fv1.htm FORM F-1 FORM F-1

As filed with the Securities and Exchange Commission on July 21, 2006.

Registration No. 333-

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

Qimonda AG

(Exact name of registrant as specified in its charter)


Federal Republic of Germany	3674	Not Applicable
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)

Gustav-Heinemann-Ring 212

81739 Munich, Germany

+(49)(89) 234-20390

(Address, including zip code, and telephone number,

including area code, of Registrant’s principal executive offices)

Qimonda North America Corp.

Attn: General Counsel

1730 North First Street

San Jose, California 95112

+1(408) 501-6000

(Name, address, including zip code, and telephone number,

including area code, of agent for service)

Copies to:


Ward A. Greenberg, Esq. Cleary Gottlieb Steen & Hamilton LLP Main Tower, Neue Mainzer Strasse 52 60311 Frankfurt Am Main, Germany +(49)(69) 9 71 03-0		J. Warden McKimm, Esq. Shearman & Sterling LLP Broadgate West 9 Appold Street London EC2A 2AP, United Kingdom +(44)(20) 7655 5000

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date hereof.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box. o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

CALCULATION OF REGISTRATION FEE




Title of Each Class of Securities	Proposed Maximum	Amount of
to be Registered	Aggregate Offering Price⁽¹⁾	Registration Fee

Ordinary Shares, no par value, offered by the registrant⁽²⁾	$756,000,000	$80,892

Ordinary Shares, no par value, offered by Infineon Technologies AG ⁽²⁾⁽³⁾	$548,100,000	$58,647


⁽¹⁾	Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) promulgated under the Securities Act of 1933.

⁽²⁾	Each American depositary share represents one ordinary registered share. American depositary shares issuable upon deposit of the ordinary registered shares registered hereby are being registered pursuant to a separate Registration Statement on Form F-6.

⁽³⁾	Includes up to 9,450,000 ordinary shares represented by 9,450,000 ADSs that the underwriters have the option to purchase solely to cover over-allotments, if any.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

PART I

INFORMATION REQUIRED IN PROSPECTUS

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell, nor does it seek an offer to buy, these securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION. DATED JULY 21, 2006

Qimonda AG

63,000,000 American Depositary Shares

Representing 63,000,000 Ordinary Shares

This is an initial public offering of 63,000,000 American Depositary Shares, or ADSs, of Qimonda AG, a German stock corporation. The ADSs may be evidenced by American Depositary Receipts, or ADRs. Each ADS will represent one ordinary share. Qimonda is offering 42,000,000 ADSs and Infineon Technologies AG is offering 21,000,000 ADSs to the public in the United States and to institutional investors outside of the United States.

Prior to this offering, there has been no public market for the shares or ADSs. It is currently estimated that the initial public offering price will be between $16 and $18 per ADS. Qimonda intends to list the ADSs on the New York Stock Exchange under the symbol “QI”.

See “Risk Factors” beginning on page 10 to read about factors you should consider before buying ADSs.

Neither the Securities and Exchange Commission nor state securities regulators have approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.


	Per ADS	Total

Initial public offering price	$	$
Underwriting discount	$	$
Proceeds, before expenses, to Qimonda AG	$	$
Proceeds, before expenses, to Infineon Technologies AG	$	$

To the extent the underwriters sell more than 63,000,000 ADSs, the underwriters have the option to purchase up to an additional 9,450,000 ADSs from Infineon Technologies AG at the initial public offering price less the underwriting discount.

The underwriters expect to deliver the ADSs against payment in New York, New York on or about , 2006.


Credit Suisse	JPMorgan

Citigroup


ABN Amro	HypoVereinsbank

Deutsche Bank Securities

Prospectus dated , 2006.

You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where sale of these securities is legally permitted. The information in this document may only be accurate on the date of this document.

TABLE OF CONTENTS


PROSPECTUS SUMMARY		1
RISK FACTORS		10
PRESENTATION OF FINANCIAL AND OTHER INFORMATION		38
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET DATA		39
USE OF PROCEEDS		40
DIVIDEND POLICY		40
EXCHANGE RATES		41
CAPITALIZATION		42
DILUTION		43
SELECTED COMBINED FINANCIAL DATA		44
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		46
THE SEMICONDUCTOR MEMORY INDUSTRY		85
OUR BUSINESS		94
MANAGEMENT		132
ARRANGEMENTS BETWEEN QIMONDA AND THE INFINEON GROUP		139
RELATED PARTY TRANSACTIONS		145
PRINCIPAL AND SELLING SHAREHOLDERS		146
ARTICLES OF ASSOCIATION		147
SHARES ELIGIBLE FOR FUTURE SALE		151
EXCHANGE CONTROLS AND LIMITATIONS AFFECTING SHAREHOLDERS		153
DESCRIPTION OF AMERICAN DEPOSITARY SHARES		154
MARKET INFORMATION		162
TAXATION		163
UNDERWRITING		167
ENFORCING CIVIL LIABILITIES		173
LEGAL MATTERS		173
EXPERTS		173
ADDITIONAL INFORMATION		173
GLOSSARY		174
INDEX TO FINANCIAL STATEMENTS		F-1
EX-3.I: ARTICLES OF ASSOCIATION
EX-3.II.A: RULES OF PROCEDURE
EX-3.II.B: RULES OF PROCEDURE
EX-4.I.A: SPECIMEN OF ORDINARY REGISTERED SHARE CERTIFICATE
EX-4.I.B: FORM OF DEPOSIT AGREEMENT
EX-10.I.A: CONTRIBUTION AGREEMENT
EX-10.I.B: CONTRIBUTION AGREEMENT
EX-10.I.C: TRUST AGREEMENT
EX-10.I.D: MASTER LOAN AGREEMENT
EX-10.I.E: GLOBAL SERVICES AGREEMENT
EX-10.I.G: JOINT VENTURE AGREEMENT
EX-10.I.I: AMENDMENT NO. 4 TO THE JOINT VENTURE AGREEMENT
EX-10.I.J: 60NM TECHNICAL COOPERATION AGREEMENT
EX-10.I.K: 110NM LICENSE AND 90/70NM TECHNICAL COOPERATION AGREEMENT
EX-10.I.L: PRODUCT PURCHASE AND CAPACITY RESERVATION AGREEMENT
EX-10.I.M: PRODUCT PURCHASE AND CAPACITY RESERVATION AGREEMENT
EX-10.I.N: PRODUCT PURCHASE AND CAPACITY RESERVATION AGREEMENT
EX-10.I.O: COOPERATIVE JOINT VENTURE CONTRACT
EX-10.I.P: SETTLEMENT AND LICENSE AGREEMENT
EX-23.A: CONSENT OF KPMG
EX-23.B: CONSENT OF KPMG
EX-99.A: ARTICLES OF ASSOCIATION

In this prospectus, references to:


•	“our company” refer to Qimonda AG;

•	“we”, “us”, “Qimonda AG” or “Qimonda” refer to Qimonda AG and, unless the context otherwise requires, to our subsidiaries and our predecessor, the former Memory Products segment of Infineon;

•	“Infineon” refers to Infineon Technologies AG, a German stock corporation and, unless the context otherwise requires, to its subsidiaries; and

•	the “Infineon Group” refers to Infineon and Infineon’s subsidiaries, including Qimonda prior to the carve-out but excluding Qimonda after the carve-out described herein.

Until , 2006, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. Because it is a summary, it does not contain all the information you should consider before investing in our ADSs. You should carefully read this entire prospectus, including the section entitled “Risk Factors” and our combined financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. Special terms used in the semiconductor industry are defined in the glossary.

Our Company

Our principal products are DRAM components and modules for use in a wide range of electronic products. Our DRAM products include standard DRAMs for use in personal computers, notebooks and workstations as well as a growing range of technologically more advanced DRAMs for use in infrastructure, graphics, mobile and consumer applications. Our infrastructure DRAMs address the high reliability requirements of servers, networking and storage equipment, our graphics DRAMs deliver advanced performance to graphics cards and game consoles, and our mobile and consumer DRAMs provide low power consumption benefits to mobile phones, digital audio players, televisions, set-top boxes, DVD recorders and other consumer electronic devices. We also have a small NAND-compatible flash memory business and are focusing on research and development in this area.

The memory products business of Infineon, substantially all of which Infineon has contributed to us, has a long-standing reputation as a supplier of high quality DRAMs, and we believe we will be able to build upon this reputation as a stand-alone entity. We serve a global base of customers, many of which are among the world’s largest suppliers of computers and electronic devices. Our current principal customers include major computing original equipment manufacturers, or OEMs, most prominently HP, Dell, IBM, Sun Microsystems and Sony. To expand our customer coverage and breadth, we also sell a wide range of products to memory module manufacturers that have diversified customer bases, such as Kingston, and to a number of distributors. More recently and in connection with the ongoing expansion of our product portfolio, especially into graphics applications, we have added customers with a strong focus on enabling these applications, such as nVidia and ATI.

We have invested significant capital in the development of leading process technologies and modern manufacturing capacity. We have established a number of strategic alliances for research and development, as well as for manufacturing in order to improve the economies of scale and the capital efficiency of our business model. We have access to several front-end and back-end manufacturing facilities worldwide, including our own, our strategic partners’ and our back-end subcontract manufacturers’. We operate these facilities as a coherent unit using our “fab cluster” concept, which enables us to share manufacturing best practice and gain operational flexibility through customer qualification of our entire cluster of fabs.

Our net sales in our financial year ended September 30, 2005 were €2,825 million, of which 56% were from standard DRAM products, 34% were from infrastructure, graphics, mobile and consumer DRAM products and the remainder primarily consisted of flash memory products and technology licensing revenues. Our EBIT (which we define as net income plus interest expense and income taxes) during that period was €111 million and our net income was €18 million. Our net sales for the six months ended March 31, 2006 were

€1,606 million, of which 52% were from standard DRAM products, 44% were from infrastructure, graphics, mobile and consumer DRAM products and the remainder primarily consisted of flash memory products and technology licensing revenues. Our EBIT during that period was a loss of €102 million and our net loss was €136 million.

We operate in the semiconductor memory industry, which is one of the largest segments of the overall semiconductor industry. According to the industry research firm Gartner, DRAM represented the largest portion of the memory semiconductor industry in 2005, followed by flash memory. DRAM sales in calendar year 2005 were $25 billion, and Gartner estimates DRAM revenues will reach $34 billion in calendar year 2010, representing a compound annual growth rate, or CAGR, of 6%. Gartner also expects DRAM bit shipments to grow at a CAGR of 53% over the same period, driven in part by increased penetration of DRAM in new applications including mobile and consumer devices. Underlying this expected bit growth is Gartner’s belief that DRAM content in traditional DRAM applications, primarily computing devices, will also continue to increase and that sales of DRAM-containing products will grow strongly in emerging markets such as China and India.

Our Strengths

We believe that we are well positioned to benefit from the projected growth in the semiconductor memory industry and to remain at its technological forefront. We consider our key strengths to include the following:


	•	*We are a leading supplier of DRAM products.* We were among the four largest DRAM suppliers, which together accounted for 77% of the global DRAM market, in calendar year 2005, according to Gartner. We have grown our operations and market share significantly over the last decade and we believe our size and scale will enable us to continue to improve our competitive position.

	•	*We are among the leaders in the transition to manufacturing on 300mm wafers.* We were among the first DRAM suppliers to transition a substantial portion of our manufacturing to 300mm technology and we currently manufacture a higher portion of the DRAM bits we ship using 300mm wafers than our major competitors. We believe this early transition will enable us to accelerate reduction of our costs per bit and will enhance our competitive position.

	•	*Our proprietary “trench” architecture possesses advantageous physical characteristics we can exploit now.* We believe that our proprietary “trench” architecture possesses physical characteristics that we can exploit during the current and next several technology nodes to yield advantages over the various alternative “stack” architectures. In particular, the larger capacitors featured in trench architecture can be used to design DRAM products with high performance or low power consumption characteristics. We believe these advantages are driving our current strong growth in graphics, mobile and consumer DRAM applications.

	•	*We are a leading developer of semiconductor process technologies and an active innovator.* We expect that our accumulated experience should enable us to accelerate our feature size shrinkage to the 75nm node giving us scope to develop and produce innovative products such as DDR3 DRAM products. If we are successfully able to ramp up our manufacturing yield on this node, we will be able to further reduce our cost per bit.

	•	*Our business model leverages strong strategic alliances.* We believe that we use capital-efficient strategic alliances to augment our front- and back-end manufacturing capacity to a greater extent than our competitors. We believe that our strategic alliances enable us to benefit from significant economies of scale at a reduced level of capital expenditures, and help us increase our operating flexibility by reducing our fixed costs.

Our Strategy

In formulating our strategy, we aim to leverage our key strengths to address our target markets and emerging opportunities that we have identified. The key elements of our strategy include the following:


	•	*Improve our average selling price by increasing our focus on DRAM products for advanced infrastructure, graphics, mobile and consumer applications.* We plan to continue leveraging our proprietary trench technology over the next several technology nodes and our enhanced application- and customer-specific product development capabilities to introduce products aimed at market segments that we believe represent significant growth opportunities and command higher and more stable prices per bit. We believe that these efforts will help us improve our blended average selling price and reduce volatility of our operating results.

	•	*Leverage our technology leadership and increase our presence in low cost regions to continue to reduce unit costs.* We intend to remain ahead of our major competitors in the transition to 300mm manufacturing technology and in realizing associated benefits of reduced unit costs. We are also seeking to complete the introduction of our 75nm technology node on the accelerated timetable we have met so far and to successfully ramp up manufacturing yield on this node, which would enable us to derive unit cost improvements. Further, we expect our focus in Asia to remain a key part of our strategy as we seek further opportunities to reduce our fixed and variable production costs.

	•	*Improve profitability and return on capital throughout our industry’s business cycle.* We believe that the average selling price improvement and unit cost reduction strategies outlined above will help us significantly improve our profitability and stability of our operating results. We plan to continue to focus on strategic alliances to optimize our capital efficiency and we believe that this capital efficiency, combined with our targeted profitability, will enable us to significantly improve our return on capital employed.

Our Carve-Out From Infineon

Effective May 1, 2006, Infineon contributed substantially all of the assets, liabilities, operations and activities, as well as the employees, of its former Memory Products segment to us. The Memory Products operations in Korea and Japan have not yet been contributed and will be held in trust for us by Infineon pending their contribution and transfer. They are governed by an agreement between us and Infineon under which sales and development personnel in the region act on Qimonda’s behalf. In addition, while Infineon’s investment in the Inotera joint venture and Infineon’s investment in the Advanced Mask Technology Center (AMTC) in Dresden have been contributed to us, the legal transfer of these investments is not yet effective. In the case of Inotera, Taiwanese legal restrictions are delaying the legal transfer. In the case of Infineon’s investment in AMTC, Infineon’s co-venturers have not yet consented to the transfer of the AMTC interest, although pursuant to the AMTC limited partnership agreement, such consent may not be unreasonably withheld. Infineon is obligated under the contribution agreement and a separate trust agreement with us to hold title to the Inotera shares in trust for us and exercise shareholder rights (including board appointments and voting) at our instructions. Infineon’s investment in AMTC is being held by Infineon for our economic benefit pursuant to the contribution agreement. For as long as Infineon holds our interest in Inotera and AMTC, we must exercise our shareholder rights with respect to these investments through Infineon, which is a more cumbersome and less efficient method of exercising these rights than if we held the interest directly. We do not expect these administrative complexities to have a material adverse effect on our business, financial condition and results of operations.

We believe that our carve-out and legal separation from Infineon will allow us and our investors to realize the following benefits:


	•	increased market responsiveness through an exclusive focus on the memory products business;

	•	direct access to a distinct investor base;

	•	incentives for our employees directly tied to our own performance; and


	•	increased flexibility to pursue strategic cooperations.

Upon conclusion of this offering, Infineon will be our largest shareholder, with a direct and indirect shareholding of %, assuming the underwriters do not exercise their over-allotment option. Infineon has advised us that it does not anticipate owning a majority of our shares over the long term. The temporary majority ownership by Infineon permits us to use the entire intellectual property umbrella as well as other benefits from contracts between the Infineon group of companies and third parties. Infineon has already begun to re-negotiate or establish intellectual property cross-licensing and other contractual relationships with third parties for our benefit.

We have already entered into agreements with Infineon with respect to various interim and ongoing relationships between the two groups and are in the process of negotiating additional agreements of this nature with Infineon. These include general support services (including sales support, logistics services, purchasing services, human resources services, facility management services, patent support, finance, accounting and treasury support, legal services and strategy services), R&D services and IT services. See “Arrangements between Qimonda and the Infineon Group.”

Our Risks and Challenges

Our business is subject to many material risks and challenges that we describe in “Risk Factors” and elsewhere in this prospectus. If any of these risks materialize or we are unable to overcome these challenges, we may fail to achieve our strategic goals, and our business, financial condition or results of operations could suffer. Our key risks and challenges include the following:


	•	*The highly cyclical and competitive nature of the DRAM industry in which we operate and the pace of technological advancement.* Our results may be affected by cyclical fluctuations of the DRAM industry, including periods of oversupply and rapid declines in DRAM prices. Our competitive position may deteriorate if we fail to keep pace with the continuous advances in memory design and manufacturing technologies. Even as we exploit the advantages of one technology, we must at the same time develop improvements to that technology or alternative technologies if we are to keep up with our competitors.

	•	*Potential loss of benefits from our strategic alliances and “fab cluster”.* Because we do not have sole control of our strategic alliances and foundry partnerships, we are exposed to risks through these arrangements, such as our partners’ having potential financial difficulties or disagreements with our partners. In some cases political and economic risks may be higher in the countries where these ventures are located than in the countries where we operate our own manufacturing facilities. If these risks materialize, we could lose the benefits of these relationships, on which our strategy relies heavily, or these relationships could be terminated altogether.

	•	*Potential adverse consequences of our carve-out from Infineon.* We may encounter operational, administrative and strategic difficulties as we adjust to operating as a stand-alone company. We may be unable to achieve the increased market responsiveness and flexibility we believe the carve-out will bring. If Infineon were to cease to be our majority shareholder, we might lose rights to intellectual property arrangements and ownership of the shares of our Inotera joint venture may revert to Infineon. Further, conflicts of interest could arise between us and Infineon and we may not be able to resolve these conflicts on favorable terms for us.

Our net loss for the six months ended March 31, 2006 was €136 million and our net income for the six months ended March 31, 2005 was €122 million. We may incur substantial losses in future periods and our results may continue to be very volatile from period to period.

You should refer to the section entitled “Risk Factors — Risks related to our carve-out as a stand-alone company and our continuing relationship with Infineon,” beginning on page 28, for a more complete discussion of these risks and challenges.

Company Information

We were registered in the commercial register of the local court of Munich on May 25, 2004 as Invot AG, a German stock corporation and wholly-owned subsidiary of Infineon Technologies AG, under number HRB 152545. We changed our name to Qimonda AG on April 6, 2006. Our principal executive offices are located at Gustav-Heinemann Ring 212, 81739 Munich, Germany, and our telephone number is +(49)(89)234-20390. Our website is http://www.qimonda.com. This website address is included in this prospectus as an inactive textual reference only. The information and other content appearing on our website are not part of this prospectus.

The Offering


ADSs offered by Qimonda:		42,000,000 ordinary shares in the form of American Depositary Shares, or ADSs.

ADSs offered by Infineon:		21,000,000 ordinary shares in the form of ADSs.

Public offering price:		We currently estimate that the initial public offering price will be between $16 and $18 per ADS.

The offering:		The offering consists of a public offering made by this prospectus in the United States and an offering to institutional investors outside the United States.

American Depositary Shares:		The underwriters will deliver our shares in the form of ADSs. Each ADS, which may be evidenced by an American Depositary Receipt, or ADR, represents an ownership interest in one of our ordinary shares. As an ADS holder, we will not treat you as one of our shareholders. The depositary, Citibank, N.A., will be the holder of the ordinary shares underlying your ADSs. You will have ADS holder rights as provided in the deposit agreement. To better understand the terms of the ADSs, you should carefully read the section in this prospectus entitled “Description of American Depositary Shares”. We also encourage you to read the deposit agreement, the form of which is attached as an exhibit to the registration statement of which this prospectus forms a part. We are offering ADSs so that our company can be quoted on the New York Stock Exchange and investors will be able to trade our securities and receive dividends on them in U.S. dollars if they wish.

Depositary:		Citibank, N.A.

Custodian:		Citibank AG, Frankfurt

Over-allotment option:		If the underwriters exercise the over-allotment option described in this prospectus under the heading “Underwriting”, Infineon may sell up to an additional 9,450,000 ordinary shares in the form of ADSs. Unless otherwise indicated, all information in this prospectus assumes the over-allotment option has not been exercised.

Shares outstanding after the offering:		342,000,000 ordinary shares.

Use of proceeds:		We expect the net proceeds to us from this offering, after expenses, to be approximately $684 million (€546 million). We currently intend to use the net offering proceeds we expect to receive from this offering to finance investments in our manufacturing facilities and for research and development. We plan to invest between €300 million and €350 million to expand our manufacturing capacity and improve our manufacturing efficiency, primarily at our 300mm manufacturing facility in Richmond, Virginia, and to a lesser extent at our backend facilities in Porto, Portugal and Suzhou, China. We plan to invest up to approximately €100 million for capacity upgrades at our 300mm manufacturing facility in Dresden, Germany. We expect to invest the remaining net offering proceeds in equipment for technology and product research and development at our R&D locations in Dresden, Germany and Xi’an, China and our R&D locations in North America. We


		anticipate that it will take us approximately one year to make these investments. Pending application of the proceeds, we intend to invest them in short term liquid investments. We plan to manage the exchange rate risk arising from these short term investments using currency market instruments. We will not receive any proceeds from the sale of ADSs by Infineon.

Lock up:		We, and our shareholders, Infineon and Infineon Technologies Investment B.V., have agreed that, subject to several exceptions, for a period of 190 days from the date of this prospectus, we and they will not, without the prior written consent of each of Credit Suisse Securities (USA) LLC, Citigroup Global Markets Inc., and J.P. Morgan Securities Inc., dispose of or hedge any of our shares or ADSs or securities which are convertible or exchangeable into these securities. Credit Suisse Securities (USA) LLC, Citigroup Global Markets Inc., and J.P. Morgan Securities Inc. in their sole discretion may release any of the securities subject to these lock-up agreements at any time without notice. The release of any lock-up is considered on a case-by-case basis. Factors in deciding whether to release shares or ADSs may include the length of time before the lock-up expires, the number of shares or ADSs involved, the reason for the requested release, market conditions, the trading price of our ADSs and historical trading volumes of our ADSs.

Dividend policy:		We have not declared any cash dividends on our ordinary shares and have no present intention to pay dividends in the foreseeable future. See “Dividend Policy” for a discussion of the factors that will affect the determination by our Supervisory and Management Boards to declare dividends, as well as other matters concerning our dividend policy.

Risk factors:		See “Risk Factors” and the other information included in this prospectus for a discussion of risks you should carefully consider before deciding to invest in our ADSs.

Proposed New York Stock Exchange symbol:		“QI”

Summary Combined Financial Data

The following table presents summary historical combined financial data for the periods indicated. We derived the summary combined financial data as of and for the years ended September 30, 2004 and 2005 from our combined financial statements for those years. These combined financial statements have been audited by our independent registered public accounting firm, KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, whom we refer to as KPMG, and are included elsewhere in this prospectus. We derived the summary combined financial data as of and for the year ended September 30, 2003 from our unaudited combined financial statements for that year. We derived the summary combined financial data as of and for the six months ended March 31, 2005 and 2006 from our unaudited combined financial statements for those periods which are included elsewhere in this prospectus. In the opinion of our management, these unaudited combined financial statements include all adjustments necessary to present fairly the financial information for the period they represent.

We have been a segment of Infineon for all of the periods indicated. Infineon did not allocate most non-operating financial statement line items among its segments during that time. We have not prepared complete summary combined financial data reflecting these items as of and for the financial years ended September 30, 2001 and 2002 because of the significant cost and effort involved with properly preparing, compiling and verifying all the financial information needed to present our complete results of operations and financial position as a stand-alone company for periods so long ago. We derived the summary financial data for the financial years ended September 30, 2001 and 2002 from Infineon’s reported data of its Memory Products segment for these periods. This financial data was prepared in accordance with U.S. GAAP and on a basis consistent with the financial data for the later periods we have presented.

Infineon contributed our business to our company on May 1, 2006. We refer to this contribution as our carve-out. Our combined financial information for all periods before the date of our carve-out from Infineon may not be representative of what our results would have been had we been a stand-alone company during any of those periods. In addition, historical results are not necessarily indicative of the results that you may expect for any future period.

In particular, the combined financial statements do not reflect estimates of one-time and ongoing incremental costs required for us to operate as a separate company. Infineon allocated to our company costs it incurred relating to research and development, logistics, purchasing, selling, information technology, employee benefits, general corporate functions and other costs. General corporate functions include accounting, treasury, tax, legal, executive oversight, human resources and other services. These and other allocated costs totalled €185 million for the first six months of 2006, €148 million for the first six months of 2005, €305 million for our 2005 financial year and €387 million for our 2004 financial year. Following the carve-out, we have assumed responsibility for substantially all of these items, subject to Infineon’s continued provision of some of these services pursuant to service agreements. These agreements are described in “Arrangements between Qimonda and the Infineon Group”. Had we been incurring these costs directly during these periods, they may have been materially different than the allocated amounts in the combined financial statements.


																				As of and for the six months
		As of and for the financial year ended September 30,																		ended March 31,

		2001			2002			2003			2004			2005			2005			2005			2006			2006

		(Unaudited)⁽¹⁾			(Unaudited)⁽¹⁾			(Unaudited)									(Unaudited)⁽²⁾			(Unaudited)			(Unaudited)			(Unaudited)⁽³⁾
		(in millions, except per share data)
Summary Combined Statement of Operations data:
Net sales		€	1,728		€	1,971		€	2,544		€	3,008		€	2,825			$3,406		€	1,399		€	1,606		$	1,950
Cost of goods sold			2,086			2,106			2,090			2,063			2,164			2,609			887			1,396			1,694

Gross (loss) profit			(358	)		(135	)		454			945			661			797			512			210			256
Research and development expenses			317			311			298			347			390			469			204			215			261
Selling, general and administrative expenses			230			179			209			232			206			248			109			113			138
Restructuring charges			35			7			3			2			1			1			1			—			—
Other operating expenses (income), net			22			(6	)		16			194			13			16			7			14			18

Operating (loss) income			(962	)		(626	)		(72	)		170			51			63			191			(132	)		(161	)
Interest income (expense), net									(35	)		(30	)		(7	)		(9	)		2			(16	)		(20	)
Equity in earnings (losses) of associated companies									22			(16	)		45			54			17			27			33
Gain (loss) on associated company share issuance									(2	)		2			—			—			—			—			—
Other non-operating income (expense), net									56			(11	)		13			15			(3	)		6			8
Minority interests									11			17			2			2			5			(3	)		(4	)

Income (loss) before income taxes									(20	)		132			104			125			212			(118	)		(144	)
Income tax expense									(55	)		(211	)		(86	)		(103	)		(90	)		(18	)		(21	)

Net (loss) income								€	(75	)	€	(79	)	€	18			$22		€	122		€	(136	)	$	(165	)

Net (loss) income per share and ADS (unaudited)⁽⁴⁾:
	Basic and diluted							€	(0.25	)	€	(0.26	)	€	0.06			$0.07		€	0.41		€	(0.45	)	$	(0.55	)
Number of shares used in earnings per share⁽⁴⁾computation:
	Basic and diluted								300			300			300			300			300			300			300
Summary Combined Balance Sheet data:
Cash and cash equivalents								€	544		€	577		€	632			$762					€	638		$	774
Marketable securities									23			2			—			—						—			—
Working capital, net⁽⁵⁾									787			78			437			527						596			723
Total assets									4,634			4,750			4,861			5,862						5,259			6,384
Short-term debt, including current portion of long-term debt									51			551			524			632						486			590
Long-term debt, excluding current portion									516			27			108			130						152			185
Business equity									2,736			2,779			2,967			3,578						3,281			3,982
Summary Combined Cash Flow data:
Net cash provided by (utilized in) operating activities								€	300		€	693		€	483			$583		€	374		€	(5	)	$	(6	)
Net cash used in investing activities									(242	)		(1,048	)		(971	)		(1,171	)		(559	)		(468	)		(568	)
Depreciation and amortization									815			752			528			636			239			347			421


⁽¹⁾	Figures for 2001 and 2002, other than those provided, are not available without undue effort to properly prepare, compile and verify all the financial information needed to present the complete results of operations and financial position as a stand-alone company for periods so long ago.

⁽²⁾	Translated into U.S. dollars solely for convenience of the reader at the rate of €1.00 = $1.2058, the noon buying rate of the Federal Reserve Bank of New York for euro on September 30, 2005.

⁽³⁾	Translated into U.S. dollars solely for convenience of the reader at the rate of €1.00 = $1.2139, the noon buying rate of the Federal Reserve Bank of New York for euro on March 31, 2006.

⁽⁴⁾	Before the carve-out, the Memory Products business was wholly owned by Infineon, and there were no earnings (loss) per share for our company. Following the carve-out, earnings (loss) per share reflects the contributed capital structure for all periods presented.

⁽⁵⁾	Calculated by subtracting current liabilities from current assets.

RISK FACTORS

Investing in our ADSs involves a high degree of risk. You should carefully consider the risk factors set forth below and all other information contained in this prospectus, including our combined financial statements and the related notes, before making an investment decision regarding our securities. The risks described below are those significant risk factors, currently known and specific to us, that we believe are relevant to an investment in our securities. If any of these risks materialize, our business, financial condition or results of operations could suffer, the price of our ADSs could decline and you could lose part or all of your investment. Additional risks not currently known to us or that we now deem immaterial may also harm us and adversely affect your investment in our ADSs.

Risks related to the semiconductor memory products industry


	*The DRAM industry is subject to cyclical fluctuations, including recurring periods of oversupply, which result in large swings in our operating results, including large losses.*

The market for DRAM products is highly cyclical, with frequently mismatched demand and supply cycles. Because the majority of DRAM products shipped, especially those for the personal computer market, are of a commodity nature, DRAM prices are driven primarily by changes in worldwide DRAM supply, which in turn is driven by manufacturing capacity and, in part, by fluctuations in demand for the end products that use memory semiconductors. A typical DRAM market cycle is characterized by an initial period of high demand for DRAM products, resulting in rising DRAM prices. Higher prices and suppliers’ perception of increasing demand lead many suppliers and manufacturers to decide to construct, equip or contract new facilities to increase capacity. However, the lead times for new or improved facilities to become operational average one to two years. By the time these facilities come on-stream, demand growth may have slowed or even reversed. When many suppliers’ additional manufacturing capacity comes on-stream, which may occur almost simultaneously, industry-wide supply often rises past the point where it exceeds demand and DRAM prices fall, sometimes precipitously. This in turn can cause DRAM manufacturers to incur losses. As a result of this cyclicality, our results of operations have historically been volatile from year to year and we expect them to remain so.


	*The reluctance of DRAM manufacturers to run their facilities at less than full capacity can cause oversupply-driven downturns to last for prolonged periods, keeping DRAM prices low.*

Because the fixed costs of building, equipping and operating DRAM manufacturing facilities, or fabs, are very high and constitute a high proportion of the costs of producing each DRAM chip, DRAM manufacturers normally operate their factories at full capacity, 24 hours per day and seven days per week, even when prices are low or falling. A manufacturer would typically continue production of DRAM products at full capacity at a DRAM facility as long as the average selling price of the DRAM chips the facility produces remains above that facility’s variable cost of producing chips and provided that the facility cannot be converted cost-effectively to manufacture a more profitable product. For this reason, there is typically little capacity or supply shrinkage in response to a market downturn. Oversupply has in the past contributed to substantial declines in average selling prices and is likely to do so again in the future. DRAM prices only begin to recover when demand growth strengthens sufficiently to catch up with supply. While lower prices may lead to an acceleration in demand if personal computer manufacturers, in particular, increase the amount of DRAM “bits per box”, or the amount of memory included in each device (for example, in each personal computer, or PC), the absorption of the oversupply may require a substantial increase in demand. As a result, oversupply-driven downturns can last for prolonged periods. It is likely that the DRAM industry will continue to suffer from cyclical downturns in the future and that we will be adversely affected by these downturns. Such downturns can have material adverse effects on our business, financial condition and results of operations for extended periods.


	*Demand weakness in any of the end markets that use our products, especially the personal computer industry, could have a material adverse effect on our results of operations.*

The majority of our sales are of products used in PCs, notebook computers, workstations and servers, with a smaller but growing portion used in graphics, mobile and consumer applications. Our revenue growth depends not only on continued growth in the number of these products sold into our customers’ end markets, but also on the amount of DRAM “bits per box”. We are likely to suffer slower growth or a decline in demand for our products if our customers’ end markets do not continue to grow or if the “bits per box” do not continue to increase or even decline. If this occurs during a period already characterized by DRAM oversupply, our business can suffer especially severe downturns. This occurred most recently in 2001, when worldwide DRAM sales dropped from $29 billion in 2000 to $11 billion in 2001, according to WSTS. According to Gartner 256Mb equivalent DRAM was priced at $36 in the third quarter of 2000, but by the fourth quarter of 2001, this price had fallen below $4. These declines had a material adverse effect on our financial condition and results of operations and those of our competitors in 2001 and 2002. Any sustained decline in our customers’ markets for our products that may occur in the future could have a material adverse effect on our business, financial condition and results of operations.


	A mismatch between the specific DRAM chips we or the DRAM industry generally are producing and the platforms for which equipment manufacturers require DRAMs can lead to declining prices for the DRAMs we produce and consequently to material inventory write-downs.

Which DRAMs are required by the market at any particular time depends on the platforms the manufacturers of PCs and other electronic devices are using in their products at that time. In general, DRAMs are designed, manufactured and assembled into modules for use on a specified platform, or logic chipset and its associated interfaces. If DRAM manufacturers are producing DRAMs for which there is not enough demand because the supply of the related platforms is low, the supply of these DRAMs may exceed the demand for them, causing prices for the affected DRAM products to fall. For example, the DDR2 generation of DRAMs is designed to work together with a DDR2 logic chipset to operate a PC. In the first quarter of our 2006 financial year, we and many of our competitors were producing large volumes of DDR2s, but the PC manufacturers sourced far fewer DDR2 logic chipsets than would permit the manufacture of enough PCs to absorb all of the DDR2s being produced. The result was a dramatic decline in DDR2 prices industry-wide. A portion of the DDR2 chips that we produced remained unsold and in our inventory until supply of appropriate logic chipsets caught up. Given the significant risk of demand and supply mismatches characteristic of our industry, we may find it necessary to write down the carrying value of inventories in the future depending on market conditions. Any such write-downs could have a material and adverse effect on our business, financial condition and results of operations.


	*We may not respond quickly enough to the rapid technological change in our industry.*

The semiconductor memory products industry is characterized by extremely rapid technological change, both in the design of memory chips and in the manufacturing processes used to produce them. The following technological developments are continuously driving the improvements in the performance standards of most DRAM products:


	•	increasing the amount of data storage capacity per DRAM chip, or density (DRAM manufacturers have generally doubled the density of DRAM chips approximately every 24 months);

	•	increasing data transfer rates, or bandwidth, between the DRAM and the central processing unit, or CPU, of the PC or other device; and

	•	decreasing operating voltage and power consumption of the DRAM.

In 2000, the industry-standard DRAM chip had a density of 64 megabits. By 2005, the density of the standard DRAM chip had increased to 256 megabits, with the 512 megabit generation in ramp-up and the 1 gigabit generations in early production phases. In that same period, the interface generation has evolved from SDRAM past DDR to DDR2, with DDR3 in the development phase. At the same time, operating voltage has

declined from 3.3 volts for SDRAM to 1.8 volts for DDR2. DRAM manufacturers have continuously reduced the feature size of their technologies to enable them to manufacture higher density memory offering higher speeds and requiring lower operating voltages.

In addition, from time to time industry participants are able to reduce the overall size of the storage cells on DRAM chips, which could be a factor in reducing manufacturing costs by increasing the number of chips that can be manufactured on a wafer.

For us to maintain or increase the competitiveness of our products, we must continually develop or acquire the technologies that allow us to increase memory capacity while shrinking the size of our chips and to do so faster than our competition. Our commitment to the development of new products and process technologies, including making the substantial investments that are required for these developments, must be made well in advance of the introduction of those products and technologies into the market. As part of this commitment, we must continually be reviewing the technologies, architectures and processes we use to make sure that they have the technological properties and robustness to permit volume manufacturing at competitive costs. Technology and industry standards or customer demands may change during the development process, rendering our products outdated or uncompetitive. Our failure to keep pace with the technological advancements, to anticipate changes that might render our technologies, architectures and processes uncompetitive or to respond quickly to market changes may materially and adversely affect our business, financial condition and results of operations.


	*The semiconductor memory products industry is characterized by intense competition, which could reduce our sales or put continued pressure on our prices.*

The semiconductor memory products industry is highly competitive and has been characterized by rapid technological change, short product lifecycles, high capital expenditures, intense pricing pressure from major customers, periods of oversupply and continuous advancements in process technologies and manufacturing facilities. We compete globally with other major DRAM suppliers, including Samsung Electronics, Micron Technology, Hynix Semiconductor, Elpida Memory and Nanya Technology Corporation (Nanya), which is our joint venture partner in Inotera Memories, Inc. Some of our competitors have substantially greater capital, human and other resources and manufacturing capacities, more efficient cost structures, higher brand recognition, larger customer bases and more diversified product lines than we have. See “Our Business — Competition”. Competitors with greater resources and more diversified operations may have long-term advantages, including the ability to better withstand future downturns in the DRAM market and to finance research and development activities. In addition, unfair price competition, government support or trade barriers by or for the benefit of our competitors would adversely affect our competitive position.

To compete successfully in the DRAM market, we must:


	•	design and develop new products and introduce them in a timely manner;

	•	develop and successfully implement improved manufacturing process technologies to reduce our per-megabit costs; and

	•	broaden our DRAM customer base, to reduce our dependence on a small number of customers and position us to increase our market share.

Other factors affecting our ability to compete successfully are largely beyond our control. These include:


	•	the extent to which and the pace at which customers incorporate our memory products into their devices;

	•	whether electronics manufacturers design their products to use DRAM configurations or new types of memory products that we do not offer;

	•	the number and nature of our competitors; and

	•	general economic conditions.

Increased competitive pressure generally or the relative weakening of our competitive position caused by these factors, or other developments we have not anticipated, could materially and adversely affect our business, financial condition and results of operations.


	Our results of operations are subject to the effects of seasonal sales patterns that apply to the demand for the products our customers sell and these seasonal sales patterns may interact with existing DRAM supply and demand dynamics in a way that further harms our results.

Retail demand for our customers’ products fluctuates throughout the year and typically varies from region to region. For example, demand in the retail sector of the PC market is often stronger during the last three months of the calendar year as a result of the Christmas holiday season. Many of the factors that create and affect seasonal trends are beyond our control. Further, if DRAM prices are relatively low, our customers may react to reduced demand for their products by increasing “bits per box” to offer the end-user a higher performing product in an attempt to spur demand, such as when a PC or notebook manufacturer offers to upgrade the amount of memory included in a product at no additional cost. However, if DRAM prices are relatively high at that time, our customers may not increase the “bits per box” but instead use another method to spur demand for their products. Alternatively, if DRAM prices are high during a period in which retail demand is relatively high, our customers may seek to limit the growth of the “bits per box”, which may in turn slow or reduce demand for DRAM and cause DRAM prices to fall. Measures like this can easily obscure the seasonal factors. These uneven sales patterns, especially when combined with the existing dynamics of DRAM demand and supply cyclicality, make prediction of net sales for each financial period difficult and increase the risk of unanticipated variations in our results and financial condition on a quarterly basis.

Risks related to our operations

Some of our agreements with strategic partners, such as our Inotera Memories joint venture with Nanya, have restrictions on transfers of the shares of the ventures they create that could cause our ownership or equity interest in these ventures to revert to Infineon, if Infineon ceases to be our majority owner, and Infineon is holding our interest in Inotera in trust for us, which could subject us to loss were Infineon to become insolvent.

Our joint venture with Nanya, Inotera Memories Inc. manufactures DRAM products on the basis of technology jointly developed by Nanya and us pursuant to a separate joint development agreement. The joint venture agreement allows Infineon to transfer its shares in Inotera to us. However, under Taiwanese law, Infineon’s shares in Inotera are subject to a compulsory restriction on transfer (lock-up) as a result of Inotera’s initial public offering, or IPO, earlier this year. Infineon may only transfer these shares to us gradually over the four years following Inotera’s initial public offering. We are currently negotiating with the Taiwanese authorities to receive an exemption from this restriction that would permit the immediate transfer of all of these shares to us.

In the contribution agreement and a separate trust agreement we entered into with Infineon, Infineon agreed to hold title to the Inotera shares in trust for us until the shares can be transferred. This trust agreement provides for Infineon to transfer the shares to us as and when the transfer restrictions expire or we receive the exemption from the lock-up.

If Infineon were to reduce its shareholding in our company to a minority level before the earlier of the fifth anniversary of our carve-out from Infineon and the achievement of early mass production using 58nm process technology at our manufacturing site in Dresden, the joint venture agreement with Nanya, as amended, could require us to retransfer these Inotera shares to Infineon. We have agreed with Infineon that, in the event Nanya requests a retransfer, we would transfer the Inotera shares back to the trust. The trust agreement provides for Infineon to again hold the Inotera shares in trust for us until they could be transferred back to us. For as long as Infineon holds our shares in Inotera in trust for us, we must exercise our shareholder rights, including board membership and voting rights, through Infineon, who must act according to our instructions. This process is a more cumbersome and less efficient method of exercising these rights than if we

held the shares directly. We do not believe that these administrative complexities will have a material adverse effect on our business, financial condition and results of operations.

Although the trust agreement was drafted in a manner designed under German law to ensure that Qimonda could force the transfer to it of the Inotera shares if Infineon were to become the subject of insolvency proceedings, there is, in the absence of any clear statutory provision or directly applicable judicial interpretation on the issue, a risk that the shares would remain subject to the insolvency proceeding in such a case. Were this to occur, we would lose a portion or all of our investment in Inotera.

In addition, our limited partnership agreement with Advanced Micro Devices (AMD) and Toppan Photomask relating to the Advanced Mask Technology Center (AMTC) in Dresden requires prior written consent from the other partners before Infineon can assign its partnership interest. In the case of a transfer to an affiliate, the consent may not be unreasonably withheld, but the interest must be transferred back to Infineon should Infineon cease to be our majority shareholder. This could lead to similar administrative complexities as described above in the case of Inotera. Infineon is currently in the process of negotiating with AMD and Toppan with the goal of reaching an agreement that would allow us to retain the interest even if Infineon ceases to be our majority shareholder.


	We have suffered substantial losses in the recent past, including in more recent financial quarters. Even during profitable years, we have suffered losses in individual quarters. Losses in the future and the unpredictability of our results may cause our share price to fall.

We have suffered substantial losses in prior periods, when the price of our products has dropped at a rate for which we could not compensate through volume increases or reduced costs. For example, in financial years 2001 and 2002 we incurred net operating losses of €962 million and €626 million. In addition we have incurred quarterly losses in net income and EBIT terms for individual quarters within financial years in which we were profitable. Likewise, in the first quarter of our 2006 financial year, we experienced significant losses, and, although our performance improved in the second quarter of our 2006 fiscal year, we realized an operating loss of €132 million in the first half of our 2006 financial year. We may also incur losses in future periods. If we sustain losses like these, it would materially and adversely affect our business, financial condition and results of operations. In addition, our share price is likely to fall if we incur losses in the future or if we report quarterly or annual results that do not meet the expectations of industry analysts or that are weaker than those reported by our competitors.

The average selling prices of our principal DRAM products may fluctuate significantly from quarter to quarter or even from month to month. This may cause us to experience significant fluctuations in our revenues. However, we have high fixed costs of operations, resulting in large part from the capital-intensive nature of our business. As a result, our reported financial results can and often do fluctuate significantly from period to period.

Our current revenues are derived largely from sales of standard DRAM products, which accounted for 66% and 56% of our revenues in our 2004 and 2005 financial years and 52% of our revenues in the first half of our 2006 financial year. While we are, as part of our strategy to reduce over-reliance on standard DRAMs, seeking to better balance our product portfolio by offering a wider range of application-specific DRAMs and to diversify our customer base by focusing on customer-specific DRAMs, these products remain to a greater or lesser extent exposed to the dynamics exemplified by the standard DRAM market. Finally, after our carve-out from Infineon, we are no longer able to offer customers a range of logic products in addition to memory products. Due to these factors, in the event of a downturn in the DRAM market, our ability to offer alternative products is very limited.

Some of our competitors have diversified production among DRAMs, flash memory, image sensors and logic ICs, while at present we remain generally focused on DRAMs. These competitors may be able to offset the negative effects of DRAM downturns by selling non-DRAM products, including flash memory. They may, when they then perceive better pricing conditions in the DRAM market, be able to quickly convert production to DRAM products, significantly increasing their DRAM capacities in response to positive environments and significantly decreasing their DRAM capacities in response to negative environments. Conversely, if the

pricing for non-DRAM products such as flash deteriorate, they can convert production back to DRAM products. Because our production is more narrowly focused on DRAMs, we are less able to adjust our capacities in response to cyclical developments. This lower ability to adjust capacity could adversely affect our financial condition and results of operation.

In addition, the potential ability of these competitors to offset the negative effects of DRAM downturns by shifting their sales to non-DRAM products may permit them to use the proceeds from those sales to invest in their DRAM business. This may cause us to be at a competitive disadvantage with regard to technological advancements taking place in the DRAM industry and reduce our relative ability to keep pace with these competitors. This could adversely affect our business, financial condition and results of operations.

The ability of some of our competitors to shift their production among memory products may leave us relatively more exposed to downturns in the DRAM industry and less able to finance technological advancement.


	*Our results may suffer if we are not able to adequately forecast demand for our products.*

It is not industry practice to enter into firm, long-term purchase commitments with respect to standard DRAMs. We primarily use internal forecasts to determine the number and mix of products that we manufacture. Although we also consult with major customers, who typically provide us with short-term rolling forecasts of their product requirements on a monthly basis, customers may cancel orders or reduce quantities for a number of reasons or discontinue their relationship with us at any time. Customers frequently place orders requesting product delivery almost immediately after the order is made, which makes forecasting customer demand even more difficult. Other customers also purchase chips on consignment, withdrawing from our stock of products kept on our premises. They may reduce their anticipated withdrawals from these stocks on very short notice. Based on past experience, if we over-estimate demand for a particular product, we may need to significantly reduce the price for that product in order to sell our excess inventory. In addition, due to the high fixed costs of operating manufacturing facilities, it is not industry practice to reduce production in response to or anticipation of demand slumps, which may lead to excess inventory and cause us to incur additional inventory carrying costs or write-downs. If we are unable to predict accurately the appropriate amount of products needed to meet customer requirements, or if our customers were to unexpectedly cancel or reduce a large number of orders simultaneously, we could fail to match our production with our customers’ demand. This could materially and adversely affect our business, financial condition and results of operations.

In addition, because our markets are volatile and subject to rapid technological and price changes, our forecasts may be incorrect, and we may make too many or too few of certain products. For example, in the first quarter of our 2006 financial year, we produced an excess of DDR2 chips because the corresponding DDR2 logic chipsets, which are produced by logic semiconductor manufacturers, were not available in quantities sufficient for PC manufacturers to absorb the supply of DDR2s in the market. A portion of the DDR2 chips that we produced remained unsold and in our inventory until supply of appropriate logic chipsets caught up.


	We expect the average selling prices of the semiconductor memory products we sell to continue to decline irrespective of cyclical fluctuations in the industry, and if prices decrease faster than we are able to reduce our costs, our margins will be adversely affected.

The average selling prices of semiconductor memory products, including DRAMs, have declined in general for many years and we expect that they will, irrespective of industry-wide fluctuations, continue to decline as a result of, among other factors, technological advancements and cost reductions. Although we may from time to time be able to take advantage of higher selling prices typically associated with new products and technologies, the prices of new products also generally decline over time, and in certain cases very rapidly, in the face of market competition. Accordingly, we need to reduce our per-megabit manufacturing costs even as we seek to maintain our technological position. Despite our significant investments in research and development and in modern manufacturing facilities, the product and process technologies that we develop may fail to keep pace with the industry’s continuous drive towards more powerful, smaller devices with lower per-megabit costs. If our development fails to keep pace, our competitors may be able to offer their products

on a more profitable basis. If the average per-megabit selling price for DRAMs and other memory chips that we produce decreases faster than we are able to reduce our per-megabit manufacturing costs, our gross margins would decrease and our business, financial condition and results of operations may be materially and adversely affected.


	To reduce our costs, we need to make investments to implement improvements and developments in our process technologies quickly. If we are unable to do so, we may not be able to reduce per-megabit manufacturing costs quickly enough to keep pace with declines in average selling prices for DRAMs and other memory products.

Implementing a significant new process technology, such as the migration to a new process technology node (for example, from 90nm to 75nm), requires very significant long-term investments and often many years of development effort. In addition, each successive improvement in process technology generally involves an increase in complexity that may increase the required level of investment and demand more development effort. In 2003, we experienced difficulties in our transition from the 140nm to the 110nm technology node because, at the same time, we moved our development work from East Fishkill, New York to Dresden, Germany and began to convert to 193nm lithography, both of which introduced complexities to the technology node transition. Product yields tend to be at relatively lower levels when new process technologies are being implemented. If we experience delays in implementing these technologies, we may not be able to reduce our per-megabit manufacturing costs quickly enough to avoid falling margins or keep our prices competitive. Our business, results of operations and financial condition could be hurt if we experience substantial delays in developing new process technologies or if we do not implement production technology transitions efficiently.


	*If we are unable to respond to customer demand for diversified DRAM products or are unable to do so in a cost efficient manner, we may fail to gain, or even lose, market share.*

The DRAM product needs of manufacturers of servers, networking and storage equipment and graphics, mobile and consumer devices are becoming increasingly diverse in terms of product specifications. This diversification requires us to devote significant resources to product design and development in cooperation with our customers. If we are unable to invest sufficient resources to meet our customers’ specialized needs, if we do so in an inefficient or untimely manner, or if our working relationships with our customers otherwise deteriorate, we may lose business opportunities or market share as a result. We also may encounter difficulties penetrating markets where our relationship with manufacturers is less developed. In addition, our competitors may be able to implement similar strategies more effectively than we can.


	*We may be unable to recoup our investments if we bring new production facilities on-stream in times of overcapacity.*

It is difficult to predict future supply and demand in the market for DRAM and other memory products. Because it takes one to two years to plan, finance, construct and equip a new facility, we must make a decision to build a new facility, or to re-equip an existing facility, with no reliable forecast of what the supply and demand ratio is likely to be when the facility is scheduled to come on-stream. The capital expenditures required to construct and equip a semiconductor facility with competitive economies of scale are typically between $2 to $3 billion.

In our 2005 financial year, commercial DRAM production began at the 300mm facilities of our fab in Richmond, Virginia and, in our 2004 financial year, at our foundry partner SMIC, in Beijing, China. In addition, Inotera Memories, our joint venture with Nanya, increased capacity at its 300mm fab in Taiwan and is building a new 300mm manufacturing module. A number of our competitors have also opened, or announced their intentions to open, new 300mm production facilities. If several new 300mm DRAM manufacturing plants come on-stream at the same time, there is a risk that the resulting supply growth might exceed demand at that point in time. This could result in strongly reduced prices for our DRAM products at a time when we have just made very substantial investments in new production. If this happens, it may take

longer for us to recoup our investments, or we may not be able to do so at all. This could materially and adversely affect our business, financial condition and results of operations.

If prices are significantly declining during the time when we are ramping up production at new facilities, we may take measures to limit our cash outflows. These measures could include canceling or delaying the delivery of manufacturing equipment at those facilities. As a consequence, these facilities might not ramp up to their expected capacity in the short term. This could prevent them from achieving the economies of scale they were designed to achieve, such that the costs of manufacture at these facilities might exceed the revenues from the sales of the products produced there. This could force us to decide to suspend manufacturing at these facilities. This would also prevent us from recouping our investments as planned or at all, which could have a material and adverse effect on our business, financial condition and results of operations.


	We may lose sales or customers or incur losses if we are unable to successfully modify existing production facilities or bring new production facilities on-stream in times of high demand.

We may experience difficulty in ramping up production at new or existing facilities in a timely manner, such as our 300mm fab in Richmond, Virginia. Similarly, our joint ventures with Nanya and CSVC, which are currently ramping up production at their fabs, or SMIC and Winbond, foundry manufacturers who provide some of our manufacturing capacity, may experience similar difficulties in ramping up production at their production facilities. We may also experience delays in converting to the next step in the technology improvements that enable us to reduce the feature sizes on chips. This could be due to a variety of factors, including an inability to hire and train new personnel in a timely fashion, the unavailability of equipment, difficulties or delays in implementing new fabrication processes and an inability to achieve required yield levels.

In the future, we may face delays in the construction, equipping or ramp-up of new facilities or the conversion of existing facilities to new process technologies. Our failure to ramp up our production on a timely basis may result in loss of sales or customers and a loss of market share, which in turn could reduce our ability to exploit economies of scale, negatively affecting our cost position and our ability to finance investments in the future. This failure could also prevent us from recouping our investments in a timely manner or at all. Any of these effects could materially and adversely affect our business, financial condition and results of operations.


	*The loss of one or more of our significant customers may adversely affect our business.*

Historically, we have relied on a limited number of customers, primarily among the largest PC manufacturers, for a substantial portion of our total sales. In the first half of our 2006 financial year, our five largest customers accounted for more than 50% of our total sales. HP, our largest customer, alone accounted for approximately 19% of our sales and Dell, our second largest customer, accounted for 14% of our sales. In our 2005 financial year, our five largest customers accounted for more than 50% of our total sales. HP, our largest customer, alone accounted for approximately 19% of our sales and Dell accounted for 14% of our sales. These major customers generally purchase products on the basis of short-term purchase orders, can easily cancel these orders and have no long-term obligations to purchase products from us. Although we are seeking to broaden our customer base, there is a limited number of major manufacturers that purchase standard DRAM products in large quantities, and most of them are existing customers of ours. Our major customers generally seek to maintain multiple sources of supply, and it may be difficult for us to meaningfully increase our current sales volumes of existing products to them where to do so would move us towards being an exclusive source for them. The loss of one of our major customers, or any substantial reduction in sales to any of these customers, could have a material adverse effect on our business, financial condition and results of operations.


	Sanctions in the United States and other countries against us and other DRAM producers for anticompetitive practices in the DRAM industry and related civil litigation may have a direct or indirect material adverse effect on our operations.

In September 2004, Infineon entered into a plea agreement with the Antitrust Division of the U.S. Department of Justice in connection with the DOJ’s ongoing investigation of alleged antitrust violations in the DRAM industry. Pursuant to this plea agreement, Infineon agreed to plead guilty and pay a fine of $160 million for conduct relating to the pricing of DRAM products between July 1, 1999 and June 15, 2002. The plea agreement requires Infineon to pay the fine (plus accrued interest) in equal annual installments through 2009. Subsequent to the commencement of the DOJ investigation, a number of putative class action lawsuits were filed against Infineon, its principal U.S. subsidiary and other DRAM manufacturers in various state and federal courts in the United States alleging violations of the Sherman Act, California’s Cartwright Act, other state laws and unfair competition law as well as unjust enrichment in connection with the sale and pricing of memory products. Each of the cases purports to be on behalf of a class of individuals and entities who purchased DRAMs directly or indirectly from Infineon in periods commencing after 1999. Infineon has reached a settlement agreement, subject to the court’s approval, in the sixteen cases filed by direct U.S. purchasers that were transferred to the U.S. District Court for the Northern District of California for coordinated proceedings. Under the terms of the settlement agreement Infineon agreed to pay approximately $21 million. We recorded a corresponding charge to other operating expense in our financial year ended September 30, 2005. In addition to this settlement payment, Infineon agreed to pay an additional amount if it is proven that sales of DRAM products to the settlement class after opt-outs during the settlement period exceeded $208.1 million. We would also be responsible for this payment. The additional amount payable is calculated by multiplying the amount by which these sales exceed $208.1 million by 10.53%. We do not currently expect this amount to have a material adverse effect on our financial condition or results of operations. The settlement was provisionally approved on May 10, 2006, and the final hearing for approval of the settlement is scheduled for September 6, 2006. On April 28, 2006 and May 5, 2006, two separate lawsuits were filed by two direct and indirect purchasers of DRAM against Infineon and various other DRAM suppliers seeking unspecified damages and other relief based on the same allegations. If those plaintiffs opt out of the Infineon direct class settlement, their claims will not be released by that settlement. As of the date hereof, 64 indirect U.S. purchaser cases are still pending in federal and state courts. A putative class action brought on behalf of non-U.S. direct purchasers of DRAM was dismissed with prejudice by the court. Plaintiffs in that case have filed a notice of appeal, but no briefs have yet been filed and no hearing date has yet been scheduled for the appeal. Furthermore, on July 13 and 14, 2006, the state attorneys general of New York, California and 33 other states filed two separate actions in federal court in New York and California against Infineon, its principal U.S. subsidiary and several other DRAM manufacturers on behalf of governmental entities and consumers who purchased products containing DRAM beginning in 1998. The plaintiffs’ claims involve the same allegations of DRAM price-fixing and artificial price inflation practices discussed above. The plaintiffs are seeking to recover three times actual damages and other relief.

Between December 2004 and February 2005, putative class proceedings were also filed in the Canadian provinces of Quebec, Ontario and British Columbia against Infineon, its principal U.S. subsidiary and other DRAM manufacturers on behalf of all direct and indirect purchasers resident in Canada who purchased DRAM or products containing DRAM between July 1999 and June 2002. Plaintiffs primarily allege conspiracy to unduly restrain competition and to illegally fix the price of DRAM. These cases are currently pending.

Infineon received a request for information regarding DRAM industry practices from the European Commission in April 2003 and a notice of formal inquiry into alleged DRAM industry competition law violations from the Canadian Competition Bureau in May 2004. Infineon is fully cooperating with the Commission’s investigation and the Competition Bureau’s inquiry.

In March 2005, Tessera Technologies, Inc. filed a lawsuit in U.S. federal court against Infineon claiming infringement of five of its patents. In April 2005, Tessera amended its complaint to allege that Infineon and its co-defendants violated U.S. antitrust law and Texas state laws by conspiring to harm the sale of Rambus’s RDRAM chips, thereby injuring Tessera’s ability to license chip packaging technology for RDRAM chips. On

May 10, 2006 Tessera amended its complaint to add us as an additional named defendant. Separate trials for the antitrust and patent claims before the same jury have been scheduled for August 2006.

In the contribution agreement we entered into with Infineon, we agreed to indemnify Infineon for all of the potential liabilities and risks in connection with the civil and criminal antitrust proceedings, including the costs of defending these proceedings. As of March 31, 2006, we had accrued liabilities in the amount of €140 million related to the DOJ and European anti-trust investigations and the direct and indirect purchaser litigation and settlements described above, as well as for legal expenses relating to the other matters described elsewhere in these risk factors. As of March 31, 2006, no further amounts had been accrued in respect of the other proceedings described above, including the securities class actions discussed below under “— An unfavorable outcome in pending securities litigation against Infineon or the incurrence of significant costs in the defense of this litigation may have a direct or indirect material adverse effect on our operations.” As additional information becomes available, the potential liability related to these matters will be reassessed and the estimates revised, if necessary. These accrued liabilities would be subject to change in the future based on new developments in each matter, or changes in circumstances, which could have a material adverse effect on our financial condition and results of operations.

An adverse final resolution of the investigations or the civil claims described above could cause us to bear significant financial liability and other adverse effects. Irrespective of the validity or the successful assertion of the above claims, Infineon could incur significant costs in connection with the defense or settlement of these claims, for which we are required to indemnify Infineon under the contribution agreement. An adverse final resolution or the incurrence of significant costs could have a material adverse effect on our business, financial condition and results of operations. See “Our Business — Legal Matters” for more information on these matters.


	An unfavorable outcome in the pending securities litigation against Infineon or the incurrence of significant costs in the defense of this litigation may have a direct or indirect material adverse effect on our operations.

A consolidated putative class action lawsuit is pending against Infineon and its U.S. subsidiary, and two of Infineon’s officers, one of which is currently the chairman of our Supervisory Board, in U.S. federal court on behalf of a putative class of purchasers of Infineon’s shares who purchased them during the period from March 2000 to July 2004. The plaintiffs allege violations of the U.S. securities laws arising out of an alleged failure to disclose Infineon’s alleged participation in DRAM price fixing activities and seek unspecified damages. On May 22, 2006, the court denied part of the motions to dismiss this action but did not deny other parts of the motions. On June 21, 2006, the court agreed to permit Infineon to move for reconsideration of the May 22, 2006 order. In the contribution agreement we entered into with Infineon, we agreed to share any future liabilities arising out of this lawsuit equally with Infineon, including the cost of defending the suit.

Because this action is in its initial stages, we are unable to provide an estimate of the likelihood of an unfavorable outcome to us or of the amount or range of potential loss arising from the action. An adverse final resolution of the class action litigation could cause us to bear significant financial liability and other adverse effects. Irrespective of the validity or the successful assertion of the securities claims, Infineon could incur significant costs in connection with the defense of these claims, and we are required to indemnify Infineon for one-half of these, as stated above. An adverse final resolution or the incurrence of significant costs could have a material adverse effect on our business, financial condition and results of operations. See “Our Business — Legal Matters” for more information on this matter.


	*We may not be able to protect our proprietary intellectual property or obtain rights to intellectual property of third parties needed to operate our business.*

Our success depends on our ability to obtain and maintain patents, licenses and other intellectual property rights covering our products and our design and manufacturing processes. The process of seeking patent protection can be long and expensive. Patents may not be granted on currently pending or future applications or may not be of sufficient scope or strength to provide us with meaningful protection or commercial advantage. In addition, effective copyright and trade secret protection may be unavailable or limited in some

countries, and our trade secrets may be vulnerable to disclosure or misappropriation by employees, strategic partners and other persons. See “Risks related to our carve-out as a stand-alone company and our continuing relationship with Infineon — We may lose rights to key intellectual property arrangements if Infineon’s ownership in our company drops below certain levels”.

Infineon transferred to us substantially all of the patents attributable to the Memory Products segment of Infineon in connection with the carve-out of our company, while Infineon retained ownership of all other Infineon patents. Qimonda’s patent portfolio at the end of May 2006 included more than 19,000 patents and patent applications (representing more than 5,600 patent families) compared to more than 23,000 patents and patent applications remaining with Infineon. Each of we and Infineon has granted the other a perpetual, royalty-free license to use these patents in each of our respective businesses. However, our rights to use these patents are subject to the limitations and restrictions described in “Our Business — Intellectual Property”.

We also require rights to use and exploit patented technology owned by third parties, including other semiconductor manufacturers, and have entered into licenses and cross-license agreements to do so (ourselves or through Infineon). We anticipate that we will continue to enter into more of these agreements in the future. If we are unable to enter into or renew our technology licensing agreements on acceptable terms, or not at all, we may lose the legal right to use some of the processes we require to produce our products, which may prevent us from manufacturing and selling some of our products, including our key products. In addition, we could be at a disadvantage if our competitors obtain licenses for protected technologies on more favorable terms than we do, or if we are unable to acquire on favorable terms any licenses we require for patented technologies we may determine we need to obtain from third parties to maintain our competitive situation.

In addition, our rights to use some of these patents are currently based on cross-license agreements between Infineon and those third parties. Some of these cross-license agreements will terminate with respect to us if we cease to be a controlled subsidiary of Infineon. Although our own patent portfolio may provide us with leverage in negotiating cross-license agreements with third parties, these agreements may be less favorable to us than the agreements that Infineon was able to negotiate, based upon its larger patent and product portfolios. If we are unable to protect our intellectual property, or retain or obtain the intellectual property we need from third parties to operate our business, our business, financial condition and results of operations could be materially and adversely affected.


	*We may be accused of infringing the intellectual property rights of others.*

Our industry is characterized by a complex series of license and cross-license agreements covering technology used in our products and manufacturing processes and those of our competitors. Accordingly, other companies have and will continue to develop technologies that are protected by patents and other intellectual property rights and that we may require to manufacture our products. These technologies may become unavailable to us or be offered to us only on unfavorable terms and conditions. In other cases, other companies may claim technology as theirs and seek to force us to stop using it, even if we believe that we have developed or otherwise have rights to exploit the technology in question. In either case, litigation, which could require substantial financial and management resources, is often necessary to defend against claims of infringement of intellectual property rights brought against us by others. In some cases, we might be able to avoid or settle litigation on favorable terms because we in turn possess patents that we could assert against a plaintiff or potential plaintiff. In other cases, the plaintiffs are engaged principally in the development and licensing of technology, and do not require access to other parties’ patent portfolios, in particular to the patents required to manufacture products.

At any given time, Infineon and we are engaged in negotiations with a number of third parties regarding assertions that technologies we are using infringe those parties’ rights. Infineon and we are currently in negotiations in a small number of matters of this nature. In part as a result of the complex series of license and cross-license agreements and the uncertainty, time and expense of litigation, it is sometimes in our interests to settle with these claimants in a way that avoids litigation. These settlements may nevertheless involve the payment of license fees or royalties or other amounts over lengthy periods in amounts that could be material for us. The contribution agreement Infineon and we entered into in connection with the carve-out provides for

us to indemnify Infineon for 60 percent of any license fee payments to which Infineon may agree in connection with two matters in which negotiations were ongoing at the time of the carve-out and which are still ongoing. Any payments we may have to make under these indemnity provisions may have a material and adverse effect on our business, financial condition and results of operations.

Rambus Inc. filed suits against Infineon in the United States and Germany in August 2000, alleging infringement of its intellectual property rights related to DRAM architecture. In March 2005 Infineon reached an agreement with Rambus settling all claims between them. Under this agreement, Infineon agreed to pay Rambus $50 million in quarterly installments of $6 million from November 2005 to November 2007. If Rambus enters into specified licensing agreements with other DRAM manufacturers, Infineon would be required to make additional quarterly payments, which may aggregate up to an additional $100 million. Because Rambus’ ability to conclude the agreements is not within our control, we are not able to estimate whether additional payment obligations may arise. These contingencies were assigned to us pursuant to the contribution agreement entered into between Infineon and us in connection with our carve-out.

In 2002 and in 2005, MOSAID Technologies Inc. filed separate suits in U.S. federal court against Infineon claiming infringement of its DRAM patents. On June 14, 2006, the parties announced that they had settled all pending litigation and appeals. The litigation in the Eastern District of Texas was dismissed with prejudice on June 20, 2006. As part of the global settlement, MOSAID purchased fifty patents from Infineon and Qimonda, including patents related to a range of technologies such as DRAM memory, power management ICs, semiconductor process technology and digital radio applications. Under the terms of the settlement agreements, Infineon and we retain royalty-free “lives of the patents” licenses to use these patents in the manufacturing and sale of any products. In addition, MOSAID granted to Infineon and us a six-year license to use any MOSAID patents in the manufacturing and sale of semiconductor products, as well as a “lives of the patents” license to those MOSAID patent families that had been in dispute. We will make the related license payments over six years.

In March 2005, Tessera Technologies, Inc. filed a lawsuit in U.S. federal court against Infineon claiming infringement of five of its patents. Tessera has also raised antitrust-related claims. Separate trials on the antitrust and patent claims have been scheduled for August 2006. See “Our Business — Legal Matters — Patent Litigation” for a more detailed description of these proceedings.

We have been made a party to the Tessera action and, pursuant to the contribution agreement we entered into with Infineon, we are required to indemnify Infineon with respect to any liability, together with the related costs, it may face in respect of this lawsuit that relates to the business that was transferred to us in our carve-out. See “Our Business — Legal Matters — Patent Litigation” for a more detailed description of the indemnification provisions. We are unable to predict the outcome of this litigation. If this claim, or others that may be asserted in the future, against us is successful, we may be forced to refrain from selling substantially all of our DRAM products in certain markets, seek to develop non-infringing technology, which may not be feasible, license the underlying technology upon economically unfavorable terms and conditions, and/or pay damages for prior use of the Tessera technology at issue. In addition, our insurance excludes liability arising out of claims that we have infringed the patent or other intellectual property rights of third parties. Any of these results may have a material and adverse effect on our business, financial condition and results of operations.


	*We may face difficulties in implementing next generations of our proprietary DRAM trench cell architecture.*

We manufacture our products using our proprietary “trench” DRAM architecture. In 2005, approximately 27% of DRAM chips produced worldwide were manufactured using trench cell architecture, of which we produced approximately half, according to Gartner. The remaining 73% was produced using different kinds of an alternative architecture known as “stack” architecture. Although we believe that the physical characteristics of trench cell technology can be exploited during the current and next several technology nodes to yield advantages over the various stack architectures, this technology may not continue to perform as well as, or better than, stack technology when migrating to smaller chip feature sizes. As part of our commitment

to the development of new products and process technologies, we must continually be reviewing the technologies, architectures and processes we use to make sure that they have the technological properties and robustness to permit volume manufacturing at competitive costs. If we were required to transition from trench to stack cell technology, the transition would require a substantial period of time and a substantial investment of capital, and may require us to acquire rights to additional technology.

To manufacture our trench cells, we need etching equipment that is specially modified to etch the deep trench capacitors. We cannot be certain that equipment manufacturers will continue to develop and supply such equipment on favorable terms, if at all.


	*We may face difficulties in shifting to new memory technologies that are not based on silicon.*

In the longer term, we face the potential risk of a fundamental shift from the silicon-based technology on which the memory industry has long been based. Although we do not believe that any technology to rival silicon-based memory is likely to prove feasible in at least the near- to medium-term, and although we devote resources to basic research in order to keep abreast of a wide range of potential new memory technologies, the fundamental technology of the semiconductor memory business may not continue to be broadly based on current technology. We may be unable to respond quickly enough to any fundamental technological shift in the industry. Our failure to implement successfully subsequent technology generations or respond to technology developments may materially and adversely affect our business, financial condition and results of operations.


	*We may misallocate our research and development resources or have insufficient resources to conduct the necessary level of research and development to remain competitive.*

We may also devote research and development resources to technologies or products that turn out to be unsuccessful. Commitments to developing any new product must be made well in advance of sales, and customer demands and technology may change while we are in development, rendering our products outdated or uncompetitive before their introduction. We must therefore anticipate both future demand and the technology features that will be required to supply such demand. If we incur losses as a result of a market downturn or otherwise, we may not be able to devote sufficient resources to the research and development needed to remain competitive. Our failure to properly allocate research and development resources could materially and adversely affect our business, financial condition and results of operations.


	*We have a limited number of suppliers of manufacturing equipment and raw materials, and our business would be harmed if they were to interrupt supply or increase prices.*

Our manufacturing operations depend upon obtaining deliveries of the equipment used in our manufacturing facilities and adequate supplies of raw materials, including silicon wafers, masks, chemicals and resists, at reasonable prices and on a timely basis.

Although there are multiple sources for most types of equipment that we use, the equipment is sophisticated and complex and it is difficult for us to rapidly substitute one supplier for another or one piece of equipment for another. We currently have only one significant sole-source equipment supplier, Advantest, which supplies some of our testing equipment. If we were to experience supply or quality problems with Advantest, it could take a long time for us to locate a secondary source of supply for that equipment.

The expansion of fabrication facilities by us, our joint venture counterparts, our foundry partners and other semiconductor companies may put additional pressure on the supply of equipment. Shortages of equipment could result in an increase in prices and longer delivery times. The lead time for delivery of some equipment may be as long as six to twelve months. If we are unable to obtain equipment in a timely manner, we may be unable to ramp up production according to our plan or fulfill our customer orders, which could negatively impact our business, financial condition and results of operations.

We generally have more than one source available for raw materials, but materials meeting our standards are in some cases available only from a limited number of vendors. The principal suppliers for our silicon wafers are Siltronic, Shin-Etsu, MEMC and SUMCO. Our revenues and earnings could decline if we were

unable to obtain adequate supplies of high-quality raw materials in a timely manner (for instance, due to interruption of supply or increased industry demand) or if there were significant increases in the costs of raw materials that we could not pass on to our customers. In addition, the raw materials we need for our business could become scarcer or more expensive as worldwide demand for semiconductors and other products also produced with the same raw materials increases. If we are unable to obtain sufficient raw materials in a timely manner, we may experience interruptions in production, which could in turn, leave us unable to fulfill our customer orders, which could negatively impact our business, financial condition and results of operations.


	*The success of our business may be dependent on our ability to maintain our third-party foundry relationships.*

In 2002, Infineon entered into agreements with each of SMIC, a Chinese foundry, and Winbond, a Taiwanese foundry, for the production of some of our memory products in their fabs. In the six months ended March 31, 2006, we sourced 19% of our DRAM capacity from these unaffiliated foundry partners and plan to maintain approximately this level in the foreseeable future. We plan to retain at least 50% of our production in our own facilities to enable us to continue to develop our manufacturing process technologies. There are relatively few foundries that could manufacture our products, and we might not be able to secure an agreement with an alternative foundry on acceptable terms, particularly in a period of industry-wide under-capacity. In the event that manufacturing capacity is reduced or eliminated at one or more foundry facilities, or if we are unsuccessful in negotiating additional capacity with our existing foundry partners or in obtaining new foundry partners, we could have difficulties fulfilling our customer’s needs, and our sales could decline.

Our reliance on third-party manufacturing relationships also subjects us to the following risks:


	•	the potential inability of our manufacturing partners to develop manufacturing methods appropriate for our products;

	•	inability of our partners to construct and equip manufacturing facilities or to ramp up production in a timely manner;

	•	unwillingness or inability of partners to devote adequate capacity to the manufacture of our products;

	•	potential product quality issues, where we do not have sufficient control to resolve them quickly or at all;

	•	our partners’ inability to acquire manufacturing machinery and equipment required to manufacture our products due to controls on the export or import of technology into the country where the partner is located or limited supply of the necessary equipment; and

	•	reduced control over delivery schedules and product costs.

If any of these events, or others we have not foreseen, were to occur, we could experience an interruption in our supply chain or an increase in costs, which could delay or decrease our sales or otherwise adversely affect our business, financial condition and results of operations.

While building new capacity of our own would require significantly higher capital expenditures than purchasing products from foundries, purchasing products from foundries may result in lower profit margins than we could obtain by manufacturing the products on our own because we base the price we pay for wafers from our foundry partners on a margin sharing principle. Therefore, in times of high DRAM prices, the prices we pay for wafers produced by our foundry partners are likely to be higher than the cost of manufacturing using our own capacities, resulting in lower profit margins.


	If our strategic alliance partners or joint ventures fail to meet their business or technological goals we may lose our investments in them, and we may fail to keep pace with the rapid developments in our industry.

As part of our strategy, we have entered into a number of long-term strategic alliances with leading industry participants, both to manufacture memory products and to develop new manufacturing process

technologies and products. For example, we have entered into a development agreement with Nanya to develop the 75nm and 58nm process technology nodes and have formed a joint venture with Nanya called Inotera Memories, Inc. to manufacture DRAM. We participate in a joint venture with Advanced Micro Devices and Toppan Photomasks to develop and manufacture lithographic masks. We also established a joint venture with China Singapore Suzhou Industrial Park Venture Co. in Suzhou, China pursuant to which we constructed a facility for assembly and testing of our memory products. We expect that our investments in our Chinese joint venture over the next three years pursuant to our current contractual obligations will be approximately €138 million, and, if and when these projects are completed, we expect that our total investments in them will total more than €660 million.

These strategic relationships and joint ventures are subject to various risks that could cause us to lose the value of these investments and damage our business. Some of those risks are:


	•	our alliance partners could encounter financial difficulties;

	•	our interests could diverge from those of our alliance partners in the future;

	•	we may not be able to agree with a joint venture or alliance partner on the amount or timing of further investments in our joint projects;

	•	the management of one of our joint ventures may not be able to control costs;

	•	a joint venture may experience ramp up or manufacturing problems;

	•	a joint venture may experience delays or difficulties in reaching its research and development targets;

	•	political instability may occur in the countries where our joint ventures and/or alliance partners are located; and

	•	economic instability, including currency devaluations or exchange rate fluctuations, may occur in the countries where our joint ventures and/or alliance partners are located.

For example, the failure of Inotera Memories to successfully reach and continue production at anticipated output levels could leave us with inadequate capacity to meet customers’ needs and our growth targets. If any of our strategic alliances do not accomplish our intended goals, we may fail to keep pace with the rapid technological developments in our industry, our revenues could be reduced and our business, financial condition and results of operations could be materially and adversely affected.


	*We may be unable to fund our research and development efforts and capital expenditures if we do not have adequate access to capital.*

We require significant amounts of capital to build, expand, modernize and maintain our sophisticated manufacturing facilities and to fund our research and development efforts. For example, we expect to invest up to about €700 million in the full 2006 financial year, largely to ramp up our manufacturing facility in Richmond, Virginia. Because of the cyclical nature of DRAM demand, the need to invest in manufacturing facilities may arise at a time when our cash flow from operations is low. We used cash in our investing activities of €971 million in the 2005 financial year and €468 million in the first six months of our 2006 financial year. Our research and development expenses were €390 million in the 2005 financial year. We plan to make additional research and development expenditures in the range of €410 million to €430 million during the 2006 financial year. We intend to continue to invest heavily in our manufacturing facilities and research and development, while continuing the policy of cooperation with other semiconductor companies to share these costs with us where appropriate.

As of March 31, 2006, our capitalization included €152 million in external long-term debt resulting from a dedicated financing for our manufacturing facility in Portugal and a note payable to a government entity related to our production facility in Richmond, Virginia. We plan to service these financings from cash generated from our operations beginning in 2008 and to refinance them upon their maturities in 2013 and 2027. We also have short-term intercompany loans payable to Infineon. As of June 30, 2006, $565 million was drawn down under that loan.

In the future, we may not be able to raise the amount of capital required for our business or the repayment of our existing financial obligations on acceptable terms due to a cyclical or other downturn in the semiconductor memory products industry, general market and economic conditions, inadequate cash flow from operations, unsuccessful asset management or other factors. Because of the high risk profile of DRAM manufacturers (due largely to the volatility of the DRAM market cycle) and our lack of an independent credit history, we may be unable to secure debt financing on acceptable terms. In general, our access to capital on favorable terms may also be more limited now that we are a stand-alone entity than it was when we operated as a segment of the Infineon Group. In particular, we will no longer have access to Infineon’s pool of capital. Our business, financial condition and results of operations may be materially and adversely affected if we are not able to fund necessary capital expenditures and research and development expenses.


	*If our manufacturing processes are delayed or disrupted, our business, financial condition and results of operations could be materially adversely affected.*

We manufacture our products using processes that are highly complex and require advanced and costly equipment that must continuously be maintained and modified to improve yields and performance when implementing new technology generations. We may face interruptions due to human error in the operation of the machines, power outages, earthquakes and other natural disasters or other incidences that have an impact on the productive availability of machines, material or manpower. Difficulties encountered in the manufacturing process can reduce production yields or interrupt production and may make it difficult for us to deliver products on time or in a cost-effective, competitive manner.

In addition, semiconductors must be produced in a tightly controlled, clean environment. Even small impurities in the manufacturing materials, difficulties in the wafer fabrication process, defects in the masks used to print circuits on a wafer, the use of defective raw materials, defective vendor-provided leadframes or component parts, or other factors can cause a substantial percentage of wafers to be rejected or numerous chips on each wafer to be non-functional. We may experience problems in achieving an acceptable yield rate in the production of chips. Reduced yields will reduce our sales revenues, which could have a material adverse effect on our business, financial condition and results of operations.


	*Our business can be hurt by changes in exchange rates.*

Our business, financial condition and results of operations have been and may in the future be adversely affected by changes in exchange rates, particularly between the euro and the U.S. dollar. We are exposed both to the risk that currency changes will reduce our revenues or margins on the products we sell and the risk arising in connection with the translation into euro of the results of subsidiaries using non-euro currencies. In addition, we could lose money on the currency transactions, such as currency hedging contracts, that we use to help us manage our exchange rate risk.

We prepare our combined financial statements in euro. However, most of our sales volumes, as well as costs relating to our design, manufacturing, selling and marketing, general and administrative, and research and development activities are denominated in other currencies, principally the U.S. dollar.

Memory products are generally priced worldwide in U.S. dollars, even if invoices are denominated in another currency, while nearly half of our expenses are denominated in euro and other currencies. In addition, the balance sheet impact of currency translation adjustments has been, and may continue to be, material. Net foreign currency derivative and transaction losses totaled €5 million in the 2004 financial year, while net foreign currency derivative and transaction gains were €17 million in the 2005 financial year. Infineon has attempted to mitigate the effects of foreign currency fluctuations on our business by entering into foreign currency hedging contracts, and we intend to do so in the future. These contracts can subject us to risks of losses if the values of the hedged currencies move in the opposite direction from what we expected when we entered into the contracts.

Since its introduction in 1999, the euro has fluctuated in value against the U.S. dollar, ranging from a high of €1.00 = $1.3625 on December 27, 2004 to a low of €1.00 = $0.8270 on October 25, 2000. The relative weakness of the euro against the dollar positively affected our revenues and results of operations in the 2001

and 2002 financial years. Since the beginning of 2003, the dollar has weakened sharply against the euro, which has had a substantial negative effect on our revenues and profitability, as reported in euro. On July 17, 2006, the exchange rate was €1.00 = $1.2529. Any further weakening of the dollar against the euro would negatively affect our reported results of operations.


	Our business could suffer as a result of negative economic developments, political instability, unfavorable legal environments or negative currency developments in the different parts of the world in which we operate, especially in Taiwan and the developing markets of China and Malaysia.

We operate in many locations around the world, with manufacturing, assembly and testing, and research and development facilities in eight countries on three continents, including in Taiwan and the developing markets of China and Malaysia. Manufacturing, assembly and testing sometimes take place in different countries and even on different continents. In the 2005 financial year, 42% of our revenues were invoiced in the Asia-Pacific region (including Japan), 38% were invoiced in North America, 20% were invoiced in Europe (including Germany). In many cases, our products were shipped to different countries than those from which our invoices were paid. Our business is subject to risks involved in international business, including:


	•	negative economic developments in foreign economies, in particular China, Malaysia and Taiwan, where we have or share substantial manufacturing facilities;

	•	political instability, including the threat of war, terrorist attacks, epidemic or civil unrest, in particular in Taiwan, which experiences recurring tensions with China;

	•	uncertainties as to the effectiveness of intellectual property protection, especially in China;

	•	devaluations of local currencies, especially in Asia;

	•	changes in laws and policies affecting trade and investment, including exchange controls and expropriation, particularly in China; and

	•	varying laws and varying practices of the regulatory, tax, judicial and administrative bodies in the jurisdictions where we operate, especially in developing Asian countries.

Any of these factors could have a material adverse effect on our business, financial condition and results of operations.


	*Reductions in the amount of government subsidies we receive or demands for repayment could increase our reported expenses.*

As is the case with many other semiconductor companies, our reported expenses have been reduced in recent years by various subsidies received from governmental entities. In particular, we have received, and expect to continue to receive, subsidies for investment projects as well as for research and development projects, including our 300mm manufacturing facility in Dresden, Germany, and our fab in Porto, Portugal. We recognized governmental subsidies as a reduction of research and development and of cost of goods sold in an aggregate amount of €110 million in the 2005 financial year. In addition, we have received grants of €208 million which are deferred and will be recognized in earnings over the useful life of the related assets in future periods.

The availability of government subsidies is largely outside our control. We may not continue to benefit from such support, sufficient alternative funding may not be available on a timely basis if necessary and any alternative funding would probably be provided to us on terms less favorable to us than those we currently receive. As a general rule, we believe that government subsidies are becoming less available in each of the countries in which we have received funding in the past, and the competition for government funding is intensifying.

The application for and implementation of such subsidies often involves compliance with extensive regulatory requirements, including, in the case of subsidies to be granted within the European Union, notification to the European Commission of the contemplated grant prior to disbursement. In particular, establishment of compliance with project related ceilings on aggregate subsidies defined under European

Union law often involves highly complex economic evaluations. Many of the legal and other criteria for receiving subsidies are more stringent than they were in the past. If we fail to meet applicable formal or other requirements, we may not be able to receive the relevant subsidies or may be obliged to repay them, which could have a material and adverse effect on our business, financial condition and results of operations.

In addition, the terms of certain of the subsidies we have received impose conditions that may limit our flexibility to utilize the subsidized facility as we deem appropriate, to divert equipment to other facilities, to reduce employment at the site, or to use related intellectual property outside the European Union. This could impair our ability to operate our business in the manner we believe is most cost effective.


	*An inability to attract and retain skilled technical personnel could adversely impact our business.*

Competition for qualified employees among companies that rely heavily on engineering and technology is intense, and the loss of qualified employees or an inability to attract, retain and motivate additional highly skilled employees required for the operation and expansion of our business could hinder our ability to conduct research activities successfully and to develop marketable products. The availability of highly skilled workers, while generally constrained worldwide, is particularly constrained in places such as China where growth of this sector of the economy is strong. Following our carve-out from Infineon, we will be directly competing with Infineon for qualified personnel in certain geographic markets, which may make our recruitment and retention efforts even more difficult.


	*Environmental laws and regulations may expose us to liability and increase our costs.*

As with other companies engaged in similar activities, we face inherent risks of environmental liability in our current and historical manufacturing activities. The manufacturing of semiconductors involves the use of metals, solvents and other chemical substances that, if handled improperly, can cause damage to the environment or to the people working with them. Recently, there has been increased media scrutiny and reporting regarding a potential link between working in semiconductor manufacturing clean room environments and certain illnesses, primarily different types of cancers. Regulatory agencies and associations have begun to study the issue to see if any actual correlation exists. While we have monitored our employees using bio-monitoring programs since 1990, we cannot be certain that in the future no link between working in a clean room environment and certain illnesses will be established.

Our operations are subject to many environmental laws and regulations wherever we operate that govern, among other things, air emissions, wastewater discharges, the use and handling of hazardous substances, waste disposal and the investigation and remediation of soil and ground water contamination. A recent directive in the European Union known as Waste Electrical and Electronic Equipment Directive, or WEEE, imposes “take-back” obligations on manufacturers for the financing of the collection, recovery and disposal of electrical and electronic equipment. Although we cannot predict the legislative outcome, the obligations under this law may be applied to us pursuant to the version of WEEE to be implemented in Germany. Additional European legislation known as Restrictions on Hazardous Substances, or RoHS, will ban the use of lead and some flame retardants in electronic components beginning in 2006. The application of this legislation to our business is likewise uncertain. Finally, a new legislative proposal by the European Commission deals with the Registration, Evaluation and Authorization of Chemicals (REACH). WEEE and RoHS legislation, if applied to us and our business, and the REACH proposal, if adopted, may require us to change certain of our manufacturing processes, to utilize more costly materials and to incur substantial additional costs.

Costs associated with future additional environmental compliance, with remediation obligations or the costs of litigation if claims were made with respect to damages resulting from our operations or the former operations of Infineon or Siemens at a site that we currently own or operate could have a material and adverse effect on our business, financial condition and results of operations. For a further description of environmental issues that we face, see “Our Business — Environmental Protection, Safety and Health.” For more information on our ongoing relationship with Infineon, see “Arrangements between Qimonda and the Infineon Group” and note 26 to the combined financial statements, and for more information on our ongoing

relationship with Siemens see “Our Business — Relationship with Siemens” and note 27 to the combined financial statements appearing elsewhere in this prospectus.


	Products that do not meet customer specifications or that contain, or are perceived to contain, defects or errors or that are otherwise incompatible with their intended end use could impose significant costs on us.

The design and production processes for memory products are highly complex. It is possible that we may produce products that do no meet customer specifications, contain or are perceived to contain defects or errors, or are otherwise incompatible with their intended uses. We may incur substantial costs in remedying such defects or errors, which could include material inventory write-downs. Moreover, if actual or perceived problems with nonconforming, defective or incompatible products occur after we have shipped the products, we might not only bear direct liability for providing replacements or otherwise compensating customers but could also suffer from long-term damage to our relationship with important customers or to our reputation in the industry generally. This could have a material adverse effect on our business, financial condition and results of operations.


	*We may be unable to make desirable acquisitions or to integrate successfully any businesses we acquire.*

Our future success may depend in part on the acquisition of businesses or technologies intended to complement, enhance or expand our current business or products or that might otherwise offer us growth opportunities. Our ability to complete such transactions may be hindered by a number of factors, including potential difficulties in obtaining financing or in issuing our own securities as payment in acquisitions. In particular, as long as Infineon is our majority shareholder, it will have substantial control over our ability to incur certain debt or to issue equity, and may seek to limit any dilution of its interest in our company. In addition, we may wish to avoid any securities issuances that would dilute Infineon’s interest in our company below the levels that would trigger adverse consequences under any intellectual property licenses or other third-party agreements from which we benefit as a majority-owned subsidiary of Infineon.

Any acquisition that we do make would pose risks related to the integration of the new business or technology with our business. We cannot be certain that we will be able to achieve the benefits we expect from a particular acquisition or investment. Acquisitions may also strain our managerial and operational resources, as the challenge of managing new operations may divert our staff from monitoring and improving operations in our existing operations. Our business, financial condition and results of operations may be materially and adversely affected if we fail to coordinate our resources effectively to manage both our existing operations and any businesses we acquire.


	*We are subject to the risk of loss due to explosion and fire because some of the materials we use in our manufacturing processes are highly combustible.*

We use highly combustible materials such as silane and hydrogen in our manufacturing processes and are therefore subject to the risk of loss arising from explosion and fire which cannot be completely eliminated. Although we maintain comprehensive fire and casualty insurance up to policy limits, including insurance for loss of property and loss of profit resulting from business interruption, our insurance coverage may not be sufficient to cover all of our potential losses. If any of our fabs were to be damaged or cease operations as a result of an explosion and fire, it could reduce our manufacturing capacity and may cause us to lose important customers.

Risks related to our carve-out as a stand-alone company and our continuing relationship with Infineon


	*We have no experience operating as an independent company.*

Our company was formed as a wholly-owned subsidiary of Infineon in May 2004 as Invot AG. Substantially all of the assets and liabilities of the Memory Products segment of Infineon were contributed to our company on May 1, 2006. These assets and liabilities, however, excluded the Memory Products operations in Korea and Japan which are held in trust for us by Infineon pending their contribution and transfer. Legal transfer of Infineon’s investment in the Inotera joint venture is delayed due to Taiwanese legal restrictions, while legal transfer of Infineon’s investment in AMTC is subject to approval by the other shareholders in the

venture. Although we operated as a separate segment within the Infineon Group, we have had no experience in conducting our operations on a stand-alone basis. Our senior management has not previously worked together to manage a stand-alone company. We may encounter operational, administrative and strategic difficulties as we adjust to operating as a stand-alone company, which may cause us to react more slowly than our competitors to market conditions, may divert our management’s attention from running our business or may otherwise harm our operations. In addition, since we are becoming a public company, our management team will need to develop the expertise necessary to comply with the numerous regulatory and other requirements applicable to independent public companies, including requirements relating to corporate governance, listing standards and securities and investor relations issues. While we were, as a business within Infineon, indirectly subject to requirements to maintain an effective internal control environment, and Infineon, as a U.S. listed company, is currently in the process of ensuring that its own internal control procedures comply with the regulatory requirements, our management will have to evaluate the applicability of those procedures to Qimonda in light of our new status as an independent company, and to implement necessary changes to those procedures to account for that status. We cannot guarantee that we will be able to do so in a timely and effective manner.

Finally, because we have not operated as an independent entity in the past, we may find that we need to acquire assets in addition to those contributed to us in connection with our carve-out. We may also face difficulty in integrating all of our assets. Our business, results of operations and financial condition could be materially and adversely affected if we fail to acquire assets that prove to be important to our operations or if we are not able to integrate all of our assets.


	Our ability to operate our business effectively may suffer if we do not, quickly and cost-effectively, establish our own financial, administrative and other support functions in order to operate as a stand-alone company, and we cannot assure you that the transitional services Infineon has agreed to provide us will be sufficient for our needs.

Historically, we have relied on financial, administrative and other resources of Infineon to operate our business. In conjunction with our carve-out from Infineon, we will need to create our own financial, administrative and other support systems or contract with third parties to replace Infineon’s systems, as well as the independent internal controls referred to above. We have entered into an agreement with Infineon under which Infineon will provide certain transitional services to us, including services related to information technology systems, treasury functions and financial and accounting services. See “Arrangements between Qimonda and the Infineon Group” for a description of these services. These services may not be sufficient to meet our needs, and, after these agreements with Infineon expire, we may not be able to replace these services at all or obtain these services at prices and on terms as favorable as we currently have. Any failure or significant downtime in our own financial or administrative systems or in Infineon’s financial or administrative systems during the transitional period could impact our results and prevent us from paying our suppliers and employees, executing foreign currency transactions or performing other administrative services on a timely basis and could materially harm our business, financial condition and results of operations.


	*Our pre-carve-out financial information may not be representative of our results as an independent company.*

The combined financial information included in this prospectus for periods prior to the legal formation of our company has been prepared on a carve-out basis. We have made numerous estimates, assumptions and allocations in our financial information because Infineon did not account for us, and we did not operate, as a single stand-alone business for any period prior to May 1, 2006. The historical financial information included in this prospectus for these periods does not reflect many significant changes that have occurred or will occur when we operate as a separate company. The primary categories of assumptions we have made relate to our allocation of expenses that cannot be specifically identified as belonging to the Memory Products business.

Use of these assumptions and estimates means that the combined financial statements presented in this prospectus are likely not to be representative of what our financial condition, results of operations and cash flows would have been had we been a separate, stand-alone entity during the periods presented. Furthermore,

the combined financial statements cannot be used to forecast or predict our future financial condition, results of operations or cash flows.


	*We may lose rights to key intellectual property arrangements if Infineon’s ownership in our company drops below certain levels.*

As a majority-owned subsidiary of Infineon, we are the beneficiary of some of Infineon’s intellectual property arrangements, including cross-licensing arrangements with other leading semiconductor companies and licenses from third parties of technology incorporated in our products and used to operate our business. We will no longer be a beneficiary under some of these agreements if Infineon’s direct or indirect equity ownership in our company no longer exceeds 50%. In addition, there may be third parties that have refrained from asserting intellectual property infringement claims against our products or processes while we were a segment of Infineon that may elect to pursue such claims against us after our carve-out from Infineon.

With Infineon’s support, we are engaged in negotiating assignments of existing agreements as well as our own agreements and arrangements with some third parties for intellectual property and technology that is important to our business and that was previously obtained through our relationship with Infineon. We may be unable to enter into these agreements successfully. If we do not successfully conclude such agreements and Infineon’s direct or indirect equity ownership of our company no longer exceeds 50%, we may be exposed to infringement claims or lose access to important intellectual property and technology. We may not then be able to obtain or renegotiate licensing arrangements or supply agreements on favorable terms or at all. Qimonda’s patent portfolio at the end of May 2006 included more than 19,000 patents and patent applications (representing more than 5,600 patent families) compared to more than 23,000 patents and patent applications remaining with Infineon. This smaller patent portfolio may make it more difficult for us to negotiate third-party patent cross licenses on terms that are as favorable to us as those previously negotiated by Infineon, especially since partners under existing cross-license agreements with Infineon will generally be able to continue to use patents transferred to us as part of the carve-out under these agreements even after Infineon’s ownership in us no longer exceeds 50%. If as a result we were to infringe intellectual property rights of others or otherwise lose access to intellectual property or technology important in the conduct of our business, it could have a material and adverse effect on our business, financial condition and results of operations. We could, for example, be forced to agree to make substantially higher royalty payments to continue using that intellectual property or technology or, if we are unable to agree on licensing terms on our own, could have to cease manufacturing products that use that intellectual property or technology. For a detailed description of the intellectual property rights contributed to us and retained by Infineon and the circumstances under which our access to the rights retained by Infineon may be affected if we cease to be a controlled subsidiary of Infineon, see “Our Business — Intellectual Property.”


	*We may not be successful in establishing a brand identity.*

We have not yet established a brand identity. Prior to our carve-out, all memory products sold by the Infineon Group were sold under either the Infineon or AENEON^® brand names. The Infineon and AENEON^® brand names are well known by memory customers, suppliers and potential employees. We will need to expend significant time, effort and resources to continue to establish our brand name in the marketplace. This effort may not be successful. If we are unsuccessful in establishing our brand identity, our business, financial condition or results of operations may be materially adversely affected. We have applied for protection of our Qimonda brand as a trademark, domain and company name, but may not be successful in actually gaining much protection at all or may only gain it in some jurisdictions.


	*We are likely to face increased administrative and related expenses as a result of operating as an independent company.*

As a business segment of the Infineon Group, we historically had access to a wide range of administrative, financial, information technology, logistics and other services that are provided centrally to Infineon Group companies. The combined financial statements included in this prospectus for periods prior to our carve-out do not reflect the additional costs of our operating as an independent company. We are likely to

incur increased administrative expenses as a stand-alone company, including expenses for services that will continue to be provided by the Infineon Group pursuant to services agreements at prices intended more closely to correspond to those obtainable among unrelated parties. As a substantially smaller company, we may also lose the benefit of some economies of scale that Infineon was able to achieve with respect to administrative operations. We have no experience operating as a stand-alone entity, and it is possible that these increased costs will be materially greater than anticipated.

In addition, during our 2004 financial year, ownership of the entire 200mm fab in Dresden was transferred to Infineon’s Communications segment. We continue to own the newer 300mm fab and the research and development center in Dresden. We expect to enter into negotiations with Infineon on the possibility that we would acquire one of the two modules of the 200mm manufacturing facility at Dresden. These negotiations would address the terms and timing of any such acquisition. If the parties do not reach agreement on this acquisition, Infineon and we have already agreed in principle that we will share any potential restructuring costs arising in connection with this module equally. If ownership of the module is in fact transferred to us, we expect that this will result in an increase in our operating expenses.


	*We may experience increased costs resulting from a decrease in the purchasing power we have historically had as a segment of Infineon.*

We have historically been able to take advantage of Infineon’s size and purchasing power in procuring goods, technology and services, including insurance, employee benefit support and audit services. Following our carve-out from Infineon, we are a smaller and less diversified company than Infineon. Although we anticipate that, while we are a majority-owned subsidiary of Infineon, we will be able to continue to take advantage of many of these benefits, we cannot guarantee that this will continue to be the case. As a separate, stand-alone company, we may be unable to obtain goods, technology and services at prices and on terms as favorable as those available to us prior to the carve-out, which could have a material adverse effect on our business, financial condition and results of operations.


	*Our agreements with Infineon relating to our carve-out may be less favorable to us than similar agreements negotiated between unaffiliated third parties.*

We entered into our contribution and related agreements with Infineon while we were a wholly owned subsidiary of Infineon, and they may be less favorable to us than would be the case if they were negotiated with unaffiliated third parties. Pursuant to our contribution agreement with Infineon, we agreed to indemnify Infineon for, among other things, liabilities arising from litigation and other contingencies related to our business such as guarantee commitments, and assumed these liabilities as part of our carve-out from Infineon. The allocation of assets and liabilities between Infineon and our company may not reflect the allocation that would have been reached by two unaffiliated parties.


	*Infineon will initially control the outcome of shareholder actions in our company, and may thereby limit our ability to obtain additional financing or make acquisitions.*

Upon completion of this offering, Infineon will hold, directly or indirectly a % equity interest in our company, assuming the underwriters do not exercise their over-allotment option. Infineon has advised us that it does not anticipate owning a majority of our shares over the long term. Its equity shareholding gives it the power to control actions that require shareholder approval, including the election of the four shareholder representatives on our Supervisory Board, which appoints our Management Board. Two of the current Supervisory Board members elected by the shareholders are affiliated with Infineon.

Even if Infineon ceases to own or control more than 50% of our shares, for so long as it continues to have a substantial equity interest in our company it may, as a practical matter, be in a position to control many or all actions that require shareholder approval. Under German law, for so long as Infineon holds more than 25% of our shares, it will be in a position to block shareholder action on any capital increase or decrease, merger, consolidation, spin-off, sale or other transfer of all or substantially all of our assets, a change in the corporate form or business purpose of our company or the dissolution of our company.

Significant corporate actions, including the incurrence of material indebtedness or the issuance of a material amount of equity securities, may require the consent of our shareholders. Infineon might oppose any action that would dilute its equity interest in our company, and may be unable or unwilling to participate in a future financing of our company. Infineon, as our majority shareholder, could block any such action and thereby materially harm our business or prospects.


	We may have conflicts of interest with Infineon and, because of Infineon’s controlling ownership interest in our company, may not be able to resolve such conflicts on favorable terms for us.

Conflicts of interest may arise between Infineon and us in a number of areas relating to our past and ongoing relationships. Potential conflicts of interest that we have identified include the following:


	•	Indemnification arrangements in connection with our carve-out from Infineon. We have agreed to indemnify Infineon with respect to lawsuits and other matters as part of our carve-out from Infineon. These indemnification arrangements could result in us having interests that are adverse to those of Infineon, for example different interests with respect to settlement arrangements in a litigation matter. In addition, under these arrangements, we agreed to reimburse Infineon for liabilities incurred (including legal defense costs) in connection with certain litigation, while Infineon will be the party prosecuting or defending the litigation.

	•	Employee recruiting and retention. Because we operate in many of the same geographical areas, we expect to compete with Infineon in the hiring and retention of employees, in particular with respect to highly-skilled technical employees. We have no agreement with Infineon that would restrict either Infineon or us from hiring any of the other’s employees.

	•	Members of our Supervisory Board and Management Board may have conflicts of interest. Certain members of our Supervisory Board and Management Board own shares in Infineon or options to purchase Infineon shares. In addition, two members of our Supervisory Board are members of the Management Board or other senior management of Infineon. Mr. Fischl is CFO of Infineon and a member of its Management Board and Mr. von Eickstedt is General Counsel of Infineon. These relationships could create, or appear to create, conflicts of interest when these persons are faced with decisions with potentially different implications for Infineon and us, even though these persons owe a duty of loyalty to take into account only our interests.

	•	Sale of shares in our company. Infineon may decide to sell all or a portion of the shares that it holds in us to a third party, including to one of our competitors, thereby giving that third party substantial influence over our business and our affairs. Such a sale could be contrary to the interests of certain of our stakeholders, including our employees or our public shareholders.

	•	Allocation of business opportunities. Business opportunities may arise that both we and Infineon find attractive, and which would complement our respective businesses. Infineon may decide to take the opportunities itself, which would prevent us from taking advantage of the opportunity ourselves.

Although our company is an independent entity, we expect to operate for as long as Infineon is our majority shareholder as a part of the Infineon Group. Infineon may from time to time make strategic decisions that it believes are in the best interests of its business as a whole, including our company. These decisions may be different from the decisions that we would have made on our own. Infineon’s decisions with respect to us or our business may be resolved in ways that favor Infineon and therefore Infineon’s own shareholders, which may not coincide with the interests of our company’s other shareholders. We may not be able to resolve any potential conflicts and, even if we do so, the resolution may be less favorable to us than if we were dealing with an unaffiliated party. Even if both parties seek to transact business on terms intended to approximate those that could have been achieved among unaffiliated parties, this may not succeed in practice.


	*Third parties may seek to hold us responsible for liabilities of Infineon that we did not assume in the contribution agreement.*

Pursuant to the contribution agreement we entered into with Infineon, Infineon agreed to retain all of its liabilities that we do not expressly assume under that agreement. Liabilities we expressly assumed include those arising out of legal matters that relate to the business that was transferred to us at the time of our carve-out. See “Our Business — Legal Matters” for a description of the relevant indemnification provisions.

Third parties may seek to hold us responsible for Infineon’s retained liabilities. Under the contribution agreement, Infineon agreed to indemnify us for claims and losses relating to these retained liabilities. However, if those liabilities are significant and we are ultimately held liable for them, we might not be able to recover the full amount of our losses from Infineon.


	*We may experience difficulty in separating our assets and resources from Infineon.*

We may face difficulty in separating our assets from Infineon’s assets. In particular, we expect to enter into negotiations with Infineon on the possibility that we would acquire one of the two modules of the 200mm manufacturing facility at Dresden. The second module would remain with Infineon. In addition, we also plan to separate our operations from Infineon’s operations at the back-end manufacturing facility in Malaysia. To complete each of these projects will require us to physically segregate our equipment from Infineon’s and relocate that equipment to its relevant owner. We may have unexpected costs or complications with either project, and there is no guarantee either project will be completed successfully. Our business, financial condition and results of operations could be harmed if we incur unexpected costs in separating our assets from Infineon’s assets relating to these matters or other aspects of the carve-out.


	Uncertainty arising from a lawsuit against Infineon alleging that the carve-out of our company from Infineon should have been approved by Infineon’s shareholders could cause our share price to decline.

In March 2006, two shareholders of Infineon filed a lawsuit in the district court (Landgericht) of Munich seeking a declaratory judgment (Feststellungsurteil) that Infineon should have had its shareholders’ meeting resolve on, and consent to, the carve-out of our company and the offering of our shares. Among other things, the plaintiffs based their claim on the so-called Holzmüller/ Gelatine doctrine under German law, pursuant to which a stock corporation (such as Infineon) must obtain shareholder approval for fundamental structural decisions that materially affect the position of shareholders.

The district court, in a decision handed down on June 8, 2006, rejected the plaintiffs’ arguments and dismissed the claim. No appeal has been filed to date.

Should the plaintiffs, contrary to our and Infineon’s legal assessment, ultimately prevail on appeal (and also on a potential further appeal) in this action, Infineon would still be able to ask its shareholders’ meeting for (retrospective) approval of the carve-out. Only in the unlikely event that the Infineon shareholders’ meeting failed to grant this retrospective approval in a legally binding manner, a new lawsuit might be filed that could demand that the carve-out of the assets comprising our company at the time of the original carve-out be unwound. In practice, however, the risk that a court would force us to effect such retransfer is, in our view, very remote, and Infineon has advised us that it shares this view. This assessment is based not only on our legal analysis, but also on the fact that by the time of a final court decision on this issue — which would very likely take up to two years or more — it would in practice be virtually impossible to retransfer the Memory Products business (in the form it had at the time of the carve-out) to Infineon.

As a consequence, we do not expect this litigation to have a material adverse effect on our business, financial condition or results of operations. However, any uncertainty that may arise as a result of developments in this litigation could cause our share price to decline, and any such decline could be material.

Risks related to the securities markets and ownership of our shares or ADSs


	*Sales of substantial numbers of shares or ADSs in the public market could adversely affect the market price of our securities.*

Upon completion of this offering, Infineon will hold, directly or indirectly, a 81.6% equity interest in our company, assuming the underwriters do not exercise their over-allotment option. Infineon does not anticipate owning a majority of our shares over the long term. Infineon has also agreed not to sell or transfer any of the remaining shares it holds until 190 days after the date of this prospectus. However, sales of substantial numbers of the shares of our company by Infineon, either in the public market or in private transactions, or the perception that such sales may occur, could adversely affect the market price of the shares and ADSs and could adversely affect our ability to raise capital through subsequent offerings of equity or equity-related securities.


	*There has been no prior market for our ADSs and an active and liquid market for our securities may fail to develop, which could adversely affect the market price of our ADSs.*

Prior to the offering described in this prospectus, there has not been a public market for our ADSs. Although we expect that our ADSs will trade on the New York Stock Exchange, we cannot assure you that an active public market for our securities will develop or be sustained after this offering. If an active market for our securities does not develop after the offering, the market price and liquidity of our ADSs may be adversely affected.


	*The price of our ADSs may be subject to wide fluctuations and our securities may trade below the initial public offering price.*

The initial public offering price of our ADSs will be determined by negotiations between Infineon, us and representatives of the underwriters, based on numerous factors that we discuss under “Underwriting”. This price may not be indicative of the market price of our securities after this offering. We cannot assure you that you will be able to resell your ADSs at or above the initial public offering price. Among the factors that could affect the price of our ADSs are the risk factors described in this section and other factors, including:


	•	the volatility of DRAM prices and therefore of our revenues;

	•	changes in market valuations of technology companies in general, and memory product companies in particular;

	•	variations in our operating results;

	•	changes in demand for, and supply of, our products;

	•	technological changes that hurt our competitive position;

	•	unfavorable developments in litigation or governmental investigations in which we are involved;

	•	strategic moves by us or our competitors, such as acquisitions or restructurings;

	•	failure of our quarterly operating results to meet market expectations;

	•	changes in expectations as to our future financial performance, including financial estimates by securities analysts; and

	•	general market conditions.

Stock markets have experienced extreme volatility in recent years that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the trading price of our securities.


	*Exchange rate fluctuations may reduce the amount of U.S. dollars you receive in respect of dividends or other distributions in respect of your ADSs.*

Exchange rate fluctuations will affect the amount of U.S. dollars our shareholders receive upon the payment of cash dividends or other distributions paid in euro, if any. Therefore, such fluctuations could also

adversely affect the value of our ADSs, and, in turn, adversely affect the U.S. dollar proceeds holders receive from the sale of our ADSs.


	*You may not be able to participate in rights offerings and may experience dilution of your holdings as a result.*

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Under the deposit agreement for the ADSs, the depositary will not offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act with respect to all holders of ADSs. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to take advantage of any exemptions from registration under the Securities Act. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience dilution in their holdings as a result.

If the depositary is unable to sell the rights that are not exercised or not distributed or if the sale is not lawful or reasonably practicable, it will allow the rights to lapse, in which case you will receive no value for these rights.


	*You may not be able to exercise your right to vote the ordinary shares underlying your ADSs.*

Holders of ADSs may exercise voting rights with respect to the ordinary shares represented by our ADSs only in accordance with the provisions of the deposit agreement. The deposit agreement provides that, upon receipt of notice of any meeting of holders of our common shares, the depositary will, as soon as practicable thereafter, fix a record date for the determination of ADS holders who shall be entitled to give instructions for the exercise of voting rights. Upon timely receipt of notice from us, the depositary shall distribute to the holders as of the record date (i) the notice of the meeting or solicitation of consent or proxy sent by us, (ii) a statement that such holder will be entitled to give the depositary instructions and a statement that such holder may be deemed, if we have appointed a proxy bank as set forth in the deposit agreement, to have instructed the depositary to give a proxy to the proxy bank to vote the ordinary shares underlying the ADSs in accordance with the recommendations of the proxy bank and (iii) a statement as to the manner in which instructions may be given by the holders.

You may instruct the depositary of your ADSs to vote the ordinary shares underlying your ADSs but only if we ask the depositary to ask for your instructions. Otherwise, you will not be able to exercise your right to vote, unless you withdraw our ordinary shares underlying the ADSs you hold. However, you may not know about the meeting far enough in advance to withdraw those ordinary shares. If we ask for your instructions, the depositary, upon timely notice from us, will notify you of the upcoming vote and arrange to deliver our voting materials to you. We cannot guarantee you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your ordinary shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote, and there may be nothing you can do if the ordinary shares underlying your ADSs are not voted as you requested.

Under the deposit agreement for the ADS, we may choose to appoint a proxy bank in accordance with the German Stock Corporation Act. In this event, the depositary will receive a proxy to which will be given to the proxy bank vote our ordinary shares underlying your ADSs at shareholders’ meetings if you do not vote in a timely fashion and in the manner specified by the depositary.

The effect of this proxy is that you cannot prevent our ordinary shares underlying your ADSs from being voted, and it may make it more difficult for shareholders to influence the management of our company, which could adversely affect your interests. Holders of our ordinary shares are not subject to this proxy.


	*You may not receive distributions on our ordinary shares represented by our ADSs or any value for them if it is illegal or impractical to make them available to holders of ADSs.*

The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of our ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. We have no obligation to take any other action to permit the distribution of our ADSs, ordinary shares, rights or anything else to holders of our ADSs. This means that you may not receive the distributions we make on our ordinary shares or any value from them if it is illegal or impractical for us to make them available to you. These restrictions may have a material adverse effect on the value of your ADSs.


	*You may be subject to limitations on transfer of your ADSs.*

Your ADSs, which may be evidenced by ADRs, are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may refuse to deliver, transfer or register transfers of your ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary think it is advisable to do so because of any requirement of law or government or governmental body, or under any provision of the deposit agreement, or for any other reason.


	*Purchasers in this offering will pay a much higher price per share than the net tangible book value per share.*

If you purchase ADSs in this offering, the value of your ADSs based upon our actual book value will immediately be less than the offering price you paid. Based upon the net tangible book value of our shares at , your shares will be worth $ less per share than the price you paid in the offering. If we raise additional funding by issuing more equity securities and/or issue additional options, the newly issued shares will further dilute your percentage ownership of our shares and may also reduce the value of your equity. See “Dilution.”


	*The rights of shareholders in German companies differ in material respects from the rights of shareholders of corporations incorporated in the United States.*

Our company is incorporated in Germany, and the rights of our shareholders are governed by German law, which differs in many respects from the laws governing corporations incorporated in the United States. For example, individual shareholders in German companies do not have standing to initiate a shareholder derivative action, either in Germany or elsewhere, including the United States unless they meet thresholds set forth under German corporate law. Therefore, our public shareholders may have more difficulty protecting their interests in the face of actions by our management, directors or controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States. See “Description of American Depositary Shares.”


	It may be difficult for you to bring any action or enforce any judgment obtained in the United States against our company or members of our supervisory board or management board, which may limit the remedies otherwise available to our shareholders.

Our company is incorporated in Germany and the majority of our assets are located outside the United States. In addition, most of the members of our Supervisory Board, Management Board and other senior management, as well as the experts named in this prospectus, are nationals and residents of Germany. Most or all of the assets of these individuals are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States if you believe your rights have been infringed under the securities laws or otherwise. In addition, a German court may prevent you from enforcing a judgment of a United States court against us or these individuals based on the

securities law of the United States or any state thereof. A German court may not allow you to bring an action in Germany against us or these individuals based on the securities laws of the United States or any state thereof. See “Enforcing Civil Liabilities.”


	We have no present intention to pay dividends on our ordinary shares in the foreseeable future and, consequently, your only opportunity to achieve a return on your investment during that time is if the price of our ADSs appreciates.

We have no present intention to pay dividends on our ordinary shares in the foreseeable future. Any determination by our Supervisory and Management Boards to pay dividends will depend on many factors, including our financial condition, results of operations, legal requirements and other factors. Accordingly, if the price of our ADSs falls in the forseeable future, you will lose money on your investment, without the likelihood that this loss will be offset in part or at all by cash dividends.

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Our combined financial statements are prepared in accordance with U.S. GAAP and expressed in euro, the single currency of the participating member states in the Third Stage of the European Economic and Monetary Union (EMU) of the Treaty Establishing the European Community, as amended from time to time. In this prospectus, references to “euro” or “€” are to euro and references to “U.S. $” or “$” are to U.S. dollars. In this prospectus, for convenience only, we have translated the euro amounts reflected in our financial statements as of and for the year ended September 30, 2005 into U.S. dollars at the rate of €1.00 = $1.2058, the noon buying rate of the Federal Reserve Bank of New York for euro on September 30, 2005 and the euro amounts reflected in our financial statements as of and for the six months ended March 31, 2006 into U.S. dollars, at the rate of €1.00 = $1.2139, the noon buying rate of the Federal Reserve Bank of New York for euro on March 31, 2006. You should not assume that, on that or on any other date, one could have converted these amounts of euros into dollars at that or any other exchange rate. The noon buying rate for euro on July 17, 2006 was €1.00 = $1.2529. Unless otherwise specified, we have used this rate for translations related to this offering which are calculated in this prospectus.

Our financial year ends on September 30 of each year. References to any financial year refer to the year ended September 30 of the calendar year specified.

This prospectus contains market data that have been prepared or reported by Gartner Inc.,(Gartner), International Data Corporation (IDC), iSuppli Corporation,(iSuppli) and World Semiconductor Trade Statistics (WSTS).

Qimonda^tm, TwinFlash^®, AENEON^® and RLDRAM^® are the property of Infineon and have been assigned to us in connection with our carve-out. Pursuant to a co-development agreement between Infineon and Micron Technology, Inc., Micron has trademark rights to CellularRAM^tm used on or in connection with products sold inside the United States, whereas Infineon has those rights with respect to products sold outside the United States. All other trademarks, trade names or service marks appearing in this prospectus are the property of their respective owners.

Figures presented in tabular format may not add up to 100% due to rounding.

Special terms used in the semiconductor industry are defined in the glossary.

SPECIAL NOTE REGARDING

FORWARD-LOOKING STATEMENTS AND MARKET DATA

This prospectus, including particularly the sections entitled “Prospectus Summary”, “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “The Semiconductor Memory Industry” and “Our Business” contains forward-looking statements. These forward-looking statements include statements regarding our financial position; our expectations concerning future operations, margins, profitability, liquidity and capital resources; our business strategy and other plans and objectives for future operations; and all other statements that are not historical facts. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “thinks”, “estimates”, “seeks”, “predicts”, “potential”, and similar expressions. Although we believe that these statements are based on reasonable assumptions, they are subject to numerous factors, risks and uncertainties that could cause actual outcomes and results to be materially different from those projected. These factors, risks and uncertainties include those listed under “Risk Factors” and elsewhere in this prospectus. Those factors, among others, could cause our actual results and performance to differ materially from the results and performance projected in, or implied by, the forward-looking statements. As you read and consider this prospectus, you should carefully understand that the forward-looking statements are not guarantees of performance or results.

These factors expressly qualify all subsequent oral and written forward-looking statements attributable to us or persons acting on our behalf. New risks and uncertainties arise from time to time, and we cannot predict those events or how they may affect us. Except for any ongoing obligations to disclose material information as required by the federal securities laws, we do not have any intention or obligation to update forward-looking statements after we distribute this prospectus.

In addition, this prospectus contains information concerning the semiconductor memory products market generally and the DRAM market in particular, that is forward-looking in nature and is based on a variety of assumptions regarding the ways in which the semiconductor market and the DRAM market in particular will develop. These assumptions have been derived from independent market research and industry reports referred to in this prospectus. Some data are also based on our good faith estimates, derived from our review of internal surveys and the independent sources listed above.

If any of the assumptions regarding the market are incorrect, actual market results may differ from those predicted. Although we do not know what impact any such differences may have on our business, our future results of operations and financial condition and the market price of our ADSs may be materially adversely affected.

USE OF PROCEEDS

If we sell all 42,000,000 ADSs we are offering at an estimated initial public offering price of $17 per ADS (the midpoint of the price range shown on the cover page of this prospectus), we will receive approximately $684 million (€546 million). This estimate reflects the deduction of $30 million in estimated underwriting discount and offering expenses. This $30 million is the midpoint of our expected range of underwriting discounts and offering expenses of $28 million to $32 million. We will not receive any proceeds from the sale of ADSs by Infineon, including in respect of any sales of ADSs resulting from an exercise by the underwriters of their option to purchase additional ADSs from Infineon.

We currently intend to use the net offering proceeds we expect to receive from this offering to finance investments in our manufacturing facilities and for research and development. We plan to invest between €300 million and €350 million to expand our manufacturing capacity and improve our manufacturing efficiency, primarily at our 300mm manufacturing facility in Richmond, Virginia, and to a lesser extent at our backend facilities in Porto, Portugal and Suzhou, China. We plan to invest up to approximately €100 million for capacity upgrades at our 300mm manufacturing facility in Dresden, Germany. We expect to invest the remaining net offering proceeds in equipment for technology and product research and development at our R&D locations in Dresden, Germany and Xi’an, China and our R&D locations in North America. We anticipate that it will take us approximately one year to make these investments. Pending application of the proceeds, we intend to invest them in short term liquid investments. We plan to manage the exchange rate risk arising from these short term investments using currency market instruments.

A $1 change, up or down, in the midpoint of the range shown on the cover page of this prospectus would change our estimated net proceeds by $41 million. Similarly, a change in the number of ADSs we sell would increase or decrease our net proceeds. We believe that our intended use of proceeds would not be affected by changes in either our initial public offering price or the number of ADSs we sell.

DIVIDEND POLICY

We have not declared any cash dividends on our ordinary shares and have no present intention to pay dividends in the foreseeable future. Any determination by our Supervisory and Management Boards to pay dividends will depend on many factors, including our financial condition, results of operations, legal requirements and other factors. We may also become subject to debt instruments or other agreements that limit our ability to pay dividends.

All of the shares represented by the ADSs offered by this prospectus will have the same dividend rights as all of our other outstanding shares. Any distribution of dividends jointly proposed by our Management and Supervisory Boards requires the approval of our shareholders in a general meeting. The section “Articles of Association — Dividend Rights” explains in more detail the procedures we must follow and the German law provisions that determine whether we are entitled to declare a dividend.

For information regarding the German withholding tax applicable to dividends and related United States refund procedures, see “Taxation — German Taxation.”

EXCHANGE RATES

Fluctuations in the exchange rate between the euro and the U.S. dollar will affect the U.S. dollar amounts received by owners of our ADSs on conversion of dividends, if any, paid in euro on the ordinary shares and will affect the U.S. dollar price of our ADSs on the New York Stock Exchange. In addition, to enable you to ascertain how the trends in our financial results might have appeared had they been expressed in U.S. dollars, the table below shows the average exchange rates of U.S. dollars per euro for the periods shown. Average rates are computed by using the noon buying rate of the Federal Reserve Bank of New York for the euro on the last business day of each month during the period indicated.

Average exchange rates of the U.S. dollar per euro


Financial year ended September 30,	Average

2001		0.8886
2002		0.9192
2003		1.0839
2004		1.2174
2005		1.2714

Six months ended March 31,

2006		1.1960

The table below shows the high and low Federal Reserve noon buying rates for euro in U.S. dollars per euro for each month from January 2006 through July 19, 2006:

Recent high and low exchange rates of the U.S. dollar per euro


	High		Low

January 2006		1.2287		1.1980
February 2006		1.2092		1.1860
March 2006		1.2197		1.1886
April 2006		1.2624		1.2091
May 2006		1.2888		1.2607
June 2006		1.2953		1.2522
July 2006 (through July 19)		1.2822		1.2500

The noon buying rate on July 19, 2006 was €1.00 = $1.2560.

CAPITALIZATION

The following table sets forth, as of March 31, 2006:


	•	our actual consolidated capitalization; and

	•	our consolidated capitalization as adjusted to reflect the sale of the ADSs in this offering, after deducting the estimated underwriting discount and offering expenses using the midpoint of our expected range of the discount and expenses of $28 million to $32 million.


		As of March 31, 2006

		Actual			As adjusted⁽¹⁾

		(Unaudited)
		(in millions)
Short-term debt — Infineon		€	486		€	486
Short-term debt and current maturities — Third parties		€	—		€	—

Long-term debt, excluding current portion⁽²⁾			152			152
Business or shareholders’ equity:
	Share capital⁽³⁾		—			684
	Additional paid-in capital⁽³⁾		—			3,217
	Retained earnings		—			—
	Investments by and advances from Infineon⁽³⁾		3,355			—
	Accumulated other comprehensive loss		(74	)		(74	)

	Total business or shareholders’ equity		3,281			3,827

Total capitalization		€	3,919		€	4,465


⁽¹⁾	Calculated based on the sale of ADSs of an estimated initial public offering price of $17 per ADS (the midpoint of the price range shown on the cover page of this prospectus).

⁽²⁾	As of March 31, 2006, long term debt consists of a €124 million project-related term loan for our production facility in Portugal and a €28 million note payable to a government entity in connection with our Richmond plant. Both loans are unsecured. The term loan is unguaranteed.

⁽³⁾	Upon the carve-out of our Company, the Investments by and advances from Infineon were contributed as equity, reflected as €600 million share capital and the remainder as additional paid-in capital.

A $1.00 increase (decrease) in the assumed initial public offering price of $17 per ADS would increase (decrease) each of additional-paid-in-capital, total business or shareholders’ equity and total capitalization by €32 million, assuming the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and offering expenses payable by us, using the midpoint of our expected range of the discount and expenses of $28 million to $32 million.

DILUTION

Our consolidated net tangible book value at March 31, 2006, was approximately €2,950 million ($3,580 million), or €9.83 ($11.93) per share or ADS. Consolidated net tangible book value per share represents the amount of our total tangible assets, meaning total assets less intangible assets and deferred taxes, reduced by our total liabilities, divided by the number of shares outstanding.

If we sell all 42,000,000 ADSs that we are offering at an estimated price of $17 per ADS (the midpoint of the range shown on the cover page of this prospectus), after deducting the estimated underwriting discount and offering expenses, using the midpoint of our expected range of the discount and expenses of €28 million to €32 million, we will have net proceeds from this offering of $684 million (€546 million). Assuming that such proceeds were made available on March 31, 2006, our consolidated net tangible book value would have been €3,496 million ($4,264 million) on that date, or €11.65 ($14.21) per share or ADS. This represents an immediate increase in consolidated net tangible book value of €1.82 ($2.28) per share to existing shareholders and an immediate dilution of €2.35 ($2.79) per share or ADS to new investors purchasing ADSs in this offering. Dilution results from the fact that the per ordinary share price of our ADSs is in excess of the book value per ordinary share attributable to the existing shareholders for our currently outstanding ordinary shares. The following table illustrates this dilution:


Assumed initial public offering price per ADS		$	17.00

	Consolidated net tangible book value per ADS before the offering	$	11.93

	Increase per ADS attributable to new investors		5.07

Pro forma consolidated net tangible book value per ADS after the offering			12.47
Dilution per ADS to new investors		$	4.53

The following table summarizes, on a pro forma basis to give effect to the offering as of March 31, 2006, the number of ADSs purchased from us, the total consideration paid and the average price per ADS paid (before deducting the underwriting discount and our estimated offering expenses and assuming an initial public offering price of $17 per ADS):


		Total consideration

							Amount					Average price
		ADS purchased					in					per ADS

		Number		Percent			$		Percent			$

		(in millions, except percentages)
Existing shareholders			279		81.6	%		3,637		77.3	%		13.04
New investors			63		18.4			1,071		22.7			17.00

	Total		342		100.0	%		4,708		100.0	%		13.77

The tables and discussions above assume no exercise of the underwriters’ over-allotment option.

A $1.00 increase (decrease) in the assumed initial public offering price of $17 per ADS would increase (decrease) total consideration paid by existing shareholders, total consideration paid by new investors, total consideration paid by all shareholders and average price per ADS paid by existing shareholders by $(20) million, $63 million, $43 million and $(0.07) per ADS, assuming the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same and before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

SELECTED COMBINED FINANCIAL DATA

The following table presents selected combined financial data for the periods indicated. We derived the selected combined financial data as of and for the years ended September 30, 2004 and 2005 from our selected combined financial statements for those years. These combined financial statements have been audited by our independent registered public accounting firm, KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, whom we refer to as KPMG, and are included elsewhere in this prospectus. We derived the selected combined financial data as of and for the year ended September 30, 2003 from our unaudited combined financial statements for that year. We derived the selected combined financial data as of and for the six months ended March 31, 2005 and 2006 from our unaudited combined financial statements for those periods which are included elsewhere in this prospectus. In the opinion of our management, these unaudited combined financial statements include all adjustments necessary to present fairly the financial information for the period they represent.

We have been a segment of Infineon for all of the periods indicated. Infineon did not allocate most non-operating financial statement line items among its segments during that time. We have not prepared complete selected combined financial data reflecting these items as of and for the financial years ended September 30, 2001 and 2002 because of the significant cost and effort involved with properly preparing, compiling and verifying all the financial information needed to present our complete results of operations and financial position as a stand-alone company for periods so long ago. We derived the selected financial data for the financial years ended September 30, 2001 and 2002 from Infineon’s reported data of its Memory Products segment for these periods. This financial data was prepared in accordance with US GAAP and on a basis consistent with the financial data for the later periods we have presented.

Infineon contributed our business to our company on May 1, 2006. We refer to this contribution as our carve-out. Our combined financial information for all periods before the date of our carve-out from Infineon may not be representative of what our results would have been had we been a stand-alone company during any of these periods. In addition, historical results are not necessarily indicative of the results that you may expect for any future period.


																				As of and for the six months ended
		As of and for the financial year ended September 30,																		March 31,

		2001			2002			2003			2004			2005			2005			2005			2006			2006

		(Unaudited)⁽¹⁾			(Unaudited)⁽¹⁾			(Unaudited)									(Unaudited)⁽²⁾			(Unaudited)			(Unaudited)			(Unaudited)⁽³⁾
		(in millions, except per share data)
Selected Combined Statement of Operations data:
Net sales		€	1,728		€	1,971		€	2,544		€	3,008		€	2,825		$	3,406		€	1,399		€	1,606		$	1,950
Cost of goods sold			2,086			2,106			2,090			2,063			2,164			2,609			887			1,396			1,694

Gross (loss) profit			(358	)		(135	)		454			945			661			797			512			210			256
Research and development expenses			317			311			298			347			390			469			204			215			261
Selling, general and administrative expenses			230			179			209			232			206			248			109			113			138
Restructuring charges			35			7			3			2			1			1			1			—			—
Other operating expenses (income), net			22			(6	)		16			194			13			16			7			14			18

Operating (loss) income			(962	)		(626	)		(72	)		170			51			63			191			(132	)		(161	)
Interest income (expense)									(35	)		(30	)		(7	)		(9	)		2			(16	)		(20	)
Equity in earnings (losses) of associated companies									22			(16	)		45			54			17			27			33
Gain (loss) on associated company share issuance									(2	)		2			—			—			—			—			—
Other non-operating income (expense), net									56			(11	)		13			15			(3	)		6			8
Minority interests									11			17			2			2			5			(3	)		(4	)

Income (loss) before income taxes									(20	)		132			104			125			212			(118	)		(144	)
Income tax expense									(55	)		(211	)		(86	)		(103	)		(90	)		(18	)		(21	)

Net (loss) income								€	(75	)	€	(79	)	€	18			22		€	122		€	(136	)	$	(165	)

Net (loss) income per share and ADS (unaudited)⁽⁴⁾:
	Basic and diluted							€	(0.25	)	€	(0.26	)	€	0.06		$	0.07		€	0.41		€	(0.45	)	$	(0.55	)
Number of shares used in earnings per share⁽⁴⁾computation:
	Basic and diluted								300			300			300			300			300			300			300
Selected Combined Balance Sheet data:
Cash and cash equivalents								€	544		€	577		€	632		$	762					€	638		$	774
Marketable securities									23			2			—			—			—			—			—
Working capital, net⁽⁵⁾									787			78			437			527						596			723
Total assets									4,634			4,750			4,861			5,862						5,259			6,384
Short-term debt, including current portion of long-term debt									51			551			524			632						486			590
Long-term debt, excluding current portion									516			27			108			130						152			185
Business equity									2,736			2,779			2,967			3,578						3,281			3,982
Selected Combined Cash Flow data:
Net cash provided by (utilized in) operating activities								€	300		€	693		€	483		$	583		€	374		€	(5	)	$	(6	)
Net cash used in investing activities									(242	)		(1,048	)		(971	)		(1,171	)		(559	)		(468	)		(568	)
Depreciation and amortization									815			752			528			636			239			347			421


⁽¹⁾	Figures for 2001 and 2002, other than those provided, are not available without undue effort to properly prepare, compile and verify all the financial information needed to present the complete results of operations and financial position as a stand-alone company for periods so long ago.

⁽²⁾	Translated into U.S. dollars solely for the convenience of the reader at the rate of €1.00 = $1.2058, the noon buying rate of the Federal Reserve Bank of New York for euro on September 30, 2005.

⁽³⁾	Translated into U.S. dollars solely for convenience of the reader at the rate of €1.00 = $1.2139, the noon buying rate of the Federal Reserve Bank of New York for euro on March 31, 2006.

⁽⁴⁾	Before the carve-out, the Memory Products business was wholly owned by Infineon, and there were no earnings (loss) per share for our company. Following the carve-out, earnings (loss) per share reflects the contributed capital structure for all periods presented.

⁽⁵⁾	Calculated by subtracting current liabilities from current assets.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis of our financial condition and results of operations is based on, and should be read in conjunction with, our audited combined financial statements as of and for the years ended September 30, 2004 and 2005, our unaudited combined financial statements as of and for the six months ended March 31, 2005 and 2006 and the accompanying notes and the other financial information included elsewhere in this prospectus. We have prepared our combined financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

This discussion and analysis of our financial condition and results of operations contains forward-looking statements. Statements that are not statements of historical fact, including expressions of our beliefs and expectations, are forward-looking in nature and are based on current plans, estimates and projections. Forward-looking statements are applicable only as of the date they are made, and we undertake no obligation to update any of them in light of new information or future events. Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results or outcomes to differ materially from those expressed in any forward-looking statement. These factors include those identified under the headings “Risk Factors” and “Special Note Regarding Forward-Looking Statements and Market Data”.

Executive Summary

Our financial performance in our financial year ended September 30, 2005, and in the first six months of our 2006 financial year as shown by the combined financial statements we prepared in connection with the carve-out, demonstrated important elements of the strategy we are adopting in response to developments in our industry.

We continued to increase the volume of memory we sold, based on bits of data storage (which we refer to as our bit shipments) during our 2005 financial year and in the first six months of our 2006 financial year. However, these increased bit shipments did not offset the impact of the declining DRAM prices that affected our industry during the year. Our average per-megabit selling prices were 27% lower in our 2005 financial year than in our 2004 financial year and 42% lower in the six months ended March 31, 2006 than in the six months ended March 31, 2005. This, exacerbated by the foreign exchange effects resulting from the depreciation of the U.S. dollar against the euro, caused our net sales to decline in our 2005 financial year. In the first six months of our 2006 financial year, our net sales increased despite the price pressure as our product mix continued to shift towards the relatively higher priced graphics, mobile and consumer DRAM products, and we considerably increased our overall bit shipments. More favorable exchange rates assisted this result.

Despite the continuous price pressure, we were able to retain positive operating income in our 2005 financial year as we focused on our strategic direction. We increased the share of our production based on 300mm wafers and enhanced our productivity in other ways, primarily through conversion of capacities to the 110nm process node. Late in the year, we began mass production based on the 90nm node. We also increased sales of graphics, mobile and consumer DRAMs. These types of products generally command higher and more stable prices than standard DRAMs. Our net income was €18 million in our 2005 financial year compared to a net loss of €79 million in the prior year.

In the six months ended March 31, 2006, we realized both an operating loss and a net loss. While the trends noted above continued, they were overshadowed during the first three months of the 2006 financial year by a very substantial price decline in DDR2 DRAM products due to a mismatch between the high volume of DDR2 memories being produced and other semiconductor manufacturers’ lower supply of logic chipsets compatible with them. While this situation improved markedly in recent months, the six month period ended with a net loss.

We continued to generate significant amounts of cash from operations. We invested this cash as well as additional cash advanced to us by Infineon in our manufacturing facilities, as we continued our migration to 300mm wafers and the 90nm process node.

Overview


	*Business Overview*

We are one of the world’s leading suppliers of semiconductor memory products. We design semiconductor memory technologies and develop, manufacture, market and sell a large variety of semiconductor memory products on a chip, component and module level. We were the fourth largest DRAM supplier in calendar year 2005, as measured by revenues and bits shipped, and by the end of the first half of our 2006 financial year, were the second largest DRAM supplier based on revenues and bits shipped, according to Gartner. Our principal products are DRAM components and modules for use in a wide variety of electronic products. In our financial year ended September 30, 2005, 56% of our net sales were of standard DRAMs for use in PC, notebook and workstation applications, 34% were of DRAM products for more advanced infrastructure applications and graphics, mobile and consumer DRAMs. Flash memory, other products and licensing revenues accounted for the remaining 10%. In the six months ended March 31, 2006, 52% of our net sales were of standard DRAMs for use in PC, notebook and workstation applications, 44% were of DRAM products for more advanced infrastructure applications and graphics, mobile and consumer DRAMs. Flash memory, other products and licensing revenue accounted for the remaining 4%. Our net sales were €2,825 million in our financial year ended September 30, 2005, our EBIT during that period was €111 million and our net income was €18 million. Our net sales were €1,606 million in the six months ended March 31, 2006, our EBIT during that period was a loss of €102 million and our net loss was €136 million.


	*Our Carve-Out from Infineon and our Combined Financial Statements*

On November 17, 2005, Infineon announced its intention to separate its Memory Product business from the remainder of its activities and place the Memory Products business in a stand-alone legal structure, with the preferred goal of conducting a public offering of the shares of the new company. For this purpose, substantially all of the assets, liabilities, operations and activities, as well as the employees, of Infineon’s former Memory Products segment were contributed to us effective May 1, 2006. This excluded the Memory Products operations in Korea and Japan, which are held in trust for us by Infineon pending their contribution and transfer. The operations in Korea and Japan are governed by an agreement between us and Infineon under which sales and development personnel in the region act for Qimonda. While Infineon’s investment in the Inotera joint venture and Infineon’s investment in the Advanced Mask Technology Center (AMTC) in Dresden have been contributed to us, the legal transfer of these investments is not yet effective. In the case of Inotera, Taiwanese legal restrictions are delaying the legal transfer, while Infineon’s co-venturers have to consent to the transfer of the AMTC interest, which consent may not be unreasonably withheld. Infineon is obligated under the contribution agreement and a separate trust agreement with us to hold the Inotera shares in trust for us and exercise shareholder rights, including board appointments and voting, at our instruction, while the AMTC interest is held for our economic benefit pursuant to the contribution agreement. For as long as Infineon holds our interest in Inotera and AMTC, we must exercise our shareholder rights through Infineon, which is a more cumbersome and less efficient method of exercising these rights than if we held the interest directly. We do not expect these administrative complexities to have a material adverse effect on our business, financial condition and results of operations. We refer to the former segment’s assets, liabilities, operations and activities as the “Memory Products business”. Our company is currently a wholly owned subsidiary of Infineon.


	*Basis of Presentation*

Our combined financial statements have been prepared in accordance with U.S. GAAP. They are presented on a “carve-out” basis and comprise the combined historical financial statements of the transferred Memory Products business assuming that we had existed as a separate legal entity for all of the financial periods presented. These financial statements have been derived from the consolidated financial statements and historical accounting records of Infineon, employing the methods and assumptions we describe below and in note 1 to the combined financial statements. Most of the assets, liabilities, operations and activities of the Memory Products business are those that comprised the Memory Products segment of Infineon during the financial periods presented.

Methodology. Infineon took two broad steps to reflect the structure of the Memory Products business in the historical financial data for the periods presented in this prospectus. The first step was to determine which companies and business areas of Infineon belong to the Memory Products business. The second step was to combine these companies and business areas for accounting purposes.

The combined financial statements differ from the segment data in Infineon’s consolidated financial statements in terms of their stated objectives as well as in aspects of the information they convey. The objective of Infineon’s segment reporting was to present its Memory Products business as an integral part of Infineon. Infineon historically allocated most financial statement items among its segments, including the Memory Products segment. However, for purposes of reporting segment data, Infineon did not allocate some items among its various segments, including certain corporate overhead costs that supported Infineon’s businesses overall, including the Memory Products business. The combined financial statements are intended to present the Memory Products business on a “carve-out” basis, which means as if it had been a separate legal entity during all of the periods presented in this prospectus. In other words, the combined financial statements present our historical financial condition, statements of operations and cash flows based on the fictitious assumption that our structure as it stands after the carve-out had already existed in the past. The combined financial statements therefore reflect further allocations to us, consistent with our post-carve-out operation as a separate legal entity.

Statements of Operations. The combined statements of operations reflect all revenues and expenses that were attributable to the Memory Products business. Operating expenses or revenues of the Memory Products business that could be specifically identified as pertaining to the Memory Products business were charged or credited directly to it without allocation or apportionment. This was the case for all of the revenues appearing on the combined statements of operations. Operating expenses that could not be specifically identified as pertaining solely to the Memory Products business were allocated to us to the extent they were related to us. The combined statements of operations include expense allocations for certain corporate functions historically provided to us by Infineon, including basic research costs, employee benefits, incentives and pension costs, interest expense, restructuring costs, the costs of our share of central departments such as finance and treasury and controlling and other costs. These allocations were made on a specifically identifiable basis or using the relative percentages, as compared to Infineon’s other businesses, of total sales, cost of goods sold, other cost measures, headcount or other reasonable methods. We and Infineon considered these allocations to be a reasonable reflection of the utilization of services provided. Our expenses as a separate, stand-alone company may be higher or lower than the amounts reflected in the statement of operations for historical periods. We describe the allocation methods we used in note 1 to the combined financial statements.

Balance Sheets. As a general rule, the assets and liabilities attributable to the Memory Products business were contributed to us at their historical book values as shown in Infineon’s balance sheet. Unless otherwise noted, all assets and liabilities specifically identifiable as pertaining to the Memory Products business are included in the combined financial statements. Where legal entities and their businesses are wholly allocable to the Memory Products business, the shares of these entities were transferred to the Memory Products business. In some cases, including at the Infineon parent company level, the memory-related assets and liabilities were identified and carved out by means of asset and liability transfer transactions.

The assets and liabilities that were directly identifiable as pertaining to Infineon’s Memory Products business include inventories, fixed assets and accounts receivable. The assumptions and allocations used for assets and liabilities that were not specifically identifiable as being part of Infineon’s Memory Products business are set forth in note 1 to the combined financial statements.

Investments by and Advances from Infineon and our Capital Structure. Because a direct ownership relationship did not exist among the various entities comprising the Memory Products business prior to our carve-out, Infineon’s investments in and advances to the Memory Products business represent Infineon’s interest in the recorded net assets of the Memory Products business. These are shown as business equity in lieu of shareholder’s equity in the combined financial statements. All intercompany transactions, including purchases of inventory and charges and cost allocations for facilities, functions and services performed by Infineon for the Memory Products business, are reflected in this business equity. After we became a separate

company and Infineon contributed the Memory Products business to us, this business equity became our shareholders’ equity.

Capital Structure. The Memory Products business has historically relied on Infineon to provide financing of its operations. Because we have historically used more cash in our investing activities than we have generated through our operations, we have historically relied on Infineon to provide a portion of the financing necessary to fund our capital expenditures. These financings are reflected in our short-term debt (which reflected €524 million of interest-bearing advances to us from Infineon at September 30, 2005) and in our business equity. The capital structure attributed to the Memory Products business in connection with the preparation of the combined financial statements is based on the business equity concept and shows only €108 million of independent financing on our combined balance sheet as of September 30, 2005. As such, it is not indicative of the capital structure that the Memory Products business would have required had it been an independent company during the financial periods presented.

The preparation of the accompanying combined financial statements required us to make estimates and assumptions, as described in “— Critical Accounting Policies” below. We believe that the estimates and assumptions underlying the combined financial statements are reasonable. However, the combined financial statements included herein may not necessarily reflect our results of operations, financial position and cash flows in the future or what our results of operations, financial position and cash flows would have been had we been a separate, stand-alone company during the periods presented.

Factors that Affect our Results of Operations


	*Relationship between DRAM prices and reduced unit costs*

The average selling prices of standard DRAMs and, to a certain extent, other semiconductor memory products, have generally declined throughout the semiconductor memory products industry during the past ten years. We expect them to continue to do so in future periods irrespective of industry-wide fluctuations as a result of, among other factors, technological advancements and cost reductions. Although we may from time to time be able to take advantage of higher selling prices typically associated with new products and technologies, we nevertheless expect the prices of new products to also decline over time, in certain cases very rapidly, primarily as a result of market competition. We have adopted enhancements to our technology to reduce our per-megabit manufacturing costs. These efforts have included the introduction of new technology such as smaller feature sizes and manufacturing using 300mm wafers. We expect that these measures will enable us to reduce our costs per chip and thereby offset declining chip prices. We will realize the full effects of these manufacturing unit cost reductions after our conversion to the 90nm technology node is complete and we have fully ramped up our 300mm wafer production in Richmond, Virginia and our back-end production in Suzhou, China. In the meantime, we are incurring higher per-unit costs in connection with this conversion and ramp-up. We have also increased our production in Asia, where we can take advantage of lower-cost economies. Our margins are to a significant extent dependent on the extent to which we can reduce our unit manufacturing costs as prices decline.


	*Relationship Between the Capital Intensive Nature of our Business and the Industry’s Cyclicality*

Declining prices have driven manufacturers, including ourselves, to invest substantial sums to shrink die sizes and to construct modern manufacturing facilities that permit the manufacture using larger wafers at lower costs per chip. We have made significant investments, individually and together with the other companies with which we cooperate, to meet the challenges these lower prices have brought. For example, during our 2005 financial year, we invested a total of €926 million in our property, plant and equipment. The majority of this capital expenditure was invested in our 300mm fab in Richmond, Virginia, increasing our ratio of bits manufactured using 300mm wafers to the point where we believe we are ahead of our major competitors on this measure. In the first half of our 2006 financial year, we invested a total of €482 million in property, plant and equipment, primarily related to our 300mm fab in Richmond. However, as we continue to ramp up our 300mm capacity, many of our competitors are expanding their own capacities. To the extent that demand for DRAM does not keep pace with these capacity increases, an oversupply situation could arise in the industry, as has occurred on a cyclical basis in the past.


	*Exchange Rate Fluctuations*

We are subject to two categories of exchange rate risks, transaction and translation risk.

Transaction risk arises where sales of a product are generated in one currency but costs relating to those revenues are incurred in a different currency. In the case of transaction risk, changes in the value of the euro relative to the U.S. dollar and other currencies generally have interrelated consequences. For example, an increase in the value of the euro relative to the U.S. dollar and other currencies generally has these effects:


	•	our margins (in euros) decline or become negative to the extent our costs were incurred in euros and the sales were generated in currencies weaker than the euro, and

	•	our competitiveness may decline as compared with competitors based in the countries with weaker currencies because our products manufactured in Europe will have been produced at constant costs (in euro) while their (constant) costs denominated in weaker currencies will appear to have declined.

Conversely, a decrease in the value of the euro relative to the U.S. dollar and other currencies generally has these effects:


	•	our margins (in euros) increase to the extent our costs were incurred in euros and the sales were generated in currencies stronger than the euro, and

	•	our competitiveness may increase as compared with competitors based in the countries with stronger currencies because our products manufactured in Europe will have been produced at constant costs (in euro) while their (constant) costs denominated in stronger currencies will appear to have increased.

We prepare our combined financial statements in euro. However, most of our sales volumes, as well as many of our worldwide costs, primarily those relating to our design, manufacturing, selling and marketing, general and administrative, and research and development activities, are denominated in other currencies, principally the U.S. dollar. The portions of our sales and costs denominated in currencies other than the euro are exposed to exchange rate fluctuations in the values of these currencies relative to the euro. If our non-euro denominated expenses do not match our non-euro denominated sales, this currency difference may have an adverse effect on our operating result.

Over time, transaction risk could adversely affect our cash flows and results of operations to the extent we are unable to reflect changes in exchange rates in the pricing of the products in local currency. Given our revenue and expense structure, in which most of our revenues are denominated in dollars but a substantial portion of the costs relating to those revenues are in euro, we experienced pressure, on our gross margin in particular, in our 2004 and 2005 financial years as a result of transaction risk. The effects of transaction risk are not quantified in our combined financial statements.

Translation risk refers to the fact that the euro-denominated amounts in our consolidated financial statements will differ based on the exchange rates we use to prepare our euro-denominated financial statements. Our subsidiaries located outside the euro zone prepare their financial statements in their local currencies, many of which have depreciated against the euro during our 2004 and 2005 financial years. When we prepare our financial statements, we translate the local currency amounts in which the financial statements of our non-euro zone subsidiaries are prepared into euro. Changes in the value of these currencies relative to the euro from period to period therefore affect our results of operations and financial condition as expressed in euro. Currency translation risks do not affect local currency cash flows or results of operations, but do affect our consolidated annual financial statements. In general, an increase in the euro value relative to the U.S. dollar and other currencies will result in a lower euro value of the sales generated in currencies that have depreciated relative to the euro. Even if the margin on these sales remains constant in a non-euro currency, its value translated into euro will be reduced.

Additional information on transaction and currency translation risks and our efforts to manage them are contained in “— Quantitative and Qualitative Disclosure About Market Risk”.

Strategic Cooperations

We believe that cooperations, such as alliances for research and development, and manufacturing and foundry partnerships, provide us with access to several benefits that can be derived from improved economies of scale. These benefits include sharing risks and costs with our business partners, reducing our capital requirements, developing a broader range of products, gaining inter-cultural know-how and accessing additional production capacities. We have invested substantial sums in these cooperations in past periods, and they are in some cases associated with commitments for further investments. The €138 million in commitments as of September 30, 2005 relate to our investments in Infineon Technologies Suzhou Co., Ltd. In addition, we have extensive commitments to purchase products from our manufacturing partners. The commitments relating to those purchases can not accurately be quantified because they are dependent on future market prices for memory products. These purchases aggregated approximately €520 million in our 2005 financial year and €433 in the first half of our 2006 financial year.

The most significant of our current co-operations in terms of impact on our financial statements are:


	•	Nanya. In November 2002, Infineon entered into agreements with Nanya Technology Corporation, a Taiwanese corporation, that set out the terms of a strategic cooperation for the development of DRAM products and DRAM process technology and for the foundation of a joint venture to construct and operate a 300mm manufacturing facility in Taiwan, called Inotera Memories, Inc. Inotera’s 300mm manufacturing facilities in Taiwan employs production technology developed under Infineon’s joint development agreements with Nanya. Under the first of these agreements, we are co-developing and sharing the development costs for advanced 90nm and 75nm process technologies. We also entered into a new agreement with Nanya in September 2005, under which we will jointly develop advanced 58nm technologies. Inotera’s current capacity is approximately 60,000 300mm wafer starts per month. Under the terms of the venture, Nanya and we each purchase 50% of Inotera’s output. Inotera completed an initial public offering of its common stock in Taiwan in March 2006, after which Infineon and Nanya each owned 41.4% of Inotera’s shares. Thereafter, in May 2006, Inotera listed its Global Depositary Receipts, or GDRs, on the Luxembourg Stock Exchange, after which Infineon and Nanya each owned 36.0% of Inotera’s shares. We invested €425 million in the venture during the two year period ended September 30, 2005. We account for Inotera by the equity method. Because of Inotera’s significance for us within the meaning of Rule 3-09 of the SEC’s Regulation S-X, we have included, elsewhere in this prospectus, Inotera’s audited consolidated financial statements as of and for the years ended December 31, 2004 and 2005.

	•	CSVC. In June 2003, Infineon established a venture with China Singapore Suzhou Industrial Park Ventures Co., Ltd. (CSVC) in Suzhou, China. CSVC is a domestic limited liability company organized under the laws of the People’s Republic of China. The venture, Infineon Technologies Suzhou Co., Ltd. (recently renamed Qimonda Technologies (Suzhou) Co., Ltd.), constructed a back-end facility for the assembly and testing of our products, which officially opened in September 2004. Infineon is required to purchase the entire output of the facility. In the 2005 financial year Infineon invested $29 million in the venture and is contractually required to invest an additional $167 million through 2008. We undertook these commitments as part of the carve-out. Infineon contributed its ownership in Infineon Technologies Suzhou Co., Ltd. to us in the carve-out effective May 1, 2006 (45% of the venture’s share capital, representing nearly 100% of the voting rights in the venture). Because we exercise voting control over this venture, we consolidate it in our combined financial statements. We plan to increase our investment in Qimonda Technologies (Suzhou) Co., Ltd. such that we will hold approximately 72.5% of its share capital by the end of 2008, with CSVC owning the remaining 27.5%. We have the option to acquire CSVC’s stake at the nominal investment value plus accrued and undistributed returns on that investment. The joint venture intends to arrange external financing for any further investment required to purchase additional equipment. There can be no assurance that this external financing can be obtained at favorable terms or at all.

	•	SMIC. In December 2002 Infineon entered into an agreement, as most recently amended in November 2005, with Semiconductor Manufacturing International Corporation (SMIC), a Cayman Islands

corporation with head offices in Shanghai, China. As amended, the agreement provides access to additional DRAM manufacturing capacity (up to 20,000 200mm wafer starts per month plus up to 15,000 300mm wafer starts per month). This agreement has been assigned to us as part of the carve-out.

• Winbond. In May 2002 and August 2004, Infineon entered into product purchase and capacity reservation agreements with Winbond Electronics Corporation, a Taiwanese corporation, which give us access to additional DRAM production capacity (up to 19,000 200mm wafer starts per month plus up to 15,000 300mm wafer starts per month). We procure an immaterial quantity of our finished products under the 2002 agreement. These agreements have been assigned to us as part of the carve-out.

Please see “Our Business” and “Arrangements between Qimonda and the Infineon Group” for more details on these strategic co-operations.

As part of our carve-out, some agreements, including licensing, purchase and shareholding agreements, and investments of Infineon relating to our business were not be transferable to us, or restrictions are delaying this transfer or, in the future, could cause our interests to revert to Infineon. Any such reversion could materially adversely effect our financial condition and results of operations. See “Risk Factors — Risks related to our operations — Some of our agreements with strategic partners, such as our Inotera Memories joint venture with Nanya, have restrictions on transfers of the shares of the ventures they create that could cause our ownership or equity interest in these ventures to revert to Infineon, if Infineon ceases to be our majority owner and Infineon is holding our interest in Inotera in trust for us, which could subject us to loss were Infineon to become insolvent.”

Critical Accounting Policies

The preparation of our combined financial statements required us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the years reported. We have identified the following critical accounting policies and related assumptions, estimates and uncertainties, which we believe are essential to understanding the underlying financial reporting risks and the impact that these accounting methods, assumptions, estimates and uncertainties have on our reported financial results. These policies have the potential to have a significant impact on our combined financial statements, either because of the significance of the combined financial statement item to which they relate or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events which are continuous in nature. Actual results may differ from our estimates under different assumptions and conditions. Our critical accounting policies include:


	•	those made in connection with our initial preparation of the combined financial statements;

	•	recoverability of long-lived assets;

	•	valuation of inventory;

	•	pension plan accounting;

	•	realization of deferred tax assets;

	•	revenue recognition; and

	•	contingencies.


	*Assumptions and Estimates We Made in Preparing Our Combined Financial Statements*

The preparation of our combined financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as disclosure of contingent amounts and liabilities, at the dates of the financial statements and the reported amounts of revenues and expenses during the financial periods we present. Actual results could differ materially from those estimates. In addition, due to the significant relationship between Infineon and our company, the terms of the carve-out transactions, the

allocations and estimations of assets and liabilities and of expenses and other transactions between our business and Infineon are not the same as those that would have resulted from transactions among unrelated third parties. We believe that the assumptions underlying the combined financial statements are reasonable.

Allocations from Infineon during our 2004 and 2005 financial years and the first six months of our 2005 and 2006 financial years, are reflected in our combined statements of operations as follows:


	For the				For the six
	financial year				months
	ended				ended
	September 30,				March 31,

	2004		2005		2005		2006

	(in millions)
Cost of goods sold	€	180	€	168	€	65	€	104
Research and development expenses		43		27		16		15
Selling, general and administrative expenses		160		109		66		66
Other operating expenses, net		2		—		—		—
Restructuring charges		2		1		1		—

	€	387	€	305	€	148	€	185

See note 1 to the combined financial statements for a description of these assumptions. However, these transactions, allocations and estimates are not indicative of those that would have obtained had our company actually been operated on a stand-alone basis, nor are they indicative of our future transactions or of our expenses or results of operations. In addition, the process of preparing the combined financial statements does not permit the revaluation of historical transactions to attempt to introduce an arms’ length relationship where one did not at the time exist. We believe that it is not practicable to estimate what the actual costs of our company would have been on a stand-alone basis if it had operated as an unaffiliated entity. Rather than allocating the expenses that Infineon actually incurred on behalf of our business, we would have had to choose from a wide range of estimates and assumptions that could have been made regarding joint overhead, joint financing, shared processes and other matters. Any of these assumptions may have led to unreliable results and would not have been more useful as an indicator of historical business development and performance than the methods employed in preparing the combined financial statements.


	*Recoverability of Long-Lived Assets*

Our business is extremely capital-intensive, and requires significant investment in property, plant and equipment. Due to rapid technological change in the semiconductor industry, we anticipate the level of capital expenditures to be significant in future periods. During the 2005 financial year, we spent €926 million, and during the first six months of our 2006 financial year, we spent €482 million to purchase property, plant and equipment. At September 30, 2005, the carrying value of our property, plant and equipment was €2,216 million and at March 31, 2006, the carrying value was €2,313 million. We have acquired other businesses, which resulted in the generation of significant amounts of long-lived intangible assets, including goodwill. At September 30, 2005 we had long-lived intangible assets of €157 million, and at March 31, 2006 we had long-lived intangible assets of €152 million.

We adopted the provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”, as of October 1, 2001. Pursuant to the requirements of SFAS No. 142, a test for impairment is done at least once a year.

We review long-lived assets, including intangible assets, for impairment when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying value of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying value of the assets exceeds the fair value of the assets.

Estimated fair value is generally based on either appraised value or discounted estimated future cash flows. Considerable judgment is necessary to estimate discounted future cash flows.

We tested goodwill for impairment pursuant to SFAS No. 142, however did not recognize any impairment charges during the years ended September 30, 2004 and 2005.


	*Valuation of Inventory*

The memory industry has historically experienced periods of extreme volatility in product demand and in industry capacity, resulting in significant price fluctuations. See “— Factors that Affect our Results of Operations” and “Risk Factors — Risks related to the semiconductor memory products industry — The DRAM industry is subject to cyclical fluctuations, including recurring periods of oversupply, which result in large swings in our operating results, including large losses.” These significant price fluctuations have often occurred within relatively short timeframes. For example, the average “spot” market price for 256Mb DDR 400 DRAM as reported by DRAM exchange fell from $4.00 at January 26, 2005 to $2.42 at March 30, 2005, a drop of nearly 40% in two months.

We value inventory on a quarterly basis at the lower of cost or market value. Market value of inventory represents the net realizable value for finished goods and work-in-process. As of September 30, 2004 and 2005, we had inventory of €368 million and €484 million, respectively, and as of March 31, 2006 we had inventory of €622 million. We reviewed the recoverability of inventory based on regular monitoring of the size and composition of inventory positions, current economic events and market conditions, projected future product demand and the pricing environment. This evaluation is inherently judgmental and requires material estimates. These estimates relate both to forecasted product demand and to the pricing environment. Both of these are susceptible to rapid and significant change.

In both the 2004 and 2005 financial years, we recorded recurring mark-to-market adjustments to value our inventory according to this policy. Likewise, in future periods write-downs on inventory may become necessary due one or more of the following:


	•	temporary or fundamental price declines as a consequence of an imbalance of demand and supply, which can occur due to weak demand and/or greatly increased supply;

	•	technological obsolescence due to rapid developments of new products and technological improvements; and

	•	changes in economic circumstances or in other conditions that impact the market price for our products.

These factors could result in adjustments to the valuation of inventory in future periods, and have a material adverse effect on our consolidated financial statements.


	*Pension Plan Accounting*

We account for our pension-benefit liabilities and related postretirement benefit costs in accordance with SFAS No. 87 “Employers’ Accounting for Pensions”. Our employees currently participate in Infineon’s pension plans, which generally specify the amount of pension benefit that each employee will receive for services performed during a specified period of employment (so-called “defined benefit plans”). Nearly all of Infineon’s pension plans are defined benefit plans. In our financial statements, the level of plan assets, or funding, of our pension obligations is proportional to Infineon’s funding of its pension plans in relation to its pension obligations. We plan to fund our pension obligations independently after our carve-out and expect to continue Infineon’s practice of investing these assets in a well-diversified portfolio of investments aimed at maximizing long-term returns.

Our pension benefit costs and liabilities are actuarially calculated using various assumptions, including discount rates, expected return on plan assets, rate of compensation increase and rate of projected future pension increases. These assumptions are based on prevailing market conditions, long-term historical averages, and estimates of future developments of rates of returns. Please see note 27 to the combined financial

statements for a quantification of the major assumptions underlying our pension plan accounting, information on our plan asset allocations and a discussion of our current funding status. A significant variation in one or more of the underlying assumptions could have a material effect on the measurement of our long-term obligation or our pension cost and therefore our financial condition or results of operation.

If the assumptions used to calculate the pension liabilities and expected return on plan assets turn out to be accurate, we will pay our recorded net liability as pension benefits to our employees after they retire, and no adjustments to our balance sheet accrual will be necessary. Differences between actual experience and these assumptions, however, can result in differences between our recorded net liability and the related actuarially calculated amount. These differences, also referred to as actuarial gains and losses, are generally not recognized in the consolidated statements of operations as they occur. Instead, due to the long-term nature of pensions and the related assumptions, they affect pension costs over the remaining service years of the relevant employees. However, differences exceeding a standard significance threshold are recorded immediately as pension cost. Our actuarial losses amounted to €1 million in the 2004 financial year and €4 million in the 2005 financial year. The increase in actuarial losses in the 2005 financial year was primarily the result of the reduction of the discount rate used to determine the benefit obligation and our use of new mortality tables in the actuarial calculations for our domestic (German) pension plans.


	*Pension Benefits — Sensitivity Analysis*

A one percentage point change in the major assumptions mentioned above would have resulted in the following impact on pension cost (and therefore in our net income) for the 2005 financial year:


	Effect on net periodic
	pension costs

	One percent			One percent
	increase			decrease

	(in millions)
Discount rate	€	(1.0	)	€	1.4
Rate of compensation increase		0.9			(0.4	)
Rate of projected future pension increases		1.0			(0.5	)
Expected return on plan assets		0.3			0.2
Total impact on pension cost (and therefore, net income)	€	1.2		€	0.7

Increases and decreases in the discount rate, rate of compensation increase and rate of projected future pension increases, which are used in determining the pension obligation, do not have a symmetrical effect on pension cost primarily due to the compound interest effect created when determining the present value of the future pension obligation. If more than one assumption were changed simultaneously, the impact would not necessarily be the same as if only one assumption were changed in isolation.

Our pension plans were underfunded by an aggregate of €31 million as of September 30, 2005, and after adjusting for unrecognized actuarial losses of €4 million as described above, we recognized the remaining €27 million as a liability on our balance sheet. As the present value of our expected future benefits payable over the years through 2015 was €19 million on September 30, 2005, we do not perceive a need to increase our plan funding in the immediate future. We currently do not have our own separate pension plans and until we do, our employees will continue to participate in Infineon’s plans. As part of the carve-out, Infineon transferred to us the portion of pension liabilities related to our employees together with a proportional share of its pension assets to pay for those liabilities.


	*Realization of Deferred Tax Assets*

Income taxes as presented in the accompanying combined financial statements are determined on a separate return basis. Although in numerous tax jurisdictions, including Germany, the company was included in the consolidated tax returns of Infineon, where the Memory Products business was only a part of an Infineon entity, the tax provision has been prepared on an as-if separate company basis except that, pursuant

to the terms of the contribution agreement between us and Infineon, any net operating losses generated by the Memory Products business and carried forward are treated as a reduction of equity at the end of the year, as such losses were retained by Infineon. Infineon evaluates its tax position and related tax strategies for its entire group as a whole, which may differ from the tax strategies we would have followed as a stand-alone company.

We recognize deferred income tax assets only if we determine that it is more likely than not that we will be able to realize the tax benefits in the future from accumulated temporary differences and tax loss carry-forwards. At September 30, 2005, our total net deferred tax assets were €165 million. Included in this amount are the tax benefits of net operating loss and credit carry-forwards, net of valuation allowance, of approximately €28 million. These tax credit carry-forwards are generally limited to the amount used by the particular entity that generated the loss or credit and do not expire under current law. Because as a general matter net operating loss carry-forwards are not transferable, certain net operating loss and credit carry-forwards, remain on Infineon’s balance sheet because they were generated by legal entities not transferred to us in connection with the carve-out. In the future, Infineon will be able to offset its tax expense with these carry-forwards. This is shown on our balance sheet as a reduction in our business equity of €59 million as of September 30, 2004 and €6 million as of September 30, 2005.

We evaluate our deferred tax asset position and the need for a valuation allowance on a regular basis. The assessment requires the exercise of judgment on the part of our management with respect to, among other things, benefits that can be realized from available tax strategies and future taxable income. Our ability to realize deferred tax assets depends on our ability to generate future taxable income sufficient to use tax loss carry-forwards or tax credits before their expiration. The assessment is based on the benefits that could be realized from available tax strategies, the reversal of taxable temporary differences in future periods and the impact of forecasted future taxable income. As a result of this assessment, we increased the deferred tax asset valuation allowance in the 2004 financial year by €27 million and in the 2005 financial year by €14 million to reduce the deferred tax asset to an amount that we believe is more likely than not expected to be realized in the future. The highly subjective character of many of the determinations Statement of Financial Accounting Standards (“SFAS”) No. 109 “Accounting For Income Taxes” requires in measuring the valuation allowance means that our deferred tax assets may be subject to further reduction if our expectations, especially those relating to the future taxable income from operations and to benefits from available tax strategies, prove to be too optimistic.


	*Revenue Recognition*

We sell our memory products throughout the world. Our policy is to record revenue when persuasive evidence of an arrangement to sell products exists, the price is fixed or determinable, shipment is made and collectibility is reasonably assured. In general, persuasive evidence of an arrangement exists when the customer’s written purchase order has been accepted. More judgment is required in the case of our licensing agreements, while the revenues from most of our DRAM business can be recognized using standardized processes.

We record reductions to revenue for estimated product returns and allowances for discounts and price protection, based on actual historical experience, at the time the related revenue is recognized. We also establish reserves for sales discounts, price protection allowances and product returns based upon our evaluation of a variety of factors, including industry demand. This process requires the exercise of substantial judgments in evaluating the above-mentioned factors and requires material estimates, including forecasted demand, returns and industry pricing assumptions.

We have entered into licensing agreements for our technology in the past, and anticipate that we will continue our efforts to monetize the value of our technology in the future. As with certain of our existing licensing agreements, any new licensing arrangements may include capacity reservation agreements with the licensee. Such transactions could represent multiple element arrangements pursuant to SEC Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition”, and Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Revenue Arrangements with Multiple Elements”. This treatment can have the result of deferring license revenues and recognizing them over the period in which we are purchasing products from the licensee. The

process of determining the appropriate revenue recognition in such transactions is highly complex and requires significant judgment, which includes evaluating material estimates in the determination of fair value and the level of our continuing involvement.


	*Contingencies*

We are subject to various legal actions and claims that arise in the normal course of business. In particular, we are subject to significant civil lawsuits that relate to the operations of the Memory Products business prior to the carve-out, including the civil antitrust litigation in the United States and Canada, securities class actions and patent litigation. These matters are described in “Our Business — Legal Matters”.

We regularly assess the likelihood of any adverse outcome or judgments related to these matters and, where appropriate, estimate the range of possible losses and recoveries. We record liabilities, including accruals for significant litigation costs related to legal proceedings, when it is probable that a liability has been incurred and the associated amount of the loss can be reasonably estimated. Where the estimated amount of loss is within a range of amounts and no amount within the range is a better estimate than any other amount or the range cannot be estimated, we accrue the minimum amount. Accordingly, we have accrued a liability and charged operating income in our combined financial statements related to certain asserted and unasserted claims existing as of each balance sheet date. As additional information becomes available, we assess any potential liability related to these actions and revise the estimates, if necessary. These accrued liabilities may be insufficient and are subject to change in the future based on new developments in each matter, or changes in circumstances. Any change we make in them could have a material impact on our results of operations, financial position and cash flows. See “Risk Factors — Risks related to our operations — Sanctions in the United States and other countries against us and other DRAM producers for anticompetitive practices in the DRAM industry and related civil litigation may have a direct or indirect material adverse effect on our operations” and “— An unfavorable outcome in the pending securities litigation against Infineon or the incurrence of significant costs in the defense of this litigation may have a direct or indirect material adverse effect on our operations.”

Results of Operations

The following table presents the various line items in our combined statements of operations expressed as percentages of net sales for the periods indicated.


	For the financial						For the
	year ended						six months ended
	September 30,						March 31,

	2004			2005			2005			2006

	(in percent)
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold		68.6			76.6			63.4			86.9

Gross profit		31.4			23.4			36.6			13.1

Research and development expenses		11.5			13.8			14.6			13.4
Selling, general and administrative expenses		7.7			7.3			7.8			7.0
Restructuring charges		0.1			—			0.1			—
Other operating expenses, net		6.4			0.5			0.5			0.9

Operating income (loss)		5.7			1.8			13.6			(8.2	)
Interest income (expense), net		(1.0	)		(0.2	)		0.1			(1.0	)
Equity in (losses) earnings of associated companies		(0.5	)		1.6			1.2			1.7
Gain on associated company share issuance		0.1			—			—			—


	For the financial						For the
	year ended						six months ended
	September 30,						March 31,

	2004			2005			2005			2006

	(in percent)
Other non-operating income (expense), net		(0.4	)		0.4			(0.2	)		0.4
Minority interests		0.5			0.1			0.5			(0.2	)

Income (loss) before income taxes		4.4			3.7			15.2			(7.3	)

Income tax expense		(7.0	)		(3.1	)		(6.4	)		(1.1	)

Net (loss) income		(2.6	)%		0.6	%		8.8	%		(8.4	)%

Six Months Ended March 31, 2006 compared to Six Months Ended March 31, 2005

We generate our net sales primarily from the sale of our memory products. Our memory products consist primarily of dynamic random access memory (DRAM) products, which are used in computers and other electronic devices. We also offer a limited range of non-volatile flash memory products, which are used in consumer applications such as digital still cameras or cellular handsets. We generate the vast majority of our memory product sales through our direct sales force, with approximately 13% of our total revenue in the first six months of the 2006 financial year derived from sales made through distributors.

We also generate a small stream of revenues from royalties and license fees earned on technology that we own and license to third parties. This often enables us to gain access to manufacturing capacity at foundries through joint licensing and capacity reservation arrangements, and also permits us to recover a small portion of our research and development expenses.

The following table presents data on our net sales for the periods indicated.


					For the six months
					ended March 31,

					2005			2006

					(in millions, except
					percentages)
Net sales:
	Memory products				€	1,248		€	1,600
		% of net sales				89	%		100	%
	License revenue				€	151		€	6

		% of net sales				11	%		0	%
				Total net sales		1,399			1,606

Effect of foreign exchange over prior year						—		€	130
			% of net sales			—			8	%

Our net sales in the six months ended March 31, 2006 increased by €207 million, or 15%, from €1,399 million in the six months ended March 31, 2005 to €1,606 million in the six months ended March 31, 2006. Primarily responsible for the increase were:


	•	higher bit shipments; and

	•	exchange rate effects.

Offsetting these increases in part were decreases related to:


	•	DRAM price declines; and

	•	the positive effect in the prior year period of license income from ProMOS.

Increase in bit shipments. Our bit shipments increased by 102% during the six months ended March 31, 2006 compared to the six months ended March 31, 2005 due to the increased yield of our 110nm technology,

conversion to our 90nm technology, our access to additional capacities of our joint venture partners and our foundries and the overall increased sales volume, particularly in our graphics product category.

The shift to higher density products we experienced in 2005 continued in the first half of 2006. In the six months ended March 31, 2006, 70% of total bit shipments were of 512Mb DRAMs, while 68% were of 256Mb DRAMs in the six months ended March 31, 2005. The share of capacities converted to the 90nm technology node increased from about 1% in the first half of 2005 to about 13% in the first half of 2006 based on wafer starts.

Exchange rate effects. The U.S. dollar strengthened against the euro in the first six months of 2006, with the average exchange rate for the period 9% higher than it was for the corresponding period of our 2005 financial year. This favorable U.S. dollar euro exchange rate contributed substantially to an increase in our revenues during the six months ended March 31, 2006. We have calculated the effects of this translation risk as follows: we would have achieved €130 million less in net sales on the six months ended March 31, 2006, had the average exchange rates we used to translate our non-euro denominated sales into euros been the same in the six months ended March 31, 2006 as they were in the six months ended March 31, 2005. This trend did not appear to be continuing in the beginning of the second half of our 2006 financial year, with the U.S. dollar weakening against the euro. Should this weakening continue, we would expect our revenues to be negatively impacted in the second half of the 2006 financial year.

Price declines: DRAM prices continued to be under the substantial pressure we had observed since September 2004 through the end of the 2005 calendar year. The average selling prices for DDR2 memories in particular declined very substantially due, we believe, to a mismatch caused by high worldwide production of DDR2 memories for which original equipment manufacturers had not yet produced enough logic chipsets. This depressed our revenues and was the most significant contributor to our loss in the first six months of the 2006 financial year. DDR2 prices rebounded in recent months as the corresponding chipsets became more available. This, together with a modest increase in DRAM prices generally and the increasing proportion of our bit shipments comprised of relatively higher-priced graphics, mobile and consumer DRAM products, led to an overall slight increase in the average selling prices of our DRAM products as compared with the first three months of the 2006 financial year. However, the extent of the market price declines as compared with the first six months of our 2005 financial year meant that our average per-megabit selling prices for DRAM products (expressed in U.S. dollars) were approximately 42% lower in the six months ended March 31, 2006 than they were in the six months ended March 31, 2005.

Decreased license revenue. Our license revenue decreased from €151 million to €6 million, primarily due to our recognition of €118 million in revenue relating to the ProMOS license agreement in the six months ended March 31, 2005, which did not re-occur in 2006.


	*Net Sales by Region*

The following table sets forth our sales by region for the periods indicated. We categorize our sales geographically based on the location where the customer chooses to be billed. Delivery might be to another location and the customer may ship the products on for further use.


	For the six months ended
	March 31,

	2005				2006

	(in millions, except percentages)
Germany	€	115	8	%	€	149	9	%
Other Europe		170	12			180	11
North America		501	36			672	42
Asia/ Pacific		561	40			525	33
Japan		51	4			71	4
Other		1	0			9	1

Total	€	1,399	100	%	€	1,606	100	%

Due to the recognition of the €118 million in revenue of the Asia/Pacific region relating to the ProMOS License agreement in the six months ended March 31, 2005, which did not recur in 2006, the sales in the Asia/Pacific region reflect a proportional decrease during the six months ended March 31, 2006 compared to the prior period.

Increased sales of specialty products, in particular for graphics applications, in the North American region during the six months ended March 31, 2006 resulted in a proportional increase compared to the six months ended March 31, 2005.


	*Cost of Goods Sold and Gross Margin*

Our cost of goods sold consists principally of expenses relating to:


	•	direct materials, principally raw wafers;

	•	employee costs;

	•	overhead, including maintenance of production equipment, indirect materials (such as photomasks) and royalties;

	•	depreciation and amortization;

	•	subcontracted assembly and testing services;

	•	production support, including facilities, utilities, quality control, automated systems and management functions; and

	•	foundry production (including chips we purchase from our Inotera joint venture).

In addition to factors that affect our revenues and those affecting the components of cost of goods sold listed above, the following factors, not all of which were material in the periods under review, affected our gross margin:


	•	foreign currency conversion gains (or losses) on transactions in non-euro currencies and translations into euro;

	•	amortization of purchased intangible assets;

	•	product warranty costs;

	•	provisions for excess or obsolete inventories; and

	•	government grants, which we recognize over the remaining useful life of the related manufacturing assets.

The following table sets forth our cost of goods sold and related data for the periods indicated.


		For the six
		months ended
		March 31,

		2005			2006

		(in millions,
		except
		percentages)
Cost of goods sold		€	887		€	1,396
	% of net sales		63	%		87	%
Gross margin			37	%		13	%

Cost of goods sold increased by €509 million, or 57%, from €887 million in the six months ended March 31, 2005 to €1,396 million in the six months ended March 31, 2006. The increase in our cost of goods sold was due primarily to:


	•	higher bit shipments;

	•	higher absolute costs from production ramp-up and increased purchases from foundries; and

	•	exchange rate effects.

Offsetting these increases in part were improvements in our productivity.

Higher bit shipments. The 102% increase in bit shipments in the six months ended March 31, 2006 was due primarily to the ramp up of production volumes at our Richmond 300mm facility, at Inotera and at those of our foundry partners manufacturing on 300mm wafers. In the six months ended March 31, 2006, we sourced over 180% more chips from these partners than we had during the six months ended March 31, 2005. As discussed below, we believe that productivity improvements were partially responsible for holding the percentage increase in costs below the percentage increase in bit shipments, as was the spreading of our fixed costs against a greater level of bit shipments.

Higher absolute costs from production ramp-up and increased purchases from foundries. While we expect our ongoing shift to production on 300mm wafers to lead to reduced manufacturing costs once the conversions are complete, during the six months ended March 31, 2006 our gross margin was adversely affected by the increased depreciation charge of €106 million mainly associated with the commencement of production in our 300mm production facilities in Richmond and Suzhou.

We report as cost of goods sold the cost of inventory purchased from our joint ventures and other associated and related companies such as Inotera. Our purchases from these affiliated entities amounted to €198 million in the six months ended March 31, 2006 as compared to €109 million in the six months ended March 31, 2005. In addition, we purchased €236 million of inventory from our foundry partners Winbond and SMIC in the six months ended March 31, 2006 compared to €90 million in the six months ended March 31, 2005.

Exchange rate effects. The relative strength of the exchange rate of the U.S. dollar against the euro in the six months ended March 31, 2006, as compared to the equivalent period one year earlier, increased the euro value of our costs that are denominated in U.S. dollars by approximately €60 million. This means that we would have incurred approximately €60 million less in costs of goods sold in our six months ended March 31, 2006, had the average exchange rates we use to translate our non-euro expenses into euros been the same in the six months ended March 31, 2006 as they were in the six months ended March 31, 2005. However, given the increase in our net sales due to foreign exchange effects, foreign currency movements overall had a positive net effect on our gross margin during the six months ended March 31, 2006.

Improved productivity. Similar to our 2005 financial year, we achieved productivity improvements through the increased conversion of capacities to 110nm and 90nm process technologies and the increasing share of our chips produced on 300mm wafers. The ramp-up of 300mm capacities at our joint venture Inotera and our foundry partner SMIC contributed to the increased share of production on 300mm wafers. Measured in wafer starts, 65% of our total production (including capacity sourced from our strategic and foundry partners) was on 300mm wafers in the six months ended March 31, 2006 as compared to 49% of our production in the six months ended March 31, 2005.

Our gross margin decreased during the six months ended March 31, 2006, falling to 13% from 37% in the six months ended March 31, 2005, primarily because our average selling prices declined at a faster rate than did our cost per unit, due to an increase in capacity purchased from silicon foundries and as a result of the lower level of license income.


	*Research and Development (R&D) Expenses*

Research and development (R&D) expenses consist primarily of salaries and benefits for research and development personnel, materials costs, depreciation and maintenance of equipment used in our research and development efforts and contracted technology development costs. Materials costs include expenses for development wafers and costs relating to pilot production activities prior to the commencement of commercial production. R&D expenses also include our joint technology development arrangements with partners such as Nanya.

The following table sets forth our R&D expenses for the periods indicated.


		For the six
		months ended
		March 31,

		2005			2006

		(in millions,
		except
		percentages)
Research and development expenses		€	204		€	215
	% of net sales		15	%		13	%

In the six months ended March 31, 2006, research and development expenses increased by 5%, from €204 million to €215 million, due to increased spending on the acceleration of the development of next generation memory technologies and the broadening of our overall portfolio of memory products.


	*Selling, General and Administrative (SG&A) Expenses*

Selling expenses consist primarily of salaries and benefits for personnel engaged in sales and marketing activities, costs of customer samples, non-R&D costs related to developing prototypes, other marketing incentives and related marketing expenses.

General and administrative expenses consist primarily of salaries and benefits for administrative personnel, non-manufacturing related overhead costs, consultancy, legal and other fees for professional services, and recruitment and training expenses.

The following table sets forth information on our selling, general and administrative expenses for the periods indicated.


		For the six
		months ended
		March 31,

		2005			2006

		(in millions,
		except
		percentages)
Selling, general and administrative expenses		€	109		€	113
	% of net sales		8	%		7	%

During the six months ended March 31, 2006, selling, general and administrative expenses increased by 4% as compared to the first six of months of the 2005 financial year, from €109 million to €113 million, as a result of an increase in the costs allocated to us by Infineon and the reflection in our expenses of stock based compensation expense (of €5 million in the aggregate, of which €2 million impacted SG&A, during the six months ended March 31, 2006) following our adoption, pursuant to a change in U.S. GAAP, of fair value accounting for stock based compensation beginning on October 1, 2005.


	*Other Operating Expense, Net*

The following table sets forth information on our other operating expense, net for the periods indicated.


		For the six months
		ended March 31,

		2005			2006

		(in millions, except
		percentages)
Other operating expense, net			€7			€14
	% of net sales		1	%		1	%

Other operating expense, net in both periods related principally to charges from our settlement of an antitrust investigation by the U.S. Department of Justice and related actions as well as an ongoing investigation in Europe.


	*Equity in Earnings of Associated Companies*

The following table sets forth information on our equity in losses or earnings of associated companies for the periods indicated.


	For the six months
	ended March 31,

	2005			2006

	(in millions, except
	percentages)
Equity in earnings of associated companies	€	17		€	27
% of net sales		1	%		2	%

Our principal associated company is Inotera. Inotera is a DRAM manufacturer that we established as a joint venture with Nanya. Our equity in this venture’s earnings has been sensitive to fluctuations in the price of DRAM. In both periods, Inotera contributed most of our equity in earnings from associated companies, which increased in the first six months of the financial year, reflecting the increased volume production by that joint venture. We have included financial statements of Inotera elsewhere in this prospectus.


	*Other Non-Operating (Expense) Income, Net*

The following table sets forth information on other non-operating expense or income for the periods indicated.


	For the six months
	ended March 31,

	2005			2006

	(in millions, except
	percentages)
Other non-operating (expense) income, net	€	(3	)	€	6
% of net sales		0	%		0	%

Other non-operating (expense) income, net consists of various items from period to period not directly related to our principal operations, including gains and losses on sales of marketable securities. In the six months ended March 31, 2006, other non-operating income related principally to non-operating foreign currency transaction gains, whereas in the six months ended March 31, 2005, other non-operating expense related principally to foreign currency transaction losses.


	*Earnings Before Interest and Taxes (“EBIT”)*

We define EBIT as net income (loss) plus interest expense and income tax expense. EBIT is not defined under U.S. GAAP and may not be comparable with measures of the same or similar title that are reported by other companies. Under SEC rules, EBIT is considered a non-GAAP financial measure. It should not be considered as a substitute for, or confused with, any U.S. GAAP financial measure. We believe the most comparable U.S. GAAP measure is net income. Our management uses EBIT as a measure to establish budgets and operational goals, to manage our business and to evaluate its performance. Because many operating decisions, such as allocations of resources to individual projects, are made on a basis for which the effects of financing the overall business and of taxation are of marginal relevance, management finds a metric that excludes the effects of interest on financing and tax expense useful. In addition, in measuring operating performance, particularly for the purpose of making internal decisions such as those relating to personnel matters, it is useful for management to consider a measure that excludes items over which the individuals being evaluated have minimal control, such as enterprise-level taxation and financing. We report EBIT information because we believe that it provides investors with meaningful information about our operating performance in a manner similar to that which management uses to assess and direct the business. EBIT is not a substitute for net income, however, because the exclusion of interest and tax expense is not appropriate when reviewing the overall profitability of our company. Although EBIT is our primary measure of evaluating operating performance, we also evaluate the costs and benefits associated with various financing structures and the income tax consequences, where relevant and material independent of the operational assessment.

EBIT is determined from the consolidated statements of operations as follows:


		For the six months
		ended March 31,

		2005			2006

		(in millions,
		except
		percentages)
Net income (loss)		€	122		€	(136	)
Add: Income tax expense			90			18
	Interest (income) expense		(2	)		16

EBIT		€	210		€	(102	)


	*Interest Income (Expense), Net*

We derive interest income primarily from cash, cash equivalents and marketable securities. Interest expense is primarily attributable to loans from Infineon and external banks and excludes interest capitalized on manufacturing facilities under construction.

The following table sets forth information on our net interest expense for the periods indicated.


	For the six months
	ended March 31,

	2005			2006

	(in millions,
	except
	percentages)
Interest income (expense) net	€	2		€	(16	)
% of net sales		0	%		(1	)%

Interest expense mainly relates to interests due to and from Infineon. The increase was due to higher average borrowings from Infineon.


	*Income Taxes*

The following table sets forth information on our income taxes for the periods indicated.


	For the six
	months ended
	March 31,

	2005			2006

	(in millions,
	except
	percentages)
Income tax expense	€	(90	)	€	(18	)
% of net sales		(6	)%		(1	)%
Effective tax rate		42	%		(15	)%

In the six months ended March 31, 2006, our effective rate was higher than our statutory rate. This resulted from losses in jurisdictions for which tax benefits could not be recognized and tax expense attributable to jurisdictions with income. In the six months ended March 31, 2005, our effective tax rate reflects a higher proportion of taxable earnings in jurisdictions with comparatively higher tax rates, such as Germany.


	*Net Income (Loss)*

Our net result decreased from a net income of €122 million in the six months ended March 31, 2005, to net loss of €136 million in the six months ended March 31, 2006.

Financial Year Ended September 30, 2005 Compared to Financial Year Ended September 30, 2004


	*Net Sales*

The following table presents data on our net sales for the periods indicated.


				For the financial
				year ended
				September 30,

				2004			2005

				(in millions, except
				percentages)
Net sales:
	Memory products			€	2,947		€	2,665
		% of net sales			98	%		94	%
	License revenue			€	61		€	160

		% of net sales			2	%		6	%
			Total net sales	€	3,008		€	2,825

Effect of foreign exchange over prior year					—		€	(132	)
	% of net sales				—			5	%

Our net sales in the 2005 financial year declined by €183 million, or 6.0%, from €3,008 million in the 2004 financial year to €2,825 million in the 2005 financial year. Primarily responsible for the decline were:


	•	DRAM price declines;

	•	exchange rate effects; and

	•	the transfer to Infineon of the Dresden 200mm facility.

Offsetting the decline in part were increases from:


	•	higher sales volumes, or bit shipments; and

	•	our settlement of a patent dispute with ProMos.

Price declines. DRAM prices were under substantial pressure during our 2005 financial year, especially during the first half. Our average per-megabit selling prices for DRAM products (expressed in U.S. dollars) were approximately 27% less in the 2005 financial year as compared with the 2004 financial year. Average per-megabit selling prices in U.S. dollars of our major products with DDR and DDR2 interfaces, declined sharply, especially early in the year. After April, prices for DDR products stabilized, while those for DDR2 products remained under pressure as a result of a supply overhang and slower than expected conversion by PC manufacturers to DDR2 as one of the primary memory interfaces they use. Both contract and spot prices followed this trend. Average per-megabit selling prices for lower-density SDRAM products declined during the financial year as well. The following graph shows the price declines in DRAM (expressed in 256Mb equivalents) during the two year period ended September 30, 2005.

DRAM Price Development

Exchange rate effects. The continued unfavorable U.S. dollar/ euro exchange rate contributed substantially to our decline in revenues in our 2005 financial year. Although the U.S. dollar was slightly stronger on September 30, 2005 than it had been one year earlier, the average exchange rate of U.S. dollars for euro over the financial year was weaker. We have calculated the effects of this translation risk as follows: we would have achieved €132 million more in net sales in our 2005 financial year had the average exchange rates we used to translate our non-euro denominated sales into euros been the same in the 2005 financial year as they were in the 2004 financial year.

Dresden 200mm transfer. A decline in net sales of €83 million was due to the transfer, effective October 1, 2004, of the 200mm front-end manufacturing facility in Dresden, Germany from Infineon’s Memory Products segment to its Communications segment. In preparing our combined financial statements, we treated as external sales those sales the Dresden 200mm facility made to other Infineon businesses while it was part of our business. Following the transfer, these sales are no longer included in our net sales. The wafers the Dresden 200mm facility produces for use in our business appear in our net sales for both financial years because these are sold to customers outside the Infineon group.

Increase in bit shipments. The declines described above were offset in part by our higher bit shipments. Our bit shipments increased by 31% during the 2005 financial year. This growth was primarily a result of:


	•	our progress in converting our capacities towards the 110nm technology node and increasing the yield of those facilities that are using that technology;

	•	the ramp-up of our manufacturing joint venture Inotera and the access to additional capacity through our cooperation with Winbond and SMIC; and

	•	the overall increased sales volume during the 2005 financial year. This resulted from increased market demand, particularly for PCs, increased “bits per box” and increasing demand for non-PC products including infrastructure and graphics, mobile and consumer DRAMs.

The majority of our semiconductor memory product sales comprised 256Mb DRAMs (68% of total bit shipments) in the first half of the 2005 financial year and 512Mb DRAMs (56% of total bit shipments) in the second half of the 2005 financial year as the market shifted to the next higher-density product generation.

Increased license revenue. Our license revenue increased from €61 million to €160 million, primarily due to the settlement Infineon reached with ProMOS in November 2004. Under this agreement, which resolved an intellectual property dispute that had begun in 2003, Infineon has licensed DRAM technology to ProMOS for ongoing use by ProMOS. This settlement led to our recognition of €118 million in revenue during the 2005 financial year. This €118 million represents the present value of the aggregate U.S.$156 million payment ProMOS agreed to make to Infineon in four equal payments under this settlement. Excluding the ProMOS settlements, our license revenues fell as a result of the timing of payments under our other outstanding licenses. We expect license revenues in future periods to remain closer to the level of the €42 million we recorded in the 2005 financial year other than those relating to the ProMOS settlement.


	*Net Sales by Region*


	For the financial year ended
	September 30,

	2004				2005

	(in millions, except percentages)
Germany	€	398	13	%	€	232	8	%
Other Europe		342	12			332	12
North America		1,135	38			1,067	38
Asia/ Pacific		1,001	33			1,091	38
Japan		131	4			102	4
Other		1	0			1	0

Total	€	3,008	100	%	€	2,825	100	%


	*Cost of Goods Sold and Gross Margin*

Our purchases from our joint ventures and other associated and related companies, such as Inotera, amounted to €247 million in the 2005 financial year and €23 million in the 2004 financial year. In addition, we purchased €520 million of inventory from our foundry partners in our 2005 financial year and €91 million in our 2004 financial year.

The following table sets forth our cost of goods sold and related data for the periods indicated.


		For the financial
		year ended
		September 30,

		2004			2005

		(in millions, except
		percentages)
Cost of goods sold		€	2,063		€	2,164
	% of net sales		69	%		77	%
Gross margin			31	%		23	%

Cost of goods sold increased by €101 million, or 5%, from €2,063 million in the 2004 financial year to €2,164 million in the 2005 financial year. The increase in our cost of goods sold was due primarily to:


	•	higher bit shipments; and

	•	increased average costs per wafer and personnel.

Offsetting these increases in part were decreases related to:


	•	the Dresden 200mm transfer;

	•	exchange rate effects; and

	•	increases in our productivity.

Higher bit shipments. The 31% increase in bit shipments in our 2005 financial year led to an increase in costs as more material, more volumes of wafers and work by employees was needed to manufacture these chips. As discussed below, we believe that productivity improvements were partly responsible for holding the percentage increase in costs below the percentage increase in bit shipments, as was the spreading of our fixed costs across greater bit shipments.

Increased average costs per wafer and personnel. In addition to the general increases in materials and personnel costs that result from increased bit shipments, our migration to a higher proportion of production on 300mm wafers has led to increased costs per wafer. These larger wafers are more expensive per wafer than 200mm wafers, although due to the substantially higher bit output per 300mm wafer, the per bit costs for using these wafers are considerably lower. The personnel costs included in cost of goods sold also increased as we ramped up production in our 300mm facility in Richmond.

Dresden 200mm transfer. €72 million of the decrease in cost of goods sold related to the transfer of the Dresden 200mm facility. Following the transfer of this facility, we no longer included in our cost of goods sold the costs relating to the chips the facility produces for Infineon’s logic business. We did, however, begin paying Infineon a margin for the chips we began to purchase from Infineon. Although the transfer of the Dresden 200mm facility did impact both net sales and cost of goods sold, the net impact on our gross margin was not significant.

Exchange rate effects. The further depreciation of the U.S. dollar against the euro reduced the euro value of our expenses that are denominated in dollars by approximately €40 million. This means that we would have incurred approximately €40 million more in costs of goods sold in our 2005 financial year had the average exchange rates we use to translate our non-euro expenses into euros been the same in the 2005 financial year as they were in the 2004 financial year. However, given the relatively large decline in our net sales due to foreign exchange effects, foreign currency movements overall had a negative net effect on our gross margin.

Productivity increase. We achieved productivity improvements through the conversion of capacities from 140nm to 110nm process technology and the increasing share of our chips produced on 300mm wafers. The share of wafer starts based on 110nm technology increased from almost 50% in the 2004 financial year to more than 80% in the 2005 financial year. By the end of the year, we had begun mass production at the 90mm node, such that 5% of our DRAMs were being manufactured using that process technology at year end. The ramp-up of 300mm capacities at our joint venture Inotera and our foundry partner SMIC contributed to the increased 300mm share. From 41% of total manufacturing capacity in the 2004 financial year (measured in wafer starts), 300mm manufacturing has increased to 53% in the 2005 financial year.

Since our average selling price declined at a faster rate than our cost per unit did during the 2005 financial year, our gross margin decreased, falling from 31% in the 2004 financial year to 23% in the 2005 financial year.


	*Research and Development (R&D) Expenses*

The following table sets forth our R&D expenses and government subsidies for the periods indicated:


		For the financial year
		ended September 30,

		2004			2005

		(in millions, except
		percentages)
Research and development expenses		€	347		€	390
	% of net sales		12	%		14	%
Government subsidies		€	25		€	16
	% of net sales		1	%		1	%

In the 2005 financial year, research and development expenses increased by 12%, from €347 million to €390 million, due to increased spending on the acceleration of the development of next generation memory technologies, the broadening of our overall portfolio of memory products and reduced government subsidies.

We recognized less in government subsidies, which decreased from €25 million in the 2004 financial year to €16 million in the 2005 financial year, mainly due to the transfer to Infineon of the Dresden 200mm facility to which a portion of prior subsidies relates.

Some of our research and development projects qualify for subsidies from local and regional governments where we do business. If the criteria to receive a grant are met, the subsidies received reduce R&D expenses over the project term as expenses are incurred.


	*Selling, General and Administrative (SG&A) Expenses*

The following table sets forth information on our selling, general and administrative expenses for the periods indicated.


		For the financial
		year ended
		September 30,

		2004			2005

		(in millions,
		except percentages)
Selling, general and administrative expenses		€	232		€	206
	% of net sales		8	%		7	%

During the 2005 financial year, selling, general and administrative expenses declined by 11% from €232 million to €206 million as a result of lower cost allocations from Infineon reflecting mainly cost savings measures, particularly with respect to central services and information technology (IT).


	*Restructuring Charges*

In the 2004 and 2005 financial years, we accrued charges of €2 million and €1 million, respectively, for restructuring and cost-saving efforts taken by Infineon, which included downsizing our workforce and consolidating certain functions and operations.


	*Other Operating Expense, Net*

The following table sets forth information on our other operating expense, net for the periods indicated.


		For the financial
		year ended
		September 30,

		2004			2005

		(in millions,
		except percentages)
Other operating expenses, net		€	194		€	13
	% of net sales		6	%		0	%

Other operating expense, net in the 2004 financial year related principally to charges from our settlement of an antitrust investigation by the U.S. Department of Justice, related settlements with customers and a related ongoing investigation in Europe. We accrued reserves in respect of these matters in the amount of €194 million in our 2004 financial year. Other operating expense in the 2005 financial year principally reflected expenses related to antitrust matters.


	*Equity in (Losses) Earnings of Associated Companies*

The following table sets forth information on our equity in losses or earnings of associated companies for the periods indicated.


		For the financial
		year ended
		September 30,

		2004			2005

		(in millions,
		except percentages)
Equity in (losses) earnings of associated companies		€	(16	)	€	45
	% of net sales		(1	)%		2	%

Start-up losses at Inotera during the ramp-up phase of production accounted for substantially all of the €16 million in losses incurred in the 2004 financial year. In the 2005 financial year, Inotera contributed most of our equity in earnings from associated companies, reflecting the start of volume production by that joint venture.


	*Other Non-Operating (Expense) Income, Net*

The following table sets forth information on other non-operating expenses or income for the periods indicated.


		For the financial
		year ended
		September 30,

		2004			2005

		(in millions,
		except percentages)
Other non-operating (expense) income, net		€	(11	)	€	13
	% of net sales		0	%		0	%

Other non-operating expense, net in the 2004 financial year consisted primarily of €7 million in non-operating foreign currency transaction losses, partially offset by €4 million in gains on sales of marketable securities, together with €7 million of investment-related impairment charges. In the 2005 financial year, other non-operating income, net included €18 million related principally to non-operating foreign currency transaction gains, which were partially offset by investment-related impairment charges of €6 million.


	*Earnings Before Interest and Taxes (“EBIT”)*

EBIT is determined from the consolidated statements of operations as follows:


	For the financial year
	ended September 30,

	2004			2005

	(in millions)
Net income (loss)	€	(79	)	€	18
Add: Income tax expense		211			86
Interest expense, net		30			7

EBIT	€	162		€	111


	*Interest Income (Expense), Net*

The following table sets forth information on our net interest expense for the periods indicated.


		For the financial
		year ended
		September 30,

		2004			2005

		(in millions, except
		percentages)
Interest income (expense), net		€	(30	)	€	(7	)
	% of net sales		(1	)%		0	%
Capitalized interest		€	9		€	7

Interest expense in the 2004 financial year included €21 million paid upon the redemption of the other investors’ ownership interests in the 300mm venture Infineon Technologies SC300 GmbH & Co. OHG (“SC300”) in Dresden, which we now refer to as our Dresden 300mm facility. Interest expense was partially reduced in both the 2004 and 2005 financial years as a result of capitalization of interest related to facilities under construction (principally Inotera and Richmond), as well as interest income from financial derivatives.


	*Income Taxes*

The following table sets forth information on our income taxes for the periods indicated.


		For the financial
		year ended
		September 30,

		2004			2005

		(in millions, except
		percentages)
Income tax expense		€	(211	)	€	(86	)
	% of net sales		(7	)%		(3	)%
Effective tax rate			160	%		83	%

We assess our deferred tax asset and the need for a valuation allowance pursuant to SFAS No. 109. As a result of this assessment, we have increased our deferred tax asset valuation allowance in our 2004 and 2005 financial years to reduce the net deferred tax asset to an amount that is more likely than not expected to be realized in future periods. Our effective tax rate in the 2004 financial year was substantially higher than our statutory tax rate due to increases in our valuation allowances, for losses which can not be utilized by us and have been retained by Infineon, as well as non-deductible expenditure we recorded (mostly related to legal matters). In the 2005 financial year our effective rate was still higher than our statutory rate, but lower than in the 2004 financial year, as a result of reduced losses in jurisdictions for which tax benefits could not be recognized, and lower non-deductible expenditures.


	*Net Income (Loss)*

Our results improved from a net loss of €79 million in the 2004 financial year to net income of €18 million in the 2005 financial year.

Financial Condition

The following table sets forth selected items from our combined balance sheets for the periods indicated.


	As of
	September 30,							As of March 31,

	2004		2005		% Change⁽¹⁾			2006		% Change⁽²⁾

	(in millions, except percentages)
Current assets	€	1,602	€	1,802		12	%		2,078		15	%
Non-current assets		3,148		3,059		(3	)		3,181		4

Total assets		4,750		4,861		2			5,259		8

Current liabilities		1,524		1,365		(9	)		1,482		9
Non-current liabilities		447		529		18			496		(6	)

Total liabilities		1,971		1,894		(4	)		1,978		4

Business equity	€	2,779	€	2,967		7	%	€	3,281		11	%


⁽¹⁾	Percentage change from September 30, 2004 to September 30, 2005.

⁽²⁾	Percentage change from September 30, 2005 to March 31, 2006.


	*As of March 31, 2006 Compared to September 30, 2005*

As of March 31, 2006, our total assets increased as compared to September 30, 2005. Total current assets increased primarily due to increased trade accounts receivable and inventories reflecting our sales growth. Non-current assets increased slightly because capital expenditures in our new facilities in Suzhou and Richmond more than offset depreciation expenses.

Current liabilities increased as of March 31, 2006 due to increased accounts payable, which reflected increased purchases from our foundry partners and increased capital expenditures. Non-current liabilities mainly decreased due to the recognition of deferred government grants.

As of March 31, 2006, our business equity increased, principally due to advances made to us by Infineon, which more than offset our net loss during the six months ended March 31, 2006. At March 31, 2006, our debt-to-equity ratio, which we define as total liabilities divided by our business equity, decreased to 60% from 64% at September 30, 2005. At March 31, 2006 our equity-to-fixed-assets ratio (which we define as our business equity divided by property, plant and equipment) was 142%, compared to 134% at September 30, 2005.


	*As of September 30, 2005 Compared to September 30, 2004*

As of September 30, 2005, our total assets increased slightly in comparison to the prior year. Total current assets increased at the end of the 2005 financial year primarily due to increased inventories stemming from product diversification and other current assets. Non-current assets decreased slightly at the end of the 2005 financial year as the combined effect of depreciation and the transfer of the Dresden 200mm facility more than offset capital expenditures and investments in associated companies during the year.

Current liabilities decreased as of the end of the 2005 financial year due to lower accrued liabilities (€63 million) and lower other current liabilities (€100 million). Non-current liabilities increased due to a borrowing of €80 million used primarily for the manufacturing facility in Portugal.

In the 2005 financial year, our business equity increased principally due to the advances made by Infineon and our net income during the year. At September 30, 2005, business equity as a percentage of total assets was 61%, compared to 59% as of September 30, 2004.

Our equity-to-fixed-assets ratio increased to 134% in the 2005 financial year from 116% in the prior year, primarily reflecting the transfer of the Dresden 200mm facility. The decrease of our debt-to-equity ratio to 64% compared to 71% in the 2004 financial year was mainly attributable to the net income generated in the 2005 financial year. We do not hedge our net investments in non-euro denominated entities by borrowing in

those non-euro currencies. On September 30, 2005, cash in the amount of €75 million was held by our subsidiaries in China subject to restrictions on transferability out of China.

Liquidity


	*Cash Flows*

Our consolidated statement of cash flows shows the sources and uses of cash during the reported periods. It is of key importance for the evaluation of our financial position. Although our combined statements of operations and balance sheets include allocations of financial statement line items from Infineon’s financial statements, the combined statements of cash flows are determined indirectly from these statements and do not reflect any additional allocations.

Cash flows from investing and financing activities are both indirectly determined based on payments and receipts. Cash flows from operating activities are determined indirectly from net income (loss). In accordance with U.S. GAAP, the line items on the cash flow statement that reflect changes in balance sheet items have been adjusted for the effects of foreign currency exchange fluctuations and for changes in the scope of consolidation. Therefore, they do not conform to the corresponding changes you will find on the balance sheets themselves.


	For the financial year						For the six months
	ended September 30,						ended March 31,

	2004			2005			2005			2006

	(in millions)
Net cash provided by (utilized in) operating activities	€	693		€	483		€	374		€	(5	)
Net cash used in investing activities		(1,048	)		(971	)		(559	)		(468	)
Net cash provided by financing activities		388			538			158			480
Effect of foreign exchange rate changes on cash and cash equivalents		—			5			(5	)		(1	)
Cash and cash equivalents at end of year		577			632			545			638

Six Months Ended March 31, 2006 Compared to Six Months Ended March 31, 2005

Our operating cash flow in the six months ended March 31, 2006 shifted from an inflow of €374 million to a €5 million outflow primarily due to our net loss of €136 million in the six months ended March 31, 2006. We recognized net income of €122 million in the six months ended March 31, 2005. Depreciation and amortization increased by €108 million mainly as a result of our new facilities in Richmond and Suzhou. Increases in our trade accounts receivable and inventory, reflecting our sales growth, further reduced our operating cash flow.

Cash used in investing activities in both periods reflect the capital expenditures we made as we continued to invest in associated companies during both periods. Our cash used in investing activities was higher in the six months ended March 31, 2005 due to our €84 million investment in our Inotera joint venture. We anticipate a reduced level of capital expenditures during the second half of the current financial year as compared to the capital expenditures of €482 million in the first six months of the financial year.

Cash provided by financing activities in both periods relates principally to investments by and advances from Infineon. Infineon advanced €462 million to us in the six months ended March 31, 2006, as compared to €136 million in the comparable period one year earlier.

Financial Year Ended September 30, 2005 Compared to Financial Year Ended September 30, 2004

Our operating cash flow in the 2005 financial year was 30% less than in the 2004 financial year, falling from €693 million to €483 million. While our net income increased by €97 million in the 2005 financial year, this positive effect on operating cash flow was more than offset by a lower share of non-cash expenses including depreciation and amortization. Depreciation and amortization decreased by €224 million as a result of our transfer of the Dresden 200mm facility to Infineon. Changes in our usage of our working capital also reduced operating cash flow.

Our inventory consumed an additional €162 million in working capital in the 2005 financial year (after releasing €73 million in the 2004 financial year), as higher production output increased our inventories. Our trade accounts payable also increased, primarily reflecting increased purchases from Inotera.

Cash used in investing activities in both financial years primarily reflects our capital expenditures, which totaled €926 million in the 2005 financial year (up from €770 million in the 2004 financial year) and related principally to equipping our 300mm facilities in Dresden and Richmond. In addition, we invested €83 million in the 2005 financial year and €350 million in the 2004 financial year in associated companies, mostly in our Inotera joint venture.

Cash provided by financing activities in the 2005 financial year principally relates to investments by and advances from Infineon totaling €500 million, which were partly offset by the repayment of a €450 million loan entered into in connection with the expansion of our 300mm facility in Dresden. In the 2004 financial year, Infineon advanced €165 million to us.

Free Cash Flow

We define free cash flow as cash from operating and investing activities excluding purchases or sales of marketable securities. Free cash flow is not defined under U.S. GAAP and may not be comparable with measures of the same or similar title that are reported by other companies. Under SEC rules, “free cash flow” is considered a non-GAAP financial measure. It should not be considered as a substitute for, or confused with, any U.S. GAAP financial measure. We believe the most comparable U.S. GAAP measure is net cash provided by operating activities. Since we operate in a capital-intensive industry, we report free cash flow to provide investors with a measure that can be used to evaluate changes in liquidity after taking capital expenditures into account. It is not intended to represent residual cash flow available for discretionary expenditures, since debt service requirements or other non-discretionary expenditures are not deducted. The free cash flow is determined as follows from our consolidated statements of cash flows:


	For the financial year						For the six months
	ended September 30,						ended March 31,

	2004			2005			2005			2006

	(in millions)
Net cash provided by (utilized in) operating activities	€	693		€	483		€	374		€	(5	)
Net cash used in investing activities		(1,048	)		(971	)		(559	)		(468	)
Sale of marketable securities		17			1			(1	)		—

Free cash flow	€	(338	)	€	(487	)	€	(186	)	€	(473	)

Free cash flow was negative in each financial year because capital expenditures exceeded the cash provided from operating activities. This shortfall was financed principally by advances from Infineon.

Net Cash Position

The following table presents our gross and net cash positions and the maturity of our debt. It is not intended to be a forecast of cash available to us in future periods.


		Payments due by period

				Less than													After
As of September 30, 2005		Total		1 year		1-2 years		2-3 years			3-4 years			4-5 years			5 years

		(in millions)
Cash and cash equivalents			€632	€	632	€	—	€	—		€	—		€	—		€	—
Less:
	Long-term debt		108		—		—		13			13			13			69
	Short-term debt and current maturities		524		524		—		—			—			—			—

Total financial debt			632		524		—		13			13			13			69

Net cash position			€0	€	108	€	—	€	(13	)	€	(13	)	€	(13	)	€	(69	)

Our gross cash position increased to €632 million at September 30, 2005, compared with €577 million at the prior year end. As part of Infineon, our historical capital structure was based on the assumption that our net cash position is zero. The capital structure attributed to us in connection with the preparation of the combined financial statements, based as it is on the business equity concept and without independent financing, is not indicative of the capital structure that we would have required had we been an independent company during the financial periods presented, and will almost certainly differ from our capital structure in the future.

Short-term debt consists of loans from Infineon totaling €524 million, which do not carry any restrictions on their use. These loans bear interest at floating rates determined by reference to market interest rates. Long-term debt principally consists of an unsecured loan from banks of €80 million, which is restricted to use in Module 2 of our backend facility in Porto, Portugal, and used primarily for the financing of R&D projects and construction at that facility. This loan bears interest at a floating rate.

To secure our cash position and to maintain flexibility with regards to liquidity, we have implemented a risk management policy with risk limits with respect to counterparty, credit rating, sector, duration, credit support and type of instrument. See note 29 to the annual combined financial statements included elsewhere in this prospectus.

Capital Requirements

We require capital in our 2006 financial year to:


	•	finance our operations;

	•	make scheduled debt payments;

	•	settle contingencies if and when they occur; and

	•	make planned capital expenditures.

We expect to meet these requirements through:


	•	cash flow generated from operations;

	•	cash on hand and securities held for sale;

	•	credit facilities we will seek to arrange after our carve-out;

	•	the proceeds from this offering; and

	•	capital market transactions we may engage in the future.

As of September 30, 2005, we estimated our financing requirements for the 2006 financial year to be €1,189 million, consisting of €524 million for short-term debt payments and €665 million for commitments. In addition, we may need up to €145 million for currently known contingencies. We also plan to invest up to an additional €300 million in capital expenditures that have not been otherwise committed. The aggregate capital required for such commitments, contingencies and planned capital expenditures during the 2006 financial year is €1,634 million as of September 30, 2005. We had a gross cash position of €632 million as of September 30, 2005. We have historically relied on Infineon to provide financing for a portion of our capital requirements.

We plan to fund our working capital and capital requirements from cash provided by operations, available funds, bank loans, government subsidies and, if needed, the issuance of additional debt or equity securities, including our portion of the net proceeds of this offering. We have also applied for governmental subsidies in connection with certain capital expenditure projects, but these subsidies may not be granted on a timely basis or at all. We may be unable to obtain additional financing for our research and development, working capital or investment requirements, and any such financing, if available, may not be on terms favorable to us.

Taking into consideration the financial resources available to us, including our internally generated funds and proceeds from this offer, we believe that we will be in a position to fund our capital requirements in the remainder of the 2006 financial year.


	*Commitments and Contingencies*

The following table sets forth information on our commitments and known contingencies by due date or expiration.


		Payments due/expirations by period⁽¹⁾

				Less than										After
As of September 30, 2005⁽²⁾⁽³⁾		Total		1 year		1-2 years		2-3 years		3-4 years		4-5 years		5 years

		(in millions)
Other contractual liabilities reflected on the balance sheet:
	Settlement for antitrust related matters⁽⁴⁾	€	111	€	23	€	22	€	22	€	22	€	22	€	—

Contractual commitments:
	Operating lease payments	€	118	€	12	€	12	€	10	€	9	€	9	€	66
	Unconditional purchase commitments ⁽⁵⁾		759		607		86		9		9		9		39
	Other long-term commitments		138		46		46		46		—		—		—

Total commitments		€	1,015	€	665	€	144	€	65	€	18	€	18	€	105

Other contingencies:
	Guarantees⁽⁶⁾	€	172	€	95	€	4	€	23	€	5	€	—	€	45
	Contingent government grants⁽⁷⁾		409		50		59		110		24		43		123

Total contingencies		€	581	€	145	€	63	€	133	€	29	€	43	€	168


⁽¹⁾	The above table should be read together with note 31 to our combined financial statements.

⁽²⁾	Certain payments of obligations or expiration of commitments that are based on the achievement of milestones or other events that are not date-certain are included in this table, based on our estimate of the reasonably likely timing of payments or expirations in each particular case. Actual outcomes could differ from those estimates.

⁽³⁾	Product purchase commitments associated with capacity reservation agreements are not included in this table, since the purchase prices are based in part on future market prices, and are accordingly not quantifiable as of September 30, 2005. Purchases under these agreements aggregated approximately €520 million for the year ended September 30, 2005.

⁽⁴⁾	These amounts are recorded as other current or other non-current liabilities on our balance sheet and reflect payments to be made under settlement agreements relating to antitrust matters.

⁽⁵⁾	Primarily purchase orders that have been placed with suppliers of fixed assets, raw materials and services. Most of these amounts relate to capacity expansion. Fixed price orders for products from our foundry partners are also shown here.

⁽⁶⁾	Guarantees are mainly issued by the parent company for the payment of import duties, rentals of buildings, contingent obligations related to government grants received and the consolidated debt of subsidiaries.

⁽⁷⁾	“Contingent government grants” refers to amounts previously received that are related to the construction and financing of certain production facilities, but that are not guaranteed otherwise. These could be repayable if the total project requirements are not met.


	*Capital Expenditures*

For the

For the six

financial year

months

ended

September 30,

March 31,

2004

2005

2006

(in millions)

Purchases of property, plant and equipment

€

770

€

926

507

482

Our capital expenditures in the 2004 financial year consisted primarily of capacity increases at our 300mm facility in Dresden and the recommencement of the expansion of capacity in our 300mm fab in Richmond, Virginia. In the 2005 financial year, we completed the construction of the 300mm fab in Richmond and ramped up production there. We also invested in our back-end venture in Suzhou.

We expect to invest between €0.5 billion and €0.7 billion in capital expenditures in the 2006 financial year, largely for the continued ramp-up of our 300mm facility in Richmond, Virginia. We are also continuously improving productivity and upgrading technology at existing facilities, especially at our 300mm facility in Dresden, Germany. As of September 30, 2005, approximately €392 million of this amount has been committed and included in unconditional purchase commitments. Due to the lead times between ordering and delivery of equipment, a substantial amount of capital expenditures typically is committed well in advance. The majority of these expected capital expenditures will be made in our front-end and back-end manufacturing facilities.


	*Credit Facilities*

We have historically relied (directly or indirectly) on Infineon to provide financing for a portion of our financing and capital requirements. Under our Master Loan Agreement with Infineon Technologies Holding B.V., we currently have $565 million in aggregate principal amount of advances outstanding, with maturities that were recently extended to July and August 2007. In this agreement, we have agreed not to draw further amounts under the agreement and to repay all outstanding amounts by the second anniversary of this offering. Accordingly, we anticipate establishing our own credit facilities and incurring our own external debt and using proceeds from potential equity offerings to finance our operations and capital requirements.

We are in the process of entering into a multicurrency revolving loan facility that we expect will be in place by the closing of this offering, in an aggregate principal amount of €250 million which has been committed to us. Affiliates of several of the underwriters of this offering will act as mandated lead arrangers of this facility. The facility will mature three years from the later of the date of our initial public offering or the date the facility is signed, and may be extended for one additional year at the option of the lenders at the end of the facility’s first year of operation.

We are entering into this facility primarily as a source of backup liquidity, and do not have present plans to draw any material advances under the facility.

Loans made under the facility, which may be used for our working capital requirements and/or general corporate purposes, may have various maturities, ranging from one to twelve months, or longer as agreed by the parties. Under the facility, loans may be extended to our company or, with a guarantee from our company, to those of our subsidiaries identified in the agreement.

The facility will contain several covenants, agreements and financial ratios customary for such transactions including the following:


	•	Negative pledge;

	•	Limitation on indebtedness;

	•	Restriction on asset dispositions;

	•	Limitations on mergers and reorganizations;


	•	Required maintenance of minimum liquidity levels and financial ratios; and

	•	Limitation on dividend payments.

Loans under the facility will bear interest at either EURIBOR or LIBOR, depending on the currency borrowed, plus a margin based in part on a measure of our earnings.

If we issue senior unsecured bonds, or if we provide a senior guarantee for such bonds issued by a finance subsidiary, we will have to repay any outstanding amounts we have borrowed under the facility and redraw them from our subsidiary Qimonda Holding B.V. prior to the bonds’ issuance. In that case, we will also have to use all commercially reasonable efforts to arrange for the transfer of our interest in Inotera Memories, Inc. to our subsidiary Qimonda Holding B.V. Funds drawn under the facility will not be used to repay indebtedness to Infineon and the agreement will contain restrictions on our ability to repay indebtedness to Infineon other than from capital market issuances, unless our liquidity exceeds certain levels.

The facility is subject to a provision permitting lenders to terminate their advances if a person or group of persons, acting in concert, other than Infineon, gains either 35% of our company’s voting power or other indices of control or share ownership exceeding 35% of our issued share capital.

Subject to conditions in the capital markets, we expect from time to time during the period after our initial public offering (but subject to the lock-up agreement we have agreed with the underwriters for this offering) to consider engaging in additional financing transactions. We would expect to use a portion or all of the proceeds from any such transactions to refinance some or all our indebtedness to Infineon.

A €124 million non-recourse project financing facility for the expansion of the Porto, Portugal manufacturing facility was executed in May 2005. As of March 31, 2006, this facility was fully drawn. This loan is on the books of the Porto entity, which was transferred to us as part of the carve-out.


	*Pension Plan Funding*

Our company’s projected benefit obligation, which considers future compensation increases, amounted to €65 million at September 30, 2005, compared to €44 million at September 30, 2004. The fair value of plan assets as of September 30, 2005 was €34 million, compared to €25 million as of September 30, 2004.

We have estimated the return on plan assets for the next financial year to be 6.5% for domestic plans and 6.7% for foreign plans. The actual return on plan assets between the last measurement dates amounted to 12.8% for domestic plans and 2.9% for foreign plans, compared to the expected return on plan assets for that period of 7.3% for domestic plans and 6.4% for foreign plans.

At September 30, 2005 and 2004, the combined funding status of our pension plans reflected an underfunding of €31 million and €19 million, respectively, and we recognized these amounts on our balance sheets on those dates. As the value of our expected future benefits payable over the years through 2015 was €19 million on September 30, 2005, we do not perceive a need to increase our plan funding in the immediate future.

Our investment approach with respect to the pension plans involves employing a sufficient level of flexibility to capture investment opportunities as they occur, while maintaining reasonable parameters to ensure that prudence and care are exercised in the execution of the investment program. The pension plans’ assets are invested with several investment managers. The plans employ a mix of active and passive investment management programs. Considering the duration of the underlying liabilities, a portfolio of investments of plan assets in equity securities, debt securities and other assets is targeted to maximize the long-term return on plan assets for a given level of risk. Investment risk is monitored on an ongoing basis through periodic portfolio reviews, meetings with investment managers and liability measurements. Investment policies and strategies are periodically reviewed to ensure the objectives of the plans are met considering any changes in benefit plan design, market conditions or other material items.

Our asset allocation targets for pension plan assets are based on our assessment of business and financial conditions, demographic and actuarial data, funding characteristics, related risk factors, market sensitivity

analyses and other relevant factors. The overall allocation is expected to help protect the plans’ level of funding while generating sufficiently stable real returns (i.e., net of inflation) to meet current and future benefit payment needs. Due to active portfolio management, the asset allocation may differ from the target allocation up to certain limits. As a matter of policy, our pension plans will not be permitted to invest in our company shares. We plan to fund our pension obligations independently after our carve-out, although we expect to continue the practice of investing these assets in a well-diversified portfolio of investments aimed at maximizing long-term returns.


	*Research and Development*

Research and development form a significant part of our operations. Our research and development expenses were €390 million in the 2005 financial year. We plan to make additional research and development expenditures in the range of €410 million to €430 million during the 2006 financial year. We intend to fund these expenditures in the normal course of business through cash provided by operating activities. For a description of our research and development policies, please see “Our Business — Research and Development.”

Quantitative and Qualitative Disclosure About Market Risk

Market risk is the risk of loss related to adverse changes in market prices, including commodity prices, foreign exchange rates and interest rates, of financial instruments. We are exposed to various financial market risks in our ordinary course business transactions, primarily from changes in commodity prices, foreign exchange rates and interest rates. Infineon has used, and we expect to use, derivative instruments to manage these risks. We use these instruments only for hedging purposes and not for speculative purposes. Following our carve-out, we expect to enter into hedging transactions such as these directly with third parties on a similar basis as Infineon has done to date. You should read the following discussion of the categories of market risk to which we are exposed in conjunction with notes 2, 29 and 30 to our combined financial statements.


	*Commodity Price Risk*

A significant portion of our business is exposed to fluctuations in market prices for standard DRAM products. For these products, the sales price responds to market forces in a way similar to that of other commodities. This price volatility can be extreme and has resulted in significant fluctuations within relatively short time-frames. We attempt to mitigate the effects of volatility by continuously improving our cost position, by entering into new strategic partnerships and by focusing our product portfolio on application-specific products that are subject to less volatility, such as DRAM products for infrastructure, graphics, mobile and consumer applications.

We are also exposed to commodity price risks with respect to raw materials used in the manufacture of our products. We seek to minimize these risks through our sourcing policies (including the use of multiple sources, where possible) and our operating procedures.

We do not use derivative financial instruments to manage any exposure to fluctuations in commodity prices remaining after the operating measures we describe above.


	*Foreign Exchange and Interest Rate Risk*

Although we prepare our combined financial statements in euro, most of our sales volumes, as well as slightly over one-half of our costs, (primarily those relating to design, manufacturing, selling, marketing, general and administrative functions, and research and development of products), are denominated in other currencies, primarily U.S. dollars. The portions of our sales and expenses denominated in currencies other than the euro are exposed to exchange rate fluctuations in the values of these currencies relative to the euro. We are therefore subject to both transaction and translation risk. For more information on these risks, please refer to “— Factors that Affect our Results of Operations — Exchange Rate Fluctuations”. Exchange rate fluctuations may have substantial effects on our sales, our costs and our overall results of operations. Although the U.S. dollar was slightly stronger on September 30, 2005 than it had been one year earlier, the average

exchange rate of U.S. dollars for euro over the 2005 financial year was weaker, falling 4% from U.S. $1.00 = €0.8209 to U.S. $1.00 = 0.7869.

The table below provides information about those derivative financial instruments that are sensitive to changes in foreign currency exchange and interest rates as of September 30, 2005, i.e., foreign currency forward contracts and currency options. For foreign currency forward contracts related to certain sale and purchase transactions, the table presents the notional amounts and the weighted average contractual foreign exchange rates. At September 30, 2005, we did not have any foreign currency derivative instruments with original terms in excess of one year.

The euro equivalent notional amounts in millions and fair values of our derivative instruments as of September 30, 2004 and 2005 are as follows:


		As of September 30,

		2004					2005

		Notional		Fair			Notional		Fair
		amount		value			amount		value

		(in millions)
Forward contracts sold
	U.S. dollar		€99		€(2	)		€42		€2
	Japanese yen		41		(1	)		34		—
Forward contracts purchased:
	U.S. dollar		25		—			122		1
	Japanese yen		5		—			—		—
	Malaysian Ringgit		—		—			11		—
	Other currencies		2		—			16		—

Fair value, net					€(3	)				€3

Before our carve-out occurred, these financial instruments were financial instruments of Infineon that were specifically identified to the Memory Products business. We anticipate entering into our own financial instruments for hedging purposes.

We do not enter into derivative transactions for trading or speculative purposes.

Infineon’s policy with respect to limiting short-term foreign currency exposure generally is to economically hedge at least 75% of our estimated net exposure for a minimum period of two months in advance and, depending on the nature of the underlying transactions, a significant portion of the period thereafter. Our foreign currency exposure resulting from differences between actual and forecasted amounts cannot be mitigated. We calculate this net exposure on a cash-flow basis taking into account balance sheet items, actual orders received or made and all other planned revenues and expenses.

We record our derivative instruments according to the provisions of SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”, as amended. SFAS No. 133 requires all derivative instruments to be recorded on the balance sheet at their fair value. Gains and losses resulting from changes in the fair values of those derivatives are accounted for depending on the use of the derivative instrument and whether it qualifies for hedge accounting. Our economic hedges are generally not considered hedges under SFAS No. 133. We report these derivatives at fair value in our combined financial statements, with changes in fair values recorded on our statement of operations.

In the 2005 financial year, our allocated foreign exchange transaction gains amounted to €18 million and were partially offset by losses from our economic hedge transactions of €1 million, resulting in a net gain of €17 million. This compares to foreign exchange losses of €14 million, offset by hedging gains of €9 million, resulting in net losses of €5 million in the 2004 financial year. For purposes of the carve-out, foreign exchange gains and losses were allocated based on Infineon’s segments’ proportions of total costs.


	*Interest Rate Risk*

We are exposed to interest rate risk through our fixed term deposits and loans. Due to the high volatility of our core business and to maintain high operational flexibility, we have historically kept a substantial amount of cash and cash equivalents. These assets are mainly invested in instruments with contractual maturities ranging from three to twelve months, bearing interest at short-term rates. To reduce the risk caused by changes in market interest rates, we attempt to align the duration of the interest rates of our debts and current assets by the use of interest rate derivatives.

Fluctuating interest rates have an impact on parts of our financial instruments such as cash and marketable securities as well as our interest-bearing debt obligations. Since we have historically received financing from Infineon, we did not have a specific need to enter into derivative instruments such as interest rate swaps to hedge against adverse interest rate developments. We anticipate making use of such instruments depending on the nature of our debt financing in the future.

Based on our long and short term debt outstanding on September 30, 2005 and the interest rates in effect at that time for those loans a 1% increase or decrease in our overall interest rate environment would (keeping all other variables constant) have increased or decreased our annualized debt service cost by an estimated €6 million.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements other than operating leases in respect of office equipment including personal computers and workstations. These arrangements are not material.

Recent Developments

The following table presents preliminary financial data for the periods indicated. We derived the preliminary financial data for the three and nine month periods ended June 30, 2005 from our preliminary unaudited combined financial statements for those periods. We derived the preliminary financial data for the three and nine month periods ended June 30, 2006 from our preliminary unaudited combined financial statements for those periods, which reflect the operations of our company as a separate legal entity after the carve-out, beginning on May 1, 2006.

We have not yet finalized our financial statements for the three and nine month periods ended June 30, 2006. Complete unaudited interim financial statements for the three and nine month periods ended June 30, 2006 and 2005 are therefore not yet available. The following discussion is based on the preliminary financial data available as of the date of this prospectus. The discussion and analysis of these preliminary financial data and results of operations contains forward-looking statements. Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements.


		As of and for the					As of and for the
		three months ended June 30,					nine months ended June 30,

		2005			2006		2005			2006

		(unaudited)			(unaudited)		(unaudited)			(unaudited)
		(in millions)
Statement of operations data
	Net sales	€	659		€	977	€	2,058		€	2,583
	Interest (income) expense, net		—			6		(2	)		22
	Income tax expense		4			40		94			58
	Net (loss) income		(140	)		54		(18	)		(82	)
Balance sheet data
	Cash and cash equivalents									€	438
	Marketable securities										170

	Short-term debt and current maturities										451
	Long-term debt										151

	Shareholders’ equity										3,341
Cash flow data
	Depreciation and amortization	€	158		€	177	€	397		€	524
	Purchases of property, plant and equipment		309			89		816			571

Our net sales increased 48% during the three months ended June 30, 2006, from €659 million in the three months ended June 30, 2005 to €977 million in the three months ended June 30, 2006. Net sales increased 26% for the nine months ended June 30, 2006, from €2,058 million in the nine months ended June 30, 2005 to €2,583 million in the nine months ended June 30, 2006. These increases were due to strong increases in bit shipments. While our average selling prices declined only marginally in the three months ended June 30, 2006 as compared with the three month period one year earlier, our increase in net sales was offset in part by substantially lower average selling prices during the nine months ended June 30, 2006, in which these prices declined by 29% as compared to the nine months ended June 30, 2005.

Our EBIT is determined from our consolidated statement of operations data as follows:


		For the three months					For the nine months
		ended June 30,					ended June 30,

		2005			2006		2005			2006

		(unaudited)			(unaudited)		(unaudited)			(unaudited)
		(in millions)
Net (loss) income		€	(140	)	€	54	€	(18	)	€	(82	)
Add: Income tax expense			4			40		94			58
	Interest expense (income), net		—			6		(2	)		22

EBIT		€	(136	)	€	100	€	74		€	(2	)

Our EBIT improved to earnings of €100 million in the three months ended June 30, 2006 from a loss of €136 million for the three month period one year earlier. With average selling prices falling only marginally, the reduction in our per-bit manufacturing costs caused by the continued yield improvements of our 110nm production facilities, the start of the ramp-up of our 90nm capacities and the increasing share of our volume manufactured on 300mm wafers led to improved operating results. Our EBIT was a loss of €2 million in the nine months ended June 30, 2006 as compared with earnings of €74 million for the nine month period one year earlier. Although our per-bit manufacturing costs decreased across the nine month period as well for the above mentioned reasons, the 2005 period included our recognition of €118 million in revenue related to the ProMOS license agreement, which did not re-occur in the nine months ended June 30, 2006.

We realized net income of €54 million in the three months ended June 30, 2006 as compared with a net loss of €140 in the three months ended June 30, 2005, but had a net loss of €82 million in the nine months

ended June 30, 2006 as compared with net loss of €18 million in the nine months ended June 30, 2005. The net loss for the nine month period ended June 30, 2006 reflected in large part the net loss of €136 million in the first six months of the 2006 financial year.

Our depreciation expense has generally increased in the three and six months ended June 30, 2006 as compared with the corresponding periods in the 2005 financial year primarily due to the placement into service of fixed assets we have acquired during recent periods, most significantly those relating to 300mm production facility in Richmond, Virginia.

The following table presents our net cash position at June 30, 2006.


		As of
		June 30,
		2006

		(unaudited)
		(in millions)
Cash and cash equivalents		€	438
Marketable securities			170
Less:
	Long-term debt		151
	Short-term debt and current maturities		451

Total financial debt			602

Net cash position		€	6

Recent Accounting Pronouncements

In June 2004, EITF No. 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments”, was issued, which includes new guidance for evaluating and recording other-than-temporary impairment losses on debt and equity securities accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, and cost method investments, as well as new disclosure requirements for investments that are deemed to be temporarily impaired. While the disclosure requirements for specified debt and equity securities and cost method investments were effective for annual periods ending after December 15, 2003, the FASB has directed the FASB staff to delay the effective date for the measurement and recognition guidance contained in EITF No. 03-1. This delay does not suspend the requirement to recognize other-than temporary impairments as required by existing authoritative literature. We do not expect the adoption of EITF No. 03-1 to have a material impact on our combined financial position or results of operations.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs — an amendment of ARB No. 43, Chapter 4”, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage), requiring that such costs be recognized as current period charges and requiring the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. SFAS No. 151 is effective for our financial year beginning October 1, 2005. We do not expect the implementation of SFAS No. 151 to have a significant impact on our combined financial position or results of operations.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — an Amendment of APB Opinion No. 29”, which eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges for nonmonetary assets that do not have commercial substance. We adopted SFAS No. 153 for nonmonetary asset exchanges occurring on or after July 1, 2005. The adoption of SFAS No. 153 did not have a significant impact on our combined financial position or results of operations.

In December 2004, the FASB issued SFAS No. 123 (revised 2004) “Share-Based Payments”. SFAS No. 123 (revised 2004) requires public entities to measure the cost of employee services received in exchange

for an award of equity instruments based on the grant-date fair value of the award and recognize the cost over the period during which an employee is required to provide service in exchange for the award. SFAS No. 123 (revised 2004) eliminates the alternative method of accounting for employee share-based payments previously available under APB No. 25. The SEC issued guidance on April 14, 2005 announcing that public companies will be required to adopt SFAS No. 123 (revised 2004) by their first financial year beginning after June 15, 2005. Accordingly, we adopted SFAS No. 123 (revised 2004) as of the first quarter of the 2006 financial year. The adoption of SFAS No. 123 (revised 2004) for the 2005 financial year would have decreased net income by €9. We intend to establish our own stock option plan prior to the offering but will not issue any options in conjunction with the offering.

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations”, which clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated even though uncertainty exists about the timing and (or) method of settlement. We are required to adopt Interpretation No. 47 prior to the end of our 2006 financial year. We are currently evaluating the impact that the adoption of Interpretation No. 47 will have on our combined financial position and results of operations.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”. SFAS No. 154 replaces APB Opinion No. 20, “Accounting Changes”, and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”, and changes the requirements for the accounting and reporting of a change in accounting principle. We are required to adopt SFAS No. 154 for accounting changes and error corrections that occur after September 30, 2006. Our results of operations and financial condition will only be impacted following the adoption of SFAS No. 154 if we implement changes in accounting principles that are addressed by the standard or corrects accounting errors in future periods.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” which amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. This Statement is aimed at improving the financial reporting of certain hybrid financial instruments. SFAS No. 155 is effective for us from October 1, 2006. We do not currently have any hybrid financial instruments and accordingly do not expect that the implementation of SFAS No. 155 will have a material effect on our financial statements.

THE SEMICONDUCTOR MEMORY INDUSTRY

Semiconductor devices, generally referred to as integrated circuits, or ICs, enable a wide variety of everyday electronic products and systems to capture, process, store and transmit data. In addition to their familiar use in computers, semiconductors also increasingly enable or control functions in mobile telephones, digital still cameras, digital audio players, DVD recorders, digital TVs, electronic gaming consoles and other telecom, consumer, automotive and industrial electronic devices.

Semiconductor devices generally fall within three broad categories: processors, which process instructions; logic devices, which capture, manipulate and transmit data or monitor or control functions within electronic devices; and memory devices, which store data in digital form. Electronic devices generally require a combination of processing, logic and memory functions. Although these may be combined on a single chip, the three are more typically produced on separate chips and then integrated in a module or chipset or in an end product through hardware and software interfaces.

There are three major types of semiconductor memory:


	•	Dynamic Random Access Memory, or DRAM, products, which are the most common volatile memories. A “volatile” memory IC retains information only while electrical power is switched on, while a “non-volatile” memory IC retains its data content after the power supply is switched off. DRAM products offer large densities at low cost with relatively fast access times and virtually unlimited endurance for the life of the product. They are “dynamic” because they must be electronically refreshed frequently in order to retain the stored data;

	•	“Flash” memory products, which are non-volatile memories offering large densities at low cost with slower access times and limited endurance; and

	•	Static Random Access Memory, or SRAM, products, which are volatile memories offering low densities at relatively higher cost with very fast access times and virtually unlimited endurance for the life of the product.

DRAM manufacturers can sell either individual DRAM chips, known as dies, or components, which are packaged dies, or DRAM modules, which are printed circuit boards generally containing between four and thirty-six components.

According to Gartner, DRAM sales in calendar year 2005 were $25 billion, representing 50% of the $50 billion semiconductor memory industry, which in turn represented 21% of the $235 billion semiconductor industry. Sales of flash memory reached $19 billion or 38% of the semiconductor memory industry in calendar year 2005.

Semiconductor Memory Product Features

The increasing complexity of the electronic devices in which memory ICs are used, including the ever more sophisticated software needed to operate them, has required growing amounts of memory to permit efficient and high-speed operation. At the same time, many of these electronic devices are themselves becoming smaller or more portable, with limited room to accommodate, and limited power to operate, the additional semiconductors they contain. These factors have driven continuous efforts to improve semiconductor design and process technologies over the years to enable manufacturers to produce ever smaller, more complex and more powerful memory products at a lower cost-per-megabit.

The principal technical features that DRAM suppliers have focused on to meet these requirements are:

Memory density

Density of a DRAM chip is the amount of data it can store and is usually measured in megabits (Mb) or gigabits (Gb). Density of a DRAM module is measured in megabytes (MB) and gigabytes (GB), where each byte contains eight bits. DRAM chips are currently offered in a variety of densities for different end uses, generally ranging from 4Mb to 1Gb per chip, or 128MB to 8GB per module for high-end modules. In recent

years, the maximum density of standard DRAM chips has generally doubled every 24 months. Smaller amounts of older generations of DRAM (4Mb, 16Mb, 64Mb and 128Mb densities) continue to be supplied for applications where memory density is less critical, such as printers. The industry is currently moving from a 256Mb standard density to a 512Mb density. According to Gartner, the percentage of standard chips produced with 512Mb was 14% in calendar year 2004 and increased to 43% in 2005.

The following table shows the percentage of worldwide DRAM bit shipments in the period from 2000 to 2005 according to Gartner.


	Year ended December 31,

	2000		2001		2002		2003		2004		2005

4Mb		0.3%		0.1%		0.1%		—		—		—
16Mb		5.9%		2.4%		1.5%		0.8%		0.7%		0.4%
64Mb		51.4%		16.8%		7.0%		3.8%		2.5%		1.3%
128Mb		37.3%		61.8%		35.7%		14.2%		7.7%		4.2%
256Mb		5.0%		18.8%		55.5%		78.9%		74.0%		48.0%
512Mb		—		—		0.2%		2.2%		14.3%		43.2%
1Gb		—		—		—		0.1%		0.9%		2.8%

Data transfer rates and interfaces

Data transfer rate is the rate at which the IC transfers data and is usually measured either in megabytes per second or by the clock frequency, which is measured in megahertz. DRAM interfaces have constantly developed towards increasing the data transfer rate from the DRAM to a device’s CPU, or central processing unit, over the last decade. Data transfer rate is important because it affects overall system performance, causing loss of CPU speed if the data transfer rate is low compared to the computation power of CPU. The rate of data transfer between the DRAM and the CPU is governed by the clock frequency, which operates in a wave-like cycle and has driven increasing clock frequencies for CPUs and demand for faster data transfer from the DRAM. In a synchronous DRAM (SDRAM) interface, data is transferred from the DRAM to the CPU according to the system clock rate. The most common current interfaces are double data rate (DDR) SDRAM and double data rate 2 (DDR2) SDRAM. DDR SDRAM supports data transfer on both edges of each clock cycle. Clock frequencies for DDR reach a maximum of 200MHz, resulting in a data transfer rate of approximately 3.2GB per second for a standard PC module. Currently the industry standard DRAM chip interface is transitioning from DDR to DDR2. The DDR2 interface further improves data transfer rates to a maximum of 6.4GB per second for a standard PC module operating at the highest clock frequencies. In the area of high-end specialty DRAM products, such as graphics DRAM, clock frequencies today reach up to 800MHz, resulting in data transfer rates of 25.6GB per second on a high end graphic card. According to Gartner, the percentage of chips produced with the DDR2 interface was 7% in calendar year 2004 and increased to 26% in calendar year 2005.

The following table shows the percentage of worldwide DRAM bit shipments by interface generation in the period from 2000 to 2005, according to Gartner.


	Year ended December 31,

	2000		2001		2002		2003		2004		2005

FPM/EDO DRAM		9.9%		3.2%		0.9%		0.4%		0.2%		0.1%
SDR SDRAM		87.0%		81.0%		55.5%		22.4%		17.6%		12.2%
DDR SDRAM		—		8.6%		37.9%		72.5%		72.6%		58.0%
DDR2 SDRAM		—		—		0.0%		1.3%		6.6%		26.5%
RDRAM		2.7%		6.4%		4.2%		1.9%		0.9%		0.4%
Other		0.3%		0.8%		1.5%		1.6%		2.1%		2.8%

Voltage and power consumption

Another trend that is becoming increasingly important for DRAM products is the continuous reduction of operating voltage and power consumption. Whereas SDR SDRAM products are operated at 3.3 Volt, the voltage has been reduced to 2.5 Volt for DDR SDRAM and to 1.8 Volt for DDR2 SDRAM products, thus constantly reducing the power consumption by mainstream DRAMs. With the increasing number of battery powered mobile applications such as mobile phones, smart handheld devices and digital audio players, the demand for ultra low-power memories has increased significantly. Specifically designed DRAM products, such as “mobile DRAM”, include active power saving features that allow the further reduction of power consumption and thus an increase in battery life for mobile applications. Recently, heat dissipation has become an additional important driver for low-power demand for DRAM products. The heat produced by high density DRAM content in server farms and the related expenditures for electricity has reached a level that has driven server manufacturers to focus on low power DRAM products in the market. Heat dissipation is also an important topic for non-portable consumer applications such as digital TVs that use slim cases and must avoid noisy cooling systems such as fans for aesthetic reasons.

DRAM Technologies


	*DRAM Architecture*

A DRAM storage cell consists of a capacitor and a transistor, and a key element in the physical layout of DRAM chips produced today is the arrangement of capacitors and transistors on the chip. In early DRAM chips, capacitors and transistors were arranged in a plane across the surface of the chip. As DRAM feature sizes have become smaller, the planar space for the capacitor has become too small to hold a sufficient amount of charges and the capacitor had to move in the third dimension. Two different technological approaches have evolved to address this issue, one in which the capacitor is laid into holes etched into the surface of the silicon, commonly referred to as the “trench” process, and another in which the capacitor is laid on top of the silicon, commonly referred to as the “stack” process. In the market today, each of several manufacturers using stack technology has developed a unique stack architecture, while all manufacturers using trench architecture use technology first developed by Infineon, Toshiba and IBM during the 1990s. The trench technology was later advanced by Qimonda and is currently being further developed cooperatively by Qimonda and Nanya. Both stack and trench cell technology have to date been accepted in the market. According to Gartner, based on bit shipments, in 2005, trench-based DRAMs accounted for approximately 27% of the worldwide DRAM market, while the various stack technologies accounted for the remainder.


	*Feature Size*

DRAM technology development has generally followed “Moore’s Law”, which estimates that the number of transistors per square inch of silicon doubles every two years. Manufacturers have achieved this progress in chip productivity by “shrinking” the circuitry on chips — that is, by reducing the minimum distance between circuits, known as the feature size. Smaller feature sizes require increasingly sophisticated manufacturing process technology, including advanced masks and photolithography techniques for printing the circuitry on the chip. The distance between circuits on a standard DRAM chip is measured in nanometers (nm) where one nm equals one-billionth of a meter. The minimum feature size has declined from 250nm in 1998 to 90nm today. The future shrinkage of feature sizes is estimated by the International Technology Roadmap for Semiconductors, or ITRS, which provides details and naming conventions for upcoming feature sizes called “technology nodes”. The next technology nodes the ITRS foresees, which industry participants generally refer to as the “shrinkage roadmap” after 90nm are 80nm, 70nm, 65nm, 57nm and 50nm. However, the actual feature sizes of the technology nodes that individual industry participants implement may differ from the node naming convention because each participant adjusts its technology to meet its manufacturing and capital requirements. Industry participants are in the advanced stages of developing process technology for 80 and even 75/70nm feature sizes, and anticipate the development of progressive generations down to approximately 50nm in the coming years. The transition from one generation to the next, for example from 170nm to 140nm technology, has typically occurred every 12 to 18 months. Due to increasing space restrictions necessitated by feature sizes of 50nm and below, transistors are also expected

to move into the third dimension in future feature size generations of both trench and stack architectures. It is not yet clear if either approach will produce greater space or cost efficiencies as chips become still smaller and memory densities continue to increase.

The Semiconductor Manufacturing Process

Semiconductor manufacturing is a very capital intensive process, with substantial fixed costs for fabrication facilities, known as “fabs”, and for manufacturing equipment. Moreover, given the rapid technology transitions in the industry, manufacturers must depreciate this equipment over short time periods, increasing the ratio of fixed costs to variable costs per chip produced. The manufacturing process, which is substantially the same for both DRAM and flash memory products, is generally divided into two steps, referred to as the front-end process and the back-end process.


	*The front-end process*

In the front-end process, electronic circuits are produced on a silicon wafer. This process involves several hundred process steps and takes place over a period of approximately two months in a clean room environment in which humidity, temperature and particle contamination are precisely controlled. Because of the very small geometries involved in wafer processing, highly complex and specialized equipment, materials and techniques are used. In the first phase of processing, transistor arrays are created through cycles of the following steps:


	•	oxidation/deposition, which involves depositing oxide material on the surface of the wafer;

	•	photolithography, which utilizes a light-sensitive material called photoresist, a pre-formatted “mask” and a light source, to imprint the desired circuitry on the deposited oxide material;

	•	etching, which involves removing the oxide material that is not still covered by photoresist, and

	•	ion implantation, during which ionic materials known as dopants are shot into the wafer to create charged regions within the silicon wafer to enable transistor functionality.

After transistors are created, they are connected together to form the logic gates using an interconnect material, usually aluminum or copper. The metal layers are built with stages of deposition, lithography, and etching, similar to the pre-metal stage but using separate equipment and masks. Dieletric material is deposited between the layers to insulate them. A final passivation layer is added above the top metal layer to protect the circuitry. At the end of the front-end process the chips are tested on the wafer for functionality.

Wafer processing is conducted in specialized fabrication facilities, or fabs. A fab’s capacity is generally stated in terms of the number of wafers on which processing can begin in a given period, or “wafer starts per” week or month. The standard diameter of silicon wafers used to produce semiconductors increased from 50 mm in 1970, to 100 mm by 1980, 150 mm by 1990 and 200 mm by 1995. Most current production continues to be on 200 mm wafers, but the industry transition to 300 mm wafers is under way. To transition a fabrication facility to larger wafer sizes requires the acquisition of adequate equipment and a lengthy testing and ramp-up period to achieve satisfactory manufacturing yields. The transition to still larger 450 mm wafers, if and when it occurs, will likely require a similarly long transition and substantial investments.

While larger silicon wafers cost more than smaller ones and the equipment used to manufacture chips on larger wafers costs more than equipment used for smaller wafers, these additional costs are more than offset by the productivity gains provided by the larger wafer. These productivity gains are primarily driven by the increase in the number of chips produced from each wafer. For example, the surface area of 300 mm wafers is approximately 2.25 times greater than that of 200 mm wafers, which yields approximately 140% more chips per wafer. Because the cost of labor and certain other fixed costs is largely independent of the size of the wafers used, use of larger wafers results in reduction of the costs per chip.

Increasing complexity and capital intensiveness of front-end processing has facilitated emergence of front-end foundries, who partner with semiconductor designers or manufacturers to perform front-end processing services.


	*The back-end process*

In the back-end process, also called the packaging, assembly and test phase, processed wafers are diced into individual chips, which, after having interconnecting pins added, are encapsulated into a packaged component using a compound material. Packaged components are tested extensively to ensure quality and technical specifications are maintained. After final testing, components are often soldered onto printed circuit boards to create modules, which themselves undergo application testing. Increasing requirements for higher component performance and smaller size have led to development of back-end processing technologies and innovative package types that optimize speed and reliability of device interconnects while reducing the extra size added by a chip’s packaging. Because back-end processing can take place in a different location than the front-end processing, several back-end foundries have emerged to specialize on back-end processing and offer outsourced services to semiconductor manufacturers who would like to specialize on front-end processing alone or augment their in-house back-end capacity.

DRAM Applications

DRAM, the most common type of memory IC, is found in a wide variety of electronic devices, including servers and workstations, personal and notebook computers, upgrade modules, graphic cards, game consoles, mobile phones, printers, digital TVs, set-top boxes and other consumer electronic devices. Because these applications require different DRAM products, we believe the DRAM’s intended application determines its pricing and competitive dynamics. We have identified the following main applications for DRAMs:


	*Standard DRAMs for PC and Workstation Applications*

PCs, workstations and other computing applications were the first users of DRAM and have historically represented the majority of DRAM sales. DRAM components and modules for use in desktop and notebook PCs and workstations accounted for approximately 52% of global DRAM bit-shipments in 2005, according to Gartner. These components and modules, can be best described as “standard DRAMs”, because they are standardized across suppliers with respect to performance and package specifications and trade like a commodity in a relatively liquid market. They combine high-density and high-speed data storage and retrieval with the lowest cost per-megabit of any volatile memory product.

Typical customers of these standard DRAMs are large PC manufactures, such as Dell, HP and Lenovo, either directly or through contract manufacturers that assemble PCs for the large manufacturers, as well as local original equipment manufacturers, or OEMs, and module manufacturers, such as Kingston. We believe that these customers tend to select their standard DRAM suppliers on the basis of price and ability to supply high volumes of product reliably. Some standard DRAM customers also produce infrastructure equipment such as servers, and networking and storage equipment, and we believe a supplier’s ability to offer other DRAM products is an additional factor that may influence these customers’ selection of standard DRAM suppliers.

The market for standard DRAMs has been characterized by intense competition, often involving price cuts, and significant volatility of revenues and operating results of market participants. The major DRAM manufacturers typically have contracts with each of their major OEM customers, with specific prices negotiated twice per month. However, there are many suppliers in the standard DRAM market, including module manufacturers and smaller DRAM manufacturers, whose DRAM sales prices are often based on spot market average selling prices, or ASPs, which fluctuate daily.


	*DRAMs for Infrastructure Applications*

The high performance equipment that forms the backbone of the Internet, such as servers and other networking and storage equipment, also use DRAMs. DRAMs for these applications accounted for approximately 24% of global DRAM bit-shipments in 2005, according to Gartner. Due to the large data volume that is handled by these applications, these customers usually demand DRAM products with higher memory capacities. DRAM modules for infrastructure applications differ from the modules used in PCs by providing extra high densities and error correction features to provide highest reliability. We believe that,

because these high-performance products often perform critical tasks, their producers select DRAM suppliers whose DRAMs display advanced features and reliability and whose manufacturing processes have proven to be of high quality. In addition there is also demand for customized products by some customers, who typically provide their product specifications to DRAM suppliers, who in turn design and produce the requested product. The customer will “validate” the DRAM supplied, testing it rigorously over a process that may last several months. DRAM products for infrastructure applications such as Registered DIMMs generally command a higher per-unit price than standard DRAM products. Typical customers who purchase DRAM products for infrastructure applications are server producers such as Sun Microsystems and network and storage equipment vendors such as Cisco Systems and EMC.

Because DRAMs used in infrastructure applications tend to be less standardized and more customer- or application-specific, interchangeability is lower relative to standard DRAMs and consequently the level of competition among suppliers is less intense. In addition, there are fewer suppliers of these types of DRAM products than standard DRAMs and these suppliers typically sell infrastructure DRAM products pursuant to contract. The smaller number of suppliers and high percentage of these products sold pursuant to contract tends to result in the prices for these DRAM products being less volatile than those for standard DRAM products.


	*DRAMs for Other Applications including Graphics, Mobile and Consumer Applications*

With the growth of the mobile communication industry and the digitalization of consumer products during the last decade, the range of applications using DRAM products has significantly broadened. Graphics applications such as game consoles and graphics cards are requiring and driving demand for high-performance graphics DRAMs that support the increasingly advanced graphics in computer games. The increasing number of communication and consumer mobile devices, including mobile phones and digital still cameras and audio players, has driven growth in demand for low-power DRAM products that allow for longer battery lifetimes. As a result, a variety of specialty DRAM components have been developed to address the specific needs of these applications. In addition there is a growing number of other consumer applications such as digital TVs, DVD players and recorders and set-top boxes that require a whole range of standard or even customized DRAM products. Products for graphics, mobile and consumer applications accounted for about 13% of DRAM bit shipments in 2005, according to Gartner.

Successful DRAM suppliers maintain close relationships with mobile phone, game console and consumer electronic device producers, to understand the customer’s requirements early in their product development stage. Many of these customers expect their DRAM suppliers to be able to proactively provide advanced products so that customers can integrate them into their product design. As a result, compared to standard DRAMs with the same density, these DRAMs tend to be relatively higher in price. Typical customers of these types of DRAMs include mobile handset manufacturers such as Motorola, Nokia and Sony Ericsson, graphic card manufacturers such as ATI and nVidia, game console manufacturers such as Microsoft, Sony and Nintendo and major consumer electronics manufacturers.

Unlike standard DRAMs, DRAM products for graphics, mobile and consumer applications tend to be customer- and application-specific, and, therefore, prices for these DRAM products tend to be more stable, with prices fixed by comparatively long-term contracts.

Drivers of DRAM Demand and Recent Trends

According to Gartner, between calendar years 1998 and 2005, bit shipments grew at a CAGR of 56% over the period. Historically, growth of DRAM bit shipments was driven by DRAM’s primary application, computing, and depended on growth in units shipped and DRAM content per unit. Rapid adoption of PCs by business and home users, combined with operating system upgrades that demanded more DRAM per unit, drove strong growth in bit demand. However, as more DRAM components began to be used in a broader range of applications, DRAMs for infrastructure and graphics, mobile and consumer applications began to represent a larger share of total DRAM bit shipments. In calendar year 2005, PCs, workstations and memory modules and upgrades represented only 53% of total DRAM consumption compared to 64% in 2001.

Current estimates by Gartner predict continued strong growth in DRAM bit shipments at a CAGR of 53% between calendar years 2005 and 2010. DRAM revenues are expected to grow at a CAGR of 6% over the same period and reach $34 billion in 2010, although DRAM prices are expected to continue to fall. Key drivers of the growth in bit demand include the following:


	•	*Emergence of mobile phones as a significant consumer of DRAM.* While mobile phones consumed nearly no DRAM five years ago, in calendar year 2005 this application represented 2% of DRAM consumption and is expected to reach 11% in calendar year 2010, according to Gartner. The 13% CAGR of units shipped between calendar years 2005 and 2010, combined with 92% CAGR in megabytes per unit, is expected to lead to 117% CAGR of total DRAM consumption by mobile phones. Rapid growth in DRAM content in phones is driven by emergence of multimedia phones and adoption of sophisticated digital audio and video functions into handsets. Market research firm International Data Corporation (IDC) estimates that smart handheld devices, including keypad- and pen-based devices, will each contain as much as 500 megabytes of DRAM by calendar year 2010.

	•	*New or increased DRAM consumption by graphics applications and digital consumer devices.* Evolution of consumer electronics has created several device categories that offer sophisticated functionality and require substantial amount of DRAM to operate. These devices, including digital TVs and digital audio players, are often characterized by strong unit growth and represent a significant incremental opportunity for DRAM suppliers. In addition, technological advances in established consumer devices have led newer models to require more advanced DRAM and consume more DRAM per unit. Such devices include game consoles, where the latest products include 512 or 256 MB of highly specialized GDDR3 DRAM. Two of the major game console developers are expected to introduce new consoles during 2006, while the third major game console developer is currently ramping production of its new console. Newer DVD technologies, including advanced optical drives that demand more discrete DRAM chips per DVD player or recorder, are also expected to contribute to this growth. These and other trends are expected to drive 40% CAGR of DRAM consumption in consumer devices between calendar years 2005 and 2010, according to Gartner.

	•	*Continuing strong growth in DRAMs for infrastructure.* DRAM consumption in servers is expected to grow at 44% CAGR between 2005 and 2010, according to Gartner, driven by an estimated increase of DRAM content per unit at a CAGR of over 35% and strong unit growth of blade servers. Evolution of processor architectures, combined with increasing complexity of systems, places significant demands on DRAM components used in these systems, including power efficiency, speed and density. However, demand for such DRAMs tends to be contract-based and therefore relatively steady, resulting in more stable and favorable pricing than the overall DRAM market.

	•	*Multiple drivers of growth in DRAMs for PC and workstations.* PCs, workstations and memory modules and upgrades are expected to increase DRAM consumption at 53% CAGR between 2005 and 2010, according to Gartner. One of the drivers of this growth involves increasing adoption of dual-core and 64-bit processors, which are expected to be incorporated in almost half of total PC shipments by the end of 2007, according to IDC. In addition, introduction of Microsoft’s first mainstream 64-bit operating system, Windows Vista, currently anticipated by Microsoft to take place in early 2007, is expected to stimulate DRAM demand by facilitating higher DRAM per unit and by triggering PC upgrades by consumers, followed by companies. Gartner expects mobile PCs to play an important role in DRAM demand as their strong unit growth is expected to continue at a 19% CAGR in the period between calendar years 2005 and 2010, driven by improved power efficiency, wireless and multimedia functionality and other trends, including substitution of desktop PCs. Given the space and power constraints present in mobile devices, this is expected to lead to increase demand for advanced DRAM components that address the above constraints. Significant DRAM market potential also exists in desktop PC penetration in emerging markets such as China and India.

Drivers of DRAM Supply and Recent Trends

Given the standardized nature of a significant share of DRAM bit shipments, supply plays a crucial role in determining DRAM selling prices, which, in turn, drive industry revenues and the financial performance of suppliers. Historically, DRAM supply has grown at high rates to meet the increasing bit demand, although time lags associated with increasing supply, coupled with unexpected changes in demand have resulted in periods of excess DRAM supply or demand. These mismatches of supply and demand have caused severe price fluctuations that, in turn have led to revenue fluctuations, such as the 51% increase in DRAM revenues from calendar years 1998 to 1999, the 63% decline from calendar years 2000 to 2001 and the 50% increase from calendar years 2003 to 2004, according to Gartner. Further, DRAM supply is relatively inelastic. In periods of declining selling prices, suppliers nonetheless continue production at full capacity as long as prices exceed their variable costs of production, while in periods of increasing selling prices, suppliers usually need a long time, up to two years, to bring new capacities on-stream.

Supply of DRAM components involves constructing and equipping complex and expensive fabrication, assembly and test facilities as well as developing and continuously improving semiconductor manufacturing technologies. Growth of DRAM supply is driven by several factors, including:


	•	*Capacity additions.* DRAM suppliers periodically build new manufacturing facilities or upgrade existing facilities to increase their overall capacity. Historically, periods of supply shortages led many market participants to decide to add more capacity or accelerate existing capacity addition plans. Given the long time required to bring new capacity on-stream, these capacity additions may result in excess supply if a significant amount of capacity comes on-stream simultaneously, in particular when demand had subsided. Recently, several market participants have experienced strong revenue growth and have announced (or completed) increased investment in new manufacturing capacities. However, some of these capacities have been or will be used to produce non-DRAM products as well, as discussed below.

	•	*Wafer size, process technology and other manufacturing improvements.* Successive generations of semiconductor manufacturing technology enable higher output and productivity, resulting in growth of supply without investments in incremental capacity. For example, the transition from 200mm to 300mm wafer-based manufacturing yields higher output given the larger size of wafers being processed. The production capacity on 300mm wafers has increased almost four fold since the beginning of calendar year 2004. According to iSuppli, the worldwide percentage of DRAM bits output on 300mm wafers was 19% in the first quarter of calendar year 2004. By the end of the fourth quarter of calendar year 2005, the percentage of bit output produced on 300mm wafers was 49%, according to iSuppli. In addition, transition to smaller process technology, for example from 110nm to 90nm and then to 75nm nodes, reduces the die size and increases the density per unit of die surface. As a result, more chips are produced from the same wafer and higher bit shipments are achieved without adding incremental capacity. When these major transitions occur in DRAM manufacturing, lithography methods or materials used, initial manufacturing yields tend to be low, resulting in output below full potential. Over time, as DRAM suppliers solve the manufacturing problems and increase their yield, a higher proportion of usable components are produced per wafer and bit supply increases.

We have observed the following trends in DRAM supply in recent periods:


	•	*Consolidation among DRAM suppliers.* Market dynamics have driven significant consolidation in the DRAM industry, as a number of major manufacturers have withdrawn from the industry. NEC and Hitachi combined their DRAM operations into Elpida Corporation in December 1999, later consolidating some of Mitsubishi’s DRAM development activities. Texas Instruments sold its DRAM operations to Micron Corporation in calendar year 1998 and Toshiba sold its U.S. DRAM fab to Micron in calendar year 2002. In January 2006, Micron combined its flash activities with Intel. Hyundai merged its DRAM operations with those of LG in calendar year 1999 (later renaming its DRAM operations as Hynix). According to Gartner, market share (measured by revenues in U.S. dollars) commanded by the four largest vendors has increased during the last decade from 46% in calendar year 1995 to 77% in calendar year 2005. We believe the market to be moderately concentrated as, according to Gartner, only eight DRAM suppliers had revenue market share of over 1% in 2005.


	•	*Increasing cost of technology development and manufacturing facilities.* The level of complexity increases with each successive generation of semiconductor manufacturing technology, as the leading edge processes are nearing limits caused by the physical properties of materials employed in the process. To solve such problems and to successfully introduce technologically advanced manufacturing capacity, DRAM suppliers need to consistently make significant investments in research and development and in expensive manufacturing equipment.

	•	*Increasing use of foundries, joint ventures and licensing agreements.* In recent years, the high costs of constructing fabs has led to the expansion of the use of semiconductor foundries, which are contract manufacturers that produce chips to the specifications of others. Historically, foundries have produced chips for what are known as “fabless semiconductor companies”, which are firms that design chips but that do not have their own manufacturing facilities. Increasingly, however, even large semiconductor companies that do have their own facilities are supplementing their capacity by making use of foundries. Using foundries involves less capital investment and may provide greater flexibility to increase or decrease output in a volatile market.

Among companies seeking to share the risks and costs of manufacturing investments, these factors have likewise increased the attractiveness of joint venture and partnership arrangements, as well as of licensing and cross-licensing arrangements. For companies with substantial intellectual property portfolios, including manufacturing know-how, licensing arrangements present an opportunity to supplement income from manufacturing semiconductors. Because technological know-how is very concentrated in the semiconductor memory products industry, many manufacturers would be unable to produce memory chips were it not for their access to the relevant technology through licensing. For example, we estimate that four of the nine largest DRAM suppliers today license most of their technology from the other top-nine suppliers.


	•	*Expansion of DRAM suppliers into flash memory products.* Driven by the historical and projected strong growth in the NAND flash market, and taking advantage of similarities between DRAM and NAND flash manufacturing, some DRAM suppliers have entered or expanded their presence in particular in the NAND flash market by adding new NAND flash manufacturing capacity or converting existing DRAM capacity to the manufacture of NAND flash memory. DRAM manufacturing capacity can generally be transferred to NAND flash and back without major cost or investment and in relatively short time. We believe that this gives suppliers flexibility to allocate capacity away from a product in periods of excess supply of that product. As suppliers convert capacity from DRAM to NAND flash, the impact may be beneficial to DRAM producers because the resulting reduced rate of growth in the supply of DRAM could operate to moderate price declines for DRAM products that would likely have occurred had the new capacity been dedicated to DRAM production.

We believe that the above trends are having an effect on the fundamentals of the DRAM industry and may be facilitating a reduction in the severity of supply and demand imbalances, and of price fluctuations, in the future.

OUR BUSINESS

Overview

Our revenues are derived from:


	•	Standard DRAM products used in personal computers, or PCs, notebooks and workstations. Sales of these standard DRAM products accounted for approximately 56% of our net sales in our 2005 financial year and for approximately 52% of our net sales in the six months ending March 31, 2006;

	•	Technologically more advanced DRAM products used in infrastructure, graphics, mobile and consumer applications. Our infrastructure DRAMs address the high reliability requirements of servers, networking and storage equipment. Our graphics, mobile and consumer DRAMs principally include “specialty DRAMs” that are designed for high performance or incorporate logic circuitry to enable low power consumption. Our graphics DRAMs deliver advanced performance to graphics cards and game consoles, and our mobile and consumer DRAMs provide low power consumption benefits to mobile phones, digital audio players, televisions, set-top boxes, DVD recorders and other consumer electronic devices. Sales of infrastructure, graphics, mobile and consumer DRAM products accounted for approximately 34% of our net sales in our 2005 financial year and for approximately 44% of our net sales in the six months ending March 31, 2006; and

	•	Other products, including embedded DRAM and NAND-compatible flash memory products, and technology licensing. Our flash memory products are primarily used in digital still cameras, mobile phones, USB drives and digital audio players. Sales of embedded DRAM and flash memory products and revenues from technology licensing and royalties accounted for approximately 10% of our net sales in our 2005 financial year and for approximately 4% of our net sales in the six months ending March 31, 2006.

The memory products business of Infineon, substantially all of which Infineon has contributed to us, has a long-standing reputation as a supplier of high-quality DRAMs. We intend to build on this reputation to broaden our product portfolio and, in turn, our customer base, by focusing on DRAM products for infrastructure and for graphics, mobile and consumer applications. In our experience, demand for DRAM products used in these applications is generally more stable than the demand for standard DRAM products due to their customized nature and advanced features, making them subject to relatively less price volatility. We believe that increasing the share of our revenues from these products will improve our average selling price and make our operating results more stable.

Our customers include the world’s largest suppliers of computers and electronic devices. Our current principal customers include major computing original equipment manufacturers, or OEMs, including HP, Dell, IBM, Sun Microsystems and Sony. To expand our customer coverage and breadth, we also sell a wide range of products to memory module manufacturers that have diversified customer bases such as Kingston, and to a number of distributors. More recently and in connection with the ongoing expansion of our product portfolio, especially into graphics applications, we have added customers with a strong focus on enabling these applications, such as nVidia and ATI. By having a close relationship with these customers we believe we can benefit in the development of future memory generations.

We supply our customers through our own front-end facilities in Germany and the United States, and through our back-end facilities in Germany, Portugal and Malaysia. We supplement our manufacturing capacity through two joint ventures, Inotera Memories Inc. and CSVC, and through supply agreements with the DRAM foundries SMIC and Winbond. In addition, we supplement our back-end manufacturing through agreements with several subcontractors. We operate these facilities as a coherent unit via our “fab cluster” concept, which enables us to share manufacturing best practice and gain operational flexibility through customer qualification of our entire cluster of fabs.

Our Strengths


	•	*We are a leading supplier of DRAM products.* We have grown our operations significantly over the last decade and, as the number of suppliers in our industry has continued to consolidate, have increased our market share from 3% to 13% between calendar years 1995 and 2005, according to Gartner. Although our market share fluctuates from quarter-to-quarter and year-to-year, by the end of calendar year 2005, we were among the four largest DRAM suppliers, which together accounted for 77% of the global DRAM market in calendar year 2005. According to Gartner, we were the second largest supplier of DRAM products in the quarter ended March 31, 2006 by revenues and bits shipped. We believe that our size and scale will enable us to continue to improve our position as a prominent developer of leading semiconductor memory technologies, as a manufacturer with facilities among the most modern in our industry and as a supplier of an increasingly broad portfolio of competitive products to customers worldwide.

	•	*We are among the leaders in the transition to manufacturing on 300mm wafers.* We were among the first DRAM suppliers to transition a substantial portion of our manufacturing to 300mm technology and began volume production on this basis in 2001. Today, we own and operate two 300mm facilities and have access through our Inotera Memories joint venture to what is, according to Gartner, the largest 300mm facility in the world. By the end of calendar year 2005, approximately two-thirds of the DRAM bits we shipped were manufactured using 300mm wafers. This compares favorably to the industry average of 49%, as measured by iSuppli in the fourth quarter of calendar year 2005. We believe this places us ahead of our major competitors, many of whom still manufacture mostly on 200mm technology. We believe the primary benefit of this early transition to 300mm will be a reduction in our costs per bit, as our fixed costs of production are spread over a higher number of chips per wafer. Because implementation of 300mm technology is complex, requires time and substantial capital investments, we expect our 300mm leadership to give us a competitive advantage relative to competitors who have not yet transitioned the majority of their capacity to 300mm.

	•	*Our proprietary “trench” architecture possesses advantageous physical characteristics we can exploit now.* Our proprietary trench architecture is one of the two principal approaches to arranging storage capacitors on a chip. While the various alternative “stack” architectures involve stacking capacitors on the surface of a silicon die, our proprietary trench architecture places capacitors in trenches carved into the surface of the die. We believe that our proprietary “trench” architecture possesses physical characteristics that we can exploit during the current and next several technology nodes to yield advantages over the various alternative “stack” architectures. In particular, the larger capacitors featured by the trench architecture can be used to design DRAM products with high performance or low power consumption characteristics. We believe these characteristics are increasingly important in specialty DRAM applications such as graphics, mobile and consumer devices, and that they will continue to drive our strong growth in these end markets in the near term.

	•	*We are a leading developer of semiconductor process technologies and an active innovator.* We have successfully developed and implemented several generations of process technologies. We have already begun volume production using 90nm process technology. We are also engaged in developing

subsequent generations of process technology, or “nodes”, including 75nm and 58nm, and expect to begin volume production based on the 75nm node by the end of calendar year 2006. We are working on designs beyond the next several technology nodes with a range of technologies and architectures under construction. We expect that our accumulated experience, including what we have acquired through our strategic alliances, should enable us to accelerate our feature size shrinkage from the 90nm node to the 75nm node. We achieved first functional samples in the 75nm node in approximately 40% less time than we did when shrinking from the 110nm to the 90nm node. If we are successfully able to ramp up our manufacturing yield on this node, we will be able to produce more bits per wafer and therefore reduce our costs per bit, as our fixed costs are applied to a larger volume of bits produced. Reduced feature sizes also enable us to develop and produce innovative products such as DDR3 DRAM products for our customers.

• Our business model leverages strong strategic alliances. We have entered into strategic alliances that leverage our research and development capabilities and augment our front- and back-end manufacturing capacity in a capital-efficient manner. We believe that we use strategic alliances to a greater extent than our competitors and that the continued success of our “fab cluster” concept is a key element of our business model. We believe our strategic alliances, including our Inotera Memories and CSVC joint ventures, as well as our foundry partnerships with SMIC and Winbond, enable us to benefit from significant economies of scale at a reduced level of capital expenditures. We also believe that these arrangements increase our operating flexibility by reducing our fixed costs, which, in turn, can help us reduce volatility in our operating margins throughout our industry’s business cycle.

Our Strategy


	•	*Improve our average selling price by increasing our focus on DRAM products for advanced infrastructure, graphics, mobile and consumer applications.* We believe significant growth opportunities exist for DRAMs used in servers, graphics cards, game consoles, mobile phones, digital audio players, televisions, set-top boxes, DVD recorders and other consumer electronic devices. We plan to continue leveraging our proprietary trench technology over the next several technology nodes to increase our sales of products used in these applications. We have substantially enhanced our product development capabilities related to these products and have hired a significant number of product development engineers, many of whom work directly with customers on application- and customer-specific product designs. This has enabled us to substantially expand our product offerings and market share in these areas. We plan to continue to introduce advanced infrastructure, graphics, mobile and consumer DRAMs with what we believe are compelling characteristics in an effort to expand our share of revenues from these products. Because in our experience these products generally command higher and more stable prices, we believe that these efforts will result in a higher blended average selling price for our DRAMs and reduced volatility of our operating results.

	•	*Leverage our technology leadership and increase our presence in low cost regions to continue to reduce unit costs.* We believe that our leadership in the transition to 300mm manufacturing technology will enable us to realize the potential benefits of reduced unit costs offered by this transition earlier than our major competitors. We intend to remain ahead of our major competitors in this process and plan to substantially complete our transition to manufacturing on 300mm wafers within the next few years. We are also seeking to complete the introduction of our 75nm technology node on the accelerated timetable we have met so far and to successfully ramp up manufacturing yield on this node, which would enable us to derive unit cost improvements. We further intend to successfully develop and implement future process technology nodes by leveraging our accumulated expertise, R&D capabilities and strategic alliances. In addition, we are actively increasing the proportion of our manufacturing located in low cost Asian regions. We expect our focus on Asia to remain a key part of our strategy as we seek further opportunities to reduce our fixed and variable production costs.


	•	*Improve profitability and return on capital throughout our industry’s business cycle.* We believe that we will achieve significantly improved profitability throughout our industry’s business cycle through the average selling price increase and unit cost reduction strategies outlined above. We also believe that we will reduce the volatility of our operating results by increasing the flexibility of our operations through our foundry partnerships and by continuing to expand the share of our revenues that are from advanced infrastructure, graphics, mobile and consumer DRAM products. While we intend to maintain at least half of our front-end production in-house, we plan to continue to focus on our strategic alliances and our fab cluster-based business model to optimize capital efficiency of our operations. We believe this capital efficiency, combined with our targeted profitability, will enable us to significantly improve our return on capital employed.

Our History

We began operations as a part of Siemens’s Semiconductor Group, whose roots in semiconductor R&D and manufacturing date back to 1952, four years after the invention of the transistor. In 1999, Siemens contributed substantially all of its Semiconductor Group, including both logic and memory semiconductor activities, to its subsidiary, Infineon Technologies AG. Following the formation of Infineon, we continued operations as the Memory Products segment of Infineon. Infineon contributed substantially all of the assets, liabilities, operations and activities, as well as the employees, of its former Memory Products segment to our company effective May 1, 2006, with the exception of its operations in Korea and Japan which are held in trust for us by Infineon pending their transfer. These operations in Korea and Japan are governed by an agreement between us and Infineon under which sales and development personnel in the region act on Qimonda’s behalf. In addition, while Infineon’s investment in the Inotera joint venture and Infineon’s investment in the Advanced Mask Technology Center (AMTC) in Dresden have been contributed to us, the legal transfer of these investments is not yet effective. In the case of Inotera, Taiwanese legal restrictions are delaying the legal transfer. In the case of Infineon’s investment in the Dresden AMTC, Infineon’s co-venturers have not yet consented to the transfer of the AMTC interest, although pursuant to the AMTC limited partnership agreement, such consent may not be unreasonably withheld. Infineon is obligated under a trust agreement with us to hold its investment in the Inotera joint venture in trust for us and exercise shareholder rights (including board appointments and voting) at our instructions. Infineon’s investment in the Dresden AMTC is being held by Infineon for our economic benefit pursuant to the contribution agreement. For as long as Infineon holds our interest in Inotera and AMTC, we must exercise our shareholder rights with respect to these investments through Infineon, which is a more cumbersome and less efficient method of exercising these rights than if we held the interest directly. We do not expect these administrative complexities to have a material adverse effect on our business, financial condition and results of operations.

Expected Benefits of our Carve-Out from Infineon

We believe that our carve-out and legal separation from Infineon will allow us and our shareholders to realize the following benefits:


	•	*Increased market responsiveness through an exclusive focus on the memory products business:* DRAMs are subject to different market dynamics compared to Infineon’s other products. By operating as a separate business we expect to react more effectively to the dynamics of the memory market through simplified decision-making processes independent from the requirements of Infineon’s remaining businesses. We believe that this independence will permit us to focus exclusively and quickly on our customers, and anticipate their specific needs.

	•	*Direct access to a distinct investor base:* We believe that as a stand-alone U.S.-listed semiconductor memory company, with distinct opportunities and risk characteristics, we will appeal more readily to those investors interested in a focused semiconductor memory company. Furthermore, as a stand-alone company, we will enjoy direct access to the capital markets.

	•	*Incentives for our employees directly tied to our own performance*: We are evaluating how to use our own shares to attract and retain senior management, technical and other personnel with the highest qualifications by fostering employee ownership through employee share purchase and/or share option

plans. We believe that our share price will reflect our performance more accurately than Infineon’s share price does and therefore can be used as a more effective compensation tool for our employees.

• Increased flexibility to pursue strategic cooperations: We believe that by becoming an independent business, we will substantially increase our flexibility to engage in strategic cooperations such as alliances or joint ventures of particular benefit to the semiconductor memory business. In addition, we will be in a position to issue our own securities, which may enable us to participate more readily in the further consolidation of the memory business should opportunities, which are attractive from a strategic, operating and financial perspective, arise.

Products and Applications


		corporation with head offices in Shanghai, China. As amended, the agreement provides access to additional DRAM manufacturing capacity (up to 20,000 200mm wafer starts per month plus up to 15,000 300mm wafer starts per month). This agreement has been assigned to us as part of the carve-out.

	•	Winbond. In May 2002 and August 2004, Infineon entered into product purchase and capacity reservation agreements with Winbond Electronics Corporation, a Taiwanese corporation, which give us access to additional DRAM production capacity (up to 19,000 200mm wafer starts per month plus up to 15,000 300mm wafer starts per month). We procure an immaterial quantity of our finished products under the 2002 agreement. These agreements have been assigned to us as part of the carve-out.


		plans. We believe that our share price will reflect our performance more accurately than Infineon’s share price does and therefore can be used as a more effective compensation tool for our employees.

	•	*Increased flexibility to pursue strategic cooperations:* We believe that by becoming an independent business, we will substantially increase our flexibility to engage in strategic cooperations such as alliances or joint ventures of particular benefit to the semiconductor memory business. In addition, we will be in a position to issue our own securities, which may enable us to participate more readily in the further consolidation of the memory business should opportunities, which are attractive from a strategic, operating and financial perspective, arise.