##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM
20-F/A
 Amendment No. 1 to Annual Report
 REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934 o
 OR
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 þ
 For the fiscal year ended September 30, 2007
 OR
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to  . o
 OR
 SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 o
 Date of event requiring this shell company report  .
 Commission file number: 001-32972
 Qimonda
AG
 (Exact name of Registrant as specified in its charter)
 Federal Republic of Germany
 Gustav-Heinemann-Ring 212,
D-81739 Munich
Federal Republic of Germany
  Name of each exchangeTitle of each class
    
    on which registeredAmerican Depositary Shares representing Qimonda AG
    
    New York Stock Exchangeordinary shares of no par valueQimonda 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 
  
  
   þ o
  o þ
   þ o
  Large accelerated filer: þ
    
    Accelerated filer: o
    
    Non-accelerated filer: o
    
    Smaller reporting company: o(Do not check if a smaller reporting company)
  o þ
  o þ




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##### 



Explanatory Note
   TABLE OF CONTENTS  Item 18. Financial StatementsItem 19. ExhibitsSIGNATURESEXHIBIT INDEXReport of Independent Registered Public Accounting FirmBALANCE SHEETSSTATEMENTS OF INCOMESTATEMENTS OF CHANGES IN STOCKHOLDERS EQUITYSTATEMENTS OF CASH FLOWSNOTES TO FINANCIAL STATEMENTSExhibit 12(i)Exhibit 12(ii)Exhibit 13Exhibit 15(i) 
 Item 18. Financial Statements
  
    
    Reports of Independent Registered Public Accounting Firm;
    
    Combined and Consolidated Statements of Operations for the years ended September 30, 2005,
2006 and 2007;
    
    Combined and Consolidated Balance Sheets as of September 30, 2006 and 2007;
    
    Combined and Consolidated Statements of Business/Shareholders Equity for the years ended
September 30, 2005, 2006 and 2007;
    
    Combined and Consolidated Statements of Cash Flows for the years ended September 30, 2005,
2006 and 2007; and
    
    Notes to the Combined and Consolidated Financial Statements.




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##### 



Item 19. Exhibits
 Exhibit 12(i)
    
    Certification of chief executive officer pursuant to Exchange Act Rule 13a-14(a)Exhibit 12(ii)
    
    Certification of chief financial officer pursuant to Exchange Act Rule 13a-14(a)Exhibit 13
    
    Certificate pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002Exhibit 15(i)
    
    Consent of KPMG




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##### 



SIGNATURES
  
 QIMONDA AGBy:  
    /s/ Kin Wah LohName: 
    Kin Wah LohChairman of the Management BoardBy:  
    /s/ Dr. Michael MajerusName: 
    Dr. Michael MajerusMember of the Management Board




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##### 



EXHIBIT INDEX
 Exhibit 12(i)
    
    Certification of chief executive officer pursuant to Exchange Act Rule 13a-14(a)Exhibit 12(ii)
    
    Certification of chief financial officer pursuant to Exchange Act Rule 13a-14(a)Exhibit 13
    
    Certificate pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of 2002Exhibit 15(i)
    
    Consent of KPMG




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##### 



INOTERA MEMORIES, INC.
 FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2006 AND 2007
(With Report of Independent Registered Public Accounting Firm)




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##### 



Report of Independent Registered Public Accounting Firm




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##### 








---



##### 



INOTERA MEMORIES, INC.
 BALANCE SHEETS
 DECEMBER 31, 2006 AND 2007
(Expressed in thousands of New Taiwan Dollars and U.S. Dollars)
 December 31,2006
    
    
    2007NTD
    
    
    NTD
    
    
    USDAssetsCurrent assets:Cash and cash equivalents (notes 4 and 16)
    
    $
    21,704,854
    
    
    
    6,023,517
    
    
    
    185,739Current portion of lease receivables (note 7)
    
    
    4,912
    
    
    
    5,209
    
    
    
    160Accounts receivable  related parties (notes 16 and 17)
    
    
    8,332,816
    
    
    
    6,649,818
    
    
    
    205,051Other receivables
    
    
    95,125
    
    
    
    210,326
    
    
    
    6,486Inventories, net (note 6)
    
    
    3,927,461
    
    
    
    4,738,770
    
    
    
    146,123Prepayments
    
    
    671,298
    
    
    
    965,788
    
    
    
    29,781Deferred income tax assets  current, net (note 13)
    
    
    79,690
    
    
    
    143,008
    
    
    
    4,410Financial assets reported at fair value through profit or loss
(notes 5 and 16)
    
    
    1,654,219
    
    
    
    793,963
    
    
    
    24,482Total current assets
    
    
    36,470,375
    
    
    
    19,530,399
    
    
    
    602,232Property, plant and equipment (notes 7, 8, 9, 11, 17 and 18):Land
    
    
    2,801,467
    
    
    
    4,516,307
    
    
    
    139,263Buildings
    
    
    2,523,511
    
    
    
    5,416,606
    
    
    
    167,025Machinery and equipment
    
    
    68,124,934
    
    
    
    135,166,527
    
    
    
    4,167,947Vehicles
    
    
    4,915
    
    
    
    5,485
    
    
    
    169Leased assets
    
    
    135,996
    
    
    
    135,996
    
    
    
    4,194Miscellaneous equipment
    
    
    6,942,453
    
    
    
    15,546,736
    
    
    
    479,39480,533,276
    
    
    
    160,787,657
    
    
    
    4,957,992Less: accumulated depreciation
    
    
    (21,743,083
    )
    
    
    (42,245,250
    )
    
    
    (1,302,660
    )Construction in progress
    
    
    41,597,511
    
    
    
    5,326,948
    
    
    
    164,260Prepayment on land purchase
    
    
    22,772
    
    
    
    
    
    
    
    Net property, plant and equipment
    
    
    100,410,476
    
    
    
    123,869,355
    
    
    
    3,819,592Other assets:Refundable deposits
    
    
    79,219
    
    
    
    28,432
    
    
    
    877Deferred charges
    
    
    118,630
    
    
    
    213,480
    
    
    
    6,583Lease receivables  long-term (note 7)
    
    
    333,876
    
    
    
    328,668
    
    
    
    10,134Deferred income tax assets  non-current, net (note 13)
    
    
    270,624
    
    
    
    165,469
    
    
    
    5,102Total other assets
    
    
    802,349
    
    
    
    736,049
    
    
    
    22,696Total Assets
    
    $
    137,683,200
    
    
    
    144,135,803
    
    
    
    4,444,520Liabilities and Stockholders EquityCurrent liabilities:Accounts payable (note 16)
    
    
    21,110,779
    
    
    
    7,798,323
    
    
    
    240,466Accounts payable  related parties (notes 16 and 17)
    
    
    405,917
    
    
    
    112,755
    
    
    
    3,477Income tax payable
    
    
    133,571
    
    
    
    56,892
    
    
    
    1,754Accrued expenses (note 12)
    
    
    941,403
    
    
    
    1,404,049
    
    
    
    43,295Other payables  related parties (notes 9 and 17)
    
    
    65,539
    
    
    
    69,867
    
    
    
    2,154Current portion of long-term loans (notes 11 and 16)
    
    
    10,299,107
    
    
    
    10,258,408
    
    
    
    316,325Other current liabilities
    
    
    14,962
    
    
    
    28,604
    
    
    
    882Current portion of lease payables (note 9)
    
    
    3,544
    
    
    
    3,705
    
    
    
    114Total current liabilities
    
    
    32,974,822
    
    
    
    19,732,603
    
    
    
    608,467Long-term liabilities:Bonds payable (notes 10 and 16)
    
    
    6,000,000
    
    
    
    20,000,000
    
    
    
    616,713Long-term loans (notes 11 and 16)
    
    
    19,392,164
    
    
    
    32,358,022
    
    
    
    997,781Lease payable  long-term (note 9)
    
    
    127,422
    
    
    
    123,717
    
    
    
    3,815Total long-term liabilities
    
    
    25,519,586
    
    
    
    52,481,739
    
    
    
    1,618,309Other liabilities:Accrued pension liabilities (note 12)
    
    
    46,746
    
    
    
    39,347
    
    
    
    1,213Guarantee deposits
    
    
    4,506
    
    
    
    4,573
    
    
    
    140Total other liabilities
    
    
    51,252
    
    
    
    43,920
    
    
    
    1,353Total liabilities
    
    
    58,545,660
    
    
    
    72,258,262
    
    
    
    2,228,129Stockholders equity (note 14):Common stock
    
    
    31,109,540
    
    
    
    33,375,120
    
    
    
    1,029,144Capital surplus
    
    
    29,317,836
    
    
    
    29,317,836
    
    
    
    904,034Legal reserve
    
    
    684,665
    
    
    
    2,271,456
    
    
    
    70,042Special reserve
    
    
    542,605
    
    
    
    542,605
    
    
    
    16,732Unappropriated earnings
    
    
    17,482,894
    
    
    
    6,370,524
    
    
    
    196,439Total stockholders equity
    
    
    79,137,540
    
    
    
    71,877,541
    
    
    
    2,216,391Commitments and contingencies (note 19)Total Liabilities and Stockholders Equity
    
    $
    137,683,200
    
    
    
    144,135,803
    
    
    
    4,444,520




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##### 



INOTERA MEMORIES, INC.
 STATEMENTS OF INCOME
 FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
(Expressed in thousands of New Taiwan Dollars and U.S. Dollars, except for earnings per share)
 For the years ended December 31,2005
    
    
    2006
    
    
    2007NTD
    
    
    NTD
    
    
    NTD
    
    
    USDOperating revenuesSales revenue
    
    $
    23,044,929
    
    
    
    40,866,245
    
    
    
    46,018,852
    
    
    
    1,419,021Sales returns
    
    
    (3,133
    )
    
    
    (7,049
    )
    
    
    (37,590
    )
    
    
    (1,159
    )Sales allowances
    
    
    (9,593
    )
    
    
    (77,486
    )
    
    
    (116,714
    )
    
    
    (3,599
    )Net operating revenues (note 17)
    
    
    23,032,203
    
    
    
    40,781,710
    
    
    
    45,864,548
    
    
    
    1,414,263Cost of goods sold (notes 9 and 17)
    
    
    (16,350,746
    )
    
    
    (24,316,647
    )
    
    
    (41,822,143
    )
    
    
    (1,289,613
    )Gross profit
    
    
    6,681,457
    
    
    
    16,465,063
    
    
    
    4,042,405
    
    
    
    124,650Operating expenses:Administrative and general expenses
    
    
    (283,853
    )
    
    
    (321,675
    )
    
    
    (391,227
    )
    
    
    (12,064
    )Research and development expenses
    
    
    (658,134
    )
    
    
    (254,923
    )
    
    
    (487,131
    )
    
    
    (15,021
    )Total operating expenses
    
    
    (941,987
    )
    
    
    (576,598
    )
    
    
    (878,358
    )
    
    
    (27,085
    )Operating income
    
    
    5,739,470
    
    
    
    15,888,465
    
    
    
    3,164,047
    
    
    
    97,565Non-operating income and gains:Interest income (note 7)
    
    
    309,821
    
    
    
    981,826
    
    
    
    306,983
    
    
    
    9,466Gain on disposal of investment
    
    
    4,532
    
    
    
    
    
    
    
    
    
    
    
    Foreign exchange gain, net
    
    
    676,797
    
    
    
    796,785
    
    
    
    
    
    
    
    Valuation gain on financial instruments, net (note 5)
    
    
    
    
    
    
    450,596
    
    
    
    501,458
    
    
    
    15,463Others (notes 7, 8 and 17)
    
    
    306,754
    
    
    
    114,515
    
    
    
    48,620
    
    
    
    1,499Total non-operating income and gains
    
    
    1,297,904
    
    
    
    2,343,722
    
    
    
    857,061
    
    
    
    26,428Non-operating expenses and losses:Interest expenses (notes 8 and 9)
    
    
    (760,618
    )
    
    
    (1,655,085
    )
    
    
    (1,709,072
    )
    
    
    (52,700
    )Foreign exchange loss, net
    
    
    
    
    
    
    
    
    
    
    (184,664
    )
    
    
    (5,694
    )Loss on inventory obsolescence and devaluation (note 6)
    
    
    
    
    
    
    (18,849
    )
    
    
    (1,027,988
    )
    
    
    (31,699
    )Impairment loss (note 8)
    
    
    
    
    
    
    (32,107
    )
    
    
    (24,630
    )
    
    
    (759
    )Others (note 17)
    
    
    (9,637
    )
    
    
    (33,823
    )
    
    
    (30,537
    )
    
    
    (942
    )Total non-operating expenses and losses
    
    
    (770,255
    )
    
    
    (1,739,864
    )
    
    
    (2,976,891
    )
    
    
    (91,794
    )Income before income tax
    
    
    6,267,119
    
    
    
    16,492,323
    
    
    
    1,044,217
    
    
    
    32,199Income tax expense (note 13)
    
    
    (337,361
    )
    
    
    (386,499
    )
    
    
    (117,368
    )
    
    
    (3,619
    )Income before cumulative effect of change in accounting principle
    
    
    5,929,758
    
    
    
    16,105,824
    
    
    
    926,849
    
    
    
    28,580Cumulative effect of change in accounting principle (net of income tax
benefit
of NT$79,305) (note 3)
    
    
    
    
    
    
    (237,915
    )
    
    
    
    
    
    
    Net income
    
    $
    5,929,758
    
    
    
    15,867,909
    
    
    
    926,849
    
    
    
    28,580Earnings per share  retroactively adjusted (note 15)Before taxIncome before cumulative effect of change in accounting principle
    
    $
    2.33
    
    
    
    5.26
    
    
    
    0.31
    
    
    
    0.01Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (0.10
    )
    
    
    
    
    
    
    Basic earnings per share
    
    $
    2.33
    
    
    
    5.16
    
    
    
    0.31
    
    
    
    0.01After taxIncome before cumulative effect of change in accounting principle
    
    $
    2.20
    
    
    
    5.14
    
    
    
    0.28
    
    
    
    0.01Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (0.08
    )
    
    
    
    
    
    
    Basic earnings per share
    
    $
    2.20
    
    
    
    5.06
    
    
    
    0.28
    
    
    
    0.01




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##### 



INOTERA MEMORIES, INC.
 STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
 FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
(Expressed in thousands of New Taiwan Dollars and U.S. Dollars)
 Retained earningsUnappropriatedCommon stock
    
    
    Capital surplus
    
    
    Legal reserve
    
    
    Special reserve
    
    
    earnings
    
    
    TotalBalance as of January 1, 2005
    
    NTD
    
    $
    24,976,600
    
    
    
    15,548,660
    
    
    
    1,559
    
    
    
    
    
    
    
    915,333
    
    
    
    41,442,152Appropriation and distribution:Appropriation for legal reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90,130
    
    
    
    
    
    
    
    (90,130
    )
    
    
    Appropriation for special reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    542,605
    
    
    
    (542,605
    )
    
    
    Remuneration to directors and supervisors
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,686
    )
    
    
    (2,686
    )Bonus to employees
    
    
    
    
    
    
    8,057
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,114
    )
    
    
    (8,057
    )Cash and stock dividends to stockholders
    
    
    
    
    
    
    124,883
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (249,766
    )
    
    
    (124,883
    )Net income for the year ended December 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,929,758
    
    
    
    5,929,758Balance as of December 31, 2005
    
    NTD
    
    
    25,109,540
    
    
    
    15,548,660
    
    
    
    91,689
    
    
    
    542,605
    
    
    
    5,943,790
    
    
    
    47,236,284Increase in capital
    
    
    
    
    
    
    6,000,000
    
    
    
    13,769,176
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,769,176Appropriation and distribution:Legal reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    592,976
    
    
    
    
    
    
    
    (592,976
    )
    
    
    Remuneration to directors and supervisors
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,736
    )
    
    
    (3,736
    )Bonus to employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (298,866
    )
    
    
    (298,866
    )Cash dividends to stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,433,227
    )
    
    
    (3,433,227
    )Net income for the year ended December 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,867,909
    
    
    
    15,867,909Balance as of December 31, 2006
    
    NTD
    
    
    31,109,540
    
    
    
    29,317,836
    
    
    
    684,665
    
    
    
    542,605
    
    
    
    17,482,894
    
    
    
    79,137,540Appropriation and distribution:Legal reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,586,791
    
    
    
    
    
    
    
    (1,586,791
    )
    
    
    Remuneration to directors and supervisors
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,453
    )
    
    
    (10,453
    )Bonus to employees
    
    
    
    
    
    
    399,008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (798,018
    )
    
    
    (399,010
    )Cash and stock dividends to stockholders
    
    
    
    
    
    
    1,866,572
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,643,957
    )
    
    
    (7,777,385
    )Net income for the year ended December 31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    926,849
    
    
    
    926,849Balance as of December 31, 2007
    
    NTD
    
    $
    33,375,120
    
    
    
    29,317,836
    
    
    
    2,271,456
    
    
    
    542,605
    
    
    
    6,370,524
    
    
    
    71,877,541Balance as of December 31, 2006
    
    USD
    
    $
    959,283
    
    
    
    904,034
    
    
    
    21,112
    
    
    
    16,732
    
    
    
    539,096
    
    
    
    2,440,257Appropriation and distribution:Legal reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,930
    
    
    
    
    
    
    
    (48,930
    )
    
    
    Remuneration to directors and supervisors
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (322
    )
    
    
    (322
    )Bonus to employees
    
    
    
    
    
    
    12,304
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,607
    )
    
    
    (12,303
    )Cash and stock dividends to stockholders
    
    
    
    
    
    
    57,557
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (297,378
    )
    
    
    (239,821
    )Net income for the year ended December 31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,580
    
    
    
    28,580Balance as of December 31, 2007
    
    USD
    
    $
    1,029,144
    
    
    
    904,034
    
    
    
    70,042
    
    
    
    16,732
    
    
    
    196,439
    
    
    
    2,216,391




---



##### 



INOTERA MEMORIES, INC.
 STATEMENTS OF CASH FLOWS
 FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
(Expressed in thousands of New Taiwan Dollars and U.S. Dollars)
 For the years ended December 31,2005
    
    
    2006
    
    
    2007NTD
    
    
    NTD
    
    
    NTD
    
    
    USDCash flows from operating activities:Net income
    
    $
    5,929,758
    
    
    
    15,867,909
    
    
    
    926,849
    
    
    
    28,580Adjustments to reconcile net income to net cash from operating activitiesDepreciation
    
    
    8,099,551
    
    
    
    11,633,379
    
    
    
    20,524,929
    
    
    
    632,899Amortization of deferred charges
    
    
    6,995
    
    
    
    8,454
    
    
    
    12,120
    
    
    
    374Amortization of deferred charges  bank loan syndication and underwriters charge on
debt securities offering
    
    
    29,170
    
    
    
    29,012
    
    
    
    56,417
    
    
    
    1,740Loss on inventory obsolescence and devaluation
    
    
    
    
    
    
    18,849
    
    
    
    1,027,988
    
    
    
    31,699Loss (gain) on disposal of property, plant and equipment
    
    
    
    
    
    
    1,590
    
    
    
    (833
    )
    
    
    (26
    )Impairment loss
    
    
    
    
    
    
    32,107
    
    
    
    24,630
    
    
    
    759Unrealized foreign currency exchange gain, net
    
    
    (280,665
    )
    
    
    (260,716
    )
    
    
    (6,300
    )
    
    
    (194
    )Gain on disposal of short-term investments
    
    
    (4,532
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred forward exchange premium
    
    
    (287,851
    )
    
    
    
    
    
    
    
    
    
    
    Realized interest income from capital lease
    
    
    (10,133
    )
    
    
    (20,066
    )
    
    
    (19,786
    )
    
    
    (610
    )Realized interest expense from capital lease
    
    
    1,513
    
    
    
    5,920
    
    
    
    5,766
    
    
    
    178Cumulative effect of change in accounting principle for financial assets
    
    
    
    
    
    
    237,915
    
    
    
    
    
    
    
    Valuation gain on financial instruments, net
    
    
    
    
    
    
    (450,596
    )
    
    
    (501,458
    )
    
    
    (15,463
    )(Increase) decrease in accounts receivable  related parties
    
    
    (2,554,838
    )
    
    
    (3,310,868
    )
    
    
    1,700,773
    
    
    
    52,444Net cash (paid on purchase) received from settlement on maturity of financial assets
    
    
    
    
    
    
    (252,832
    )
    
    
    1,361,714
    
    
    
    41,989Decrease (increase) in other receivables
    
    
    106,119
    
    
    
    (44,427
    )
    
    
    (115,201
    )
    
    
    (3,552
    )Increase in inventories
    
    
    (1,358,055
    )
    
    
    (460,725
    )
    
    
    (1,839,297
    )
    
    
    (56,716
    )Decrease (increase) in prepayments
    
    
    395,049
    
    
    
    (53,855
    )
    
    
    (294,490
    )
    
    
    (9,081
    )Increase (decrease) in accounts payable
    
    
    804,060
    
    
    
    (266,255
    )
    
    
    811,206
    
    
    
    25,014(Decrease) increase in accounts payable  related parties
    
    
    (71,320
    )
    
    
    350,705
    
    
    
    (293,162
    )
    
    
    (9,040
    )Increase (decrease) in income tax payable
    
    
    124,357
    
    
    
    9,269
    
    
    
    (76,679
    )
    
    
    (1,476
    )Increase in accrued expenses
    
    
    407,478
    
    
    
    85,494
    
    
    
    463,566
    
    
    
    14,294(Decrease) increase in other payables  related parties
    
    
    (198,268
    )
    
    
    (20,714
    )
    
    
    3,256
    
    
    
    100Increase in other current liabilities
    
    
    5,255
    
    
    
    874
    
    
    
    13,222
    
    
    
    408Increase (decrease) in accrued pension liabilities
    
    
    19,839
    
    
    
    (3,848
    )
    
    
    (7,399
    )
    
    
    (228
    )Decrease in deferred income tax assets, net
    
    
    185,198
    
    
    
    118,154
    
    
    
    41,837
    
    
    
    402Net cash provided by operating activities
    
    
    11,348,680
    
    
    
    23,254,729
    
    
    
    23,819,668
    
    
    
    734,494Cash flows from investing activities:Decrease in short-term investments
    
    
    4,532
    
    
    
    
    
    
    
    
    
    
    
    Decrease in lease receivable
    
    
    10,291
    
    
    
    26,756
    
    
    
    24,698
    
    
    
    762Proceeds from disposal of idle assets and property, plant and equipment
    
    
    
    
    
    
    600
    
    
    
    833
    
    
    
    26Purchases of property, plant and equipment
    
    
    (28,313,919
    )
    
    
    (28,446,514
    )
    
    
    (58,192,125
    )
    
    
    (1,794,392
    )Increase in deferred charges
    
    
    (52,728
    )
    
    
    (22,000
    )
    
    
    (163,387
    )
    
    
    (5,038
    )Decrease (increase) in refundable deposits
    
    
    18,117
    
    
    
    (50,675
    )
    
    
    50,787
    
    
    
    1,566Net cash used in investing activities
    
    
    (28,333,707
    )
    
    
    (28,491,833
    )
    
    
    (58,279,194
    )
    
    
    (1,797,076
    )Cash flows from financing activities:Decrease in short-term loans
    
    
    (158,200
    )
    
    
    (2,323,300
    )
    
    
    
    
    
    
    Repayment of long-term loans
    
    
    
    
    
    
    (2,553,123
    )
    
    
    (10,358,972
    )
    
    
    (319,426
    )Proceeds from long-term loans
    
    
    17,285,096
    
    
    
    
    
    
    
    23,300,000
    
    
    
    718,471Increase in bonds payable
    
    
    
    
    
    
    6,000,000
    
    
    
    14,000,000
    
    
    
    431,699Decrease in lease payables
    
    
    (3,152
    )
    
    
    (9,311
    )
    
    
    (9,310
    )
    
    
    (287
    )Proceeds from capital increase
    
    
    
    
    
    
    19,769,176
    
    
    
    
    
    
    
    Increase in guarantee deposits
    
    
    1,114
    
    
    
    2,815
    
    
    
    67
    
    
    
    2Cash dividend to stockholders
    
    
    (124,611
    )
    
    
    (3,433,498
    )
    
    
    (7,776,965
    )
    
    
    (239,808
    )Bonus to employees
    
    
    (8,057
    )
    
    
    (298,866
    )
    
    
    (399,010
    )
    
    
    (12,303
    )Remuneration to directors and supervisors
    
    
    (2,686
    )
    
    
    (3,736
    )
    
    
    (10,453
    )
    
    
    (322
    )Net cash provided by financing activities
    
    
    16,989,504
    
    
    
    17,150,157
    
    
    
    18,745,357
    
    
    
    578,026Effect of
foreign currency exchange translation on cash and cash equivalents
    
    
    (162,098
    )
    
    
    (30,767
    )
    
    
    32,832
    
    
    
    1,012(Decrease) increase in cash and cash equivalents
    
    
    (157,621
    )
    
    
    11,882,286
    
    
    
    (15,681,337
    )
    
    
    (483,544
    )Cash and cash equivalents at beginning of year
    
    
    9,980,189
    
    
    
    9,822,568
    
    
    
    21,704,854
    
    
    
    669,283Cash and cash equivalents at end of year
    
    $
    9,822,568
    
    
    
    21,704,854
    
    
    
    6,023,517
    
    
    
    185,739Supplemental cash flow information:Income tax paid
    
    $
    27,860
    
    
    
    259,071
    
    
    
    152,211
    
    
    
    4,694Interest paid (excluding capitalized interest)
    
    $
    972,201
    
    
    
    1,749,036
    
    
    
    1,406,914
    
    
    
    43,383Investing activities affecting both cash and non-cash items:Acquisition of property, plant, and equipment
    
    $
    22,928,454
    
    
    
    45,915,339
    
    
    
    44,008,438
    
    
    
    1,357,029(Decrease) increase in payables to equipment suppliers
    
    
    5,385,465
    
    
    
    (17,468,825
    )
    
    
    14,183,687
    
    
    
    437,363Cash paid
    
    $
    28,313,919
    
    
    
    28,446,514
    
    
    
    58,192,125
    
    
    
    1,794,392Non-cash investing and financing activities:Current portion of lease receivables
    
    $
    6,690
    
    
    
    4,912
    
    
    
    5,209
    
    
    
    160Current portion of lease payables
    
    $
    3,390
    
    
    
    3,544
    
    
    
    3,705
    
    
    
    114Current portion of long-term loans
    
    $
    6,431,636
    
    
    
    10,299,107
    
    
    
    10,258,408
    
    
    
    316,325




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 DECEMBER 31, 2005, 2006 AND 2007
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (1)
    
    Organization and Principal ActivitiesInotera Memories, Inc. (the Company) was legally
established with the approval by the Taiwan Ministry
of Economic Affairs on January 23, 2003. The Companys main operating activities are
manufacturing and selling semiconductor products. In January 2006, the Company was granted
approval of its application to list its shares on the Taiwan Stock Exchange (TSE). The Companys
shares were initially listed on the TSE on March 17, 2006. On May 16, 2006, the Company listed
its shares in the form of global depositary shares (GDSs) on the Luxembourg Stock Exchange
(LSE).As of December 31, 2006 and 2007, the Company had 2,898 and 3,421 employees, respectively.(2)
    
    Summary of Significant Accounting Policies and Basis of
PresentationThe accompanying financial statements are prepared in conformity with the Guidelines Governing
the Preparation of Financial Reports by Securities Issuers, Business Entity Accounting Act,
Regulation on Handling Business Entity Accounting, and accounting principles generally accepted
in the Republic of China (ROC).The significant accounting policies followed by the Company are as follows:




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
  (i)
    

Buildings: 8 to 50 years.
 (ii)
    




Vehicles: 5 years.
 (iii)
    


Machinery and equipment: 3 to 5 years.
 (iv)
    


Leased assets: 23.7 years.
 (v)
    



Miscellaneous equipment: 3 to 15 years.
    (i)
    
    the lease transfers ownership of the leased assets to the lessee by the end of
the lease term;(ii)
    
    the lease contains a bargain purchase option;(iii)
    
    the lease term is equal to 75% of or more of the total estimated economic life
of the leased assets; this criterion should not be applied to leases in which the
leased asset has been used for more than 75% of its estimated economic life before the
lease begins; or(iv)
    
    the present value of the rental plus the bargain purchase price or the
guaranteed residual value is at least 90% of the fair market value of the leased assets
at the inception date of the lease.
  (i)
    
    collectibility of the lease payments is reasonably predictable; and(ii)
    
    no important uncertainties surround the amount of unreimbursable costs yet to
be incurred by the lessor under the lease.




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##### 



5 INOTERA
MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 Under a capital lease, the Company, as the lessee, capitalizes the leased assets based on
(a) the present value of all future installment rental payments (minus executory cost born
by lessor) plus bargain purchase price or lessees guaranteed residual value or (b) the fair
market value of leased assets at the lease inception date, whichever is lower. The
depreciation period is restricted to the lease term, rather than the estimated useful life
of the assets, unless the lease provides for transfer of title or includes a bargain
purchase option.Under a capital lease, the Company, as the lessor, records all installments plus bargain
purchase price or guaranteed residual value as the lease receivables. The implicit interest
rate is used to calculate the present value of lease receivables as the cost of leased
assets transferred. The difference between the total amount of lease receivables and the
cost of leased assets transferred is recognized as unrealized interest income and is then
recognized as realized interest income using the interest method over the lease term.(j)
    
    Employee retirement planThe Company has established an employee noncontributory defined benefit retirement plan (the
Plan) covering full-time employees in the Republic of China. In accordance with the Plan,
employees are eligible for retirement or are required to retire after meeting certain age or
service requirements. Payments of retirement benefits are based on years of service and the
average salary for the last six months before the employees retirement. Each employee gets
2 months salary for each service year for the first 15 years, and 1 months salary for each
service year thereafter. A lump-sum retirement benefit is paid through the retirement fund.Starting from July 1, 2005, the enforcement of the newly enacted Labor Pension Act (the New
Act) stipulates those employees covered by the defined contribution plan as follows:
 (i)
    
    employees who were covered by the Plan and opt to be subject to the pension
mechanism under the New Act;(ii)
    
    employees who are employed after the enforcement date of the New Act.




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##### 



6 
 INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (k)
    
    Employee stock option plansEmployee stock option plans with a grant date on or after January 1, 2004 are accounted for
under the interpretations issued by the Accounting Research and Development Foundation
(ARDF). The Company adopted the intrinsic value method, under which, compensation cost is
recognized on a straight-line basis over the vesting period.(l)
    
    Deferred charges
 (i)
    
    Bank charges related to syndicated loans are deferred and amortized over the
terms of the loans.(ii)
    
    Power line installation costs and royalty paid to the Industrial Technology
Research Institute are deferred and amortized over the estimated useful lives or the
agreement terms.(iii)
    
    Underwriter handling charges on bonds payable are deferred and amortized over
the term of the bond.
 (m)
    
    Revenue recognitionRevenue is generally recognized when it is realized or realizable and earned when all of the
following criteria are met:
 (i)
    
    persuasive evidence of an arrangement exists,(ii)
    
    shipment has occurred or services have been rendered,(iii)
    
    the sellers price to the buyer is fixed or determinable, and(iv)
    
    collectibility is reasonably assured.
  (n)
    
    Income taxThe Company has adopted the SFAS No. 22 Income Taxes. Income taxes are accounted for using
the asset and liability method. Deferred income tax is determined based on differences
between the financial statements and tax basis of assets and liabilities using enacted tax
rates in effect during the years in which the differences are expected to reverse. The
income tax effects of taxable temporary differences are recognized as deferred income tax
liabilities. The income tax effects resulting from deductible temporary differences, net
operating loss carryforwards, and income tax credits are recognized as deferred income tax
assets. The realization of the deferred income tax assets is evaluated, and if it is
considered more likely than not that the asset will not be realized, a valuation allowance
is recognized accordingly.




---



##### 



7 INOTERA
MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 The classification of deferred income tax assets and liabilities as current or non-current
is based on the classification of the related asset or liability. If the deferred income tax
asset or liability is not directly related to a specific asset or liability, then the
classification is based on the expected realization date of the asset or liability.The 10% surtax on current years undistributed earnings, computed according to the ROC
Income Tax Law, is charged to current income tax expense in the year when the shareholders
decided not to distribute those earnings during their meeting.(o)
    
    Earnings per shareEarnings per common share are computed by dividing net income by weighted-average number of
outstanding shares during the year.The Company has issued employee stock options, which are potential common shares. Both basic
and diluted earnings per share are disclosed if those potential common shares are dilutive,
otherwise, only basic earnings per share are disclosed. Diluted earnings per share are
computed by taking basic earnings per share into consideration, plus the additional common
shares that would have been outstanding if the potentially dilutive shares are issued.The number of outstanding shares is retroactively adjusted for common stock issued through the
distribution of stock dividends out of unappropriated earnings and capital surplus.
 (3)
    
    Reasons for and Cumulative Effect of Accounting Principle Change
 (a)
    
    As the Company adopted the SFAS No. 34 Financial Instruments: Recognition and
Measurement, SFAS No. 36 Financial Instruments: Disclosure and Presentation, and newly
amended SFAS No. 1 Conceptual Framework for Financial Accounting and Preparation of
Financial Statements effective January 1, 2006, the net income and earnings per share
(after tax) for the year ended December 31, 2006, were affected as follows:
 Decrease in
    
    
    Decrease inNature of change in accounting principle
    
    net income
    
    
    earnings per shareAccounting for financial instruments
    
    $
    27,600
    
    
    
    0.01




---



##### 



8 INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (b)
    
    The Company adopted SFAS No. 34 Financial Instruments: Recognition and
Measurement effective January 1, 2006. Accordingly, the Company measured and
reclassified the financial assets based on fair value at the
beginning of financial year 2006. As of
January 1, 2006, the cumulative effect of this change in accounting principle amounted to
NT$237,915 net of tax benefit.
 (4)
    
    Cash and Cash EquivalentsCash and cash equivalents as of December 31, 2006 and 2007, consisted of the following:
 December 31,2006
    
    
    2007NTD
    
    
    NTD
    
    
    USDCash on handpetty cash
    
    $
    230
    
    
    
    210
    
    
    
    6Cash in bankchecking account
    
    
    19,386
    
    
    
    20,644
    
    
    
    637Cash in bankdemand deposit account
    
    
    287
    
    
    
    230
    
    
    
    7Cash in bankforeign currency account
    
    
    1,523,104
    
    
    
    3,238,712
    
    
    
    99,868Time deposit
    
    
    500,000
    
    
    
    
    
    
    
    Time depositforeign currency
    
    
    3,944,973
    
    
    
    2,701,721
    
    
    
    83,309Cash equivalentscommercial paper
    
    
    360,385
    
    
    
    
    
    
    
    Cash equivalentsrepurchase agreements collateralized
by corporate bonds
    
    
    15,356,489
    
    
    
    62,000
    
    
    
    1,912$
    21,704,854
    
    
    
    6,023,517
    
    
    
    185,739
 (5)
    
    Financial Assets Reported at Fair Value through Profit or LossCurrentFinancial assets reported at fair value with changes in fair value recorded through profit or
loss as of December 31, 2006 and 2007, consisted of the following:
 December 31,2006
    
    
    2007Carrying
    
    
    Notional
    
    
    Carrying
    
    
    Carrying
    
    
    Notionalamount
    
    
    amount
    
    
    amount
    
    
    amount
    
    
    amountNTD
    
    
    USD
    
    
    NTD
    
    
    USD
    
    
    USDFor trading purposesFinancial assetsForeign exchange forward contracts
    
    $
    941,480
    
    
    
    520,000
    
    
    
    776,995
    
    
    
    23,959
    
    
    
    334,000Interest rate swaps
    
    
    52,255
    
    
    
    92,857
    
    
    
    16,968
    
    
    
    523
    
    
    
    55,714Mutual bond fund
    
    
    660,484
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,654,219
    
    
    
    
    
    
    
    793,963
    
    
    
    24,482




---



##### 



9 INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (a)
    
    The Company entered into foreign exchange forward contracts with several banks to
hedge the risk from foreign currency exchange rate fluctuations for foreign currency
long-term loans. If the Company had continued adopting the accounting treatment for
forward contracts under the old SFAS No. 14, which was effective prior to January 1,
2006, amortization of deferred forward exchange premium and unrealized foreign currency
exchange gain would have amounted to NT$267,216, and net income would have decreased by
NT$38,552 (after tax) for the year ended December 31, 2006.(b)
    
    The Company entered into several interest rate swaps agreements (IRS) with banks to
hedge the risk from fluctuations of interest rates for foreign long-term loans. If the
Company had continued adopting the old accounting treatment for IRS which was effective
prior to January 1, 2006, there would have been no gain or loss based on mark-to-market
revaluation of IRS, and net income would have increased by NT$10,214 (after tax) for the
year ended December 31, 2006.(c)
    
    In 2006, the Company purchased 197,396.36 units of a mutual bond fund for
NT$659,500; the fund was disposed in 2007.(d)
    
    For the years ended December 31, 2006 and 2007, the Company recognized net gain on
valuation of financial instruments as follows:
 December 31,2006
    
    
    2007Realized
    
    
    Unrealized
    
    
    Realized
    
    
    Realized
    
    
    Unrealized
    
    
    UnrealizedNTD
    
    
    NTD
    
    
    NTD
    
    
    USD
    
    
    NTD
    
    
    USDForeign exchange forward contracts
    
    $
    217,335
    
    
    
    215,813
    
    
    
    338,356
    
    
    
    10,433
    
    
    
    171,774
    
    
    
    5,297Interest rate swaps
    
    
    2,846
    
    
    
    13,618
    
    
    
    9,687
    
    
    
    299
    
    
    
    (24,836
    )
    
    
    (766
    )Mutual bond fund
    
    
    
    
    
    
    984
    
    
    
    6,477
    
    
    
    200
    
    
    
    
    
    
    
    $
    220,181
    
    
    
    230,415
    
    
    
    354,520
    
    
    
    10,932
    
    
    
    146,938
    
    
    
    4,531




---



##### 



10 INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (6) Inventories, net
  December 31,2006
    
    
    2007NTD
    
    
    NTD
    
    
    USDRaw materials
    
    $
    736,290
    
    
    
    944,318
    
    
    
    29,119Supplies
    
    
    579,913
    
    
    
    1,023,301
    
    
    
    31,554Work in process
    
    
    2,624,819
    
    
    
    3,811,242
    
    
    
    117,522Finished goods
    
    
    5,288
    
    
    
    5,228
    
    
    
    161Materials and supplies in transit
    
    
    
    
    
    
    1,518
    
    
    
    473,946,310
    
    
    
    5,785,607
    
    
    
    178,403Less: allowance for inventory obsolescence and devaluation
    
    
    (18,849
    )
    
    
    (1,046,837
    )
    
    
    (32,280
    )$
    3,927,461
    
    
    
    4,738,770
    
    
    
    146,123
 (7) Lease Receivables
 (a)
    
    The Company signed a long-term lease agreement with Nanya Technology Corp. (NTC) to
lease out a portion of the building and land (including supplemental equipment) located
at No. 667, Fuhsing 3rd Road, Hwa-Ya Technology Park, Kueishan Valley, Taoyuan County.
The lease took effect on July 1, 2005, and remains effective until December 31, 2034
(including the period when the lease is automatically extended), a total of 354 months.
The lease agreement for the building is treated as a capital lease because the present
value of the periodic rental payments at inception date was at least 90% of the
market value of the leased assets. The rental for the land is treated as an operating
lease. The monthly rentals for the lease of building and land were NT$2,058 and $310,
respectively.(b)
    
    The initial total amount of lease receivables for the capital lease of the building
was NT$728,587; the implicit interest rate was 5.88%. The cost of leased assets
transferred was NT$345,637 (including the net book value of the building and
miscellaneous equipment of NT$277,372 and NT$68,265, respectively). The difference
between the total amount of lease receivables and the cost of leased assets transferred
amounted to NT$382,950, which was recognized as unrealized interest income and is
amortized over the lease period. Interest income (classified under non-operating income
and gainsinterest income) of NT$10,133, NT$20,066 and NT$19,786 was recognized for the
years ended December 31, 2005, 2006 and 2007, respectively.




---



##### 



11 INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (c)
    
    The details of lease receivables as of December 31, 2006 and 2007, were as follows:
 December 31,2006
    
    
    2007Current
    
    
    Non-current
    
    
    Current
    
    
    Current
    
    
    Non-current
    
    
    Non-currentNTD
    
    
    NTD
    
    
    NTD
    
    
    USD
    
    
    NTD
    
    
    USDGross lease receivables
    
    $
    24,698
    
    
    
    666,842
    
    
    
    24,698
    
    
    
    761
    
    
    
    642,144
    
    
    
    19,800Less: unrealized interest income
    
    
    (19,786
    )
    
    
    (332,966
    )
    
    
    (19,489
    )
    
    
    (601
    )
    
    
    (313,476
    )
    
    
    (9,666
    )Net lease receivables
    
    $
    4,912
    
    
    
    333,876
    
    
    
    5,209
    
    
    
    160
    
    
    
    328,668
    
    
    
    10,134
 (d)
    
    For the years ended December 31, 2005, 2006 and 2007, the rent revenues (classified
under non-operating income and gainsothers) from the operating lease of the land were
NTT$1,859, NT$3,719 and NT$3,719, respectively.(e)
    
    As of December 31, 2006 and 2007, the uncollected rent revenues (classified under
non-operating income and gainsothers) were NT$310 and NT$0, respectively.(f)
    
    Future gross lease receivables for leases classified as capital lease or operating
lease as of December 31, 2007, were as follows:
 December 31, 2007Capital lease
    
    
    Capital lease
    
    
    Operating lease
    
    
    Operating leaseDuration
    
    NTD
    
    
    USD
    
    
    NTD
    
    
    USD2008.1.1~2008.12.31
    
    $
    24,698
    
    
    
    762
    
    
    
    3,719
    
    
    
    1152009.1.1~2009.12.31
    
    
    24,698
    
    
    
    762
    
    
    
    3,719
    
    
    
    1152010.1.1~2010.12.31
    
    
    24,698
    
    
    
    762
    
    
    
    3,719
    
    
    
    1152011.1.1~2011.12.31
    
    
    24,698
    
    
    
    762
    
    
    
    3,719
    
    
    
    1152012.1.1~2034.12.31
    
    
    568,050
    
    
    
    17,516
    
    
    
    85,525
    
    
    
    2,637Total
    
    $
    666,842
    
    
    
    20,564
    
    
    
    100,401
    
    
    
    3,097




---



##### 



12 INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (8) Property, Plant and Equipment
 (a)
    
    In March 2005, the Company purchased two parcels of land numbered 350 and 351 located
in Hwa-Ya, Kueishan, Taoyuan County, for NT$28,465 from the Land Readjustment Committee in
Kueishan, Taoyuan County. As of December 31, 2006, the Company had prepaid NT$22,772 of the
total purchase price, which was recorded as a prepayment on land purchase. As of December
31, 2007, the Company has fully paid the total purchase price, completed the process of
registering the transfer of ownership, and recorded the land.(b)
    
    In March 2007, the Company has secured the approval to purchase two parcels of land
numbered 21 and 33 located in Taoyuan Hi-Tech Industrial Park Tang Wei District, for
NT$1,686,190 from the Taoyuan County Government. Asia Pacific Development Co. was engaged
by the Taoyuan County Government to handle the sale of the land in this industrial park. As
of December 31, 2007, the Company has fully paid the total purchase price, completed the
process of registering the transfer of ownership, and recorded the land.(c)
    
    The Company assessed the related assets for any impairment. Fixed assets not used in
operation were transferred to idle assets based on book value and were provided with a 100%
impairment loss provision thereon. The details of idle assets as of December 31, 2006 and
2007, were as follows:
 December 31,2006
    
    
    2007NTD
    
    
    NTD
    
    
    USDOriginal cost of machinery and equipment
    
    $
    52,182
    
    
    
    96,329
    
    
    
    2,970Less: accumulated depreciation
    
    
    (20,075
    )
    
    
    (41,485
    )
    
    
    (1,279
    )accumulated impairment
    
    
    (32,107
    )
    
    
    (54,844
    )
    
    
    (1,691
    )$
    
    
    
    
    
    
    
    
    




---



##### 



13 INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (d)
    
    Capitalized interests for the years ended December 31, 2005, 2006 and 2007, were as
follows:
 For the years ended December 31,2005
    
    2006
    
    2007NTD
    
    NTD
    
    NTD
    
    USDTotal interest expenses
    
    $
    1,156,119
    
    
    
    1,776,473
    
    
    
    2,152,910
    
    
    
    66,386Capitalized interest (charged to construction in progress)
    
    
    395,501
    
    
    
    121,388
    
    
    
    443,838
    
    
    
    13,686Capitalized interest rates
    
    
    3.20%~5.20
    %
    
    
    4.90%~6.12
    %
    
    
    3.65%~4.96
    %
 (e)
    
    The property, plant and equipment pledged to secure bank
loans are described in note
11.
 (9) Leased Assets and Lease Payables
 (a)
    
    The Company signed a long-term lease agreement with NTC to lease a portion of the
building and land located on the land numbered 348, 348-2 and 348-4, Hwa-Ya Section,
Kueishan Valley, Taoyuan County. The lease took effect on July 1, 2005, and remains
effective until February 28, 2029 (including the period when the agreement can be
automatically extended), a total of 284 months. The lease agreement for the building is
treated as a capital lease because (a) the present value of the periodic rental payments
made at inception date was at least 90% of the market value of the leased assets and
(b) the lease term was equal to 75% or more of the total estimated economic life of the
leased assets at inception of the lease. The land is treated as an operating lease. The monthly rentals for the
leased building and land were NT$775 and NT$357, respectively. Total interest expenses of
NT$1,513, NT$5,920 and NT$5,766 were recognized for the years ended
December 31, 2005, 2006 and 2007,
respectively.(b)
    
    The total present value of lease payables from the capital lease of the building was
NT$135,996; the implicit interest rate was 4.46%. The fair value of the leased assets at
the beginning of the lease period was NT$135,996.(c)
    
    As of December 31, 2006 and 2007, the details of these lease payables were as follows:
 December 31,2006
    
    
    2007NTD
    
    
    NTD
    
    
    USDLease payables
    
    $
    130,966
    
    
    
    127,422
    
    
    
    3,929Less: current portion of lease payables
    
    
    (3,544
    )
    
    
    (3,705
    )
    
    
    (114
    )Lease payableslong-term
    
    $
    127,422
    
    
    
    123,717
    
    
    
    3,815




---



##### 



14 INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (d)
    
    For the years ended December 31, 2005, 2006 and 2007, the lease expenses for the
operating lease of the land (classified under manufacturing overhead) were NT$2,141,
NT$4,282 and NT$4,282, respectively.(e)
    
    As of December 31, 2006 and 2007, the unpaid rent expenses (classified under other
payablesrelated parties) were NT$357 and NT$0, respectively.(f)
    
    Future lease payments (excluding interest component) classified as capital lease or
operating lease as of December 31, 2007, were as follows:
 December 31, 2007Capital lease
    
    
    Operating leaseDuration
    
    NTD
    
    
    USD
    
    
    NTD
    
    
    USD2008.1.1~2008.12.31
    
    $
    3,705
    
    
    
    114
    
    
    
    4,282
    
    
    
    1322009.1.1~2009.12.31
    
    
    3,874
    
    
    
    119
    
    
    
    4,282
    
    
    
    1322010.1.1~2010.12.31
    
    
    4,050
    
    
    
    125
    
    
    
    4,282
    
    
    
    1322011.1.1~2011.12.31
    
    
    4,235
    
    
    
    131
    
    
    
    4,282
    
    
    
    1322012.1.1~2029.02.28
    
    
    111,558
    
    
    
    3,440
    
    
    
    73,504
    
    
    
    2,267Total
    
    $
    127,422
    
    
    
    3,929
    
    
    
    90,632
    
    
    
    2,795
 (10) Bonds Payable
  December 31,2006
    
    
    2007NTD
    
    
    NTD
    
    
    USDDomestic unsecured corporate bonds
    
    $
    6,000,000
    
    
    
    20,000,000
    
    
    
    616,713




---



##### 



15 INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
  The first domestic
    
    
    The second domestic
    
    
    The first domestic
    
    
    The second domesticunsecured corporate
    
    
    unsecured corporate
    
    
    unsecured corporate
    
    
    unsecured corporatebond in 2006
    
    

bond in 2006
    
    
    bond in 2007
    
    
    bond in 2007Principal
    
    NTD   6,000,000
    
    
    
    4,000,000
    
    
    
    5,000,000
    
    
    
    5,000,000Par value
    
    
    1,000
    
    
    
    1,000
    
    
    
    1,000
    
    
    
    1,000Duration
    

    2006.12.19 ~ 2011.12.19
    
    

    2007.01.05 ~ 2012.01.05
    
    

    2007.03.30 ~ 2012.03.30
    
    
    2007.05.09 ~ 2012.05.09Coupon rate and
    
    Interest payable
    
    Interest payable
    
    Interest payable
    
    Interest payableinterest payment
    
    annually at 2.20%
    
    annually at 2.23%
    
    annually at 2.17%
    
    annually at 2.20%Repayment term
    
    Repayable in three
    
    Repayable on maturity
    
    Repayable on maturity
    
    Repayable on maturityannual installments: at
    
    date
    
    date
    
    datethe rate of 33%, 33%,and 34%, respectively;starting from 3 yearsafter the issuance date.
 (11) Long-term Loans
  December 31, 2006Bank
    
    
    
    
    
    Duration
    
    Nature
    
    Interest rate
    
    NTDTaiwan Cooperative Bank
    
    
    (1
    )
    
    February 2, 2004 ~
    
    Machinery loan
    
    4.6214%~6.3352%
    
    $
    6,030,260(the managing bank)
    
    
    
    
    
    February 2, 2009Mega International
Commercial Bank
    
    
    (2
    )
    
    November 15, 2004 ~
    
    Machinery loan
    
    5.3488%~6.2090%
    
    
 18,775,296(the managing bank)
    
    
    
    
    
    November 15, 2009Mega International
Commercial Bank
    
    
    (2
    )
    
    November 15, 2004 ~
    
    Machinery loan
    
    2.426%~2.6184%
    


4,885,715(the managing bank)
    
    
    
    
    
    November 15, 200929,691,271Less: current portion of
long-term loans
    
    
    
    
    
    
    
    
    
    
    
    
    (10,299,107
    )$
    19,392,164




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##### 



16 INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 December 31, 2007Bank
    
    
    
    
    
    Duration
    
    Nature
    
    Interest rate
    
    NTD
    
    
    USDTaiwan Cooperative Bank
    
    
    (1
    )
    
    February 2, 2004~
    
    Machinery loan
    
    6.0914%~6.3352%
    
    $
    3,601,173

    
    
    
    111,045(the managing bank)
    
    
    
    
    
    February 2, 2009Mega International Commercial Bank
    
    
    (2
    )
    
    November 15, 2004~
    
    Machinery loan
    
    6.1945%~6.2371%
    
    
    12,458,112
    
    
    
    384,154(the managing bank)
    
    
    
    
    
    November 15, 2009Mega International Commercial Bank
    
    
    (2
    )
    
    November 15, 2004~
    
    Machinery loan
    
    2.6184%~3.7833%
    
    
    3,257,145
    
    
    
    100,436(the managing bank)
    
    
    
    
    
    November 15, 2009Mega International Commercial Bank
    
    
    (3
    )
    
    March 30, 2007~
    
    Machinery loan
    
    2.314%~2.9158%
    
    
 23,300,000
    
    
    
    718,471(the managing bank)
    
    
    
    
    
    March 30, 201242,616,430
    
    
    
    1,314,106Less: current portion of long-term loans
    
    
    
    
    
    
    
    
    
    
    
    
    (10,258,408
    )
    
    
    (316,325
    )$
    32,358,022
    
    
    
    997,781
 
 (1)
    
    The Company signed a syndicated loan agreement with Taiwan Cooperative Bank, the
managing bank of this syndicated loan, and 15 other banks on January 16, 2004. The
details of this loan are as follows:
 (a)
    
    Credit line: US$260,000.(b)
    
    Interest rate: USD 3-month or 6-month London Inter-bank Offered Rate
(LIBOR) plus margin.(c)
    
    Duration: 5 years.(d)
    
    Repayment: The principal is payable in 7 semi-annual installments starting
from 24 months after the first drawing date.(e)
    
    The long-term loan is secured by buildings and machinery. As of December
31, 2006 and 2007, the net book value of the pledged assets amounted to NT$7,657,438
and NT$5,865,960, respectively.(f)
    
    The Company has issued a promissory note for the syndicated loan.(g)
    
    As of December 31, 2007, the Company repaid US$149,000.
 (2)
    
    The Company signed a syndicated loan agreement with Mega International Commercial
Bank (formerly I.C.B.C.) the managing bank of the syndicated loan, and 23 other banks on
October 14, 2004 (as of December 31, 2007, the actual number of banks had increased to
31). The details of this loan are as follows:
 (a)
    
    Credit line: US$672,000 and NT$5,700,000.(b)
    
    Interest rate for Tranche A: USD 3-month or 6-month London Inter-bank
Offered Rate plus margin.




---



##### 



17 INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (c)
    
    Interest rate for Tranche B: 90-day or 180-day commercial paper rate in the
primary market which appears on Moneyline Telerate, plus margin.(d)
    
    Duration: 5 years.(e)
    
    Repayment: The principal is payable in 7 semi-annual installments starting
from 24 months after the first drawing date.(f)
    
    This long-term debt is secured by buildings and machinery. As of December
31, 2006 and 2007, the net book value of the pledged assets amounted to NT$24,272,894
and NT$19,185,045, respectively.(g)
    
    The Company has issued a promissory note for this syndicated loan.(h)
    
    As of December 31, 2007, the Company repaid US$288,000 and NT$2,442,855.
 (3)
    
    The Company signed a syndicated loan agreement with Mega International Commercial
Bank, the managing bank of the syndicated loan, and 24 other banks on March 5, 2007 (as
of December 31, 2007, the actual number of banks had decreased to 24 in total). The
Company applied for drawings of NT$23,300,000 from March 30,
2007, to December 31, 2007. The
details of this loan are as follows:
 (a)
    
    Credit line: US$400,000 and NT$27,000,000.(b)
    
    Interest rate for Tranche A: USD 3-month or 6-month London Inter-bank
Offered Rate plus margin.(c)
    
    Interest rate for Tranche B: 90-day or 180-day commercial paper rate in the
secondary market which appears on Moneyline Telerate, plus margin.(d)
    
    Duration: 5 years.(e)
    
    Repayment: The principal is payable in 6 semi-annual installments starting
from 30 months after the first drawing date.(f)
    
    The Company has issued a promissory note for this syndicated loan.(g)
    
    The long-term loan is secured by machinery. As of December 31, 2007, the
net book value of the pledged assets amounted to NT$30,472,144.
 The above three long-term loan agreements contain undertakings and restrictive covenants
requiring the Company to maintain certain financial ratios. In addition, the long-term
loan agreements require that (i) no material adverse change shall be made to the off-take
sales arrangements signed by the Company, Nanya Technology
Corporation (NTC), and Qimonda
AG (Qimonda), (ii) that NTC and Infineon and/or Qimonda and their affiliates, taken as a
whole,




---



##### 



18 INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 directly or indirectly, shall remain the largest shareholders of the Company and
retain control over the Company.
 The Company received confirmation letters from the syndicated
banks indicating therein that they had no information
regarding the Company's inability to meet two of its financial covenants under the
syndicate loan agreements as of December 31, 2007. On March 31, 2008, the syndicated banks agreed to waive those covenant requirements for 2007.
 (12) Accrued Pension Liabilities
 (a)
    
    The pension costs and related information for the years ended December 31, 2005, 2006
and 2007, were as follows:
 For the years ended December 31,2005
    
    2006
    
    2007NTD
    
    NTD
    
    NTD
    
    USDBalance of the retirement fund
    
    $
    29,192
    
    
    
    44,428
    
    
    
    60,692
    
    
    
    1,871Periodic pension costsDefined benefit plan cost
    
    
    35,317
    
    
    
    11,372
    
    
    
    7,384
    
    
    
    228Defined contribution plan cost
    
    
    23,482
    
    
    
    61,083
    
    
    
    89,773
    
    
    
    2,768Accrued pension liabilities  defined benefit plan
    
    
    50,594
    
    
    
    46,746
    
    
    
    39,347
    
    
    
    1,213Accrued expenses  defined contribution plan
    
    
    12,265
    
    
    
    20,099
    
    
    
    25,682
    
    
    
    792




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (b)
    
    The funded status was reconciled to accrued pension liability as of December 31, 2006
and 2007, as follows:
 December 31,2006
    
    
    2007NTD
    
    
    NTD
    
    
    USDBenefit obligation:Vested benefit obligation
    
    $
    (3,504
    )
    
    
    (5,609
    )
    
    
    (173
    )Non-vested benefit obligation
    
    
    (61,546
    )
    
    
    (43,444
    )
    
    
    (1,340
    )Accumulated benefit obligation
    
    
    (65,050
    )
    
    
    (49,053
    )
    
    
    (1,513
    )Projected compensation increase
    
    
    (70,459
    )
    
    
    (44,833
    )
    
    
    (1,382
    )Projected benefit obligation
    
    
    (135,509
    )
    
    
    (93,886
    )
    
    
    (2,895
    )Fair value of plan assets
    
    
    46,963
    
    
    
    63,142
    
    
    
    1,947Funded status
    
    
    (88,546
    )
    
    
    (30,744
    )
    
    
    (948
    )Unamortized pension gain or losses
    
    
    41,800
    
    
    
    (8,603
    )
    
    
    (265
    )Accrued pension liability
    
    $
    (46,746
    )
    
    
    (39,347
    )
    
    
    (1,213
    )
 (c)
    
    As of December 31, 2006 and 2007, the actuarial present value of the vested benefits
for the Companys employees in accordance with the retirement benefit plan was
approximately NT$4,112 and NT$6,292, respectively.(d)
    
    Major assumptions used to determine the pension plan funded status and accrued pension
liability for the years ended December 31, 2005, 2006 and 2007, were as follows:
 For the years ended December 31,2005
    
    2006
    
    2007Discount rate
    
    
    3.00
    %
    
    
    2.75
    %
    
    
    2.75
    %Rate of increase in compensation
    
    
    3.00
    %
    
    
    3.00
    %
    
    
    3.00
    %Expected long-term rate of return on plan assets
    
    
    3.00
    %
    
    
    2.75
    %
    
    
    2.75
    %




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (13) Income Tax
 (a)
    
    The Companys earnings are subject to income tax at a statutory rate of 25%. Effective
January 1, 2006, the Company also adopted the requirements of the Income Basic Tax Act in
calculating the basic tax. For the years ended December 31, 2005, 2006 and 2007, the
components of income tax expense were as follows:
 For the years ended December 31,2005
    
    
    2006
    
    
    2007NTD
    
    
    NTD
    
    
    NTD
    
    
    USDIncome tax expense  current
    
    $
    152,162
    
    
    $
    268,345
    
    
    
    75,531
    
    
    
    2,329Income tax expense  deferred
    
    
    185,199
    
    
    
    118,154
    
    
    
    41,837
    
    
    
    1,290Income tax expense
    
    $
    337,361
    
    
    $
    386,499
    
    
    
    117,368
    
    
    
    3,619
 (b)
    
    The details of deferred income tax expenses for the years ended December 31, 2005, 2006
and 2007, were as follows:
 For the years ended December 31,2005
    
    
    2006
    
    
    2007NTD
    
    
    NTD
    
    
    NTD
    
    
    USDNewly applied and unused investment tax credit
    
    $
    (2,917,497
    )
    
    
    (963,916
    )
    
    
    (4,206,348
    )
    
    
    (129,705
    )Difference in depreciation expense for tax purposes
and financial accounting purposes
    
    
    1,260
    
    
    
    1,260
    
    
    
    747
    
    
    
    23Allowance for inventory obsolescence and devaluation
    
    
    
    
    
    
    (4,712
    )
    
    
    (256,997
    )
    
    
    (7,925
    )Decrease in provision for pension expense in excess of tax limit
    
    
    (4,634
    )
    
    
    962
    
    
    
    1,850
    
    
    
    56Operating expenses accrued in prior but paid this year
    
    
    2,138
    
    
    
    14,308
    
    
    
    622
    
    
    
    19Impairment loss provision on idle asset
    
    
    
    
    
    
    (8,027
    )
    
    
    (2,104
    )
    
    
    (65
    )Utilized loss carryforwards
    
    
    47,414
    
    
    
    
    
    
    
    
    
    
    
    Valuation allowance for deferred income tax assets
    
    
    3,123,694
    
    
    
    1,220,105
    
    
    
    4,381,638
    
    
    
    135,111(Increase) decrease in unrealized foreign exchange gain or loss
    
    
    (67,177
    )
    
    
    (152,808
    )
    
    
    20,814
    
    
    
    642Increase in valuation gain on financial instruments
    
    
    
    
    
    
    10,982
    
    
    
    64,425
    
    
    
    1,987Unrealized valuation gain in 2006 realized in 2007
    
    
    
    
    
    
    
    
    
    
    37,190
    
    
    
    1,147Deferred income tax expense
    
    $
    185,199
    
    
    
    118,154
    
    
    
    41,837
    
    
    
    1,290




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (c)
    
    The income tax on pretax financial income calculated at a statutory income tax rate of
25% was reconciled with the actual income tax as reported in the accompanying statements of
income for the years ended December 31, 2005, 2006 and 2007, as follows:
 For the years ended December 31,2005
    
    
    2006
    
    
    2007NTD
    
    
    NTD
    
    
    NTD
    
    
    USDIncome tax calculated on pretax financial income
    
    $
    1,566,770
    
    
    
    4,123,070
    
    
    
    261,044
    
    
    
    8,049Tax effect of tax-free income from company tax holiday
    
    
    (1,269,720
    )
    
    
    (3,967,622
    )
    
    
    (207,353
    )
    
    
    (6,394
    )Increase in income tax credit on purchase machinery
and equipment
    
    
    (3,090,641
    )
    
    
    (1,188,138
    )
    
    
    (4,701,631
    )
    
    
    (144,978
    )Under accrual of income tax in 2005 and 2006
    
    
    
    
    
    
    40,089
    
    
    
    480
    
    
    
    15Tax-exempt securities
    
    
    (985
    )
    
    
    (5,147
    )
    
    
    (114
    )
    
    
    (3
    )Increase in valuation allowance for deferred income
tax assets
    
    
    3,123,694
    
    
    
    1,220,105
    
    
    
    4,381,638
    
    
    
    135,11110% surtax on undistributed earnings
    
    
    7,862
    
    
    
    160,095
    
    
    
    382,869
    
    
    
    11,806Income tax levied separately
    
    
    381
    
    
    
    4,034
    
    
    
    303
    
    
    
    9Prior year income tax adjustment
    
    
    
    
    
    
    
    
    
    
    132
    
    
    
    4Permanent differences
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    Income tax expense
    
    $
    337,361
    
    
    
    386,499
    
    
    
    117,368
    
    
    
    3,619
 (d)
    
    Deferred income tax assets and tax liabilities as of December 31, 2006 and 2007, were
as follows:
 December 31,2006
    
    
    2007NTD
    
    
    NTD
    
    
    USDCurrent:Deferred income tax assets
    
    $
    116,396
    
    
    
    353,151
    
    
    
    10,890Valuation allowance for deferred income tax assets
    
    
    
    
    
    
    (115,253
    )
    
    
    (3,554
    )Deferred income tax liabilities
    
    
    (36,706
    )
    
    
    (94,890
    )
    
    
    (2,926
    )Current deferred income tax (liabilities) assets, net
    
    $
    79,690
    
    
    
    143,008
    
    
    
    4,410Non-current:Deferred income tax assets
    
    $
    8,086,962
    
    
    
    12,248,192
    
    
    
    377,681Valuation allowance for deferred income tax assets
    
    
    (7,816,338
    )
    
    
    (12,082,723
    )
    
    
    (372,579
    )Non-current deferred income tax assets, net
    
    $
    270,624
    
    
    
    165,469
    
    
    
    5,102Total deferred income tax assets
    
    $
    8,203,358
    
    
    
    12,601,343
    
    
    
    388,571Total deferred income tax liabilities
    
    $
    36,706
    
    
    
    94,890
    
    
    
    2,926Total valuation allowance for deferred income tax assets
    
    $
    7,816,338
    
    
    
    12,197,976
    
    
    
    376,133




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (e)
    
    As of December 31, 2006 and 2007, the components of deferred income tax assets or
liabilities were as follows:
 December 31,2006
    
    
    2007NTD
    
    
    NTD
    
    
    USDDeferred income tax assets:Unused investment tax credit
    
    
    7,987,293
    
    
    
    12,193,641
    
    
    
    375,999Allowance for inventory obsolescence and devaluation
    
    
    4,712
    
    
    
    261,709
    
    
    
    8,070Provision for pension expense in excess of tax limit
    
    
    11,687
    
    
    
    9,837
    
    
    
    304Unrealized foreign exchange loss
    
    
    108,366
    
    
    
    81,311
    
    
    
    2,507Unrealized loss on valuation of financial instruments
    
    
    79,305
    
    
    
    42,115
    
    
    
    1,299Allowance for impairment loss on idle asset
    
    
    8,027
    
    
    
    10,131
    
    
    
    312Others
    
    
    3,968
    
    
    
    2,599
    
    
    
    80Deferred income tax assets, gross
    
    $
    8,203,358
    
    
    
    12,601,343
    
    
    
    388,571Deferred income tax liabilities:Unrealized foreign exchange gain
    
    
    25,724
    
    
    
    19,483
    
    
    
    601Unrealized valuation gain on financial instruments
    
    
    10,982
    
    
    
    75,407
    
    
    
    2,325Deferred income tax liabilities, gross
    
    $
    36,706
    
    
    
    94,890
    
    
    
    2,926
 (f)
    
    Under the ROC Statute for Upgrading Industries, the Companys unused investment tax
credits as of December 31, 2007, were as follows:
 Purchasing machinery
    
    Personnel training and researchand equipment
    
    and development expenditures
    
    Expiry YearYear
    
    NTD
    
    USD
    
    NTD
    
    USD2004
    
    $
    3,053,806
    
    
    
    94,166
    
    
    
    
    
    
    
    
    
    
    
    20082005
    
    
    3,843,681
    
    
    
    118,523
    
    
    
    
    
    
    
    
    
    
    
    20092006
    
    
    1,509,467
    
    
    
    46,545
    
    
    
    47,635
    
    
    
    1,469
    
    
    
    20102007
    
    
    3,739,052
    
    
    
    115,296
    
    
    
    
    
    
    
    
    
    
    
    2011$
    12,146,006
    
    
    
    374,530
    
    
    
    47,635
    
    
    
    1,469
 ROC Income Tax Law allows companies to avail of an investment tax credit on their purchase
of certain types of equipment and machinery. Such tax credit can be used to reduce by up to
50% of income tax liability arising from the Companys products produced using such
machinery for four years starting from the year of equipment purchase, and can be used to
reduce by up to 100% such income tax liability in the fifth year.




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (g)
    
    The Companys income tax returns have been examined by the ROC tax authority through
2005.(h)
    
    Undistributed earnings, imputation credit account (ICA) and creditable ratio
 December 31,2005
    
    
    2006
    
    
    2007NTD
    
    
    NTD
    
    
    NTD
    
    
    USDUndistributed earnings after 1997
    
    $
    5,943,790
    
    
    
    17,482,894
    
    
    
    6,370,524
    
    
    
    196,439Imputation credit account
    
    $
    27,822
    
    
    
    146,489
    
    
    
    104,715
    
    
    
    3,229
 2005 (Actual)
    
    
    2006 (Actual)
    
    

2007 (Projected)Creditable ratio
    
    
    
    
    

    
    3.24
    %
    
    
    1.61
    %
    
    
    2.54
    %
 (i)
    
    The stockholders approved a resolution during their meetings on June 29, 2005, and
October 18, 2004, to allow the Company to avail of the Income Tax Holiday for investment
projects under Article 9 of the Statute for Upgrading Industries. The Company has availed
of the five-year Income Tax Holiday commencing from January 1, 2005, June 1, 2005, and
January 1, 2006, respectively, for the taxable income that is derived only from the sale of
products produced from its Fab-1Phases 1, 2, and 3 investment project.On June 29, 2007, the stockholders approved a resolution during their meeting to allow the
Company to avail of the Income Tax Holiday for its investment projects, Fab-1  Phase 4 and
Fab-2 under Article 9 of the Statute for Upgrading Industries. The related registration has
not yet been applied to the Industrial Development Bureau as of December 31, 2007.
 Duration of Income Tax HolidayInotera Fab-1  Phase 1
    
    January 2005 ~ December 2009Inotera Fab-1  Phase 2
    
    June 2005 ~ May 2010Inotera Fab-1  Phase 3
    
    January 2006 ~ December 2010




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (14) Stockholders Equity
 (a)
    
    Common stockOn October 23, 2007, the board of directors approved to increase the Companys capital
through the issuance of 250 million to 300 million Company shares for cash. This capital
increase was approved by the Securities and Futures Bureau (SFB) on December 10, 2007. On
March 14, 2008, the Company formally notified the SFB of its decision to stop its capital
increase plan because it was unable to carry out its capital increase plan three months
after receipt of the said SFB approval. For this reason, the SFB formally revoked on March
25, 2008 its approval of the Companys application to increase capital, in accordance with
the Regulations Governing the Offering and Issuance of Securities by Securities Issuers.During their meeting on June 29, 2007, the stockholders approved a resolution allowing the
Company to further increase its capital by NT$2,265,580, divided into 226,558 thousand
Company shares with NT$10 par value per share, by capitalizing the stock dividends to
stockholders of NT$1,866,572 and bonus to employees of NT$399,008. This capital increase was
approved by the SFB on July 18, 2007. The related registration processes were completed.On February 6, 2006, the board of directors approved the Initial Public Offering of the
Companys shares through the issuance of 200 million Company shares for cash at initial
price offering of NT$33 per share on the Taiwan Stock Exchange (TSE). The Company approved a
resolution to set March 14, 2006, as the effective date for issuing new shares. This capital
increase was approved by the SFB on April 11, 2006.Effective May 16, 2006, the Company sold for cash 40 million GDSs, representing 400 million
common shares of the Company, at a price of US$10.53 per share and subsequently listed its
GDSs on the LSE. Total issuance of GDSs amounted to US$421,200, and each GDS offers the
holder the right to receive 10 shares of the Company. The offering was approved by the SFB
on May 1, 2006. On May 16, 2006, the Company issued 400 million of its shares, and net
proceeds were US$416,114, or NT$13,169,176 (after deducting commissions and offering
expenses payable by the Company). The net proceeds exceeded the par value by NT$9,169,176,
which was recorded as capital surplus  paid-in capital in excess of par value.As of December 31, 2006 and 2007, the Companys total authorized capital both amounted to
NT$40,000,000, and total issued common stock amounted to NT$31,109,540 and NT$33,375,120,
respectively, with NT$10 par value per share.




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (b)


    Capital surplusAs of December 31, 2005, 2006 and 2007, the capital surplus consisted of the following:
 December 31,2005
    
    
    2006
    
    
    2007NTD
    
    
    NTD
    
    
    NTD
    
    
    USDPaid-in capital in excess of par value
    
    $
    15,548,660
    
    
    
    29,317,836
    
    
    
    29,317,836
    
    
    
    904,034
 According to the ROC Company Law, realized capital surplus can be transferred to common
stock after deducting the accumulated deficit, if any. Realized capital surplus includes the
additional paid-in capital from issuance of common stock in excess of the common stocks par
value, donation from others, and additional paid-in capital  treasury stock.(c)
    
    Earnings appropriation and distributionThe Companys annual net profit, after providing for income tax and covering the losses of
previous years, shall be first set aside for legal reserve at the rate of 10% thereof until
the accumulated balance of legal reserve equals the total issued capital. The remaining net
profit, if any, after providing for any special reserves or reserving certain undistributed
earnings for business purposes shall be distributed as follows:
 (i)
    
    0.1% to 1% as remuneration to directors and supervisors.(ii)
    
    1% to 8% as bonus to employees.(iii)
    
    The remainder as dividends to stockholders, distributed in the form of cash
dividends and/or stock dividends.




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
  Earnings distribution
    
    
    Distribution per share2005
    
    
    2006
    
    
    2005
    
    
    2006NTD
    
    
    NTD
    
    
    NTD
    
    
    NTDDividends to stockholders  cash
    
    $
    3,433,227
    
    
    
    7,777,385
    
    
    
    1.1036
    
    
    
    2.5Dividends to stockholders  stock
    
    
    
    
    
    
    1,866,572
    
    
    
    
    
    
    
    0.6Bonus to employees  cash
    
    
    298,866
    
    
    
    399,010
    
    
    
    
    
    
    
    Bonus to employees  stock
    
    
    
    
    
    
    399,008
    
    
    
    
    
    
    
    Remuneration to directors and supervisors
    
    
    3,736
    
    
    
    10,453
    
    
    
    
    
    
    
    $
    3,735,829
    
    
    
    10,452,428
    
    
    
    1.1036
    
    
    
    3.1
 If the remuneration to directors and supervisors and the employees bonus were recorded as
compensation expense, the non-retroactively adjusted earnings per share in 2005 and 2006
would decrease from NT$2.36 and NT$5.43 to NT$2.24 and NT$5.15, respectively. Stock
dividends distributed to employees represented 1.28% of the outstanding common shares in
2006.The appropriation of the Companys 2007 earnings is subject to a resolution to be passed and
approved by the Companys directors and stockholders during their regular meetings.
Following the approval of those resolutions, related information can be obtained from the
Market Observation Post System website of the Taiwan Stock Exchange.(d)

    Employee stock option plansOn August 29, 2007 and December 13, 2007, 98,000 and 2,000 stock options, respectively,
were granted to qualified full-time employees of the Company. Each option entitles the
holder to subscribe for one thousand common shares of the Company when exercisable. The
exercise price is NT$31.05 and NT$26.50 per share, respectively. The options granted are
valid for 8 years and exercisable at certain percentages after the second anniversary year
from the grant date. 50%, 75% and 100% of these stock options are vested after the second,
third and fourth anniversary dates, respectively. The options were granted at an exercise
price equal to the closing price of the Companys common shares listed on the Taiwan Stock
Exchange Corporation on grant date. For any subsequent changes in the Companys paid-in
capital, the exercise price and the number of options will be adjusted accordingly. Also,
the exercise price of the option shall be adjusted according to the related regulation if
a cash dividend is paid on the underlying shares.




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
  Weighted-averageNumber of options
    
    
    exercise price(Units)
    
    
    (NTD)Options granted
    
    
    100,000
    
    
    $
    30.96Options forfeited
    
    
    (4,826
    )
    
    
    31.05Outstanding at December 31, 2007
    
    
    95,174
    
    
    
    30.95Options exercisable at December 31, 2007
    
    
    Weighted-average fair value of options
granted
    
    $
    12.45
  Options outstanding
    
    
    
    
    
    
    Options exercisableRange of exercise
    
    
    Number of
    
    
    Remaining
    
    
    Exercise price
    
    
    Number of
    
    
    Exercise priceprice (NTD)
    
    
    options
    
    
    periods
    
    
    (NTD)
    
    
    options
    
    
    (NTD)$
    31.05
    
    
    
    93,174
    
    
    
    7.66
    
    
    $
    31.05
    
    
    
    
    
    
    
    $
    26.50
    
    
    
    2,000
    
    
    
    7.95
    
    
    $
    26.50
    
    
    
    
    
    
    
    
  For the year ended December 31, 2007The first batch of
    
    The second batch ofthe stock option plan
    
    the stock option planAssumptionsExpected dividend yield
    
    
    
    %
    
    
    
    %Expected volatility
    
    
    40.23
    %
    
    
    38.41
    %Risk-free interest rate
    
    
    2.5317
    %
    
    
    2.4820
    %Expected term
    
    5.375 years
    
    5.375 years




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
  Employee stock options in 2007NTD
    
    USDNet incomeAs reported (in thousands)
    
    $
    926,849
    
    
    
    28,580Pro forma (in thousands)
    
    $
    820,516
    
    
    
    25,301Basic
 after income tax earnings per shareAs reported
    
    $
    0.28
    
    
    
    0.009Pro forma
    
    $
    0.25
    
    
    
    0.008
 (15) Earnings
Per Share  retroactively adjusted
  For the year ended December 31, 2005Amount
    
    
    
    
    
    
    Earnings per shareIncome before
    
    
    Income after
    
    
    Total weighted-average
    
    
    Before
    
    
    Afterincome tax
    
    
    income tax
    
    
    outstanding shares
    
    
    income tax
    
    
    income taxNTD
    
    
    NTD
    
    
    
    
    
    
    NTD
    
    
    NTDBasic
 earnings per share 
retroactively adjusted
    
    $
    6,267,119
    
    
    
    5,929,758
    
    
    
    2,693,816
    
    
    
    2.33
    
    
    
    2.20
 For the year ended December 31, 2006Amount
    
    
    
    
    
    
    Earnings per shareIncome before
    
    
    Income after income
    
    
    Total weighted-average
    
    
    Before
    
    
    Afterincome tax
    
    
    tax
    
    
    outstanding shares
    
    
    income tax
    
    
    income taxNTD
    
    
    NTD
    
    
    
    
    
    
    NTD
    
    
    NTDBasic
 earnings per share  retroactively adjustedIncome
before cumulative effect of change in accounting principle
    
    $
    16,492,323
    
    
    
    16,105,824
    
    
    
    3,136,467
    
    
    
    5.26
    
    
    
    5.14Cumulative effect of change in
accounting principle
    
    
    (317,220
    )
    
    
    (237,915
    )
    
    
    3,136,467
    
    
    
    (0.10
    )
    
    
    (0.08
    )Basic
 earnings per share 
retroactively adjusted
    
    $
    16,175,103
    
    
    
    15,867,909
    
    
    
    
    
    
    
    5.16
    
    
    
    5.06




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 For the year ended December 31, 2007Amount
    
    
    
    
    
    
    Earnings per shareTotal weighted-averageIncome before income tax
    
    
    Income after income tax
    
    
    outstanding shares
    
    
    Before income tax
    
    
    After income taxNTD
    
    
    USD
    
    
    NTD
    
    
    USD
    
    
    
    
    
    
    NTD
    
    
    USD
    
    
    NTD
    
    
    USDBasic
 earnings per
share  retroactively
adjusted
    
    $
    1,044,217
    
    
    
    32,199
    
    
    
    926,849
    
    
    
    28,580
    
    
    
    3,337,512
    
    
    
    0.31
    
    
    
    0.010
    
    
    
    0.28
    
    
    
    0.009
 (16) Financial Instrument Information
 (a)
    
    Fair value of financial instrumentsAs of December 31, 2006 and 2007, the fair value of the Companys financial assets and
liabilities were as follows:
 December 31,2006
    
    2007Financial instruments

    
    Book value
    
    Fair value
    
    Book value
    
    Book value
    
    Fair value
    
    Fair valueNTD
    
    NTD
    
    NTD
    
    USD
    
    NTD
    
    USDFinancial assets:Cash and cash equivalents
    
    $
    21,704,854
    
    
    
    21,704,854
    
    
    
    6,023,517
    
    
    
    185,739
    
    
    
    6,023,517
    
    
    
    185,739Accounts receivable  related parties
    
    
    8,332,816
    
    
    
    8,332,816
    
    
    
    6,649,818
    
    
    
    205,051
    
    
    
    6,649,818
    
    
    
    205,051Interest rate swap
    
    
    52,255
    
    
    
    52,255
    
    
    
    16,968
    
    
    
    523
    
    
    
    16,968
    
    
    
    523Foreign exchange forward contracts
    
    
    941,480
    
    
    
    941,480
    
    
    
    776,995
    
    
    
    23,959
    
    
    
    776,995
    
    
    
    23,959Mutual bond fund
    
    
    660,484
    
    
    
    660,484
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Financial liabilities:Current portion of long-term loans
    
    
    10,299,107
    
    
    
    10,299,107
    
    
    
    10,258,408
    
    
    
    316,325
    
    
    
    10,258,408
    
    
    
    316,325Accounts payable (including accounts
payable  related parties)
    
    
    21,516,696
    
    
    
    21,516,696
    
    
    
    7,911,078
    
    
    
    243,943
    
    
    
    7,911,078
    
    
    
    243,943Bonds payable
    
    
    6,000,000
    
    
    
    5,988,672
    
    
    
    20,000,000
    
    
    
    616,713
    
    
    
    19,223,496
    
    
    
    592,769Long-term loans
    
    
    19,392,164
    
    
    
    19,392,164
    
    
    
    32,358,022
    
    
    
    997,781
    
    
    
    32,358,022
    
    
    
    997,781




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (b)
    
    The methods and assumptions used to estimate the fair value of each class of financial
instruments were as follows:
 (i)
    
    The book value of short-term financial instruments is believed to be not
materially different from the fair value because the maturity dates of short-term
financial instruments are within one year from the balance sheet date. Therefore, their
book value is adopted as a reasonable basis for determining their fair value. This
principle is applied in estimating the fair value of short-term financial instruments
including cash and cash equivalents, account receivables/ payables (including related
parties).(ii)
    
    The fair value of financial instruments traded in active markets is based on
quoted market prices. If the financial instruments are not in an active market, then
the fair value is determined by certain valuation techniques, using assumptions under
existing market conditions.(iii)
    
    The discounted present value of anticipated cash flows is adopted as the fair
value of long-term debt. Such present value approximates the carrying value of the
Companys existing long-term loans.(iv)
    
    Fair value of bond payable was determined by using brokers quote. This quote
is tested for reasonableness by discounting the estimated future cash flows based on
the terms and maturity of each contract and using market interest rates for a similar
instrument at the measurement date.




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (c)
    
    As of December 31, 2006 and 2007, the fair values of the financial instruments, were
based on market values in an active market or determined by using broker quotes / carrying
values, as follows:
 December 31,2006
    
    
    2007Market value
    
    
    Value determined by
    
    
    Market value
    
    
    Value determined byin active
    
    
    using broker quote /
    
    
    in active
    
    
    using broker quote /Financial instruments
    
    market
    
    
    carrying value
    
    
    market
    
    
    carrying valueNTD
    
    
    NTD
    
    
    NTD
    
    
    USD
    
    
    NTD
    
    
    USDFinancial assets:Cash and cash equivalents
    
    $
    21,704,854
    
    
    
    
    
    
    
    6,023,517
    
    
    
    185,739
    
    
    
    
    
    
    
    Accounts receivable  related parties
    
    
    
    
    
    
    8,332,816
    
    
    
    
    
    
    
    
    
    
    
    6,649,818
    
    
    
    205,051Interest rate swap
    
    
    
    
    
    
    52,255
    
    
    
    
    
    
    
    
    
    
    
    16,968
    
    
    
    523Foreign exchange forward contracts
    
    
    
    
    
    
    941,480
    
    
    
    
    
    
    
    
    
    
    
    776,995
    
    
    
    23,959Mutual bond fund
    
    
    
    
    
    
    660,484
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Financial liabilities:Current portion of long-term loans
    
    
    
    
    
    
    10,299,107
    
    
    
    
    
    
    
    
    
    
    
    10,258,408
    
    
    
    316,325Accounts
payable (including accounts payable  related parties)
    
    
    
    
    
    
    21,516,696
    
    
    
    
    
    
    
    
    
    
    
    7,911,078
    
    
    
    243,943Bonds payable
    
    
    
    
    
    
    5,988,672
    
    
    
    
    
    
    
    
    
    
    
    19,223,496
    
    
    
    592,769Long-term loans
    
    
    
    
    
    
    19,392,164
    
    
    
    
    
    
    
    
    
    
    
    32,358,022
    
    
    
    997,781
 (d)
    
    Financial risk information
 (i)
    
    Market riskAll derivative financial instruments are intended as hedges for
fluctuations in foreign exchange rates and interest rates. Gains or losses from
these hedging instruments are likely to be offset by gains or losses from the
hedged items. Thus, market price risks are believed to be low.(ii)
    
    Credit riskThe Company signed a Product Purchase and Capacity Reservation Agreement
with NTC and Qimonda AG, as described in notes 17(b) and 23(a)(viii). Under this
agreement, these entities are each entitled to a contracted percentage of the
Companys production capacity. Under the agreement, the sales of the Company were
derived 100% from NTC and Qimonda AG. The sales are an indication that the Company
has concentration of credit risk. Because these customers are both reputable listed
companies, the accounts receivable from NTC and Qimonda AG are collectible.
Management believes its exposure related to the potential payment default by NTC
and Qimonda is low.




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 Credit risks of financial instrument transactions represent the positive net settlement
amount of those contracts with positive fair values at the balance sheet date. The
positive net settlement amount represents the loss to the Company if the
counter-parties breached the contracts. The banks, which are the counter-parties to
the foregoing derivative financial instruments, are reputable financial
institutions. Management believes its exposure related to the potential default by
those counter-parties is low.(iii)
    
    Cash flow riskThe Company has sufficient operating capital to meet the cash requirements for the
derivative financial instrument transactions. In addition, additional cash inflow is
expected to meet the cash outflow. Therefore, the cash flow risk is low.(iv)
    
    Interest rate riskInterest rate risk arises from short-term and long-term loans. Loans issued at variable
rates expose the Company to cash flow interest rate risk. If the market interest
rate increases by 1%, the cash outflow of the Company would increase by NT$296,913
and NT$426,164 for the years ended December 31, 2006 and 2007, respectively. The
Company manages its cash flow interest rate risk by using floating-to-fixed
interest-rate swaps. Such interest rate swaps have the economic effect on
conversion of loans with floating rates to loans with fixed rates.
 (17) Related-party Transactions
 (a)
    
    Names and relationship of related parties
 Name
    
    Relationship with the CompanyNan Ya Plastics Corp. (NPC)
    
    Common chairmanNanya Technology Corp. (NTC)
    
    One of major stockholdersQimonda AG
    
    One of major stockholdersInfineon Technologies AG (IFX)
    
    Immediate parent company of Qimonda AGQimonda Technologies Suzhou Co., Ltd
    
    Subsidiary of Qimonda AGQimonda Richmond, LLC
    
    Subsidiary of Qimonda AG




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (b)
    
    Significant related-party transactions
 (i)
    
    Sales revenue and accounts receivableSignificant sales to related parties for the years ended December 31, 2005, 2006 and
2007, were as follows:
 For the years ended December 31,2005
    
    
    2006
    
    
    2007% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    
    
    
    
    % ofAmount
    
    
    net sales
    
    
    Amount
    
    
    net sales
    
    
    Amount
    
    
    
    
    
    
    net salesNTD
    
    
    
    
    
    
    NTD
    
    
    
    
    
    
    NTD
    
    
    USDNTC
    
    $
    11,502,292
    
    
    
    49.94
    
    
    
    20,477,214
    
    
    
    50.21
    
    
    
    22,984,160
    
    
    
    708,731
    
    
    
    50.11Qimonda AG
    
    
    
    
    
    
    
    
    
    
    13,615,363
    
    
    
    33.39
    
    
    
    22,880,388
    
    
    
    705,532
    
    
    
    49.89IFX
    
    
    9,180,137
    
    
    
    39.86
    
    
    
    3,994,116
    
    
    
    9.79
    
    
    
    
    
    
    
    
    
    
    
    Qimonda Technologies Suzhou Co., Ltd.
    
    
    2,347,571
    
    
    
    10.19
    
    
    
    2,695,017
    
    
    
    6.61
    
    
    
    
    
    
    
    
    
    
    
    Qimonda Richmond, LLC
    
    
    2,203
    
    
    
    0.01
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    23,032,203
    
    
    
    100.00
    
    
    
    40,781,710
    
    
    
    100.00
    
    
    
    45,864,548
    
    
    
    1,414,263
    
    
    
    100.00
  December 31,2006
    
    
    2007% of accounts
    
    
    
    
    
    
    
    
    
    
    % of accountsreceivable
    
    
    
    
    
    
    
    
    
    
    receivableAmount
    
    
    related parties
    
    
    Amount
    
    
    related partiesNTD
    
    
    
    
    
    
    NTD
    
    
    USDNTC
    
    $
    4,325,897
    
    
    
    51.91
    
    
    
    3,282,276
    
    
    
    101,211
    
    
    
    49.36Qimonda AG
    
    
    4,006,919
    
    
    
    48.09
    
    
    
    3,367,542
    
    
    
    103,840
    
    
    
    50.64$
    8,332,816
    
    
    
    100.00
    
    
    
    6,649,818
    
    
    
    205,051
    
    
    
    100.00




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (ii)
    
    Purchases and accounts payableSignificant purchases from related parties for the years
ended December 31, 2005, 2006 and
2007, were as follows:
 For the years ended December 31,2005
    
    
    2006
    
    
    2007% of net
    
    
    
    
    
    
    % of net
    
    
    
    
    
    
    
    
    
    
    % of netAmount
    
    
    purchases
    
    
    Amount
    
    
    purchases
    
    
    Amount
    
    
    purchasesNTD
    
    
    
    
    
    
    NTD
    
    
    
    
    
    
    NTD
    
    
    USDNPC
    
    $
    49,827
    
    
    
    0.17
    
    
    
    680,957
    
    
    
    6.11
    
    
    
    25,151
    
    
    
    776
    
    
    
    0.13NTC
    
    
    
    
    
    
    
    
    
    
    70,039
    
    
    
    0.63
    
    
    
    166,696
    
    
    
    5,140
    
    
    
    0.83IFX
    
    
    464,481
    
    
    
    1.56
    
    
    
    217,230
    
    
    
    1.95
    
    
    
    
    
    
    
    
    
    
    
    Qimonda AG
    
    
    
    
    
    
    
    
    
    
    252,285
    
    
    
    2.26
    
    
    
    971,653
    
    
    
    29,962
    
    
    
    4.83$
    514,308
    
    
    
    1.73
    
    
    
    1,220,511
    
    
    
    10.95
    
    
    
    1,163,500
    
    
    
    35,878
    
    
    
    5.79
  December 31,2006
    
    
    2007% of total
    
    
    
    
    
    
    
    
    
    
    % of totalaccounts
    
    
    
    
    
    
    
    
    
    
    accountsAmount
    
    
    payable
    
    
    Amount
    
    
    payableNTD
    
    
    
    
    
    
    NTD
    
    
    USDNPC
    
    $
    346,304
    
    
    
    1.61
    
    
    
    1,786
    
    
    
    55
    
    
    
    0.02NTC
    
    
    
    
    
    
    
    
    
    
    750
    
    
    
    23
    
    
    
    0.01Qimonda AG
    
    
    59,613
    
    
    
    0.28
    
    
    
    110,219
    
    
    
    3,399
    
    
    
    1.39$
    405,917
    
    
    
    1.89
    
    
    
    112,755
    
    
    
    3,477
    
    
    
    1.42




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (iii)
    
    Acquisition and disposal of property, plant and equipmentDisposal of machinery and equipment:
 December
31, 2006Proceeds from
    
    
    
    
    
    
    Loss ondisposal of PPE
    
    
    Book value
    
    
    disposal of PPENTD
    
    
    NTD
    
    
    NTDNTC
    
    $
    600
    
    
    
    2,142
    
    
    
    1,542
 
 (iv)
    
    Training expenseNTC transferred some of its employees to the Company to enable the Company to have a
sufficient number of high quality and loyal staff. Consequently, the Company is required
to reimburse NTC for the loss of their experienced employees in an amount equal to 6
months salary of those employees. The Company booked this expenditure as training
expenses (classified under administrative and general expenses) of NT$5,180 for the year
ended December 31, 2005. As of December 31, 2005, the Company fully paid these training
expenses.(v)
    
    Lease contractsCommencing from July 1, 2005, the Company signed lease contracts with NTC. Refer to
notes 7 and 9 for details.(vi)
    
    Other significant transactionsOther payablesrelated parties arising from other transactions were as follows:
 December 31,2006
    
    
    2007NTD
    
    
    NTD
    
    
    USDQimonda AG (IT services, etc.)
    
    $
    36,511
    
    
    
    49,510
    
    
    
    1,527NTC (utility expenses, etc.)
    
    
    24,932
    
    
    
    20,062
    
    
    
    618NPC (dormitory expenses, etc.)
    
    
    4,096
    
    
    
    295
    
    
    
    9$
    65,539
    
    
    
    69,867
    
    
    
    2,154




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 The Company rented out Probe cards to Qimonda Richmond, LLC. For the year ended December
31, 2007, the rental revenue amounted to NT$988, which was accounted for as
non-operating income and gainsothers.(vii)
    
    Contracts with related partiesThe Company signed a Product Purchase and Capacity
Reservation Agreement with NTC and IFX. Under this agreement, these entities are each entitled to a
contracted percentage of the Companys production capacity. The Company is committed to
sell its production to these entities at a transfer price calculated in accordance with
the formula stated in the agreement. This agreement took effect on July 15, 2003, and
will continue to be in effect until terminated by either party with cause or when the
Joint Venture Agreement and/or the License and Technical Cooperation Agreement between
NTC and IFX are terminated.The Company signed a Know-How Transfer Agreement
with NTC and IFX. Under this agreement, these entities allowed the Company to utilize their know-how
in the semiconductor manufacturing process. This contract took effect on July 15, 2003,
and it will continue to be in effect until either of the following conditions has been
fulfilled: 1) both corporations decide to terminate their Joint Venture Agreement or 2)
three years after the completion of the know-how transfer.IFX has completed the carve-out of its memory product business group effective on May 1,
2006. Accordingly, IFXs memory products business, including substantially all of the
related assets and liabilities and personnel were transferred to a wholly owned
subsidiary named Qimonda AG. Also, IFX assigned the rights and obligations under the
Product Purchase and Capacity Reservation Agreement and Know-How Transfer Agreement
to Qimonda AG effective on May 1, 2006.The Company signed a service contract with NTC. Under this contract, NTC provides
transaction support in the following areas: human resources, finance, engineering and
construction, raw material, inventory, etc. The service fee is charged based on the
actual type of service rendered. The contract took effect on July 15, 2003, and will
continue to be in effect until terminated mutually by both parties.
 (18)
    
    Pledged PropertiesRefer to note 11 for information on the Companys assets pledged to secure loans.




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (19)
    
    Commitments and ContingenciesAs of December 31, 2006 and 2007, in addition to those described in the financial statements and
accompanying notes, the balance of outstanding letters of credit were as follows:
 December 31,Currency
(thousand)
    
    2006

    

    
    2007USD
    
    $
    65,308
    


    
    
    51,419JPY
    
    $
    2,099,273
    


    
    
    629,965EUR
    
    $
    50,907
    


    
    
    2,822
 (20) Significant Disaster Loss: None.
 (21) Subsequent
Events: Refer to Note 11.
 (22) Others
  For the year ended December 31, 2005Cost of goods sold
    
    Operating expenses
    
    TotalNTD
    
    NTD
    
    NTDPersonnel expensesSalaries
    
    
    1,048,967
    
    
    
    192,903
    
    
    
    1,241,870Labor and health insurance
    
    
    63,796
    
    
    
    8,084
    
    
    
    71,880Pension expenses
    
    
    48,974
    
    
    
    9,825
    
    
    
    58,799Other personnel expenses
    
    
    29,724
    
    
    
    3,628
    
    
    
    33,352Depreciation expenses
    
    
    8,049,957
    
    
    
    49,594
    
    
    
    8,099,551Amortization expenses
    
    
    6,995
    
    
    
    
    
    
    
    6,995




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 For the year ended December 31, 2006Cost of goods sold
    
    Operating expenses
    
    TotalNTD
    
    NTD
    
    NTDPersonnel expensesSalaries
    
    
    1,369,465
    
    
    
    205,154
    
    
    
    1,574,619Labor and health insurance
    
    
    90,656
    
    
    
    8,267
    
    
    
    98,923Pension expenses
    
    
    61,163
    
    
    
    11,292
    
    
    
    72,455Other personnel expenses
    
    
    41,019
    
    
    
    4,037
    
    
    
    45,056Depreciation expenses
    
    
    11,571,260
    
    
    
    62,119
    
    
    
    11,633,379Amortization expenses
    
    
    8,454
    
    
    
    
    
    
    
    8,454
 For the year ended December 31, 2007Cost of goods sold
    
    Operating expenses
    
    TotalNTD
    
    NTD
    
    NTDPersonnel expensesSalaries
    
    
    2,010,249
    
    
    
    232,129
    
    
    
    2,242,378Labor and health insurance
    
    
    130,576
    
    
    
    8,722
    
    
    
    139,298Pension expenses
    
    
    85,937
    
    
    
    11,220
    
    
    
    97,157Other personnel expenses
    
    
    59,739
    
    
    
    4,779
    
    
    
    64,518Depreciation expenses
    
    
    20,445,457
    
    
    
    79,472
    
    
    
    20,524,929Amortization expenses
    
    
    12,120
    
    
    
    
    
    
    
    12,120For the year ended December 31, 2007Cost of goods sold
    
    Operating expenses
    
    TotalUSD
    
    USD
    
    USDPersonnel expensesSalaries
    
    
    61,987
    
    
    
    7,158
    
    
    
    69,145Labor and health insurance
    
    
    4,026
    
    
    
    269
    
    
    
    4,295Pension expenses
    
    
    2,650
    
    
    
    346
    
    
    
    2,996Other personnel expenses
    
    
    1,842
    
    
    
    147
    
    
    
    1,989Depreciation expenses
    
    
    630,448
    
    
    
    2,451
    
    
    
    632,899Amortization expenses
    
    
    374
    
    
    
    
    
    
    
    374
 (b)
    
    As discussed in note 17(b)(vi) to the financial statements, the Company signed a
service contract with NTC, under which, the General Administrative Office of the Formosa
Group is entrusted to provide certain administrative services. For the years ended December
31, 2005, 2006 and 2007, the service expenses paid to the General Administrative Office of
the Formosa Group amounted to NT$25,631, NT$28,278 and NT$40,558, respectively.




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (c)
    
    Stock purchase planThe Board of Directors of the Company approved a resolution to adopt a Deferred
Stock Purchase Plan (the Plan). Under this Plan, the employees of the Company are
allowed to purchase the Companys shares which are being held by Hwa-Keng Investment
Corp., a corporate stockholder of the Company, following the approval thereof by the
board of directors and stockholders of Hwa-Keng Investment Corp.The Plan requires that its actual implementation shall be made within 4 weeks after the
approval of the Companys stock listing by the SFB. The purchase price is the higher of
NT$15 per share or the net book value per share of the Company at the time of the Plans
execution plus 10% premium thereof. There were 73,124 thousand Company shares being held by
Hwa-Keng Investment Corp., which were made available for purchase by the employees. On
January 6, 2006, the Company received the approval from the SFB for the listing of its
stock, and implemented the Plan on the same day. On February 9, 2006, Hwa-Keng Investment
Corp. sold 64,032,908 Company shares at NT$20.07 per share to the employees of the Company,
following the Companys implementation of the Plan.Under the International Financial Reporting Standards (IFRS), share-based payments are
normally accounted for as current expenses. If IFRS would be applied to account for the
share-based payment under this Plan, the Company would recognize compensation expense of
approximately NT$826,025 in current results of operations. The ROC SFAS No. 39 Share-Based
Payment, however, simply requires disclosing the details of the Plan in the financial
statements when the Plan is consummated before this new accounting standard takes effect on
January 1, 2008, without recognizing any expense. For this reason, the Company simply
disclosed the details of the Plan to conform with the requirement for disclosure.(d)
    
    ReclassificationsCertain accounts in the financial statements as of and for the year ended December 31,
2006, have been reclassified to conform with the presentation of the financial statements as
of and for the year ended December 31, 2007, for purposes of comparison. These
reclassifications have not materially affected the financial statements.
 (23) Segment Information
 (a)
    
    Industrial informationThe Companys main operating activities are to manufacture and to sell semiconductor
product,
which belong to a single industrial segment.




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (b)
    
    Geographic informationThe Company has no foreign operation segment; thus, no geographic information is
provided.(c)
    
    Export sales informationExport sales to geographic areas in 2005, 2006 and 2007 were summarized as follows:
 For the years ended December 31,2005
    
    
    2006
    
    
    2007% of net
    
    
    
    
    
    
    % of net
    
    
    
    
    
    
    
    
    
    
    % of netDestination Area
    
    Amount
    
    
    sales
    
    
    Amount
    
    
    sales
    
    
    Amount
    
    
    salesNTD
    
    
    
    
    
    
    NTD
    
    
    
    
    
    
    NTD
    
    
    USDEurope
    
    $
    9,180,137
    
    
    
    39.86
    
    
    
    17,609,479
    
    
    
    43.18
    
    
    
    22,880,388
    
    
    
    705,532
    
    
    
    49.89Asia
    
    
    2,347,571
    
    
    
    10.19
    
    
    
    2,695,017
    
    
    
    6.61
    
    
    
    
    
    
    
    
    
    
    
    North America
    
    
    2,203
    
    
    
    0.01
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    11,529,911
    
    
    
    50.06
    
    
    
    20,304,496
    
    
    
    49.79
    
    
    
    22,880,388
    
    
    
    705,532
    
    
    
    49.89
 (d)
    
    Major clientsThe major clients of the Company in 2005, 2006 and 2007, were as follows:
 For the years ended December 31,2005
    
    
    2006
    
    
    2007% of net
    
    
    
    
    
    
    % of net
    
    
    
    
    
    
    
    
    
    
    % of netClient
    
    Amount
    
    
    sales
    
    
    Amount
    
    
    sales
    
    
    Amount
    
    
    salesNTD
    
    
    
    
    
    
    NTD
    
    
    
    
    
    
    NTD
    
    
    USDNTC
    
    $
    11,502,292
    
    
    
    49.94
    
    
    
    20,477,214
    
    
    
    50.21
    
    
    
    22,984,160
    
    
    
    708,731
    
    
    
    50.11Qimonda AG
    
    
    
    
    
    
    
    
    
    
    13,615,363
    
    
    
    33.39
    
    
    
    22,880,388
    
    
    
    705,532
    
    
    
    49.89IFX
    
    
    9,180,137
    
    
    
    39.86
    
    
    
    3,994,116
    
    
    
    9.79
    
    
    
    
    
    
    
    
    
    
    
    Qimonda Technologies
Suzhou Co., Ltd.
    
    
    2,347,571
    
    
    
    10.19
    
    
    
    2,695,017
    
    
    
    6.61
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    23,030,000
    
    
    
    99.99
    
    
    
    40,781,710
    
    
    
    100.00
    
    
    
    45,864,548
    
    
    
    1,414,263
    
    
    
    100.00




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (24) Summary of Significant Differences between Accounting Principles Followed by the Company and
Generally 
        Accepted Accounting Principles in the United States of America
 (a.)
    
    Derivative financial instrument transactionsPrior to January 1, 2006, under ROC GAAP, there were no specific rules related to
accounting for derivative financial instruments, nor criteria for hedge accounting.
Therefore, companies had flexibility in choosing when to recognize derivative financial
instruments and when to follow hedge accounting versus fair value accounting for such
instruments. In practice, derivative contracts including foreign currency forward contracts
and interest rate swaps were accounted for as follows:
 (i)
    
    Foreign exchange forward contractsForeign exchange forward contracts, which were entered into for the purpose of
hedging the risks of exchange rate fluctuation on foreign currency receivables and
payables, were translated into New Taiwan Dollars using spot rates on the balance sheet
date. The resulting translation difference was recorded as an exchange gain or loss in the
accompanying statements of income. The difference between the forward rate and spot rate
at the contract date was amortized over the contract period.(ii)
    
    Interest rate swapAs there is no physical transfer of principal, only memo entries of notional
principals were made for interest rate swaps. For trading swaps, the differences between
the present and market values of interest receivables or payables arising thereon were
reported as unrealized gains or losses on derivative instruments. For non-trading swaps,
interest was accrued based on contract terms, with interest revenue and expense recognized
in the same period that the hedged items affect earnings.
 Effective January 1, 2006, however, the accounting for derivative financial instrument
transactions is principally equivalent to U.S. GAAP.U.S. GAAP contains comprehensive guidance as to when hedge accounting is appropriate. As
a consequence, certain derivative contracts such as foreign currency forward contracts and
interest rate swaps included in the Companys balance sheet would be recorded at the
derivatives contracts market rate as of the reporting date, resulting in a decrease in other
receivables as reported under the ROC GAAP balance sheet.




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (b.)
    
    Bonuses to employees, directors and supervisorsUnder the ROC regulations and the Companys Articles of Incorporation, a portion of
distributable earnings should be set aside as bonuses to employees, directors and
supervisors. Bonuses to directors and supervisors are always paid in cash. However, bonuses
to employees may be granted in cash or shares or both. All of these appropriations, including
share bonuses which are valued at par value of NT$10, are charged against retained earnings,
after such appropriations are formally approved by the shareholders in the following year.Under U.S. GAAP, bonuses and remuneration are generally expensed as services are
rendered. Also under U.S. GAAP, bonuses which are paid in the form of Company shares are
recorded within equity at fair market value, with a corresponding charge to earnings for the
difference between the fair value of the shares at the date of grant and the price paid by
the employee, if any.(c.)
    
    Undistributed earnings surtaxCompanies in the ROC are subject to a 10% surtax on undistributed profits earned after
December 31, 1997. If the undistributed earnings are distributed in the following year, the
10% surtax is not due. Under ROC GAAP, income tax expense is recorded in the statement of
operations only in the following year when the shareholders decide not to distribute the
earnings.Under U.S. GAAP, the 10% surtax leviable on the undistributed earnings is recorded in
the statement of income in the year when the profits were earned. The income tax expense,
including the tax effects of temporary differences, in such year is measured by using the
rate that includes this 10% surtax.(d.)
    
    Capital contributionUnder ROC GAAP, the expatriate employees payroll cost paid by a foreign joint venture
partner/shareholder is not recorded nor treated as the shareholders capital contribution in
the Company.Under U.S. GAAP, the expatriate employees payroll cost paid by a foreign joint venture
partner would be recorded as expense and treated as capital contribution in the Company.




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (e.)
    
    LeaseUnder ROC GAAP, the estimated fair value of a partially leased building used in
evaluating the lease classification described under Note 2 (h) to the financial
statements can be based on the proportionate fair value of the entire building.Under U.S. GAAP, the fair value of a partially leased building used in
determining the lease classification must be based on the specific fair value of
the leased asset. In the event that the fair value of the partially leased
building can not be determined, the lease of a partial building should be
treated as an operating lease. As a result, the leased asset described in Note 7
to the financial statements, which was treated as a capital lease under ROC GAAP
would be treated as an operating lease under U.S. GAAP.(f.)
    
    Related partyUnder ROC GAAP, the transaction with the Formosa Group as described in Note
22(b) is not treated as a related party transaction.
Under U.S. GAAP, the transaction would be considered a related party transaction.(g.)
    
    Earnings per shareUnder ROC GAAP, earnings per share are calculated based on
the weighted average number of outstanding shares. The
weighted average number of outstanding shares is
retroactively adjusted for common stock issued arising from
the distribution of stock dividends through unappropriated
earnings and capital surplus.Under U.S. GAAP, when a simple capital structure exists,
basic earnings per share are calculated using the weighted
average number of common shares outstanding. The weighted
average number of outstanding shares is not retroactively
adjusted for stock dividends.(h.)
    
    Stock purchase planUnder ROC GAAP, no compensation cost is recognized for the deferred stock
purchase plan because there are no specific accounting principles or
declaratory statutes announced by the Accounting Research and Development
Foundation (the ARDF) in the Republic of China.Under U.S. GAAP, compensation cost is recognized for the deferred stock
purchase plan based on the difference between the fair value of the shares
at the date of grant and the price paid by the employee.




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (i.)
    
    PensionUnder ROC GAAP, the Companys unrecognized actuarial gains and losses are not recognized
as pension liabilities until the accumulated unrecognized amounts exceed certain thresholds.In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158
Employers Accounting for Defined Benefit Pension and Other Post-retirement Plans, an
amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS 158 requires an employer to
recognize the overfunded or underfunded status of a defined benefit post-retirement plan as
an asset or liability in the balance sheet and to recognize changes in that funded status in
other comprehensive income in the year in which the changes occur. Retrospective application
of SFAS 158 is not permitted. The Company has adopted SFAS 158 for purposes of its US GAAP
reconciliation with effect as of December 31, 2006.(j.)
    
    Statement cash flowsUnder ROC GAAP, bonus to employees and remuneration to directors and supervisors are
considered financing activities. Also, deferred charges arising from
bank charges on syndicate loans and underwriter handling charges are
classified as investing activities.Under US GAAP, bonus to employees and remuneration to directors and supervisors are
considered operating activities. Also, bank charges on syndicate
loans and underwriter handling charges are classified as financing
activities.(k.)
    
    Employee Stock OptionsUnder ROC GAAP, share-based payment transaction can be accounted for using either the
fair value method or intrinsic value method. Entities electing to adopt the intrinsic value
method must make pro forma disclosures of net income as if the fair value based method of
accounting had been applied.Under U.S. GAAP SFAS No. 123(Revised 2004) Share-Based
Payment, employee stock options granted can only be accounted
for using the fair value based method of accounting.(l.)
    
    Stock dividends paid to stockholdersUnder ROC GAAP, stockholders stock dividends paid are recorded at par value, with a
charge to retained earnings.Under US GAAP, generally if the ratio of distribution is less than 25% of the same class
of shares outstanding, the fair value of the shares issued should be charged to retained
earnings.




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 (m.)
    
    Write-down allowances for the inventoryUnder ROC GAAP, inventory is valued at the lower of cost or market. Market is determined on
the basis of replacement cost or net realizable value. Any write-down to market value is
recognized as non-operating expenses and losses. Reversals of previous write-downs are
recognized in profit or loss in the period in which the reversal occurs.Under US GAAP, inventory is valued at the lower of cost or market, with market limited to an
amount that is not more than net realizable value nor less than net realizable value less a
normal profit margin. Any write-down to market value must be recognized as cost of goods sold.
Reversals of previous write-downs are not permitted.(n.)
    
    Classification of loans with covenantsBased on calculations performed by management, the Company did
not have a minimum current ratio of 1:1 and a maximum debt to equity
ratio of 1:1 at December 31, 2007, as required by its syndicated bank
loan agreements. On March 31, 2008 the syndicated banks agreed to
waive these two covenant requirements for 2007. Provisions of the
loan agreements specify that the syndicated bank will perform
calculations to determine if the Company is in violation of any of its
covenants upon receipt of the audited annual and semi-annual
financial statements of the Company. Consequently, if the syndicated
banks, upon obtaining the audited interim financial statements as of
and for the six-month period ended June 30, 2008, determine that the
Company is in violation of any of its covenants pursuant to its
syndicated bank loan agreement at June 30, 2008, they may notify the
Company that it is in default of its syndicated loan agreements. If
the Company is in default of its syndicated loan agreements, the
syndicated banks have the right to call the loans and demand immediate
repayment. In such case, the Company expects to fully pay its
outstanding syndicate loan with funds generated from operating cash
flows, financial assistance from its major shareholders and their
affiliates and available bank credit facilities.Under ROC GAAP, there is no specific guidance on whether or not the debtor is
deemed to be in default on the balance sheet date when the provisions of a long-term syndicate
loan agreement requires the creditor/bank to review its audited semi-annual or annual financial
statements before declaring the debtor is in default. In practice, however, such long-term loan is
classified as non-current  if the debtor (i) is able to secure from syndicate
banks formal confirmations that they do not have any information
that the debtor is in default of its financial covenant on the balance sheet date, and (ii) has not been
formally notified by syndicate banks that it is in default of any loan covenant.Under US GAAP, the current liability classification includes obligations that, by their terms, are
due on demand or will be due on demand within on year from the balance sheet date, even though liquidation may
not be expected within that period. It also includes long-term obligations that are or will be callable by the
creditor either because the debtors violation of a debt covenant at the balance sheet date makes the obligation
callable, or because the violation, if not cured within a specific grace period, will make the obligation callable.
Therefore, a callable loan shall be classified as current on the balance sheet date, unless one of the following conditions is met:
 i)
    
    The creditor has waived or subsequently lost the right to demand repayment for more than one year from the balance sheet.ii)
    
    For long-term obligations containing a grace period within which the debtor may cure the violation, it is probable
that the violation will be cured within that period, thus preventing the obligation from becoming callable.
 (o.)
    
    Uncertain tax positionsUnder ROC GAAP, uncertain tax positions are recognized based on the more likely than not
criterion although for deferred tax assets, a valuation allowance is provided if it is more likely than not that all or some portion of the asset will not be realized.Under US GAAP, recognition of uncertain tax positions prior to 2007
was based on the probable criterion, which provided a higher
threshold than the more likely than not criterion, although a valuation allowance was also provided if it was more
likely than not that all or some portion of the deferred tax asset would not be realized. In June 2006, the Financial
Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, Accounting for Uncertainty in income Taxes, an interpretation of Statement of Financial
Accounting Standards No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in tax positions. FIN 48
requires that an entity recognizes in the financial statements the impact of a tax position, if that position is more
likely than not of being sustained upon examination, based on the technical merits of the position. The
Companys accounting policy is to accrue interest and penalties related to unrecognized tax benefits, if and when required, as a component
of general and administrative expenses in the consolidated statements of income. The adoption of FIN 48 as of January 1, 2007 did not
have any effect on the Companys financial statements.(p.)
    
    Loss on impairment of long-lived assetsUnder ROC GAAP, the loss on impairment of long-lived assets is classified as non-operating expenses and losses.Under US GAAP, the loss on impairment of long-lived assets is classified as operating expense.




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
  For the years ended December 31,2005
    
    
    2006
    
    
    2007NTD
    
    
    NTD
    
    
    NTD
    
    
    USDNet incomeNet income based on ROC GAAP
    
    $
    5,929,758
    
    
    
    15,867,909
    
    
    
    926,849
    
    
    
    28,580Adjustments:a. Foreign currency forward contracts  marked to market
    
    
    (355,857
    )
    
    
    
    
    
    
    
    
    
    
    a. Interest rate swaps  marked to market
    
    
    75,943
    
    
    
    
    
    
    
    
    
    
    
    a. Cumulative effect of change in accounting principle
    
    
    
    
    
    
    317,220
    
    
    
    
    
    
    
    b. Bonuses to employees
    
    
    (298,866
    )
    
    
    (799,742
    )
    
    
    (924,934
    )
    
    
    (28,521
    )b. Remuneration to directors and supervisors
    
    
    (3,736
    )
    
    
    (9,997
    )
    
    
    (1,066
    )
    
    
    (33
    )c. 10% surtax on undistributed earnings
    
    
    (565,812
    )
    
    
    (1,428,112
    )
    
    
    (83,416
    )
    
    
    (2,572
    )c. Tax benefit arising from reversal of prior years over
accrual of 10% surtax
    
    
    533,695
    
    
    
    804,424
    
    
    
    795,203
    
    
    
    24,521d. Expatriate employees payroll cost paid by IFX
    
    
    (168,697
    )
    
    
    (166,766
    )
    
    
    (184,686
    )
    
    
    (5,695
    )d. Tax benefit on expatriate payroll cost paid by IFX
    
    
    54,827
    
    
    
    54,199
    
    
    
    60,023
    
    
    
    1,851e. Operating lease
    
    
    (4,742
    )
    
    
    (8,930
    )
    
    
    (8,650
    )
    
    
    (267
    )h. Deferred Stock Purchase Plan
    
    
    
    
    
    
    (826,025
    )
    
    
    
    
    
    
    k. Employee stock options
    
    
    
    
    
    
    
    
    
    
    (106,250
    )
    
    
    (3,276
    )Net decrease in net income
    
    
    (733,245
    )
    
    
    (2,063,729
    )
    
    
    (453,776
    )
    
    
    (13,992
    )Net income based on U.S. GAAP
    
    $
    5,196,513
    
    
    
    13,804,180
    
    
    
    473,073
    
    
    
    14,588Earnings per share
    
    $
    2.08
    
    
    
    4.44
    
    
    
    0.15
    
    
    
    0.004Stockholders equityStockholders equity based on ROC GAAP
    
    $
    47,236,284
    
    
    
    79,137,540
    
    
    
    71,877,541
    
    
    
    2,216,390Adjustments:a. Foreign currency forward contracts  marked to market
    
    
    (355,857
    )
    
    
    
    
    
    
    
    
    
    
    a. Interest rate swaps  marked to market
    
    
    38,637
    
    
    
    
    
    
    
    
    
    
    
    b. Bonuses to employees
    
    
    (298,866
    )
    
    
    (799,742
    )
    
    
    (48,387
    )
    
    
    (1,492
    )b. Remuneration to directors and supervisors
    
    
    (3,736
    )
    
    
    (9,997
    )
    
    
    (1,066
    )
    
    
    (33
    )c. 10% surtax on undistributed earnings
    
    
    (565,812
    )
    
    
    (1,428,112
    )
    
    
    (83,416
    )
    
    
    (2,572
    )c. Tax benefit arising from reversal of prior years over
accrual of 10% surtax
    
    
    533,694
    
    
    
    772,307
    
    
    
    139,399
    
    
    
    4,298d. Expatriate employees payroll cost paid by IFX
    
    
    (324,773
    )
    
    
    (491,539
    )
    
    
    (676,225
    )
    
    
    (20,852
    )d.
Contributed capital arising from employees payroll paid by IFX
    
    
    219,221
    
    
    
    331,788
    
    
    
    456,451
    
    
    
    14,075d Tax benefit on expatriate payroll cost paid by IFX
    
    
    105,553
    
    
    
    159,751
    
    
    
    219,774
    
    
    
    6,777e. Operating lease
    
    
    (4,742
    )
    
    
    (13,672
    )
    
    
    (22,322
    )
    
    
    (688
    )i. Other comprehensive income  pension
    
    
    
    
    
    
    (41,800
    )
    
    
    8,591
    
    
    
    265i Tax benefit on pension
    
    
    
    
    
    
    
    
    
    
    (2,792
    )
    
    
    (86
    )Net decrease in stockholders equity
    
    
    (656,681
    )
    
    
    (1,521,016
    )
    
    
    (9,993
    )
    
    
    (308
    )Stockholders equity based on U.S. GAAP
    
    $
    46,579,603
    
    
    
    77,616,524
    
    
    
    71,867,548
    
    
    
    2,216,082Changes in stockholders equity based on U.S. GAAPBalance, beginning of period
    
    $
    41,377,184
    
    
    
    46,579,603
    
    
    
    77,616,524
    
    
    
    2,393,355Issuance of common stock
    
    
    
    
    
    
    19,769,176
    
    
    
    
    
    
    
    Cash dividend to stockholders
    
    
    (124,883
    )
    
    
    (3,433,227
    )
    
    
    (7,777,385
    )
    
    
    (239,821
    )Bonus shares issued at a premium to the employees
    
    
    16,919
    
    
    
    
    
    
    
    1,276,824
    
    
    
    39,372Contributed
capital (net of tax of NT$54,827, NT$54,199 and NT$60,023 in 2005,
2006 and 2007, respectively) arising from employees payroll paid by
IFX
    
    
    113,870
    
    
    
    112,567
    
    
    
    124,663
    
    
    
    3,844Deferred Stock Purchase Plan
    
    
    
    
    
    
    826,025
    
    
    
    
    
    
    
    Employee stock options
    
    
    
    
    
    
    
    
    
    
    106,250
    
    
    
    3,276Other comprehensive income  pension
    
    
    
    
    
    
    (41,800
    )
    
    
    47,599
    
    
    
    1,468Net income for the year
    
    
    5,196,513
    
    
    
    13,804,180
    
    
    
    473,073
    
    
    
    14,588Balance, end of period
    
    $
    46,579,603
    
    
    
    77,616,524
    
    
    
    71,867,548
    
    
    
    2,216,082




---



##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
  December 31,2006
    
    
    2007NTD
    
    
    NTD
    
    
    USDCurrent AssetsROC GAAP
    
    $
    36,470,375
    
    
    
    19,530,399
    
    
    
    602,232U.S. GAAP adjustmentse. Current portion of lease receivables
    
    
    (4,912
    )
    
    
    (5,209
    )
    
    
    (161
    )c. Deferred tax assets  current, net
    
    
    28,351
    
    
    
    (143,007
    )
    
    
    (4,410
    )U.S. GAAP
    
    $
    36,493,814
    
    
    
    19,382,183
    
    
    
    597,661Property, plant and equipmentROC GAAP
    
    $
    100,410,476
    
    
    
    123,869,355
    
    
    
    3,819,592U.S. GAAP adjustmentse. Building and structure
    
    
    281,538
    
    
    
    281,538
    
    
    
    8,681e. Other equipment
    
    
    75,555
    
    
    
    75,555
    
    
    
    2,330e. Accumulated depreciation
    
    
    (31,977
    )
    
    
    (45,537
    )
    
    
    (1,404
    )U.S. GAAP
    
    $
    100,735,592
    
    
    
    124,180,911
    
    
    
    3,829,199Other AssetsROC GAAP
    
    $
    802,349
    
    
    
    736,049
    
    
    
    22,697U.S. GAAP adjustmentsc. Deferred tax assets  non-current, net
    
    
    29,900
    
    
    
    250,830
    
    
    
    7,735e. Lease receivables  long term
    
    
    (333,876
    )
    
    
    (328,668
    )
    
    
    (10,135
    )U.S. GAAP
    
    $
    498,373
    
    
    
    658,211
    
    
    
    20,297Current LiabilitiesROC GAAP
    
    $
    32,974,822
    
    
    
    19,732,603
    
    
    
    608,467U.S. GAAP adjustmentsb. Employees bonus
    
    
    799,742
    
    
    
    48,387
    
    
    
    1,493b. Remuneration to directors and supervisors
    
    
    9,997
    
    
    
    1,066
    
    
    
    33c. Deferred tax liabilities  current, net
    
    
    
    
    
    
    54,633
    
    
    
    1,685c. 10% surtax on undistributed earnings
    
    
    714,056
    
    
    
    
    
    
    
    n. Classification of syndicate loans for
which loan covenants were not complied
    
    
    
    
    
    
    32,358,022
    
    
    
    997,781U.S. GAAP
    
    $
    34,498,617
    
    
    
    52,194,711
    
    
    
    1,609,459Long-term LiabilitiesROC GAAP
    
    $
    25,519,586
    
    
    
    52,481,739
    
    
    
    1,618,308U.S. GAAP adjustmentsn. Classification of syndicate loans for
which loan covenants were not complied
    
    
    
    
    
    
    (32,358,022
    )
    
    
    (997,781
    )U.S. GAAP
    
    $
    25,519,586
    
    
    
    20,123,717
    
    
    
    620,527Other LiabilitiesROC GAAP
    
    $
    51,252
    
    
    
    43,920
    
    
    
    1,353U.S. GAAP adjustmentsi. Accrued pension liabilities
    
    
    41,800
    
    
    
    (8,591
    )
    
    
    (264
    )U.S. GAAP
    
    $
    93,052
    
    
    
    35,329
    
    
    
    1,089




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##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS
 (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
  
 (1)
    Valuation allowance for deferred income tax assets
 (i)
    
    The change in valuation allowance for deferred tax assets as follows:
 NTD
    
    USDBalance as of January 31, 2007
    
    
    7,182,330
    
    
    
    221,472Additions
    
    
    5,060,763
    
    
    
    156,052Balance as of December 31, 2007
    
    
    12,243,093
    
    
    
    377,524
 The Company recognized an additional valuation allowance in 2007 as a result
of increased investment tax credits that will expire if unused during 2008 to 2011, the
Companys five-year tax holidays expiring during 2009 to 2010, and forecasted
taxable results through 2009.
 (ii)
    
    The aggregate amount and per share effects of the tax holiday




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##### 



INOTERA MEMORIES, INC.
 NOTES TO FINANCIAL STATEMENTS (All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)
 For the years ended December 31,2006
    
    2007NTD
    
    NTD
    
    USDThe aggregate amount of the tax holiday
    
    
    15,870,490
    
    
    
    829,413
    
    
    
    25,575Per share effect of the tax holiday
    
    
    5.10
    
    
    
    0.26
    
    
    
    0.01
 (iii)
    
    The valuation allowance for deferred tax assets are allocated on pro-rata basis between gross current and non-current deferred
tax assets as follows:
 December
31, 2007NTD
    
    

USDValuation allowance for deferred tax assets  current
    
    
    397,626
    
    
    
    12,261Valuation allowance for deferred tax assets  non-current
    
    
    11,845,467
    
    
    
    365,263Total
    
    
    12,243,093
    
    
    
    377,524