20-F 1 f01837e20vf.htm FORM 20-F e20vf
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As filed with the Securities and Exchange Commission on November 16, 2007
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 20-F
 
     
(Mark One)    
 
o
  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended September 30, 2007.
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
o
  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    Date of event requiring this shell company report
 
For the transition period from                 to                
 
Commission file number 001-32972
QIMONDA AG
(Exact name of Registrant as specified in its charter)
 
Gustav-Heinemann-Ring 212
81739 Munich, Germany
+(49)(89) 60088-0
(Address of principal executive offices)
 
 
 
 
Securities registered or to be registered pursuant to Section 12(b) of the Act.
 
         
Title of Each Class:
 
Name of Each Exchange on Which Registered:
 
 
American Depositary Shares representing Qimonda AG     New York Stock Exchange  
ordinary shares of no par value
       
Qimonda AG ordinary shares of no par value
    New York Stock Exchange*  
 
* Not for trading, but only in connection with the registration of American Depositary Shares.
 
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
(Title of class)
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
(Title of class)
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
 
As of September 30, 2007, 342,000,001 ordinary shares, of no par value, of Qimonda AG were outstanding.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ     No o
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes o     No þ
 
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ     No o     Not applicable o.
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
þ Large accelerated filer     o Accelerated filer     o Non-accelerated filer
 
Indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 o     Item 18 þ
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o     No þ
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes o     No o
 


Table of Contents

 
CROSS REFERENCES TO FORM 20-F
 
                 
        Page
 
 
PART I:
             
 
Item 1:
    Identity of Directors, Senior Management and Advisers     n/a  
 
Item 2:
    Offer Statistics and Expected Timetable     n/a  
 
Item 3:
    Key Information        
          Selected Financial Data     30  
          Exchange Rate Information     140  
          Risk Factors     3  
      Information on the Company     2  
          History and Development of the Company     81  
          Business Overview     78  
          Organizational Structure     81, 139  
          Property, Plant and Equipment     116  
 
Item 4A
    Unresolved Staff Comments     none  
      Operating and Financial Review and Prospects     32  
          Operating Results     45  
          Liquidity and Capital Resources     57  
          Research and Development; Patents and Licenses     91, 103  
          Trend Information     68  
          Off-Balance Sheet Arrangements     66  
          Contractual Obligations     61  
 
Item 6:
    Directors, Senior Management and Employees        
          Directors and Senior Management     117  
          Compensation     122  
          Board Practices     118  
          Employees     107  
          Share Ownership     124  
 
Item 7:
    Major Shareholders and Related Party Transactions        
          Major Shareholders     126  
          Related Party Transactions     127  
 
Item 8:
    Financial Information     F-1  
          Litigation     108  
          Dividend Policy     139  
          Significant Changes     140  
 
Item 9:
    The Offer and Listing        
          Price History of the Stock     140  
          Markets     140  
 
Item 10:
    Additional Information        
          Articles of Association     135  
          Material Contracts     148  
          Exchange Controls     145  
          Taxation     141  
          Documents on Display     146  
          Subsidiary Information     139  


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        Page
 
      Quantitative and Qualitative Disclosure About Market Risk     64  
 
Item 12:
    Description of Securities Other Than Equity Securities     n/a  
 
PART II:
             
 
Item 13:
    Defaults, Dividend Arrearages and Delinquencies     none  
      Material Modifications to the Rights of Security Holders and Use of Proceeds     147  
      Controls and Procedures     146  
      Audit Committee Financial Expert     148  
      Code of Ethics     148  
      Principal Accountant Fees and Services     148  
      Exemption from the Listing Standards for Audit Committees     148  
 
Item 16E:
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers     none  
 
PART III:
             
      Financial Statements     F-1  
      Exhibits (See Exhibit Index)      


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CONTENT OVERVIEW
 
         
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    F-1  
     
 Exhibit 1(ii)(A)
 Exhibit 1(ii)(B)
 Exhibit 4(i)(Z)
 Exhibit 12(i)
 Exhibit 12(ii)
 Exhibit 13
 Exhibit 14
 Exhibit 99(i)


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PRESENTATION OF FINANCIAL AND OTHER INFORMATION
 
Our combined and consolidated 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 annual report, references to “euro” or ‘‘€” are to euro and references to “U.S. $” or “$” are to U.S. dollars. In this annual report, for convenience only, we have translated the euro amounts reflected in our combined and consolidated financial statements as of and for the financial year ended September 30, 2007, into U.S. dollars at the rate of €1.00 = $1.4219, the noon buying rate of the Federal Reserve Bank of New York for euro on September 28, 2007, the last currency trading day in September 2007. You should not assume that, on these or on any other dates, one could have converted these amounts of euros into dollars at these or any other exchange rates.
 
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 annual report contains market data that have been prepared or reported by DRAMeXchange, Gartner Inc. (Gartner), International Data Corporation (IDC), iSuppli Corporation (iSuppli) and World Semiconductor Trade Statistics (WSTS).
 
The trademarks Qimondatm, TwinFlash®, AENEON® and RLDRAM® have been assigned to us by Infineon in connection with our carve-out. Pursuant to a co-development agreement between Infineon and Micron Technology, Inc., Micron has trademark rights to CellularRAM® 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 annual report 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.
 
Forward-looking statements and market data
 
This annual report, including particularly the sections entitled “Risk Factors”, “Selected Combined and Consolidated Financial Data”, “Operating and Financial Review”, “The Semiconductor Memory Industry”, “Our Business”, “Management”,“Related Party Transactions and Relationships” and “Additional Information” 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 annual report. 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 annual report, 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 annual report.
 
In addition, this annual report 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


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this annual report. 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.
 
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 +49-89-60088-0. Our website is http://www.qimonda.com. This website address is included in this annual report as an inactive textual reference only. The information and other content appearing on our website are not part of this annual report. Our agent for service of process in the United States is Qimonda North America Corp., Corporation Trust Center, 1209 Orange Street, Wilmington, County of New Castle, Delaware 19801.
 
Use of Non-U.S. GAAP Financial Measures
 
This document contains non-U.S. GAAP financial measures. Non-U.S. GAAP financial measures are measures of our historical or future performance, financial position or cash flows that contain adjustments that exclude or include amounts that are included or excluded, as the case may be, from the most directly comparable measure calculated and presented in accordance with U.S. GAAP in our combined and consolidated financial statements. Earnings before interest and taxes (“EBIT”) is an example of a non-U.S. GAAP financial measure. For descriptions of these non-U.S. GAAP financial measures and the adjustment made to the most directly comparable U.S. GAAP financial measures to obtain them, please refer to “Operating and Financial Review”.


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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 annual report, including our combined and consolidated 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 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 PC market, is 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. We and our competitors are currently bringing new capacity on-stream, in our case through the ramp-up at our DRAM manufacturing facility in Richmond, Virginia. Several of our competitors and we have announced the construction of new capacity, in our case a new DRAM manufacturing facility in Singapore, which we expect will commence production in 2009. 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 to exceed 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 cyclicality of the DRAM market is evidenced through the development of market prices for the higher volume standardized memory products. The average “spot” market price for 512Mb DDR2 DRAM as reported by DRAMeXchange fell from $6.36 on December 29, 2006, to $1.45 on September 28, 2007, a drop of 77.2%. We believe that part of this price decline, especially towards the end of March 2007, was driven by seasonal demand weakness, the effects of an earlier build-up of inventories at original equipment manufacturers (OEMs) ahead of the introduction of the Windows Vista computer operating system and capacity conversions from NAND to DRAM by some competitors following severe price erosion in the NAND flash area. During the three months ended June 30, 2007, the price decline continued and was amplified by strong DRAM output growth across the industry, driven, we believe, mostly by capacity increases and technology conversions to more efficient technologies. Although prices for DRAM products improved slightly in July 2007 compared to June 2007, in August 2007, prices resumed the decline that has characterized the calendar year to date. These price declines may have significant negative impact on operating results of DRAM suppliers, including ours.
 
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 cost-effectively converted 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 a number of periods contributed to substantial declines in average selling prices. It did


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so in the nine months ended September 30, 2007, and is likely to do so again in the future. DRAM prices only begin to recover when demand growth strengthens sufficiently to match supply. While lower prices may lead to acceleration in demand if PC manufacturers, in particular, increase the amount of DRAM “bits per box”, or the amount of memory included in each device, 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.
 
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.
 
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.
 
We sell our products for use in a variety of applications such as PCs, servers, game consoles and mobile and consumer devices. 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 if either 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


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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 DDR2 DRAMs, but the PC manufacturers sourced far fewer DDR2 logic chipsets than would permit the manufacture of enough PCs to absorb all of the DDR2 DRAMs being produced. The result was a dramatic oversupply and price decline in DDR2 DRAMs industry-wide. A portion of the DDR2 DRAMs that we produced remained unsold and in our inventory until supply of appropriate logic chipsets created sufficient demand for these accumulated DDR2 DRAMs.
 
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. For some of our products, the significant price decline in our 2007 financial year resulted in the write-down of inventory of those products to market value in an amount of €85 million in accordance with our policy. Due to the volatility of the DRAM market, write-downs of this nature may continue to occur in periods of sharp price decline. Any such write-downs could have a material 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 industry is characterized by 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 host device, such as a PC;
 
  •  decreasing operating voltage and power consumption of the DRAM; and
 
  •  reducing and tailoring the form factor of DRAM chips and components with a given density,
 
In 2000, the industry-standard DRAM chip had a density of 64 megabits. By 2006, the density of the standard DRAM chip had increased to 512 megabits with the 1 gigabit generation in ramp-up phase and higher densities in development. In the 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 1.5 volts for DDR3. 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


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manufactured on a wafer, and is becoming increasingly important for certain applications that require very small and specifically tailored form factors.
 
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 industry is characterized by intense competition, which could reduce our sales or put continued pressure on our prices.
 
The semiconductor memory 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, Hynix Semiconductor, Elpida Memory, Micron Technology 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 can 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.


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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, as our product mix shifts towards applications used in consumer electronics, we are increasingly exposed to the seasonal sales patterns around the Christmas season. In addition, 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 these 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, Inc. 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.
 
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. Infineon has transferred its shares in Inotera to us, other than a portion representing 0.24% of the total Inotera shares, which Infineon holds in trust for us due to Taiwanese legal restrictions.
 
If Infineon were to reduce its shareholding in Qimonda to a minority level before the fifth anniversary of our carve-out from Infineon and the early mass production using 58nm process technology at our manufacturing site in Dresden has not been achieved by that time, 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 to Infineon in compliance with a trust agreement pursuant to which Infineon has agreed it would hold the Inotera shares in trust for us until they could be transferred back to us. If Infineon acquires our shares in Inotera to hold in trust for us, we would have to exercise our shareholder rights, including board membership and voting rights, only through Infineon, which would be required under the trust agreement to 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 would 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 Photomasks Inc. relating to the Advanced Mask Technology Center (AMTC) and the Maskhouse Building Administration Company (BAC) 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. Under the current agreement, 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.


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Infineon and we are currently finalizing negotiations with AMD and Toppan concerning an agreement that would include the consent to the assignment to us and address Infineon’s intention to reduce its stake in us below 50%. Under this agreement, a “change of control” that could lead to termination of the agreements with AMD and Toppan would only be deemed to occur if a direct competitor of AMD or Toppan becomes the beneficial owner of 30% or more of our equity interests or obtains the power to appoint the majority of the members of our Supervisory Board.
 
We have suffered substantial losses in the recent past. 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 our 2001 and 2002 financial years, 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, including in our 2006 financial year, in which we experienced significant losses in the first quarter. In our 2007 financial year we experienced significant losses in the third and fourth quarters. 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 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.
 
A high proportion of our revenues are derived from sales of standard DRAM products for PC and workstation applications, which accounted for 51% of our revenues in our 2005 financial year, 47% of our revenues in our 2006 financial year and 39% in our 2007 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, 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 memory deteriorates, they can convert production back to DRAM products. Because our production is 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 business, financial condition and results of operations.
 
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.


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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 DRAMs 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 DDR2 DRAMs in the market. A portion of the DDR2 DRAMs that we produced remained unsold and in our inventory until supply of appropriate logic chipsets created sufficient demand for our accumulated DDR2 DRAMs.
 
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 the 2005 financial year, commercial DRAM production began at the 300mm facilities of our fab in Richmond, Virginia. In the same year, our foundry partner SMIC ramped up its new 300mm facility, in Beijing, China with our DRAM technology. In the 2006 financial year, our foundry partner Winbond ramped up a new 300mm fab in Taichung, Taiwan with our DRAM technology. In addition, Inotera Memories, Inc. our joint venture with Nanya, increased its capacity at its 300mm fab in Taoyuan, Taiwan in the 2006 financial year, and has started manufacturing in its second 300mm manufacturing module in December 2006. We are also continuing the ramp-up at our 300mm manufacturing facility in Richmond, Virginia.


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We recently announced plans to build a new 300mm manufacturing facility in Singapore with production expected to start there in 2009. 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 cancelling 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, as well as 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 our 2007 financial year, our five largest customers accounted for approximately 48% of our total sales. HP, our largest customer accounted for approximately 17% of our sales and Dell, our second largest customer accounted for approximately 12% of our sales in that period. These major customers generally purchase products on 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 are 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. 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.


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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 (DOJ) in connection with the DOJ’s investigation of alleged antitrust violations in the DRAM industry. Pursuant to this plea agreement, Infineon agreed to plead guilty to a single count of conspiring with other unspecified DRAM manufacturers to fix the prices of DRAM products between July 1, 1999 and June 15, 2002, and pay a fine of $160 million. 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 suppliers 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 in or after 1999. Infineon reached a settlement agreement in the class action 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 to pay any additional amount to the class. In November 2006, the District Court for the Northern District of California approved the settlement with the direct U.S. purchasers, entered final judgment and dismissed the class action claims with prejudice. Between March 2006 and March 2007, six separate lawsuits were filed by six direct and indirect purchasers of DRAM against Infineon and various other DRAM suppliers seeking unspecified damages and other relief based on the same allegations. One of those lawsuits was voluntarily dismissed on April 26, 2007, pursuant to a settlement. In October 2006, these six plaintiffs along with a number of other individuals and entities gave notice that they are opting out of the direct U.S. purchaser class and settlement. As a consequence their claims were not released by that settlement. As of the date hereof, 62 indirect U.S. purchaser class action 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. In July 2006, plaintiffs filed their opening brief on appeal in that case and defendants filed their joint opening brief in September 2006. No hearing date has yet been scheduled for the appeal. Furthermore, in July and September 2006, the state attorneys general of New York, California and 39 other states and territories 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 actual and treble damages in unspecified amounts, penalties, costs and other relief. In August 2007, the court granted the defendants’ motion to dismiss in part, dismissing the claims on behalf of consumers, businesses and governmental agencies in a number of states and dismissing certain other claims with leave to amend. The plaintiffs in both actions filed amended complaints in October 2007.
 
Between December 2004 and February 2005, two putative class proceedings were also filed in the Canadian province of Quebec and one was filed in each of 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. In the British Columbia action, the certification motion has been scheduled for August 2007 and will resume in November 2007. In one Quebec class action, a tentative date for the motion for authorization (certification) has been set for May 2008 (with the possibility of a March 2008 date if the court calendar opens); the other Quebec action has been stayed pending developments in the one that is going forward.


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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 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 June 30, 2007, we have accrued liabilities in the amount of €101 million related to potential liabilities and risks with respect to the DOJ and European antitrust investigations and the direct and indirect purchaser litigation and settlements described above, as well as for legal expenses relating to the securities class actions and the Canadian antitrust investigation and litigation described in “Our Business — Legal Matters”. 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 three of Infineon’s current and former 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. In September 2006, the court dismissed the complaint with leave to amend and in October 2006, the plaintiffs filed a second amended complaint. In March 2007, the plaintiffs withdrew the second amended complaint and were granted a motion for leave to file a third amended complaint. The plaintiffs filed a third amended complaint in July 2007 and Infineon filed a further brief in support of its motion to dismiss in October 2007. The court has scheduled a hearing on the motion in November 2007. 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.
 
We are currently 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. Infineon’s directors’ and officers’ insurance carriers have denied coverage in the securities class action and Infineon filed suit against the carriers in December 2005 and August 2006. Infineon’s claims against one D&O insurance carrier were finally dismissed in May 2007. The claims against the other insurance carrier were dismissed in November 2006; Infineon filed an appeal against this decision. See “Our Business — Legal Matters” for more information on this matter.


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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 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 September 2007 included approximately 20,000 patents and patent applications (representing approximately 6,000 patent families) compared to more than 23,000 patents and patent applications remaining with Infineon at the time of the carve-out. 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 may require rights to use patented technology owned by third parties, including other semiconductor manufacturers, and have entered into licenses and cross-license agreements to obtain such rights (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 which we may determine we need to obtain from third parties in order to maintain our competitive situation.
 
In addition, our rights to use some third party 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 existing Infineon agreements. 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 developed 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, such as ours. For example, in August 2006, we entered into a six year license agreement with Tessera under which Tessera granted us a worldwide, non exclusive, non transferable and non sublicensable license to use a portfolio of Tessera patents. We paid Tessera a one time fee of $40 million and are required to pay additional royalties based on volume of components we sell that are subject to the license.


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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 involve the payment of license fees, royalties or other consideration over lengthy periods in amounts that could be material for us. 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 any such settlement or litigation relating to our business, and to bear 60% of the combined license fee payments that Infineon and we must or may have to pay in the future related to two of these negotiations, one of which is still ongoing.
 
If any intellectual property infringement claims that may be asserted against us in the future are successful, we may be forced to refrain from selling 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 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 “trench” DRAM architecture. In 2006, approximately 24% of DRAM chips produced worldwide were manufactured using trench cell architecture, of which we produced approximately two-thirds, according to Gartner. The remaining 76% were 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 90nm node, which currently accounts for more than half of our production, and during the next several technology nodes, including the 58nm node that is currently in development, 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 provide the technological properties, regarding performance, power consumption and form factor as well as the robustness to permit volume manufacturing at competitive costs. If we were required to transition from trench to other technology platforms, the transition could 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.


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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, SEH, 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. We sourced 22% of our DRAM capacity from these unaffiliated foundry partners in the 2006 financial year compared to 25% in the 2007 financial year and plan to reduce those levels somewhat in the coming months as we increase the proportion of our capacity sourced from Inotera. In addition, we sourced about 7% of our capacity from Infineon’s 200mm fab in Dresden. We intend to source at least 50% of our production capacity from 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


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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 the value of 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 development agreements 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 until the end of our 2008 financial year, pursuant to our current contractual obligations will be $86.5 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;


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  •  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, Inc. 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 invested €686 million in property, plant and equipment in our 2006 financial year and a further €879 million in our 2007 financial year, largely for capacity expansion of our 300mm facility in Richmond, Virginia and for equipment upgrades at our 300mm facility in Dresden, Germany. Due to the lead times between ordering and delivery of equipment, a substantial amount of capital expenditures typically is committed well in advance. As of September 30, 2007, approximately €237 million of capital expenditures have been included in unconditional purchase commitments, mostly for investments to be made in our front-end and back-end manufacturing facilities. While we have reduced our planned capital expenditures for the 2008 financial year, through increased focus on our partnership model, we still expect to spend between €650 million and €750 million during the year.
 
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 net cash in our investing activities of €972 million in our 2005 financial year, €801 million in our 2006 financial year and €847 million in the 2007 financial year. Our research and development expenses were €390 million in our 2005 financial year, €433 million in our 2006 financial year and €401 million in our 2007 financial year. We intend to continue to invest heavily in our manufacturing facilities, including in the new manufacturing facility we plan to construct in Singapore, and research and development, while continuing the policy of cooperation with other semiconductor companies to share these costs with us where appropriate.
 
As of September 30, 2007, our external financial debt included €148 million 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. In August 2006, we entered into a committed multicurrency revolving loan facility in an aggregate principal amount of €250 million, which we then voluntarily terminated on September 28, 2007. We decided to terminate this facility, under which we had made no drawdowns, because its restrictions on asset dispositions were inconsistent with the sale and leaseback transactions we had decided to enter into covering some of our manufacturing equipment in our Richmond facility. For more details on this termination and on the sale and leaseback transactions, see “MD&A — Liqidity and Capital Requirements”.
 
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 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 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.


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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 lead frames 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 and consolidated 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 50% of our expenses in our 2007 financial year, were denominated in euro and other currencies. In addition, the balance sheet impact of currency translation adjustments has been material in some periods and varies widely, and we expect these characteristics to continue. Net foreign currency derivative and transaction gains totaled €17 million in our 2005 financial year, while net foreign currency derivative and transaction losses were €2 million in our 2006 financial year. Net foreign currency derivative and transaction losses were €14 million in our financial year 2007. We attempt to mitigate the effects of foreign currency fluctuations on our business by entering into foreign currency hedging contracts. 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 = $1.4691 on November 8, 2007 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. The exchange rate varied in our 2006 financial year between €1.00 = $1.1667 on November 14, 2005, and €1.00 = $1.2953 on June 5, 2006. On September 29, 2006, the last currency trading day in September 2006, the noon buying rate of the Federal Reserve Bank of New York for euro was €1.00 = $1.2687. The dollar continued to weaken during our 2007 financial year. On September 28, 2007, the last currency trading day in September 2007, the noon buying rate of the Federal Reserve Bank of New York for euro was €1= $1.4219. Any further weakening of the dollar against the euro would negatively affect our reported results of operations.


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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 the United States, 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 2007 financial year 45% of our revenues were invoiced in the Asia-Pacific region (including Japan), 37% were invoiced in North America, 18% were invoiced in the Rest of Europe (including Germany and in other regions), as described in “Our Business — Customers, Sales and Marketing”). 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 the United States, 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 aggregate amounts of €112 million in the 2006 financial year and €100 million in the 2007 financial year. In addition, we had received grants of €179 million and €146 million as of September 30, 2006 and 2007, respectively, 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.


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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 Singapore, China, Germany and Japan where the need for qualified employees in our industry is strong. Since our carve-out, we have been competing, and will continue to compete, directly with other semiconductor companies 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. The implementation of the WEEE directive has not been completed in most EU Countries and therefore the potential costs are not foreseeable. We have begun supplying WEEE-compliant products in the German market. The related cost impact is minor in Germany, but could be higher in other countries depending on their implementations of the directive.
 
The Registration, Evaluation and Authorization of Chemicals used in the European Union, or REACH Regulation, is a regulatory framework that concerns the registration, evaluation and authorization of certain chemicals. This regulatory framework came into effect in December 2006. While it has not been fully determined which chemicals will fall under these regulations, we believe the regulation is targeted towards chemical companies and industries in which significant volumes of chemicals are used. As we use very few chemicals whose volume exceeds 100 tons per year, we are classified as a “downstream user category II” under this legislation. Furthermore, this legislation contains a proposal to exempt companies who meet certain standards from the authorization process. Due to these uncertainties, we believe it is premature to estimate the potential costs this regulation could impose on us.
 
In 2006 a European directive on the Restriction of the use of Hazardous Substances, or RoHS, restricting the usage of lead-based and other chemicals and compounds in products went into effect and we were successful in limiting the cost impact of this new legislation upon our business. A similar set of rules has recently been implemented in the People’s Republic of China. These rules impose labeling requirements on all electronic information products, as defined in those rules that are sold in the Chinese retail market. In addition, a self-declaration containing details on the affected chemicals and compounds must be created and communicated within


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the supply chain. The future implementation obligations of this new law may impose additional costs upon our business or may have an effect on our ability to timely meet customer demand for our products in China.
 
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 “Related Party Transactions and Relationships — with Infineon” and note 27 “Related Parties” to the combined and consolidated financial statements, and for more information on our ongoing relationship with Siemens see “Related Party Transactions and Relationships — with Siemens” and note 27 “Related Parties” to the combined and consolidated financial statements appearing elsewhere in this annual report.
 
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 not 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 liability for providing replacements or otherwise compensating customers for damages incurred 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 insurances, 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.


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Risks related to our carve-out as a stand-alone company and our continuing relationship with Infineon
 
We have limited 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. This excluded the Memory Products operations in Korea and Japan, which have since been transferred to us. Legal transfer of Infineon’s investment in AMTC and BAC is subject to approval by the other shareholders in the venture. Although we operated as a separate segment within the Infineon Group, we had no experience in conducting our operations on a stand-alone basis until May 2006. 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.
 
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 has been evaluating and continues to evaluate the applicability of those procedures to Qimonda in light of our new status as an independent company, and has been implementing 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.
 
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, 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 establish our own independent internal controls referred to above. We have entered into agreements with Infineon under which Infineon provides certain transitional services to us, including services related to information technology systems and financial and accounting services. See “Related Party Transactions and Relationships — with Infineon” 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 annual report for periods prior to the legal carve-out 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 annual report for these periods does not reflect many significant changes that have occurred since we have begun to operate as a separate company. The primary categories of assumptions we have made relate to our allocation of expenses that could not be specifically identified as belonging to the Memory Products business.
 
Use of these assumptions and estimates means that the combined financial statements for periods prior to our carve-out presented in this annual report 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.


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We may lose rights to 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 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%. Infineon has publicly announced that it aims to reduce its stake in Qimonda to significantly below 50% by the time of Infineon’s Annual Shareholder Meeting in 2009, at the latest.
 
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. our patent portfolio at the end of September 2007 included approximately 20,000 patents and patent applications (representing approximately 6,000 patent families) compared to more than 23,000 patents and patent applications remaining with Infineon at the time of the carve-out. 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 are still in the early stages of establishing our own 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 the Qimonda 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 in some jurisdictions.
 
We may face additional costs under our agreements with Infineon relating to Infineon’s 200mm fab in Dresden.
 
During our 2004 financial year, we transferred ownership of the entire 200mm fab in Dresden to Infineon’s Communications segment. We continue to own the newer 300mm fab and the research and development center in Dresden.
 
In April 2006, we entered into an agreement with Infineon for the production of wafers in the Dresden 200mm fab. Pursuant to the agreement, as amended in January 2007, Infineon has agreed to manufacture specified semiconductor memory products at the Dresden 200mm fab, using our manufacturing technologies and masks, and to sell them to us at prices specified in the agreement. These prices are based on the cost of manufacture. We are required under this agreement to pay for idle costs resulting from our purchasing fewer wafers from Infineon than


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agreed upon, if Infineon cannot otherwise utilize the capacity. We are also obligated to indemnify Infineon against any third party claims based on or related to any products manufactured for us under this agreement and against any intellectual property infringement claims related to the products covered by the agreement. In addition, we agreed to share equally with Infineon any potential restructuring costs that might be incurred in connection with the ramp-down of production in the Dresden 200mm fab if neither company can use that capacity. Restructuring costs may include severance payments. Although no restructuring plan has been established, these costs could be material and adversely affect our financial condition and results of operations. The capacity arrangements terminate on September 30, 2009, unless we terminate them earlier.
 
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.
 
Infineon currently holds, directly or indirectly, a 77.5% equity interest in our company. This includes shares equal to 1% of the equity interests in our company that Infineon loaned to an affiliate of J.P. Morgan Securities Inc. in connection with Infineon’s placement of bonds exchangeable into shares of our company. Infineon has advised us that J.P. Morgan has already returned some of these shares. The remainder must be returned no later than August 31, 2010 upon the termination of the loan. Infineon has publicly announced that it aims to reduce its stake in our company to significantly below 50% by the time of Infineon’s Annual Shareholder Meeting in 2009, at the latest. 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.
 
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.


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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, Peter Fischl, a member of our Supervisory Board, is the Chief Financial Officer of Infineon and a member of its Management Board. 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.


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We may experience difficulty in separating our assets and resources from Infineon.
 
We may face difficulty in completing the final steps in the separation of our assets and resources from Infineon’s assets and resources. In particular, we may experience additional costs and delay in finalizing the transfers to us of our interest in AMTC and BAC. Our business, financial condition and results of operations could be harmed if we incur unexpected costs in completing the separation.
 
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.
 
Infineon holds, directly or indirectly, a 77.5% equity interest in our company. Infineon does not anticipate owning a majority of our shares over the long term and has publicly announced that it intends to reduce its stake in our company to significantly below 50% by the time of Infineon’s Annual Shareholders Meeting in 2009, at the latest. In connection with an offering of our shares in September 2007, Infineon agreed not to sell or transfer any of the remaining shares they hold until November 19, 2007. The underwriters may, however, waive this restriction in their discretion. 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.
 
The price of our ADSs may be subject to wide fluctuations.
 
The trading price of our ADSs may fluctuate widely and may fall below the price at which ADSs were sold in our IPO or below our net asset value. 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;
 
  •  review of the long-term values of our assets, which could lead to impairment charges that could reduce our earnings;
 
  •  dispositions or anticipated dispositions by Infineon of shares in our company; 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.


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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 this event, the depositary will receive a proxy which will be given to the proxy bank to 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.


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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.
 
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.
 
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, named in this annual report, 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.
 
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. No earnings were available for distribution as a dividend for our 2007 financial year, since Qimonda AG, on a stand alone basis, as parent company, incurred a cumulative loss (Bilanzverlust) as of September 30, 2007. 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


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the foreseeable 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.
 
The effect of Infineon’s loan of our ADSs to J.P. Morgan, any exercise of the exchange rights under the exchangeable notes Infineon Technologies Investment B.V. has offered or any sales of our ADSs in short sale transactions by the investors in the exchangeable notes may have a negative effect on the market price of our ADSs. In addition, purchases of ADSs in connection with the termination of Infineon’s loan of shares in our company to J.P. Morgan may result in a temporary increase in the market price of our ADSs during the loan unwind period.
 
In September 2007, Infineon Technologies Investment B.V. offered, in sales it has advised us were exempt from registration under the U.S. Securities Act of 1933, as amended, pursuant to Regulation S thereunder, notes exchangeable into shares it currently holds in our company. We have been advised by J.P. Morgan Securities Inc. that, in connection with that offering, its affiliate has facilitated and expects to continue to facilitate the establishment by the investors in the exchangeable note of hedged positions in the exchangeable notes through the entry into privately negotiated derivative transactions with those investors. Infineon also loaned approximately 3.5 million shares to an affiliate of J.P. Morgan Securities, Inc. in connection with these anticipated transactions. The increase in the number of our ADSs outstanding upon exchanges of the exchangeable notes could have a negative effect on the market price of our ADSs. The market price of our ADSs also could be negatively affected by other short sales of our ADSs by or on behalf of the investors in the exchangeable notes to hedge their investments in the exchangeable notes. In addition, purchases of ADSs in connection with the termination of the loan may result in a temporary increase in the market price of our ADSs during the loan unwind period.


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SELECTED COMBINED AND CONSOLIDATED FINANCIAL DATA
 
The following table presents summary historical combined and consolidated financial data for the periods indicated. We derived the summary combined and consolidated financial data as of and for the years ended September 30, 2004, 2005, 2006 and 2007 from our combined and consolidated financial statements for those years. These combined and consolidated financial statements have been audited by our independent registered public accounting firm, KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, whom we refer to as KPMG. The combined and consolidated financial statements as of September 30, 2006 and 2007 and for each of the years in the three year period ended September 30, 2007, are included elsewhere in this annual report. 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. In the opinion of our management, these unaudited condensed combined and consolidated financial statements include all adjustments necessary to present fairly the financial information for the periods 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 the periods prior to our carve-out from Infineon. 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 totaled €387 million for our 2004 financial year, €305 million for our 2005 financial year and €203 million before the carve-out for our 2006 financial year. Following our carve-out from Infineon, we are responsible 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 “Related Party Transactions and Relationships — with Infineon”. As a result, costs are no longer allocated after the carve-out, but rather charged on the basis of these agreements. Had we been incurring these costs directly during these periods before the carve-out, they may have been materially different than the allocated amounts in the combined financial statements.
 


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    As of and for the financial year ended September 30,  
    2003     2004     2005     2006     2007     2007(1)  
    (Unaudited)                             (Unaudited)  
    (in millions, except share and per share data)  
 
Selected Combined and Consolidated Statement of Operations data:
                                               
Net sales
  2,544     3,008     2,825     3,815     3,608     $ 5,130  
Cost of goods sold
    2,090       2,063       2,164       3,048       3,390       4,820  
                                                 
Gross (loss) profit
    454       945       661       767       218       310  
Research and development expenses
    298       347       390       433       401       570  
Selling, general and administrative expenses
    209       232       206       215       199       283  
Restructuring charges
    3       2       1                    
Other operating expenses (income), net
    16       194       13       60       (18 )     (26 )
                                                 
Operating (loss) income
    (72 )     170       51       59       (364 )     (517 )
Interest (expense) income, net
    (35 )     (30 )     (7 )     (25 )     7       10  
Equity in earnings (losses) of Associated companies
    22       (16 )     45       80       117       166  
Gain (loss) on associated company share issuance
    (2 )     2             72              
Other non-operating income (expense), net
    56       (11 )     13       8       7       10  
Minority interests
    11       17       2       (6 )     (6 )     (9 )
                                                 
Income (loss) before income taxes
    (20 )     132       104       188       (239 )     (340 )
Income tax (expense) benefit
    (55 )     (211 )     (86 )     (114 )     (10 )     (14 )
                                                 
Net (loss) income
  (75 )   (79 )   18     74     (249 )   $ (354 )
                                                 
Net (loss) income per share and ADS (unaudited)(2):
                                               
Basic and diluted
  (0.25 )   (0.26 )   0.06     0.24     (0.73 )   $ (1.03 )
Number of shares used in earnings per share computation(2):
                                               
Basic (in thousands)
    300,000       300,000       300,000       305,984       342,000       342,000  
Diluted (in thousands)
    300,000       300,000       300,000       305,984       342,000       342,000  
Summary Combined and Consolidated Balance Sheet data:
                                               
Cash and cash equivalents
  544     577     632     932     746     $ 1,061  
Marketable securities
    23       2             138       265       377  
Working capital, net(3)
    787       78       437       1,328       1,013       1,440  
Total assets
    4,634       4,750       4,861       5,861       5,381       7,651  
Short-term debt, including current portion of long-term debt
    51       551       524       344       77       109  
Long-term debt, excluding current portion
    516       27       108       151       227       323  
Business/shareholders’ equity
    2,736       2,779       2,967       3,871       3,517       5,001  
Summary Combined and Consolidated Cash Flow data:
                                               
Net cash provided by operating Activities
  300     693     484     326     980     $ 1,395  
Net cash used in investing Activities
    (242 )     (1,048 )     972       (801 )     (847 )     (1,205 )
Depreciation and amortization
    815       752       528       703       666       946  
 
 
(1) Translated into U.S. dollars solely for convenience of the reader at the rate of €1.00 = $1.4219, the noon buying rate of the Federal Reserve Bank of New York for euro on September 28, 2007, the last currency trading day in September 2007.
 
(2) 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 and the additions due to the IPO for all periods presented. For presentation purposes, we used the number of shares outstanding at the carve-out date for the presentation of earnings (loss) per share for periods prior to our carve-out.
 
(3) Calculated by subtracting current liabilities from current assets.

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OPERATING AND FINANCIAL REVIEW
 
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 and consolidated financial statements as of and for the years ended September 30, 2005, 2006, 2007 and the other financial information included elsewhere in this annual report. We have prepared our combined and consolidated 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
 
We are one of the world’s leading suppliers of semiconductor memory products. We came into being as Qimonda effective May 1, 2006 when Infineon contributed substantially all of the assets, liabilities, operations and activities, as well as the employees, of its former Memory Products segment to us. On August 9, 2006 we completed our IPO on the New York Stock Exchange under the symbol QI. Infineon’s shareholding in our company was 77.5% as of September 30, 2007, and Infineon has announced that it wants to reduce its stake in Qimonda to significantly less than 50 percent by the time of its 2009 annual shareholders’ meeting.
 
We prepared our combined and consolidated financial statements on the basis of a number of assumptions and estimates. We believe these assumptions and estimates to be reasonable. In addition, there are a number of critical accounting policies which we believe are essential to understanding our financial statements. However, our financial statements may not be indicative of our future performance. Several additional factors, particularly the volatility of DRAM prices, strongly affect our capital intensive business. We aim to increase profitability by maintaining our product portfolio diversity in applications outside the standard PC market, by reducing our costs per bit and through strategic cooperations.
 
The single most important factor affecting our results of operations in our 2007 financial year was the high rate of decline of prices for the DRAM products we sell. While our business model is premised on managing the continuous price decline that characterizes our industry, the price declines in 2007 exceeded our ability to compensate through improvements in technology and efficiency. After falling precipitously during our second and third financial quarters — the average “spot” market price for 512Mb DRAM as reported by DRAMeXchange fell by nearly three-quarters in the first five months of calendar year 2007 — prices stabilized and increased briefly in July 2007 before resuming their decline through our financial year end. The effects of these price declines pushed us into a loss in the 2007 financial year after a profitable 2006 financial year. However, in both financial years, we believe we benefited strongly from the major elements of our strategy, and that our implementation of that strategy has helped us to reduce the impact of the very rough recent market conditions and has enabled us to achieve strong results when market conditions were less severe.
 
Our strategic responses to market conditions in both years has been generally to increase our volumes of memory sold, to maintain our efforts to push our product mix towards the relatively higher priced infrastructure, graphics, consumer and mobile DRAM products and to enhance our productivity. In particular, the volume of memory we sold, based on bits of data storage (which we refer to as our bit shipments) grew by 79% in our 2006 financial year and 44% in our 2007 financial year. We grew the share of our bit shipments for non-PC applications from less than 50% on average in the 2006 financial year to more than 50% in the 2007 financial year, which, we believe, caused the overall decline in our average selling prices to be smaller than it would have been had our product mix remained unchanged from its level of several years ago. In our production, we increased the share of our capacities based on 300mm wafers to approximately 75% in our 2007 financial year and enhanced our


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productivity in other ways, primarily through conversion of capacities to the 90nm process node in the 2006 financial year and to the 80nm and 75nm process nodes in the 2007 financial year.
 
Despite the continuous price pressure, we were able to retain positive operating income in both our 2005 and 2006 financial years and in the first six months of our 2007 financial year. However, due to the significant price decline for DRAM products described above, we incurred operating losses in the second half our 2007 financial year and for the full financial year. In our 2007 financial year, we incurred a net loss of €249 million, compared to net income of €74 million in our 2006 financial year.
 
We generated significant amounts of cash from operations in each of our 2006 and 2007 financial years. We invested this cash, together with proceeds from our IPO, in our manufacturing facilities and on R&D, as we continued our migration to 300mm wafers and for the technical conversion to the 80nm and smaller technology nodes. We also repaid the remainder of our outstanding debt to Infineon during 2007 and entered into our first sale and leaseback transaction, both in furtherance of our strategy of developing a strong and independent capital structure.
 
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. For the full calendar year 2006, we were the world’s third largest supplier of DRAM by revenue and bit shipments, with a market share of approximately 16%, according to Gartner. For the first nine months of the 2007 calendar year, we remained the third largest supplier of DRAM by revenue and were the fourth largest supplier of DRAM by bit shipments with market shares of approximately 13% according to iSuppli’s preliminary report in November 2007. Although our market share fluctuates, in each of the past five calendar years, we captured between 12% and 16% of the worldwide DRAM market based on revenues, according to Gartner, and remained among the four largest DRAM suppliers worldwide based on revenues.
 
Our principal products are DRAM components and modules for use in a wide variety of electronic products. In our 2007 financial year 39% of our net sales were of standard DRAMs for use in PC, notebook and workstation applications and 60% 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 1%.
 
For the financial year ended September 30, 2007, our net sales were €3.608 million, our earnings before interest and taxes (abbreviated as “EBIT”) was a loss of €246 million and our net loss was €249 million. For the financial year ended September 30, 2006, our net sales were €3,815 million, our EBIT was €213 million and our net income was €74 million.
 
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. We refer to this event as the “carve-out”. This temporarily excluded the Memory Products operations in Korea and Japan, which have since been transferred to us. While Infineon’s investment in the Advanced Mask Technology Center (AMTC) and the Maskhouse Building Administration Company (BAC) in Dresden has been contributed to us, the legal transfer of this investment is not yet effective because Infineon’s co-venturers have not yet given the required consent to the transfer of the AMTC and BAC interest. While pursuant to the AMTC and BAC limited partnership agreements, such consent may not be unreasonably withheld, we, Infineon and Infineon’s co-venturers are finalizing negotiations on agreement that provides such consent and also addresses Infineon’s intention to reduce its stake in us to below 50%. Infineon is obligated under the contribution agreement to hold the AMTC and BAC interest for our economic benefit. For as long as Infineon holds our interest in AMTC and BAC, 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. A similar arrangement was in place for our joint venture with Nanya, Inotera Memories, Inc., where Infineon held our shares in trust until March 2007. Infineon transferred nearly all of these shares to us on March 13, 2007. Only a


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portion of shares representing less than 1% of the total Inotera share capital remains in the trust. 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”.
 
In connection with our carve-out, some agreements (including licensing, purchase and shareholding agreements) and investments of Infineon relating to our business could not be transferred to us. In other cases, as outlined above, the transfer of such agreements and investments were delayed due to legal restrictions. In the future, some of our interests could revert to Infineon or be terminated. Any such reversion or termination could materially adversely affect 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, Inc. 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”.
 
On August 9, 2006 we completed our initial public offering, or IPO, on the New York Stock Exchange through the issuance of 42 million ordinary shares, which commenced trading as American Depositary Shares (ADSs) under the symbol QI. We used the offering proceeds of €415 million, net of offering costs and tax benefits thereon, to finance investments in our manufacturing facilities and for research and development. In our 2007 financial year we invested these proceeds primarily in our 300mm front-end manufacturing sites in Richmond, Virginia and Dresden, Germany for capacity expansion and new equipment for the technical conversion to the 80nm and smaller technology nodes as well as approximately €77 million in our ongoing research and development activities. After our IPO and Infineon’s sale of 6.3 million shares upon the exercise of the underwriters’ over-allotment option, Infineon’s shareholding in our company was 85.9%.
 
On September 25, 2007, Infineon sold 28,750,000 Qimonda shares to the public from its shareholdings in a secondary public offering. On September 26, 2007 Infineon Technologies Investment B.V. placed bonds exchangeable for up to 20.5 million Qimonda shares, equivalent to approximately 6.0% of our share capital. At the same time, Infineon loaned 3,550,098 Qimonda shares to an affiliate of J.P. Morgan Securities, Inc. in connection with the placement of the exchange bonds. These shares must be returned to Infineon no later than August 31, 2010. Some of these shares have already been returned to Infineon. As of September 30, 2007, Infineon’s shareholding in our company was 77.5%. For more information, see “Risk Factors — Risks related to the securities markets and ownership of our shares or ADSs”
 
In August 2007, Infineon announced that it intends to reduce its stake in Qimonda to significantly less than 50% by the time of its 2009 annual shareholders’ meeting.
 
Basis of Presentation of Our Combined Financial Statements
 
Our combined and consolidated financial statements have been prepared in accordance with U.S. GAAP. These financial statements are presented on a “carve-out” or combined basis for all periods prior to our carve-out 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. Our financial statements are presented on a consolidated basis for all periods thereafter. The combined 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 and consolidated 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 annual report. 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


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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 annual report. 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 and consolidated 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 and consolidated 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 in the amount of €3,372 million 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 were reflected in our short-term debt (which included €344 million of interest-bearing advances to us from Infineon at September 30, 2006) and in our business equity before the carve-out. The capital structure attributed to the Memory Products business in connection with the preparation of the


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combined financial statements was based on the business equity, and as such, is neither indicative of the capital structure that the Memory Products business would have required had it been an independent company during the financial periods presented before the carve-out, nor is it indicative of the capital structure that we may require in future. In April 2007, we completely repaid our shareholder loan from Infineon.
 
The preparation of the accompanying combined and consolidated 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 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 80nm and 75nm technology nodes. In the meantime, we are incurring higher per-unit costs in connection with this conversion which is expected to extend through our 2008 financial year. 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 of DRAM products 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. We invested a total of €879 million in our 2007 financial year, a total of €686 million during our 2006 financial year and a total of €926 million in our 2005 financial year in property, plant and equipment. As a result of this investment we have substantially increased our ratio of bits manufactured using 300mm wafers to the point where we believe we are ahead of our major competitors on this measure. 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 and as, we believe, occurred during most of our 2007 financial year.
 
We recently announced plans to construct a new 300mm manufacturing facility in Singapore, which we plan to fully own. Depending on the growth and development of the world semiconductor market, we intend to invest approximately €2 billion in this facility over the next five years. This facility may contribute to oversupply in the industry in the future and we may have difficulty recovering our investment.
 
While we have reduced our planned capital expenditures for the 2008 financial year, through increased focus on our partnership model, we still expect to spend between €650 million to €750 million.
 
Exchange Rate Fluctuations
 
We are subject to two categories of exchange rate risks, transaction and translation risk.


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Transaction 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
 
  •  Additionally our competitiveness may decline as compared with competitors based in countries with weaker currencies while our products manufactured in Europe will have been produced at constant costs (in euro), their (constant) costs denominated in weaker currencies will appear to have declined.
 
Conversely, as the value of the euro relative to the U.S. dollar and other currencies decreases, 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 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 and consolidated 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 and in the financial year ended September 30, 2007. In our 2006 financial year we benefited from changes in exchange rates. The effects of transaction risk are not quantified in our combined and consolidated financial statements.
 
Translation risk
 
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 functional currencies. For us the most important currency outside the euro zone is the U.S. dollar. The U.S. dollar depreciated against the euro during our 2004 and 2005 financial years and appreciated against the euro during our 2006 financial year, based on the average exchange rates we use in our financial statements. The U.S. dollar depreciated again during our 2007 financial year. The noon buying rate of the Federal Reserve Bank of New York for euro rose from €1.00=$1.2687 on September 29, 2006, the last currency trading day in September 2006, to €1.00=$1.4219 on September 28, 2007, the last currency trading day in September 2007. Since the end of our financial year, the noon buying rate has continued to rise to a high of €1.00=$1.4691 on November 8, 2007. When we prepare our financial statements, we translate the local functional currency financial statements of our non-euro zone subsidiaries 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 functional 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


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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. In addition, we have extensive commitments to purchase products from our manufacturing partners. These commitments can not be precisely quantified because they are dependent on future market prices for memory products. These purchases aggregated to approximately €520 million in our 2005 financial year, €1,185 million in our 2006 financial year and €1,282 million in our 2007 financial year, as we increased our share of foundry purchases from Winbond and SMIC, and other purchases from Inotera.
 
The most significant of our current cooperations in terms of impact on our financial statements are:
 
  •  Nanya.  Our strategic cooperation with Nanya Technology Corporation, a Taiwanese corporation, encompasses the joint development of DRAM products and DRAM process technology as well as a joint venture called Inotera Memories, Inc. that owns and operates a 300mm manufacturing facility in Taiwan. Inotera uses production technology developed under our joint development agreements with Nanya. We initially developed advanced 90nm and 75nm process technologies together with Nanya and shared the related development costs. In September 2005, we agreed to continue developing advanced 58nm technologies together. Under the terms of the joint 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. In May 2006, Inotera listed Global Depositary Receipts, or GDRs, on the Luxembourg Stock Exchange. After these transactions we owned 35.6% of Inotera’s shares. We account for Inotera using 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 incorporated by reference in this annual report, Inotera’s audited consolidated financial statements as of and for the years ended December 31, 2005 and 2006.
 
  •  CSVC.  In July 2003, Infineon established a venture with China Singapore Suzhou Industrial Park Ventures Co., Ltd. (CSVC) in Suzhou, China. CSVC is a limited liability company organized under the laws of the People’s Republic of China. The venture, renamed Qimonda Technologies (Suzhou) Co., Ltd. after our carve-out and herein referred to as Qimonda Suzhou, constructed a back-end facility for the assembly and testing of our products, which officially opened in September 2004. We are required to purchase the entire output of the facility. We currently hold 63% of Qimonda Suzhou’s share capital, representing 72.5% of the voting rights. We expect to invest a further $86.5 million in Qimonda Suzhou by the end of July 2008 pursuant to our current contractual obligations, and will hold approximately 72.5% of its share capital and voting rights by that date, with CSVC owning the remaining 27.5%. We consolidate Qimonda Suzhou into our combined and consolidated financial statements, because we have exercised voting control over this venture from the outset. Dividends from this venture belonging to CSVC are shown as minority interests in our combined and consolidated financial statements. We have the option to acquire CSVC’s stake at the nominal investment value plus accrued and undistributed returns on that investment.
 
In March 2007, we announced plans to expand capacity at our Qimonda Suzhou venture, for which we expect to make capital expenditures of €250 million over the next three years. The venture intends to arrange external financing for any additional investment required to purchase further equipment. We cannot assure you that this external financing can be obtained on favorable terms or at all.
 
  •  SMIC.  In December 2002 Infineon entered into an agreement with Semiconductor Manufacturing International Corporation (SMIC), a Cayman Islands corporation with head offices in Shanghai, China. This


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  agreement was assigned to us as part of the carve-out. As most recently amended in October 2007, the agreement provides us access to additional DRAM manufacturing capacity.
 
  •  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. These agreements were assigned to us as part of the carve-out. In 2006 and 2007, we entered into additional agreements with Winbond, enabling 80mm, 75nm and 58nm DRAM manufacturing for us.
 
Please see “Our Business” and “Arrangements between Qimonda and the Infineon Group” for more details on these strategic cooperations.
 
Critical Accounting Policies
 
The preparation of our combined and consolidated financial statements required us to apply accounting policies, and 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 and consolidated financial statements, either because of the significance of the combined and consolidated 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 these 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.


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Allocations from Infineon during the financial year ended September 30, 2005, and the seven months ended April 30, 2006 are reflected in the combined statements of operations as follows:
 
                 
    For the
    For the
 
    financial year
    seven months
 
    ended
    ended
 
    September 30,
    April 30,
 
    2005     2006  
    (in millions)  
 
Cost of goods sold
  168     111  
Research and development expenses
    27       17  
Selling, general and administrative expenses
    109       75  
Restructuring charges
    1        
                 
    305     203  
                 
 
The allocation during the 2006 financial year relates to the seven-month period between October 1, 2005 and April 30, 2006. After our carve-out on May 1, 2006, costs were charged according to agreements with Infineon, which amounted to €33 million for the five months period ended September 30, 2006, and €56 million for the year ended September 30, 2007. See note 1 to the combined and consolidated financial statements for a description of the assumptions used for periods prior to the carve-out. However, these transactions, allocations and estimates are not indicative of those that would have obtained had our company actually 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. We invested a total of €879 million in our 2007 financial year, a total of €686 million during our 2006 financial year and a total of €926 million in our 2005 financial year in property, plant and equipment. At September 30, 2007, the carrying value of our property, plant and equipment was €2,186 million.
 
Prior to our carve-out Infineon acquired other businesses to augment the Memory Products business. These acquisitions resulted in the generation of significant amounts of long-lived intangible assets, including goodwill. At September 30, 2007 we had long-lived intangible assets of €143 million.
 
We apply the provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”, and perform a test for impairment at least once a year.
 
We also 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.


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In applying this policy we did not recognize any goodwill impairment charges during our 2005 or 2007 financial years. However, in light of the weak market conditions for commodity NAND flash memories in the three months ended September 30, 2006, we decided to ramp down our flash production and stop the current development of NAND-compatible flash memory products based on Saifun’s proprietary NROM technology. We and Saifun amended the license agreement relating to this technology to terminate the payment of quarterly installments as of December 31, 2006. As a result of the partial termination, we reduced payables, goodwill and other intangible assets, and recognized an impairment charge as of September 30, 2006 in the aggregate amount of €9 million related to the license (€7 million) and fixed assets (€2 million) that were not considered to be recoverable.
 
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 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 512Mb DDR2 DRAM as reported by DRAMeXchange fell from $6.36 on December 29, 2006 to $1.45 on September 28, 2007, a drop of 77% in nine months. Rapid price increases can also occur. For example, the average “spot” market price for 512Mb DDR2 DRAM as reported by DRAMeXchange increased from $3.75 on January 2, 2006, to $5.15 on February 2, 2006, a gain of over 37% in just one month. Over the long term, however, DRAM prices have generally tended to decline.
 
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, 2006 and 2007, we had inventory of €622 million and €619 million, respectively. We review 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 each of our three most recent financial years, we recorded recurring adjustments to value our inventory according to this policy. In the 2007 financial year, these adjustments amounted to €85 million. These adjustments offset an increase in the volume of inventory relating to the decision on our part later in the 2007 financial year to hold finished products in our inventory rather than sell them into an oversupplied market characterized by swiftly falling prices. Our inventory in euro terms was substantially the same as of September 30, 2006 and 2007 due to these offsetting factors. In future periods write-downs on inventory may also be necessary due to 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” and SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R)”.


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Prior to our carve-out, our employees participated in Infineon’s defined benefit pension plans. The pension costs and liabilities included in our combined and consolidated financial statements for periods prior to the carve-out include the portion of the Infineon pension costs and liabilities that relate to our employees’ participation in the respective Infineon pension plans. With the carve out, these pension liabilities and related assets were legally transferred to us.
 
In September, 2006, we established the Qimonda Pension Trust for the purpose of funding future pension benefit payments for our employees in Germany. Subsequently, Infineon’s pension trust transferred €26 million of cash, representing our actuarially determined proportion of the funding in Infineon’s pension trust as of the carve-out date, to this trust for use in funding these pension benefit obligations. The Qimonda Pension Trust’s investment strategy is to invest this cash in a well-diversified portfolio of investments aimed at maximizing long-term returns.
 
In February 2007,we established a uniform Qimonda Pension Plan for Germany with effect from October 1, 2006, into which the substantial majority of the employees were transferred, representing more than 90% of the existing pension obligations. The Qimonda Pension Plan is available to new employees. The previous Infineon plan regulations continue to apply to existing retirees and employees who did not consent to the new plan. The Qimonda Pension Plan for Germany qualifies as a defined benefit plan and, accordingly, the change from the previous defined benefit plans is treated as a plan amendment pursuant to SFAS No. 87, which increased the projected benefit obligation by €4 million. This will be amortized as part of net periodic pension cost in future periods.
 
The Infineon pension plan regulations continue to apply to our foreign employees, although all respective assets and obligations have been transferred to us.
 
Our pension 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 28 to the combined and consolidated 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 operations.
 
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. Prior to September 30, 2007, however, our actual experience differed from those assumptions. This resulted in differences between our recorded net liability and the related actuarially calculated amount. Those differences, also referred to as actuarial gains and losses, were generally not recognized in the consolidated statements of operations as they occurred. Instead, due to the long-term nature of pensions and the related assumptions, they affected pension costs over the remaining service years of the relevant employees.
 
We adopted the recognition provision of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”, as of September 30, 2007, pursuant to which the overfunded or underfunded status of a defined benefit postretirement plan is recognized as an asset or liability in the balance sheet and changes in that funded status in the year in which the changes occur through comprehensive income. As of September 30, 2007 the adoption of the Recognition Provision of SFAS No. 158 resulted in a decrease in other non-current liabilities of €5 million, an increase in non-current deferred tax liabilities of €2 million and an increase in accumulated other comprehensive income of €3 million.


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Pension Benefits — Sensitivity Analysis
 
The expense related to pension plans and similar commitments we recognize in our consolidated financial statements is referred to as net periodic pension cost (“NPPC”) and consists of several separately calculated components. We estimate that our NPPC for our 2008 financial year will be €6.2 million. A one percentage point change in the major assumptions mentioned above would result in the following impact on the estimated pension cost for the 2008 financial year:
 
                 
    Effect on net periodic
 
    pension costs  
    One percent
    One percent
 
    increase     decrease  
    (in millions)  
 
Discount rate
  (0.8 )   1.0  
Rate of compensation increase
    0.5       (0.5 )
Rate of projected future pension increases
    0.2       (0.1 )
Expected return on plan assets
    (0.3 )     0.3  
 
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 NPPC 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 €29 million as of September 30, 2006, and after adjusting for unrecognized actuarial losses as described above of €7 million, we recognized the remaining €22 million as a liability on our balance sheet. Our pension plans were underfunded by an aggregate of €25 million as of September 30, 2007. After adopting the recognition provision of SFAS No. 158 as described above, we recognized this underfunded status as a liability on our balance sheet. Since the present value of future benefits we expect to pay over the next five financial years totals €9 million as of September 30, 2007, we do not perceive a need to increase our plan funding in the immediate future.
 
Realization of Deferred Tax Assets
 
Income taxes as presented in the accompanying combined and consolidated 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 before the carve-out, where the Memory Products business was only a part of an Infineon entity, the tax provision was 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 net operating loss and credit carry-forwards. At September 30, 2006 and 2007, our total net deferred tax assets were €153 million and €151 million, respectively. Our gross deferred tax assets increased from €316 million as of September 30, 2006 to €438 million as of September 30, 2007, principally due to the tax benefits of net operating loss and credit carry-forwards of approximately €32 million as of September 30, 2006 and of approximately €187 million as of September 30, 2007. These net operating loss and credit carry-forwards are generally limited to the amount used by the particular entity that generated the loss or credit and in certain circumstances do not expire under current law. Because as a general matter net operating loss and credit carry-forwards are not transferable, certain net operating loss and credit carry-forwards remained on Infineon’s balance sheet because they were generated by legal entities not transferred to us in connection with our carve-out. In the future, Infineon will be able to offset its tax expense with these carry-forwards. The retention of these carry-forwards is shown on our balance sheets prior to our carve-out as a reduction in our business equity of €6 million as of September 30, 2005. We provided valuation allowance


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against our total deferred tax assets of €70 million and €204 million, as of September 30, 2006 and 2007, respectively.
 
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, to the extent applicable, the impact of forecasted future taxable income. If we do not expect to be able to realize all of these benefits to the extent the deferred tax asset would indicate, we increase the deferred tax valuation allowance accordingly. As a result of this assessment, we increased the deferred tax asset valuation allowance for our 2007 financial year by €134 million and in the 2006 financial year by €11 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 2006 amount excluded tax losses of €101 million before the carve-out that could not be transferred to us and will instead be available to Infineon 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, delivery has occurred 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, whereas 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 judgment 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 Deliverables”. 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”. As part of our carve-out, we agreed to indemnify Infineon with respect to claims (including any related expenses) arising in connection with certain matters, which are described under “Arrangements between Qimonda and the Infineon Group”.
 
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


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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 and consolidated 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 and consolidated statements of operations expressed as percentages of net sales for the periods indicated.
 
                         
    For the financial year ended September 30,  
    2005     2006     2007  
    (in percent)  
 
Net sales
    100.0 %     100.0 %     100.0 %
Cost of goods sold
    76.6       79.9       94.0  
Gross profit
    23.4       20.1       6.0  
Research and development expenses
    13.8       11.3       11.1  
Selling, general and administrative expenses
    7.3       5.6       5.5  
Restructuring charges
    *            
Other operating (expenses) income, net
    0.5       1.6       0.5  
Operating income
    1.8       1.6       (11.1 )
Interest (expense) income, net
    (0.2 )     (0.7 )     0.2  
Equity in earnings of associated companies
    1.6       2.1       3.2  
Gain on associated company share issuance
          1.9        
Other non-operating (expense) income, net
    0.4       0.2       0.2  
Minority interests
    0.1       (0.2 )     (0.2 )
Income before income taxes
    3.7       4.9       (6.6 )
Income tax (expense) benefit
    (3.1 )     (3.0 )     (0.3 )
Net (loss) income
    0.6       1.9       (6.9 )
 
 
* less than 1%
 
Net Sales
 
We generate our net sales primarily from the sale of our memory products. Our memory products consist primarily of dynamic random access memory (DRAM) components and modules, which are used in a wide variety of electronic products including PC, notebook and workstation applications, more advanced infrastructure applications as well as graphics, mobile and consumer electronic devices. In 2007 we ceased offering the limited range of non-volatile flash memory products we had previously marketed and sold. The vast majority of our memory product sales are made through our direct sales force, whereas approximately 12% of our total sales in our 2007 financial year were made through distributors.


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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 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 financial year ended September 30,  
    2005     2006     2007  
    (in millions, except percentages)  
 
Net sales
                       
Memory products
  2,665     3,808     3,600  
% of net sales
    94 %     100 %     100 %
License revenue
  160     7     8  
                         
% of net sales
    6 %     0 %     0 %
Total net sales
  2,825     3,815     3,608  
                         
Effect of foreign exchange over prior period
  (132 )   117     (298 )
% of net sales
    5 %     3 %     8 %
 
In our 2007 financial year our total net sales decreased by €207 million, or 5%, to €3,608 million from €3,815 million in our 2006 financial year. Primarily responsible for the decrease were:
 
  •  DRAM price declines of 29%; and
 
  •  an 8% decrease in the average exchange rate of dollars for euro.
 
Offsetting these decreases in part were increases related to higher bit shipments, which increased 44%
 
In our 2006 financial year our total net sales increased by €990 million, or 35%, to €3,815 million from €2,825 million in the 2005 our financial year. Primarily responsible for the increase were:
 
  •  higher bit shipments, which increased 79%; and
 
  •  a 3% increase in the average exchange rate of dollars for euro.
 
Offsetting these increases in part were decreases related to:
 
  •  DRAM price declines of 20%; and
 
  •  the positive effect in our 2005 financial year of license income from ProMOS of €118 million.
 
Price declines and increases.  While we generally expect prices for DRAM products to decline over time, and this in fact occurred during each of our 2005, 2006 and 2007 financial years, our 2007 financial year was characterized by particularly steep price declines for DRAM products. After remaining stable until the end of December 2006, prices declined significantly thereafter. We believe that a part of this price decline, especially towards the end of March 2007, was driven by seasonal demand weakness, the effects of an earlier build-up of inventories at original equipment manufacturers (OEMs) ahead of the introduction of the new Windows Vista computer operating system and capacity conversions from NAND to DRAM by some competitors, following severe price erosion in the NAND Flash area. During the three months ended June 30, 2007 the price decline continued and was amplified by strong DRAM output growth across the industry driven, we believe, mostly by capacity increases and technology conversions to more efficient technologies. In the three months ended September 30, 2007, prices initially showed signs of improvement, but then resumed their decline and ended up on average at the same low level as during the previous three months. The average daily “spot” market price for 512Mb DRAM as reported by DRAMeXchange fell from $6.36 on December 29, 2006 to $1.45 on September 28, 2007, a drop of 77%.
 
In our 2007 financial year we continued to focus on our diversification strategy, as indicated by the relative portions of our product mix comprising DRAMs for PC applications, on the one hand, and for infrastructure, graphics, consumer and mobile applications, on the other. Measured in bit shipments, our share of DRAMs for non-


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PC applications was well above 50% during the seasonally stronger December and September quarters and close to 50% in the second and third quarters when there was a greater emphasis on DRAMs for PC applications. The share of our net sales for non-PC applications, which generally command higher and more stable prices than standard DRAMs, increased to 60% in our 2007 financial year as compared to 51% in the 2006 financial year. This increase was due both to seasonal factors and our ability to increase bit shipments of DRAMs for non-PC applications.
 
Due, we believe, largely to our careful focus on market trends and attention to our product mix, our average per-megabit selling prices were 29% lower in the 2007 financial year than in the 2006 financial year, a significantly smaller decline than average market price decline for DRAM of 35%, based on data reported by WSTS, over the same period.
 
DRAM prices were under substantial pressure during the first quarter of our 2006 financial year, after which they recovered over the remaining three quarters. Our average per-megabit selling prices for DRAM products in the 2006 financial year were approximately 20% less than they had been in with the 2005 financial year. The per-megabit selling prices in U.S. dollars in the spot market of our major products with DDR2 interfaces declined sharply at the start of our 2006 financial year, declining around 26% over the first three months. During this quarter, we produced an excess of DDR2 DRAMs 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 DDR2 DRAMs in the market. A portion of the DDR2 DRAMs that we produced remained unsold and in our inventory until supply of appropriate logic chipsets created sufficient demand for our accumulated DDR2 DRAMs. After December 2005 prices recovered somewhat and remained relatively stable until May, when DDR2 pricing experienced some erosion until July before again rising through to September 30, 2006 due to tight market supply. DDR prices recovered steadily, albeit more slowly than DDR2 prices, from the December 2005 low points, continuing to increase through to the end of our 2006 financial year.
 
In our 2006 financial year sales of DRAM products for use in game consoles drove significant growth in bit shipments of graphic products. This contributed to the increased share of net sales from DRAMs for infrastructure, graphics, mobile and consumer applications to 50% as compared to 38% in the 2005 financial year. Our average per-bit selling prices in the 2006 financial year were 27% lower than in our 2005 financial year.
 
DRAM prices remained relatively stable for most of the 2006 financial year. Towards the end of the year prices increased, we believe, due to strong demand exceeding supply (our fourth quarter has proven in recent years to be the strongest for DRAM products for consumer electronics such as gaming consoles in advance of the end-year peak retailing season). Early in our 2007 financial year, DRAM suppliers started to heavily increase their output and bit growth rates, causing prices to come under more pressure and to fall precipitously during our second and third financial quarters.


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The following graphic shows the average monthly market prices for DRAM (expressed in 512Mb equivalents), as reported by WSTS, for the three years ended September 30, 2007.
 
(DRAM PRICE DEVELOPMENT LINE GRAPH)
 
  (Source: WSTS)
 
Increase in bit shipments.  Our bit shipments increased by 44% during the 2007 financial year compared to the 2006 financial year due to:
 
  •  our progress in increasing the yield of our manufacturing technologies,
 
  •  the conversion of an increasing share of our capacities to our 80nm and 75nm technologies,
 
  •  the increase of production volumes at our Richmond 300mm facility.
 
  •  our access to additional capacities of our joint venture partners and our foundries, and
 
  •  growth in demand, particularly for PCs, increased “bits per box” and our continued diversification in new market areas, especially with our consumer DRAM products.
 
The growth in our bit shipments was offset in part by our decision, later in the financial year, to hold some products in our inventory rather than sell them into a particularly unfavorable market.
 
Our bit shipments increased by 79% during the 2006 financial year as compared to the 2005 financial year. This growth was primarily a result of:
 
  •  our progress in increasing the yield of our 110nm technology,
 
  •  the conversion of an increasing share of our capacities to our 90nm technology,
 
  •  our access to additional capacities of our joint venture partners and our foundries,
 
  •  the overall demand growth in the DRAM market and our successful diversification in new market segments, particularly with our graphic DRAM products, and
 
  •  the ramp-up of production volumes at our Richmond 300mm facility.
 
Exchange rate effects.  The U.S. dollar weakened against the euro in the 2007 financial year, with the average exchange rate for the period 8% lower than it was for the 2006 financial year. This unfavorable U.S. dollar euro exchange rate negatively affected our revenues during our 2007 financial year. We have calculated the effect of this change in exchange rate on our revenues as follows: we would have achieved €298 million more in net sales in the


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2007 financial year had the average exchange rates we used to translate our non-euro denominated sales into euros been the same in the 2007 financial year as they were in the 2006 financial year.
 
The U.S. dollar/euro exchange rate had an opposite effect in our 2006 financial year. Although the U.S. dollar was slightly weaker on September 30, 2006 than it had been one year earlier, the average exchange rate of U.S. dollars for euro over the financial year was 3% higher than it was for the 2005 financial year. We have calculated the effect of this change in exchange rate on our revenues as follows: we would have achieved €117 million less in net sales in our 2006 financial year had the average exchange rates we used to translate our non-euro denominated sales into euros been the same in the 2006 financial year as they were in the 2005 financial year.
 
Decline in license revenue.  In the 2005 financial year our license revenue increased 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 licensed DRAM technology to ProMOS for ongoing use by ProMOS, resulting in recognition of €118 million in revenue during the 2005 financial year. We recorded significantly less license revenue in our 2006 and 2007 financial years, and do not expect license revenues in future periods to be as substantial as they were in our 2005 financial year.
 
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.
 
Net sales by region
 
                                                 
    For the financial year ended September 30,  
    2005     2006     2007  
    (in millions, except percentages)  
 
Germany
  232       8 %   316       8 %   256       7 %
Rest of Europe*
    333       12 %     482       12 %     399       11 %
North America
    1,067       38 %     1,591       42 %     1,323       37 %
Asia/Pacific
    1,091       38 %     1,174       31 %     1,182       33 %
Japan
    102       4 %     252       7 %     448       12 %
                                                 
Total
  2,825       100 %     3,815       100 %   3,608       100 %
                                                 
 
 
* The Rest of Europe region also includes other countries and territories in the rest of the world outside of the listed main geographic regions with aggregate sales representing no more than 2% of total sales in any period.
 
The increased sales in Japan during our financial year ended September 30, 2007 resulted from a strong growth in demand for our specialty products, in particular for graphics and consumer applications, as well as additional demand for standard DRAM products for PC applications through an expansion of our customer base. The decrease in sales in North America for 2007, as compared to the previous period, was primarily caused by OEM customers shifting their production to Asia.
 
The percentage of net sales in the Asia/Pacific region were relatively high in our 2005 financial year due to the recognition of license revenue of €118 million relating to the ProMOS license agreement.
 
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;


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  •  depreciation and amortization;
 
  •  subcontracted assembly and testing services;
 
  •  production support, including facilities, utilities, quality control, automated systems and management functions; and
 
  •  foundry production (including purchases from our joint ventures and other associated and related companies, such as Inotera).
 
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 write-downs to market value; 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 financial year ended September 30,  
    2005     2006     2007  
    (in millions, except percentages)  
 
Cost of goods sold
  (2,164 )   (3,048 )   (3,390 )
% of net sales
    77 %     80 %     94 %
Gross margin
    23 %     20 %     6 %
 
Cost of goods sold increased by €342 million, or 11%, from €3,048 million in our 2006 financial year to €3,390 million in our 2007 financial year. The increase in our cost of goods sold was due primarily to:
 
  •  higher bit shipments; and
 
  •  inventory revaluation and reserves.
 
Offsetting these increases in part were
 
  •  improvements in our productivity; and
 
  •  exchange rate effects.
 
Cost of goods sold increased by €884 million, or 41%, from €2,164 million in our 2005 financial year to €3,048 million in our 2006 financial year. 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 44% increase in bit shipments in our 2007 financial year and the 79% increase in bit shipments in our 2006 financial year were due primarily to the increase of production volumes at our Richmond 300mm facility, at Inotera and at those of our foundry partners manufacturing on 300mm wafers. In our 2006 financial year, we sourced in bits over 198% more chips from these partners than we had during our 2005 financial year. 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 out of our fixed costs over a greater level of bit shipments.


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Inventory revaluation and reserves.  We value our inventory on a quarterly basis at the lower of cost or market value. If the market price declines below the full production cost of a particular product, then all inventories of that product are written down to its market price. For some of our products, the significant price decline in our 2007 financial year resulted in the write-down of inventory to market value in an amount of €85 million in accordance with our policy. Due to the volatility of the DRAM market, write-downs of this nature may occur in periods of sharp price decline and negatively impact our cost of sales and margins.
 
Productivity improvements.  Similar to our 2006 financial year, we achieved productivity improvements in our 2007 financial year through the increased conversion of capacities to 90nm, 80nm and 75nm process technologies and the increasing share of our chips produced on 300mm wafers. The increase of 300mm capacities at our Richmond facility, our joint venture Inotera and our foundry partners SMIC and Winbond contributed to the increased share of production on 300mm wafers. Measured in wafer starts, 75% of our total production (including capacity sourced from our joint ventures and foundry partners) was on 300mm wafers in our 2007 financial year as compared to 68% of our production in our 2006 financial year. We believe that productivity improvements helped to increase our bit shipments so that although our absolute costs increased, we could achieve unit cost reductions because of the larger sales volume over which our fixed costs are spread.
 
In our 2006 financial year we achieved productivity improvements through the 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 manufacturing facility at Richmond, Virginia, at our joint venture Inotera and at our foundry partner SMIC contributed to the increased share of production on 300mm wafers. Measured in wafer starts, 68% of our total production (including capacity sourced from our strategic and foundry partners) was on 300mm wafers in our 2006 financial year as compared to 53% of our production in our 2005 financial year.
 
Exchange rate effects.  The weaker exchange rate of U.S. dollars for euro in the 2007 financial year, as compared to the 2006 financial year, decreased the euro value of our costs that are denominated in U.S. dollars by approximately €188 million. This means that we would have incurred approximately €188 million more in costs of goods sold in our 2007 financial year, had the average exchange rates we use to translate our non-euro expenses into euros been the same in the 2007 financial year as they were in the 2006 financial year. However, given the decrease in our net sales due to foreign exchange effects, foreign currency movements overall had a negative net effect on our gross margin during the 2007 financial year.
 
The relative strength of the exchange rate of the U.S. dollar against the euro in the 2006 financial year, as compared to the 2005 financial year, increased the euro value of our costs that are denominated in U.S. dollars by approximately €45 million. This means that we would have incurred approximately €45 million less in costs of goods sold in our 2006 financial year, had the average exchange rates we use to translate our non-euro expenses into euros been the same in the 2006 financial year as they were in the 2005 financial year. 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 2006 financial year.
 
Purchases from foundries.  Our purchases from our joint ventures and other associated and related companies, such as Inotera, amounted to €546 million in the 2007 financial year, €438 million in our 2006 financial year and €247 million in our 2005 financial year. In addition, we purchased €736 million of inventory from our foundry partners in our 2007 financial year as compared to €747 million in our 2006 financial year and €273 million in our 2005 financial year.
 
Our gross margin decreased to 6% in our 2007 financial year, from 20% in our 2006 financial year, primarily due to lower average selling prices and inventory write downs. These could not be offset by lower production cost per unit resulting from increased manufacturing productivity and lower unit costs from foundry partners.
 
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


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production. R&D expenses also include our joint technology development arrangements with partners such as Nanya. Some of our research and development projects qualify for subsidies from local and regional governments in the countries 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.
 
The following table sets forth our R&D expenses and government subsidies for the periods indicated:
 
                         
    For the financial year ended September 30,  
    2005     2006     2007  
    (in millions, except percentages)  
 
Research and development expenses
  (390 )   (433 )   (401 )
% of net sales
    14 %     11 %     11 %
Government subsidies
  16     17     24  
% of net sales
    1 %     *     1 %
 
 
* less than 1%
 
In our 2007 financial year, R&D expenses decreased by 7%, from €433 million to €401 million, due to the completion of R&D work on our 80nm and 75nm technology platforms earlier in the 2007 financial year and due to our focus on production support research before development efforts took off on our 58nm technology platform towards the end of the 2007 financial year. We also initiated cost saving measures in an effort to increase the productivity of our development efforts. Furthermore, the increase in governmental subsidies from €17 million in our 2006 financial year to €24 million in our 2007 financial year reduced the development expenses.
 
In our 2006 financial year, R&D expenses increased by 11%, from €390 million to €433 million, due to our effort to strengthen the development capabilities with respect to the next generation of memory technologies and further diversify our portfolio of memory products. We also paid €10 million for research services provided by Infineon during the five months after the carve-out to our 2006 financial year end, and €28 million during our 2007 financial year.
 
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, distribution center costs, 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 (SG&A) expenses for the periods indicated.
 
                         
    For the financial year ended September 30,  
    2005     2006     2007  
    (in millions, except percentages)  
 
Selling, general and administrative expenses
  (206 )   (215 )   (199 )
% of net sales
    7 %     6 %     6 %
 
During the 2007 financial year SG&A expenses decreased by 7% as compared to the 2006 financial year, from €215 million to €199 million. The primary reason for the decline was that during the 2007 financial year the combined costs under our post carve-out service agreements with Infineon and to build out our corporate functions were less than the costs Infineon allocated to us for the 2006 financial year. We also incurred lower costs in the 2007 financial year than we did for the same period one year earlier for special projects, such as our carve-out and IPO.


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Due to the decrease in net sales during our 2007 financial year, SG&A expenses relative to net sales remained constant compared to our 2006 financial year.
 
During the 2006 financial year SG&A expenses increased by 4% as compared to the 2005 financial year, from €206 million to €215 million. The increase was driven by higher cost allocations from Infineon through April 30, 2006 and project costs related to the carve-out and IPO. We also paid €14 million for corporate services provided by Infineon during the five months after the carve-out to our 2006 financial year end, and €15 million during our 2007 financial year.
 
In addition, in the 2006 financial year we had expenses of €8 million relating to stock-based compensation, of which €3 million are included in SG&A expenses. The remaining portion is reflected in different expense categories based on the cost centers of the employees concerned. These employees received these options on Infineon shares when they were Infineon employees in periods prior to our carve-out. We issued our own stock options for the first time in our 2007 financial year. Together with the cost of Infineon stock options, we had total stock-based compensation expenses in our 2007 financial year of €6 million, of which €2 million are included in SG&A expenses.
 
Restructuring Charges
 
We did not incur any restructuring charges in our 2006 or 2007 financial years. In our 2005 financial year, we accrued charges of €1 million for restructuring and cost-saving efforts taken by Infineon, which included downsizing our workforce and consolidating certain functions and operations.
 
In March 2007, we announced the building of a new DRAM module manufacturing facility in Johor, Malaysia. Following the construction of this facility, we plan to move the backend production from our existing Malacca plant to this new backend production facility. As of September 30, 2007 we have implemented a restructuring plan pursuant to SFAS No. 88, but we cannot yet make a reasonable estimate of the amount of involuntary benefits to be paid.
 
Other Operating (Expenses) Income, Net
 
Other operating (expenses) income, net contains various items related to our operations, and may fluctuate from period to period due to the more or less infrequent nature of these items, which include subsidies, grants, insurance proceeds and accruals for legal matters.
 
The following table sets forth information on our other operating (expenses) income, net for the periods indicated.
 
                         
    For the financial year ended September 30,  
    2005     2006     2007  
    (in millions, except percentages)  
 
Other operating (expenses) income, net
  (13 )   (60 )   18  
% of net sales
    0 %     2 %     0 %
 
Other operating income, net in our 2007 financial year related primarily to subsidies, proceeds from insurance claims and the adjustment of accruals for legal matters to reflect current estimates. In our 2006 financial year other operating expenses, net reflected expenses related to litigation settlement charges of €54 million as well as impairment charges of €9 million related to our decision to ramp down our flash production and NROM development activities. Other operating expenses, net in our 2005 financial year principally reflected expenses related to antitrust matters.
 
Equity in Earnings of Associated Companies
 
The equity in earnings of associated companies with financial year ends that differ by not more than three months from the Company’s financial year end is recorded with a three month delay. This applies in particular to our joint venture Inotera Memories, which has a December 31 financial year-end.


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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,  
    2005     2006     2007  
    (in millions, except percentages)  
 
Equity in earnings of associated companies
  45     80     117  
% of net sales
    2 %     2 %     3 %
 
In the last three financial years, Inotera contributed most of our equity in earnings from associated companies. This increased in the 2006 financial year and the beginning of 2007, primarily due to the increased volume production by Inotera and selling prices that were at that time, on average, higher and stable. Our equity in Inotera’s earnings is, however, sensitive not only to fluctuations in the price of DRAM and production volumes, but also to changes in the portion of our inventory which we purchased from Inotera and that remains unsold. This is because we eliminate Inotera’s profit from the inventory we have not yet sold.
 
Gain on Associated Company Share Issuance
 
The following table sets forth information on Gain on associated company share issuance for the periods indicated.
 
                         
    For the financial year ended September 30,  
    2005     2006     2007  
    (in millions, except percentages)  
 
Gain on associated company share issuance
  0     72     0  
% of net sales
    0 %     2 %     0 %
 
On March 17, 2006 Inotera successfully completed its initial public offering on the Taiwanese stock exchange of 200 million ordinary shares. On May 10, 2006 Inotera successfully completed a public offering on the Luxembourg stock exchange of 40 million global depositary shares (representing 400,000,000 common shares). As a result, our ownership was diluted from 45.9% to 36.0% while our proportional share of Inotera’s equity increased by €72 million. We reflected this gain as part of non-operating income during the 2006 financial year.
 
Other Non-Operating Income, Net
 
Other non-operating 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.
 
The following table sets forth information on other non-operating expenses or income for the periods indicated.
 
                         
    For the financial year ended September 30,  
    2005     2006     2007  
    (in millions, except percentages)  
 
Other non-operating income, net
  13     8     7  
% of net sales
    0 %     0 %     0 %
 
In the 2007 financial year other non-operating income related principally to valuation of derivatives, dividend income and a gain of €2 million on the sale of our investment in Ramtron. In the 2006 financial year, other non-operating income related principally to non-operating foreign currency transaction gains. 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.


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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 financial year ended September 30,  
    2005     2006     2007  
    (in millions, except percentages)  
 
Net income (loss)
  18     74     (249 )
Add: interest expense (income)
  7     25     (7 )
Add: income tax expense (benefit)
  86     114     10  
                         
EBIT
  111     213     (246 )
                         
 
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 income (expense) for the periods indicated.
 
                         
    For the financial year ended September 30,  
    2005     2006     2007  
    (in millions, except percentages)  
 
Interest income (expense), net
  (7 )   (25 )   7  
% of net sales
    0 %     (1 )%     0 %
Capitalized interest
  7     0     0  
 
We earned interest income on cash and cash equivalents and marketable securities in the 2007 financial year. Our interest expense decreased in the 2007 financial year as compared to the 2006 financial year, due to our lower average borrowings from Infineon, as we fully repaid a total of €344 million of outstanding debt to Infineon. Our interest expense increased in the 2006 financial year as compared to the 2005 financial year, due to our higher average borrowings from Infineon.


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We no longer have any outstanding debt to Infineon. With the establishment of our own independent capital structure, including our recent capital lease of 200mm equipment, we expect interest expense to increase in future periods compared to the 2007 financial year. See “-Capital Requirements”.
 
Income Taxes
 
The following table sets forth information on our income taxes for the periods indicated.
 
                         
    For the financial year ended September 30,  
    2005     2006     2007  
    (in millions, except percentages)  
 
Income tax expense
  86     114     10  
Percent of net sales
    3 %     3 %     0 %
Effective tax rate
    83 %     61 %     (4 )%
 
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 2005, 2006 and 2007 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 2006 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. In the 2007 financial year our effective rate decreased but was still higher than our statutory rate, due to losses in jurisdictions for which tax benefits could not be recognized.
 
Net Income (Loss)
 
Our net income had improved from a net income of €18 million in the 2005 financial year to €74 million in the 2006 financial year before falling to a net loss of €249 million in the 2007 financial year.
 
Financial Condition
 
The following table sets forth selected items from our consolidated balance sheets for the periods indicated.
 
                         
    As of September 30,        
    2006     2007     Change(1)  
    (in millions, except percentages)        
 
Current assets
  2,807     2,257       (20 )%
Non-current assets
  3,054     3,124       2 %
                         
Total assets
  5,861     5,381       (8 )%
                         
Current liabilities
  1,479     1,244       (16 )%
Non-current liabilities
  511     620       21 %
                         
Total liabilities
  1,990     1,864       (6 )%
                         
Shareholders’ equity
  3,871     3,517       (9 )%
                         
 
 
(1) Percentage changes from September 30, 2006 to September 30, 2007.
 
As of September 30, 2007, our current assets decreased significantly as compared to September 30, 2006, primarily due to lower trade accounts receivables which resulted from lower revenues and faster collections in the 2007 financial year compared to the 2006 financial year. This effect was partially offset by investments made in marketable securities pending use in capital expenditures and an increase of other current assets mainly due to an increase of income tax refunds and the fair value of derivatives. Inventory was essentially unchanged as compared to September 30, 2006. While bit production growth exceeded bit shipments during the financial year, and we held some unsold inventory late in the year rather than sell it into a very unfavorable market, these factors were offset by


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the reduction in our manufacturing costs and our write-down of inventory during the year ended September 30, 2007. Non-current assets increased slightly because capital expenditures exceeded the corresponding depreciation in the 2007 financial year.
 
As of September 30, 2007, current liabilities decreased as compared to September 30, 2006 primarily as a result of the full repayment of €344 million on our short-term loan due to Infineon during the year ended September 30, 2007. As of September 30, 2007, non-current liabilities increased compared to September 30, 2006, mainly due to the increase in capital lease obligations following the sale and lease back of 200mm equipment.
 
As of September 30, 2007, our shareholders’ equity decreased as compared to September 30, 2006 mainly due to our net loss of €249 million and additional foreign currency translation losses affecting equity of €124 million during the 2007 financial year.
 
Liquidity
 
Cash Flows
 
Our combined and 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 prior to our carve-out include allocations of financial statement line items from Infineon’s financial statements, the combined and consolidated 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 between the balance sheets themselves.
 
                         
    For the financial year ended September 30,  
    2005     2006     2007  
    (in millions, except percentages)  
 
Net cash provided by operating activities
  484     326     980  
Net cash used in investing activities
  (972 )   (801 )   (847 )
Net cash provided by (used in) financing activities
  538     773     (307 )
Effect of foreign exchange rate changes on cash and cash equivalents
  5     2     (12 )
Cash and cash equivalents at end of period
  632     932     746  
 
Financial Year Ended September 30, 2007 Compared to Financial Year Ended September 30, 2006
 
Our operating cash flow increased from an inflow of €326 million in the 2006 financial year to an inflow of €980 million in the 2007 financial year. The growth in cash generated was primarily due to working capital improvements resulting from the substantial decrease in our trade accounts receivable (which had increased in our 2006 financial year). The working capital improvements also result from faster collections and improved payment terms with various customers and suppliers and include some prepayments to secure supply. Also positively affecting cash flow from operations as compared with the prior year were the effect of, non-cash inventory write-downs taken during the 2007 financial year and with comparably larger decreases in other current assets and larger increases in other liabilities. The effect of these increases in operating cash flow was partially offset by our net loss in the 2007 financial year, a comparably smaller increase in trade accounts payable and decreases in accrued liabilities.
 
Cash used in investing activities in these periods principally reflect the capital expenditures and investments in associated companies during this period. Our cash used in investing activities increased in the 2007 financial year, mainly because we had higher capital expenditures than in the 2006 financial year. This outflow was partially offset


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by proceeds received of €156 million from our sale and leaseback of 200mm equipment in Richmond in September 2007.
 
Cash used in financing activities in our 2007 financial year mainly reflects the full repayment of our short term loan from Infineon, By comparison, cash provided by financing activities in the 2006 financial year mainly came from our IPO proceeds of €415 million and advances by Infineon prior to our carve-out.
 
Financial Year Ended September 30, 2006 Compared to Financial Year Ended September 30, 2005
 
Our operating cash flow in the 2006 financial year declined from an inflow of €483 million to a €326 million inflow. The reduction in cash generated was primarily due to increases in our trade accounts receivable, inventory and trade accounts payable, reflecting our sales growth. This was in part offset by our higher net income and by depreciation and amortization, which increased by €175 million mainly as a result of our new facilities in Richmond, Virginia and Suzhou.
 
Cash used in investing activities in both periods reflect the capital expenditures and investments in associated companies during both periods. Our cash used in investing activities was lower in the 2006 financial year, mainly because we had lower capital expenditures compared to the 2005 financial year, which was partially offset by increased investments in marketable securities.
 
Cash provided by financing activities in both periods relates principally to investments by and advances from Infineon and, in the 2006 financial year, our IPO proceeds of €415 million, net of offering costs and tax benefits thereon. Infineon advanced €484 million to us in the 2006 financial year, as compared to €500 million in the same period one year earlier. We repaid €163 million to Infineon in the 2006 financial year.
 
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. Free cash flow is determined as follows from our combined and consolidated statements of cash flows:
 
                         
    For the financial year ended September 30,  
    2005     2006     2007  
    (in millions, except percentages)  
 
Net cash provided by operating activities
  484     326     980  
Net cash used in investing activities
  (972 )   (801 )   (847 )
Purchases of marketable securities, net
  (1 )   138     133  
                         
Free Cash Flow
  (489 )   (337 )   266  
                         
 
Free cash flow was negative in our 2005 and 2006 financial years because capital expenditures exceeded the cash provided by operating activities. Prior to our carve-out this shortfall was financed principally by advances from Infineon and subsequent to our carve-out was financed by our available cash balances.
 
Our free cash flow in the 2007 financial year was positive mainly due to working capital improvements that increased our operating cash flow by an amount in excess of our capital expenditures.


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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, 2007
  Total     1 year     1-2 years     2-3 years     3-4 years     4-5 years     5 years  
                      (in millions)              
 
Cash and cash equivalents
  746     746                      
Marketable securities
  265     265                      
                                                         
Gross cash position
  1,011     1,011                      
                                                         
Less:
                                                       
Long-term debt
  276     49     51     54     57     21     44  
Short-term debt
  28     28                      
                                                         
Total financial debt
  304     77     51     54     57     21     44  
                                                         
Net cash position
  707     934     (51 )   (54 )   (57 )   (21 )   (44 )
 
Our gross cash position (which we define as cash and cash equivalents plus marketable securities) amounted to €1.011 million at September 30, 2007, compared to €1.070 million at September 30, 2006. As part of Infineon, our historical capital structure was based on the assumption that our net cash position was zero. Our net cash position increased to €707 million at September 30, 2007, compared to €575 million at September 30, 2006 mainly as a result of our positive free cashflow during the 2007 financial year. We fully repaid the shareholder loan from Infineon by April 2007.
 
Long-term debt at September 30, 2007 principally consists of an unsecured bank loan of €124 million related to our Porto, Portugal backend facility, and a capital lease obligation of €128 related to the sale and lease back of 200mm equipment.
 
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 30 to the combined and consolidated financial statements included elsewhere in this annual report.
 
Return on Capital Employed (RoCE)
 
In addition to EBIT, our management has committed itself since the beginning of the 2007 financial year to focus on measuring the profitability of the Company using a measure that compares net income, with adjustments it believes necessary to make the measure a meaningful assessment tool, to the capital that has been required for the business. We began calculating and reporting the financial indicator Return on Capital Employed or “RoCE” for this purpose.
 
RoCE and its constituents, earnings before interest, capital employed are non-GAAP financial measures, which means they are 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, “Return on Capital Employed” 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. Reconciliations to the closest GAAP measures net (loss) income to shareholders’ equity ratio, net (loss) income and shareholders’ equity are presented below. We calculate our capital employed as our end period shareholders’ equity less the net cash position on that data. RoCE is calculated as earnings before interest divided by capital employed. RoCE is determined as follows from the consolidated financial statements:
 
                         
    As of September 30,  
    2005     2006     2007  
 
Shareholder’s equity
  2,967     3,871     3,517  
Less: net cash position
  0     (575 )   (707 )
                         
Capital employed
  2,967     3,296     2,810  
                         


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    For the financial year ended September 30,  
    2005     2006     2007  
 
Net income
  18     74     (249 )
Adjust: interest income (expense), net
  7     25     (7 )
                         
Earnings (loss) before interest
  25     99     (256 )
                         
Return on Capital Employed
    1 %     3 %     (9 )%
Net income (loss) in percent of shareholder’s equity
    1 %     2 %     (7 )%
 
Capital Requirements
 
We require capital in our 2008 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 we can sell;
 
  •  available credit facilities and
 
  •  capital market and other financing transactions in which we may engage in the future.
 
As of September 30, 2007, we required funds for our 2008 financial year aggregating €905 million. This consisted of €828 million for commitments and €77 million of short term debt. In addition, known contingencies of less than one year as of September 30, 2007 totaled €126 million. In our 2007 financial year we spent €879 million in capital expenditures. Approximately €237 million capital expenditures have been committed and included in unconditional purchase commitments for the 2008 fiscal year. We had a gross cash position of €1,070 million as of September 30, 2006 and €1,011 million as of September 30, 2007. Our sources of funding, in addition to this cash position, include our cash flows from operations — we generated cash flows from operations of €326 million in our 2006 financial year and €980 million during the financial year ended September 30, 2007. We can also draw, for short-term purposes, on the working capital lines we maintain in several locations in an aggregate amount of €161 million.
 
We are also exploring whether other kinds of longer term financing transactions may be arranged on favorable terms. One kind of transaction that is common in our industry is a sale and leaseback involving manufacturing equipment. We entered into such an agreement as of September 28, 2007 for a part of the 200mm equipment of our Richmond, Virginia, plant which resulted in net proceeds of €156 million. We are currently discussing further potential transactions of this nature and evaluating whether to engage in other bilateral or syndicated financing arrangements. Whether we do so depends on market conditions and the attractiveness of the terms we are able to achieve.


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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, 2007(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)
  63     22     21     20              
                                                         
Contractual commitments:
                                                       
Operating lease payments
  95     27     25     17     9     8     9  
Unconditional purchase
                                                       
commitments(5)
    787       737       43       5       2              
Other long-term commitments
  70     64     2     2     1     1        
                                                         
Total contractual commitments
  952     828     70     24     12     9     9  
                                                         
Other contingencies:
                                                       
Guarantees(6)
  128     19     16     1     9     30     53  
Contingent government grants(7)
  406     107     22     45     166     26     40  
                                                         
Total contingencies
  534     126     38     46     175     56     93  
                                                         
 
 
(1) The above table should be read together with note 31 to our combined and consolidated 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, 2007. Purchases under these agreements aggregated approximately €1.131 million for the 2007 financial year and €1,185 million for the 2006 financial year.
 
(4) These amounts are recorded as accrued, 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. 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.
 
(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.


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Capital Expenditures
 
                         
    For the financial year ended September 30,  
    2005     2006     2007  
    (in millions)  
 
Purchases of property, plant and equipment
  926     686     879  
 
Our capital expenditures of €879 million for the 2007 financial year consisted primarily of equipment upgrades at our 300mm facility in Dresden, Germany capacity expansion at our 300mm facility in Richmond, Virginia and extension of our wafer test and component capacities in Porto, Portugal. During the 2006 financial year we invested primarily in the capacity expansion at our 300mm facility in Richmond, our 300mm facility in Dresden and our back-end venture in Suzhou, China. In our 2005 financial year, we completed the construction of the 300mm facility in Richmond, ramped up production there and also invested in our back-end venture in Suzhou.
 
We have reduced our planned capital expenditures for the 2008 financial year to a range between €650 million to €750 million and aim to increase our collaboration with our partners. As of September 30, 2007, approximately €237 million of capital expenditures have been committed and included in unconditional purchase commitments for our 2008 financial year. 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.
 
In March 2007, we announced plans to expand capacity at our back-end manufacturing facility in Suzhou, China for which we expect capital expenditures of €250 million over the next three years. We also plan to invest up to €150 million over the next five years to build a new DRAM module manufacturing facility in Johor, Malaysia. In April 2007, we also announced plans to construct a new front-end manufacturing facility in Singapore, for which we plan to invest approximately €2 billion over the next five years.
 
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 had $435 million (€344 million) drawn at September 30, 2006 with initial maturities in July and August 2007. We fully repaid this shareholder loan by April 2007. We have also agreed not to draw further amounts under the agreement.
 
In addition we have established both short- and long-term credit facilities with a number of different financial institutions in order to meet our anticipated funding requirements. We can draw, for short term purposes, on the working capital lines we maintain in several locations in an aggregate amount of €161 million as of September 30, 2007. We already drew €28 million under this short-term facility for working capital purposes in China and fully repaid it on October 10, 2007.
 
In August 2006 we entered into a multicurrency revolving loan facility in an aggregate principal amount of €250 million which we voluntarily cancelled on September 28, 2007. Before cancellation, we did not have any drawdown at any time from this revolving loan facility. This cancellation was due to certain restrictions on asset dispositions which limited us from pursuing engagements in sale and leaseback transactions involving manufacturing equipment. We entered into such an agreement on September 28, 2007 for a portion of the 200mm equipment in our Richmond, Virginia, USA plant and are considering further potential transactions of this nature.
 
Subject to conditions in the capital markets, we expect from time to time (but subject to the lock-up agreement we have agreed with the underwriters for the secondary offering of our ADSs on September 20, 2007 by Infineon) to consider engaging in additional financing transactions.
 
A €124 million non-recourse project financing facility for the expansion of the Porto, Portugal manufacturing facility was fully drawn as of September 30, 2007.
 
A €24 million note payable to a government entity in connection with our Richmond, Virginia, USA plant had been fully drawn as of September 30, 2007.


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We plan to fund our working capital requirements from cash provided by operations, available funds, bank loans, other potential financing transactions, government subsidies and, if needed, the issuance of additional debt or equity securities. We have also applied for governmental subsidies in connection with certain capital expenditure projects, but can provide no assurance that such subsidies will be granted on a timely basis or at all. We can provide no assurance that we will be able to obtain additional financing for our research and development, working capital or investment requirements or that any such financing, if available, will be on terms favorable to us.
 
Taking into consideration the financial resources available to us, including our internally generated funds and currently available borrowing facilities, we believe that we will be in a position to fund our capital requirements in our 2008 financial year.
 
Pension Plan Funding
 
The following table sets forth the status of our pension plan funding for the periods indicated.
 
                         
    As of September 30,        
    2006     2007     Change  
    (in millions)  
 
Projected benefit obligations
  (56 )   (54 )   2  
Fair value of plan assets
  27     29     2  
                         
Funded status
  (29 )   (25 )   4  
                         
 
As of September 30, 2006, we recognized the funded status, net of €7 million unrecognized actuarial losses as a liability on our balance sheet. As of September 30, 2007 we adopted SFAS No. 158 and recognized the funded status as a liability on our balance sheet and recorded an actuarial gain and prior service cost of €5 million as part of equity. Since the present value of future benefits we expect to pay over the next five financial years totals €9 million as of September 30, 2007, we do not perceive a need to increase our plan funding in the immediate future.
 
We have estimated the return on plan assets for the next financial year to be 6.3% for domestic plans and 6.4% for foreign plans. The actual return on plan assets between the last measurement dates amounted to 8.8% for domestic plans and 9.6% for foreign plans, compared to the expected return on plan assets for that period of 5.9% for domestic plans and 6.4% for foreign plans.
 
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 an investment manager in co-operation with an investment consultant. 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 are not permitted to invest in our company or Infineon Technologies AG shares. The Qimonda Pension Trust has adopted an asset allocation strategy similar to that of the Infineon Pension Trust, which employs a mix of active and passive investment management programs. In September and October 2006 Infineon Pension Trust transferred €26 million of cash to the Qimonda Pension Trust for use in funding these pension benefit obligations, thereby reducing accrued pension liabilities. In October 2006 the Qimonda Pension Trust invested this cash in a diversified portfolio of investments aimed at maximizing long term returns.


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Research and Development
 
Research and development form a significant part of our operations. Our research and development expenses were €401 million in the 2007 financial year and €433 million in 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 of business transactions, primarily from changes in commodity prices, foreign exchange rates and interest rates.
 
We use financial instruments, including derivatives, to manage foreign exchange rate risks and interest rate risks. Since our carve-out from Infineon, we have set up a separate financial risk management function. We enter into diverse financial transactions with several counterparties to limit our risk. Derivative instruments are only used for hedging purposes and not for speculative purposes.
 
You should read the following discussion of categories of market risk to which we are exposed in conjunction with notes 2, 29 and 30 to our combined and consolidated 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 financial instruments to manage any exposure to fluctuations in commodity prices remaining after the operating measures we describe above.
 
Foreign Exchange Rate Risk
 
Although we prepare our combined and consolidated 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 weaker on September 30, 2006 than it had been one year earlier, the average exchange rate of U.S. dollars for euro over the 2006 financial year was stronger than it had been in the 2005 financial year, increasing 3% from U.S. $1.00 = €0.7869 to U.S. $1.00 = €0.8117. During the 2007 financial year, by contrast, the average exchange rate decreased by 8% from U.S. $1.00 = €0.8117 to U.S. $1.00 = €0.7497.
 
The table below provides information about derivative financial instruments as of September 30, 2006 and as of September 30, 2007, including those foreign currency forward contracts sensitive to changes in foreign currency exchange and interest rates. 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.


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The euro equivalent notional amounts in millions and fair values of our derivative instruments as of September 30, 2006 and as of September 30, 2007 are as follows:
 
                                 
    As of September 30,     As of September 30,  
    2006     2007  
    Notional
    Fair
    Notional
    Fair
 
    amount     value     amount     value  
    (in millions)  
 
Forward contracts sold:
                               
U.S. dollar
  168     (1 )   475     11  
Japanese yen
    26             2       *  
Forward contracts purchased:
                               
U.S. dollar
    17             72       (1 )
Japanese yen
    22             70       (2 )
Singapore dollar
    3             5        
Malaysian ringgit
    5             17        
Other currencies
                1        
Other
    94       5       108       11  
                                 
Fair value, net
          4             19  
                                 
 
 
*) less then 1 million
 
Our 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 and consolidated financial statements, with changes in fair values recorded on our statement of operations.
 
In the 2007 financial year, our allocated foreign exchange transaction loss amounted to €39 million and was offset by gains from our economic hedge transactions of €25 million, resulting in a net loss of €14 million. This compares to foreign exchange gains of €2 million, offset by hedging losses of €4 million, resulting in a net loss of €2 million in the 2006 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. We had no outstanding interest rate derivatives at September 30, 2007. However, we anticipate making use of such instruments depending on the nature of our debt financing in the future.


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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.
 
Based on our long and short term debt outstanding on September 30, 2007 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 €3 million.
 
Off-Balance Sheet Arrangements
 
We have no off-balance sheet arrangements other than operating leases in respect of office space, manufacturing land and office equipment including PCs and workstations. As of September 30, 2006, we had contractual commitments for operating lease payments of €107 million. As of September 30, 2007, those contractual commitments decreased to €95 million.
 
Recent Accounting Pronouncements
 
Adopted in the year ended September 30, 2007
 
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R)”, which requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization (“Recognition Provision”). SFAS No. 158 does not change the basic approach to measuring net periodic pension cost. We adopted the Recognition Provision of SFAS No. 158 as of September 30, 2007 as described above in ‘‘— Critical Accounting Policies — Pension Plan Accounting”.
 
In September 2006, the SEC issued SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”. SAB No. 108 provides interpretive guidance on how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in the current year financial statements. SAB No. 108 requires us to quantify misstatements using both an income statement (“rollover”) and balance sheet (“iron curtain”) approach and to evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. If prior year errors that had been previously considered immaterial are considered material upon adoption based on either approach, no restatement is required so long as management properly applied its previous approach and all relevant facts and circumstances were considered. If prior years are not restated, the cumulative effect adjustment is recorded in opening accumulated earnings (deficit) as of the beginning of the year of adoption. We adopted SAB No. 108 as of the year ended September 30, 2007 which did not result in restatement or cumulative effect adjustment.
 
Issued but principally applicable in future financial years
 
In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”) which defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. FIN 48 also provides guidance on the de-recognition measurement and classification of income tax uncertainties, along with any related interest and penalties. FIN 48 also includes guidance concerning accounting for income tax uncertainties in interim periods and increases the level of disclosures associated with any recorded income tax uncertainties. FIN 48 is effective for us from our financial year beginning October 1, 2007. The differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption will be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. We are in the process of determining the impact, if any, that the adoption of FIN 48 will have on our consolidated financial position and results of operations.
 
In September 2006, the FASB released SFAS No. 157, “Fair Value Measurements”, which provides guidance for using fair value to measure assets and liabilities. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value


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measurements. The standard also responds to investors’ requests for more information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect that fair value measurements have on earnings. SFAS No. 157 will apply whenever another standard requires (or permits) assets or liabilities to be measured at fair value. SFAS No. 157 does not expand the use of fair value to any new circumstances. SFAS No. 157 is effective for us from our financial years beginning after October 1, 2008, and interim periods within those financial years. We are in the process of evaluating the impact that the adoption of SFAS No. 157 will have on our consolidated financial position and results of operations.
 
SFAS No. 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions (“Measurement Date Provision”). We currently measure the funded status of our plans annually on June 30. The Measurement Date Provision is effective for us as of the end of the fiscal year ending September 30, 2009. We do not expect the application of the Measurement Date Provision of SFAS No. 158 annually on September 30 to have a significant impact on our results of operations or financial position.
 
In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115”. SFAS No. 159 permits entities to choose to measure certain financial assets and liabilities and other eligible items at fair value, which are not otherwise currently required to be measured at fair value. Under SFAS No. 159, the decision to measure items at fair value is made at specified election dates on an irrevocable instrument-by-instrument basis. Entities electing the fair value option would be required to recognize changes in fair value in earnings and to expense upfront cost and fees associated with the item for which the fair value option is elected. Entities electing the fair value option are required to distinguish on the face of the statement of financial position, the fair value of assets and liabilities for which the fair value option has been elected and similar assets and liabilities measured using another measurement attribute. If elected, SFAS No. 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007, with earlier adoption permitted provided that the entity also early adopts all of the requirements of SFAS No. 157. We are currently evaluating whether to elect the option provided for in this standard.
 
Recent Events
 
The following significant events occurred after September 30, 2007:
 
On October 2, 2007 we and Sony Corporation announced that we have signed an agreement to found the joint venture Qreatic Design. The scope of the joint venture is the design of high-performance, low power, embedded and customer specific DRAMs for consumer and graphic applications. According to the agreement, the 50:50 joint venture is intended to start with up to 30 specialists from Sony and Qimonda, bringing together their engineering expertise for the mutual benefit of both companies. Qreatic Design, which will be located in Tokyo, Japan, is planned to start operations by the end of the 2007 calendar year, subject to regulatory approvals and other closing conditions, and to substantially expand its capacities by hiring additional designers.
 
On October 8, 2007, we entered into a rental agreement for new headquarter offices south of Munich, Germany. The agreement involves the construction of a building by a third party lessor, and includes a 15 year non-cancelable lease term, which is expected to start in early 2010. We have an option to extend the lease for two 5 year periods at similar lease terms to the initial non-cancelable lease term. The minimum rental payments aggregate €96 million over the initial lease term. The lease contract provides for rent escalation in line with market-based increases in rent. The agreement will be accounted for as an operating lease with monthly lease payments expensed on a straight-line basis over the lease term.
 
On October 15, 2007, the court entered an order denying the motion to dismiss in the Unisys and the DRAM Liquidation Trust cases without prejudice. On October 29, 2007, Infineon answered the Unisys complaint, denying liability and asserting a number of affirmative defenses. On November 1, 2007, Infineon answered the DRAM Claims Liquidation Trust complaint, denying liability and asserting a number of affirmative defenses. See “Our Business — Legal Matters” for more information on these matters.


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On November 9, our Supervisory Board allocated 200,000 options for grant to our Management Board in the 2008 financial year.
 
Outlook
 
Our revenues are a function of the bit volume we ship and the selling price we achieve for our products. While we have an influence over our production growth, through capacity additions and productivity improvements, our sales volume depends on the extent to which our product offerings match market demand. Our selling prices are a function of the supply and demand relationship in the DRAM market. These market forces are beyond our control and accordingly, it is difficult for us to reliably estimate what these future sales prices, and the resulting revenues and the contribution to our earnings will be.
 
In the first quarter of the 2008 financial year, we expect our bit production to grow by approximately 5%, mainly based on productivity improvements from the ongoing conversion to 80nm and 75nm technologies and including effects from declining 200mm capacities.
 
For the full 2008 financial year, we expect bit demand for DRAM to be driven by the continued strong growth in graphics, consumer and communication applications, by price elasticity and the move to higher density modules in the PC market. For the 2008 financial year, we estimate an increase in bit production of approximately 50%. We target our share of bit shipments to non-PC applications to be more than 50% for the full financial year.
 
We are continuously taking steps to reduce our cost-per-bit in manufacturing, such as the introduction of advanced process technologies featuring smaller die-sizes, the ramp-up of more productive 300-mm capacities and other cost savings and productivity improvement measures. By the end of the first quarter of our 2008 financial year we expect more than 50% of our manufacturing capacity to be using 80nm and smaller die sizes, and we are targeting to increase this share to approximately 75% by the end of the second quarter.
 
We expect to make capital expenditures in the 2008 financial year of between €650 and €750 million. In the years thereafter our aim is to have capital expenditures of approximately 15% to 25% of revenues on average over the DRAM cycle.
 
Depreciation and amortization is estimated to range between €700 million and €800 million for the 2008 financial year. For the years thereafter depreciation and amortization is expected to be in line with capital expenditures.
 
Research and development expenses are anticipated to be between €450 million and €490 million for the 2008 financial year. In the years thereafter our aim is to have research and development expenses of approximately 10% of sales on average over the DRAM cycle.
 
Selling, general and administrative expenses are expected to range between €210 million and €230 million for the 2008 financial year. In the years thereafter our aim is to have selling, general and administrative expenses of approximately 5% of sales on average over the DRAM cycle.
 
We anticipate that our number of employees will increase moderately in certain areas in the current year due to the expansion of our business and the diversification of our product portfolio.
 
We no longer have any outstanding debt to Infineon. With the establishment of our own independent capital structure, such as the recent sale and leaseback of 200mm equipment, we expect interest expense to increase in future periods compared to the 2007 financial year.


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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, GPS devices, 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 2006 were $34 billion, representing 56% of the $61 billion semiconductor memory industry, which in turn represented 23% of the $263 billion semiconductor industry. Sales of NAND flash memory reached $14 billion or 22% of the semiconductor memory industry in calendar year 2006.
 
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 2Gb 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


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critical, such as printers. The industry has migrated from a 256Mb standard density to a 512Mb standard density. According to Gartner, the percentage of standard chips produced with 512Mb was 14% in calendar year 2004 and increased to 75% in 2006.
 
The following table shows the percentage of worldwide DRAM bit shipments in the period from 2000 to 2006, according to Gartner.
 
                                                         
    Year ended December 31  
    2000     2001     2002     2003     2004     2005     2006  
 
4Mb
    0.3%       0.1%       0.1%                          
16Mb
    5.9%       2.4%       1.5%       0.8%       0.7%       0.4%       0.3%  
64Mb
    51.4%       16.8%       7.0%       3.8%       2.5%       1.3%       0.9%  
128Mb
    37.3%       61.8%       35.7%       14.2%       7.7%       4.2%       2.5%  
256Mb
    5.0%       18.8%       55.5%       78.9%       74.0%       48.0%       17.9%  
512Mb
                0.2%       2.2%       14.3%       43.2%       74.9%  
1Gb
                      0.1%       0.9%       2.8%       3.5%  
2Gb
                                        0.1%  
 
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. The industry standard DRAM chip interface has transitioned 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 1GHz, resulting in data transfer rates of 32GB 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 55% in calendar year 2006. The next generation, higher bandwidth interface, double data rate 3 (DDR3), is currently in the early production phase at some manufacturers, including ourselves.
 
The following table shows the percentage of worldwide DRAM bit shipments by interface generation in the period from 2000 to 2006, according to Gartner.
 
                                                         
    Year ended December 31,  
    2000     2001     2002     2003     2004     2005     2006  
 
FPM/EDO DRAM
    9.9%       3.2%       0.9%       0.4%       0.2%       0.1%       0.0%  
SDR SDRAM
    87.0%       81.0%       55.5%       22.4%       17.6%       12.3%       9.7%  
DDR SDRAM
          8.6%       37.9%       72.5%       72.6%       58.2%       31.4%  
DDR2 SDRAM
                0.0%       1.3%       6.6%       26.3%       55.1%  
DDR3 SDRAM
                                        0.1%  
RDRAM
    2.7%       6.4%       4.2%       1.9%       0.9%       0.4%       0.1%  
Other
    0.3%       0.8%       1.5%       1.6%       2.1%       2.7%       3.5%  


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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 1.5 Volt for DDR3 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. We later advanced the trench technology and have been developing it further in cooperation with Nanya. Both stack and trench cell technology have to date been accepted in the market. According to Gartner, based on bit shipments, in 2006, trench-based DRAMs accounted for approximately 24% 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 75nm 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 current and next technology nodes outlined by the ITRS also generally referred to as the “shrinkage roadmap”, are 90nm, 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 currently introducing and ramping process technology for 75/70nm and are in the advanced stages of developing process technology for 65/60nm feature sizes. They anticipate the development down to approximately 50nm in the coming years. We believe that industry participants are currently working on concepts for smaller process technologies and alternative platforms. 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 70nm and below, transistors are starting to move into the third dimension in future feature size generations of both trench


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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 periods of time, 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. The main process steps to build the circuit structures include oxidation or deposition steps, photolithography, etching and ion implantation. 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 50mm in 1970, to 100mm by 1980, 150mm by 1990 and 200mm by 1995, and has increased to 300mm since 2000, although the industry transition to 300mm wafers is still underway. 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 450mm 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 300mm wafers is approximately 2.25 times greater than that of 200mm wafers, which yields approximately 140% more chips per wafer. Because the cost of labor and certain other fixed costs are largely independent of the size of the wafers used, the 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 desire to specialize in front-end processing alone or augment their in-house back-end capacity.


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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 54% of global DRAM bit shipments in 2006, according to Gartner’s report for the third quarter of the 2007 calendar year. 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 18% of global DRAM bit shipments in 2006, according to Gartner’s report for the third quarter of the 2007 calendar year. 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


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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 are 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 19% of DRAM bit shipments in 2006, according to Gartner’s report for the third quarter of the 2007 calendar year.
 
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 AMD 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’s report for the third quarter of the 2007 calendar year, between calendar years 1998 and 2006, bit shipments grew at a CAGR of 55% 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 2006, PCs, workstations and memory modules and upgrades represented only 54% of total DRAM consumption as compared to 66% in 2001.
 
Current estimates by Gartner predict continued strong growth in DRAM bit shipments at a CAGR of 52% between calendar years 2006 and 2011, according to Gartner’s report for the third quarter of the 2007 calendar year. Overall semiconductor memory sales were $61 billion in 2006, and DRAM sales were $34 billion in that year. Market research firms expect DRAM sales to remain volatile, as increases in bit shipments are offset to varying levels of declines in the average selling prices for DRAM products. Key drivers of the growth in DRAM bit demand include the following:
 
  •  Emergence of mobile phones as a significant consumer of DRAM.  While mobile phones consumed nearly no DRAM six years ago, in calendar year 2006, this application represented 3% of DRAM consumption and is expected to reach 6% in calendar year 2011, according to Gartner. The 11% CAGR of units shipped between calendar years 2006 and 2011, combined with 55% CAGR in megabytes per unit, is expected to lead to 71% 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.


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  •  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. All three major game console developers introduced new consoles using these technologies within the last twelve months. 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 36% CAGR of DRAM consumption in consumer devices between calendar years 2006 and 2011, according to Gartner.
 
  •  Continuing strong growth in DRAMs for infrastructure.  DRAM consumption in servers is expected to grow at a 49% CAGR between 2006 and 2011 and for Infrastructure at 53%, according to Gartner, driven by an estimated increase of DRAM content per unit at a CAGR of over 39% and continued unit growth of entry-level 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 a 55% CAGR between 2006 and 2011, 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, Microsoft’s first mainstream 64-bit operating system, Windows Vista, which was launched in January 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 21% CAGR in the period between calendar years 2006 and 2011, 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 in 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, whereas 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


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  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 eight 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, which further reported that this percentage had increased to 66% in the fourth quarter of the 2006 calendar year. 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 72% in calendar year 2006.
 
  •  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 have 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


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manufacturing semiconductors. Because technological know-how is very concentrated in the semiconductor memory 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. 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. After capacity conversions from DRAM to NAND flash memory products in the calendar year 2006, the industry has recently seen capacity conversions back to DRAM in reaction to the severe price erosion for NAND flash products. We believe that capacity conversions will continue to take place in both directions whenever substantial differences arise in margins between those product types.
 
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.


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OUR 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 began operations within the Semiconductor Group of Siemens AG, whose roots in semiconductor R&D and manufacturing date back to 1952, and operated as the Memory Products segment of Infineon Technologies AG since its carve-out from Siemens AG in 1999. In each of the past five calendar years, we captured between 12% and 16% of the worldwide DRAM market based on revenues, according to industry research firm Gartner. Although our market share fluctuates, and we may gain or lose market share quarter-to-quarter (for example, we lost market share in the fourth quarter of the 2006 calendar year and in the first quarter of the 2007 calendar year) or year-to-year, in each of those five years, we remained among the four largest DRAM suppliers worldwide based on revenues. For the full calendar year 2006, we were the world’s third largest supplier of DRAM, with market share of approximately 16% both in revenues and bit shipments, according to Gartner. For the first nine months of the 2007 calendar year, we remained the third largest supplier of DRAM by revenue and were the fourth largest supplier of DRAM by bit shipments with market shares of approximately 13%, according to iSuppli’s preliminary report in November 2007.
 
Our revenues are derived from:
 
  •  Technologically 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, GPS devices, televisions, set-top boxes, DVD recorders and other consumer electronic devices. Sales of infrastructure, graphics, mobile and consumer DRAM products accounted for approximately 38% of our net sales in our 2005 financial year, for approximately 50% of our net sales in our 2006 financial year and for approximately 60% of our net sales for our 2007 financial year;
 
  •  Standard DRAM products used in personal computers, or PCs and workstations. Sales of these standard DRAM products accounted for approximately 51% of our net sales in our 2005 financial year, approximately 47% of our net sales in our 2006 financial year and approximately 39% of our net sales in our 2007 financial year; and
 
  •  Other products, including embedded DRAM, technology licensing and NAND-compatible flash memory products. We ramped down flash memory products during the 2007 financial year. Sales of these products and revenues from technology licensing and royalties accounted for approximately 11% of our net sales in our 2005 financial year, for approximately 3% of our net sales in our 2006 financial year and for approximately 1% of our net sales in our 2007 financial year.
 
The memory products business of Infineon, substantially all of which Infineon has contributed to us, had a long-standing reputation as a supplier of high-quality DRAMs. We intend to continue 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 in the PC and Server markets, 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


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portfolio, especially into graphics applications, we have added customers with a strong focus on enabling these applications, such as nVidia, AMD and customers who are active in the game console market, such as Microsoft, Sony and Nintendo. In addition, we have added customers in the area of consumer and mobile applications, such as LG, Spansion and SanDisk. We believe that having a close relationship with these customers can benefit us in the development of future memory generations by making it easier to develop memory solutions for future end applications and improve our product designs.
 
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 Qimonda Technologies (Suzhou) Co., Ltd., China, 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 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 have grown our operations significantly over the last decade and, as the suppliers in our industry have continued to consolidate, we have increased our market share from 3% to 16% (based on revenues) between calendar years 1995 and 2006, according to Gartner. Although our market share fluctuates from quarter-to-quarter and year-to-year, by the end of calendar year 2006, we were among the four largest DRAM suppliers, which together accounted for 72% of the global DRAM market that year. For the calendar year 2006, we were the world’s third largest supplier of DRAM with market share of approximately 16% both in revenues and bit shipments, according to Gartner. For the first nine months of calendar year 2007, we remained the third largest supplier of DRAM by revenue and were the fourth largest supplier of DRAM by bit shipments, with market shares of approximately 13%, according to iSuppli’s preliminary report in November 2007. 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 possess one of the broadest product portfolios in the DRAM industry.  We have in recent years significantly broadened our product portfolio of DRAM products for infrastructure, graphics, consumer and mobile applications, which we believe offer on average higher and less volatile prices than those for standard PC applications. In our 2007 financial year, our product portfolio included over 100 distinct products in these application areas that each accounted for revenues in excess of €1 million, as compared with about 70 such products in our 2005 financial year. Within these application areas, we have focused on products that we design to meet the particular specifications customers identify for individual applications (which we refer to as “design ins”). We believe that this focus on individual applications and customers can help us mitigate the effects of price declines. In addition, our broadened product portfolio has enabled us to strengthen our customer base, both by adding new customers and expanding existing customer relationships to encompass more products.
 
  •  We demonstrate strong application and product design know-how.  We believe that strong application and product design know-how is necessary to achieve design wins in applications outside the PC area, and that this know-how is not widely available in the market. We have strengthened our product design know-how in recent years through experienced design teams, and have continued to view the further strengthening of our capabilities in these areas as a priority. We believe that our application and design know-how has been instrumental in being selected as a lead supplier in many of the more technologically advanced applications in the graphics, consumer and mobile areas in recent years. For example, the number of our customers who are among the leading suppliers in the area of consumer and mobile applications increased from 5 in the 2005 financial year to 19 in the 2007 financial year.


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  •  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 believe that our accumulated experience, including that which we have acquired through our strategic alliances, is enabling us to introduce new memory technology platforms with smaller feature sizes on a schedule and at costs that enable us to remain among the leaders in standardized DRAMs while focusing on the more specialized products and designins described above. For example, we achieved the qualification of our 75nm node in approximately 30% less time than we did when shrinking from the 110nm to the 90nm node and have fully converted the production of standard DRAM products in our lead manufacturing facility in Dresden to the latest 80nm and 75nm technologies. We are also maintaining, as a focus of our continuing research and development efforts, the development of process technologies and architectures that possess physical characteristics that can be utilized to yield advantages for customer specific applications in terms of performance and power consumption. We believe these characteristics are important in DRAM products for use in applications such as infrastructure, graphics, mobile and consumer devices and have enabled us to achieve important design wins for products for use in applications ranging from game consoles and MP3 players to advanced servers. In this context, we are currently preparing for the qualification of our trench technology at the 58nm technology node by the end of our 2008 financial year. At the same time we are working on designs beyond this technology node with an open platform approach and a range of architectures and technologies under review.
 
  •  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, Inc. joint venture to one of the largest 300mm facilities in the world, according to Gartner. In the second quarter of the calendar year 2007, about 81% of the DRAM bits we produced were manufactured using 300mm wafers. This compares favorably to the industry average of 75%, as reported by iSuppli for the same quarter. We believe this places us ahead of our major competitors, many of which still manufacture to a larger extent on 200mm technology. We believe the primary benefit of this early transition to 300mm has been and will continue to be a reduction in our costs per bit, as our fixed costs of production can be spread over a higher number of chips per wafer. Because implementation of 300mm technology is complex and requires time and substantial capital investments, we expect our 300mm leadership to give us an advantage relative to competitors who have not yet transitioned as great a proportion of their capacity to 300mm as we have.
 
  •  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 that our strategic alliances, including our Inotera and Qimonda Suzhou 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, even as we seek, through productivity improvements and new capacity such as the manufacturing facility we plan to construct in Singapore, to maintain at least half of our production capacity in house. 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
 
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 maintaining our focus on technologically advanced, customer and application specific DRAM products for infrastructure, graphics, mobile and consumer applications.  We believe significant growth opportunities exist for application-specific DRAMs used in servers, graphics cards, game consoles, mobile phones, digital audio players, GPS devices, televisions, set-top boxes, DVD


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  recorders and other consumer electronic devices. Our customers and the other original equipment manufacturers we target in these areas increasingly require DRAM products with higher performance, lower power consumption and smaller form factors, all at an attractive price. We intend to focus on memory products for applications in these areas as we seek to develop, frequently together with research and development partners, new solutions to the physical and economic challenges posed by the ever-increasing technical and financial demands of these customer requirements. We plan to meet and drive this demand by continuing to exploit our strengths in technology innovation, not only in the form of our trench technology but also in the form of new architectures and platforms that may result from these research and development activities. We have enhanced our product development capabilities and have recruited a significant number of product development engineers, many of whom work directly with customers on application- and customer-specific product designs. This has already enabled us to substantially expand our product offerings and market share in these areas. Because in our experience these application-specific 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 as compared with the industry as a whole 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 successfully ramp up manufacturing yield on the 80nm and the 75nm technology nodes and to introduce a 58nm technology by the end of our 2008 financial year, which we believe will 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 improvement 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 maintaining or expanding 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 production capacity in-house, through productivity improvements and new capacity such as the manufacturing facility we plan to construct in Singapore, 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 Memory Products segment to our company effective May 1, 2006. This excluded the Memory Products operations in Korea and Japan, which were placed in trust for us by Infineon pending their contribution and transfer. The operations in Korea and Japan have since been transferred to us. While Infineon’s investment in the Advanced Mask Technology Center (AMTC) and the Maskhouse Building Administration Company (BAC) in Dresden has been contributed to us, the legal transfers of these investments are not yet effective, since Infineon’s co-venturers have not yet given the required consent to the transfer of the AMTC and


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BAC interest. While pursuant to the AMTC and BAC limited partnership agreements, such consent may not be unreasonably withheld. Infineon and we are currently finalizing negotiations with AMD and Toppan concerning an agreement that provides the consent to the assignment to us and addresses Infineon’s intention to reduce its stake in us below 50%. The AMTC and BAC interest is held by Infineon for our economic benefit pursuant to the contribution agreement. For as long as Infineon holds our interests in AMTC and BAC, 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 interests directly. We do not expect these administrative complexities to have a material adverse effect on our business, financial condition and results of operations.
 
Benefits of our Carve-out
 
We believe that operating as an independent company allows us 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 are able 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 permits 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 appeal more readily to those investors interested in a focused semiconductor memory company. Furthermore, as a stand-alone company, we enjoy direct access to the capital markets.
 
  •  Incentives for our employees directly tied to our own performance:  We believe that our share price reflects our performance more accurately than Infineon’s share price did and therefore can be used as a more effective compensation tool for our employees. Our shareholders have authorized the Supervisory Board to grant to the members of the Management Board, and the Management Board to grant to certain key executives in our group, through September 30, 2009, a total of 6,000,000 non-transferable option rights to receive our ordinary shares in the form of ADSs. As of September 30, 2007, a total of 1,883,400 options were outstanding. We have not granted any options since that date.
 
  •  Increased flexibility to pursue strategic cooperations:  We believe that by becoming an independent business, we have substantially increased our flexibility to engage in strategic cooperations such as alliances or joint ventures of particular benefit to the semiconductor memory business. In addition, we are 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
 
We design semiconductor memory technologies and develop, manufacture, market and sell a large variety of semiconductor memory products with various packaging and configuration options, architectures and performance characteristics on a chip, component and module level. We currently offer technologically more advanced DRAM products for infrastructure, graphics, mobile and consumer applications, as well as standard DRAM products for PCs, notebooks and workstations. We also offered a small number of non-volatile NAND-compatible flash memory products, but discontinued production of these products in our 2007 financial year.


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The following table sets forth our revenues provided by category of activity for the periods indicated:
 
                                                 
    For the financial year ended September 30,  
    2005     2006     2007  
    (in
    (in percent
    (in
    (in percent
    (in
    (in percent
 
    millions)     of total)     millions)     of total)     millions)     of total)  
 
DRAMs:
                                               
Standard DRAMs for PCs, Notebooks and workstations
  1,435       51 %   1,784       47 %   1,407       39 %
DRAMs for infrastructure, graphics, mobile and consumer applications
    1,089       38 %     1,928       50 %     2,160       60 %
                                                 
Total DRAMs
    2,524       89 %     3,712       97 %     3,567       99 %
Other products and services(1)
    301       11 %     103       3 %     41       1 %
                                                 
Total
  2,825       100 %   3,815       100 %   3,608       100 %
                                                 
 
 
(1) Primarily includes embedded DRAM products, flash memory products and technology licensing revenues. Technology licensing revenues consists of revenues from licensing our technology to third parties in connection with manufacturing agreements that provide us with access to manufacturing capacity. See “— Strategic Alliances and Agreements.”
 
Brands
 
Most of our products are sold under our Qimonda brand, and we are working to establish a brand identity for ourselves using the Qimonda name. See “Risk Factors — Risks related to our carve-out as a stand-alone company and our continuing relationship with Infineon — We may not be successful in establishing a brand identity.” We have applied for protection of our Qimonda brand as a trademark, domain and company name, but may not gain protection in all jurisdictions. Qimonda is intended to be the market brand for memory products exclusively sold to OEMs (Original Equipment Manufacturers) in the IT industry. We also sell DRAM products under our AENEON® brand. Our AENEON brand is positioned as a separate memory brand, dedicated to serving the needs of the “channel” & “retail” market. “Channel” refers to the hundreds of small PC manufacturers and systems integrators or system builders worldwide. They typically assemble and install PC systems serving both consumer and corporate segments that require these services. “Retail” refers typically to retail storefronts or online retail that sell computer systems, components and upgrade parts to consumers. It also covers specialists who configure individual PCs and sell memory upgrades to consumers. The products sold under the AENEON brand include DRAM modules for notebooks, PC desktops and servers; as well as flash based products such as USB sticks, SD cards and MicroSD cards. We test the quality of our AENEON® products through testing the compatibility with major PC and notebook platforms. This process is often shorter and more cost-efficient than the testing required by high-end applications of our OEM customers. We sell our AENEON® products via an extensive network of distributors and retailers worldwide, and have recently begun to offer them through a dedicated online sales channel.
 
DRAMs for Infrastructure, Graphics, Mobile and Consumer Applications
 
We design, manufacture and sell technologically advanced DRAM components and modules for use in servers, networking and storage equipment and a variety of specialty DRAMs for use primarily in graphics, as well as in mobile and consumer applications.
 
Infrastructure Applications
 
Our current portfolio of DRAMs for use in servers, networking and storage equipment includes FB-DIMMs, which we believe will serve as the next generation of memory used in high-end servers, and very-low-profile-DIMMs, intended for the blade server market. DRAM consumption in entry level servers is expected to enjoy 60%


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compound annual growth rate (CAGR) (based on bits shipped) from 2006 to 2011, according to iSuppli. We believe we are the only FB-DIMM supplier who has in-house capabilities to design a key component of this module, a logic chip called Advanced Memory Buffer, or AMB. This allows us to customize the AMB design specifically for our memory modules, providing us better know-how transfer from chip to system level and vice versa. We also provide customized modules to server manufacturers, in each case specifically designed to meet the individual customer’s unique platform requirements. We expect the markets for servers to grow substantially in the next few years, and we are currently engaged in the development of products we believe will address that growth. For example, we are developing new generations of standard DRAM with 2 gigabits of capacity for use in future IT infrastructure applications.
 
Graphics Applications
 
We offer a broad portfolio of graphics DRAMs that support applications with performance ranging from entry level to very advanced. Due to their speed, low power consumption and limited heat generation, our graphics DRAM components are used in game consoles, graphics cards, PCs and notebook computers. In some cases, we make customized products for use in entertainment applications, including game consoles and imaging devices. We believe that the trend towards the extensive use of sophisticated graphics applications will result in strong growth in high performance graphics systems which we believe will in turn drive the demand for our graphics DRAM products.
 
Mobile and Consumer Applications
 
We offer low-power specialty DRAM products, such as Mobile-RAM and CellularRAM®, that are suited for use in a variety of mobile and consumer applications, such as:
 
  •  mobile phones;
 
  •  mobile consumer products, such as digital still cameras and digital audio players; and
 
  •  stationary consumer products, such as digital televisions and DVD recorders.
 
Our Mobile-RAM is specifically designed for ultra-low power consumption that is increasingly demanded by today’s battery powered mobile communication, especially in high end phones and handheld consumer products. We intend to focus further on driving technological innovations in this area and we believe we were the first to produce chips with a temperature sensor integrated onto the chip as well as the first to introduce a DDR interface for a Mobile-RAM to further reduce power consumption or alternatively offer higher performance. We also expect that new consumer products that combine more features will require DRAMs that consume very low power, yet operate at adequate speeds. We believe that the trench-architecture-based products we currently offer allow for a significantly longer battery life and reduced heat dissipation, both important features for potential customers and their end users.
 
Our CellularRAM® is designed to be the best choice of memory for entry and mid range handset models. This market segment is characterized by stringent low power requirements, but more moderate density and bandwidth needs. CellularRAM balances low power efficiency with high data throughput. We are also a founding member of the CellularRAM® specification co-development team and together with six other industry members, we create common specifications for high-performance pseudo-SRAM devices, enabling us to take an active role in the development of DRAM memory products for one of the fastest-growing technology sectors.
 
Both our Mobile-RAM and CellularRAM® products are offered as components and as so-called Known-Good-Dies, or KGDs, for use in Multi-Chip-Packages, or MCPs. MCPs combine different memory chips, usually a non-volatile flash chip, and a faster, volatile RAM, and are increasingly used in mobile communication and consumer devices due to their lower space consumption. We supply our Mobile-RAM and CellularRAM® as KGDs on wafer level to MCP manufacturers.
 
We also offer a broad range of DRAM products for consumer applications, some of which are of smaller memory densities or older interface generations, such as SDRAM. These are often referred to as “legacy” DRAM products. For example the manufacturers of hard disk drives, DVD players, home gateways and some printers do not


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require large amounts of DRAM, but do require a DRAM product that is guaranteed to be available for the printer’s entire life cycle, which may be many years. In addition, we sell products with industrial-level tolerance for cases when consumer applications require a broader guaranteed temperature range. For high-end digital televisions, we offer modules with up to DDR2 800. Demand for these ’dedicated’ consumer DRAM products is often less volatile, and their prices are relatively steadier, as compared to other standard DRAM products.
 
Standard DRAMs for PC, Notebook and Workstation Applications
 
In addition to the DRAMs for infrastructure, graphics, mobile and consumer applications, we believe we offer a complete portfolio of standard DRAM products that provide a variety of speeds, configurations and densities suited to particular end uses. We sell the majority of our standard DRAM products, to desktop and notebook computer manufacturers for use in PCs and workstations and to distributors who sell DRAMs on to smaller original equipment manufacturers and contract manufacturers. Our standard modules, including Unbuffered DIMMs and SO-DIMMs, are used primarily for PCs and notebooks, while our more specialized modules such as High-Density SO-DIMMs and Micro-DIMMs are typically used in high-end notebook computers and sub-notebooks. We believe our engineering capabilities permit us to offer these specialized modules and differentiate us from suppliers focused primarily on standard DRAM products. Many of our customers that produce PCs and workstations also produce servers, networking and storage equipment or graphics, mobile and consumer products. We believe these customers expect us to offer both standard DRAM products and other types of DRAM products so that we can supply their entire product ranges. We intend to invest in technology development and anticipate playing an active role in the development of future DRAM architectures, including third-generation DDR, or DDR3.
 
The large size of the standard DRAM market has made possible the substantial capital investments required to achieve ever more advanced manufacturing capabilities. Being active in the high-volume standard DRAM market enabled us to build our current scale and develop our existing manufacturing capabilities forming the basis to expand our production of DRAMs for advanced infrastructure applications and specialty DRAM products.
 
Other Products and Technology Licensing
 
In the 2006 financial year, we offered data flash memory products, primarily in the form of cards and to a lesser extent in component form, for use in digital still cameras, USB flash drives, digital audio players and mobile phones. Due to the significant price decline for data flash memory since the beginning of the 2006 calendar year, we decided to ramp down the production of our flash products during our 2007 financial year and to convert our flash production capacities to DRAM production capacities. We stopped developing NAND-compatible flash memory products based on Saifun’s proprietary NROM technology, which we licensed from Saifun when we purchased its remaining interest in our joint venture. See “— Intellectual Property — Amendment and Partial Termination of Our License Agreement with Saifun”.
 
We continue to be engaged in technology development for non-volatile memories to address a market, if one develops, in which we can provide a competitive platform for flash systems (which are modules containing flash memory and a controller). We conduct our non-volatile memory development activities through our wholly-owned subsidiary Qimonda Flash at our facilities in Dresden and Munich, Germany and Padua, Italy.
 
We sell a relatively small volume of embedded DRAM products in the form of “system-on-chip” ICs that integrate memory and logic circuitry on a single chip.
 
In addition, we grant technology licenses of our intellectual property to our alliance partners, including Winbond and Nanya. These licenses are often granted as part of cross licensing arrangements. They often enable us to gain access to manufacturing capacity at foundries through these kinds of cross licenses and capacity reservation arrangements.


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The following table presents summary information regarding our principal products.
 
             
   
Products
 
Principal features
 
Principal applications
 
Standard DRAM Components   Memory components in different package configurations with different interfaces
(DDR, DDR2) and densities (128Mb, 256Mb, 512Mb and 1Gb)
 
•   Mainstream bandwidths from DDR-333 to DDR2-800
•   Organization: x4, x8, x16
 
•   Memory modules
•   Components-on-mainboards
Personal Systems DRAM Modules   Unbuffered Dual Inline Memory Modules (DIMMs) based on DDR and DDR2 components, with densities ranging from 256MB to 2GB  
•   Mainstream bandwidths from DDR-333 to DDR2-800
 
•   Desktop computers
•   Workstations
    Unbuffered Dual Inline Memory Modules (DIMMs) with ECC (Error Correction Code) based on DDR and DDR2 components, with densities ranging from 256MB to 2GB  
•   Mainstream bandwidths from DDR-333 to DDR2-800
•   Error correction code
 
•   Workstations
•   Entry-level Servers
    SO (Small-Outline)-DIMMs based on DDR or DDR2 components, with densities ranging from 256MB to 2GB  
•   Mainstream bandwidths from DDR-333 to DDR2-800
 
•   Notebook computers
    Micro-DIMMs based DDR2 components, with densities ranging from 256MB to 1GB  
•   Bandwidths from DDR2-400 to DDR2-667
•   35% smaller than standard SO-DIMMs
 
•   Sub-Notebooks
•   Ultra-mobile PCs
Infrastructure DRAM modules   Registered DIMMs and customized DIMMs based on DDR and DDR2 components, with densities ranging from 256MB to 8GB  
•   Mainstream bandwidths from DDR-266 to DDR2-800
 
•   Servers
    FB (Fully Buffered) DIMMs based on DDR2 components, with densities from 512MB to 4GB  
•   Bandwidths from DDR2-533 to DDR2-800
•   Advanced Memory Buffer technology
  •   Servers
•   Workstations
    Very-low-profile-Registered DIMMs based on DDR2 components, with densities ranging from 512MB to 4GB  
•   Bandwidths from DDR2-533 to DDR2-800
•   Reduced height
  •   Blade servers


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Products
 
Principal features
 
Principal applications
 
Networking, Storage and Industrial DRAM Products   Memory components and modules in different package configurations with different interfaces (SDR, DDR, DDR2) and densities (128Mb, 256Mb, 512Mb, 1Gb, 2Gb) High Density DIMMs (DDR1, DDR2) and Fully Buffered DIMMs (DDR2)  
•   Industrial temperature Capabilities
•   Lead-containing DRAM packages
•   Low power self refresh
•   Mainstream bandwidths from DDR-266 to DDR2-800
  •   Networking, Telecom and Industrial equipment
•   Storage
Graphics   Graphics RAM (256Mb, 512Mb) based on DDR2 and GDDR3 interfaces  
•   Bandwidth per pin from 0.8Gb per second up to 2Gb per second
•   Organization: x16, x32
•   Manufactured in 75nm, 80nm, 90nm and 110nm process technology
  •   Graphics cards in desktop and note-book computers
•   Game consoles
    Customized DRAM components   Application specific DRAM configurations in terms of memory density and memory interface   Gaming application and Digital TV applications
Mobile and Consumer(1)   Mobile-RAM (128Mb, 256Mb, 512Mb, 1Gb) based on SDR and DDR interfaces; also available as “known good dies”  
•   Ultra low power
•   FGBA-package
•   Organization: x16, x32 (Mobile RAM)
  •   Top range mobile phones (2.5G/3G)
•   PDAs
    CellularRAM® (64Mb, 128Mb); also available as “known good dies”  
•   Low operating current
•   Low standby current
•   Low power consumption
•   Manufactured in 110nm process Technology
  •   Digital still cameras
•   Digital audio players
•   Mid-range mobile phones (2.5G/3G)
•   GPS
 
 
(1) We also sell our range of standard DRAM components to customers who manufacture infrastructure equipment and consumer electronic devices including digital televisions, set-top boxes and DVD recorders.

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DRAM Density and Interface Development
 
We believe we are an industry leader in transitioning to next generation memory density and interface. According to iSuppli, we were the largest supplier of 512M DDR2 products, based on bits shipped, during the ramp-up phase of this product density in the market, which occurred in the first half of the 2006 calendar year. The following table sets forth the percentage of our total DRAM bit shipments (by density and interface) for the periods indicated:
 
                         
    For the financial year ended September 30,  
DRAM:
  2005     2006     2007  
    (in percent)  
 
By density:
                       
128Mb
    1       0       0  
256Mb
    51       24       12  
512Mb
    47       74       86  
1Gb
    1       2       2  
By interface:
                       
SDRAM
    5       3       2  
DDR
    60       30       15  
DDR2
    27       51       64  
Specialty DRAMs
    8       16       19  
 
We believe we were one of the first suppliers to deliver DDR3 components and modules in the third quarter of our 2007 financial year, to leading motherboard vendors and manufacturers of overclocking memory modules. In addition, our DDR3 products have been validated on Intel reference platforms.
 
Customers, Sales and Marketing
 
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 in the PC and Server markets, 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, AMD and customers who are active in the game console market, such as Microsoft, Sony and Nintendo. In addition, we have added customers in the area of consumer and mobile applications, such as LG, Spansion and SanDisk. We believe that having a close relationship with these customers can benefit us in the development of future memory generations by making it easier to develop memory solutions for future end applications and improve our product designs.
 
We have been a primary DRAM supplier to major OEMs, including HP and Dell, in a number of recent years. These customers generally provide relatively more stable demand for standard DRAM than is available on the spot market, and we believe they are good partners for product development. In the infrastructure area, we believe that we have been able to establish a strong presence based on our high performance and high quality products, including application-specific and customized products. For example, we have received supplier awards from Sun Microsystems in each of the last five years.
 
The number of customers we serve has increased over recent years from about 150 in our 2003 financial year to about 170 in our 2006 financial year as we continued to diversify our product portfolio. In our 2007 financial year the number of customers we serve declined slightly compared to our 2006 financial year due to the phase out of our flash production and of our support to certain Infineon customers. In our 2007 financial year, our five largest customers accounted for 48% of our total sales. HP, our largest customer, accounted for 17% of our sales and Dell, our second largest customer, accounted for 12% of our sales during that period. In our 2006 financial year five largest customers accounted for 49% of our total sales. HP, our largest customer, accounted for 18% of our sales and Dell, our second largest customer, accounted for 16% of our sales during that period. In our 2005 financial year, our


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five largest customers accounted for 52% of our sales and our 20 largest customers accounted for nearly 76% of our sales. HP accounted for nearly 19% of our sales, Dell accounted for 14% of our sales and three additional customers each accounted for more than 5% of our sales during that period.
 
We sell our semiconductor memory products throughout the world, primarily in the United States, Europe and the Asia/Pacific region. We make our sales primarily through direct sales channels and, in order to ensure best possible customer coverage and reach, make use of distributors. We focus our principal sales and marketing efforts on the technology leaders in each of the DRAM markets we serve. We believe we have strong customer relationships and that our customers, many of which are leaders in their respective fields, provide us with special insights into the current state of their respective markets. Our sales strategy has three main focus points, which we believe will continue to position us to better serve our customers:
 
  •  Key Account approach:  Via our Key Account Centers, we tailor our sales approach to our customers, serving our largest customers, primarily global PC and Server OEMs, and serve our local OEMs, module manufacturers and distributors via our regional sales organizations. Each Key Account Center team is responsible for the needs of its customers on a global basis, and we expect them to achieve or maintain a position as a top supplier of DRAM to that customer in terms of quality and volume. We believe that our key account approach assists us in developing and maintaining strong relationships with our major customers, which is particularly important for customers who purchase primarily standard DRAMs who could easily migrate to other suppliers.
 
  •  Leveraging our existing relationships to expand the applications with which we serve our customers:  Because many of our Key Accounts in the PC and Server markets also produce graphics, mobile and consumer products, we work with our existing customer base to sell a wider range of our products and applications. For example, during the last year, we have been increasing our efforts to market customer- and application-specific DRAMs for graphics, mobile and consumer applications, because we believe the market for these applications will be attractive with respect to price, stability and demand growth.
 
  •  Leveraging our strong technical skills to work directly with customers to design specific memory products:  The third key focus of our sales strategy is to continue to expand the product portfolio we deliver to each of our customers by leveraging our strong technical skills and working directly with them to design specific memory products for use in their end products. Our development engineering teams, composed of trained engineers, work directly with customers, creating products specifically designed for particular customers in a process we call “design-in”. In some cases, several DRAM producers may attempt to design their product into the customer’s application, each vying to best meet the customer’s requirements. Our development engineering teams play a key role in this regard.
 
Our regional sales teams are located in Europe, North America, Asia/Pacific and Japan, and are supported by our headquarters in Germany. These regional sales centers enable us to bring our business to our customer base and to provide local contact and support to the Key Account Center teams in those regions. Each of our regional sales centers is equipped to perform all key sales support, and each of our regional sales organizations is responsible for acquiring new customers and managing the region’s product mix and inventory.
 
We generally enter into agreements with our customers specifying the terms and conditions under which they agree to purchase our products and the terms and conditions under which we agree to supply them. The period of time over which prices and volume are fixed depends on the application market in which the customer operates. In general, prices and volumes are negotiated for periods ranging from a few days, for standard DRAMs for PC, notebook and workstation products in the spot market, up to one year for customer- and application-specific DRAMs used in graphics, mobile and consumer applications. The majority of our sales volume, however, is based on contracts in which prices and volumes are re-negotiated twice a month. The majority of our customer agreements require our customers to provide us with a regular forecast of their DRAM demand. Our determination of the mix of products to be manufactured is primarily based on our own internal forecasts in combination with the forecasts our customers provide.
 
We categorize our sales geographically based on chosen billing location.


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In many cases, our customers then choose to ship our products to locations other than the billing locations. Accordingly, we do not believe that the geographical distribution of our sales are necessarily indicative of where our products are actually used. The geographical distribution of our sales by percentage during the periods indicated was as follows:
 
Sales by Region
 
                         
    For the financial year ended September 30,  
    2005     2006     2007  
 
Germany
    8       8       7  
Rest of Europe(1)
    12       12       11  
North America
    38       42       37  
Asia/Pacific
    38       31       33  
Japan
    4       7       12  
                         
      100 %     100 %     100 %
                         
 
 
(1) The Rest of Europe region also includes other countries and territories in the rest of the world outside of the listed main geographic regions with aggregate sales representing no more than 2% of total sales in any period.
 
The increased sales in Japan during the 2007 financial year resulted from a strong growth in demand for our specialty products, in particular for graphics and consumer applications, as well as additional demand for standard DRAM products for PC applications during the 2007 financial year. The decrease in sales in North America for the 2007 financial year, as compared to the previous period, was primarily caused by OEM customers shifting th