##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 20-F/A
 Amendment No. 1 to Annual Report
 REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934 o
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
þ
For the fiscal year ended September 30, 2006
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from  to  . o  OR
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 o  Date of event requiring this shell company report  .
 Commission file number: 001-32972
 Qimonda AG
 (Exact name of Registrant as specified in its charter)
 Federal Republic of Germany
 Gustav-Heinemann-Ring 212,
D-81739 Munich
Federal Republic of Germany
  Name of each exchange
 Title of each class
    
    on which registeredAmerican Depositary Shares representing Qimonda AG
    
    New York Stock Exchangeordinary shares of no par valueQimonda AG ordinary shares of no par value
    
    New York Stock Exchange*
 
 
 
   o þ
  o þ
   þ o
  o o þ
  o þ
  o þ




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TABLE OF CONTENTS  Item 18. Financial StatementsItem 19. ExhibitsSIGNATURESEXHIBIT INDEXExhibit 12.1Exhibit 12.2Exhibit 13Exhibit 14.1    Table of Contents  Explanatory Note
   
 Item 18. Financial Statements
  
    
    Report of Independent Registered Public Accounting Firm;
    
    Combined and Consolidated Statements of Operations for the years ended September 30, 2004, 2005 and 2006;
    
    Combined and Consolidated Balance Sheets as of September 30, 2005 and 2006;
    
    Combined and Consolidated Statements of Business/Shareholders Equity for the years ended September 30, 2004, 2005 and
2006;
    
    Combined and Consolidated Statements of Cash Flows for the years ended September 30, 2004, 2005 and 2006; and
    
    Notes to the Combined and Consolidated Financial Statements.
    
 Item 19. Exhibits
 Exhibit 12.1
    
    Certification of chief executive officer pursuant to Exchange Act Rule 13a-14(a)Exhibit 12.2
    
    Certification of chief financial officer pursuant to Exchange Act Rule 13a-14(a)Exhibit 13
    
    Certificate pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of 2002Exhibit 14.1
    
    Consent of KPMG Certified Public
Accountant




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
        
 KPMG Certified Public
Accountants, the Taiwan member firm of the 
KPMG network of
independent member firms affiliated with KPMG
international, a Swiss cooperative F-1




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##### Table of Contents



INOTERA MEMORIES, INC.
Balance Sheets
December 31, 2005 and 2006
(Expressed in thousands of New Taiwan Dollars and U.S. Dollars)
 2005
    
    
    2006(Unaudited)NTD
    
    
    NTD
    
    
    USDAssetsCurrent 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
 F-2




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##### Table of Contents



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
 See accompanying notes to financial statements. F-3




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##### Table of Contents



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
    
    
    2006(Unaudited)NTD
    
    
    NTD
    
    
    USDOperating 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 in accounting 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
 See accompanying notes to financial statements. F-4




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##### Table of Contents



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 stock
    
    Capital surplus
    
    Legal reserve
    
    Special reserve
    
    Unappropriated 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
 See accompanying notes to financial statements. F-5




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##### Table of Contents



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
    
    
    2006(Unaudited)NTD
    
    
    NTD
    
    
    USDCash 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
 See accompanying notes to financial statements. F-6




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##### Table of Contents



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 ActivitiesInotera Memories, Inc. (the Company) was legally established with the approval by Ministry of
Economic Affairs on January 23, 2003. The Companys main operating activities are to manufacture
and to sell semiconductor products. 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. On May 16, 2006, the Company listed
its shares in the form of global depositary shares (GDSs) on the Luxembourg Stock Exchange
(LSE).As of December 31, 2005 and 2006, the Company had 1,824 and 2,898 employees, respectively.(2)
    
    Summary of Significant Accounting PoliciesThe accompanying financial statements are prepared in conformity with accounting principles
generally accepted in the Republic of China (ROC). The financial statements are not intended to
present the financial position of the Company and the related results of operations and cash
flow in accordance with accounting principles and practices generally accepted in countries and
jurisdictions other than the ROC.The significant accounting policies followed by the Company are as follows:
 (a)
    
    Convenience translation into U.S. dollarsThe financial statements are stated in New Taiwan Dollars. Translation of the 2006 New Taiwan
Dollar amounts into U.S. dollar amounts is included solely for the convenience of the readers,
using the Bank of Taiwan exchange rate on December 29, 2006, of NT$32.595 to US$1 uniformly
for all the financial statements accounts. The convenience translations should not be
construed as representations that the New Taiwan Dollar amounts have been, could have been, or
could in the future be, converted into U.S. dollars at this rate or any other rate of
exchange.(b)
    
    Foreign currency transactions and translationThe Companys reporting currency is New Taiwan Dollar. Foreign currency transactions during
the period are translated at the exchange rates on the transaction dates. Foreign
currency-denominated assets and liabilities are translated into New Taiwan Dollars at the
exchange rate prevailing on the balance sheet date, and the resulting translation gains or
losses are recognized as non-operating income or expenses. Effective January 1, 2005, the
Company adopted the amended Republic of China Statement of Financial Accounting Standards No.
14 (SFAS No. 14) The Effects of Changes in Foreign Exchange Rates. Under the amended SFAS
No. 14, the exchange difference from the translation using the exchange rate on balance sheet
date of foreign currency monetary and
non-monetary assets and liabilities reported at fair value through profit or loss is
recognized in earnings.
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INOTERA MEMORIES, INC.
 Notes to Financial Statements
 (c)
    
    Basis for classifying assets and liabilities as current or non-currentCash and other assets that the Company will convert to cash or use within in a relatively
short period of time  one year or one operating cycle, whichever is longer  are classified
as current assets, otherwise, are classified as non-current assets. Debts due within one year
or one operating cycle, whichever is longer, are classified as current liabilities; otherwise,
are classified as long-term liabilities.(d)
    
    Asset impairmentCommencing from January 1, 2005, the Company adopted the ROC SFAS No. 35 Impairment of
Assets. In accordance with SFAS No. 35, the Company assesses at each balance sheet date
whether there is any indication that an asset (individual asset or cash-generating unit) may
have been impaired. If any such indication exists, the Company estimates the recoverable
amount of the asset. The Company recognizes impairment loss for an asset whose carrying
value is higher than the recoverable amount.The Company reverses an impairment loss recognized in prior periods for assets if there is
any indication that the impairment loss recognized no longer exists or has decreased. The
carrying value after the reversal should not exceed the recoverable amount or the
depreciated or amortized balance of the assets assuming no impairment loss was recognized in
prior periods.(e)
    
    Cash and cash equivalentsCash and cash equivalents consist of cash on hand, cash in banks, time deposits, negotiable
time deposits, and other cash equivalents. Other cash equivalents represent highly liquid
debt instruments with a maturity period of less than three months, such as commercial paper,
government bonds held under repurchase agreement, and other highly liquid investments which
do not have a significant level of market or credit risk from potential interest rate
changes.(f)
    
    Financial instrumentsEffective January 1, 2006, the Company adopted the ROC SFAS No. 34 Financial Instruments:
Recognition and Measurement. In accordance with the SFAS No. 34, the Company classifies its
financial assets as financial assets/liabilities reported at fair value through profit or
loss.The Company adopted trade-date-accounting for financial instrument transactions. The financial
instruments are initially recognized at fair value plus transaction costs.After the initial recognition, the financial instruments that the Company held or issued are
classified as financial assets reported at fair value through profit or loss, including those
held for trading. Financial assets held for trading are those that the Company is holding
mainly for the purpose of short-term profit-taking. Financial derivatives, except for those
that meet the criteria for hedge accounting, are accounted for as financial assets reported at
fair value through profit or loss.
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 Before January 1, 2006, some of the investments held by the Company were classified, according
to the Companys intention for holding them, as short-term investments, including open-end
mutual funds. These short-term investments were evaluated at the lower of cost or market
value. Market value of open-end mutual funds was determined based on the net asset value of
the mutual funds at the balance sheet date. The aggregate cost of these short-term investments
was determined by the weighted-average method. Devaluation losses resulting from a decline in
market value were recognized in the income statement.Before January 1, 2006, interest rate swaps and foreign currency forward contracts
were accounted for as follows:
 (i)
    
    Foreign exchange forward contractsForeign exchange forward contracts, which were entered into for the purpose of hedging
the risks of exchange rate fluctuation on foreign currency receivables and payables, were
translated into New Taiwan Dollars using spot rates on the balance sheet date. The
resulting translation difference was recorded as an exchange gain or loss in the
accompanying statements of income. The difference between the forward rate and spot rate
at the contract date was amortized over the contract period.(ii)
    
    Interest rate swapsBecause there is no physical transfer of principal, only memo entries of notional
principals were made for interest rate swaps. For trading swaps, the differences between
the present and market values of interest receivables or payables arising thereon were
reported as unrealized gains or losses on derivative instruments. For non-trading swaps,
interest was accrued based on contract terms, with interest revenue and expense
recognized in the same period that the hedged items affect earnings.
 (g)
    
    InventoriesInventories are stated at the lower of cost or market value. Cost is determined by using the
monthly weighted-average method. Market value represents replacement cost or net realizable
value. The market value of raw materials and supplies are determined on the basis of
replacement cost. The market value of finished goods and work in-process are determined on
the basis of net realizable value.(h)
    
    Property, plant and equipment / DepreciationProperty, plant and equipment are stated at cost less accumulated depreciation. Interest
costs related to the construction of property, plant and equipment are capitalized and
included in the cost of the related asset. Maintenance and repairs are expensed when
incurred; major addition, improvement and replacement expenditures are capitalized.
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 Depreciation of property, plant and equipment is provided over their estimated useful lives
by using the straight-line method. Assets still in service after reaching the end of their
estimated useful lives are depreciated based on the residual value over their re-estimated
useful lives. The useful lives of the assets are as follows:
 (i)
    
    Buildings: 8 to 50 years.(ii)
    
    Vehicles: 5 years.(iii)
    
    Machinery and equipment: 3 to 5 years.(iv)
    
    Leased assets: 23.7 years.(v)
    
    Miscellaneous equipment: 5 to 15 years.Gains or losses on disposal of property, plant and equipment are recorded as non-operating
income or expenses.
 (i)
    
    LeasesA lease is deemed to be a capital lease if it conforms to any one of the following
classification criteria:
 (i)
    
    the lease transfers ownership of the leased assets to the lessee by the end of
the lease term;(ii)
    
    the lease contains a bargain purchase option;(iii)
    
    the lease term is equal to 75% of or more of the total estimated economic life
of the leased assets; this criterion should not be applied to leases in which the
leased asset has been used for more than 75% of its estimated economic life before the
lease begins;(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.
 For the lessor, a capital lease must also conform to any one of the four classification
criteria specified above and both of the following two further criteria:
 (i)
    
    collectibility of the lease payments is reasonably predictable; and(ii)
    
    no important uncertainties surround the amount of unreimbursable costs yet to
be incurred by the lessor under the lease.
 
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 Under a capital lease, the Company, as the lessee, capitalizes the leased assets based on
(a) the present value of all future installment rental payments (minus executory cost born
by lessor) plus bargain purchase price or lessees guaranteed residual value or (b) the fair
market value of leased assets at the lease inception date, whichever is lower. The
depreciation period is restricted to the lease term, rather than the estimated useful life
of the assets, unless the lease provides for transfer of title or includes a bargain
purchase option.Under a capital lease, the Company, as the lessor, records all installments plus bargain
purchase price or guaranteed residual value as the lease receivables. The implicit interest
rate is used to calculate the present value of lease receivables as the cost of leased
assets transferred. The difference between the total amount of lease receivables and the
cost of leased assets transferred is recognized as unrealized interest income and is then
recognized as realized interest income using the interest method over the lease term.(j)
    
    Employee retirement planThe Company has established an employee noncontributory defined benefit retirement plan (the
Plan) covering full-time employees in the Republic of China. In accordance with the Plan,
employees are eligible for retirement or are required to retire after meeting certain age or
service requirements. Payments of retirement benefits are based on years of service and the
average salary for the last six months before the employees retirement. Each employee gets
2 months salary for each service year for the first 15 years, and 1 months salary for each
service year thereafter. A lump-sum retirement benefit is paid through the retirement fund.Starting from July 1, 2005, the enforcement of the newly enacted Labor Pension Act (the New
Act) stipulates those employees covered by the defined contribution plan as follows:
 (i)
    
    employees who were covered by the Plan and opt to be subject to the pension
mechanism under the New Act;(ii)
    
    employees who are employed after the enforcement date of the New Act.
 In accordance with the New Act, the rate of contribution by an employer to an individual
labor pension fund account per month shall not be less than 6% of the workers monthly
wages. The Plan has not been modified to conform to the New Act. For those provisions of the
New Act not currently included in the Plan, the Company follows the New Act.
 The Company adopts the SFAS No. 18, Accounting for Pensions, for its defined benefit
retirement plan. SFAS No. 18 requires an actuarial calculation of the Companys pension
obligation at the end of each year. Based on the actuarial calculation, the Company
recognizes a minimum pension liability and net periodic pension costs.
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 (k)
    
    Deferred charges
 (i)
    
    Bank charges related to syndicated loans are deferred and amortized over the terms
of the loans.(ii)
    
    Power line installation costs and royalty paid to the Industrial Technology
Research Institute are deferred and amortized over the estimated useful lives or the
agreement terms.(iii)
    
    Underwriter handling charges on bonds payable are deferred and amortized over the
term of the bond.
 (l)
    
    Revenue recognitionRevenue is generally recognized when it is realized or realizable and earned when all of the
following criteria are met:
 (i)
    
    persuasive evidence of an arrangement exists,(ii)
    
    shipment has occurred or services have been rendered,(iii)
    
    the sellers price to the buyer is fixed or determinable, and(iv)
    
    collectibility is reasonably assured.Rental income is recognized when services are provided.
 (m)
    
    Income taxThe Company has adopted the SFAS No. 22 Income Taxes. Income taxes are accounted for using
the asset and liability method. Deferred income tax is determined based on differences
between the financial statements and tax basis of assets and liabilities using enacted tax
rates in effect during the years in which the differences are expected to reverse. The
income tax effects of taxable temporary differences are recognized as deferred income tax
liabilities. The income tax effects resulting from deductible temporary differences, net
operating loss carryforwards, and income tax credits are recognized as deferred income tax
assets. The realization of the deferred income tax assets is evaluated, and if it is
considered more likely than not that the asset will not be realized, a valuation allowance
is recognized accordingly.The classification of deferred income tax assets and liabilities as current or non-current
is based on the classification of the related asset or liability. If the deferred income tax
asset or liability is not directly related to a specific asset or liability, then the
classification is based on the expected realization date of the asset or liability.
 F-12




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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 A tax imputation system was adopted in accordance with the amended ROC Income Tax Law. Under
this system, the Company may retain the earnings (on tax basis) incurred after December 31,
1997 but will be subject to 10% surtax. This surtax is computed according to the ROC Income
Tax Law, and is charged to current income tax expense in the year when the shareholders
resolved during their meeting not to distribute the earnings. The ROC Income Tax Law was
further amended in 2006, under which, the 10% surtax is calculated based on the after tax
earnings (on accounting basis).(n)
    
    Earnings (loss) per common shareEarnings (loss) per share are calculated based on the weighted-average number of outstanding
 shares. The number of outstanding shares is retroactively adjusted for common stock issued
through the distribution of stock dividends out of unappropriated earnings and capital
surplus.
 (3)
    
    Reasons for and Cumulative Effect of Accounting Principle Change
 (a)
    
    As the Company adopted the SFAS No. 34 Financial Instruments: Recognition and
Measurement, SFAS No. 36 Financial Instruments: Disclosure and Presentation, and newly
amended SFAS No. 1 Conceptual Framework for Financial Accounting and Preparation of
Financial Statements effective January 1, 2006, the net income and earnings per share
(after tax) for the year ended December 31, 2006, were affected as follows:
 Decrease in net
    
    
    Decrease inNature of the change in accounting principle
    
    income
    
    
    earnings per shareAccounting for financial instruments
    
    $
    27,600
    
    
    
    0.01
 The financial instruments are recorded in accordance with the SFAS No. 34 and No. 36.
The effects of the adoption of these new accounting principles were discussed further in
note 5 to the financial statements.(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).
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 (4)
    
    Cash and Cash EquivalentsCash and cash equivalents as of December 31, 2005 and 2006, consisted of the following:
 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
 Cash and cash equivalents were not pledged or mortgaged to secure bank loans.(5)
    
    Financial Assets Reported at Fair Value through Profit or LossFinancial assets reported at fair value with changes in fair value recorded through profit or
loss as of December 31, 2005 and 2006, consisted of the following:
 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
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 (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 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.
 
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 (6)
    
    Inventories, netAs of December 31, 2005 and 2006, inventories consisted of the following:
 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
 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 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).
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 The details of lease receivables of December 31, 2005 and 2006, were as follows:
 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.
 F-17




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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 (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.(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.
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 (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 LoansShort-term loans as of December 31, 2005 and 2006 consisted of the following:
 2005.12.31
    
    
    2006.12.31Unsecured borrowings
    
    $
    2,323,300
    
    
    
    
 The short-term loans bear interest at annual rate of 1.39% as of December 31, 2005.As of December 31, 2005 and 2006, the unused credit facility for short-term loans amounted to
NT$5,666,700 and NT$10,115,936, respectively.
 (11)
    
    Bonds PayableOn November 22, 2006, the board of directors approved the issuance of domestic unsecured
corporate bond to raise long-term funds for the repayment of loans. The issuance of this bond
was approved by the Securities and Futures Bureau (SFB). On December 19, 2006, the Company
issued the unsecured bond amounting to NT$6,000,000 at coupon rate as follows:
 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.
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 Future principal repayments for the Companys unsecured corporate bond as of December 31,
2006, were as follows:
 Year
    
    Amount2009
    
    $
    1,980,0002010
    
    
    1,980,0002011
    
    
    2,040,000Total
    
    $
    6,000,000
 (12)
    
    Long-term LoansLong-term loans as of December 31, 2005 and 2006, consisted of the following:
 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 of long-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 of long-term
loans
    
    
    
    
    
    
    
    
    (10,299,107
    )$
    19,392,164
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 (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.(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.
 The details of this loan are as follows:(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.
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 The two long-term loan agreements contain undertakings and restrictive covenants requiring the
Company to maintain certain financial ratios. In addition, the long-term loan agreements require
that (i) no material adverse change shall be made to the off-take sales arrangements signed by
the Company,
Nanya Technology Corporation (NTC), and Infineon AG (IFX), (ii) that Nan Ya Plastics Corporation
(NPC) shall remain the largest shareholder of and retain management control over NTC, and (iii)
that NTC and IFX continue to be the Companys largest shareholders and retain control over the
Company. As of December 31, 2006, the Company was in compliance with these undertakings and
covenants.(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
 (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
    %
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 (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
 (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
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 (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
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 (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
 ROC Income Tax Law provides an investment tax credit to companies that purchase certain types
of equipment and machinery. Such tax credit can be used to reduce by up to 50% of income tax
liability arising from the Companys products produced using such machinery for four years
starting from the year of equipment purchase, and can be used to reduce by up to 100% such
income tax liability in the fifth year.
 (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 ( Actual )
    
    2006 ( Projected )Creditable ratio
    
    
    3.24
    %
    
    
    2.12
    %
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 (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 stockDuring their meeting on June 29, 2005, the stockholders approved a resolution allowing the
Company to further increase its capital by NT$132,940 by declaring stock dividends out of
its 2004 earnings. This capital increase was approved by the Securities and Futures Bureau
(SFB) on July 12, 2005. On July 18, 2005, the board of directors approved a resolution to
set August 9, 2005, as the effective date for distributing this stock dividend by issuing
new shares.On February 6, 2006, the board of directors approved the Initial Public Offering of the
Companys shares through the issuance of 200 million Company shares for cash at initial
price offering of NT$33 per share on the Taiwan Stock Exchange (TSE). The Company approved a
resolution to set March 14, 2006, as the effective date for issuing new shares. This capital
increase was approved by the SFB on April 11, 2006. The excess of the initial price offering
over the par value of the shares issued of NT$23 per share was recorded as capital surplus
paid-in capital in excess of par value.Effective May 16, 2006, the Company sold for cash 40 million GDSs, representing 400 million
common shares of the Company, at a price of US$10.53 per share and subsequently listed its
GDSs on the LSE. Total issuance of GDSs amounted to US$421,200 thousand, and each GDS offers
the holder the right to receive 10 shares of the Company. The offering was approved by the
SFB on May 1, 2006. On May 16, 2006, the Company issued 400 million of its shares, and net
proceeds were US$416,114 thousand, or NT$13,169,176 (after deducting commissions and
offering expenses payable by the Company). The net proceeds exceeded the par value by
NT$9,169,176, which was recorded as capital surplus  paid-in capital in excess of par
value.
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 As of December 31, 2005 and 2006, the Companys total authorized capital amounted to
NT$40,000,000, and total issued common stock amounted to NT$25,109,540 and NT$31,109,540,
respectively, with $10 par value per share.
 (b)
    
    Capital surplusAs of December 31, 2005 and 2006, the capital surplus consisted of the following:
 2005.12.31
    
    
    2006.12.31Paid-in capital in excess of par value
    
    $
    15,548,660
    
    
    
    29,317,836
 According to the ROC Company Law, realized capital surplus can be transferred to common
stock after deducting the accumulated deficit, if any. Realized capital surplus includes the
additional paid-in capital from issuance of common stock in excess of the common stocks par
value, donation from others, and additional paid-in capital-treasury stock.(c)
    
    Earnings appropriation and distributionThe Companys annual net profit, after providing for income tax and covering the losses of
previous years, shall be first set aside for legal reserve at the rate of 10% thereof until
the accumulated balance of legal reserve equals the total issued capital. The remaining net
profit, if any, after providing for any special reserves or reserving certain undistributed
earnings for business purposes shall be distributed as follows:
 (i)
    
    0.1% 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.
 As it belongs to a highly capital-intensive industry with strong growth potential, the
Company adopts a dividend distribution policy which is in line with its capital budget and
long-term financial plans. This policy requires, among other things, that the distribution
of cash dividends shall be at least fifty percent (50%) of the Companys total dividend
distribution for the year.Based on the resolutions approved by the stockholders during their meeting on June 29, 2005,
and June 7, 2006, the Companys stockholders proposed to distribute the Companys 2004 and
2005 earnings as follows:
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 
 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
 If the remuneration to directors and supervisors and the employees bonus were recorded
as compensation expenses, the retroactive earnings per share in 2004 would decrease from
NTD$0.51 to NTD$0.5 and the earnings per share in 2005 would decrease from NTD$2.36 to
NTD$2.24.The appropriation of the Companys 2006 net income for the employees bonus and
remuneration to directors and supervisors is subject to a resolution to be passed and
approved by the Companys directors and stockholders during their meetings normally held
within six months after the year-end closing. Following the approval of this resolution,
related information can be obtained from the public information website.
 (16) Earnings Per Share
 For the years ended December 31, 2005, and 2006, the weighted-average number of outstanding
common shares and the common stock equivalents for calculating the basic EPS consisted of the
following (expressed in thousands of New Taiwan Dollars and shares, except for earnings per
share expressed in New Taiwan Dollars):
 2005Amount
    
    
    
    
    
    
    Earnings per shareTotal weightedIncome 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
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 2006Amount
    
    
    
    
    
    
    Earnings per shareTotal weightedIncome 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
 (17)
    
    Financial Instrument Information
 (a)
    
    Fair value of financial instrumentsAs of December 31, 2005 and 2006, the fair value of the Companys financial assets and
liabilities were as follows:
 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
 (b)
    
    The methods and assumptions used to estimate the fair value of each class of financial
instruments were as follows:
 (i)
    
    The book value of short-term financial instruments is believed to be not
materially different from the fair value because the maturity dates of short-term
financial instruments are within one year from the balance sheet date. Therefore, their
book value is adopted as a reasonable basis for determining their fair value. This
principle is applied in estimating the fair value of short-term financial instruments
including cash and cash equivalents, account receivables, account payables, and
short-term loans.
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 (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.
 (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 determined by usingMarket value in active
    
    broker quote / carryingFinancial instruments
    
    market
    
    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
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 (d)
    
    Financial risk information
 (i)
    
    Market riskAll derivative financial instruments are intended as hedges for fluctuations in
foreign exchange rates and interest rates. Gains or losses from these hedging
instruments are likely to be offset by gains or losses from the hedged items. Thus,
market price risks are believed to be low.The Company has sufficient operating capital to meet the cash requirements for
the derivative financial instrument transactions. In addition, additional cash inflow
is expected to meet the cash outflow. Therefore, the cash flow risk is low.(ii)
    
    Credit riskThe Company signed a Product Purchase and Capacity Reservation Agreement with
NTC and IFX ( which transferred all its rights to Qimonda), as described in note 18(b)
(vi). Under this agreement, these entities are each entitled to a contracted
percentage of the Companys production capacity. Under the agreement, the sales of the
Company were derived 100% from NTC, IFX and Qimonda. The sales are an indication that
the Company has concentration of credit risk. Because these customers are all
reputable listed companies, the accounts receivable from NTC and Qimonda are
collectible. Management believes its exposure related to the potential payment default
by NTC and Qimonda is low, as described in note 18(b).Credit risks of financial instrument transactions represent the positive net settlement
amount of those contracts with positive fair values at the balance sheet date. The
positive net settlement amount represents the loss to the Company if the
counter-parties breached the contracts. The banks, which are the counter-parties to
the foregoing derivative financial instruments, are reputable financial institutions.
Management believes its exposure related to the potential default by those
counter-parties is low.(iii)
    
    Cash flow and interest rate riskInterest rate risk arises from short-term and long-term loans. Loans issued at variable
rates expose the Company to cash flow interest rate risk. If the market interest rate
increases by 1%, the cash outflow of the Company would increase by NT$296,913. The
Company manages its cash flow interest rate risk by using floating-to-fixed
interest-rate swaps. Such interest rate swaps have the economic effect of converting
loans from floating rates to fixed rates.
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 (18) Related-party Transactions
 (a)
    
    Names of and relationship with related parties
 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
 (b)
    
    Significant related-party transactions
 (i)
    
    Sales revenue and accounts receivableSignificant sales to related parties for the years ended December 31, 2005 and 2006,
were as follows:
 2005
    
    
    2006% of
    
    
    
    
    
    
    % ofAmount
    
    
    net sales
    
    
    Amount
    
    
    net 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
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 The balances of accounts receivable resulting from the above transactions as of
December 31, 2005 and 2006, consisted of the following:
 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
 The normal credit term with the related parties above is 60 days from delivery date.(ii)
    
    Purchases and accounts payableSignificant purchases from related parties for the years ended December 31, 2005 and
2006, were as follows:
 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
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 The balances of accounts payable resulting from the above transactions as of December
31, 2005 and 2006, were as follows:
 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
 The Company pays NPC and NTC on the 15th of the month following the month of purchase,
and pays IFX and Qimonda AG within 30 days of the invoice date. Purchases from NPC
included miscellaneous equipment. Purchase prices and payment terms of purchases from
related parties are not materially different from those of non-related general
suppliers.(iii)
    
    Acquisition and disposition of property, plant and equipmentIn May 2005, the Company purchased for NT$1,575,000 from NTC six parcels of land
numbered 347 and five other numbers, which are located in Hwa-Ya, Kueishan, Taoyuan
County. As of December 31, 2005, the Company fully paid the purchase price.In June 2005, the Company purchased for NT$73,827 electronic equipment from NTC, which
was accounted for as machinery and equipment. As of December 31, 2005, the Company fully
paid the purchase price.In July 2006, the Company sold for NT$600 to NTC machinery with a book value of
NT$2,142. Loss on disposal of this asset amounted to NT$1,542, which was accounted for
as non-operating expenses and losses  others. As of December 31, 2006, the Company
received full payment from NTC.(iv)
    
    Training expenseNTC transferred some of its employees to the Company to enable the Company to have a
sufficient number of high quality and loyal staff. Consequently, the Company is required
to reimburse NTC for the loss of their experienced employees in an amount equal to 6
months salary of those employees. The Company booked this expenditure as training
expenses (classified under administrative and general expenses) of NT$5,180 for the year
ended December 31, 2005. As of            December 31, 2005, the Company fully paid these
training expenses.
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 (v)
    
    Lease contractsCommencing from July 1, 2005, the Company signed lease contracts with NTC. Refer to
notes 7 and 9 for details.(vi)
    
    Other significant transactionsIFX provides some IT and inspection services and other services to the Company. As of
December 31, 2005 and 2006, the unpaid liability from these transactions amounted to
NT$61,757 and NT$0, respectively, which was accounted for as other payables  related
parties.Qimonda AG provides IT and handling services to the Company. As of December 31, 2006,
the unpaid liability from these transactions amounted to NT$36,511, which was accounted
for as other payables  related parties.NTC supplies some of the Companys utilities, steam, purification for waste water and
employee dormitories. As of December 31, 2005 and 2006, the unpaid liability from this
transaction amounted to NT$20,059 and NT$24,932, respectively, which was accounted for
as other payables  related parties.NPC rents out dormitory space and water and power utility facilities to the Company. As
of December 31, 2005 and 2006, the unpaid rental and utilities amounted to NT$4,437 and
NT$4,096, respectively, which was accounted for as other payables  related parties.(vii)
    
    Contracts with related partiesThe Company signed a Product Purchase and Capacity Reservation Agreement with NTC and
IFX. Under this agreement, these entities are each entitled to a contracted percentage
of the Companys production capacity. The Company is committed to sell its production to
these entities at a transfer price calculated in accordance with the formula stated in
the agreement. This agreement took effect on July 15, 2003, and will continue in effect
until terminated by either party with cause or when the Joint Venture Agreement and/or
the License and Technical Cooperation Agreement between NTC and IFX are terminated.The Company signed a Know-How Transfer Agreement with NTC and IFX. Under this
agreement, these entities allowed the Company to utilize their know-how in the
semiconductor manufacturing process. This contract took effect on July 15, 2003, and it
will continue in effect until either of the following conditions has been fulfilled: 1)
both corporations decide to terminate their Joint Venture Agreement or 2) three years
after the completion of know-how transfer.IFX has completed the carve-out of its memory product business group effective on May 1,
2006. Accordingly, IFXs memory products business, including substantially all of the
related assets and liabilities and personnel were transferred to a wholly owned
subsidiary named Qimonda AG. Also, IFX assigned the rights and obligations under the
Product Purchase and Capacity Reservation Agreement and Know-How Transfer Agreement
to Qimonda AG effective on May 1, 2006.
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 The Company signed a service contract with NTC. Under this contract, NTC provides
transaction support in the following areas: human resources, finance, engineering and
construction, raw material, inventory, etc. The service fee is charged based on the
actual type of service rendered. The contract took effect on July 15, 2003, and will
continue in effect until terminated mutually by both parties.
 (19)
    
    Pledged PropertiesRefer to note 12 for information on the Companys assets pledged to secure loans.(20)
    
    Commitments and ContingenciesAs of December 31, 2005 and 2006, in addition to those described in the financial statements and
accompanying notes, the balance of outstanding letters of credit were as follows:
 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:The Company issued a second domestic unsecured bonds on January 5, 2007. The issuance was
approved by the SFB, as follows:
 Coupen 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
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 (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 planThe Board of Directors of the Company approved a resolution to adopt a Deferred
Stock Purchase Plan (the Plan). Under this Plan, the employees of the Company are
allowed to purchase the Companys shares which are being held by Hwa-Keng Investment
Corp., a corporate stockholder of the Company, following the approval thereof by the
board of directors and stockholders of Hwa-Keng Investment Corp.
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 The Plan requires that its actual implementation shall be made within 4 weeks after the
approval of the Companys stock listing by the SFB. The purchase price is the higher of
NT$15 per share or the net book value per share of the Company at the time of the Plans
execution plus 10% premium thereof. There were 73,124 thousand Company shares being held by
Hwa-Keng Investment Corp., which were made available for purchase by the employees. On
January 6, 2006, the Company received the approval from the SFB, and implemented the Plan on
the same day. On February 9, 2006, Hwa-Keng Investment Corp. sold 64,032,908 Company shares
at NT$20.07 per share to the employees of the Company, following the Companys
implementation of the Plan.Under the International Financial Reporting Standards (IFRS), the share-based payment
is normally accounted for as current expenses. If the IFRS is adopted to account for the
share-based payment under this Plan, the Company should recognize compensation cost of
approximately NT$826,025 in current results of operations. However, the Company did not
adopt this accounting treatment under IFRS because there are no specific accounting
principles or declaratory statutes announced by the Accounting Research and Development
Foundation (the ARDF) in the Republic of China. The ARDF is now in the process of
promulgating the accounting treatment on share-based payment under this type of Plan and has
indicated that there is a common view that simply requires disclosing the details of the
Plan in the financial statements when the Plan is consummated before the declaratory
statutes is announced by the ARDF, without recognizing an expense currently. For this
reason, the Company simply disclosed the details of the Plan to conform with the requirement
for disclosure.(d)
    
    ReclassificationsCertain accounts in the 2005 financial statements, have been reclassified to conform with
the financial statements presentation adopted in 2006, for purposes of comparison.
These reclassifications have not materially affected the financial statements.
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 (24) Segment Information
 (a)
    
    Industrial informationThe Companys main operating activities are to manufacture and to sell semiconductor
product, which belong to a single industrial segment.(b)
    
    Geographic informationThe Company has no foreign operation segment; thus, no geographic information is
provided.(c)
    
    Export sales informationExport sales to geographic areas in 2005 and 2006 were summarized as follows:
 2005
    
    
    2006Destination Area
    
    Amount
    
    
    % of net sales
    
    
    Amount
    
    
    % of net 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 clientsThe major clients of the Company for the years 2005 and 2006 were summarized as
follows:
 2005
    
    
    2006Client
    
    Amount
    
    
    % of net sales
    
    
    Amount
    
    
    % of net 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
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 (25)
    
    Summary of Significant Differences between Accounting Principles Followed by the
Company and Generally Accepted Accounting Principles in the United States of America
 a.
    
    Derivative financial instrument transactionsBefore January 1, 2006, under ROC GAAP, there are no specific rules related to accounting for
derivative financial instruments, nor criteria for hedge accounting. Therefore, companies have
flexibility in choosing when to recognize derivative financial instruments and when to follow hedge
accounting versus fair value accounting for such instruments. In practice, derivative contracts
including foreign currency forward contracts and interest rate swaps are accounted for as follows:
 (i)
    
    Foreign exchange forward contractsForeign exchange forward contracts, which were entered into for the purpose of hedging
the risks of exchange rate fluctuation on foreign currency receivables and payables, were
translated into New Taiwan Dollars using spot rates on the balance sheet date. The
resulting translation difference was recorded as an exchange gain or loss in the
accompanying statements of income. The difference between the forward rate and spot rate
at the contract date was amortized over the contract period.(ii)
    
    Interest rate swapsBecause there is no physical transfer of principal, only memo entries of notional
principals were made for interest rate swaps. For trading swaps, the differences between
the present and market values of interest receivables or payables arising thereon were
reported as unrealized gains or losses on derivative instruments. For non-trading swaps,
interest was accrued based on contract terms, with interest revenue and expense
recognized in the same period that the hedged items affect earnings.
 Effective January 1, 2006, however, the accounting for derivative financial instrument transactions
is principally equivalent to U.S. GAAP.U.S. GAAP contains comprehensive guidance as to when hedge accounting is appropriate. As a
consequence, certain derivative contracts such as foreign currency forward contracts and interest
rate swaps included in the Companys balance sheet would be recorded at the derivatives contracts
market rate as of the reporting date, resulting in a decrease in other receivables as reported
under the ROC GAAP balance sheet.
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 b.
    
    Bonuses to employees, directors and supervisorsUnder the ROC regulations and the Companys Articles of Incorporation, a portion of
distributable earnings should be set aside as bonuses to employees, directors and supervisors.
Bonuses to directors and supervisors are always paid in cash. However, bonuses to employees may be
granted in cash or shares or both. All of these appropriations, including share bonuses which are
valued at par value of NT$10, are charged against retained earnings, after such appropriations are
formally approved by the shareholders in the following year.Under U.S. GAAP, bonuses and remuneration are generally expensed as services are rendered. Also
under U.S. GAAP, bonuses which are paid in the form of Company shares are recorded within
equity at fair market value, with a corresponding charge to earnings for the difference between
the fair value of the shares at the date of grant and the price paid by the employee, if any.c.
    
    Undistributed earnings surtaxCompanies in the ROC are subject to a 10% surtax on undistributed profits earned after
December 31, 1997. If the undistributed earnings are distributed in the following year, the 10%
surtax is not due. Under ROC GAAP, income tax expense is recorded in the statement of operations in
the following year if the earnings are not distributed to the shareholders.Under U.S. GAAP, the 10% surtax leviable on the undistributed earnings is recorded in the statement
of income in the year when the profits were earned. The income tax expense, including the tax
effects of temporary differences, in such year is measured by using the rate that includes this 10%
surtax.As of December 31, 2005 and 2006, the Company has
established a valuation allowance for principally all of its deferred
tax assets as a result of forecasts for future taxable income and the
five-year Income Tax Holiday related to taxable income that is
derived from the sale of products produced from Phases 1, 2, and
3 of Fab 1.d.
    
    Capital contributionUnder ROC GAAP, the expatriate employees payroll cost paid by a foreign joint venture
partner/shareholder is not recorded nor treated as the shareholders capital contribution in the
Company.Under U.S. GAAP, the expatriate employees payroll cost paid by a foreign joint venture partner
would be recorded as expense and treated as capital contribution in the Company.
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 e.
    
    LeaseUnder ROC GAAP, the estimated fair value of a partially leased building used in
evaluating the lease classification described under Note 2 (h) to the financial
statements can be based on the proportionate fair value of the entire building.

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



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 i.
    
    PensionIn accordance with ROC GAAP, the Companys unrecognized actuarial
gains and losses are not recognized as pension liabilities until the
accumulated unrecognized amounts exceed certain thresholds.
In September 2006, the Financial Accounting Standards Board (FASB)
issued SFAS No. 158 Employers Accounting for Defined Benefit Pension
and Other Post-retirement Plans, an amendment of FASB Statements No.
87, 88, 106, and 132(R). SFAS 158 requires an employer to recognize
the overfunded or underfunded status of a defined benefit
post-retirement plan as an asset or liability in the balance sheet and
to recognize changes in that funded status in other comprehensive
income in the year in which the changes occur. Retrospective
application of SFAS 158 is not permitted. The Company has adopted SFAS
158 for purposes of its US GAAP reconciliation with effect as of
December 31, 2006.j.
    
    Statement cash flowsUnder ROC GAAP, bonus to employees and remuneration to directors and
supervisors are considered financing activities.Under US GAAP, bonus to employees and remuneration to directors and
supervisors are considered operating activities.
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
 The following reconciles net income and stockholders entity under ROC GAAP as reported in
the audited financial statements to the net income and stockholders equity amounts
determined under U.S. GAAP, giving effect to adjustments for the differences listed above.
 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
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##### Table of Contents



INOTERA MEMORIES, INC.
 Notes to Financial Statements
  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
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##### Table of Contents



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




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##### Table of Contents



EXHIBIT INDEX
 Exhibit 12.1
    
    Certification of chief executive officer pursuant to Exchange Act Rule 13a-14(a)Exhibit 12.2
    
    Certification of chief financial officer pursuant to Exchange Act Rule 13a-14(a)Exhibit 13
    
    Certificate pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of 2002Exhibit 14.1
    
    Consent of KPMG Certified Public
Accountant