##### 



Exhibit 99(i)
 
  REPORT
    OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




---



##### 



INOTERA
    MEMORIES, INC.
    Balance Sheets
    December 31, 2005 and 2006
    (Expressed in thousands of New Taiwan Dollars and
    U.S. Dollars)
  2005


2006NTD


NTD


USD(Unaudited)AssetsCurrent assets:Cash and cash equivalents (notes 4 and 17)

$
9,822,568



21,704,854



665,895Current portion of lease receivables (note 7)


6,690



4,912



151Accounts receivable-related parties (notes 17 and 18)


5,050,277



8,332,816



255,647Other receivables (note 7)


54,110



95,125



2,918Inventories, net (note 6)


3,485,585



3,927,461



120,493Prepayments and other current assets


616,693



671,298



20,595Deferred income tax assets-current, net (note 14)


36,405



79,690



2,445Financial assets reported at fair value through profit or loss
    (notes 5 and 17)


1,268,011



1,654,219



50,751Total current assets


20,340,339



36,470,375



1,118,895Property, plant and equipment (notes 7, 8, 9, 12, 18 and
    19):Land


2,801,467



2,801,467



85,948Buildings


2,424,571



2,523,511



77,420Machinery and equipment


59,669,447



68,124,934



2,090,042Vehicles


2,913



4,915



151Leased assets


135,996



135,996



4,172Miscellaneous equipment


6,465,676



6,942,453



212,99171,500,070



80,533,276



2,470,724Less: accumulated depreciation


(10,130,631
)


(21,743,083
)


(667,068
)Construction in progress


4,770,603



41,597,511



1,276,193Prepayment on land purchase


22,772



22,772



699Net property, plant and equipment


66,162,814



100,410,476



3,080,548Other assets:Refundable deposits (note 17)


28,544



79,219



2,430Deferred charges


134,846



118,630



3,640Lease receivables-long-term (note 7)


338,788



333,876



10,243Deferred income tax assets-non-current, net (note 14)


352,758



270,624



8,303Total other assets


854,936



802,349



24,616Total Assets

$
87,358,089



137,683,200



4,224,059




---



##### 



INOTERA
    MEMORIES, INC.
    Balance Sheets  (Continued)
    December 31, 2005 and 2006
    (Expressed in thousands of New Taiwan Dollars and
    U.S. Dollars)
  2005


2006NTD


NTD


USD(Unaudited)Liabilities and Stockholders EquityCurrent liabilities:Short-term loans (notes 10 and 17)

$
2,323,300







Accounts payable (note 17)


4,010,066



21,110,779



647,669Accounts payable-related parties (notes 17 and 18)


55,212



405,917



12,453Income tax payable


124,302



133,571



4,098Accrued expenses (note 13)


855,816



941,477



28,884Other payables-related parties (notes 9 and 18)


86,253



65,539



2,011Current portion of long-term loans (notes 12 and 17)


6,431,636



10,299,107



315,972Other current liabilities


14,014



14,888



458Current portion of lease payables (note 9)


3,390



3,544



109Total current liabilities


13,903,989



32,974,822



1,011,654Long-term liabilities:Bonds payable (notes 11 and 17)






6,000,000



184,077Long-term loans (notes 12 and 17)


26,034,564



19,392,164



594,943Lease payables-long-term (note 9)


130,967



127,422



3,909Total long-term liabilities


26,165,531



25,519,586



782,929Other liabilities:Accrued pension liabilities (note 13)


50,594



46,746



1,434Guarantee deposits


1,691



4,506



138Total other liabilities


52,285



51,252



1,572Total liabilities


40,121,805



58,545,660



1,796,155Stockholders equity (note 15):Common stock


25,109,540



31,109,540



954,427Capital surplus


15,548,660



29,317,836



899,458Legal reserve


91,689



684,665



21,005Special reserve


542,605



542,605



16,647Unappropriated earnings


5,943,790



17,482,894



536,367Total stockholders equity


47,236,284



79,137,540



2,427,904Commitments and contingencies (note 20)Total Liabilities and Stockholders Equity

$
87,358,089



137,683,200



4,224,059




---



##### 



INOTERA
    MEMORIES, INC.
    Statements of Income
    For the years ended December 31, 2005 and 2006
    (Expressed in thousands of New Taiwan Dollars and U.S. Dollars,
    except for
    earnings per share)
  2005


2006NTD


NTD


USD(Unaudited)Operating revenuesSales revenue

$
23,044,929



40,866,245



1,253,758Sales returns


(3,133
)


(7,049
)


(216
)Sales allowances


(9,593
)


(77,486
)


(2,377
)Net operating revenues (note 18)


23,032,203



40,781,710



1,251,165Cost of goods sold (notes 18 and 23)


(16,350,746
)


(24,316,647
)


(746,024
)Gross profit


6,681,457



16,465,063



505,141Operating expenses:Administrative and general expenses (notes 9, 18 and 23)


(283,853
)


(321,675
)


(9,869
)Research and development expenses (note 23)


(658,134
)


(254,923
)


(7,821
)Total operating expenses


(941,987
)


(576,598
)


(17,690
)Operating income


5,739,470



15,888,465



487,451Non-operating income and gains:Interest income (notes 5 and 7)


309,821



981,826



30,122Gain on disposal of short-term investments


4,532







Foreign exchange gain, net


676,797



796,785



24,445Valuation gain on financial instruments, net (note 5)






450,596



13,824Others (note 7)


306,754



114,515



3,513Total non-operating income and gains


1,297,904



2,343,722



71,904Non-operating expenses and losses:Interest expenses (excluding capitalized interest of $395,501
    and $121,388 in 2005 and 2006, respectively) (notes 5 and 9)


(760,618
)


(1,655,085
)


(50,777
)Loss on obsolescence of inventories (note 6)






(18,849
)


(578
)Impairment loss on idle assets (note 8)






(32,107
)


(985
)Others (note 18)


(9,637
)


(33,823
)


(1,038
)Total non-operating expenses and losses


(770,255
)


(1,739,864
)


(53,378
)Income before income tax


6,267,119



16,492,323



505,977Income tax expense (note 14)


(337,361
)


(386,499
)


(11,858
)Income before cumulative effect of change inaccounting principle


5,929,758



16,105,824



494,119Cumulative effect of change in accounting principle (net of
    income tax benefit of $79,305) (note 3)






(237,915
)


(7,299
)Net income

$
5,929,758



15,867,909



486,820Basic earnings per share (note 16)Before taxIncome before cumulative effect of change in accounting principle

$
2.50



5.64



0.17Cumulative effect of change in accounting principle






(0.11
)


(0.00
)Net income

$
2.50



5.53



0.17After taxIncome before cumulative effect of change in accounting principle

$
2.36



5.51



0.17Cumulative effect of change in accounting principle






(0.08
)


(0.00
)Net income

$
2.36



5.43



0.17




---



##### 



INOTERA
    MEMORIES, INC.
    Statements of Changes in Stockholders Equity
    For the years ended December 31, 2005 and 2006
    (Expressed in thousands of New Taiwan Dollars and
    U.S. Dollars)
  Retained earningsCommon


Capital


Legal


Special


Unappropriatedstock


surplus


reserve


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:Appropriation for 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



79,137,540Balance as of January 1, 2006 (Unaudited)


USD



770,350



477,026



2,813



16,647



182,353



1,449,189Increase in capital






184,077



422,432















606,509Appropriation and distribution:Appropriation for legal reserve














18,192







(18,192
)


Remuneration to directors and supervisors






















(115
)


(115
)Bonus to employees






















(9,169
)


(9,169
)Cash dividends to stockholders






















(105,330
)


(105,330
)Net income for the year ended December 31, 2006






















486,820



486,820Balance as of December 31, 2006 (Unaudited)


USD



954,427



899,458



21,005



16,647



536,367



2,427,904




---



##### 



INOTERA
    MEMORIES, INC.
    Statements of Cash Flows
    For the years ended December 31, 2005 and 2006
    (Expressed in thousands of New Taiwan Dollars and
    U.S. Dollars)
  2005


2006NTD


NTD


USD(Unaudited)Cash flows from operating activities:Net income

$
5,929,758



15,867,909



486,820Depreciation


8,099,551



11,633,379



356,907Amortization of deferred charges


6,995



8,454



259Amortization of deferred charges  bank loan
    syndication fees


29,170



29,012



890Losses on obsolescence of inventories






18,849



578Losses on disposal of property, plant and equipment






1,590



49Impairment loss on idle assets






32,107



985Unrealized foreign currency exchange gain, net


(280,665
)


(260,716
)


(7,999
)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
)


(616
)Realized interest expense from capital lease


1,513



5,920



182Cumulative effect of change in accounting principle for
    financial assets






237,915



7,299Valuation gain on financial instruments, net






(450,596
)


(13,824
)Increase in accounts receivable  related parties


(2,554,838
)


(3,310,868
)


(101,576
)Net cash paid on purchase of financial assets reported at fair
    value through profit or loss






(252,832
)


(7,757
)Decrease (increase) in other receivables


106,119



(44,427
)


(1,363
)Increase in inventories


(1,358,055
)


(460,725
)


(14,135
)Cash received from lease receivable


10,291



26,756



821Decrease (increase) in prepayments and other current assets


395,049



(53,855
)


(1,652
)Increase (decrease) in accounts payable


804,060



(266,255
)


(8,169
)(Decrease) increase in accounts payable  related
    parties


(71,320
)


350,705



10,759Increase in income tax payable


124,357



9,269



284Increase in accrued expenses


407,478



85,494



2,623Decrease in other payables  related parties


(198,268
)


(20,714
)


(635
)Cash paid on lease payables


(3,152
)


(9,311
)


(286
)Increase in other current liabilities


5,255



874



27Increase (decrease) in accrued pension liabilities


19,839



(3,848
)


(118
)Decrease in deferred income tax assets, net


185,198



118,154



3,625Net cash provided by operating activities


11,355,819



23,272,174



713,978Cash flows from investing activities:Decrease in short-term investments


4,532







Proceeds from disposal of property, plant and equipment






600



18Purchases of property, plant and equipment


(28,313,919
)


(28,446,514
)


(872,726
)Increase in deferred charges


(52,728
)


(22,000
)


(675
)Decrease (increase) in refundable deposits


18,117



(50,675
)


(1,555
)Net cash used in investing activities


(28,343,998
)


(28,518,589
)


(874,938
)Cash flows from financing activities:Decrease in short-term loans


(158,200
)


(2,323,300
)


(71,278
)Proceeds from long-term loans


17,285,096



3,850,000



118,116Repayment of long-term loans






(6,403,123
)


(196,445
)Increase in bonds payable






6,000,000



184,077Increase in capital






19,769,176



606,509Increase in guarantee deposits


1,114



2,815



86Cash dividend to stockholders


(124,611
)


(3,433,498
)


(105,338
)Bonus to employees


(8,057
)


(298,866
)


(9,169
)Remuneration to directors and supervisors


(2,686
)


(3,736
)


(115
)Net cash provided by financing activities


16,992,656



17,159,468



526,443Effect of foreign currency exchange translation


(162,098
)


(30,767
)


(30,767
)(Decrease) increase in cash and cash equivalents


(157,621
)


11,882,286



364,543Cash and cash equivalents at beginning of year


9,980,189



9,822,568



301,352Cash and cash equivalents at end of year

$
9,822,568



21,704,854



665,895Supplemental cash flow information:Income tax paid

$
27,860



259,071



7,948Interest paid (excluding capitalized interest)

$
972,201



1,749,036



53,660Investing activities affecting both cash and non-cash
    items:Accquisition of property, plant, and equipment

$
22,928,454



45,915,339



1,408,662Decrease (increase) in payables to equipment suppliers


5,385,465



(17,468,825
)


(535,936
)Cash paid

$
28,313,919



28,446,514



872,726Non-cash investing and financing activities:Current portion of long-term loans

$
6,431,636



10,299,107



315,972




---



##### 



INOTERA
    MEMORIES, INC.
    Notes to Financial Statements
    December 31, 2005 and 2006
    (All amounts are expressed in thousands of New Taiwan
    Dollars,
    except for per share information or unless otherwise
    specified)
  (1) Organization
    and Principal Activities
      (2) Summary
    of Significant Accounting Policies




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
                      (i)
    Foreign exchange forward contracts    (ii)
    Interest rate swaps




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
                             (i)
    the lease transfers ownership of the leased assets to the lessee
    by the end of the lease term;    (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;(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.      (ii)
    no important uncertainties surround the amount of unreimbursable
    costs yet to be incurred by the lessor under the lease.




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
          (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.        (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.      (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




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
            (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 net


Decrease inNature of the change in accounting principle

income


earnings per shareAccounting for financial instruments

$
27,600



0.01     (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 2006. As of January 1, 2006, the cumulative
    effect of the change in accounting principle amounted to
    NT$237,915 (net of tax).




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
   (4) Cash
    and Cash Equivalents
    2005.12.31


2006.12.31Cash on hand  petty cash

$
160



230Cash in bank  checking account


5,346



19,386Cash in bank  demand deposit account


5,143



287Cash in bank  foreign currency account


546,761



1,523,104Time deposit  new Taiwan dollars


9,265,158



500,000Time deposit  foreign currency






3,944,973Cash equivalents  commercial paper






360,385Cash equivalents  government and corporate bonds
    under agreement to repurchase






15,356,489Total

$
9,822,568



21,704,854     (5) Financial
    Assets Reported at Fair Value through Profit or Loss
    2005.12.31


2006.12.31Financial assets reported at fair value through profit of lossInterest rate swaps

$




52,255Foreign exchange forward contracts


1,268,011



941,480Mutual bond fund






660,484$
1,268,011



1,654,219   (a)
    The Company entered into seventeen foreign exchange forward
    contracts with Standard Chartered Bank and three other banks to
    hedge the risk of foreign currency exchange rate fluctuations
    for foreign long-term loans. The foreign exchange forward
    contracts with notional amounts aggregating to US$130,000
    thousand matured in 2006. The maturity of these forward
    contracts resulted in net cash settlement and gain on disposal
    of financial assets of NT$403,822 and NT$217,335, respectively.
    As of December 31, 2005 and 2006, the notional amounts of
    the remaining foreign exchange forward contracts aggregated to
    US$650,000 thousand and US$520,000 thousand, respectively, with
    net fair value of NT$912,154 and NT$941,480, respectively. As of
    December 31, 2006, the
    mark-to-market
    revaluation of foreign exchange forward contracts resulted in
    unrealized gain on financial assets of NT$215,813. 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 four interest rate swap agreements
    (IRS) with Taipei Fubon Bank and two other banks to hedge the
    risk from fluctuations of interest rates for foreign long-term
    loans, which were obtained by the Company in 2004. As of
    December 31, 2005 and 2006, the notional amounts of the
    outstanding interest rate swap agreements amounted to US$130,000
    thousand and US$92,857 thousand, respectively. The net interest
    arising from these interest hedging activities resulted in net
    interest expense of NT$12,822 in 2005 and interest income of
    NT$24,488 in 2006. The net interest receivable as of
    December 31, 2005 and 2006, amounted to NT$1,348 and
    NT$13,118, respectively. As of December 31, 2005 and 2006,
    the




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
  net fair value of IRS amounted to NT$38,637 and NT$52,255,
    respectively. Also, the
    mark-to-market
    revaluation of IRS resulted in unrealized gain on financial
    assets of NT$13,618. 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. As of December 31, 2006, the fair
    value of the mutual bond fund amounted to NT$660,484. The
    mark-to-market
    revaluation of the mutual bond fund resulted in unrealized gain
    on financial assets of NT$984. If the Company had continued
    adopting the old accounting treatment for mutual bond fund which
    was effective prior to January 1, 2006, the mutual bond
    fund would have amounted to NT$659,500, and net income would
    have increased by NT$738 (after tax) for the year ended
    December 31, 2006.  (d)
    In December 2006, the maturities of cross currency swaps
    resulted in realized gain on financial assets of NT$2,846.  (e)
    In accordance with SFAS No. 34, the net foreign
    exchange forward receivable amounting to NT$1,268,011 was
    reclassified to financial assets reported at fair value through
    profit or loss as of December 31, 2005.  (6) Inventories,
    net
    2005.12.31


2006.12.31Raw materials

$
557,814



736,290Supplies


577,199



579,913Work in process


2,341,178



2,624,819Finished goods


9,394



5,288Total


3,485,585



3,946,310Less: allowance for inventory losses






(18,849
)Total

$
3,485,585



3,927,461     (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 since the inception date is at least 90% of the
    market value of the leased assets. The land is treated as an
    operating lease. The monthly rents for the lease of building and
    land were NT$2,058 and NT$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. For the years ended December 31,
    2005 and 2006, NT$10,133 and NT$20,066, respectively, was
    recognized as interest income (classified under non-operating
    income and gains  interest income).




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
     2005.12.31


2006.12.31Current


Non-current


Current


Non-currentGross lease receivables

$
26,756



691,540



24,698



666,842Less: Unrealized interest income


(20,066
)


(352,752
)


(19,786
)


(332,966
)Net lease receivables

$
6,690



338,788



4,912



333,876   (c)
    For the years ended December 31, 2005 and 2006, the rent
    revenues (classified under non-operating income and
    gains  others) from the operating lease of land were
    NT$1,859 and NT$3,719, respectively.  (d)
    As of December 31, 2005 and 2006, the uncollected rent
    revenues (classified under other receivables) were NT$310 and
    NT$310, respectively.  (e)
    Future gross lease receivables for leases classified as capital
    lease or operating lease as of December 31, 2006, were as
    follows:  2006.12.31Duration

Capital lease


Operating lease2007.1.1-2007.12.31

$
24,698



3,7192008.1.1-2008.12.31


24,698



3,7192009.1.1-2009.12.31


24,698



3,7192010.1.1-2010.12.31


24,698



3,7192011.1.1-2034.12.31


592,748



89,244Total

$
691,540



104,120   (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.  (b)
    The property, plant and equipment are pledged to secure bank
    loans as of December 31, 2005 and 2006, as described in
    note 12.  (c)
    For the years ended December 31, 2005, and 2006, 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 NT$0 and NT$32,107, respectively, was
    recognized as impairment loss on idle asset.  (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 since the inception date is at least 90% of the
    market value of the leased assets and (b) the lease term is
    equal to 75% or more of the total estimated economic life of the
    leased assets. The land is treated as an operating lease. The
    monthly rents for the leased building and land were NT$775 and
    NT$357, respectively. Total interest expenses of NT$1,513 and
    NT$5,920 were recognized for the years ended December 31,
    2005 and 2006, respectively.




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
   (b)
    The total present value of lease payables for 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, 2005 and 2006, the details of these
    lease payables were as follows:  2005.12.31


2006.12.31Lease payables

$
134,357



130,966Less: Current portion of lease payables


(3,390
)


(3,544
)Lease payables  long-term

$
130,967



127,422   (d)
    For the years ended December 31, 2005 and 2006, the lease
    expenses for the operating lease of the land (classified under
    administrative and general expenses) were NT$2,141 and NT$4,282,
    respectively, which were fully paid.  (e)
    As of December 31, 2005 and 2006, the unpaid rent expenses
    (classified under other payables  related parties)
    were NT$0 and NT$357, respectively.  (f)
    Future lease payments (excluding interest component) classified
    as capital lease or operating lease as of December 31,
    2006, were as follows:  2006.12.31Duration

Capital lease


Operating lease2007.1.1-2007.12.31

$
3,544



4,2822008.1.1-2008.12.31


3,706



4,2822009.1.1-2009.12.31


3,874



4,2822010.1.1-2010.12.31


4,050



4,2822011.1.1-2029.12.31


115,792



77,786Total

$
130,966



94,914   (10) Short-term
    Loans
    2005.12.31


2006.12.31Unsecured borrowings

$
2,323,300



     (11) Bonds
    Payable
    Coupon Rate andPrincipal

Par Value

Duration

Interest Payment

Repayment TermNT$6,000,000

NT$1,000

2006.12.19 - 2011.12.19

Interest payable
    annually at 2.2%

Repayable in 3 annual installments December 2009, 2010 and 2011:
    33%, 33%, and 34% of principal, respectively.




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
    Year

Amount2009

$
1,980,0002010


1,980,0002011


2,040,000Total

$
6,000,000   (12) Long-term
    Loans
    2005.12.31Bank

Repayment period

Nature

Interest rate

2005.12.31Taiwan Cooperative Bank (the managing bank)

(1) February 2, 2006- February 2, 2009

Machinery loan

4.6214%-4.7688%

$
8,541,000Mega International Commercial Bank(the managing bank)

(2) November 15, 2006- November 15, 2009

Machinery loan

4.6512%-5.3488%


22,075,200Mega International Commercial Bank (the managing bank)

(2) November 15, 2006- November 15, 2009

Machinery loan

2.3362%-2.4260%


1,850,00032,466,200Less: Current portion oflong-term loans








(6,431,636
)$
26,034,564   2006.12.31Bank

Repayment period

Nature

Interest rate

2006.12.31Taiwan Cooperative Bank (the managing bank)

(1) February 2, 2006- February 2, 2009

Machinery loan

4.6214%-6.3352%

$
6,030,260Mega International Commercial Bank (the managing bank)

(2) November 15, 2006- November 15, 2009

Machinery loan

5.3488%-6.2090%


18,775,296Mega International Commercial Bank (the managing bank)

(2) November 15, 2006- November 15, 2009

Machinery loan

2.4260%-2.6184%


4,885,71529,691,271Less: Current portion oflong-term loans








(10,299,107
)$
19,392,164   (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 Company had
    utilized US$260,000 thousand from this loan facility for the
    period from February 2 to August 2, 2004. The details of
    this loan are as follows:  (a)
    Credit line: US$260,000 thousand.  (b)
    Interest rate: USD
    3-month or
    6-month
    London Inter-bank Offered Rate (LIBOR) plus margin.




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
   (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 machinery. As of
    December 31, 2005 and 2006, the net book value of the
    pledged assets amounted to NT$9,625,951 and NT$7,657,438,
    respectively.  (f)
    The Company has issued a promissory note for the syndicated loan.  (g)
    As of December 31, 2006, the Company repaid US$75,000
    thousand of this syndicated loan.  (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, 2006, the actual
    number of banks had increased to 31). The Company applied for
    drawings of US$672,000 thousand and NT$5,700,000 for the period
    November 15, 2004, to December 31, 2006.    (a)
    Credit line: US$672,000 thousand and NT$5,700,000.  (b)
    Interest rate for Tranche A: USD
    3-month or
    6-month
    London Inter-bank Offered Rate (LIBOR) plus margin.  (c)
    Interest rate for Tranche B: The
    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, 2005 and 2006, the net book value of the
    pledged assets amounted to NT$17,949,184 and NT$24,272,894,
    respectively.  (g)
    The Company has issued a promissory note for this syndicated
    loan.(h)
    As of December 31, 2006, the Company repaid US$96,000
    thousand and NT$814,285 of this syndicated loan.    (13) Accrued
    Pension Liabilities
  (a)
    The pension information for the years ended December 31,
    2005 and 2006, was as follows:  2005


2006Balance of the retirement fund

$
29,192



44,428Periodic pension costsDefined benefit plan cost


35,317



11,372Defined contribution plan cost


23,482



61,083Accrued pension liabilities-defined benefit plan


50,594



46,746Accrued expenses-defined contribution plan


12,265



20,099




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
  (b)
    The following table sets forth the details of the reconciliation
    of funded status to accrued pension liability on
    December 31, 2005 and 2006:  2005


2006Benefit obligation:Vested benefit obligation

$
(4,227
)


(3,504
)Non-vested benefit obligation


(54,372
)


(61,546
)Accumulated benefit obligation


(58,599
)


(65,050
)Projected compensation increase


(65,607
)


(70,459
)Projected benefit obligation


(124,206
)


(135,509
)Fair value of plan assets


31,115



46,963Funded status


(93,091
)


(88,546
)Unamortized pension gain or losses


42,497



41,800Accrued pension liability

$
(50,594
)


(46,746
)   (c)
    As of December 31, 2005 and 2006, the actuarial present
    value of the vested benefits for the Companys employees in
    accordance with the retirement benefit plan was approximately
    NT$4,609 and NT$4,112, respectively.  (d)
    Major assumptions used to determine the pension plan funded
    status for the years ended December 31, 2005, and 2006,
    were as follows:  2005


2006Discount rate


3.00%



2.75%Rate of increase in compensation


3.00%



3.00%Expected long-term rate of return on plan assets


3.00%



2.75%   (14) Income
    Tax
  (a)
    The Companys earnings are subject to income tax at a
    statutory rate of 25%. For the years ended December 31,
    2005, and 2006, the components of income tax expense were as
    follows:  2005


2006Income tax expense  current

$
152,162



268,345Income tax expense  deferred


185,199



118,154Income tax expense

$
337,361



386,499




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
  (b)
    The details of deferred income tax expenses for the years ended
    December 31, 2005, and 2006, were as follows:  2005


2006Investment tax credit

$
(2,917,497
)


(963,916
)Difference in depreciation expense for tax purposes and
    financial accounting purposes


1,261



1,260Allowance for inventory devaluation






(4,712
)Provision for pension expense in excess of tax limit


(4,634
)


962Realized accrued operating expenses


2,138



14,308Impairment loss on idle asset






(8,027
)Utilized loss carryforwards


47,414



Allowance for valuation of deferred tax assets


3,123,694



1,220,105Decrease in unrealized foreign exchange gain


(67,177
)


(152,808
)Increase in valuation gain on financial instruments, net






10,982Deferred income tax expense

$
185,199



118,154   (c)
    The income tax calculated on pretax financial income at a
    statutory income tax rate of 25% was reconciled with the actual
    income tax as reported in the accompanying financial statements
    for the years ended December 31, 2005, and 2006, as follows:  2005


2006Income tax calculated based on financial pretax income

$
1,566,770



4,123,070Tax effect of tax-free income from income tax holiday


(1,269,720
)


(3,967,622
)Increase in income tax credit for purchasing machinery and
    equipment


(3,353,697
)


(694,779
)Differences between estimated and actual income tax expense
    filing


263,056



(453,270
)Tax-exempt securities


(985
)


(5,147
)Increase in valuation allowance for deferred income tax assets


3,123,694



1,220,10510% surtax on undistributed earnings


7,862



160,095Income tax levied separately


381



4,034Permanent differences






13Income tax expense

$
337,361



386,499




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
  (d)
    Deferred income tax assets and tax liabilities as of
    December 31, 2005 and 2006, were as follows:  2005.12.31


2006.12.31Current:Deferred income tax assets

$
66,267



116,396Deferred income tax liabilities


(29,862
)


(36,706
)Current deferred income tax liablilities  current, net

$
36,405



79,690Non-current:Deferred income tax assets

$
7,194,031



8,086,962Valuation allowance for deferred income tax assets


(6,596,233
)


(7,816,338
)Deferred income tax assets  non-current, net


597,798



270,624Deferred income tax liabilities


(245,040
)


Non-current deferred income tax assets, net

$
352,758



270,624Total deferred income tax assets

$
7,260,298



8,203,358Total deferred income tax liabilities

$
274,902



36,706Total valuation allowance for deferred income tax assets

$
6,596,233



7,816,338   (e)
    As of December 31, 2005 and 2006, the components of
    deferred income tax assets or liabilities were as follows:  2005.12.31


2006.12.31Effects on





Effects onAmount


income tax


Amount


income taxDeferred income tax assets:Unused investment tax credit

$
7,023,377



7,023,377



7,987,293



7,987,293Difference in depreciation expense for tax purposes and
    financial accounting purposes


8,030



2,007



2,986



747Allowance for inventory devaluation










18,849



4,712Provision for pension expense in excess of tax limit


50,594



12,649



46,746



11,687Unrealized foreign exchange loss


818,944



204,736



433,465



108,366Cumulative effect of change in accounting principle on financial
    assets










317,220



79,305Allowance for impairment loss on idle










32,107



8,027Unrealized operating expenses


70,114



17,529



12,886



3,221Deferred income tax assets, gross





$
7,260,298







8,203,358Deferred income tax liabilities:Unrealized foreign exchange gain

$
1,099,609



274,902



102,899



25,724Unrealized valuation gain on financial instruments










43,928



10,982Deferred income tax liabilities, gross





$
274,902







36,706




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
  (f)
    Under the ROC Statute for Upgrading Industries, the
    Companys unused investment tax credits as of
    December 31, 2006, were as follows:  Personnel training andPurchasing machinery


research and developmentYear

and equipment


expenditures


Expiry Year2003

$
565,230



14,539



20072004


3,049,861







20082005


3,852,048



35,058



20092006


470,557







2010$
7,937,696



49,597     (g)
    The Companys income tax returns have been examined by the
    ROC tax authority through 2004.(h)
    Undistributed earnings, imputation credit account (ICA) and
    creditable ratio  2005.12.31


2006.12.31Undistributed earnings after 1997

$
5,943,790



17,482,894Imputation credit account

$
27,822



146,489   2005


2006(Actual)


(Projected)Creditable ratio


3.24
%


2.12
%   (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. As of
    December 31, 2006, the exemption from profit-seeking
    enterprise income tax (Income Tax Holiday) under
    Article 9 of the Statute for Upgrading Industries for the
    aforesaid investment projects had the following duration.  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   (15) Stockholders
    Equity
  (a)
    Common stock




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
        (b)
    Capital surplus    2005.12.31


2006.12.31Paid-in capital in excess of par value

$
15,548,660



29,317,836     (c)
    Earnings appropriation and distribution    (i)
    0.1%  1% as remuneration to directors and supervisors.(ii)
    1%  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  (Continued)
    Earnings distribution


Distribution per share2004


2005


2004


2005Legal reserve

$
90,130



592,976







Special reserve


542,605











Remuneration to directors and supervisors


2,686



3,736







Bonus to employees  cash


8,057



298,866







Bonus to employees  stock


8,057











Dividends to stockholders  cash


124,883



3,433,227



0.05



1.1036Dividends to stockholders  stock


124,883







0.05



$
901,301



4,328,805



0.10



1.1036       (16) Earnings
    Per Share
    2005Amount


Total weighted


Earnings per shareIncome before


Income after


average shares


Before


Afterincome tax


income tax


outstanding


income tax


income taxBasic earnings per shareNet income

$
6,267,119



5,929,758



2,510,954



2.50



2.36   2006Amount

Total weighted

Earnings per shareIncome before

Income after

average shares

Before

Afterincome tax

income tax

outstanding

income tax

income taxBasic earnings per shareIncome before cumulative effect of change in accounting principle

$
16,492,323



16,105,824



2,923,557



5.64



5.51Cumulative effect of change in accounting principle


(317,220
)


(237,915
)


2,923,557



(0.11
)


(0.08
)Net income

$
16,175,103



15,867,909







5.53



5.43




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
  (17)
    Financial
    Instrument Information      2005.12.31


2006.12.31Financial instruments

Book value


Fair value


Book value


Fair valueFinancial assets:Cash and cash equivalents

$
9,822,568



9,822,568



21,704,854



21,704,854Accounts receivable  related parties


5,050,277



5,050,277



8,332,816



8,332,816Interest rate swap






38,637



52,255



52,255Foreign exchange forward contracts


1,268,011



912,154



941,480



941,480Mutual bond fund










660,484



660,484Refund deposits


28,544



28,544



79,219



79,219Financial liabilities:Short-term loans (including current portion of long-term loans)


8,754,936



8,754,936



10,299,107



10,299,107Accounts payable (including accounts payable  related
    parties)


4,065,278



4,065,278



21,516,696



21,516,696Bond payable










6,000,000



5,988,672Long-term loans


26,034,564



26,034,564



19,392,164



19,392,164     (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, account payables, and
    short-term loans.(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. The discounting
    rates used in calculating the present value are similar to those
    of the Companys existing long-term loans.(iv)
    Fair value of bond payable was determined by using broker quote.
    This quote is tested for reasonableness by discounting 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.(v)
    Refundable deposits are refunded in cash based on its contracted
    amount. Therefore, its book value is equivalent to its fair
    value.




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
  (c)
    As of December 31, 2006, 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:  2006.12.31Value determinedby usingMarket value in


broker quote/Financial instruments

active market


carrying valueFinancial assets:Cash and cash equivalents

$
21,704,854



Accounts receivables  related parties






8,332,816Interest rate swaps






52,255Foreign exchange forward contracts






941,480Mutual bond fund






660,484Refund deposits






79,219Financial liabilities:Current portion of long-term loans






10,299,107Accounts payable (including accounts payable  related
    parties)






21,516,696Bond payable






5,988,672Long-term loans






19,392,164




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
                  floating-to-fixed
  (18) Related-party
    Transactions
    Name

Relationship with the CompanyNan Ya Plastics Corp. (NPC)

Common chairmanNanya Technology Corp. (NTC)

StockholderInfineon Technologies AG (IFX)

StockholderQimonda Technologies Suzhou Co., Ltd (formerly Infineon
    Technologies Suzhou Co., Ltd)

Subsidiary of Qimonda AGQimonda Richmond, LLC (formerly Infineon Technologies, Richmond)

Subsidiary of Qimonda AGQimonda AG

Subsidiary of IFX




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
        2005


2006% of net





% of netAmount


sales


Amount


salesNTC

$
11,502,292



49.94



20,477,214



50.21IFX


9,180,137



39.86



3,994,116



9.79Qimonda Technologies Suzhou Co., Ltd


2,347,571



10.19



2,695,017



6.61Qimonda Richmond, LLC


2,203



0.01







Qimonda AG










13,615,363



33.39$
23,032,203



100.00



40,781,710



100.00     2005.12.31


2006.12.31% of accounts





% of accountsreceivable





receivableAmount


related parties


Amount


related partiesNTC

$
2,362,640



46.78



4,325,897



51.91IFX


1,898,230



37.59







Qimonda Technologies Suzhou Co., Ltd


789,407



15.63







Qimonda AG










4,006,919



48.09$
5,050,277



100.00



8,332,816



100.00         2005


2006% of net





% of netAmount


purchases


Amount


purchasesNPC

$
49,827



0.17



680,957



15.85NTC










70,039



1.63IFX


464,481



1.56



217,230



5.06Qimonda AG










252,285



5.87$
514,308



1.73



1,220,511



28.41




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
    2005.12.31


2006.12.31% of total





% of totalaccounts





accountsAmount


payable


Amount


payableNPC

$
32,420



0.80



346,304



1.61IFX


22,792



0.56







Qimonda AG










59,613



0.28$
55,212



1.36



405,917



1.89




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
              (19) Pledged
    Properties
    (20) Commitments
    and Contingencies
    Currency

2005.12.31


2006.12.31USD

$
13,197



65,308JPY

¥
342,070



2,099,273EUR


674



50,907   (21) Significant
    Disaster Loss: None.
  (22) Subsequent
    Events:
    Coupon Rate andPrincipal

Par Value

Duration

Interest Payment

Repayment TermNT$4,000,000

NT$1,000

2007.1.5 - 2012.1.5

Interest payable annually at 2.23%

Payable on maturity date




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
  (23) Others
  (a)
    The Companys personnel, depreciation, and amortization
    expenses were as follows:  For the year ended December 31, 2005Cost of goods sold


Operating expenses


TotalPersonnel 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   For the year ended December 31, 2006Cost of goods sold


Operating expenses


TotalPersonnel 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   (b)
    As discussed in note 18(b)(vii) 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 and 2006, the service
    expenses paid to the General Administrative Office of the
    Formosa Group amounted to NT$25,631 and NT$28,278, respectively.  (c)
    Stock purchase plan




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
    (d)
    Reclassifications    (24)
    Segment
    Information  (a)
    Industrial information    (b)
    Geographic information    (c)
    Export sales information    2005


2006% of





% ofnet





netDestination Area

Amount


sales


Amount


salesEurope

$
9,180,137



39.86



17,609,479



43.18Asia


2,347,571



10.19



2,695,017



6.61North America


2,203



0.01







Total

$
11,529,911



50.06



20,304,496



49.79   (d)
    Major clients    2005


2006% of





% ofnet





netClient

Amount


sales


Amount


salesNTC

$
11,502,292



49.94



20,477,214



50.21Qimonda AG










13,615,363



33.39IFX


9,180,137



39.86



3,994,116



9.79Qimonda Technologies Suzhou Co., Ltd


2,347,571



10.19



2,695,017



6.61Total

$
23,030,000



99.99



40,781,710



100.00




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
  (25)
    Summary
    of Significant Differences between Accounting Principles
    Followed by the Company and Generally Accepted Accounting
    Principles in the United States of America




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
    2005


2006Net incomeNet income based on ROC GAAP

$
5,929,758



15,867,909Adjustments: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






317,220b. Bonuses to employees


(298,866
)


(799,742
)b. Remuneration to directors and supervisors


(3,736
)


(9,997
)c. 10% surtax on undistributed earnings


(565,812
)


(1,428,112
)c. Tax benefit


588,522



858,623d. Expatriate employees payroll cost paid by IFX


(168,697
)


(166,766
)e. Operating lease


(4,742
)


(8,930
)h. DSPP






(826,025
)Net decrease in net income


(733,245
)


(2,063,729
)Net income based on U.S. GAAP

$
5,196,513



13,804,180Earnings per share

$
2.08



4.72Stockholders equityStockholders equity based on ROC GAAP

$
47,236,284



79,137,540Adjustments: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
)b. Remuneration to directors and supervisors


(3,736
)


(9,997
)c. 10% surtax on undistributed earnings


(565,812
)


(1,428,112
)c. Tax benefit


639,247



932,058d. Expatriate employees payroll cost paid by IFX


(324,773
)


(491,539
)d. Contributed capital (net of tax of $105,552 and $159,951
    in 2005 and 2006, respectively) arising from employees payroll
    paid by IFX


219,221



331,788e. Operating lease


(4,742
)


(13,672
)i. Other comprehensive income  pension






(41,800
)Net decrease in stockholders equity


(656,681
)


(1,521,016
)Stockholders equity based on U.S. GAAP

$
46,579,603



77,616,524Changes in stockholders equity based on U.S. GAAPBalance, beginning of period

$
41,377,184



46,579,603Issuance of common stock






19,769,176Cash dividend to stockholders


(124,883
)


(3,433,227
)Bonus shares issued at a premium to the employees


16,919



Contributed capital (net of tax of $54,827 and $54,199 in 2005
    and 2006, respectively ) arising from employees


113,870



112,567DSPP






826,025Other comprehensive income  pension






(41,800
)Net income for the year


5,196,513



13,804,180Balance, end of period

$
46,579,603



77,616,524




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
    2005


2006Current AssetsAs reported

$
20,340,339



36,470,375U.S. GAAP adjustmentsa. Financial assets-Interest rate swaps


38,637



a. Financial assets-Foreign currency forward contracts


(355,857
)


e. Current portion of lease receivables


(6,690
)


(4,912
)c. Deferred tax assets  current, net


11,277



28,351e. Other current assets


2,057



As adjusted

$
20,029,763



36,493,814Property, plant and equipmentAs reported

$
66,162,814



100,410,476U.S. GAAP adjustmentse. Building and structure


281,538



281,538e. Other equipment


75,555



75,555e. Accumulated depreciation


(18,414
)


(31,977
)As adjusted

$
66,501,493



100,735,592Other AssetsAs reported

$
854,936



802,349U.S. GAAP adjustmentsc. Deferred tax assets  non-current, net


239,512



29,900e. Lease receivables  long term


(338,788
)


(333,876
)As adjusted

$
755,660



498,373Current LiabilitiesAs reported

$
13,903,989



32,974,822U.S. GAAP adjustmentsb. Employees bonus


298,866



799,742b. Remuneration to directors and supervisors


3,736



9,997c. 10% surtax on undistributed earnings


282,906



714,056As adjusted

$
14,489,497



34,498,617Other LiabilitiesAs reported

$
52,285



51,252U.S. GAAP adjustmentsi. Accrued pension liabilities






41,800As adjusted

$
52,285



93,052




---



##### 








---



##### 



INOTERA
    MEMORIES, INC. Balance
    Sheets
    December 31, 2004 and 2005
    (Expressed in thousands of New Taiwan Dollars and
    U.S. Dollars)
  2004


2005NTD


NTD


USDAssetsCurrent assets:Cash and cash equivalents (note 5)

$
9,980,189



9,822,568



299,469Accounts receivable related parties (note 17)


2,589,503



5,050,277



153,972Other receivables (note 7 and 16)


160,283



1,322,121



40,309Inventories, net (note 6)


2,127,530



3,485,585



106,268Current portion of lease receivables (note 7)






6,690



204Prepayments and other current assets


1,011,742



616,693



18,802Deferred income tax assets  current, net
    (note 13)


12,163



36,405



1,110Total current assets


15,881,410



20,340,339



620,134Property, plant and equipment (notes 7, 8,
    9, 11 and 17)Land


1,225,459



2,801,467



85,411Buildings and structures


2,374,783



2,424,571



73,920Machinery and equipment


26,546,487



59,669,447



1,819,190Vehicles


2,913



2,913



89Leased assets






135,996



4,146Miscellaneous equipment


5,087,028



6,465,676



197,12435,236,670



71,500,070



2,179,880Less: accumulated depreciation


(2,042,536
)


(10,130,631
)


(308,861
)Construction in progress


18,349,418



4,770,603



145,445Prepayment on land purchase






22,772



694Net property, plant and equipment


51,543,552



66,162,814



2,017,158Other assets:Refundable deposits


46,661



28,544



870Deferred charges


118,283



134,846



4,111Lease receivables long-term (note 7)






338,788



10,329Deferred income tax assets  non-current, net
    (note 13)


562,198



352,758



10,755Total other assets


727,142



854,936



26,065Total assets

$
68,152,104



87,358,089



2,663,357




---



##### 



INOTERA
    MEMORIES, INC.
    Balance Sheets  (Continued)
    December 31, 2004 and 2005
    (Expressed in thousands of New Taiwan Dollars and
    U.S. Dollars)
  2004


2005NTD


NTD


USDLiabilities and Stockholders EquityCurrent liabilities:Short-term loans (note 10)

$
2,481,500



2,323,300



70,832Accounts payable


8,640,125



4,010,066



122,258Accounts payable  related parties (note 17)


131,039



55,212



1,683Income tax payable






124,302



3,790Accrued expenses (notes 12 and 16)


450,856



855,816



26,092Other payables  related parties (note 17)


284,521



86,253



2,630Current portion of long-term loans (note 11)






6,431,636



196,086Current portion of lease payables (note 9)






3,390



103Other current liabilities


8,759



14,014



427Total current liabilities


11,996,800



13,903,989



423,901Long-term liabilities:Long-term loans (note 11)


14,681,820



26,034,564



793,737Lease payables  long-term (note 9)






130,967



3,993Total long-term liabilities


14,681,820



26,165,531



797,730Other liabilities:Accrued pension liabilities (note 12)


30,755



50,594



1,543Guarantee deposits


577



1,691



52Total other liabilities


31,332



52,285



1,595Total liabilities


26,709,952



40,121,805



1,223,226Stockholders equity (note 14):Common stock


24,976,600



25,109,540



765,535Capital surplus


15,548,660



15,548,660



474,045Legal reserve


1,559



91,689



2,795Special reserve






542,605



16,543Retained earnings


915,333



5,943,790



181,213Total stockholders equity


41,442,152



47,236,284



1,440,131Commitments and contingencies (note 19)Total liabilities and stockholders equity

$
68,152,104



87,358,089



2,663,357




---



##### 



INOTERA
    MEMORIES, INC.
    Statements of Income
    For the years ended December 31, 2004 and 2005
    (Expressed in thousands of New Taiwan Dollars and
    U.S. Dollars except for earnings per share)
  2004


2005NTD


NTD


USDOperating revenues (note 17)Sales revenue

$
5,961,954



23,044,929



702,589Sales returns


(161
)


(3,133
)


(96
)Sales allowances


(963
)


(9,593
)


(292
)Net operating revenues


5,960,830



23,032,203



702,201Cost of goods sold (notes 17 and 22)


(3,912,658
)


(16,350,746
)


(498,498
)Gross profit


2,048,172



6,681,457



203,703Operating expenses (notes 17 and 22):Administrative and general expenses


(1,395,577
)


(283,853
)


(8,654
)Research and development expenses


(322,185
)


(658,134
)


(20,065
)Total operating expenses


(1,717,762
)


(941,987
)


(28,719
)Operating income


330,410



5,739,470



174,984Non-operating income:Interest income (note 7)


24,110



309,821



9,446Gain on disposal of investments


85,648



4,532



138Foreign exchange gain, net


551,248



676,797



20,634Others (note 16)


12,966



306,754



9,352Total non-operating income and gains


673,972



1,297,904



39,570Non-operating expenses:Interest expenses (excluding capitalized interest of NT$151,686
    and NT$395,501 for 2004 and 2005, respectively) (note 16)


(91,322
)


(760,618
)


(23,190
)Others (note 16)


(11,713
)


(9,637
)


(294
)Total non-operating expenses and losses


(103,035
)


(770,255
)


(23,484
)Income before income tax


901,347



6,267,119



191,070Income tax expense (note 13)


(46
)


(337,361
)


(10,285
)Net income

$
901,301



5,929,758



180,785Basic earnings per share (note 15)Before tax

$
0.51



2.50



0.08After tax

$
0.51



2.36



0.07




---



##### 



INOTERA
    MEMORIES, INC.
    Statements of Changes in Stockholders Equity
    For the years ended December 31, 2004 and 2005
    (Expressed in thousands of New Taiwan Dollars and
    U.S. Dollars)
  Retained earningsAccumulated lossduring theCommon


Capital


Legal


Special


development


Accumulatedstock


surplus


reserve


reserve


stage


earnings


TotalBalance as of January 1, 2004


NTD



8,591,700



3,333,350











15,591







11,940,641Appropriation and distribution:Appropriation for legal reserve














1,559







(1,559
)






Issuance of common stock






16,384,900



12,215,310



















28,600,210Cumulative net loss from January 1 to May 31, 2004






















(237,597
)






(237,597
)Accumulated loss






















223,565



(223,565
)


Net income from June 1, 2004 toDecember 31, 2004


























1,138,898



1,138,898Balance as of December 31, 2004


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 for directors and supervisors


























(2,686
)


(2,686
)Bonus for employees






8,057



















(16,114
)


(8,057
)Bonus for 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



47,236,284Balance as of December 31, 2004


USD



761,482



474,045



48











27,906



1,263,481Appropriation and distribution:Appropriation for legal reserve














2,747











(2,747
)


Appropriation for special reserve


















16,543







(16,543
)


Remuneration for directors and supervisors


























(82
)


(82
)Bonus for employees






246



















(491
)


(245
)Bonus for stockholders






3,807



















(7,615
)


(3,808
)Net income for the year ended December 31, 2005


























180,785



180,785Balance as of December 31, 2005


USD



765,535



474,045



2,795



16,543







181,213



1,440,131




---



##### 



INOTERA
    MEMORIES, INC.
    Statements of Cash Flows
    For the years ended December 31, 2004 and 2005
    (Expressed in thousands of New Taiwan Dollars and
    U.S. Dollars)
  2004


2005NTD


NTD


USDCash flows from operating activities:Net income

$
901,301



5,929,758



180,785Depreciation


2,041,633



8,099,551



246,938Amortization of deferred charges


12,269



36,165



1,103Unrealized foreign currency exchange gain, net


(549,374
)


(280,665
)


(8,557
)Realized interest revenue from capital lease






(10,133
)


(309
)Gain on disposal of short-term investments


(85,648
)


(4,532
)


(138
)Amortization of deferred forward exchange premium






(287,851
)


(8,776
)Increase in accounts receivable  related parties


(2,634,669
)


(2,554,838
)


(77,891
)Decrease (increase) in other receivables


(40,841
)


106,119



3,235Increase in inventories


(2,095,342
)


(1,358,055
)


(41,404
)Decrease in lease receivables






10,291



314Decrease (increase) in prepayments and other current assets


(940,582
)


395,049



12,044(Decrease) increase in accounts payable


492,165



(4,581,405
)


(139,677
)Decrease in accounts payable  related parties


(160,139
)


(71,320
)


(2,174
)Increase in tax payables






124,357



3,791Increase in accrued expenses


350,970



407,478



12,423(Decrease) increase in other payables  related parties


254,113



(198,268
)


(6,045
)Decrease in lease payables






(1,639
)


(50
)Increase in other current liabilities


6,182



5,255



160Increase in accrued pension liability


15,038



19,839



605Decrease in deferred income tax assets, net


9



185,198



5,646Net cash provided by (used in) operating activities


(2,432,915
)


5,970,354



182,023Cash flows from investing activities:Increase in short-term investments


4,822,138



4,532



138Purchases of property, plant and equipment


(37,915,757
)


(22,928,454
)


(699,038
)Increase in deferred charges


(123,218
)


(52,728
)


(1,608
)Decrease (increase) in refundable deposits


(13,574
)


18,117



552Net cash used in investing activities


(33,230,411
)


(22,958,533
)


(699,956
)Cash flows from financing activities:(Decrease) increase in short-term loans


1,728,852



(158,200
)


(4,823
)Increase in long-term loans


15,270,954



17,285,096



526,985Increase in capital


28,600,210







Decrease in advance receipts for stock










Increase in guarantee deposits


448



1,114



34Cash dividends






(124,611
)


(3,799
)Bonus for employees






(8,057
)


(246
)Remuneration of directors and supervisors






(2,686
)


(82
)Net cash provided by financing activities


45,600,464



16,992,656



518,069Effect of foreign currency exchange translation


(38,322
)


(162,098
)


(4,942
)Increase (decrease) in cash and cash equivalents


9,898,816



(157,621
)


(4,806
)Cash and cash equivalents at beginning of year


81,373



9,980,189



304,275Cash and cash equivalents at end of year

$
9,980,189



9,822,568



299,469Supplemental cash flow information:Income tax paid

$
2,351



27,860



849Interest paid (excluding capitalized interest)

$
122,644



972,201



29,640Non-cash investing and financing activities:Classification of current portion of long-term loans from
    long-term loans

$




6,431,636



196,086Lease payables and leased assets resulting from lease agreement

$




135,996



4,146Lease receivables and leased assets transferred resulting from
    lease agreement

$




345,637



10,538




---



##### 



INOTERA
    MEMORIES, INC.
    Notes to Financial Statements
    December 31, 2004 and 2005
    (All amounts expressed in thousands of New Taiwan Dollars
    and U.S. Dollars except per share information or unless
    otherwise specified)
  (1) Organization
    and Principal Activities
        (2) Summary
    of Significant Accounting Policies




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
         (i)
    Buildings and structures: 8-50 years.(ii)
    Vehicles: 5 years.(iii)
    Machinery and equipment: 3-5 years.(iv)
    Leased assets: 23.7 years.(v)
    Miscellaneous equipment: 5-15 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% 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;(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.




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
     (i)
    Any charges and consulting fees related to the syndicated loans
    are deferred and amortized over the loan terms.(ii)
    Power line compensation and the royalty paid to the Industrial
    Technology Research Institute are deferred and amortized over
    the estimated useful lives or the agreement terms.        (i)
    employees who originally adopted the Plan and opt to be subject
    to the pension mechanism under the New Act;(ii)
    employees who commenced working after the enforcement date of
    the New Act.            (i)
    persuasive evidence of an arrangement exists,(ii)
    delivery 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.




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
       (3) Reasons
    for and Cumulative Effect of Accounting Principle
    Changes
    (4) Revenues
    and expenses during development stage
  2004.1.1-2004.5.30


2002.12.17-2003.12.31NTD


NTDOperating revenue

$




Cost of goods sold






Gross profit






Administrative expenses


(1,452,163
)


(566,506
)Net loss


(1,452,163
)


(566,506
)Non-operating incomeInterest income


1,171



4,417Gain on disposal of investment


15,825



20,737Exchange gain, net


231,209



5,259Other income


3,633



773251,838



31,186Non-operating expensesInterest expenses


(40,420
)


(23,336
)Other expenses


(788
)


(30
)(41,208
)


(23,366
)Loss before income tax


(1,241,533
)


(558,686
)Income tax benefit


1,003,936



574,277Net (loss) income

$
(237,597
)


15,591   (5) Cash
    and cash equivalents
    2004


2005NTD


NTD


USDCash on hand and petty cash

$
130



160



5Cash in bank  checking account


4,159



5,346



163Cash in bank  demand deposit account


7,616,966



5,143



157Cash in bank  foreign currency account


600,106



546,761



16,670Time deposit


1,758,828



9,265,158



282,474Total

$
9,980,189



9,822,568



299,469




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
  (6)
    Inventories    2004


2005NTD


NTD


USDRaw material

$
541,186



557,814



17,007Supplies


379,428



468,803



14,293Work in process


1,188,247



2,341,178



71,377Finished goods


130



9,394



286Inventory in transit


18,539



108,396



3,305Total

$
2,127,530



3,485,585



106,268   (a)
    The insurance coverage for inventories amounted to NT$2,412,642
    and NT$3,245,671 as of December 31, 2004 and 2005,
    respectively.  (b)
    Inventories were not pledged or mortgaged to secure bank loans.  (7)
    Lease
    Receivables  (a)
    The Company signed a long-term lease agreement with Nanya
    Technology Corp. (NTC) to lease out a portion of a 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 since the inception date is at least 90% of the
    market value of the leased assets. The land is treated as an
    operating lease. The monthly rents for the leased building and
    land were NT$2,058 and NT$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 was NT$382,950 and was
    recognized as unrealized interest income which is amortized over
    the lease period. For the year ended December 31, 2005,
    NT$10,133 was recognized as realized interest income. The
    details of lease receivables were as follows:  2005Current


Non-currentNTD


USD


NTD


USDGross lease receivables

$
26,756



816



691,540



21,084Less: Unrealized interest revenue


(20,066
)


(612
)


(352,752
)


(10,755
)Net lease receivables

$
6,690



204



338,788



10,329   (c)
    For the year ended December 31, 2005, the rent revenue from
    the operating lease for land was NT$1,859, of which NT$310 was
    not received and was recorded as other receivables.




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
  (d)
    Future gross lease receivables classified as capital lease or
    operating lease as of December 31, 2005, were as follows:  Capital lease


Operating leaseDuration

NTD


USD


NTD


USD2006.1.1-2006.12.31

$
24,698



753



3,719



1132007.1.1-2007.12.31


24,698



753



3,719



1132008.1.1-2008.12.31


24,698



753



3,719



1132009.1.1-2009.12.31


24,698



753



3,719



1132010.1.1-2034.12.31


617,447



18,825



92,964



2,834$
716,239



21,837



107,840



3,286   (8)
    Property,
    Plant and Equipment/Depreciation    2004


2005NTD


NTD


USDBuildings and structures

$
24,756



99,863



3,045Machinery and equipment


1,845,574



9,219,024



281,067Vehicles


239



725



22Leased assets






2,873



88Miscellaneous equipment


171,967



808,146



24,639Total

$
2,042,536



10,130,631



308,861   (a)
    All construction in progress is insured, and the insurance
    coverage thereon amounted to NT$60,354,152 and NT$35,778,787 as
    of December 31, 2004 and 2005, respectively.  (b)
    As of December 31, 2004 and 2005, the insurance coverage on
    the buildings and equipment against fire loss amounted to
    NT$33,186,671 and NT$67,533,079, respectively.  (c)
    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, 2005, the
    Company had paid NT$22,772, which was recorded as a prepayment
    on land purchase.  (d)
    As of December 31, 2005, the insurance coverage for losses
    on business interruption amounted to NT$13,658,519.  (e)
    The property, plant and equipment pledged to secure bank loans
    as of December 31, 2004 and 2005, were 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 since the inception date is at least 90% of the
    market value of the leased assets and (b) the lease term is
    equal to 75% of or more of the total estimated economic life of
    the leased assets. The land is treated as an operating lease.
    The monthly rents for the leased building and land were NT$775
    and NT$357, respectively.




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
   (b)
    The total amount of lease payables for the capital lease of the
    building was NT$135,996; the implicit interest rate was 4.46%.
    The fair value of the leased assets was NT$135,996. The details
    were as follows:  2005.12.31NTD


USDLease payables

$
134,357



4,096Less: Current portion of lease payables


(3,390
)


(103
)$
130,967



3,993   (c)
    For the year ended December 31, 2005, the lease expense for
    the operating lease for land was NT$2,141, which was fully paid.  (d)
    Future lease payments (excluding interest component) classified
    as capital lease or operating lease as of December 31,
    2005, were as follows:  Capital lease


Operating leaseDuration

NTD


USD


NTD


USD2006.1.1-2006.12.31

$
3,390



103



4,282



1312007.1.1-2007.12.31


3,544



108



4,282



1312008.1.1-2008.12.31


3,706



113



4,282



1312009.1.1-2009.12.31


3,874



118



4,282



1312010.1.1-2029.02.28


119,843



3,654



82,068



2,502$
134,357



4,096



99,196



3,026   (10)
    Short-term
    Loans    2004


2005NTD


NTD


USDUnsecured borrowings

$
2,481,500



2,323,300



70,832       (11)
    Long-term
    Loans    2004Bank

Repayment period

Nature

Interest rate

NTDTaiwan Cooperative Bank (the managing bank)

February 2, 2006- February 2, 2009

Machinery loan

1.1725%-2.5793%

$
8,298,420I.C.B.C. (the managing bank)

November 15, 2006- November 15, 2009

Machinery loan

3.1607%-3.4567%


6,383,400$
14,681,820




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
  2005Bank

Repayment period

Nature

Interest rate

NTD


USDTaiwan Cooperative Bank (the managing bank)

February 2, 2006- February 2, 2009

Machinery loan

4.6214%-4.7688%

$
8,541,000



260,396I.C.B.C. (the managing bank)

November 15, 2006- November 15, 2009

Machinery loan

5.3488%


22,075,200



673,025I.C.B.C. (the managing bank)

November 15, 2006- November 15, 2009

Machinery loan

2.4260%


1,850,000



56,40232,466,200



989,823Less: Current portion oflong-term loans








(6,431,636
)


(196,086
)$
26,034,564



793,737     (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 machinery. As of
    December 31, 2004 and 2005, the net book value of the
    pledged assets amounted to NT$11,654,503 and NT$9,625,951,
    respectively.  (f)
    This long-term borrowing was guaranteed by Nan Ya Plastics
    Corporation.  (g)
    The Company has issued a promissory note for the syndicated loan.    (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 (LIBOR) plus margin.  (c)
    Interest rate for Tranche B: The
    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, 2005, the net book value of the pledged assets
    amounted to NT$17,949,184.  (g)
    This long-term borrowing was guaranteed by Nan Ya Plastics
    Corporation.(h)
    The Company has issued a promissory note for this syndicated
    loan.




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
   (12)
    Accrued
    Pension Liability    2004


2005NTD


NTD


USDBalance of the retirement fund

$
12,637



29,193



890The net pension costsDefined benefit retirement plan


30,094



35,317



1,077Defined contribution plan






23,482



716Accrued pension expenses






12,265



374Accrued pension liabilities


30,755



50,594



1,543   (a)
    The Company adopted Republic of China Statement of Financial
    Accounting Standards No. 18, Accounting for
    Pensions for those employees covered by the
    non-contributory defined benefit retirement plan. The Company
    recognizes a minimum pension liability based on the actuarial
    report, which uses the balance sheet date as the measurement
    date.  (b)
    The following table sets forth the details of the reconciliation
    of funded status to accrued pension liability on
    December 31, 2004 and 2005:  2004


2005NTD


NTD


USDBenefit obligation:Vested benefit obligation

$
(1,589
)


(4,227
)


(129
)Non-vested benefit obligation


(33,262
)


(54,372
)


(1,658
)Accumulated benefit obligation


(34,851
)


(58,599
)


(1,787
)Projected compensation increase


(38,746
)


(65,607
)


(2,000
)Projected benefit obligation


(73,597
)


(124,206
)


(3,787
)Fair value of plan assets


15,132



31,115



949Funded status


(58,465
)


(93,091
)


(2,838
)Unamortized pension gain or losses


27,710



42,497



1,295Accrued pension liability

$
(30,755
)


(50,594
)


(1,543
)   (c)
    As of December 31, 2004 and 2005, the actuarial present
    value of the vested benefits for the Companys employees in
    accordance with the retirement benefit plan was approximately
    NT$1,835 and NT$4,609, respectively. Major assumptions used to
    determine the pension plan funded status as of December 31,
    2004 and 2005, were as follows:  2004


2005Discount rate


3.00
%


3.00
%Rate of increase in compensation


3.00
%


3.00
%Expected long-term rate of return on plan assets


3.00
%


3.00
%




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
  (13)
    Income
    Tax  (a)
    The Companys earnings are subject to income tax at a
    statutory rate of 25%. For the years ended December 31,
    2004 and 2005, the components of income tax expense were as
    follows:  2004


2005NTD


NTD


USDIncome tax expense  current

$
46



152,162



4,639Income tax expense  deferred






185,199



5,646Income tax expense

$
46



337,361



10,285   (b)
    The differences between expected income tax expense calculated
    at a statutory income tax rate of 25% and the actual income tax
    as reported in the accompanying financial statements for the
    years ended December 31, 2004 and 2005, were summarized as
    follows:  2004


2005NTD


NTD


USDIncome tax calculated based on financial pretax income

$
225,327



1,566,770



47,767Tax effect of tax-free income from income tax holiday






(1,269,719
)


(38,711
)Increase in income tax credit for purchasing machinery and
    equipment


(3,480,741
)


(3,353,698
)


(102,248
)Differences between estimated and actual income tax expense
    filing


(85
)


263,056



8,020Tax-exempt securities


(21,412
)


(985
)


(30
)Increase in valuation allowance for deferred income tax assets


3,276,911



3,123,694



95,23510% surtax on undistributed earnings






7,862



240Income tax expense imposed separately


46



381



12Income tax expense

$
46



337,361



10,285     2004


2005NTD


NTD


USDCurrent:Deferred income tax assets


23,744



66,267



2,020Deferred income tax liabilities


(11,581
)


(29,862
)


(910
)Current deferred income tax assets, net

$
12,163



36,405



1,110Non-current:Deferred income tax assets

$
4,182,020



7,194,031



219,331Valuation allowance for deferred income tax assets


(3,472,538
)


(6,596,233
)


(201,105
)Deferred income tax assets, net


709,482



597,798



18,226Deferred income tax liabilities


(147,284
)


(245,040
)


(7,471
)Non-current deferred income tax assets, net

$
562,198



352,758



10,755Total deferred income tax assets, gross...

$
4,205,764



7,260,298



221,351Total deferred income tax liabilities, gross

$
158,865



274,902



8,381Total valuation allowance for deferred income tax assets

$
3,472,538



6,596,233



201,105




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
  (d)
    As of December 31, 2004 and 2005, the components of
    deferred income tax assets or liabilities were as follows:  2004


2005NTD


NTD


USDEffects





Effects





Effectson





on





onincome





income





incomeAmount


tax


Amount


tax


Amount


taxDeferred income tax assets:Investment tax credit

$
4,105,880



4,105,880



7,023,377



7,023,377



214,127



214,127Difference in depreciation expense for tax purposes and
    financial accounting purposes


13,075



3,269



8,030



2,008



245



61Pension expense in excess of tax limit


32,056



8,014



50,594



12,648



1,543



386Loss carryforwards


189,657



47,414















Unrealized foreign exchange loss


86,083



21,521



818,944



204,736



24,968



6,242Unrealized operating expense


78,665



19,666



70,114



17,529



2,138



535Deferred income tax assets, gross






4,205,764







7,260,298







221,351Deferred income tax liabilities:Unrealized foreign exchange gain

$
635,458



158,864



1,099,609



274,902



33,525



8,381   (e)
    Under the ROC Statute for Upgrading Industries, the
    Companys unused investment tax credits as of
    December 31, 2005, were as follows:  Remaining deductibleYear

Amount


Amount


Expiry YearNTD


USDInvestment tax credit for purchasing machinery and equipment:2003

$
427,988



13,048



20072004


3,241,691



98,832



20082005


3,353,698



102,247



2009$
7,023,377



214,127         (h)
    As of December 31, 2004 and 2005, the balance of the
    Companys ICA amounted to NT$196 and NT$27,822,
    respectively. The Companys creditable ratio related to
    2005 was 0.06%. There were no undistributed earnings belonging
    to the years before 1997.  (i)
    The stockholders approved a resolution during their meetings on
    June 29, 2005, and October 18, 2004, to allow the
    Company to avail itself of the Income Tax Holiday for investment
    projects under Article 9 of the Statute for Upgrading
    Industries. The Company has availed itself of the five-year
    Income Tax Holiday commencing from January 1, 2005 and
    June 1, 2005, respectively, for the taxable income that is
    derived only from the sale of products produced from its Fab
    1-Phases 1 and 2 investment project. This income tax




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
  holiday reduced the Companys effective income tax rate to
    as low as 5% in 2005. As of December 31, 2005, the
    exemption from profit-seeking enterprise income tax
    (Income Tax Holiday) under Article 9 of the
    Statute for Upgrading Industries for the aforesaid investment
    projects had the following duration.  Duration of Income Tax HolidayInotera Fab-1  Phase 1

January 2005-December 2009Inotera Fab-1  Phase 2

June 2005-May 2009   (14)
    Stockholders
    Equity              2004


2005NTD


NTD


USDPaid-in capital in excess of par value

$
15,548,660



15,548,660



474,045         (i)
    0.1%-1% as bonuses for directors and supervisors(ii)
    1%-8% as employee bonuses(iii)
    The remainder as dividends and bonuses for stockholders,
    distributed in the form of cash dividends
    and/or stock
    dividends.




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
     (i)
    Legal reserve (10% of net income): NT$90,130(ii)
    Voluntary reserve: NT$542,605(iii)
    Remuneration of directors and supervisors: NT$2,686(iv)
    Employees bonus  cash: NT$8,057(v)
    Employees bonus  stock: NT$8,057(vi)
    Stockholders dividend  stock (0.05 NT dollar
    per share): NT$124,883(vii)
    Stockholders dividend  cash (0.05 NT dollar per
    share): NT$124,883      (15)
    Earnings
    per Share    2004Amount



Earnings per shareIncome before

Income after

Total shares

Before

Afterincome tax

income tax

outstanding

income tax

income taxBasic earnings per share  retroactively adjusted

$
901,347



901,301



1,767,217



0.51



0.51   NTD2005Amount



Earnings per shareIncome before

Income after

Total shares

Before

Afterincome tax

income tax

outstanding

income tax

income taxBasic earnings per share  retroactively adjusted

$
6,267,119



5,929,758



2,510,954



2.50



2.36   USDBasic earnings per share  retroactively adjusted

$
191,070



180,785



2,510,954



0.08



0.07   (16)
    Financial
    Instrument Information    (i)
    In July 2004, the Company entered into two Euro forward exchange
    contracts to hedge the risk of Euro payments with Chinatrust
    Commercial Bank and Taishin International Bank, respectively.
    The foreign exchange loss thereon amounted to NT$1,387, which
    was recorded under other losses on the




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
  income statement. These contracts had the same notional amount
    of EUR4,000 thousand and were settled in advance on
    August 9, 2004.  (ii)
    The Company entered into four interest rate swap agreements with
    Taipei Fubon Bank and three other banks to hedge the risk from
    fluctuations of interest rates for foreign long-term loans which
    were obtained by the Company in 2004. As of December 31,
    2005 and 2004, the notional amounts of the outstanding interest
    rate swap agreements amounted to US$130,000 and US$130,000,
    respectively. Interest expenses incurred from these interest
    hedging activities amounted to NT$12,822 and NT$36,580,
    respectively. The net interest receivable and a payable as of
    December 31, 2005 and 2004, amounted to interest receivable
    of NT$1,348 and interest payable of NT$20,554, respectively.  (iii)
    The Company entered into seventeen forward foreign exchange
    contracts with Standard Chartered Bank and three other banks to
    hedge the risk of foreign currency exchange rate fluctuations
    for foreign long-term loans. The deferred exchange gain for the
    year ended December 31, 2005, amounted to NT$1,313,265, of
    which NT$287,851 was amortized as non-operating income. The
    remaining unamortized balance was NT$1,025,414 as of
    December 31, 2005. As of December 31, 2005, the
    balance of forward foreign exchange contracts amounted to
    US$650,000, the details of which were as follows:  2005NTD


USDForward contract receivables

$
21,352,500



650,991Payables for forward purchases


(19,059,075
)


(581,069
)Deferred exchange gains


(1,025,414
)


(31,263
)Forward contract receivable, net

$
1,268,011



38,659   (iv)
    The Company entered into five foreign currency swap agreements
    with Citibank to hedge the foreign currency exchange risk for
    Euro payments. There was no unsettled balance as of
    December 31, 2005. For the year ended December 31,
    2005, the exchange loss incurred amounted to NT$3,004 and
    recorded as other losses.  (v)
    The Companys hedging strategy is to cover the biggest part
    of the risk. Because the foreign forward exchange rate is fixed,
    the cash flow risk is low. Credit risk is the risk that a
    counter-party will default on its obligation. The banks with
    which the Company entered into derivative transactions are all
    well-known financial institutions. Therefore, the Company does
    not expect the banks to default. As a result, the Company
    estimates credit risk to be reasonably low.      2004


2005NTD


NTD


USDBook


Fair


Book


Fair


Book


FairFinancial Instruments

value


value


value


value


value


valueForward foreign exchange contracts

$








1,268



912



39



28Interest rate swap agreements






(37
)






39







1



(37
)


1,268



951



39



29     (i)
    The book value is believed to be not materially different from
    their fair value because the maturity dates of short-term
    financial instruments are within one year from the balance sheet
    date. Therefore,




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
  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,
    account payables, accrued expenses and short-term loans.  (ii)
    Refundable deposits and guarantee deposits are collected or
    refunded in cash based on their amount. Therefore, their book
    value is equivalent to their fair value.  (iii)
    The discounted present value of anticipated cash flows is
    adopted as the fair value of long-term debt and corporate bonds
    payable. The discounting rates used in calculating the present
    value are similar to those of the Companys existing
    long-term loans.  (iv)
    The fair values of derivative financial instruments are the
    estimated amounts expected to be received or to be paid by the
    Company assuming that it terminates the contracts on the balance
    sheet date. The majority of the Companys derivative
    financial instruments have quotations available from financial
    institutions which are used in the calculation of the fair value.  (v)
    The fair value of letters of credit or endorsements/guarantees
    is based on the contract price.  (c)
    As of December 31, 2004 and 2005, the fair values of
    non-derivative financial instruments were estimated to be equal
    to their book values as of the same date.  (17) Related-party
    Transactions
    Name

Relationship with the CompanyNan Ya Plastics Corp. (NPC)

The president of Nan Ya Plastics Corp. is the chairman of the
    Company.Nanya Technology Corp. (NTC)

Major shareholderInfineon Technologies AG (IFX)

Major shareholderInfineon Technologies Suzhou Co., Ltd. (IFSZ)

Subsidiary of IFXInfineon Technologies, Richmond (IFR)

Subsidiary of IFX         2004


2005NTD


% of net


NTD


USD


% of netAmount


sales


Amount


Amount


salesNTC

$
2,985,699



50.09



11,502,292



350,680



49.94IFX


2,975,131



49.91



9,180,137



279,882



39.86IFSZ










2,347,571



71,572



10.19IFR










2,203



67



0.01$
5,960,830



100.00



23,032,203



702,201



100.00




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
    2004


2005NTD





NTD


USDAmount


%


Amount


Amount


%NTC

$
1,354,917



52.32



2,362,640



72,032



46.78IFX


1,234,586



47.68



1,898,230



57,873



37.59IFSZ










789,407



24,067



15.63$
2,589,503



100.00



5,050,277



153,972



100.00         2004


2005NTD


% of net


NTD


USD


% of netAmount


purchases


Amount


Amount


purchasesNPC

$
165,793



3.63



49,827



1,519



0.51IFX


562,897



12.31



464,481



14,161



4.71NTC


















$
728,690



15.94



514,308



15,680



5.22     2004


2005% of total








% of totalaccounts








accountsNTD


and notes


NTD


USD


and notesAmount


payable


Amount


Amount


payableNPC

$
88,654



0.98



32,420



988



0.80IFX


42,385



0.47



22,792



695



0.56NTC


















$
131,039



1.45



55,212



1,683



1.36         2004Maximum daily


Balance onbalance


December 31Related party

NTD


NTD


Interest rate


Interest expenseNTC

$
315,500







2.281-2.849
%


68




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
               2004Training expenseRelated party

payable


Training expenseIFX

$




3,718NTC






6,960Total

$




10,678   2005Training expenseRelated party

payable


Training expenseNTC-NTD

$




5,180NTC-USD

$




158




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
  and/or
      (18)
    Pledged
    Properties    (19)
    Commitments
    and Contingencies    (20) Significant
    Disaster Loss: None.
  (21)
    Subsequent
    Events  (a)
    The Board of Directors of the Company resolved 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. Also, 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 71,124 thousand Company shares
    which were made available for purchase by the employees. On
    January 6, 2006, the Company received the approval from the
    SFB, and implemented the Plan on the same day. As of
    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.  (b) i.
    On January 12, 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.  ii.
    On February 6, 2006 and in accordance with the resolution
    approved by the Shareholders on September 27, 2005, the
    Board of Directors approved the Initial Public Offering of the
    Company shares through the issuance of 200 million Company
    shares for cash at proposed price of NT$33 per share on the
    TSE. The offering occurred on March 17, 2006.iii.
    On March 9, 2006 and in accordance with the resolution
    approved by the Shareholders on September 27, 2005, the
    Board of Directors approved the offering of Global Depositary
    Shares (GDS) through the issuance of 335 million to
    400 million Company shares for cash. The offering is still
    pending.




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
   (22)
    Others    2004Cost of goods


Operatingsold


expenses


TotalNTDPersonnel expensesSalaries

$
470,957



447,971



918,928Labor and health insurance


28,996



22,486



51,482Pension expenses


14,535



15,559



30,094Other personnel expenses


14,076



11,108



25,184Depreciation expenses


2,008,139



33,495



2,041,634Amortization expenses


12,269







12,269   2005Cost of goods


Operatingsold


expenses


TotalNTDPersonnel expensesSalaries

$
1,048,968



192,903



1,241,871Labor 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


8,049,956



49,595



8,099,551Amortization expenses


36,165







36,165   2005Cost of goods


Operatingsold


expenses


TotalUSDPersonnel expensesSalaries

$
31,981



5,881



37,862Labor and health insurance


1,945



246



2,191Pension expenses


1,493



300



1,793Other personnel expenses


906



111



1,017Depreciation expenses


245,425



1,512



246,937Amortization expenses


1,103







1,103     (23)
    Segment
    Information




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
         2004


2005% of








% ofNTD


net


NTD


USD


netDestination area

Amount


sales


Amount


Amount


salesEurope

$
2,975,131



49.91



9,180,137



279,882



39.86Asia










2,347,571



71,572



10.19North America










2,203



67



0.01$
2,975,131



49.91



11,529,911



351,521



50.06       2004


2005% of








% ofNTD


net


NTD


USD


netAmount


sales


Amount


Amount


salesNTC

$
2,985,699



50.09



11,502,292



350,680



49.94IFX


2,975,131



49.91



9,180,137



279,882



39.86IFSZ










2,347,571



71,572



10.19$
5,960,830



100.00



23,030,000



702,134



99.99   (24)
    Summary
    of Significant Difference Between Accounting Principles Followed
    by the Company and Generally Accepted Accounting Principles in
    the United States of America




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
    2004


2005NTD


NTD


USDNet income

$
901,301


$
5,929,758



180,785Net income based on ROC GAAPAdjustments:a. Foreign currency forward
    contracts-mark-to-market






(355,857
)


(10,849
)a. Interest rate
    swaps-mark-to-market


(53,763
)


75,943



2,315b. Bonuses to employees


(24,976
)


(298,866
)


(9,112
)b. Remuneration to directors and supervisors


(2,686
)


(3,736
)


(114
)c. 10% surtax on undistributed tax earnings






(565,812
)


(17,250
)c. Tax expense


50,725



588,522



17,943d. Expatriate employees payroll cost paid by IFX


(156,076
)


(168,697
)


(5,143
)e. Operating lease






(4,742
)


(145
)Net decrease in net income


(186,776
)


(733,245
)


(22,355
)Net income based on U.S. GAAP

$
714,525


$
5,196,513



158,430Earnings per share

$
0.41


$
2.08



0.06Shareholders equityShareholders equity based on ROC GAAP

$
41,442,152


$
47,236,284



1,440,131Adjustments:a. Foreign currency forward contracts 
    mark-to-market






(355,857
)


(10,849
)a. Interest rate swaps 
    mark-to-market


(37,306
)


38,637



1,178b. Bonuses to employees


(24,976
)


(298,866
)


(9,112
)b. Remuneration to directors and supervisors


(2,686
)


(3,736
)


(114
)c. 10% surtax on undistributed tax earnings






(565,812
)


(17,250
)c. Tax expense


50,725



639,247



19,489d. Expatriate employees payroll cost paid by IFX


(156,076
)


(324,773
)


(9,902
)d. Contributed capital (net of tax) arising from employees
    payroll paid by IFX


105,351



219,221



6,684e. Operating lease






(4,742
)


(145
)Net decrease in shareholders equity


(64,968
)


(656,681
)


(20,021
)Shareholders equity based on U.S. GAAP

$
41,377,184


$
46,579,603



1,420,110Changes in shareholders equity based on
    U.S. GAAPBalance, beginning of year

$
11,957,098


$
41,377,184



1,261,500Issuance of common stock


28,600,210







Bonus to stockholders






(124,883
)


(3,807
)Bonus share issued at a premium to the employees






16,919



516Contributed capital (net of tax) arising from employees payroll
    paid by IFX


105,351



113,870



3,471Net income for the twelve months


714,525



5,196,513



158,430Balance, end of year

$
41,377,184


$
46,579,603



1,420,110




---



##### 



INOTERA
    MEMORIES, INC.
  Notes to
    Financial Statements  (Continued)
    2004


2005NTD


NTD


USDCurrent AssetsAs reported

$
15,881,410


$
20,340,339



620,132U.S. GAAP adjustmentsFinancial assets-Interest rate swaps






38,637



1,178Financial assets-Foreign currency forward contracts






(355,857
)


(10,849
)Current portion of lease receivables






(6,690
)


(204
)Deferred tax assets  current, net






11,277



344Other current assets






2,057



63As adjusted

$
15,881,410


$
20,029,763



610,664Property, plant and equipmentAs reported

$
51,543,552


$
66,162,814



2,017,158U.S. GAAP adjustmentsBuilding and structure






281,538



8,583Other equipment






75,555



2,304Accumulated depreciation






(18,414
)


(561
)As adjusted

$
51,543,552


$
66,501,493



2,027,484Other AssetsAs reported

$
727,142


$
854,936



26,065U.S. GAAP adjustmentsDeferred tax assets  non-current, net






239,512



7,302Lease Receivables  long term






(338,788
)


(10,329
)As adjusted

$
727,142


$
755,660



23,038Current LiabilitiesAs reported

$
11,996,800


$
13,903,989



423,902U.S. GAAP adjustmentsEmployees bonus


24,976



298,866



9,112Remuneration to directors and supervisors


2,686



3,736



11410% surtax on undistributed earnings






282,906



8,625As adjusted

$
12,024,462


$
14,489,497



441,753Other LiabilitiesAs reported

$
31,332


$
52,285



1,594U.S. GAAP adjustmentsOther financial liabilities-IRS


37,306







As adjusted

$
68,638


$
52,285



1,594